InfoBytes, September 19, 2008
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Miscellany
- Mortgages
- Banking
- Consumer Finance
- Securities
- Insurance
- Litigation
- Credit Cards
Federal Issues
Paulson Announces Asset Relief Program. On September 19, U.S. Treasury Secretary Henry Paulson, Jr. announced a major troubled asset relief program in an effort to stem further financial distress to the economy and to provide a jumpstart to frozen credit markets by removing illiquid mortgage-related assets from financial institutions. Secretary Paulson announced that immediate actions will be taken to provide credit relief, including Fannie Mae and Freddie Mac increasing their purchases of mortgage-backed securities (MBS), and the Treasury Department expanding the MBS purchase program that it announced earlier this month. Secretary Paulson indicated that “[w]hen we get through this difficult period, which we will, our next task must be to improve the financial regulatory structure so that these past excesses do not recur. This crisis demonstrates in vivid terms that our financial regulatory structure is sub-optimal, duplicative and outdated. I have put forward my ideas for a modernized financial oversight structure that matches our modern economy, and more closely links the regulatory structure to the reasons why we regulate. That is a critical debate for another day.” The Bush administration will work with Members of Congress to pass legislation to implement the program, which may be passed as early as next week. For a copy of the press release, please see http://www.treas.gov/press/releases/hp1149.htm.
FHFA Announces New Chairmen of Fannie, Freddie. On September 16, Federal Housing Finance Agency (FHFA) Director James B. Lockhart announced the appointment of the new non-executive chairmen of the Boards of Directors of Freddie Mac and Fannie Mae. John A. Koskinen, formerly the chief executive of Palmieri Co., a consulting firm, will chair Freddie Mac. Philip A. Laskawy, a former chief executive of Ernst & Young, will chair Fannie Mae. The FHFA press release states that the FHFA directed the appointments “to ensure solid leadership and good corporate governance.” For a copy of the press release, please see http://www.buckleykolar.com/documents/FHFA_Sept_16_08.pdf.
Fed Authorizes $85 Billion Loan to AIG. On September 16, the Federal Reserve Board announced that it has authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group, Inc. (AIG) pursuant to section 13(3) of the Federal Reserve Act. In exchange, the U.S. government will receive a 79.9% equity interest in AIG. The loan is intended to allow AIG to meet its financial obligations “with the least possible disruption to the overall economy.” An intended sale of the firm’s assets will repay the loan. For a copy of the press release, please see http://federalreserve.gov/newsevents/press/other/20080916a.htm.
HUD Mortgagee Letter Addresses Revised Downpayment, Maximum Mortgage Requirements. On September 5, Assistant Secretary for Housing Brian Montgomery issued Mortgagee Letter 2008-23, a letter that discusses revised downpayment and maximum mortgage requirements for single family mortgages backed by the Federal Housing Administration. Under the new requirements, which were enacted into law as part of the Housing and Economic Recovery Act of 2008 (HERA), a mortgagor must pay a minimum 3.5% downpayment in connection with an FHA loan beginning January 1, 2009. According to the mortgagee letter, this minimum downpayment cannot include closing costs and is inapplicable to refinances. HERA also eliminates variable loan-to-value limits, which were based on a combination of property value and the average closing costs of the state where the property is located. Instead, the mortgagee letter states that the maximum mortgage must be calculated by applying 96.5% to the lesser of either the appraiser’s estimate or the adjusted sales price. Financing concessions up to 6% of the sales price may still be provided by sellers, while amounts in excess of 6% and other inducements to purchase must be subtracted from the lesser of either the appraiser’s estimate or the adjusted sales price when calculating the maximum mortgage amount. Finally, the letter notes that HERA limits the maximum amount of a mortgage to 100% of the appraised value, a value which includes the upfront mortgage insurance premium. For a copy of the mortgagee letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/08-23ml.pdf.
HUD Mortgagee Letter Addresses New Requirements for HECM Mortgage Originators. On September 16, Assistant Secretary for Housing Brian D. Montgomery issued Mortgagee Letter 2008-24 (ML 08-24), a letter that addresses new requirements for originators of Home Equity Conversion Mortgages (HECMs), as set forth in the HERA. Although the Federal Housing Administration (FHA) intends to seek comments from interested parties before providing definitive guidance, ML 08-24 advises that mortgagees cannot condition a HECM mortgage on the purchase of any other financial or insurance product, and encourages mortgagees to establish, consistent with HERA, firewalls and other safeguards to ensure there is no undue pressure or appearance of pressure for a mortgagor to purchase another product from the mortgage originator or mortgage originator’s company. In addition, because HERA requires that loan origination be performed by FHA approved entities, effective on October 1, 2008, ML 08-24 rescinds Mortgagee Letter 2008-14, which provided guidance regarding the ways in which a non-approved entity or third party may participate and be compensated. Beginning with case number assignments made on or after October 1, 2008, only FHA-approved mortgagees may participate and be compensated for the origination of HECMs to be insured by FHA. For a copy of ML 08-24, please see http://www.mortgagebankers.org/files/News/InternalResource/65195_MortgageeLetter08-24.pdf.
OTS Issues Memorandum on Mortgage Lending Documentation, Underwriting Standards. On September 17, Office of Thrift Supervision (OTS) Deputy Director Timothy Ward issued a memorandum stating that an institution’s Board-approved loan policy should establish a limit for aggregate pipeline, warehouse, and credit-enhancing repurchase exposure for mortgage loans originated for sale to non-government sponsored enterprise purchasers. The memorandum states that the level of such exposure can constitute a concentration risk, and that a savings association will receive closer supervisory review of its concentration risk when such exposure exceeds its Tier 1 capital. The memorandum also reiterates OTS policy that savings associations use prudent underwriting and documentation standards for all loans they originate, both for those to be held in portfolio and for those originated for sale. The OTS expects that loans originated for sale will be underwritten to comply with the institution’s Board approved loan policy and with all existing regulations and supervisory guidance governing the documentation and underwriting standards for residential mortgages. For a copy of the memorandum, please see http://files.ots.treas.gov/252801.pdf.
FDIC Executes Information-Sharing Agreements with New York State Banking Department, Texas Department of Banking. On September 15, the Federal Deposit Insurance Corporation (FDIC) executed separate information-sharing agreements with the New York State Banking Department (NYSBD) and the Texas Department of Banking (TDOB) pertaining to Money Services Businesses (MSB) supervision. The agreements will provide relevant supervisory information for MSB customers with banking relationships at FDIC-supervised financial institutions. The agreements will also provide “assistance to each agency in promoting opportunities to learn from the other’s industry expertise.” For a copy of the NYSBD press release, please see http://www.banking.state.ny.us/pr080915.htm. For a copy of the TDOB pres release, please see http://www.banking.state.tx.us/news/press/2008/09-15-08pr.htm.
Fed Issues Technical Amendment to Regulation B. On September 17, the Federal Reserve Board published a technical amendment to the Equal Credit Opportunity Act’s implementing Regulation B. The amendment updates the address for the Office of Thrift Supervision (OTS) to be used in adverse action notices. Creditors for which the OTS administers compliance with Regulation B must include this new address on their adverse action notices starting September 17, 2009. For a copy of the Federal Register notice, please see http://edocket.access.gpo.gov/2008/pdf/E8-21629.pdf.
State Issues
New Jersey Passes Bill Requiring Foreclosure Notices. On September 15, New Jersey Governor Jon Corzine signed A2780, the “Save New Jersey Homes Act of 2008.” The bill requires creditors, including servicers, to provide several notices to borrowers facing the foreclosure of an “introductory rate mortgage,” as defined by the bill. Under the bill, creditors must alert borrowers of foreclosure alternatives, such as refinancing, renegotiating, or extension of the loan. Creditors must also notify borrowers of the ability to receive an extension for an introductory rate mortgage for three years following an interest rate reset. Creditors must provide borrowers with a “certification of extension form,” which may be completed by the borrower, to effect such an extension. The form, in part, affirms that the borrower does not have the monthly income to make the mortgage payments that will apply after the rate reset, that the borrower agrees to the modification of the mortgage, and that the borrower will repay any deferred interest. The bill also requires creditors to provide borrowers with certain written notices at 60 days, and again at 30 days, before any adjustable rate mortgage’s introductory interest rate resets. These notices must state (i) the borrower’s current interest rate, (ii) the date on which the current rate will adjust, (iii) an explanation of how the new monthly payment will be determined, (iv) an estimate of the new monthly payment, and (v) a list of alternatives that the borrower may pursue, such as refinancing or renegotiating the loan. The bill took effect immediately upon signature and remains in effect until January 1, 2011. For a copy of the bill, please see http://www.njleg.state.nj.us/2008/Bills/A3000/2780_R2.PDF.
