InfoBytes, September 25, 2009
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Insurance
- Litigation
- E-Financial Services
- Privacy/Data Security
- Credit Cards
Federal Issues
HUD Issues New Appraisal Standards for FHA-Insured Mortgages. On September 18, the Department of Housing and Urban Development (HUD) issued three Mortgagee Letters (ML 09-28, ML 09-29, and ML 09-30) addressing appraiser independence, appraisal portability, and appraisal validity periods. ML 09-28 provides new appraisal requirements for Federal Housing Administration (FHA) insured mortgages and reaffirms existing policy on FHA requirements regarding appraiser independence and geographic competence. The new requirements, which become effective January 1, 2010, prohibit mortgage brokers and commission-based lender staff from participating in the appraisal process, and require lenders to assure that the appraiser who actually conducted the appraisal used for the FHA-insured mortgage is correctly identified in FHA Connection. FHA does not require the use of appraisal management companies or other third party providers for appraisal ordering, but does require that lenders take responsibility to assure appraiser independence. While FHA’s existing policies regarding appraiser independence are consistent with the Home Valuation Code of Conduct (HVCC) (see InfoBytes, March 7, 2008), according to a HUD press release, FHA will adopt language from the HVCC to ensure full alignment of FHA and Government Sponsored Enterprise standards. ML 09-29 addresses the portability of appraisals for the purpose of facilitating the loan process when a borrower switches from one FHA approved lender to another, generally requiring the first lender to transfer to the second lender an appraisal ordered by and completed for the first lender. ML 09-30 announces a change to the validity period for appraisals used for FHA-insured mortgages for all case numbers assigned on or after January 1, 2010 to 120 days for all appraisals on existing, proposed, and under-construction properties - a reduction of the current validity period of six months for an appraisal of an existing property that is complete and 12 months for proposed and under-construction properties. The changes promulgated by ML 09-29 and ML 09-30 become effective January 1, 2010. Finally, on September 23, HUD issued ML 09-36 to remind all approved lenders and appraisers that, as of October 1, 2009, appraisers listed on the FHA Appraiser Roster who are not state certified (certified residential or certified general) will be removed from the Roster. For a copy of the Mortgagee Letters, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-28ml.doc, http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-29ml.doc, http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-30ml.doc, and http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-36ml.doc.
HUD Sets New Principal Limit Factors for Reverse Mortgages, HECMs. On September 23, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2009-34, to announce a new set of principal limit factors (PLF) for the Federal Housing Administration’s (FHA) Home Equity Conversion Mortgages (HECM) Program. Under the new PLF, the amount seniors can claim in cash withdraws against their home for reverse mortgages or HECMs will decrease by 10 percent. The PLF decreases are meant to address an estimated $800 million short fall in the HECM program’s insurance fund. The PLF changes go into effect for all HECMs assigned an FHA case number on or after October 1, 2009. For a copy of Mortgagee Letter 2009-34, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-34ml.doc.
HUD Updates Conditions for Loan Modification Loss Mitigation Incentives. On September 23, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2009-35 to update the conditions under which the Federal Housing Administration (FHA) will pay loss mitigation claims for modifications of loans. Under the revised conditions, for a mortgagee’s loss mitigation actions to qualify for FHA loss mitigation incentives, the mortgagee must ensure that the note rate on a modified loan is reduced to the “current market rate,” as defined by the letter. Additionally, the mortgagee must re-amortize the total unpaid amount due over a 360 month period from the due date of the first installment required under the modified mortgage. These new requirements take effect October 23, 2009. For a copy of Mortgagee Letter 2009-35, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-35ml.doc.
