InfoBytes, October 9, 2009
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Insurance
- Litigation
- Privacy/Data Security
- Credit Cards
Federal Issues
FTC Extends Comment Period for Debt Relief Amendments to Telemarketing Sales Rule. On October 5, the Federal Trade Commission (FTC) formally extended the public comment period for proposed Debt Relief Amendments to the Telemarketing Sales Rule (TSR) to October 26, 2009 (the proposal was first reported in InfoBytes, July 31, 2009). The proposal generally addresses the sale of debt relief services (e.g., credit counseling, debt management plans, debt settlement, and debt negotiation). Among other things, the proposed amendments would (i) define the term “debt relief service,” (ii) subject debt relief service telemarketers to the TSR regardless of the medium through which such services are initially advertised, (iii) mandate certain disclosures and prohibit misrepresentations in the telemarketing of debt relief services, and (iv) require full performance and documentation to the consumer before a debt relief services company requests and/or receives payment for debt relief services. The FTC will host a public forum on November 4, 2009 in Washington, D.C. to discuss the proposed rule. For a copy of the Federal Register notice, please see http://www.ftc.gov/os/2009/10/091005tsr.pdf.
FTC Proposes Amendments to the Free Credit Report Rule. On October 7, the Federal Trade Commission (FTC) proposed amendments to the Free Annual File Disclosures Rule, also known as the "Free Credit Report Rule." The proposed rule would implement the requirements of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) by instituting regulations outlawing deceptive marketing practices by credit reporting agencies (CRAs). The Credit CARD Act requires that certain advertisements for “free credit reports” include prominent disclosures to prevent confusion with federally mandated free annual credit reports. Generally, the rule would regulate these disclosures in television, radio, print, Internet, and other media. (e.g., CRA web sites must initially display a separate landing page stating: “This is not the free credit report provided for by Federal law. To get your free report, visit www.AnnualCreditReport.com or call 877-322-8228.”) Additionally, the proposed rule would prohibit CRAs from advertising other products or services to consumers seeking free credit reports until a consumer receives the free credit report, and further prohibit other practices that may interfere with the free credit report process. The comment period for the proposed rule ends November 30, 2009. The FTC intends to implement the final rule by February 22, 2010. For a copy of the FTC’s press release, please see http://www.ftc.gov/opa/2009/10/freecredit.shtm. For a copy of the proposed rule, please see http://www.ftc.gov/os/2009/10/R411005freeannualfile.pdf.
FTC Announces Revisions to Guidance Regarding Endorsements, Testimonials in Advertising. On October 5, the Federal Trade Commission (FTC) announced final revisions to the guidance (“FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising,” hereafter the Guides) that assists advertisers to comply with FTC Act provisions regarding endorsement and testimonial advertisements. The revisions, among other things, (i) eliminate a “safe harbor” provision that allowed advertisers to describe unusual results to illustrate a consumer’s experience with a product or service by providing a disclaimer such as “results not typical,” (ii) add new examples (e.g., “new media” such as blogs and “word-of-mouth” marketers) to illustrate that “material connections” (e.g., payments or free products) between advertisers and endorsers, especially connections that consumers would not expect, must be disclosed to consumers, and (iii) address celebrity endorsements. The FTC notes that the Guides provide the FTC’s interpretation of the FTC Act and that the Guides are not binding law. The changes to the Guides become effective December 1, 2009. For a copy of the press release, please see http://www.ftc.gov/opa/2009/10/endortest.shtm. For a copy of the Federal Register notice, please see http://www.ftc.gov/os/2009/10/091005endorsementguidesfnnotice.pdf.
HUD Revises FAQs on Revised RESPA Rule. On October 7, the U.S. Department of Housing and Urban Development (HUD) revised its “Frequently Asked Questions” regarding its 2008 amendments to Regulation X, the Real Estate Settlement Procedures Act’s (RESPA) implementing regulation. For a copy of the revised FAQs, please see http://www.hud.gov/offices/hsg/ramh/res/resparulefaqs.pdf.
OTS Issues Guidance on “No Interest, No Payment” Credit Card Programs. On September 24, the Office of Thrift Supervision (OTS) issued a memorandum letter regarding the implementation of “no interest, no payment” credit card programs by savings associations. The letter reiterates guidance contained in the 2003 Account Management and Loss Allowance Guidance for Credit Card Lending (AMG), which states that lenders should require consumers to make minimum payments that will amortize their current balance over a reasonable period of time consistent with their creditworthiness and the type of debt they incur. As indicated in § 218 of its Examination Handbook, the OTS has interpreted this requirement to mean that, at a minimum, monthly payments should equal at least a one percent principal balance reduction plus all assessed monthly interest and finance charges. Therefore, when offering “no interest, no payment” credit card programs, OTS-regulated savings associations (or their retail partners) must require minimum monthly payments even during the promotional period. The OTS expects full compliance with the guidance by February 22, 2010. For a copy of the letter, please see http://files.ots.treas.gov/25321.pdf.
Treasury, HUD Announce More Than 500,000 Trial Loan Modifications in Progress Under Making Home Affordable Program. On October 8, the U.S. Department of the Treasury (Treasury) and U.S. Department of Housing and Urban Development (HUD) announced that they have met a goal set in July to have 500,000 trial loan modifications in progress under the Making Home Affordable program by November 1. According to the press release, on the same day senior Treasury and HUD officials held one of a series of ongoing meetings with servicers to discuss improving servicer efficiency and responsiveness to borrowers during the loan modification process. For a copy of the press release, please see http://www.ustreas.gov/press/releases/tg315.htm.
FTC Settles Charges with Fraudulent Credit Repair Operations. On October 8, the Federal Trade Commission (FTC) announced the settlement of charges with two allegedly fraudulent credit repair companies and their principals. According to the FTC’s complaints, filed in 2008, both operations falsely promised to remove negative information from consumers’ credit reports even when the information was accurate and not obsolete, in violation of the FTC Act and the Credit Repair Organizations Act (CROA). The FTC also charged the credit repair companies with violating the CROA by charging and collecting payment for their services before performing any work. The settlement orders bar the defendants from making false claims when marketing credit repair services or any other product or service, and specifically prohibit them from misrepresenting any material fact, including (i) that they can substantially improve consumers’ credit reports by permanently removing negative information, even when it’s accurate and not obsolete, (ii) that they can otherwise improve a consumer’s credit report or ability to obtain credit, (iii) the full cost of their services and any restrictions, (iv) material restrictions or limitations to purchase or receive goods or services, (v) any material aspect of their refund or cancellation policy, and (vi) any aspect of how the goods or services will perform. The orders also bar them from violating the CROA in any way when selling credit repair services, for example, misrepresenting their services or charging for services in advance. Finally, the settlements contain record-keeping and reporting provisions to allow the FTC to monitor compliance and impose judgments totaling approximately $10.5 million, which will be suspended due to the defendants’ inability to pay. For a copy of the FTC press release, please see http://www.ftc.gov/opa/2009/10/successcredit.shtm.