Illinois Amends Foreclosure Requirements for Tenant-Occupied Properties. On August 26, Illinois Governor Rod Blagojevich approved S.B. 2721, a bill amending Illinois’ foreclosure requirements for tenant-occupied rental properties. Among other items, the bill provides that, in a foreclosure proceeding involving tenant-occupied real estate, if “timely” written notice regarding rental payments is not provided to the tenant, or if the tenant makes “good-faith efforts” to keep current on rental payments, any order of possession must allow the tenant to retain possession of the property for up to 120 days following notice of a hearing on this issue. In addition, mortgagees that fail to file a “supplemental petition for possession” are also prohibited from filing a forcible entry and detainer action against the tenant until 90 days after serving the tenant with a notice of intent to file the action. For a copy of the bill, please see http://www.ilga.gov/legislation/publicacts/95/PDF/095-0933.pdf.
California Department of Corporations Releases Mortgage Servicers Survey Results. On September 9, the California Department of Corporations made available its “Mortgage Servicers Survey” results for July 2008. The data reflects, among other items, that the total number of loan modifications in California has increased 16.57% from June to July and evidences a consistent monthly increase in the total number of loan workouts from January to July. For a copy of the press release, please see http://www.corp.ca.gov/press/news/SPL/ServicerSurvey0708.pdf.
Courts
Ninth Circuit Holds Federal Bankruptcy Code Does Not Preempt California’s Bona Fide Purchaser Statute. On September 4, the U.S. Court of Appeals for the Ninth Circuit held that the federal Bankruptcy Code does not preempt California’s statute protecting bona fide purchasers (BFPs) because there is no inconsistency between the Bankruptcy Code and California’s protection of the BFPs of real property. Burkart v. Coleman, No. 06-15411, 2008 WL 4070690 (9th Cir. Sept. 4, 2008). In this case, a BFP bought a property, for which the bankruptcy trustee had not recorded a Chapter 7 filing with the county recorder, from Chapter 7 debtors. The bankruptcy trustee brought suit, seeking to invalidate the transaction. The court addressed (i) whether the post-petition deed could convey a property interest in the residence to the BFP, (ii) whether the federal Bankruptcy Code preempts the California statute protecting BFPs as applied to purchasers from a debtor in bankruptcy, and (iii) whether the automatic stay voids the debtors’ sale to the BFP. Regarding the first issue, the court held that a post-petition deed can convey a property interest, reasoning that the California BFP statute renders an unrecorded conveyance void as to subsequent BFPs, such as the BFP in this case, who record their title first. With respect to the second issue, the court relied upon the test from Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198 (9th Cir. 2005) to determine whether the California statute is consistent with the “’essential goals and purposes of federal bankruptcy law.’” The court held that there is no meaningful inconsistency between protecting the “equitable distribution of the debtor’s assets among creditors” under federal law and California’s protection of BFPs which would result in preemption. Regarding the third issue, the court held that the automatic stay provision of the federal Bankruptcy Code does not void the debtors’ sale to the BFP because the automatic stay provision does not apply to transfers initiated by debtors. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Burkart_v_Coleman.pdf.
Eighth Circuit Affirms Card Agreement Containing Arbitration Clause Not Unconscionable. On September 8, the U.S. Court of Appeals for the Eighth Circuit affirmed that the arbitration clause of an agreement for a pre-loaded, stored-value card was not substantively or procedurally unconscionable. Pleasants v. American Express Co., No. 07-3235 (8th Cir. Sept. 8, 2008). In this case, the plaintiff received a combination of pre-loaded, stored-value cards issued by the defendant in exchange for completing online surveys. The plaintiff used the cards at a restaurant that processed a charge in excess of the balances of the cards. The defendant then sent the plaintiff a letter requesting the payment of the difference, a late fee, and a transaction fee pursuant to the terms and conditions of the card agreement. The plaintiff filed suit, alleging that the defendant “falsely and misleadingly represented” that the card could not be used as a credit or charge card, in violation of the Truth in Lending Act (TILA) and Regulation Z. After the district court granted a motion to compel arbitration of the claims, the plaintiff appealed, arguing that the card agreement’s class-action waiver was unconscionable. The plaintiff alleged that the agreement was substantively unconscionable because claims of this type are unlikely to be tried without a class action due to the small recovery amounts available to consumers. The plaintiff further alleged that the agreement was procedurally unconscionable because the defendant “had superior bargaining power, presented the arbitration clause on a take-it-or-leave-it basis, and did not send the agreement to [the plaintiff] until after she completed the surveys.” The court held that the agreement was not substantively unconscionable, reasoning that the plaintiff could obtain the cost of action and a reasonable attorney’s fee under TILA’s remedial provision without filing a class action suit. The court further reasoned that there was “not a strong indicia” of procedural unconscionability because the agreement conspicuously displayed the class-action waiver. The court factually distinguished the case from Whitney v. Alltell Commuc’n Inc., 173 S.W. 3d 300 (Mo. Ct. App. 2005), a case in which the Missouri Court of Appeals held that a card agreement containing a class-action waiver was unconscionable, because the arbitration clause in this case did not limit the plaintiff’s remedies under TILA. The court also asserted that the decision in Whitney, a ruling by an intermediate state appellate court, was not binding on a federal court deciding a case under applicable state law. For a copy of the opinion, please see http://www.ca8.uscourts.gov/opndir/08/09/073235P.pdf.
Federal District Court Awards Statutory Damages for Violation of RESPA Qualified Written Request Requirement. On September 10, a federal district court in South Carolina ruled that a loan servicer, CIT Group/Consumer Finance, Inc. (CIT), violated its duty to provide a written response to the plaintiffs’ qualified written request for an explanation of charges on their account, as required by the Real Estate Settlement Procedures Act (RESPA). Serfass v. CIT Group/Consumer Finance, Inc., Civ. No. 8:07-90, 2008 WL 4200356 (D.S.C. Sept. 10, 2008). In this case, the plaintiffs refinanced their loan and made a final payment on the loan serviced by CIT. However, the final check was returned for insufficient funds after the plaintiffs’ bank inadvertently debited their previous payment twice. The bank did not reverse the double debit until several months later, and in the interim the defendant began sending collection notices to the plaintiffs. In various telephone calls to CIT, the plaintiffs disputed CIT’s accounting. The plaintiffs’ attorney then sent a qualified written request on their behalf disputing the debt. CIT failed to respond in writing to this letter or to subsequent letters sent by the attorney. The court ruled that, although actual damages as a result of the alleged violation were not established by the plaintiff, the defendant’s failure to respond to five qualified written requests established a “pattern or practice of noncompliance with requirements of this section” of RESPA, and awarded the plaintiffs $1,000 in statutory damages. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Serfass_v_CIT.pdf.
Tenth Circuit Holds Non-Employee Consultant Was Primary Securities Law Violator for Drafting SEC Filings. On September 2, the U.S. Court of Appeals for the Tenth Circuit held that a non-employee consultant was liable as a primary securities fraud violator for his role in drafting materially misleading Securities and Exchange Commission (SEC) filings on behalf of a corporation. SEC v. Wolfson, No. 06-4035 (10th Cir. Sept. 2, 2008). Defendants Jon R. Marple and Grateful Internet Associates, LLC, his consulting company, drafted periodic financial reports on behalf of a public company, F10 Oil and Gas Properties, Inc. (F10). The reports failed to disclose, among other items, the nature of an agreement with Sukomo Ltd. for the purchase of up to 10 million shares of F10 stock and the relevant distribution of proceeds between the various parties. The district court awarded summary judgment to the SEC on the charge of securities fraud regarding the alleged material misstatements and omissions in the financial reports. On appeal, the defendants argued that F10 “made” the material statements and that the defendants, acting as individuals, only signed, certified, and filed the reports. The court rejected this argument, reasoning that the defendants caused the company to make the statements and knew or should have known that those statements would reach investors. The court also rejected the defendants’ argument that the SEC failed to prove that the misstatements and omissions were made “in connection with” the purchase or sale of securities pursuant to Section 10(b) of the Securities Exchange Act of 1934 and Section 17(a) of the Securities Act of 1933 (§ 17). The court reasoned that the misstatements and omissions were designed to reach investors, that they were material to a reasonable investor’s decision to buy the stock, and that the relevant misstatements were contained in filings available to the public at the time of the F10 stock offer. The court also rejected the defendants’ narrow interpretation of § 17, reasoning that a defendant who is not the actual seller or offeror of securities remains subject to the section. Finally, the court rejected the argument that the SEC failed to prove that the defendants "’obtain[ed] money or property by means of’ a material misstatement of omission" pursuant to § 17(a)(2). The court reasoned that the defendants received fees for preparing the reports, obtained shares of F10 stock, and were paid the proceeds of the sale of F10 stock. For a copy of the opinion, please see http://www.ca10.uscourts.gov/opinions/06/06-4035.pdf.