HUD Mortgagee Letters Address Counterparty Risk Management, Streamlined Refinance Transaction Procedures. On September 18, the U.S. Department of Housing and Urban Development (HUD) released two Mortgagee Letters designed to strengthen the Federal Housing Administration’s (FHA) oversight of approved lenders and to revise the procedures for Streamlined Refinance Transactions. ML 09-31 implements the requirements of Public Law 111-22, the “Helping Families Save Their Homes Act of 2009,” affecting various FHA programs. The letter introduces a number of changes intended to reduce the risk of doing business with counterparties who present significant legal issues, including adding a number of new “ineligibility criteria” for officers, partners, directors, principals, and other personnel of an approved lender or mortgagee who, among other things, (i) have been subject to legal or disciplinary proceedings resulting from violations of the SAFE Mortgage Licensing Act, (ii) have been subject to indictments or convictions for offenses relating to integrity, competence, and fitness, or (iii) are engaged in business practices that do not comport with “generally accepted practices of prudent mortgagees.” The law also imposes notification requirements on approved lenders, including (i) if an individual employee of the lender is subject to any sanction or administrative action, (ii) a revocation of a state-issued loan originator license pursuant to the SAFE Act, or (iii) business changes relating to the debarment, suspension or other penalty against a lender or lender’s personnel or the revocation of a state-issued loan originator license. Additionally, the letter requires all supervised mortgagees to submit an annual audited financial statement within 90 days of their fiscal year end. Finally, the law increases the ability of the FHA to seek civil money penalties in certain situations, including against owners, officers, or directors of an FHA-approved mortgagee for violations of FHA requirements.
ML 09-32 revises the procedures required for Streamline Refinance transactions. Many of the revisions impose revised underwriting requirements, including imposing (i) a 6-month minimum seasoning requirement, (ii) an “acceptable payment history” requirement based upon the timeliness of the borrower’s payments and the length of payment history; (iii) a maximum combined loan to value ratio if subordinate financing remains in place, and (iv) a maximum insurable mortgage amount for the transaction, depending upon whether an appraisal was used. The requirements also require determination that the refinance will have a net tangible benefit for the borrower, subject to certain determinations. The letter also disallows mortgagees from using an abbreviated uniform residential loan application. For a copy of Mortgage Letter 09-31, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-31ml.doc; for a copy of Mortgagee Letter 09-32, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-32ml.doc.
HUD Revises FAQs on Revised RESPA Rule. On September 18, the U.S. Department of Housing and Urban Development (HUD) revised its “Frequently Asked Questions” regarding its 2008 amendments to Regulation X, the Real Estate Settlement Procedures Act’s (RESPA) implementing regulation. For a copy of the revised FAQs, please see http://www.hud.gov/offices/hsg/ramh/res/resparulefaqs.pdf.
FRB Announces Schedules for Term Auction Facility, Term Securities Lending Facility. On September 24, the Federal Reserve Board (FRB) announced schedules for operations under the Term Auction Facility (TAF) and the Term Securities Lending Facility (TSLF) through January 2010, including the scaling back of operations of both facilities pursuant to a previously-issued announcement on June 25 (reported in InfoBytes, June 26, 2009). Under the TAF, the FRB will continue to offer $75 billion per 28-day auction through January 2010. (At its peak, the FRB offered $150 billion through 28-day auctions.) According to the FRB, reductions in 28-day auctions will continue after January 2010. The FRB will also reduce the amounts offered under the existing cycle of auctions of 84-day funds to align the maturity dates of 84-day funds with 28-day funds, such that there will be a single cycle of 28-day funds offered every 28 days. Over the next several months, the FRB will assess whether to maintain a TAF on a permanent basis and will publish a request for public comment regarding a permanent TAF. Additionally, the FRB has discontinued Schedule 1 TSLF operations and TSLF Options Program operations. The FRB has also reduced the frequency and size of its Schedule 2 TSLF operations. TSLF offerings will be reduced to $50 billion in the October auction and to $25 billion in the November, December, and January auctions in the current 28-day cycle of auctions. According to the FRB, the TAF and TSLF schedules reflect the possibility that “market pressures could be heightened over year-end.” For a copy of the press release, including the relevant schedules, please see http://www.federalreserve.gov/newsevents/press/monetary/20090924a.htm.