Six Companies that Claimed Compliance with International, US Privacy Laws Settle with FTC. On October 6, the Federal Trade Commission (FTC) issued proposed settlements with six companies that allegedly falsely claimed (i) to comply with United States (U.S.) and European Union (E.U.) privacy laws and (ii) to be certified under the U.S./E.U. Safe Harbor Program (the Program). The six companies are World Innovators, Inc., ExpatEdge Partners LLC, Onyx Graphics, Inc., Directors Desk LLC, Collectify LLC, and Progressive Gaitways LLC. According to the FTC, each of the companies allowed certifications under the Program to lapse without attempting to renew them. The settlements prohibit each company from misrepresenting the extent of their participation in any privacy, security, or other compliance program sponsored by a government or third party. The FTC will determine whether to finalize the settlements following a public comment period that closes on November 5, 2009. For a copy of the press release, please see http://www.ftc.gov/opa/2009/10/safeharbor.shtm.
Treasury Announces Additional Initial Closings Under Legacy Securities Public-Private Investment Program. On October 6, the U.S. Department of the Treasury announced three additional initial closings of Public-Private Investment Funds (PPIFs) established under the Legacy Securities Public-Private Investment Program (PPIP). The PPIFs are (i) AllianceBernstein, LP and its sub-advisors Greenfield Partners, LLC and Rialto Capital Management, LLC, (ii) BlackRock, Inc., and (iii) Wellington Management Company, LLP. Each closing represents more than $500 million of committed equity capital from private investors. The total committed equity and debt capital under the PPIP is now $12.27 billion. Last week, Treasury reported that Invesco Ltd. (Invesco Legacy Securities Master Fund, L.P.) and The TCW Group, Inc. (UST/TCW Senior Mortgage Securities Fund, L.P.) were the first two funds to make initial closings under the PPIP (reported in InfoBytes, Oct. 2, 2009). For a copy of the press release, please see http://www.financialstability.gov/latest/tg_10052009.html.
State Issues
Delaware Clarifies Law Applicable to Debt Management Services Modifying Unsecured Debt. On October 5, Delaware Governor Jack Markell signed H.B. 232, clarifying those protections available to Delaware homeowners facing foreclosure in contrast to the protections available to the bearer of unsecured debt (e.g., unsecured credit cards). The bill amends the Delaware Debt Management Services Act (the Act) by inserting the word “unsecured” in the definition of debt management services to denote that the Act regulates unsecured debt management service providers that negotiate terms or concessions related to unsecured credit and not secured debt (e.g., a mortgage). As a result, companies offering to negotiate modifications of secured debt on behalf of individuals with homes in foreclosure are required to comply with the Mortgage Rescue Fraud Prevention Act in 6 Del. C. Chapter 24B. For a copy of the bill, please see http://legis.delaware.gov/LIS/lis145.nsf/vwLegislation/HB+232/$file/legis.html?open.
Connecticut State Banking Commissioner Sets Maximum Fees for Debt Negotiators. On September 28, the Connecticut State Banking Commissioner issued a maximum fee schedule for “debt negotiation” - including loan modification, short sales or foreclosure rescue activities - performed on behalf of Connecticut debtors (the licensure requirement for debt negotiators was reported in InfoBytes, Sept. 25, 2009). Under the schedule, a debt negotiator may charge as much as $50 for an initial or set-up fee and as much as $8 for monthly service fees for each creditor listed on a debt negotiation contract; the total service fee chargeable to a debtor cannot exceed $40. The aggregate fees, including the initial and service fees, charged by a debt negotiator cannot exceed 10 percent of the amount by which the consumer’s debt is reduced. Finally, a debt negotiator of secured debt, including Short Sales and Foreclosure Rescue Services, cannot charge more than $500 for debt negotiation services involving secured debt, and such a fee is collectable only upon the successful completion of the debt negotiation services (i.e., the fee cannot be collected up-front). For a copy of the press release, please see http://www.ct.gov/dob/cwp/view.asp?a=2245&q=447726.
Courts
DOJ, Bank Reach Proposed Consent Decree Regarding Allegations of Fair Housing Act, ECOA Violations. On September 30, the U.S. Department of Justice (DOJ) filed a complaint and proposed consent decree in a case alleging that First United Security Bank (the Bank) engaged in discriminatory pricing of home mortgages and redlining, in violation of the Fair Housing Act and Equal Credit Opportunity Act. United States v. First United Security Bank, No. 09-0644 (S.D. Ala. Sept. 30, 2009). The complaint alleges that, in 2004, the Bank charged African-American borrowers higher rates for home mortgage refinancing loans than similarly situated white borrowers. The complaint further alleges that the Bank “has avoided serving the [] credit needs of majority-black census tracts,” evidenced by the fact that none of the Bank’s 19 Alabama branches are located in either a majority-African-American census tract or anywhere in the five majority-black counties in the Bank’s market area. The Bank’s advertising and marketing practices were also cited in the redlining allegations. Under the settlement agreement, the Bank must open one new branch in a majority-African-American census tract. In addition, the Bank must spend $110,000 on a targeted marketing and advertising campaign, host or sponsor a series of financial education seminars, create a $50,000 settlement fund to compensate aggrieved persons, and invest $500,000 in a special financing program. For a copy of the press release, please see http://www.usdoj.gov/opa/pr/2009/September/09-crt-1062.html. For a copy of the complaint, please see http://www.usdoj.gov/crt/housing/documents/fusbcomp.pdf. For a copy of the order, please see http://www.usdoj.gov/crt/housing/documents/fusborder.pdf.
DOJ, Bank Enter into Partial Consent Decree Regarding Allegations of ECOA Violations. On September 30, the U.S. Department of Justice, following a fair lending investigation that arose from a referral by the Federal Reserve Board, entered into a partial consent decree with Nara Bank (the Bank) to resolve allegations that the Bank and two automobile dealers in the Bank’s automobile lending network violated the Equal Credit Opportunity Act (ECOA) by charging non-Asian customers higher "overages" or "dealer mark-ups" than similarly-situated Asian customers. United States v. Nara Bank, No. 09-7124 (C.D. Cal. Sept. 30, 2009). Under the terms of the partial consent decree, the Bank agreed to (i) pay $410,000 in consumer redress to aggrieved non-Asian borrowers and (ii) invest $100,000 per year in consumer financial education efforts. While the Bank no longer makes automobile loans, if it resumes originating automobile loans, it must (i) implement defined limits on dealer overages, (ii) monitor dealer mark-up practices, and (iii) implement enhanced and mandatory ECOA training for its employees and agents. For a copy of the press release, please see http://www.usdoj.gov/opa/pr/2009/September/09-crt-1063.html. For a copy of the complaint, please see http://www.usdoj.gov/crt/housing/documents/narabankcomp.pdf. For a copy of the partial settlement, please see http://www.usdoj.gov/crt/housing/documents/narapartialsettle.pdf.
