InfoBytes, September 11, 2009
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Miscellany
- Mortgages
- Banking
- Privacy/Data Security
- Credit Cards
Federal Issues
FDIC Issues Proposed Rule on Debt Guarantee Program. On September 9, the Federal Deposit Insurance Corporation (FDIC) issued a notice of proposed rulemaking setting forth two alternatives for winding down the operations of the agency’s Debt Guarantee Program (DGP). Under the first, the FDIC would follow the procedures established by the FDIC’s October 23, 2008 interim rulemaking. This proposal, known as “Alternative A,” would permit insured depository institutions and other participating entities to continue to issue guaranteed debt under the DGP until October 31, 2009, with the FDIC’s guarantee for such debt expiring no later than December 31, 2012. Under the FDIC’s second proposal, “Alternative B,” the DGP would phase out operations pursuant to the same timeline as provided in Alternative A, except that it could continue operating on a limited, case-by-case basis, as an emergency guarantee facility through April 30, 2010. If Alternative B were adopted, participation would be limited to insured depository institutions enrolled in the DGP and to entities that have issued FDIC-guaranteed debt under the DGP as of September 9, 2009. Additionally, any eligible entity seeking to utilize the emergency facility would be subject to (i) prior approval by the FDIC, and (ii) an increased annualized participation fee of at least 300 basis points. Comments must be submitted no later than 15 days after the proposal is published in the Federal Register. For a copy of the proposed rule, please see http://www.fdic.gov/news/board/NoticeSept9no6.pdf.
FDIC Encourages Loss-Share Partner Institutions to Institute Temporary Forbearance Plan for Certain Borrowers to Avoid Foreclosures. On September 11, the Federal Deposit Insurance Corporation (FDIC) announced that it is encouraging loss-share partner institutions, as part of its loss-share agreement with acquirers of failed FDIC-insured institutions, to consider temporarily reducing mortgage payments for borrowers whose unemployment or underemployment is the primary cause for default on a home mortgage. Under such a temporary forbearance plan, institutions would (i) reduce the borrower’s monthly housing debt to income ratio to no more than 31 percent at the time of the modification, and (ii) eliminate adjustable interest rate and negative amortization features. The plan would be applicable to "qualifying loans" for a period of at least six months. According to the FDIC, the reductions in mortgage payments during a temporary forbearance period are not covered losses under the loss-share agreement with the FDIC. Losses incurred from subsequent permanent loan modifications, however, would be covered under the loss-share agreement. If the home preservation efforts are ultimately unsuccessful, losses incurred in subsequent foreclosures or short sales would also be covered losses. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2009/pr09167.html.
FDIC Announces Enhanced Supervisory Procedures for Newly Insured Institutions. On August 28, the Federal Deposit Insurance Corporation (FDIC) issued Financial Institution Letter 50-2009 (FIL-50-2009), which announces enhanced supervisory procedures for institutions that have been insured FDIC-supervised depository institutions for seven years or less. Under the current policy, newly insured institutions are subject to higher capital requirements and more frequent examination activities during the first three years of operation. The FDIC will now extend its procedures for these institutions from three to seven years for examinations, capital, and other requirements. In addition, the period during which material changes in business plans for newly insured institutions will require prior FDIC approval will be extended from the first three years of operation to the first seven years of operation. De novo entities that are subsidiaries of existing eligible holding companies generally are excluded from the requirements in FIL-50-2009. For a copy of the letter, please see http://www.fdic.gov/news/news/financial/2009/fil09050.pdf.
FDIC Issues Rule Finalizing the Extension of the Standard Maximum Deposit Insurance Amount; Revisions to Mortgage Servicing Account Regulations. On September 9, the Federal Deposit Insurance Corporation (FDIC) approved a rule to finalize the extension of the increase in the standard maximum deposit insurance amount to $250,000 through December 31, 2013. The rule also finalizes, without substantive changes, (i) the revisions to the mortgage servicing account regulations adopted by the FDIC in October 2008, which provide coverage to mortgagees (or investors) as a collective group based on the cumulative amount of the borrowers’ payments of principal and interest into the account (reported in InfoBytes, Oct. 24, 2008), and (ii) finalizes revisions to the revocable trust account regulations adopted by the FDIC in September 2008. The final rule becomes effective 30 days after publication in the Federal Register. For a copy of the final rule, please see http://www.fdic.gov/news/board/NoticeSept9no2.pdf.
NACHA Proposes Extending Adjustment Entry Period for RDFIs. On September 1, the National Automated Clearing House Association (NACHA) issued, for comment, a proposal to extend the period during which a Receiving Depository Financial Institution (RDFI) may transmit an adjustment entry related to an unauthorized entry to its Automated Clearing House (ACH) Operator, from 60 days to 90 days. According to NACHA, the extension is intended to harmonize NACHA rules with requirements under Regulation E, which requires that an RDFI provide credit to a consumer who asserts a claim within 60 days from the transmittal of the statement showing an unauthorized transaction and who meets certain other requirements. The NACHA rules provide that an adjustment entry must be made within 60 days of the settlement date of an entry. If the settlement date of an entry occurs at the beginning of the month and the statement is transmitted at the end of the month, an RDFI would have 90 days from the settlement date of an entry to provide credit to a consumer while only having 60 days to transmit an adjustment entry to the ACH. According to NACHA, the extension to 90 days would give RDFIs sufficient time to submit credit adjustment entries for virtually all entries for which RDFIs are required to give credit to consumers under Regulation E. Comments must be received by October 16, 2009. NACHA is proposing a December 17, 2010 implementation date for the final rules. For a copy of the proposal summary, please see http://www.nacha.org/ACH_Rules/Rule_Making_Process/Rules_Work_Groups/RFC%20-%2009012009/docs/Extended%20Timeframe%20for%20Adjustment%20Entries%20-%20Executive%20Summary%20and%20Rules%20Description%20-%20September%201,%202009.pdf. For a copy of the proposal, please see http://www.nacha.org/ACH_Rules/Rule_Making_Process/Rules_Work_Groups/RFC%20-%2009012009/docs/Proposed%20Modifications%20to%20the%20Rules%20-%20Extended%20Return%20Times%20for%20Adjustment%20Entries%20-%20September%201,%202009.pdf.