Federal Banking Regulatory Agencies Request Comment on “Correspondent Concentration Risks” Guidance. On September 25, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision requested comment on proposed “Correspondent Concentration Risks” guidance. In general, the guidance addresses supervisory matters relating to identifying, monitoring, managing and performing appropriate due diligence of correspondent concentration risks. Specifically, the guidance proposes that an institution should (i) identify the totality of the institution’s aggregate credit and funding exposure to other institutions on a standalone basis, (ii) take into account exposures to other institutions’ affiliates, and (iii) be aware of exposures of its affiliates to other institutions and their affiliates. As a result, while the federal bank regulatory agencies generally have considered credit exposures greater than 25 percent of Tier 1 capital as “concentrations,” according to the guidance, funding exposures as low as 5 percent of an institution’s total liabilities could, under some circumstances, be considered a “concentration.” As a result, the guidance proposes for bank management to (i) implement procedures for identifying the totality of an institution’s aggregate credit and funding exposures to other institutions and their affiliates, (ii) specify what information, ratios or trends will be reviewed for each correspondent, (iii) set “prudent” correspondent concentration limits, establish ranges or tolerances for each factor being monitored, (iv) develop plans for managing risks when these limits, ranges or tolerances are met or exceeded, and (v) conduct an independent analysis before entering into any credit or funding transactions with another financial institution. According to the bank regulatory agencies, the proposed guidance would supplement existing guidance. Comments must be submitted by October 26, 2009. For a copy of the FDIC’s Financial Institution Letter regarding the proposal, please see http://www.fdic.gov/news/news/financial/2009/fil09055.pdf. For a copy of the Federal Register notice, please see http://edocket.access.gpo.gov/2009/pdf/E9-23208.pdf.
Dish Network Dealers Settle with FTC over Alleged Telemarketing Sales Rule Violations. On September 22, the Federal Trade Commission (FTC) announced that it had settled charges against two authorized Dish Network dealers for alleged violations of the “Do Not Call” provisions of the FTC Telemarketing Sales Rule (TSR). The litigation arose after the FTC requested that the Department of Justice (DOJ) file a complaint in March of this year against the dealers (reported in InfoBytes, March 27, 2009). The government’s complaint charged that the entities had violated the TSR’s “Do Not Call” provisions by (i) calling consumers with numbers registered on the National Do Not Call Registry, and (ii) leaving pre-recorded telemarketing messages (so-called “robocalls”). Under the terms of the settlement agreements, the dealers and their owners cannot call any number on the Do Not Call Registry, nor violate any other provision of the TSR. Additionally, the settlement allows the FTC to continue to monitor the companies’ compliance with the settlement. Finally, the settlement imposes substantial civil penalties on the dealers, which are currently suspended because of the dealers’ inability to pay. For a copy of the press release, please see http://www.ftc.gov/opa/2009/09/dish.shtm.
UK-Based Internet Payday Lending Operation Settles FTC, Nevada Charges. On September 21, a United Kingdom-based internet payday lending operation agreed to a $1 million fine to settle claims filed by the Federal Trade Commission (FTC) and the State of Nevada that alleged that the lender failed to disclose key loan terms to its American customers and used unlawful debt collection practices. The lawsuits alleged that the lending operation falsely told customers that loans had to be paid back by the customer’s next payday in order to avoid extended loan terms and fees. Additionally, the lending operation allegedly (i) failed to disclose information to customers prior to completing a transaction, such as the amount financed, interest rate, number of payments, and late fees, in violation of the Truth in Lending Act and Regulation Z, (ii) threatened customers with legal action, arrest, and imprisonment, (iii) repeatedly called customers at their place of business, (iv) used abusive and profane language when communicating threats to customers, and (v) released private information about customers’ debts to third parties. In addition to the $970,125 fine to the FTC and the $29,875 fine to the State of Nevada, the order, among other things, imposes record-keeping and reporting requirements to allow the FTC to ensure compliance with the order. For a copy of the press release, please see http://www.ftc.gov/opa/2009/09/cash.shtm.