Texas Federal Court Holds Military Service Member Who Is a Non-Party to a Mortgage Can Be Compelled to Arbitrate Claims Against Lender. Recently, a Texas federal court held that a military service member who is a non-party to a mortgage, but obtains benefits under the Service Members Civil Relief Act (the Act) with respect to that mortgage, can be compelled to arbitrate claims against the lender in accordance with the mortgage’s arbitration clause. Beach v. Green Tree Servicing LLC, Civil Action No. 08-cv-2358, 2009 WL 1759595 (S.D. Tex. June 17, 2009). In this case, the military member’s wife was the mortgagor, but the husband sued the lender claiming the lender’s failure to accept the mortgage payments resulted in foreclosure of the mortgage. The military member had obtained an extension of time to pay the mortgage due to a line of duty injury and had also obtained a reduction in the loan interest rate, as provided by the Act. The court held that, although it is unclear what substantive law governs whether a non-party must arbitrate, the question of the scope of an arbitration provision is governed by state law. Applying Texas state law, the service member was found to be bound by the arbitration provision because he had sought to derive a direct benefit from the contract containing the arbitration provision (the mortgage). For a copy of the opinion, please contact .
Third Circuit Affirms Dismissal of FCRA Firm Offer of Insurance Claim. On October 5, the U.S. Court of Appeals for the Third Circuit affirmed the dismissal of a consumer’s “firm offer of insurance” claim under the Fair Credit Reporting Act (FCRA). Gelman v. State Farm Mutual Automobile Insurance Co., No. 07-3665, 2009 WL 3163553 (3d Cir. Oct. 5, 2009). In Gelman, the plaintiff consumer alleged that the defendant insurance company’s mailing, which offered him insurance products that he might qualify for, was not a “firm offer of insurance” that would legitimize defendant’s access to his credit report under FCRA § 1681a. Relying on Cole v. U.S. Capital, Inc., 389 F.3d 719 (7th Cir. 2004) (reported in InfoBytes, Dec. 3, 2004), the consumer argued that the mailing was not a “firm offer” because it had no “value” to him. The insurance company moved to dismiss, and the district court granted the motion, holding, among other things, that the mailing constituted a “firm offer of insurance” under FCRA (the district court’s opinion was reported in InfoBytes, Aug. 17, 2007). On appeal, the Third Circuit affirmed the district court’s decision. Looking to the text of FCRA and to the Seventh Circuit’s more recent opinion in Murray v. New Cingular Wireless Services, Inc., 523 F.3d 719 (7th Cir. 2008) (reported in InfoBytes, Apr. 18, 2008), the court rejected the consumer’s contention that the mailing was not a “firm offer” because it lacked “value.” According to the court, “[t]he text of 1681a(l) is unambiguous, and it does not mention ‘value,’ or anything akin to it.” Indeed, the court noted that the provision could not have been intended to be limited to offers with “value” because if refers to “any offer of…insurance” (emphasis in opinion). According to the court, to be a “firm offer of insurance” under FCRA, the mailing need only be honored provided any required conditions are met. The mailing in this case was just such an offer, and therefore did not violate FCRA. For a copy of the opinion, please see http://www.ca3.uscourts.gov/opinarch/073665p.pdf.
Second Circuit Affirms Dismissal of Lender’s Suit Against Credit Bureaus Based on FCRA Preemption. On October 5, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s finding that the Fair Credit Reporting Act (FCRA) preempted a plaintiff mortgage broker’s state law claims alleging improper use of “trigger leads” against several consumer reporting agencies (CRAs). Premium Mortgage Corp. v. Equifax, Inc., No. 08-5317-cv, 2009 WL 3163225 (2d Cir. Oct. 5, 2009). In this case, the mortgage broker brought a putative class action against several consumer credit reporting agencies relating to the CSA’s sale of mortgage “trigger leads” to third-party lenders. Trigger leads were generated when a mortgage broker purchased an aggregated credit report from an intermediate reseller of consumer credit information in order to evaluate an applicant’s creditworthiness, and the reseller, separately, sold the “pre-screened” consumer report – known in the industry as a “trigger lead” - to third parties who would compete with the plaintiff to solicit the consumers for mortgages. The court found that trigger leads constitute “consumer reports” under FCRA. As such, FCRA preempted the mortgage broker’s common law claims for misappropriation of trade secrets, unfair competition, and unjust enrichment. The court also found that the mortgage broker failed to adequately plead its breach of contract, tortious interference with contract, and fraud claims. For a copy of the opinion, please see http://www.buckleysandler.com/Premium_v_Equifax.pdf.
Customer Sues Bank for Maintaining Insufficient Authentication Standards Following Fraudulent Transfers. On September 18, a Maine-based construction company filed a complaint against People’s United Bank d/b/a Ocean’s Bank (Ocean’s Bank), alleging violations of state law, negligence, breach of contract, breach of fiduciary duty, unjust enrichment, and conversion after unknown third parties were able to access the company’s checking and overdraft protection line of credit accounts and initiate unauthorized electronic funds transfers totaling over $500,000. Patco. Constr. Co. v. People’s United Bank, No. cv-2009-00275 (Me. Super. Ct. Sep. 18, 2009). In its complaint, the company alleges that Ocean’s Bank is liable for the fraudulent transfers because it failed to notice several “red flags” alerting it to suspicious account activity—for example, the requested transfer amounts were significantly larger than the amounts of any transfers made by the company in the past. The complaint also alleges that Ocean’s Bank unnecessarily exposed the company to the possibility of large fraudulent transfers. Among other things, Ocean’s Bank allegedly (i) did not offer multi-factor user authentication to the company, (ii) established a transfer limit for the company that was too high for its needs, and (iii) set an unreasonably low threshold for challenge question authentication, such that the challenge questions "provided little or no additional security . . .” The complaint requests that Ocean’s Bank be ordered to pay the net outstanding balance of the fraudulent transfers, plus interest, as well as damages, costs, and attorney’s fees. For a copy of the complaint, please see http://www.buckleysandler.com/Patco_v_Peoples.pdf.
Firm News
Jeff Naimon will be speaking about developments in appraisal requirements and related risks at the North Carolina Bankers Association’s Management Team Conference on October 20 in Greensboro, North Carolina.