State Issues
North Carolina Law to Increase Requirements for Collection Agencies, Debt Buyers in Foreclosure Actions. On September 9, North Carolina Governor Bev Perdue signed SB 974, the “North Carolina Consumer Economic Protection Act,” (the Act) which pertains to debt collection and mortgage foreclosure practices. Under the Act, the Clerk of Court who presides over foreclosure hearings has the authority to continue hearings regarding a foreclosure for up to 60 days. In making this determination, the Clerk of Court may consider (i) whether the debtor was offered an opportunity to resolve the foreclosure through forbearance, loan modification, or other commonly accepted resolution plan, (ii) whether there was actual responsive communication with the debtor (e.g., telephone conferences or in-person meetings), (iii) whether the debtor has indicated that he or she has the intent and ability to make payments under a foreclosure resolution plan, and (iv) whether there were “good faith voluntary resolution efforts” to avoid a foreclosure. Further, under the Act, a collection agency that is or is acting on behalf of a “debt buyer,” as defined by the Act, cannot attempt to collect on a debt (e.g., bring suit or initiate an arbitration proceedings) (i) if such actions would be barred by the statute of limitations, (ii) without first giving the debtor written notice of the intent to file a legal action at least 30 days in advance of filing, and (iii) without valid documentation that the debt buyer is the owner of debt and that there has been “reasonable verification” of the amount of the debt. The Act also amends requirements for (i) materials that must be part of and attached to complaints against certain debt collection entities, (ii) prerequisites to entering a default or summary judgment against a debtor, (iii) materials required for setting forth a party’s obligation to pay attorneys’ fees for services rendered to an assignee or a debt buyer, and (iv) the percentage of the principal balance of the loan which must be posted by an appealing party opposing a foreclosure. Finally, the Act increases certain civil penalty amounts that may be imposed against debt collection agencies from $100-$2,000 to $500-$4,000 per incident. The Act becomes effective October 1, 2009 and applies to foreclosures initiated, debt collection activities undertaken, and actions filed on or after October 1, 2009. For a copy of the Act, please see http://www.ncleg.net/Sessions/2009/Bills/Senate/PDF/S974v5.pdf.
Courts
Fifth, Eighth Circuits Hold PMSI Includes Negative Equity; Reject Debtors’ Cramdown Attempts. On September 8, the U.S. Courts of Appeals for the Fifth and Eighth Circuits held that an auto finance creditor’s purchase-money security interest (PMSI) includes the financing of negative equity from a trade-in vehicle, and thus rejected the debtors’ attempt to bifurcate and cramdown their bankruptcy claims. In re Dale, No. 08-20583, 2009 WL 2857998 (5th Cir. Sept. 8, 2009). In re Mierkowski, No. 08-3866, 2009 WL 2853586 (8th Cir. Sept. 8, 2009). In both cases, a debtor traded in a vehicle in which the debtor held "negative equity" (i.e., the amount owed on the trade-in vehicle exceeded the value of that vehicle) in conjunction with financing a new vehicle purchase. The amount financed to purchase the new vehicle included the "negative equity" from the trade-in vehicle. In both cases, the debtors filed for Chapter 13 bankruptcy protection after purchasing the new vehicle. The debtors sought to "cramdown" their Chapter 13 plan by bifurcating the creditor’s claim into (i) a secured portion, and (ii) an unsecured portion (the negative equity from the trade-in vehicle), and the creditors in both cases objected to this proposed treatment of its security interest. In Mierkowski, the court followed the persuasive precedent of the Tenth, Fourth, and Eleventh Circuits to hold that, because the amount financed to pay off the negative equity in the trade-in is "part of the price" of the new car, the auto finance creditor had a PMSI securing the negative-equity financing under Missouri law. The court looked to the definition of PMSI in the Missouri Uniform Commercial Code, which requires a “close nexus” between the acquisition of collateral and the secured obligation and to the definition of "time sale price" in the Missouri Motor Vehicle Time Sales Act to arrive at its decision. On September 9, the Eighth Circuit followed Mierkowski to affirm that PMSI is included in the negative equity from a trade-in vehicle. In re Callicott, No. 09-1030, 2009 WL 2870501 (8th Cir. Sept. 9, 2009). In Dale, the Fifth Circuit held that the funds used to pay off the negative equity were “value given to enable,” and, thus, the auto finance creditor had a PMSI securing the negative-equity financing under Texas law. For a copy of the Mierkowski opinion, please see http://www.ca8.uscourts.gov/opndir/09/09/083866P.pdf. For a copy of the Callicott opinion, please see http://www.ca8.uscourts.gov/opndir/09/09/091030P.pdf. For a copy of the Dale opinion, please see http://www.ca5.uscourts.gov/opinions%5Cpub%5C08/08-20583-CV0.wpd.pdf.
California Federal Court Holds Non-Disclosure of Mortgage Loan Terms Claims Not Preempted by TILA, HOLA. On August 18, the U.S. District Court for the Central District of California held that neither the Home Owners Loan Act (HOLA) nor the Truth in Lending Act (TILA) completely preempt state law claims based upon the nondisclosure of mortgage loan terms. Barela v. Downey Savings & Loan Ass’n, F.A., No. CV 09-3757, 2009 WL 2578889 (C.D. Cal. Aug. 18, 2009). In Barela, the borrower alleged claims of concealment, fraud, and negligent misrepresentation in connection with a mortgage loan. The defendant, the lender’s successor in interest, argued that the borrower’s claims were “artfully pled” TILA claims related to alleged nondisclosure of loan terms, and that such claims were completely preempted by federal law. Turning to HOLA and its implementing Office of Thrift Supervision (OTS) regulations, the court found that the “dispositive question” for complete preemption was not whether HOLA preempted state law by occupying “the entire field” of lending regulation for federal savings associations. The court held that HOLA and OTS regulations did not provide the “exclusive course of action” for the borrower’s claims. In so holding, the court stated that it could not find the requisite Congressional intent for complete preemption of state law when the regulation which claimed such preemption “reflects only the views of an executive branch agency acting without Congressional guidance.” The court further held that TILA did not completely preempt state law action because its “savings clause” only preempts state law based claims that are inconsistent with TILA. As a result, the court granted the borrower’s motion to remand the case to state court. For a copy of the opinion, please see http://www.buckleysandler.com/Barela_v_Downey.pdf.