State Issues
Connecticut “Debt Negotiation” License Required For Certain Activities Performed on Behalf of Connecticut Debtors. Effective October 1, the Connecticut Department of Banking will require licensure for “debt negotiation” - including loan modification, short sales or foreclosure rescue activities - performed on behalf of Connecticut debtors. Persons triggering debt negotiation licensure must license a corporate or “main office,” as well as all branch locations where debt negotiation will occur. The application process requires, among other things, the submission of forms as drafted by the Department, licensing fees, and surety bond and personal forms for “control persons.” Connecticut law exempts from the debt negotiation licensing requirements (i) an attorney admitted to practice in Connecticut, when engaged in such practice, (ii) certain banks and credit unions (however, subsidiaries of such institutions other than operating subsidiaries of federal banks and federally-chartered out-of-state banks are not exempt from licensure), (iii) licensed Connecticut debt adjusters, while performing debt adjuster services, (iv) individuals performing “debt negotiation” under court order, and (v) a “bona fide nonprofit organization.” For a copy of the application and application checklists, please see http://www.ct.gov/dob/cwp/view.asp?a=2232&q=446840.
Courts
Kansas Supreme Court Affirms MERS Is Not A Necessary Party in Foreclosure Action. On August 28, the Kansas Supreme Court affirmed two lower court decisions that held that the Mortgage Electronic Registration Systems (MERS) is not a contingently necessary party to a foreclosure action and that due process does not mandate that MERS be allowed to intervene in a foreclosure action. Landmark Nat’l Bank v. Kesler, No. 98,489, 2009 WL 2633640 (D. Kan. Aug. 28, 2009). In this case, the defendant borrower defaulted on his first-lien and subordinate-lien mortgages, and the first lienholder moved to foreclose. The first lienholder served notice on the borrower and on Millennia, the named lender of the subordinate-lien loan. The subordinate mortgage documents also named MERS as the nominee for the lender and the lender’s successors and assigns. Prior to the foreclosure, Millennia had apparently assigned the note to Sovereign, but the assignment was not recorded. The foreclosure notice was not served on either Sovereign or MERS; default judgment was entered against Kesler and Millennia in the foreclosure action. Following the sheriff’s sale, Sovereign and MERS filed suit to vacate the default judgment and recover the surplus proceeds from the sale. The suit claimed that MERS was a necessary party, and, by failing to include MERS, Sovereign had not received notice. The trial court and the appeals court both declined to overturn the default judgment, finding that MERS was only Millennia’s agent and therefore was not a real party in interest. The Kansas Supreme Court affirmed, reasoning that “[i]n attempting to circumvent the statutory registration requirement for notice, MERS creates a system in which the public has no notice of who holds the obligation on a mortgage.” The court also held that MERS’s due process rights were not violated because MERS suffered no injury. The court reasoned that, because MERS did not hold a protected property interest in the mortgage, MERS had no “ascertainable monetary loss as a consequence of the litigation.” For a copy of the opinion, please see http://www.kscourts.org/Cases-and-Opinions/opinions/supct/2009/20090828/98489.htm.