Kirk Jensen and Clint Rockwell participated in a West LegalWorks webcast entitled “Underwater World: The Rippling Effect of California’s Foreclosure Crisis” on September 23.
Margo Tank spoke at the Electronic Signature and Records Association (ESRA) Annual Meeting on September 23 on the Mortgage Disclosure Improvement Act requirements and the impact on the electronic delivery of disclosures under the new rules. She also discussed the proposed FHA Electronic Signature Guidelines.
Andrea Mitchell spoke on a panel regarding new closed-end credit rules under Regulation Z for Women in Housing and Finance on September 30.
Andrew Sandler and Jeff Naimon spoke at the 2009 CRA and Fair Lending Colloquium October 4-7 in New Orleans. Andrew Sandler spoke on Regulatory Reform, and Jeff Naimon spoke on Navigating a HMDA Data Analysis.
Andrew Sandler spoke on October 6 at the Financial Access Roundtable Discussion with Bankers and Regulators, sponsored by Louisiana Appleseed, on a Latino Outreach Roundtable regarding Latino immigrant access to banks.
Mortgages
HUD Revises FAQs on Revised RESPA Rule. On October 7, the U.S. Department of Housing and Urban Development (HUD) revised its “Frequently Asked Questions” regarding its 2008 amendments to Regulation X, the Real Estate Settlement Procedures Act’s (RESPA) implementing regulation. For a copy of the revised FAQs, please see http://www.hud.gov/offices/hsg/ramh/res/resparulefaqs.pdf.
Treasury, HUD Announce More Than 500,000 Trial Loan Modifications in Progress Under Making Home Affordable Program. On October 8, the U.S. Department of the Treasury (Treasury) and U.S. Department of Housing and Urban Development (HUD) announced that they have met a goal set in July to have 500,000 trial loan modifications in progress under the Making Home Affordable program by November 1. According to the press release, on the same day senior Treasury and HUD officials held one of a series of ongoing meetings with servicers to discuss improving servicer efficiency and responsiveness to borrowers during the loan modification process. For a copy of the press release, please see http://www.ustreas.gov/press/releases/tg315.htm.
DOJ, Bank Reach Proposed Consent Decree Regarding Allegations of Fair Housing Act, ECOA Violations. On September 30, the U.S. Department of Justice (DOJ) filed a complaint and proposed consent decree in a case alleging that First United Security Bank (the Bank) engaged in discriminatory pricing of home mortgages and redlining, in violation of the Fair Housing Act and Equal Credit Opportunity Act. United States v. First United Security Bank, No. 09-0644 (S.D. Ala. Sept. 30, 2009). The complaint alleges that, in 2004, the Bank charged African-American borrowers higher rates for home mortgage refinancing loans than similarly situated white borrowers. The complaint further alleges that the Bank “has avoided serving the [] credit needs of majority-black census tracts,” evidenced by the fact that none of the Bank’s 19 Alabama branches are located in either a majority-African-American census tract or anywhere in the five majority-black counties in the Bank’s market area. The Bank’s advertising and marketing practices were also cited in the redlining allegations. Under the settlement agreement, the Bank must open one new branch in a majority-African-American census tract. In addition, the Bank must spend $110,000 on a targeted marketing and advertising campaign, host or sponsor a series of financial education seminars, create a $50,000 settlement fund to compensate aggrieved persons, and invest $500,000 in a special financing program. For a copy of the press release, please see http://www.usdoj.gov/opa/pr/2009/September/09-crt-1062.html. For a copy of the complaint, please see http://www.usdoj.gov/crt/housing/documents/fusbcomp.pdf. For a copy of the order, please see http://www.usdoj.gov/crt/housing/documents/fusborder.pdf.
Texas Federal Court Holds Military Service Member Who Is a Non-Party to a Mortgage Can Be Compelled to Arbitrate Claims Against Lender. Recently, a Texas federal court held that a military service member who is a non-party to a mortgage, but obtains benefits under the Service Members Civil Relief Act (the Act) with respect to that mortgage, can be compelled to arbitrate claims against the lender in accordance with the mortgage’s arbitration clause. Beach v. Green Tree Servicing LLC, Civil Action No. 08-cv-2358, 2009 WL 1759595 (S.D. Tex. June 17, 2009). In this case, the military member’s wife was the mortgagor, but the husband sued the lender claiming the lender’s failure to accept the mortgage payments resulted in foreclosure of the mortgage. The military member had obtained an extension of time to pay the mortgage due to a line of duty injury and had also obtained a reduction in the loan interest rate, as provided by the Act. The court held that, although it is unclear what substantive law governs whether a non-party must arbitrate, the question of the scope of an arbitration provision is governed by state law. Applying Texas state law, the service member was found to be bound by the arbitration provision because he had sought to derive a direct benefit from the contract containing the arbitration provision (the mortgage). For a copy of the opinion, please contact .
Second Circuit Affirms Dismissal of Lender’s Suit Against Credit Bureaus Based on FCRA Preemption. On October 5, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s finding that the Fair Credit Reporting Act (FCRA) preempted a plaintiff mortgage broker’s state law claims alleging improper use of “trigger leads” against several consumer reporting agencies (CRAs). Premium Mortgage Corp. v. Equifax, Inc., No. 08-5317-cv, 2009 WL 3163225 (2d Cir. Oct. 5, 2009). In this case, the mortgage broker brought a putative class action against several consumer credit reporting agencies relating to the CSA’s sale of mortgage “trigger leads” to third-party lenders. Trigger leads were generated when a mortgage broker purchased an aggregated credit report from an intermediate reseller of consumer credit information in order to evaluate an applicant’s creditworthiness, and the reseller, separately, sold the “pre-screened” consumer report – known in the industry as a “trigger lead” - to third parties who would compete with the plaintiff to solicit the consumers for mortgages. The court found that trigger leads constitute “consumer reports” under FCRA. As such, FCRA preempted the mortgage broker’s common law claims for misappropriation of trade secrets, unfair competition, and unjust enrichment. The court also found that the mortgage broker failed to adequately plead its breach of contract, tortious interference with contract, and fraud claims. For a copy of the opinion, please see http://www.buckleysandler.com/Premium_v_Equifax.pdf.