Illinois Federal Court Denies Class Certification Under FCRA For Transactions Involving Business Credit Card Transactions. On September 4, the U.S. District Court for the Northern District of Illinois denied class certification in a case alleging violations of the Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Transaction Act (FACTA), holding that FCRA does not provide a private right of action for plaintiffs alleging FCRA violations involving business credit card transactions. Pezl v. Amore Mio, Inc., No. 08 C 3993, 2009 WL 2870040 (N.D. Ill. Sept. 4, 2009). In Pezl, the plaintiff consumer received a credit card receipt from the defendant restaurant that allegedly displayed more than the last five digits of a business credit card number. The consumer filed suit, alleging that the defendant violated FACTA and sought to certify a class of all persons, from December 4, 2006 forward, who received a receipt from the defendant displaying more than the last five digits of a credit card. The defendants argued that, because FCRA excludes lawsuits involving business credit card transactions, the consumer is “subject to unique defenses,” and, thus, the class should not be certified. The court agreed and held that FCRA provides a private right of action for “consumers” and that business credit card users are not “consumers” under FCRA. As a result, the court denied certification of the class and granted summary judgment to the defendants. For a copy of the opinion, please see http://www.buckleysandler.com/Pezl_v_Amore_Mio.pdf.
Oregon Federal Court Rules Collection Letter Sent to Debtor by Attorney Violates FDCPA. On September 1, the U.S. District Court for the District of Oregon held that an attorney violated the Fair Debt Collection Practices Act (FDCPA) by delivering a debt collection letter to the plaintiff debtor that (i) overshadowed or contradicted the plaintiff’s right to dispute and validate the debt, and (ii) falsely represented attorney involvement. Dunn v. Derrick E. McGavic, P.C., No. 09-3035, 2009 WL 282842 (D. Or. Sept. 1, 2009). In Dunn, the defendant sent a letter to the debtor after being hired by a bank to collect the debt. The letter contained the validation notice required by the FDCPA, however, the debtor argued that the notice (i) was overshadowed or contradicted by language in the letter which suggested a threat of immediate legal action, and (ii) did not effectively convey to the least sophisticated consumer that the attorney must cease litigation if the debtor disputes the debt. The court held that the letter violated the FDCPA. In arriving at its decision, the court emphasized that the “least sophisticated consumer” reading the letter would likely infer that the attorney’s firm was prepared to bring legal action against the debtor at any time. As a result, the court awarded the debtor $1,000 in statutory damages as well as attorney’s fees and costs. For a copy of the opinion, please see http://www.buckleysandler.com/Dunn_v_DEM_PC.pdf.
Maine Federal Court Finds Maine Data Collection Law Likely Violates First Amendment. On September 9, the U.S. District Court for the District of Maine held that a recently passed Maine Act requiring parental consent for the collection of health-related information from a minor is likely overbroad and thus could violate the First Amendment. Maine Independent Colleges Ass’n v. Baldacci, No. CV-09-396 (D. Me. Sept. 9, 2009). As reported in InfoBytes, Aug. 7, 2009, the Act makes it an illegal and unfair trade practice for a person or company “to knowingly collect or receive health-related information or personal information for marketing purposes from a minor without first obtaining verifiable parental consent of that minor’s parent or legal guardian.” On August 26, four plaintiffs, including the Maine Independent Colleges Association, challenged the constitutionality of the law, scheduled to take effect on September 12, 2009. On September 9, the court issued a stipulated order of dismissal by both parties. According to the dismissal order, the Maine Attorney General “has committed not to enforce” the Act, and the Maine legislature will reconsider the statute. The dismissal order further notes that the private right of action availed under the Act “could suffer from the same constitutional infirmities.” For a copy of the Act, please see http://www.mainelegislature.org/legis/bills/bills_124th/chappdfs/PUBLIC230.pdf. For a copy of the plaintiff’s memorandum, please see http://www.buckleysandler.com/MICA_v_ Baldacci_Mem.pdf. For a copy of the dismissal order, please see http://www.buckleysandler.com/MICA_Dismissal.pdf.
TJX Settles with Financial Institutions Regarding 2005, 2006 Security Breach. On September 2, The TJX Companies, Inc. (TJX) announced a settlement with AmeriFirst Bank, HarborOne Credit Union, SELCO Community Credit Union, and Trustco Bank in connection with 2005 and 2006 retail data security breaches involving consumer credit and debit card information. In re TJX Companies Retail Security Breach Litigation, No. 07-cv-10162 (D. Mass. Sept. 2, 2009). Under the settlement, (i) the financial institutions agree to release their claims against TJX, (ii) TJX denies all wrongdoing, and (iii) TJX will pay $525,000. The settlement payment will partially reimburse the financial institutions for costs incurred while pursuing the litigation, excluding attorneys’ fees. The settlement funds will be taken from a previously-established reserve. For a copy of the press release, please see http://www.buckleysandler.com/TJX_Settlement_September_2009.pdf.
Firm News
Jeff Naimon and Chris Witeck will be speaking at the Mortgage Bankers Association’s Regulatory Compliance Conference in Washington D.C. on September 16. Jeff Naimon will be addressing fair lending developments as part of the “Hot Topics” Panel. Chris Witeck will be speaking on the Secondary Market Panel.
Andrew Sandler and Jeff Naimon will be speaking at the 2009 CRA and Fair Lending Colloquium October 4-7 in New Orleans. Andrew Sandler will speak on Regulatory Reform, and Jeff Naimon will speak on Navigating a HMDA Data Analysis. For registration or additional information about this conference, go to www.cracolloquium.com.
Jeff Naimon also will be speaking about developments in appraisal requirements and related risks at the North Carolina Bankers Association’s Management Team Conference on October 20 in Greensboro, North Carolina.
Margo Tank gave an audio conference entitled “Building Effective Electronic Records and Electronic Records Management Systems: Navigating the Legal Traps” on September 10. For more information, please see http://www.alexinformation.com/store/10700909.php.
Chris Witeck gave a presentation at the Mortgage Bankers Association’s Reverse Mortgage Conference in San Diego on September 10 entitled “The HECM Challenge.” He also moderated the “Secondary Market Update” panel on September 11.