California Federal Court Holds State Law Claims Not Subject to NBA Preemption. On September 3, the U.S. District Court for the Central District of California held that several state statutory and common law claims leveled against a national bank were not preempted under the National Bank Act (NBA) and regulations promulgated by the Office of the Comptroller of the Currency (OCC). Davis v. Chase Bank U.S.A., N.A., No. CV 06-04804, 2009 WL 2868817 (C.D. Cal. Sept. 3, 2009). In Davis, the plaintiff consumer brought a putative class action alleging, among other claims, that the defendant national bank violated California’s Consumer Legal Remedies Act (CLRA) and Unfair Competition Law (UCL), and breached the implied covenant of good faith and fair dealing in connection with a merchant credit card promotion that the consumer alleged “induce[d] customers into believing that they will have an extended time period in which to pay off their Promotional Purchases.” The national bank moved to dismiss, arguing that the claims were preempted by the NBA and by regulations promulgated by the OCC. In response, the consumer argued that preemption was not applicable because the claims were based on laws of general applicability that have only an incidental effect on bank operations. The court granted in part and denied in part defendant’s motion. The court first found that the consumer’s CLRA claims and UCL advertising claims were not expressly preempted by the NBA and OCC regulations. According to the court, “[t]he predicate duty – to avoid deceptive disclosures – is significantly broader than a specific duty to disclose certain provisions that would fall within the scope of [NBA express preemption].” However, the court held that the consumer’s UCL claims that “challenge the allocation of payments apart from the way that allocation interacts with deceptive advertising” were expressly preempted by the NBA because such a “claim appears to be based on an argument regarding Defendant’s charging of a finance fee and the application of monthly payments.” According to the court, “[a]lthough the claim could be framed as a ‘general’ attack (like any claim could), the result it seeks squarely impedes on the decision to employ certain lending terms.” The court next found that the consumer’s CLRA and UCL claims related to unconscionable provisions and breach of the implied covenant of good faith and fair dealing were based in contract, and therefore were not preempted because those claims do not “seek to impose a specific term of credit, but rather [are] part of a general rule of contract law.” According to the court, “[s]uch a claim does not seek to force [defendant] to set its contracts in a certain way, but rather merely to adhere to the contracts it does create.” For a copy of the opinion, please see http://www.buckleysandler.com/Davis_v_Chase.pdf.
Illinois Federal Court Holds TILA Cardholder Liability Limit Survives Motion for Summary Judgment; Bank Improperly Reported Disputed Information Under FCRA in Case Alleging Unauthorized HELOC Withdrawal. On August 21, the U.S. District Court for the Northern District of Illinois denied summary judgment in a case involving the alleged theft of a borrowers’ password to access their HELOC account, which resulted in an unauthorized electronic withdrawal. Shames-Yeakel v. Citizens Fin. Bank, No. 07 C 5387, 2009 WL 2949500 (N.D.Ill. Aug. 21, 2009). In this case, the plaintiff borrowers opened a $50,000 HELOC account with the defendant bank. The bank denied responsibility for an unauthorized $26,000 withdrawal from the HELOC account, began foreclosure proceedings on the borrowers’ home after the borrowers refused to pay, and reported the delinquent account information to credit reporting agencies. In response, the borrowers filed suit, alleging, among other things, violations of the Truth in Lending Act (TILA), the Electronic Fund Transfer Act (EFTA), and the Fair Credit Reporting Act (FCRA), as well as state law claims including negligence. First, the borrowers claimed that the liability for the $26,000 was limited to $50 because the withdrawal is subject to the cardholder liability limit for unauthorized use of a credit card under TILA. In denying the bank’s motion for summary judgment, the court rejected the bank’s argument that the HELOC account was not for personal purposes - and thus not subject to TILA - when the account was used (i) to buy a loft for the son that generated no income, (ii) to payoff two cars which were in part used for the borrowers’ business and (iii) to repair part of the roof over the plaintiff’s home office. Also, without some evidence that the funds were used for business, the court disagreed with an OTS staff letter stating that linking a HELOC to a business checking account transformed the HELOC into a business account, especially when the business account was primarily used to pay down the line of credit. The court also denied the bank’s motion on the borrowers’ claim that the bank willfully or negligently violated FCRA where the bank reported a debt arising from a theft but failed to note the disputed nature of the debt. However, the court granted the defendant’s motion for summary judgment on the borrowers’ EFTA claim, determining that the HELOC is a credit account not governed by the EFTA. Regarding state law negligence claims, the court held that (i) because of the bank’s apparent delay in complying with Federal Financial Institution Examination Council’s security standards, a reasonable finder of fact could conclude that the bank breached its duty to protect the borrowers’ account against fraudulent access, and (ii) a reasonable finder of fact could conclude that that the bank’s alleged negligence was a proximate cause of the borrowers’ alleged mental and emotional anguish. For a copy of the opinion, please see http://www.buckleysandler.com/SY_v_Citizens.pdf.