Banking
DOJ, Bank Reach Proposed Consent Decree Regarding Allegations of Fair Housing Act, ECOA Violations. On September 30, the U.S. Department of Justice (DOJ) filed a complaint and proposed consent decree in a case alleging that First United Security Bank (the Bank) engaged in discriminatory pricing of home mortgages and redlining, in violation of the Fair Housing Act and Equal Credit Opportunity Act. United States v. First United Security Bank, No. 09-0644 (S.D. Ala. Sept. 30, 2009). The complaint alleges that, in 2004, the Bank charged African-American borrowers higher rates for home mortgage refinancing loans than similarly situated white borrowers. The complaint further alleges that the Bank “has avoided serving the [] credit needs of majority-black census tracts,” evidenced by the fact that none of the Bank’s 19 Alabama branches are located in either a majority-African-American census tract or anywhere in the five majority-black counties in the Bank’s market area. The Bank’s advertising and marketing practices were also cited in the redlining allegations. Under the settlement agreement, the Bank must open one new branch in a majority-African-American census tract. In addition, the Bank must spend $110,000 on a targeted marketing and advertising campaign, host or sponsor a series of financial education seminars, create a $50,000 settlement fund to compensate aggrieved persons, and invest $500,000 in a special financing program. For a copy of the press release, please see http://www.usdoj.gov/opa/pr/2009/September/09-crt-1062.html. For a copy of the complaint, please see http://www.usdoj.gov/crt/housing/documents/fusbcomp.pdf. For a copy of the order, please see http://www.usdoj.gov/crt/housing/documents/fusborder.pdf.
DOJ, Bank Enter into Partial Consent Decree Regarding Allegations of ECOA Violations. On September 30, the U.S. Department of Justice, following a fair lending investigation that arose from a referral by the Federal Reserve Board, entered into a partial consent decree with Nara Bank (the Bank) to resolve allegations that the Bank and two automobile dealers in the Bank’s automobile lending network violated the Equal Credit Opportunity Act (ECOA) by charging non-Asian customers higher "overages" or "dealer mark-ups" than similarly-situated Asian customers. United States v. Nara Bank, No. 09-7124 (C.D. Cal. Sept. 30, 2009). Under the terms of the partial consent decree, the Bank agreed to (i) pay $410,000 in consumer redress to aggrieved non-Asian borrowers and (ii) invest $100,000 per year in consumer financial education efforts. While the Bank no longer makes automobile loans, if it resumes originating automobile loans, it must (i) implement defined limits on dealer overages, (ii) monitor dealer mark-up practices, and (iii) implement enhanced and mandatory ECOA training for its employees and agents. For a copy of the press release, please see http://www.usdoj.gov/opa/pr/2009/September/09-crt-1063.html. For a copy of the complaint, please see http://www.usdoj.gov/crt/housing/documents/narabankcomp.pdf. For a copy of the partial settlement, please see http://www.usdoj.gov/crt/housing/documents/narapartialsettle.pdf.
Customer Sues Bank for Maintaining Insufficient Authentication Standards Following Fraudulent Transfers. On September 18, a Maine-based construction company filed a complaint against People’s United Bank d/b/a Ocean’s Bank (Ocean’s Bank), alleging violations of state law, negligence, breach of contract, breach of fiduciary duty, unjust enrichment, and conversion after unknown third parties were able to access the company’s checking and overdraft protection line of credit accounts and initiate unauthorized electronic funds transfers totaling over $500,000. Patco. Constr. Co. v. People’s United Bank, No. cv-2009-00275 (Me. Super. Ct. Sep. 18, 2009). In its complaint, the company alleges that Ocean’s Bank is liable for the fraudulent transfers because it failed to notice several “red flags” alerting it to suspicious account activity—for example, the requested transfer amounts were significantly larger than the amounts of any transfers made by the company in the past. The complaint also alleges that Ocean’s Bank unnecessarily exposed the company to the possibility of large fraudulent transfers. Among other things, Ocean’s Bank allegedly (i) did not offer multi-factor user authentication to the company, (ii) established a transfer limit for the company that was too high for its needs, and (iii) set an unreasonably low threshold for challenge question authentication, such that the challenge questions "provided little or no additional security . . .” The complaint requests that Ocean’s Bank be ordered to pay the net outstanding balance of the fraudulent transfers, plus interest, as well as damages, costs, and attorney’s fees. For a copy of the complaint, please see http://www.buckleysandler.com/Patco_v_Peoples.pdf.
Consumer Finance
FTC Extends Comment Period for Debt Relief Amendments to Telemarketing Sales Rule. On October 5, the Federal Trade Commission (FTC) formally extended the public comment period for proposed Debt Relief Amendments to the Telemarketing Sales Rule (TSR) to October 26, 2009 (the proposal was first reported in InfoBytes, July 31, 2009). The proposal generally addresses the sale of debt relief services (e.g., credit counseling, debt management plans, debt settlement, and debt negotiation). Among other things, the proposed amendments would (i) define the term “debt relief service,” (ii) subject debt relief service telemarketers to the TSR regardless of the medium through which such services are initially advertised, (iii) mandate certain disclosures and prohibit misrepresentations in the telemarketing of debt relief services, and (iv) require full performance and documentation to the consumer before a debt relief services company requests and/or receives payment for debt relief services. The FTC will host a public forum on November 4, 2009 in Washington, D.C. to discuss the proposed rule. For a copy of the Federal Register notice, please see http://www.ftc.gov/os/2009/10/091005tsr.pdf.
FTC Proposes Amendments to the Free Credit Report Rule. On October 7, the Federal Trade Commission (FTC) proposed amendments to the Free Annual File Disclosures Rule, also known as the "Free Credit Report Rule." The proposed rule would implement the requirements of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) by instituting regulations outlawing deceptive marketing practices by credit reporting agencies (CRAs). The Credit CARD Act requires that certain advertisements for “free credit reports” include prominent disclosures to prevent confusion with federally mandated free annual credit reports. Generally, the rule would regulate these disclosures in television, radio, print, Internet, and other media. (e.g., CRA web sites must initially display a separate landing page stating: “This is not the free credit report provided for by Federal law. To get your free report, visit www.AnnualCreditReport.com or call 877-322-8228.”) Additionally, the proposed rule would prohibit CRAs from advertising other products or services to consumers seeking free credit reports until a consumer receives the free credit report, and further prohibit other practices that may interfere with the free credit report process. The comment period for the proposed rule ends November 30, 2009. The FTC intends to implement the final rule by February 22, 2010. For a copy of the FTC’s press release, please see http://www.ftc.gov/opa/2009/10/freecredit.shtm. For a copy of the proposed rule, please see http://www.ftc.gov/os/2009/10/R411005freeannualfile.pdf.