Miscellany
FTC to Host Event on Litigation, Arbitration Proceedings to Collect Consumer Debt. On September 10, the Federal Trade Commission (FTC) announced that it will host a two-day public event on consumer protection issues in litigation and arbitration proceedings to collect on consumer debt in San Francisco, CA. The event will take place on September 29-30 at the San Francisco State University Downtown Campus. Registration is free and open to the public; no pre-registration is required and seats are available on a first-come, first-served basis. For a copy of the press release, please see http://www.ftc.gov/opa/2009/09/debtcollect.shtm.
Errata. In last week’s issue of InfoBytes, AARMR was incorrectly referenced. AARMR is the American Association of Residential Mortgage Regulators.
Mortgages
North Carolina Law to Increase Requirements for Collection Agencies, Debt Buyers in Foreclosure Actions. On September 9, North Carolina Governor Bev Perdue signed SB 974, the “North Carolina Consumer Economic Protection Act,” (the Act) which pertains to debt collection and mortgage foreclosure practices. Under the Act, the Clerk of Court who presides over foreclosure hearings has the authority to continue hearings regarding a foreclosure for up to 60 days. In making this determination, the Clerk of Court may consider (i) whether the debtor was offered an opportunity to resolve the foreclosure through forbearance, loan modification, or other commonly accepted resolution plan, (ii) whether there was actual responsive communication with the debtor (e.g., telephone conferences or in-person meetings), (iii) whether the debtor has indicated that he or she has the intent and ability to make payments under a foreclosure resolution plan, and (iv) whether there were “good faith voluntary resolution efforts” to avoid a foreclosure. Further, under the Act, a collection agency that is or is acting on behalf of a “debt buyer,” as defined by the Act, cannot attempt to collect on a debt (e.g., bring suit or initiate an arbitration proceedings) (i) if such actions would be barred by the statute of limitations, (ii) without first giving the debtor written notice of the intent to file a legal action at least 30 days in advance of filing, and (iii) without valid documentation that the debt buyer is the owner of debt and that there has been “reasonable verification” of the amount of the debt. The Act also amends requirements for (i) materials that must be part of and attached to complaints against certain debt collection entities, (ii) prerequisites to entering a default or summary judgment against a debtor, (iii) materials required for setting forth a party’s obligation to pay attorneys’ fees for services rendered to an assignee or a debt buyer, and (iv) the percentage of the principal balance of the loan which must be posted by an appealing party opposing a foreclosure. Finally, the Act increases certain civil penalty amounts that may be imposed against debt collection agencies from $100-$2,000 to $500-$4,000 per incident. The Act becomes effective October 1, 2009 and applies to foreclosures initiated, debt collection activities undertaken, and actions filed on or after October 1, 2009. For a copy of the Act, please see http://www.ncleg.net/Sessions/2009/Bills/Senate/PDF/S974v5.pdf.
FDIC Encourages Loss-Share Partner Institutions to Institute Temporary Forbearance Plan for Certain Borrowers to Avoid Foreclosures. On September 11, the Federal Deposit Insurance Corporation (FDIC) announced that it is encouraging loss-share partner institutions, as part of its loss-share agreement with acquirers of failed FDIC-insured institutions, to consider temporarily reducing mortgage payments for borrowers whose unemployment or underemployment is the primary cause for default on a home mortgage. Under such a temporary forbearance plan, institutions would (i) reduce the borrower’s monthly housing debt to income ratio to no more than 31 percent at the time of the modification, and (ii) eliminate adjustable interest rate and negative amortization features. The plan would be applicable to "qualifying loans" for a period of at least six months. According to the FDIC, the reductions in mortgage payments during a temporary forbearance period are not covered losses under the loss-share agreement with the FDIC. Losses incurred from subsequent permanent loan modifications, however, would be covered under the loss-share agreement. If the home preservation efforts are ultimately unsuccessful, losses incurred in subsequent foreclosures or short sales would also be covered losses. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2009/pr09167.html.
FDIC Issues Rule Finalizing the Extension of the Standard Maximum Deposit Insurance Amount; Revisions to Mortgage Servicing Account Regulations. On September 9, the Federal Deposit Insurance Corporation (FDIC) approved a rule to finalize the extension of the increase in the standard maximum deposit insurance amount to $250,000 through December 31, 2013. The rule also finalizes, without substantive changes, (i) the revisions to the mortgage servicing account regulations adopted by the FDIC in October 2008, which provide coverage to mortgagees (or investors) as a collective group based on the cumulative amount of the borrowers’ payments of principal and interest into the account (reported in InfoBytes, Oct. 24, 2008), and (ii) finalizes revisions to the revocable trust account regulations adopted by the FDIC in September 2008. The final rule becomes effective 30 days after publication in the Federal Register. For a copy of the final rule, please see http://www.fdic.gov/news/board/NoticeSept9no2.pdf.
California Federal Court Holds Non-Disclosure of Mortgage Loan Terms Claims Not Preempted by TILA, HOLA. On August 18, the U.S. District Court for the Central District of California held that neither the Home Owners Loan Act (HOLA) nor the Truth in Lending Act (TILA) completely preempt state law claims based upon the nondisclosure of mortgage loan terms. Barela v. Downey Savings & Loan Ass’n, F.A., No. CV 09-3757, 2009 WL 2578889 (C.D. Cal. Aug. 18, 2009). In Barela, the borrower alleged claims of concealment, fraud, and negligent misrepresentation in connection with a mortgage loan. The defendant, the lender’s successor in interest, argued that the borrower’s claims were “artfully pled” TILA claims related to alleged nondisclosure of loan terms, and that such claims were completely preempted by federal law. Turning to HOLA and its implementing Office of Thrift Supervision (OTS) regulations, the court found that the “dispositive question” for complete preemption was not whether HOLA preempted state law by occupying “the entire field” of lending regulation for federal savings associations. The court held that HOLA and OTS regulations did not provide the “exclusive course of action” for the borrower’s claims. In so holding, the court stated that it could not find the requisite Congressional intent for complete preemption of state law when the regulation which claimed such preemption “reflects only the views of an executive branch agency acting without Congressional guidance.” The court further held that TILA did not completely preempt state law action because its “savings clause” only preempts state law based claims that are inconsistent with TILA. As a result, the court granted the borrower’s motion to remand the case to state court. For a copy of the opinion, please see http://www.buckleysandler.com/Barela_v_Downey.pdf.