Fifth Circuit Holds Texas Law Tolling Statute of Limitations Against Out-of-State Defendants Violates Commerce Clause. On September 8, the U.S. Court of Appeals for the Fifth Circuit held that a Texas law allowing for the tolling of the statute of limitations for out-of-state defendants violated the Commerce Clause of the U.S. Constitution. Cadles of Grassy Meadows II, L.L.C. v. Goldner, No. 07-10711 (5th Cir. Sept. 8, 2008). In this case, a creditor attempted to collect an 18-year old debt by claiming that the statute of limitations was tolled against the defendants when they left Texas after contracting for the debt in Texas, pursuant to Tex. Civ. Prac. & Rem. Code § 16.063. The court relied heavily upon the balancing test employed by the U.S. Supreme Court in Bendix Autolite Corp. v. Midwesco Enterprises, Inc., 486 U.S. 888 (1998), a case that involved a similar tolling provision in Ohio. Quoting Bendix, the court concluded that “’the burden imposed on interstate commerce by the tolling statute exceeds any local interest that the State might advance.’” The court reasoned that the tolling provision “restricts one’s freedom to incur business obligations in Texas and then to leave the state without detriment” because the provision "deprives defendants of a limitations defense by virtue of the fact that they are out of state." The court rejected the state’s argument that the statute of limitations was not discriminatory with respect to out-of-state defendants because out-of-state residents could obtain the benefits of the provision by appointing a resident agent. The court reasoned that no case law supported this proposition as applied to individuals as opposed to corporate entities. The court also denied that there was a benefit to Texas by making the service of out-of-state defendants “less arduous,” reasoning that "modern personal jurisdiction doctrine and the existence of a long-arm statute makes the Texas tolling provision no longer necessary to advance the provision’s traditional purpose." For a copy of the opinion, please see http://www.buckleykolar.com/documents/Cadles_v_Goldner.pdf.
Ohio Federal Court Upholds FCRA Claim Against Credit Card Company. On September 5, a federal district court in Ohio held that an issue of material fact existed as to whether a credit card company, Citibank, violated the federal Fair Credit Reporting Act’s (FCRA) “reasonable investigation” requirement. Watson v. Citi Corp., No. 2:07-cv-0777, 2008 WL 4186317 (S.D. Ohio Sept. 5, 2008). The plaintiff in the case alleged, among other claims, that Citibank continued to report incorrect information regarding her settled credit card account despite receiving several notices of dispute. With respect to the third dispute notice sent by the plaintiff, Citibank argued that its investigation of and subsequent response to the dispute were “reasonable” as a matter of law because, at the time, its records did not reflect the settlement of the account in full and because the notice of dispute did not specify why the plaintiff believed her account balance to be zero. The court disagreed, reasoning that the initial dispute notices and other communications between the plaintiff and Citibank were sufficient to establish a triable fact regarding the reasonableness of Citibank’s investigation. The court cited to Westra v. Credit Control of Pinellas, 409 F.3d 825 (7th Cir. 2005) in support of the proposition that summary judgment is appropriate only when the reasonableness of the defendant’s procedures is “’beyond question.’” Although Citibank argued that its conduct was not willful, the court – relying on the Supreme Court’s opinion in Safeco Ins. Co. of America v.Burr, 551 U.S. 1, 127 S. Ct. 2201 (2007) – held that this was a question of fact for which summary judgment was not appropriate. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Watson_v_Citi.pdf.
Wisconsin Federal Court Finds Triable Issues in FCRA “Reasonable Investigation” Case. On September 12, the U.S. District Court for the Western District of Wisconsin held that an issue of fact remained as to whether the defendants, Trans Union, LLC (Trans Union) and FIA Card Services, NA (FIA) provided, respectively, “all relevant information” to a creditor regarding a credit dispute and whether a “reasonable” investigation of a complaint was conducted under the Fair Credit Reporting Act (FCRA). Scheel-Baggs v. Bank of America, No. 07-cv-671, 2008 WL 4194294 (W.D. Wis. Sept. 15, 2008). In this case, a divorce decree assigned the plaintiff’s credit card debt to the plaintiff’s ex-husband, who later defaulted on the debt. Subsequently, FIA asserted that the plaintiff was liable for the remainder of the balance and reported to Trans Union that she was delinquent on her payments. FIA then initiated an arbitration proceeding against the plaintiff to collect the delinquent funds. Ultimately, the arbitrator ruled in favor of the plaintiff, stating that she was not responsible for the delinquent account. Despite this ruling, FIA continued to report that the plaintiff was liable for the debt. Additionally, the plaintiff, seeking to repair her credit report, informed Trans Union that she had never been included on the delinquent account and that the account belonged solely to her ex-husband. However, Trans Union failed to inform FIA fully of the nature of the dispute or take any other actions to verify the accuracy of the account. The plaintiff then filed suit, alleging violations arising under FCRA. The court held that whether Trans Union conveyed “all relevant information” to FIA, as required by § 1681i of FCRA, was a question of fact for a jury’s determination. The court further held that FIA’s failure to discover the arbitration ruling within the company’s own legal records constituted a question of fact as to whether FIA performed a “reasonable” investigation of the dispute, as required by § 1681s-2(b) of FCRA. As a result, the court denied FIA’s motion for summary judgment. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Scheel_Baggs_v_BofA.pdf.
Firm News
Margo Tank will be featured in a panel discussion on eLegal Issues at the Mortgage Bankers Association’s Document Management & Custody Conference on September 23 in Charlotte, North Carolina. Click here for additional information on this conference.
Jeff Naimon will be moderating a panel entitled “Ensuring Your Practices Keep Pace with Emerging Legislative and Regulatory Initiatives” at the American Conference Institute’s 5th National Forum on Preventing, Detecting And Resolving Mortgage Fraud on September 23 in Phoenix, Arizona. For a copy of the conference brochure, please see http://www.buckleykolar.com/documents/ACI_Fraud_Conference_Brochure.pdf.
Joe Kolar will participate in an audio presentation on the Housing and Economic Recovery Act of 2008 (HERA) sponsored by the American Bar Association on September 25.
Clint Rockwell will be presenting on topics related to recent state and federal mortgage lending developments at the American Financial Services Association’s State Government Affairs Forum / NACCA Annual Meeting on October 2 in Beverly Hills, California. Click here for additional information about this conference.
Jerry Buckley will be a featured speaker at the upcoming Corporate Risk Advisors & Fair Lending Colloquium Conference taking place October 27 in Orlando, Florida. The topic being discussed by his panel is entitled “Identifying Trends and Potential Regulatory Concerns.”
Jerry Buckley and Margo Tank will be conducting a panel discussion on electronic-related legal and regulatory issues at the Electronic Signature and Records Association Second Annual Conference: E-Signatures ’08: Business, Legal and Technology Trends on November 12 and 13th in Washington, D.C. For more information on the conference, and to register online, go to http://www.esignrecords.org/events/.
Margo Tank was a featured speaker at the New York State Bar Association’s Business Law Fall Meeting on September 12 in Newport, Rhode Island. Ms. Tank’s presentation was entitled “Electronic Signatures – What Does a Business Lawyer Need to Know?”
Jonathan Jerison was the featured speaker of a Pratt audio conference entitled “Between a Rock and a Hard Place: Managing HELOCs in the Current Environment” on August 26.
Jeff Naimon participated in the American Bankers Association Telephone Briefing entitled “Is Your Bank Ready for Regulation Z?” on September 3, discussing the Federal Reserve Board’s recently adopted HOEPA rule.
Matthew Previn presented in a panel discussion entitled “Litigation and Enforcement Update” at the Mortgage Bankers Association’s Regulatory Compliance Conference in Washington D.C. on September 15.
Jonathan Jerison participated in two events at the Mortgage Bankers Association’s Regulatory Compliance Conference in Washington, D.C. on September 15 & 16.