FTC Announces Revisions to Guidance Regarding Endorsements, Testimonials in Advertising. On October 5, the Federal Trade Commission (FTC) announced final revisions to the guidance (“FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising,” hereafter the Guides) that assists advertisers to comply with FTC Act provisions regarding endorsement and testimonial advertisements. The revisions, among other things, (i) eliminate a “safe harbor” provision that allowed advertisers to describe unusual results to illustrate a consumer’s experience with a product or service by providing a disclaimer such as “results not typical,” (ii) add new examples (e.g., “new media” such as blogs and “word-of-mouth” marketers) to illustrate that “material connections” (e.g., payments or free products) between advertisers and endorsers, especially connections that consumers would not expect, must be disclosed to consumers, and (iii) address celebrity endorsements. The FTC notes that the Guides provide the FTC’s interpretation of the FTC Act and that the Guides are not binding law. The changes to the Guides become effective December 1, 2009. For a copy of the press release, please see http://www.ftc.gov/opa/2009/10/endortest.shtm. For a copy of the Federal Register notice, please see http://www.ftc.gov/os/2009/10/091005endorsementguidesfnnotice.pdf.
FTC Settles Charges with Fraudulent Credit Repair Operations. On October 8, the Federal Trade Commission (FTC) announced the settlement of charges with two allegedly fraudulent credit repair companies and their principals. According to the FTC’s complaints, filed in 2008, both operations falsely promised to remove negative information from consumers’ credit reports even when the information was accurate and not obsolete, in violation of the FTC Act and the Credit Repair Organizations Act (CROA). The FTC also charged the credit repair companies with violating the CROA by charging and collecting payment for their services before performing any work. The settlement orders bar the defendants from making false claims when marketing credit repair services or any other product or service, and specifically prohibit them from misrepresenting any material fact, including (i) that they can substantially improve consumers’ credit reports by permanently removing negative information, even when it’s accurate and not obsolete, (ii) that they can otherwise improve a consumer’s credit report or ability to obtain credit, (iii) the full cost of their services and any restrictions, (iv) material restrictions or limitations to purchase or receive goods or services, (v) any material aspect of their refund or cancellation policy, and (vi) any aspect of how the goods or services will perform. The orders also bar them from violating the CROA in any way when selling credit repair services, for example, misrepresenting their services or charging for services in advance. Finally, the settlements contain record-keeping and reporting provisions to allow the FTC to monitor compliance and impose judgments totaling approximately $10.5 million, which will be suspended due to the defendants’ inability to pay. For a copy of the FTC press release, please see http://www.ftc.gov/opa/2009/10/successcredit.shtm.
Six Companies that Claimed Compliance with International, US Privacy Laws Settle with FTC. On October 6, the Federal Trade Commission (FTC) issued proposed settlements with six companies that allegedly falsely claimed (i) to comply with United States (U.S.) and European Union (E.U.) privacy laws and (ii) to be certified under the U.S./E.U. Safe Harbor Program (the Program). The six companies are World Innovators, Inc., ExpatEdge Partners LLC, Onyx Graphics, Inc., Directors Desk LLC, Collectify LLC, and Progressive Gaitways LLC. According to the FTC, each of the companies allowed certifications under the Program to lapse without attempting to renew them. The settlements prohibit each company from misrepresenting the extent of their participation in any privacy, security, or other compliance program sponsored by a government or third party. The FTC will determine whether to finalize the settlements following a public comment period that closes on November 5, 2009. For a copy of the press release, please see http://www.ftc.gov/opa/2009/10/safeharbor.shtm.
Delaware Clarifies Law Applicable to Debt Management Services Modifying Unsecured Debt. On October 5, Delaware Governor Jack Markell signed H.B. 232, clarifying those protections available to Delaware homeowners facing foreclosure in contrast to the protections available to the bearer of unsecured debt (e.g., unsecured credit cards). The bill amends the Delaware Debt Management Services Act (the Act) by inserting the word “unsecured” in the definition of debt management services to denote that the Act regulates unsecured debt management service providers that negotiate terms or concessions related to unsecured credit and not secured debt (e.g., a mortgage). As a result, companies offering to negotiate modifications of secured debt on behalf of individuals with homes in foreclosure are required to comply with the Mortgage Rescue Fraud Prevention Act in 6 Del. C. Chapter 24B. For a copy of the bill, please see http://legis.delaware.gov/LIS/lis145.nsf/vwLegislation/HB+232/$file/legis.html?open.
Connecticut State Banking Commissioner Sets Maximum Fees for Debt Negotiators. On September 28, the Connecticut State Banking Commissioner issued a maximum fee schedule for “debt negotiation” - including loan modification, short sales or foreclosure rescue activities - performed on behalf of Connecticut debtors (the licensure requirement for debt negotiators was reported in InfoBytes, Sept. 25, 2009). Under the schedule, a debt negotiator may charge as much as $50 for an initial or set-up fee and as much as $8 for monthly service fees for each creditor listed on a debt negotiation contract; the total service fee chargeable to a debtor cannot exceed $40. The aggregate fees, including the initial and service fees, charged by a debt negotiator cannot exceed 10 percent of the amount by which the consumer’s debt is reduced. Finally, a debt negotiator of secured debt, including Short Sales and Foreclosure Rescue Services, cannot charge more than $500 for debt negotiation services involving secured debt, and such a fee is collectable only upon the successful completion of the debt negotiation services (i.e., the fee cannot be collected up-front). For a copy of the press release, please see http://www.ct.gov/dob/cwp/view.asp?a=2245&q=447726.
DOJ, Bank Enter into Partial Consent Decree Regarding Allegations of ECOA Violations. On September 30, the U.S. Department of Justice, following a fair lending investigation that arose from a referral by the Federal Reserve Board, entered into a partial consent decree with Nara Bank (the Bank) to resolve allegations that the Bank and two automobile dealers in the Bank’s automobile lending network violated the Equal Credit Opportunity Act (ECOA) by charging non-Asian customers higher "overages" or "dealer mark-ups" than similarly-situated Asian customers. United States v. Nara Bank, No. 09-7124 (C.D. Cal. Sept. 30, 2009). Under the terms of the partial consent decree, the Bank agreed to (i) pay $410,000 in consumer redress to aggrieved non-Asian borrowers and (ii) invest $100,000 per year in consumer financial education efforts. While the Bank no longer makes automobile loans, if it resumes originating automobile loans, it must (i) implement defined limits on dealer overages, (ii) monitor dealer mark-up practices, and (iii) implement enhanced and mandatory ECOA training for its employees and agents. For a copy of the press release, please see http://www.usdoj.gov/opa/pr/2009/September/09-crt-1063.html. For a copy of the complaint, please see http://www.usdoj.gov/crt/housing/documents/narabankcomp.pdf. For a copy of the partial settlement, please see http://www.usdoj.gov/crt/housing/documents/narapartialsettle.pdf.
Insurance
HUD Revises FAQs on Revised RESPA Rule. On October 7, the U.S. Department of Housing and Urban Development (HUD) revised its “Frequently Asked Questions” regarding its 2008 amendments to Regulation X, the Real Estate Settlement Procedures Act’s (RESPA) implementing regulation. For a copy of the revised FAQs, please see http://www.hud.gov/offices/hsg/ramh/res/resparulefaqs.pdf.