Banking
FDIC Issues Proposed Rule on Debt Guarantee Program. On September 9, the Federal Deposit Insurance Corporation (FDIC) issued a notice of proposed rulemaking setting forth two alternatives for winding down the operations of the agency’s Debt Guarantee Program (DGP). Under the first, the FDIC would follow the procedures established by the FDIC’s October 23, 2008 interim rulemaking. This proposal, known as “Alternative A,” would permit insured depository institutions and other participating entities to continue to issue guaranteed debt under the DGP until October 31, 2009, with the FDIC’s guarantee for such debt expiring no later than December 31, 2012. Under the FDIC’s second proposal, “Alternative B,” the DGP would phase out operations pursuant to the same timeline as provided in Alternative A, except that it could continue operating on a limited, case-by-case basis, as an emergency guarantee facility through April 30, 2010. If Alternative B were adopted, participation would be limited to insured depository institutions enrolled in the DGP and to entities that have issued FDIC-guaranteed debt under the DGP as of September 9, 2009. Additionally, any eligible entity seeking to utilize the emergency facility would be subject to (i) prior approval by the FDIC, and (ii) an increased annualized participation fee of at least 300 basis points. Comments must be submitted no later than 15 days after the proposal is published in the Federal Register. For a copy of the proposed rule, please see http://www.fdic.gov/news/board/NoticeSept9no6.pdf.
FDIC Encourages Loss-Share Partner Institutions to Institute Temporary Forbearance Plan for Certain Borrowers to Avoid Foreclosures. On September 11, the Federal Deposit Insurance Corporation (FDIC) announced that it is encouraging loss-share partner institutions, as part of its loss-share agreement with acquirers of failed FDIC-insured institutions, to consider temporarily reducing mortgage payments for borrowers whose unemployment or underemployment is the primary cause for default on a home mortgage. Under such a temporary forbearance plan, institutions would (i) reduce the borrower’s monthly housing debt to income ratio to no more than 31 percent at the time of the modification, and (ii) eliminate adjustable interest rate and negative amortization features. The plan would be applicable to "qualifying loans" for a period of at least six months. According to the FDIC, the reductions in mortgage payments during a temporary forbearance period are not covered losses under the loss-share agreement with the FDIC. Losses incurred from subsequent permanent loan modifications, however, would be covered under the loss-share agreement. If the home preservation efforts are ultimately unsuccessful, losses incurred in subsequent foreclosures or short sales would also be covered losses. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2009/pr09167.html.
FDIC Announces Enhanced Supervisory Procedures for Newly Insured Institutions. On August 28, the Federal Deposit Insurance Corporation (FDIC) issued Financial Institution Letter 50-2009 (FIL-50-2009), which announces enhanced supervisory procedures for institutions that have been insured FDIC-supervised depository institutions for seven years or less. Under the current policy, newly insured institutions are subject to higher capital requirements and more frequent examination activities during the first three years of operation. The FDIC will now extend its procedures for these institutions from three to seven years for examinations, capital, and other requirements. In addition, the period during which material changes in business plans for newly insured institutions will require prior FDIC approval will be extended from the first three years of operation to the first seven years of operation. De novo entities that are subsidiaries of existing eligible holding companies generally are excluded from the requirements in FIL-50-2009. For a copy of the letter, please see http://www.fdic.gov/news/news/financial/2009/fil09050.pdf.
FDIC Issues Rule Finalizing the Extension of the Standard Maximum Deposit Insurance Amount; Revisions to Mortgage Servicing Account Regulations. On September 9, the Federal Deposit Insurance Corporation (FDIC) approved a rule to finalize the extension of the increase in the standard maximum deposit insurance amount to $250,000 through December 31, 2013. The rule also finalizes, without substantive changes, (i) the revisions to the mortgage servicing account regulations adopted by the FDIC in October 2008, which provide coverage to mortgagees (or investors) as a collective group based on the cumulative amount of the borrowers’ payments of principal and interest into the account (reported in InfoBytes, Oct. 24, 2008), and (ii) finalizes revisions to the revocable trust account regulations adopted by the FDIC in September 2008. The final rule becomes effective 30 days after publication in the Federal Register. For a copy of the final rule, please see http://www.fdic.gov/news/board/NoticeSept9no2.pdf.
NACHA Proposes Extending Adjustment Entry Period for RDFIs. On September 1, the National Automated Clearing House Association (NACHA) issued, for comment, a proposal to extend the period during which a Receiving Depository Financial Institution (RDFI) may transmit an adjustment entry related to an unauthorized entry to its Automated Clearing House (ACH) Operator, from 60 days to 90 days. According to NACHA, the extension is intended to harmonize NACHA rules with requirements under Regulation E, which requires that an RDFI provide credit to a consumer who asserts a claim within 60 days from the transmittal of the statement showing an unauthorized transaction and who meets certain other requirements. The NACHA rules provide that an adjustment entry must be made within 60 days of the settlement date of an entry. If the settlement date of an entry occurs at the beginning of the month and the statement is transmitted at the end of the month, an RDFI would have 90 days from the settlement date of an entry to provide credit to a consumer while only having 60 days to transmit an adjustment entry to the ACH. According to NACHA, the extension to 90 days would give RDFIs sufficient time to submit credit adjustment entries for virtually all entries for which RDFIs are required to give credit to consumers under Regulation E. Comments must be received by October 16, 2009. NACHA is proposing a December 17, 2010 implementation date for the final rules. For a copy of the proposal summary, please see http://www.nacha.org/ACH_Rules/Rule_Making_Process/Rules_Work_Groups/RFC%20-%2009012009/docs/Extended%20Timeframe%20for%20Adjustment%20Entries%20-%20Executive%20Summary%20and%20Rules%20Description%20-%20September%201,%202009.pdf. For a copy of the proposal, please see http://www.nacha.org/ACH_Rules/Rule_Making_Process/Rules_Work_Groups/RFC%20-%2009012009/docs/Proposed%20Modifications%20to%20the%20Rules%20-%20Extended%20Return%20Times%20for%20Adjustment%20Entries%20-%20September%201,%202009.pdf.