Jeff Naimon facilitated roundtable at the Mortgage Bankers Association’s Regulatory Compliance Conference Roundtable entitled “Miscellaneous Regulatory Concerns: RESPA and TILA Issues (including Right of Rescission)” on September 15.
Miscellany
Barclays Acquires Lehman Brothers. On September 16, Barclays Capital (Barclays) signed a definitive agreement to acquire “substantially all of the North American businesses and operating assets of Lehman Brothers Inc.” and “certain related assets of Lehman Brothers Holdings Inc. and its affiliates” in exchange for $250 million in cash and contingent considerations. The sale includes Lehman Brothers’ Investment Banking, and Fixed Income and Equities Sales, Trading and Research operations. Barclays will also purchase corporate real estate from Lehman Brothers for approximately $1.45 billion. For a copy of the press release, please see http://www.lehman.com/press/pdf_2008/0916_barclays_acquisition.pdf.
Bank of America Acquires Merrill Lynch. On September 15, Bank of America Corporation announced the acquisition of Merrill Lynch & Co., Inc. in an all-stock transaction totaling $50 billion. The transaction is subject to shareholder and regulatory approval and is expected to close during the first quarter of 2009. For a copy of the press release, please see http://newsroom.bankofamerica.com/index.php?s=press_releases&item=8255.
Mortgages
Paulson Announces Asset Relief Program. On September 19, U.S. Treasury Secretary Henry Paulson, Jr. announced a major troubled asset relief program in an effort to stem further financial distress to the economy and to provide a jumpstart to frozen credit markets by removing illiquid mortgage-related assets from financial institutions. Secretary Paulson announced that immediate actions will be taken to provide credit relief, including Fannie Mae and Freddie Mac increasing their purchases of mortgage-backed securities (MBS), and the Treasury Department expanding the MBS purchase program that it announced earlier this month. Secretary Paulson indicated that “[w]hen we get through this difficult period, which we will, our next task must be to improve the financial regulatory structure so that these past excesses do not recur. This crisis demonstrates in vivid terms that our financial regulatory structure is sub-optimal, duplicative and outdated. I have put forward my ideas for a modernized financial oversight structure that matches our modern economy, and more closely links the regulatory structure to the reasons why we regulate. That is a critical debate for another day.” The Bush administration will work with Members of Congress to pass legislation to implement the program, which may be passed as early as next week. For a copy of the press release, please see http://www.treas.gov/press/releases/hp1149.htm.
FHFA Announces New Chairmen of Fannie, Freddie. On September 16, Federal Housing Finance Agency (FHFA) Director James B. Lockhart announced the appointment of the new non-executive chairmen of the Boards of Directors of Freddie Mac and Fannie Mae. John A. Koskinen, formerly the chief executive of Palmieri Co., a consulting firm, will chair Freddie Mac. Philip A. Laskawy, a former chief executive of Ernst & Young, will chair Fannie Mae. The FHFA press release states that the FHFA directed the appointments “to ensure solid leadership and good corporate governance.” For a copy of the press release, please see http://www.buckleykolar.com/documents/FHFA_Sept_16_08.pdf.
HUD Mortgagee Letter Addresses Revised Downpayment, Maximum Mortgage Requirements. On September 5, Assistant Secretary for Housing Brian Montgomery issued Mortgagee Letter 2008-23, a letter that discusses revised downpayment and maximum mortgage requirements for single family mortgages backed by the Federal Housing Administration. Under the new requirements, which were enacted into law as part of the Housing and Economic Recovery Act of 2008 (HERA), a mortgagor must pay a minimum 3.5% downpayment in connection with an FHA loan beginning January 1, 2009. According to the mortgagee letter, this minimum downpayment cannot include closing costs and is inapplicable to refinances. HERA also eliminates variable loan-to-value limits, which were based on a combination of property value and the average closing costs of the state where the property is located. Instead, the mortgagee letter states that the maximum mortgage must be calculated by applying 96.5% to the lesser of either the appraiser’s estimate or the adjusted sales price. Financing concessions up to 6% of the sales price may still be provided by sellers, while amounts in excess of 6% and other inducements to purchase must be subtracted from the lesser of either the appraiser’s estimate or the adjusted sales price when calculating the maximum mortgage amount. Finally, the letter notes that HERA limits the maximum amount of a mortgage to 100% of the appraised value, a value which includes the upfront mortgage insurance premium. For a copy of the mortgagee letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/08-23ml.pdf.
HUD Mortgagee Letter Addresses New Requirements for HECM Mortgage Originators. On September 16, Assistant Secretary for Housing Brian D. Montgomery issued Mortgagee Letter 2008-24 (ML 08-24), a letter that addresses new requirements for originators of Home Equity Conversion Mortgages (HECMs), as set forth in the HERA. Although the Federal Housing Administration (FHA) intends to seek comments from interested parties before providing definitive guidance, ML 08-24 advises that mortgagees cannot condition a HECM mortgage on the purchase of any other financial or insurance product, and encourages mortgagees to establish, consistent with HERA, firewalls and other safeguards to ensure there is no undue pressure or appearance of pressure for a mortgagor to purchase another product from the mortgage originator or mortgage originator’s company. In addition, because HERA requires that loan origination be performed by FHA approved entities, effective on October 1, 2008, ML 08-24 rescinds Mortgagee Letter 2008-14, which provided guidance regarding the ways in which a non-approved entity or third party may participate and be compensated. Beginning with case number assignments made on or after October 1, 2008, only FHA-approved mortgagees may participate and be compensated for the origination of HECMs to be insured by FHA. For a copy of ML 08-24, please see http://www.mortgagebankers.org/files/News/InternalResource/65195_MortgageeLetter08-24.pdf.
OTS Issues Memorandum on Mortgage Lending Documentation, Underwriting Standards. On September 17, Office of Thrift Supervision (OTS) Deputy Director Timothy Ward issued a memorandum stating that an institution’s Board-approved loan policy should establish a limit for aggregate pipeline, warehouse, and credit-enhancing repurchase exposure for mortgage loans originated for sale to non-government sponsored enterprise purchasers. The memorandum states that the level of such exposure can constitute a concentration risk, and that a savings association will receive closer supervisory review of its concentration risk when such exposure exceeds its Tier 1 capital. The memorandum also reiterates OTS policy that savings associations use prudent underwriting and documentation standards for all loans they originate, both for those to be held in portfolio and for those originated for sale. The OTS expects that loans originated for sale will be underwritten to comply with the institution’s Board approved loan policy and with all existing regulations and supervisory guidance governing the documentation and underwriting standards for residential mortgages. For a copy of the memorandum, please see http://files.ots.treas.gov/252801.pdf.
Fed Issues Technical Amendment to Regulation B. On September 17, the Federal Reserve Board published a technical amendment to the Equal Credit Opportunity Act’s implementing Regulation B. The amendment updates the address for the Office of Thrift Supervision (OTS) to be used in adverse action notices. Creditors for which the OTS administers compliance with Regulation B must include this new address on their adverse action notices starting September 17, 2009. For a copy of the Federal Register notice, please see http://edocket.access.gpo.gov/2008/pdf/E8-21629.pdf.
New Jersey Passes Bill Requiring Foreclosure Notices. On September 15, New Jersey Governor Jon Corzine signed A2780, the “Save New Jersey Homes Act of 2008.” The bill requires creditors, including servicers, to provide several notices to borrowers facing the foreclosure of an “introductory rate mortgage,” as defined by the bill. Under the bill, creditors must alert borrowers of foreclosure alternatives, such as refinancing, renegotiating, or extension of the loan. Creditors must also notify borrowers of the ability to receive an extension for an introductory rate mortgage for three years following an interest rate reset. Creditors must provide borrowers with a “certification of extension form,” which may be completed by the borrower, to effect such an extension. The form, in part, affirms that the borrower does not have the monthly income to make the mortgage payments that will apply after the rate reset, that the borrower agrees to the modification of the mortgage, and that the borrower will repay any deferred interest. The bill also requires creditors to provide borrowers with certain written notices at 60 days, and again at 30 days, before any adjustable rate mortgage’s introductory interest rate resets. These notices must state (i) the borrower’s current interest rate, (ii) the date on which the current rate will adjust, (iii) an explanation of how the new monthly payment will be determined, (iv) an estimate of the new monthly payment, and (v) a list of alternatives that the borrower may pursue, such as refinancing or renegotiating the loan. The bill took effect immediately upon signature and remains in effect until January 1, 2011. For a copy of the bill, please see http://www.njleg.state.nj.us/2008/Bills/A3000/2780_R2.PDF.