Third Circuit Affirms Dismissal of FCRA Firm Offer of Insurance Claim. On October 5, the U.S. Court of Appeals for the Third Circuit affirmed the dismissal of a consumer’s “firm offer of insurance” claim under the Fair Credit Reporting Act (FCRA). Gelman v. State Farm Mutual Automobile Insurance Co., No. 07-3665, 2009 WL 3163553 (3d Cir. Oct. 5, 2009). In Gelman, the plaintiff consumer alleged that the defendant insurance company’s mailing, which offered him insurance products that he might qualify for, was not a “firm offer of insurance” that would legitimize defendant’s access to his credit report under FCRA § 1681a. Relying on Cole v. U.S. Capital, Inc., 389 F.3d 719 (7th Cir. 2004) (reported in InfoBytes, Dec. 3, 2004), the consumer argued that the mailing was not a “firm offer” because it had no “value” to him. The insurance company moved to dismiss, and the district court granted the motion, holding, among other things, that the mailing constituted a “firm offer of insurance” under FCRA (the district court’s opinion was reported in InfoBytes, Aug. 17, 2007). On appeal, the Third Circuit affirmed the district court’s decision. Looking to the text of FCRA and to the Seventh Circuit’s more recent opinion in Murray v. New Cingular Wireless Services, Inc., 523 F.3d 719 (7th Cir. 2008) (reported in InfoBytes, Apr. 18, 2008), the court rejected the consumer’s contention that the mailing was not a “firm offer” because it lacked “value.” According to the court, “[t]he text of 1681a(l) is unambiguous, and it does not mention ‘value,’ or anything akin to it.” Indeed, the court noted that the provision could not have been intended to be limited to offers with “value” because if refers to “any offer of…insurance” (emphasis in opinion). According to the court, to be a “firm offer of insurance” under FCRA, the mailing need only be honored provided any required conditions are met. The mailing in this case was just such an offer, and therefore did not violate FCRA. For a copy of the opinion, please see http://www.ca3.uscourts.gov/opinarch/073665p.pdf.
Litigation
DOJ, Bank Reach Proposed Consent Decree Regarding Allegations of Fair Housing Act, ECOA Violations. On September 30, the U.S. Department of Justice (DOJ) filed a complaint and proposed consent decree in a case alleging that First United Security Bank (the Bank) engaged in discriminatory pricing of home mortgages and redlining, in violation of the Fair Housing Act and Equal Credit Opportunity Act. United States v. First United Security Bank, No. 09-0644 (S.D. Ala. Sept. 30, 2009). The complaint alleges that, in 2004, the Bank charged African-American borrowers higher rates for home mortgage refinancing loans than similarly situated white borrowers. The complaint further alleges that the Bank “has avoided serving the [] credit needs of majority-black census tracts,” evidenced by the fact that none of the Bank’s 19 Alabama branches are located in either a majority-African-American census tract or anywhere in the five majority-black counties in the Bank’s market area. The Bank’s advertising and marketing practices were also cited in the redlining allegations. Under the settlement agreement, the Bank must open one new branch in a majority-African-American census tract. In addition, the Bank must spend $110,000 on a targeted marketing and advertising campaign, host or sponsor a series of financial education seminars, create a $50,000 settlement fund to compensate aggrieved persons, and invest $500,000 in a special financing program. For a copy of the press release, please see http://www.usdoj.gov/opa/pr/2009/September/09-crt-1062.html. For a copy of the complaint, please see http://www.usdoj.gov/crt/housing/documents/fusbcomp.pdf. For a copy of the order, please see http://www.usdoj.gov/crt/housing/documents/fusborder.pdf.
DOJ, Bank Enter into Partial Consent Decree Regarding Allegations of ECOA Violations. On September 30, the U.S. Department of Justice, following a fair lending investigation that arose from a referral by the Federal Reserve Board, entered into a partial consent decree with Nara Bank (the Bank) to resolve allegations that the Bank and two automobile dealers in the Bank’s automobile lending network violated the Equal Credit Opportunity Act (ECOA) by charging non-Asian customers higher "overages" or "dealer mark-ups" than similarly-situated Asian customers. United States v. Nara Bank, No. 09-7124 (C.D. Cal. Sept. 30, 2009). Under the terms of the partial consent decree, the Bank agreed to (i) pay $410,000 in consumer redress to aggrieved non-Asian borrowers and (ii) invest $100,000 per year in consumer financial education efforts. While the Bank no longer makes automobile loans, if it resumes originating automobile loans, it must (i) implement defined limits on dealer overages, (ii) monitor dealer mark-up practices, and (iii) implement enhanced and mandatory ECOA training for its employees and agents. For a copy of the press release, please see http://www.usdoj.gov/opa/pr/2009/September/09-crt-1063.html. For a copy of the complaint, please see http://www.usdoj.gov/crt/housing/documents/narabankcomp.pdf. For a copy of the partial settlement, please see http://www.usdoj.gov/crt/housing/documents/narapartialsettle.pdf.
Texas Federal Court Holds Military Service Member Who Is a Non-Party to a Mortgage Can Be Compelled to Arbitrate Claims Against Lender. Recently, a Texas federal court held that a military service member who is a non-party to a mortgage, but obtains benefits under the Service Members Civil Relief Act (the Act) with respect to that mortgage, can be compelled to arbitrate claims against the lender in accordance with the mortgage’s arbitration clause. Beach v. Green Tree Servicing LLC, Civil Action No. 08-cv-2358, 2009 WL 1759595 (S.D. Tex. June 17, 2009). In this case, the military member’s wife was the mortgagor, but the husband sued the lender claiming the lender’s failure to accept the mortgage payments resulted in foreclosure of the mortgage. The military member had obtained an extension of time to pay the mortgage due to a line of duty injury and had also obtained a reduction in the loan interest rate, as provided by the Act. The court held that, although it is unclear what substantive law governs whether a non-party must arbitrate, the question of the scope of an arbitration provision is governed by state law. Applying Texas state law, the service member was found to be bound by the arbitration provision because he had sought to derive a direct benefit from the contract containing the arbitration provision (the mortgage). For a copy of the opinion, please contact .