Fifth, Eighth Circuits Hold PMSI Includes Negative Equity; Reject Debtors’ Cramdown Attempts. On September 8, the U.S. Courts of Appeals for the Fifth and Eighth Circuits held that an auto finance creditor’s purchase-money security interest (PMSI) includes the financing of negative equity from a trade-in vehicle, and thus rejected the debtors’ attempt to bifurcate and cramdown their bankruptcy claims. In re Dale, No. 08-20583, 2009 WL 2857998 (5th Cir. Sept. 8, 2009). In re Mierkowski, No. 08-3866, 2009 WL 2853586 (8th Cir. Sept. 8, 2009). In both cases, a debtor traded in a vehicle in which the debtor held "negative equity" (i.e., the amount owed on the trade-in vehicle exceeded the value of that vehicle) in conjunction with financing a new vehicle purchase. The amount financed to purchase the new vehicle included the "negative equity" from the trade-in vehicle. In both cases, the debtors filed for Chapter 13 bankruptcy protection after purchasing the new vehicle. The debtors sought to "cramdown" their Chapter 13 plan by bifurcating the creditor’s claim into (i) a secured portion, and (ii) an unsecured portion (the negative equity from the trade-in vehicle), and the creditors in both cases objected to this proposed treatment of its security interest. In Mierkowski, the court followed the persuasive precedent of the Tenth, Fourth, and Eleventh Circuits to hold that, because the amount financed to pay off the negative equity in the trade-in is "part of the price" of the new car, the auto finance creditor had a PMSI securing the negative-equity financing under Missouri law. The court looked to the definition of PMSI in the Missouri Uniform Commercial Code, which requires a “close nexus” between the acquisition of collateral and the secured obligation and to the definition of "time sale price" in the Missouri Motor Vehicle Time Sales Act to arrive at its decision. On September 9, the Eighth Circuit followed Mierkowski to affirm that PMSI is included in the negative equity from a trade-in vehicle. In re Callicott, No. 09-1030, 2009 WL 2870501 (8th Cir. Sept. 9, 2009). In Dale, the Fifth Circuit held that the funds used to pay off the negative equity were “value given to enable,” and, thus, the auto finance creditor had a PMSI securing the negative-equity financing under Texas law. For a copy of the Mierkowski opinion, please see http://www.ca8.uscourts.gov/opndir/09/09/083866P.pdf. For a copy of the Callicott opinion, please see http://www.ca8.uscourts.gov/opndir/09/09/091030P.pdf. For a copy of the Dale opinion, please see http://www.ca5.uscourts.gov/opinions%5Cpub%5C08/08-20583-CV0.wpd.pdf.
Oregon Federal Court Rules Collection Letter Sent to Debtor by Attorney Violates FDCPA. On September 1, the U.S. District Court for the District of Oregon held that an attorney violated the Fair Debt Collection Practices Act (FDCPA) by delivering a debt collection letter to the plaintiff debtor that (i) overshadowed or contradicted the plaintiff’s right to dispute and validate the debt, and (ii) falsely represented attorney involvement. Dunn v. Derrick E. McGavic, P.C., No. 09-3035, 2009 WL 282842 (D. Or. Sept. 1, 2009). In Dunn, the defendant sent a letter to the debtor after being hired by a bank to collect the debt. The letter contained the validation notice required by the FDCPA, however, the debtor argued that the notice (i) was overshadowed or contradicted by language in the letter which suggested a threat of immediate legal action, and (ii) did not effectively convey to the least sophisticated consumer that the attorney must cease litigation if the debtor disputes the debt. The court held that the letter violated the FDCPA. In arriving at its decision, the court emphasized that the “least sophisticated consumer” reading the letter would likely infer that the attorney’s firm was prepared to bring legal action against the debtor at any time. As a result, the court awarded the debtor $1,000 in statutory damages as well as attorney’s fees and costs. For a copy of the opinion, please see http://www.buckleysandler.com/Dunn_v_DEM_PC.pdf.
FTC to Host Event on Litigation, Arbitration Proceedings to Collect Consumer Debt. On September 10, the Federal Trade Commission (FTC) announced that it will host a two-day public event on consumer protection issues in litigation and arbitration proceedings to collect on consumer debt in San Francisco, CA. The event will take place on September 29-30 at the San Francisco State University Downtown Campus. Registration is free and open to the public; no pre-registration is required and seats are available on a first-come, first-served basis. For a copy of the press release, please see http://www.ftc.gov/opa/2009/09/debtcollect.shtm.
Fifth, Eighth Circuits Hold PMSI Includes Negative Equity; Reject Debtors’ Cramdown Attempts. On September 8, the U.S. Courts of Appeals for the Fifth and Eighth Circuits held that an auto finance creditor’s purchase-money security interest (PMSI) includes the financing of negative equity from a trade-in vehicle, and thus rejected the debtors’ attempt to bifurcate and cramdown their bankruptcy claims. In re Dale, No. 08-20583, 2009 WL 2857998 (5th Cir. Sept. 8, 2009). In re Mierkowski, No. 08-3866, 2009 WL 2853586 (8th Cir. Sept. 8, 2009). In both cases, a debtor traded in a vehicle in which the debtor held "negative equity" (i.e., the amount owed on the trade-in vehicle exceeded the value of that vehicle) in conjunction with financing a new vehicle purchase. The amount financed to purchase the new vehicle included the "negative equity" from the trade-in vehicle. In both cases, the debtors filed for Chapter 13 bankruptcy protection after purchasing the new vehicle. The debtors sought to "cramdown" their Chapter 13 plan by bifurcating the creditor’s claim into (i) a secured portion, and (ii) an unsecured portion (the negative equity from the trade-in vehicle), and the creditors in both cases objected to this proposed treatment of its security interest. In Mierkowski, the court followed the persuasive precedent of the Tenth, Fourth, and Eleventh Circuits to hold that, because the amount financed to pay off the negative equity in the trade-in is "part of the price" of the new car, the auto finance creditor had a PMSI securing the negative-equity financing under Missouri law. The court looked to the definition of PMSI in the Missouri Uniform Commercial Code, which requires a “close nexus” between the acquisition of collateral and the secured obligation and to the definition of "time sale price" in the Missouri Motor Vehicle Time Sales Act to arrive at its decision. On September 9, the Eighth Circuit followed Mierkowski to affirm that PMSI is included in the negative equity from a trade-in vehicle. In re Callicott, No. 09-1030, 2009 WL 2870501 (8th Cir. Sept. 9, 2009). In Dale, the Fifth Circuit held that the funds used to pay off the negative equity were “value given to enable,” and, thus, the auto finance creditor had a PMSI securing the negative-equity financing under Texas law. For a copy of the Mierkowski opinion, please see http://www.ca8.uscourts.gov/opndir/09/09/083866P.pdf. For a copy of the Callicott opinion, please see http://www.ca8.uscourts.gov/opndir/09/09/091030P.pdf. For a copy of the Dale opinion, please see http://www.ca5.uscourts.gov/opinions%5Cpub%5C08/08-20583-CV0.wpd.pdf.