Illinois Amends Foreclosure Requirements for Tenant-Occupied Properties. On August 26, Illinois Governor Rod Blagojevich approved S.B. 2721, a bill amending Illinois’ foreclosure requirements for tenant-occupied rental properties. Among other items, the bill provides that, in a foreclosure proceeding involving tenant-occupied real estate, if “timely” written notice regarding rental payments is not provided to the tenant, or if the tenant makes “good-faith efforts” to keep current on rental payments, any order of possession must allow the tenant to retain possession of the property for up to 120 days following notice of a hearing on this issue. In addition, mortgagees that fail to file a “supplemental petition for possession” are also prohibited from filing a forcible entry and detainer action against the tenant until 90 days after serving the tenant with a notice of intent to file the action. For a copy of the bill, please see http://www.ilga.gov/legislation/publicacts/95/PDF/095-0933.pdf.
California Department of Corporations Releases Mortgage Servicers Survey Results. On September 9, the California Department of Corporations made available its “Mortgage Servicers Survey” results for July 2008. The data reflects, among other items, that the total number of loan modifications in California has increased 16.57% from June to July and evidences a consistent monthly increase in the total number of loan workouts from January to July. For a copy of the press release, please see http://www.corp.ca.gov/press/news/SPL/ServicerSurvey0708.pdf.
Federal District Court Awards Statutory Damages for Violation of RESPA Qualified Written Request Requirement. On September 10, a federal district court in South Carolina ruled that a loan servicer, CIT Group/Consumer Finance, Inc. (CIT), violated its duty to provide a written response to the plaintiffs’ qualified written request for an explanation of charges on their account, as required by the Real Estate Settlement Procedures Act (RESPA). Serfass v. CIT Group/Consumer Finance, Inc., Civ. No. 8:07-90, 2008 WL 4200356 (D.S.C. Sept. 10, 2008). In this case, the plaintiffs refinanced their loan and made a final payment on the loan serviced by CIT. However, the final check was returned for insufficient funds after the plaintiffs’ bank inadvertently debited their previous payment twice. The bank did not reverse the double debit until several months later, and in the interim the defendant began sending collection notices to the plaintiffs. In various telephone calls to CIT, the plaintiffs disputed CIT’s accounting. The plaintiffs’ attorney then sent a qualified written request on their behalf disputing the debt. CIT failed to respond in writing to this letter or to subsequent letters sent by the attorney. The court ruled that, although actual damages as a result of the alleged violation were not established by the plaintiff, the defendant’s failure to respond to five qualified written requests established a “pattern or practice of noncompliance with requirements of this section” of RESPA, and awarded the plaintiffs $1,000 in statutory damages. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Serfass_v_CIT.pdf.
Banking
Paulson Announces Asset Relief Program. On September 19, U.S. Treasury Secretary Henry Paulson, Jr. announced a major troubled asset relief program in an effort to stem further financial distress to the economy and to provide a jumpstart to frozen credit markets by removing illiquid mortgage-related assets from financial institutions. Secretary Paulson announced that immediate actions will be taken to provide credit relief, including Fannie Mae and Freddie Mac increasing their purchases of mortgage-backed securities (MBS), and the Treasury Department expanding the MBS purchase program that it announced earlier this month. Secretary Paulson indicated that “[w]hen we get through this difficult period, which we will, our next task must be to improve the financial regulatory structure so that these past excesses do not recur. This crisis demonstrates in vivid terms that our financial regulatory structure is sub-optimal, duplicative and outdated. I have put forward my ideas for a modernized financial oversight structure that matches our modern economy, and more closely links the regulatory structure to the reasons why we regulate. That is a critical debate for another day.” The Bush administration will work with Members of Congress to pass legislation to implement the program, which may be passed as early as next week. For a copy of the press release, please see http://www.treas.gov/press/releases/hp1149.htm.
OTS Issues Memorandum on Mortgage Lending Documentation, Underwriting Standards. On September 17, Office of Thrift Supervision (OTS) Deputy Director Timothy Ward issued a memorandum stating that an institution’s Board-approved loan policy should establish a limit for aggregate pipeline, warehouse, and credit-enhancing repurchase exposure for mortgage loans originated for sale to non-government sponsored enterprise purchasers. The memorandum states that the level of such exposure can constitute a concentration risk, and that a savings association will receive closer supervisory review of its concentration risk when such exposure exceeds its Tier 1 capital. The memorandum also reiterates OTS policy that savings associations use prudent underwriting and documentation standards for all loans they originate, both for those to be held in portfolio and for those originated for sale. The OTS expects that loans originated for sale will be underwritten to comply with the institution’s Board approved loan policy and with all existing regulations and supervisory guidance governing the documentation and underwriting standards for residential mortgages. For a copy of the memorandum, please see http://files.ots.treas.gov/252801.pdf.
FDIC Executes Information-Sharing Agreements with New York State Banking Department, Texas Department of Banking. On September 15, the Federal Deposit Insurance Corporation (FDIC) executed separate information-sharing agreements with the New York State Banking Department (NYSBD) and the Texas Department of Banking (TDOB) pertaining to Money Services Businesses (MSB) supervision. The agreements will provide relevant supervisory information for MSB customers with banking relationships at FDIC-supervised financial institutions. The agreements will also provide “assistance to each agency in promoting opportunities to learn from the other’s industry expertise.” For a copy of the NYSBD press release, please see http://www.banking.state.ny.us/pr080915.htm. For a copy of the TDOB pres release, please see http://www.banking.state.tx.us/news/press/2008/09-15-08pr.htm.
Fed Issues Technical Amendment to Regulation B. On September 17, the Federal Reserve Board published a technical amendment to the Equal Credit Opportunity Act’s implementing Regulation B. The amendment updates the address for the Office of Thrift Supervision (OTS) to be used in adverse action notices. Creditors for which the OTS administers compliance with Regulation B must include this new address on their adverse action notices starting September 17, 2009. For a copy of the Federal Register notice, please see http://edocket.access.gpo.gov/2008/pdf/E8-21629.pdf.
Consumer Finance
Eighth Circuit Affirms Card Agreement Containing Arbitration Clause Not Unconscionable. On September 8, the U.S. Court of Appeals for the Eighth Circuit affirmed that the arbitration clause of an agreement for a pre-loaded, stored-value card was not substantively or procedurally unconscionable. Pleasants v. American Express Co., No. 07-3235 (8th Cir. Sept. 8, 2008). In this case, the plaintiff received a combination of pre-loaded, stored-value cards issued by the defendant in exchange for completing online surveys. The plaintiff used the cards at a restaurant that processed a charge in excess of the balances of the cards. The defendant then sent the plaintiff a letter requesting the payment of the difference, a late fee, and a transaction fee pursuant to the terms and conditions of the card agreement. The plaintiff filed suit, alleging that the defendant “falsely and misleadingly represented” that the card could not be used as a credit or charge card, in violation of the Truth in Lending Act (TILA) and Regulation Z. After the district court granted a motion to compel arbitration of the claims, the plaintiff appealed, arguing that the card agreement’s class-action waiver was unconscionable. The plaintiff alleged that the agreement was substantively unconscionable because claims of this type are unlikely to be tried without a class action due to the small recovery amounts available to consumers. The plaintiff further alleged that the agreement was procedurally unconscionable because the defendant “had superior bargaining power, presented the arbitration clause on a take-it-or-leave-it basis, and did not send the agreement to [the plaintiff] until after she completed the surveys.” The court held that the agreement was not substantively unconscionable, reasoning that the plaintiff could obtain the cost of action and a reasonable attorney’s fee under TILA’s remedial provision without filing a class action suit. The court further reasoned that there was “not a strong indicia” of procedural unconscionability because the agreement conspicuously displayed the class-action waiver. The court factually distinguished the case from Whitney v. Alltell Commuc’n Inc., 173 S.W. 3d 300 (Mo. Ct. App. 2005), a case in which the Missouri Court of Appeals held that a card agreement containing a class-action waiver was unconscionable, because the arbitration clause in this case did not limit the plaintiff’s remedies under TILA. The court also asserted that the decision in Whitney, a ruling by an intermediate state appellate court, was not binding on a federal court deciding a case under applicable state law. For a copy of the opinion, please see http://www.ca8.uscourts.gov/opndir/08/09/073235P.pdf.