Third Circuit Affirms Dismissal of FCRA Firm Offer of Insurance Claim. On October 5, the U.S. Court of Appeals for the Third Circuit affirmed the dismissal of a consumer’s “firm offer of insurance” claim under the Fair Credit Reporting Act (FCRA). Gelman v. State Farm Mutual Automobile Insurance Co., No. 07-3665, 2009 WL 3163553 (3d Cir. Oct. 5, 2009). In Gelman, the plaintiff consumer alleged that the defendant insurance company’s mailing, which offered him insurance products that he might qualify for, was not a “firm offer of insurance” that would legitimize defendant’s access to his credit report under FCRA § 1681a. Relying on Cole v. U.S. Capital, Inc., 389 F.3d 719 (7th Cir. 2004) (reported in InfoBytes, Dec. 3, 2004), the consumer argued that the mailing was not a “firm offer” because it had no “value” to him. The insurance company moved to dismiss, and the district court granted the motion, holding, among other things, that the mailing constituted a “firm offer of insurance” under FCRA (the district court’s opinion was reported in InfoBytes, Aug. 17, 2007). On appeal, the Third Circuit affirmed the district court’s decision. Looking to the text of FCRA and to the Seventh Circuit’s more recent opinion in Murray v. New Cingular Wireless Services, Inc., 523 F.3d 719 (7th Cir. 2008) (reported in InfoBytes, Apr. 18, 2008), the court rejected the consumer’s contention that the mailing was not a “firm offer” because it lacked “value.” According to the court, “[t]he text of 1681a(l) is unambiguous, and it does not mention ‘value,’ or anything akin to it.” Indeed, the court noted that the provision could not have been intended to be limited to offers with “value” because if refers to “any offer of…insurance” (emphasis in opinion). According to the court, to be a “firm offer of insurance” under FCRA, the mailing need only be honored provided any required conditions are met. The mailing in this case was just such an offer, and therefore did not violate FCRA. For a copy of the opinion, please see http://www.ca3.uscourts.gov/opinarch/073665p.pdf.
Second Circuit Affirms Dismissal of Lender’s Suit Against Credit Bureaus Based on FCRA Preemption. On October 5, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s finding that the Fair Credit Reporting Act (FCRA) preempted a plaintiff mortgage broker’s state law claims alleging improper use of “trigger leads” against several consumer reporting agencies (CRAs). Premium Mortgage Corp. v. Equifax, Inc., No. 08-5317-cv, 2009 WL 3163225 (2d Cir. Oct. 5, 2009). In this case, the mortgage broker brought a putative class action against several consumer credit reporting agencies relating to the CSA’s sale of mortgage “trigger leads” to third-party lenders. Trigger leads were generated when a mortgage broker purchased an aggregated credit report from an intermediate reseller of consumer credit information in order to evaluate an applicant’s creditworthiness, and the reseller, separately, sold the “pre-screened” consumer report – known in the industry as a “trigger lead” - to third parties who would compete with the plaintiff to solicit the consumers for mortgages. The court found that trigger leads constitute “consumer reports” under FCRA. As such, FCRA preempted the mortgage broker’s common law claims for misappropriation of trade secrets, unfair competition, and unjust enrichment. The court also found that the mortgage broker failed to adequately plead its breach of contract, tortious interference with contract, and fraud claims. For a copy of the opinion, please see http://www.buckleysandler.com/Premium_v_Equifax.pdf.
Customer Sues Bank for Maintaining Insufficient Authentication Standards Following Fraudulent Transfers. On September 18, a Maine-based construction company filed a complaint against People’s United Bank d/b/a Ocean’s Bank (Ocean’s Bank), alleging violations of state law, negligence, breach of contract, breach of fiduciary duty, unjust enrichment, and conversion after unknown third parties were able to access the company’s checking and overdraft protection line of credit accounts and initiate unauthorized electronic funds transfers totaling over $500,000. Patco. Constr. Co. v. People’s United Bank, No. cv-2009-00275 (Me. Super. Ct. Sep. 18, 2009). In its complaint, the company alleges that Ocean’s Bank is liable for the fraudulent transfers because it failed to notice several “red flags” alerting it to suspicious account activity—for example, the requested transfer amounts were significantly larger than the amounts of any transfers made by the company in the past. The complaint also alleges that Ocean’s Bank unnecessarily exposed the company to the possibility of large fraudulent transfers. Among other things, Ocean’s Bank allegedly (i) did not offer multi-factor user authentication to the company, (ii) established a transfer limit for the company that was too high for its needs, and (iii) set an unreasonably low threshold for challenge question authentication, such that the challenge questions "provided little or no additional security . . .” The complaint requests that Ocean’s Bank be ordered to pay the net outstanding balance of the fraudulent transfers, plus interest, as well as damages, costs, and attorney’s fees. For a copy of the complaint, please see http://www.buckleysandler.com/Patco_v_Peoples.pdf.
Privacy/Data Security
Second Circuit Affirms Dismissal of Lender’s Suit Against Credit Bureaus Based on FCRA Preemption. On October 5, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s finding that the Fair Credit Reporting Act (FCRA) preempted a plaintiff mortgage broker’s state law claims alleging improper use of “trigger leads” against several consumer reporting agencies (CRAs). Premium Mortgage Corp. v. Equifax, Inc., No. 08-5317-cv, 2009 WL 3163225 (2d Cir. Oct. 5, 2009). In this case, the mortgage broker brought a putative class action against several consumer credit reporting agencies relating to the CSA’s sale of mortgage “trigger leads” to third-party lenders. Trigger leads were generated when a mortgage broker purchased an aggregated credit report from an intermediate reseller of consumer credit information in order to evaluate an applicant’s creditworthiness, and the reseller, separately, sold the “pre-screened” consumer report – known in the industry as a “trigger lead” - to third parties who would compete with the plaintiff to solicit the consumers for mortgages. The court found that trigger leads constitute “consumer reports” under FCRA. As such, FCRA preempted the mortgage broker’s common law claims for misappropriation of trade secrets, unfair competition, and unjust enrichment. The court also found that the mortgage broker failed to adequately plead its breach of contract, tortious interference with contract, and fraud claims. For a copy of the opinion, please see http://www.buckleysandler.com/Premium_v_Equifax.pdf.
Credit Cards
OTS Issues Guidance on “No Interest, No Payment” Credit Card Programs. On September 24, the Office of Thrift Supervision (OTS) issued a memorandum letter regarding the implementation of “no interest, no payment” credit card programs by savings associations. The letter reiterates guidance contained in the 2003 Account Management and Loss Allowance Guidance for Credit Card Lending (AMG), which states that lenders should require consumers to make minimum payments that will amortize their current balance over a reasonable period of time consistent with their creditworthiness and the type of debt they incur. As indicated in § 218 of its Examination Handbook, the OTS has interpreted this requirement to mean that, at a minimum, monthly payments should equal at least a one percent principal balance reduction plus all assessed monthly interest and finance charges. Therefore, when offering “no interest, no payment” credit card programs, OTS-regulated savings associations (or their retail partners) must require minimum monthly payments even during the promotional period. The OTS expects full compliance with the guidance by February 22, 2010. For a copy of the letter, please see http://files.ots.treas.gov/25321.pdf.