California Federal Court Holds Non-Disclosure of Mortgage Loan Terms Claims Not Preempted by TILA, HOLA. On August 18, the U.S. District Court for the Central District of California held that neither the Home Owners Loan Act (HOLA) nor the Truth in Lending Act (TILA) completely preempt state law claims based upon the nondisclosure of mortgage loan terms. Barela v. Downey Savings & Loan Ass’n, F.A., No. CV 09-3757, 2009 WL 2578889 (C.D. Cal. Aug. 18, 2009). In Barela, the borrower alleged claims of concealment, fraud, and negligent misrepresentation in connection with a mortgage loan. The defendant, the lender’s successor in interest, argued that the borrower’s claims were “artfully pled” TILA claims related to alleged nondisclosure of loan terms, and that such claims were completely preempted by federal law. Turning to HOLA and its implementing Office of Thrift Supervision (OTS) regulations, the court found that the “dispositive question” for complete preemption was not whether HOLA preempted state law by occupying “the entire field” of lending regulation for federal savings associations. The court held that HOLA and OTS regulations did not provide the “exclusive course of action” for the borrower’s claims. In so holding, the court stated that it could not find the requisite Congressional intent for complete preemption of state law when the regulation which claimed such preemption “reflects only the views of an executive branch agency acting without Congressional guidance.” The court further held that TILA did not completely preempt state law action because its “savings clause” only preempts state law based claims that are inconsistent with TILA. As a result, the court granted the borrower’s motion to remand the case to state court. For a copy of the opinion, please see http://www.buckleysandler.com/Barela_v_Downey.pdf.
Illinois Federal Court Denies Class Certification Under FCRA For Transactions Involving Business Credit Card Transactions. On September 4, the U.S. District Court for the Northern District of Illinois denied class certification in a case alleging violations of the Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Transaction Act (FACTA), holding that FCRA does not provide a private right of action for plaintiffs alleging FCRA violations involving business credit card transactions. Pezl v. Amore Mio, Inc., No. 08 C 3993, 2009 WL 2870040 (N.D. Ill. Sept. 4, 2009). In Pezl, the plaintiff consumer received a credit card receipt from the defendant restaurant that allegedly displayed more than the last five digits of a business credit card number. The consumer filed suit, alleging that the defendant violated FACTA and sought to certify a class of all persons, from December 4, 2006 forward, who received a receipt from the defendant displaying more than the last five digits of a credit card. The defendants argued that, because FCRA excludes lawsuits involving business credit card transactions, the consumer is “subject to unique defenses,” and, thus, the class should not be certified. The court agreed and held that FCRA provides a private right of action for “consumers” and that business credit card users are not “consumers” under FCRA. As a result, the court denied certification of the class and granted summary judgment to the defendants. For a copy of the opinion, please see http://www.buckleysandler.com/Pezl_v_Amore_Mio.pdf.
Oregon Federal Court Rules Collection Letter Sent to Debtor by Attorney Violates FDCPA. On September 1, the U.S. District Court for the District of Oregon held that an attorney violated the Fair Debt Collection Practices Act (FDCPA) by delivering a debt collection letter to the plaintiff debtor that (i) overshadowed or contradicted the plaintiff’s right to dispute and validate the debt, and (ii) falsely represented attorney involvement. Dunn v. Derrick E. McGavic, P.C., No. 09-3035, 2009 WL 282842 (D. Or. Sept. 1, 2009). In Dunn, the defendant sent a letter to the debtor after being hired by a bank to collect the debt. The letter contained the validation notice required by the FDCPA, however, the debtor argued that the notice (i) was overshadowed or contradicted by language in the letter which suggested a threat of immediate legal action, and (ii) did not effectively convey to the least sophisticated consumer that the attorney must cease litigation if the debtor disputes the debt. The court held that the letter violated the FDCPA. In arriving at its decision, the court emphasized that the “least sophisticated consumer” reading the letter would likely infer that the attorney’s firm was prepared to bring legal action against the debtor at any time. As a result, the court awarded the debtor $1,000 in statutory damages as well as attorney’s fees and costs. For a copy of the opinion, please see http://www.buckleysandler.com/Dunn_v_DEM_PC.pdf.
Maine Federal Court Finds Maine Data Collection Law Likely Violates First Amendment. On September 9, the U.S. District Court for the District of Maine held that a recently passed Maine Act requiring parental consent for the collection of health-related information from a minor is likely overbroad and thus could violate the First Amendment. Maine Independent Colleges Ass’n v. Baldacci, No. CV-09-396 (D. Me. Sept. 9, 2009). As reported in InfoBytes, Aug. 7, 2009, the Act makes it an illegal and unfair trade practice for a person or company “to knowingly collect or receive health-related information or personal information for marketing purposes from a minor without first obtaining verifiable parental consent of that minor’s parent or legal guardian.” On August 26, four plaintiffs, including the Maine Independent Colleges Association, challenged the constitutionality of the law, scheduled to take effect on September 12, 2009. On September 9, the court issued a stipulated order of dismissal by both parties. According to the dismissal order, the Maine Attorney General “has committed not to enforce” the Act, and the Maine legislature will reconsider the statute. The dismissal order further notes that the private right of action availed under the Act “could suffer from the same constitutional infirmities.” For a copy of the Act, please see http://www.mainelegislature.org/legis/bills/bills_124th/chappdfs/PUBLIC230.pdf. For a copy of the plaintiff’s memorandum, please see http://www.buckleysandler.com/MICA_v_ Baldacci_Mem.pdf. For a copy of the dismissal order, please see http://www.buckleysandler.com/MICA_Dismissal.pdf.