Ohio Federal Court Upholds FCRA Claim Against Credit Card Company. On September 5, a federal district court in Ohio held that an issue of material fact existed as to whether a credit card company, Citibank, violated the federal Fair Credit Reporting Act’s (FCRA) “reasonable investigation” requirement. Watson v. Citi Corp., No. 2:07-cv-0777, 2008 WL 4186317 (S.D. Ohio Sept. 5, 2008). The plaintiff in the case alleged, among other claims, that Citibank continued to report incorrect information regarding her settled credit card account despite receiving several notices of dispute. With respect to the third dispute notice sent by the plaintiff, Citibank argued that its investigation of and subsequent response to the dispute were “reasonable” as a matter of law because, at the time, its records did not reflect the settlement of the account in full and because the notice of dispute did not specify why the plaintiff believed her account balance to be zero. The court disagreed, reasoning that the initial dispute notices and other communications between the plaintiff and Citibank were sufficient to establish a triable fact regarding the reasonableness of Citibank’s investigation. The court cited to Westra v. Credit Control of Pinellas, 409 F.3d 825 (7th Cir. 2005) in support of the proposition that summary judgment is appropriate only when the reasonableness of the defendant’s procedures is “’beyond question.’” Although Citibank argued that its conduct was not willful, the court – relying on the Supreme Court’s opinion in Safeco Ins. Co. of America v.Burr, 551 U.S. 1, 127 S. Ct. 2201 (2007) – held that this was a question of fact for which summary judgment was not appropriate. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Watson_v_Citi.pdf.
Wisconsin Federal Court Finds Triable Issues in FCRA “Reasonable Investigation” Case. On September 12, the U.S. District Court for the Western District of Wisconsin held that an issue of fact remained as to whether the defendants, Trans Union, LLC (Trans Union) and FIA Card Services, NA (FIA) provided, respectively, “all relevant information” to a creditor regarding a credit dispute and whether a “reasonable” investigation of a complaint was conducted under the Fair Credit Reporting Act (FCRA). Scheel-Baggs v. Bank of America, No. 07-cv-671, 2008 WL 4194294 (W.D. Wis. Sept. 15, 2008). In this case, a divorce decree assigned the plaintiff’s credit card debt to the plaintiff’s ex-husband, who later defaulted on the debt. Subsequently, FIA asserted that the plaintiff was liable for the remainder of the balance and reported to Trans Union that she was delinquent on her payments. FIA then initiated an arbitration proceeding against the plaintiff to collect the delinquent funds. Ultimately, the arbitrator ruled in favor of the plaintiff, stating that she was not responsible for the delinquent account. Despite this ruling, FIA continued to report that the plaintiff was liable for the debt. Additionally, the plaintiff, seeking to repair her credit report, informed Trans Union that she had never been included on the delinquent account and that the account belonged solely to her ex-husband. However, Trans Union failed to inform FIA fully of the nature of the dispute or take any other actions to verify the accuracy of the account. The plaintiff then filed suit, alleging violations arising under FCRA. The court held that whether Trans Union conveyed “all relevant information” to FIA, as required by § 1681i of FCRA, was a question of fact for a jury’s determination. The court further held that FIA’s failure to discover the arbitration ruling within the company’s own legal records constituted a question of fact as to whether FIA performed a “reasonable” investigation of the dispute, as required by § 1681s-2(b) of FCRA. As a result, the court denied FIA’s motion for summary judgment. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Scheel_Baggs_v_BofA.pdf.
Securities
Tenth Circuit Holds Non-Employee Consultant Was Primary Securities Law Violator for Drafting SEC Filings. On September 2, the U.S. Court of Appeals for the Tenth Circuit held that a non-employee consultant was liable as a primary securities fraud violator for his role in drafting materially misleading Securities and Exchange Commission (SEC) filings on behalf of a corporation. SEC v. Wolfson, No. 06-4035 (10th Cir. Sept. 2, 2008). Defendants Jon R. Marple and Grateful Internet Associates, LLC, his consulting company, drafted periodic financial reports on behalf of a public company, F10 Oil and Gas Properties, Inc. (F10). The reports failed to disclose, among other items, the nature of an agreement with Sukomo Ltd. for the purchase of up to 10 million shares of F10 stock and the relevant distribution of proceeds between the various parties. The district court awarded summary judgment to the SEC on the charge of securities fraud regarding the alleged material misstatements and omissions in the financial reports. On appeal, the defendants argued that F10 “made” the material statements and that the defendants, acting as individuals, only signed, certified, and filed the reports. The court rejected this argument, reasoning that the defendants caused the company to make the statements and knew or should have known that those statements would reach investors. The court also rejected the defendants’ argument that the SEC failed to prove that the misstatements and omissions were made “in connection with” the purchase or sale of securities pursuant to Section 10(b) of the Securities Exchange Act of 1934 and Section 17(a) of the Securities Act of 1933 (§ 17). The court reasoned that the misstatements and omissions were designed to reach investors, that they were material to a reasonable investor’s decision to buy the stock, and that the relevant misstatements were contained in filings available to the public at the time of the F10 stock offer. The court also rejected the defendants’ narrow interpretation of § 17, reasoning that a defendant who is not the actual seller or offeror of securities remains subject to the section. Finally, the court rejected the argument that the SEC failed to prove that the defendants "’obtain[ed] money or property by means of’ a material misstatement of omission" pursuant to § 17(a)(2). The court reasoned that the defendants received fees for preparing the reports, obtained shares of F10 stock, and were paid the proceeds of the sale of F10 stock. For a copy of the opinion, please see http://www.ca10.uscourts.gov/opinions/06/06-4035.pdf.
Barclays Acquires Lehman Brothers. On September 16, Barclays Capital (Barclays) signed a definitive agreement to acquire “substantially all of the North American businesses and operating assets of Lehman Brothers Inc.” and “certain related assets of Lehman Brothers Holdings Inc. and its affiliates” in exchange for $250 million in cash and contingent considerations. The sale includes Lehman Brothers’ Investment Banking, and Fixed Income and Equities Sales, Trading and Research operations. Barclays will also purchase corporate real estate from Lehman Brothers for approximately $1.45 billion. For a copy of the press release, please see http://www.lehman.com/press/pdf_2008/0916_barclays_acquisition.pdf.
Bank of America Acquires Merrill Lynch. On September 15, Bank of America Corporation announced the acquisition of Merrill Lynch & Co., Inc. in an all-stock transaction totaling $50 billion. The transaction is subject to shareholder and regulatory approval and is expected to close during the first quarter of 2009. For a copy of the press release, please see http://newsroom.bankofamerica.com/index.php?s=press_releases&item=8255.
Insurance
Fed Authorizes $85 Billion Loan to AIG. On September 16, the Federal Reserve Board announced that it has authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group, Inc. (AIG) pursuant to section 13(3) of the Federal Reserve Act. In exchange, the U.S. government will receive a 79.9% equity interest in AIG. The loan is intended to allow AIG to meet its financial obligations “with the least possible disruption to the overall economy.” An intended sale of the firm’s assets will repay the loan. For a copy of the press release, please see http://federalreserve.gov/newsevents/press/other/20080916a.htm.
Litigation
Ninth Circuit Holds Federal Bankruptcy Code Does Not Preempt California’s Bona Fide Purchaser Statute. On September 4, the U.S. Court of Appeals for the Ninth Circuit held that the federal Bankruptcy Code does not preempt California’s statute protecting bona fide purchasers (BFPs) because there is no inconsistency between the Bankruptcy Code and California’s protection of the BFPs of real property. Burkart v. Coleman, No. 06-15411, 2008 WL 4070690 (9th Cir. Sept. 4, 2008). In this case, a BFP bought a property, for which the bankruptcy trustee had not recorded a Chapter 7 filing with the county recorder, from Chapter 7 debtors. The bankruptcy trustee brought suit, seeking to invalidate the transaction. The court addressed (i) whether the post-petition deed could convey a property interest in the residence to the BFP, (ii) whether the federal Bankruptcy Code preempts the California statute protecting BFPs as applied to purchasers from a debtor in bankruptcy, and (iii) whether the automatic stay voids the debtors’ sale to the BFP. Regarding the first issue, the court held that a post-petition deed can convey a property interest, reasoning that the California BFP statute renders an unrecorded conveyance void as to subsequent BFPs, such as the BFP in this case, who record their title first. With respect to the second issue, the court relied upon the test from Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198 (9th Cir. 2005) to determine whether the California statute is consistent with the “’essential goals and purposes of federal bankruptcy law.’” The court held that there is no meaningful inconsistency between protecting the “equitable distribution of the debtor’s assets among creditors” under federal law and California’s protection of BFPs which would result in preemption. Regarding the third issue, the court held that the automatic stay provision of the federal Bankruptcy Code does not void the debtors’ sale to the BFP because the automatic stay provision does not apply to transfers initiated by debtors. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Burkart_v_Coleman.pdf.
Eighth Circuit Affirms Card Agreement Containing Arbitration Clause Not Unconscionable. On September 8, the U.S. Court of Appeals for the Eighth Circuit affirmed that the arbitration clause of an agreement for a pre-loaded, stored-value card was not substantively or procedurally unconscionable. Pleasants v. American Express Co., No. 07-3235 (8th Cir. Sept. 8, 2008). In this case, the plaintiff received a combination of pre-loaded, stored-value cards issued by the defendant in exchange for completing online surveys. The plaintiff used the cards at a restaurant that processed a charge in excess of the balances of the cards. The defendant then sent the plaintiff a letter requesting the payment of the difference, a late fee, and a transaction fee pursuant to the terms and conditions of the card agreement. The plaintiff filed suit, alleging that the defendant “falsely and misleadingly represented” that the card could not be used as a credit or charge card, in violation of the Truth in Lending Act (TILA) and Regulation Z. After the district court granted a motion to compel arbitration of the claims, the plaintiff appealed, arguing that the card agreement’s class-action waiver was unconscionable. The plaintiff alleged that the agreement was substantively unconscionable because claims of this type are unlikely to be tried without a class action due to the small recovery amounts available to consumers. The plaintiff further alleged that the agreement was procedurally unconscionable because the defendant “had superior bargaining power, presented the arbitration clause on a take-it-or-leave-it basis, and did not send the agreement to [the plaintiff] until after she completed the surveys.” The court held that the agreement was not substantively unconscionable, reasoning that the plaintiff could obtain the cost of action and a reasonable attorney’s fee under TILA’s remedial provision without filing a class action suit. The court further reasoned that there was “not a strong indicia” of procedural unconscionability because the agreement conspicuously displayed the class-action waiver. The court factually distinguished the case from Whitney v. Alltell Commuc’n Inc., 173 S.W. 3d 300 (Mo. Ct. App. 2005), a case in which the Missouri Court of Appeals held that a card agreement containing a class-action waiver was unconscionable, because the arbitration clause in this case did not limit the plaintiff’s remedies under TILA. The court also asserted that the decision in Whitney, a ruling by an intermediate state appellate court, was not binding on a federal court deciding a case under applicable state law. For a copy of the opinion, please see http://www.ca8.uscourts.gov/opndir/08/09/073235P.pdf.
Federal District Court Awards Statutory Damages for Violation of RESPA Qualified Written Request Requirement. On September 10, a federal district court in South Carolina ruled that a loan servicer, CIT Group/Consumer Finance, Inc. (CIT), violated its duty to provide a written response to the plaintiffs’ qualified written request for an explanation of charges on their account, as required by the Real Estate Settlement Procedures Act (RESPA). Serfass v. CIT Group/Consumer Finance, Inc., Civ. No. 8:07-90, 2008 WL 4200356 (D.S.C. Sept. 10, 2008). In this case, the plaintiffs refinanced their loan and made a final payment on the loan serviced by CIT. However, the final check was returned for insufficient funds after the plaintiffs’ bank inadvertently debited their previous payment twice. The bank did not reverse the double debit until several months later, and in the interim the defendant began sending collection notices to the plaintiffs. In various telephone calls to CIT, the plaintiffs disputed CIT’s accounting. The plaintiffs’ attorney then sent a qualified written request on their behalf disputing the debt. CIT failed to respond in writing to this letter or to subsequent letters sent by the attorney. The court ruled that, although actual damages as a result of the alleged violation were not established by the plaintiff, the defendant’s failure to respond to five qualified written requests established a “pattern or practice of noncompliance with requirements of this section” of RESPA, and awarded the plaintiffs $1,000 in statutory damages. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Serfass_v_CIT.pdf.
Tenth Circuit Holds Non-Employee Consultant Was Primary Securities Law Violator for Drafting SEC Filings. On September 2, the U.S. Court of Appeals for the Tenth Circuit held that a non-employee consultant was liable as a primary securities fraud violator for his role in drafting materially misleading Securities and Exchange Commission (SEC) filings on behalf of a corporation. SEC v. Wolfson, No. 06-4035 (10th Cir. Sept. 2, 2008). Defendants Jon R. Marple and Grateful Internet Associates, LLC, his consulting company, drafted periodic financial reports on behalf of a public company, F10 Oil and Gas Properties, Inc. (F10). The reports failed to disclose, among other items, the nature of an agreement with Sukomo Ltd. for the purchase of up to 10 million shares of F10 stock and the relevant distribution of proceeds between the various parties. The district court awarded summary judgment to the SEC on the charge of securities fraud regarding the alleged material misstatements and omissions in the financial reports. On appeal, the defendants argued that F10 “made” the material statements and that the defendants, acting as individuals, only signed, certified, and filed the reports. The court rejected this argument, reasoning that the defendants caused the company to make the statements and knew or should have known that those statements would reach investors. The court also rejected the defendants’ argument that the SEC failed to prove that the misstatements and omissions were made “in connection with” the purchase or sale of securities pursuant to Section 10(b) of the Securities Exchange Act of 1934 and Section 17(a) of the Securities Act of 1933 (§ 17). The court reasoned that the misstatements and omissions were designed to reach investors, that they were material to a reasonable investor’s decision to buy the stock, and that the relevant misstatements were contained in filings available to the public at the time of the F10 stock offer. The court also rejected the defendants’ narrow interpretation of § 17, reasoning that a defendant who is not the actual seller or offeror of securities remains subject to the section. Finally, the court rejected the argument that the SEC failed to prove that the defendants "’obtain[ed] money or property by means of’ a material misstatement of omission" pursuant to § 17(a)(2). The court reasoned that the defendants received fees for preparing the reports, obtained shares of F10 stock, and were paid the proceeds of the sale of F10 stock. For a copy of the opinion, please see http://www.ca10.uscourts.gov/opinions/06/06-4035.pdf.
Fifth Circuit Holds Texas Law Tolling Statute of Limitations Against Out-of-State Defendants Violates Commerce Clause. On September 8, the U.S. Court of Appeals for the Fifth Circuit held that a Texas law allowing for the tolling of the statute of limitations for out-of-state defendants violated the Commerce Clause of the U.S. Constitution. Cadles of Grassy Meadows II, L.L.C. v. Goldner, No. 07-10711 (5th Cir. Sept. 8, 2008). In this case, a creditor attempted to collect an 18-year old debt by claiming that the statute of limitations was tolled against the defendants when they left Texas after contracting for the debt in Texas, pursuant to Tex. Civ. Prac. & Rem. Code § 16.063. The court relied heavily upon the balancing test employed by the U.S. Supreme Court in Bendix Autolite Corp. v. Midwesco Enterprises, Inc., 486 U.S. 888 (1998), a case that involved a similar tolling provision in Ohio. Quoting Bendix, the court concluded that “’the burden imposed on interstate commerce by the tolling statute exceeds any local interest that the State might advance.’” The court reasoned that the tolling provision “restricts one’s freedom to incur business obligations in Texas and then to leave the state without detriment” because the provision "deprives defendants of a limitations defense by virtue of the fact that they are out of state." The court rejected the state’s argument that the statute of limitations was not discriminatory with respect to out-of-state defendants because out-of-state residents could obtain the benefits of the provision by appointing a resident agent. The court reasoned that no case law supported this proposition as applied to individuals as opposed to corporate entities. The court also denied that there was a benefit to Texas by making the service of out-of-state defendants “less arduous,” reasoning that "modern personal jurisdiction doctrine and the existence of a long-arm statute makes the Texas tolling provision no longer necessary to advance the provision’s traditional purpose." For a copy of the opinion, please see http://www.buckleykolar.com/documents/Cadles_v_Goldner.pdf.