TJX Settles with Financial Institutions Regarding 2005, 2006 Security Breach. On September 2, The TJX Companies, Inc. (TJX) announced a settlement with AmeriFirst Bank, HarborOne Credit Union, SELCO Community Credit Union, and Trustco Bank in connection with 2005 and 2006 retail data security breaches involving consumer credit and debit card information. In re TJX Companies Retail Security Breach Litigation, No. 07-cv-10162 (D. Mass. Sept. 2, 2009). Under the settlement, (i) the financial institutions agree to release their claims against TJX, (ii) TJX denies all wrongdoing, and (iii) TJX will pay $525,000. The settlement payment will partially reimburse the financial institutions for costs incurred while pursuing the litigation, excluding attorneys’ fees. The settlement funds will be taken from a previously-established reserve. For a copy of the press release, please see http://www.buckleysandler.com/TJX_Settlement_September_2009.pdf.
Privacy/Data Security
Maine Federal Court Finds Maine Data Collection Law Likely Violates First Amendment. On September 9, the U.S. District Court for the District of Maine held that a recently passed Maine Act requiring parental consent for the collection of health-related information from a minor is likely overbroad and thus could violate the First Amendment. Maine Independent Colleges Ass’n v. Baldacci, No. CV-09-396 (D. Me. Sept. 9, 2009). As reported in InfoBytes, Aug. 7, 2009, the Act makes it an illegal and unfair trade practice for a person or company “to knowingly collect or receive health-related information or personal information for marketing purposes from a minor without first obtaining verifiable parental consent of that minor’s parent or legal guardian.” On August 26, four plaintiffs, including the Maine Independent Colleges Association, challenged the constitutionality of the law, scheduled to take effect on September 12, 2009. On September 9, the court issued a stipulated order of dismissal by both parties. According to the dismissal order, the Maine Attorney General “has committed not to enforce” the Act, and the Maine legislature will reconsider the statute. The dismissal order further notes that the private right of action availed under the Act “could suffer from the same constitutional infirmities.” For a copy of the Act, please see http://www.mainelegislature.org/legis/bills/bills_124th/chappdfs/PUBLIC230.pdf. For a copy of the plaintiff’s memorandum, please see http://www.buckleysandler.com/MICA_v_ Baldacci_Mem.pdf. For a copy of the dismissal order, please see http://www.buckleysandler.com/MICA_Dismissal.pdf.
Illinois Federal Court Denies Class Certification Under FCRA For Transactions Involving Business Credit Card Transactions. On September 4, the U.S. District Court for the Northern District of Illinois denied class certification in a case alleging violations of the Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Transaction Act (FACTA), holding that FCRA does not provide a private right of action for plaintiffs alleging FCRA violations involving business credit card transactions. Pezl v. Amore Mio, Inc., No. 08 C 3993, 2009 WL 2870040 (N.D. Ill. Sept. 4, 2009). In Pezl, the plaintiff consumer received a credit card receipt from the defendant restaurant that allegedly displayed more than the last five digits of a business credit card number. The consumer filed suit, alleging that the defendant violated FACTA and sought to certify a class of all persons, from December 4, 2006 forward, who received a receipt from the defendant displaying more than the last five digits of a credit card. The defendants argued that, because FCRA excludes lawsuits involving business credit card transactions, the consumer is “subject to unique defenses,” and, thus, the class should not be certified. The court agreed and held that FCRA provides a private right of action for “consumers” and that business credit card users are not “consumers” under FCRA. As a result, the court denied certification of the class and granted summary judgment to the defendants. For a copy of the opinion, please see http://www.buckleysandler.com/Pezl_v_Amore_Mio.pdf.
TJX Settles with Financial Institutions Regarding 2005, 2006 Security Breach. On September 2, The TJX Companies, Inc. (TJX) announced a settlement with AmeriFirst Bank, HarborOne Credit Union, SELCO Community Credit Union, and Trustco Bank in connection with 2005 and 2006 retail data security breaches involving consumer credit and debit card information. In re TJX Companies Retail Security Breach Litigation, No. 07-cv-10162 (D. Mass. Sept. 2, 2009). Under the settlement, (i) the financial institutions agree to release their claims against TJX, (ii) TJX denies all wrongdoing, and (iii) TJX will pay $525,000. The settlement payment will partially reimburse the financial institutions for costs incurred while pursuing the litigation, excluding attorneys’ fees. The settlement funds will be taken from a previously-established reserve. For a copy of the press release, please see http://www.buckleysandler.com/TJX_Settlement_September_2009.pdf.
Credit Cards
Illinois Federal Court Denies Class Certification Under FCRA For Transactions Involving Business Credit Card Transactions. On September 4, the U.S. District Court for the Northern District of Illinois denied class certification in a case alleging violations of the Fair Credit Reporting Act (FCRA), as amended by the Fair and Accurate Transaction Act (FACTA), holding that FCRA does not provide a private right of action for plaintiffs alleging FCRA violations involving business credit card transactions. Pezl v. Amore Mio, Inc., No. 08 C 3993, 2009 WL 2870040 (N.D. Ill. Sept. 4, 2009). In Pezl, the plaintiff consumer received a credit card receipt from the defendant restaurant that allegedly displayed more than the last five digits of a business credit card number. The consumer filed suit, alleging that the defendant violated FACTA and sought to certify a class of all persons, from December 4, 2006 forward, who received a receipt from the defendant displaying more than the last five digits of a credit card. The defendants argued that, because FCRA excludes lawsuits involving business credit card transactions, the consumer is “subject to unique defenses,” and, thus, the class should not be certified. The court agreed and held that FCRA provides a private right of action for “consumers” and that business credit card users are not “consumers” under FCRA. As a result, the court denied certification of the class and granted summary judgment to the defendants. For a copy of the opinion, please see http://www.buckleysandler.com/Pezl_v_Amore_Mio.pdf.