Ohio Federal Court Upholds FCRA Claim Against Credit Card Company. On September 5, a federal district court in Ohio held that an issue of material fact existed as to whether a credit card company, Citibank, violated the federal Fair Credit Reporting Act’s (FCRA) “reasonable investigation” requirement. Watson v. Citi Corp., No. 2:07-cv-0777, 2008 WL 4186317 (S.D. Ohio Sept. 5, 2008). The plaintiff in the case alleged, among other claims, that Citibank continued to report incorrect information regarding her settled credit card account despite receiving several notices of dispute. With respect to the third dispute notice sent by the plaintiff, Citibank argued that its investigation of and subsequent response to the dispute were “reasonable” as a matter of law because, at the time, its records did not reflect the settlement of the account in full and because the notice of dispute did not specify why the plaintiff believed her account balance to be zero. The court disagreed, reasoning that the initial dispute notices and other communications between the plaintiff and Citibank were sufficient to establish a triable fact regarding the reasonableness of Citibank’s investigation. The court cited to Westra v. Credit Control of Pinellas, 409 F.3d 825 (7th Cir. 2005) in support of the proposition that summary judgment is appropriate only when the reasonableness of the defendant’s procedures is “’beyond question.’” Although Citibank argued that its conduct was not willful, the court – relying on the Supreme Court’s opinion in Safeco Ins. Co. of America v.Burr, 551 U.S. 1, 127 S. Ct. 2201 (2007) – held that this was a question of fact for which summary judgment was not appropriate. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Watson_v_Citi.pdf.
Wisconsin Federal Court Finds Triable Issues in FCRA “Reasonable Investigation” Case. On September 12, the U.S. District Court for the Western District of Wisconsin held that an issue of fact remained as to whether the defendants, Trans Union, LLC (Trans Union) and FIA Card Services, NA (FIA) provided, respectively, “all relevant information” to a creditor regarding a credit dispute and whether a “reasonable” investigation of a complaint was conducted under the Fair Credit Reporting Act (FCRA). Scheel-Baggs v. Bank of America, No. 07-cv-671, 2008 WL 4194294 (W.D. Wis. Sept. 15, 2008). In this case, a divorce decree assigned the plaintiff’s credit card debt to the plaintiff’s ex-husband, who later defaulted on the debt. Subsequently, FIA asserted that the plaintiff was liable for the remainder of the balance and reported to Trans Union that she was delinquent on her payments. FIA then initiated an arbitration proceeding against the plaintiff to collect the delinquent funds. Ultimately, the arbitrator ruled in favor of the plaintiff, stating that she was not responsible for the delinquent account. Despite this ruling, FIA continued to report that the plaintiff was liable for the debt. Additionally, the plaintiff, seeking to repair her credit report, informed Trans Union that she had never been included on the delinquent account and that the account belonged solely to her ex-husband. However, Trans Union failed to inform FIA fully of the nature of the dispute or take any other actions to verify the accuracy of the account. The plaintiff then filed suit, alleging violations arising under FCRA. The court held that whether Trans Union conveyed “all relevant information” to FIA, as required by § 1681i of FCRA, was a question of fact for a jury’s determination. The court further held that FIA’s failure to discover the arbitration ruling within the company’s own legal records constituted a question of fact as to whether FIA performed a “reasonable” investigation of the dispute, as required by § 1681s-2(b) of FCRA. As a result, the court denied FIA’s motion for summary judgment. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Scheel_Baggs_v_BofA.pdf.
Credit Cards
Eighth Circuit Affirms Card Agreement Containing Arbitration Clause Not Unconscionable. On September 8, the U.S. Court of Appeals for the Eighth Circuit affirmed that the arbitration clause of an agreement for a pre-loaded, stored-value card was not substantively or procedurally unconscionable. Pleasants v. American Express Co., No. 07-3235 (8th Cir. Sept. 8, 2008). In this case, the plaintiff received a combination of pre-loaded, stored-value cards issued by the defendant in exchange for completing online surveys. The plaintiff used the cards at a restaurant that processed a charge in excess of the balances of the cards. The defendant then sent the plaintiff a letter requesting the payment of the difference, a late fee, and a transaction fee pursuant to the terms and conditions of the card agreement. The plaintiff filed suit, alleging that the defendant “falsely and misleadingly represented” that the card could not be used as a credit or charge card, in violation of the Truth in Lending Act (TILA) and Regulation Z. After the district court granted a motion to compel arbitration of the claims, the plaintiff appealed, arguing that the card agreement’s class-action waiver was unconscionable. The plaintiff alleged that the agreement was substantively unconscionable because claims of this type are unlikely to be tried without a class action due to the small recovery amounts available to consumers. The plaintiff further alleged that the agreement was procedurally unconscionable because the defendant “had superior bargaining power, presented the arbitration clause on a take-it-or-leave-it basis, and did not send the agreement to [the plaintiff] until after she completed the surveys.” The court held that the agreement was not substantively unconscionable, reasoning that the plaintiff could obtain the cost of action and a reasonable attorney’s fee under TILA’s remedial provision without filing a class action suit. The court further reasoned that there was “not a strong indicia” of procedural unconscionability because the agreement conspicuously displayed the class-action waiver. The court factually distinguished the case from Whitney v. Alltell Commuc’n Inc., 173 S.W. 3d 300 (Mo. Ct. App. 2005), a case in which the Missouri Court of Appeals held that a card agreement containing a class-action waiver was unconscionable, because the arbitration clause in this case did not limit the plaintiff’s remedies under TILA. The court also asserted that the decision in Whitney, a ruling by an intermediate state appellate court, was not binding on a federal court deciding a case under applicable state law. For a copy of the opinion, please see http://www.ca8.uscourts.gov/opndir/08/09/073235P.pdf.
Ohio Federal Court Upholds FCRA Claim Against Credit Card Company. On September 5, a federal district court in Ohio held that an issue of material fact existed as to whether a credit card company, Citibank, violated the federal Fair Credit Reporting Act’s (FCRA) “reasonable investigation” requirement. Watson v. Citi Corp., No. 2:07-cv-0777, 2008 WL 4186317 (S.D. Ohio Sept. 5, 2008). The plaintiff in the case alleged, among other claims, that Citibank continued to report incorrect information regarding her settled credit card account despite receiving several notices of dispute. With respect to the third dispute notice sent by the plaintiff, Citibank argued that its investigation of and subsequent response to the dispute were “reasonable” as a matter of law because, at the time, its records did not reflect the settlement of the account in full and because the notice of dispute did not specify why the plaintiff believed her account balance to be zero. The court disagreed, reasoning that the initial dispute notices and other communications between the plaintiff and Citibank were sufficient to establish a triable fact regarding the reasonableness of Citibank’s investigation. The court cited to Westra v. Credit Control of Pinellas, 409 F.3d 825 (7th Cir. 2005) in support of the proposition that summary judgment is appropriate only when the reasonableness of the defendant’s procedures is “’beyond question.’” Although Citibank argued that its conduct was not willful, the court – relying on the Supreme Court’s opinion in Safeco Ins. Co. of America v.Burr, 551 U.S. 1, 127 S. Ct. 2201 (2007) – held that this was a question of fact for which summary judgment was not appropriate. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Watson_v_Citi.pdf.
Wisconsin Federal Court Finds Triable Issues in FCRA “Reasonable Investigation” Case. On September 12, the U.S. District Court for the Western District of Wisconsin held that an issue of fact remained as to whether the defendants, Trans Union, LLC (Trans Union) and FIA Card Services, NA (FIA) provided, respectively, “all relevant information” to a creditor regarding a credit dispute and whether a “reasonable” investigation of a complaint was conducted under the Fair Credit Reporting Act (FCRA). Scheel-Baggs v. Bank of America, No. 07-cv-671, 2008 WL 4194294 (W.D. Wis. Sept. 15, 2008). In this case, a divorce decree assigned the plaintiff’s credit card debt to the plaintiff’s ex-husband, who later defaulted on the debt. Subsequently, FIA asserted that the plaintiff was liable for the remainder of the balance and reported to Trans Union that she was delinquent on her payments. FIA then initiated an arbitration proceeding against the plaintiff to collect the delinquent funds. Ultimately, the arbitrator ruled in favor of the plaintiff, stating that she was not responsible for the delinquent account. Despite this ruling, FIA continued to report that the plaintiff was liable for the debt. Additionally, the plaintiff, seeking to repair her credit report, informed Trans Union that she had never been included on the delinquent account and that the account belonged solely to her ex-husband. However, Trans Union failed to inform FIA fully of the nature of the dispute or take any other actions to verify the accuracy of the account. The plaintiff then filed suit, alleging violations arising under FCRA. The court held that whether Trans Union conveyed “all relevant information” to FIA, as required by § 1681i of FCRA, was a question of fact for a jury’s determination. The court further held that FIA’s failure to discover the arbitration ruling within the company’s own legal records constituted a question of fact as to whether FIA performed a “reasonable” investigation of the dispute, as required by § 1681s-2(b) of FCRA. As a result, the court denied FIA’s motion for summary judgment. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Scheel_Baggs_v_BofA.pdf.