California Federal Court Holds Servicer Not Prohibited From Collecting Unenforceable Mortgage. On September 9, the U.S. District Court for the Northern District of California, ruling on a motion to dismiss a class action complaint, held that California’s debt collection law did not prohibit a servicer from collecting a mortgage debt that was unenforceable under California’s anti-deficiency statute. Herrera v. LCS Fin. Servs. Corp., No. C09-02843, 2009 WL 2912517 (N.D. Cal. Sept. 9, 2009). In Herrera, the defendant servicer attempted to collect on a second mortgage following a non-judicial foreclosure action by the first mortgage holder. According to the plaintiff borrower, the servicer’s collection efforts violated California’s debt collection law and provisions of the federal Fair Debt Collection Practices Act (FDCPA) incorporated into the state law, as California’s anti-deficiency statute had extinguished the second mortgage. The court, however, found that the anti-deficiency statute eliminated the creditor’s ability to seek a deficiency judgment, but did not eliminate the underlying debt. Thus, according to the court, the servicer did not violate California’s debt collection law merely by attempting to collect on the second mortgage. Nonetheless, the court determined that the borrower could still state a claim against the servicer by alleging that the content of the servicer’s letters misrepresented the nature of her debt. For a copy of the opinion, please see http://www.buckleysandler.com/Herrera_v_LCS.pdf.
Seventh Circuit Holds Plaintiff Lacks Standing to Appeal a Denial of Class Certification. On August 31, the U.S. Court of Appeals for the Seventh Circuit held that a named plaintiff lacks standing to appeal a lower court’s denial of class certification if the plaintiff no longer has a personal stake in the definitive adjudication of the class-certification issue. Muro v. Target Corp., No. 08-1256, 2009 WL 2707537 (7th Cir. Aug. 31, 2009). In this case, the plaintiff, Muro, received an unsolicited Target Visa credit card after having previously closed her credit card account with the same retailer. She did not activate the new card, nor did she incur any charges or fees associated with the card. Muro subsequently filed the underlying putative class action against Target, alleging violations of 15 U.S.C. §§ 1637 and 1642 under the Truth in Lending Act (TILA). The trial court denied class certification of the § 1642 claim on typicality grounds and granted Target’s summary judgment motion on the § 1637 claim. Muro and Target subsequently settled the § 1642 claim, but Muro reserved her right to appeal the denial of class certification in the settlement agreement. Muro then appealed the denial of § 1642 class certification and the § 1637 summary judgment ruling. On appeal, the Seventh Circuit addressed whether reservation of the right to appeal a class certification ruling permits a named plaintiff in a putative class action who has settled her individual claim to appeal the ruling. Addressing an issue that has caused disagreement among the circuits, the Muro Court sided with the Fourth and Eighth Circuits to hold that “[o]nly if issues personal to the prospective class representative remain alive in the litigation can a court be assured that there remains sufficient concrete adverseness to ensure that the class certification issue is presented in a truly adversarial manner and, consequently, will be litigated comprehensively and clearly.” The court went on to state that “[a]n abstract interest in a matter never has been considered a sufficient basis for the maintenance of – or the continuation of – litigation in the federal courts.” Accordingly, mere reservation of the right to appeal does not satisfy the necessary case-or-controversy requirement under the U.S. Constitution. With respect to the § 1637 claims, the court upheld the summary judgment ruling in favor of Target because Muro never activated the credit card. TILA establishes card issuer liability only where the cardholder pays a fee prescribed under or where the cardholder uses the credit card or charge card. For a copy of the opinion, please see http://www.buckleysandler.com/Muro_Target.pdf.
Illinois Federal Court Holds Online Register Receipt Is Subject to FACTA. On September 3, the U.S. District Court for the Northern District of Illinois held that an online register receipt is "printed," and, thus, is subject to the requirements of the Fair and Accurate Credit Transactions Act (FACTA). Romano v. Active Network, Inc., No. 09 C 19052009, WL 2916838 (N.D. Ill. Sept. 3, 2009). In Romano, the plaintiff consumer made a transaction using the defendant merchant’s website. The plaintiff argued that the defendant violated FACTA because the online register receipt included more than the last five digits and the expiration date of the consumer’s credit card. The court, in denying the merchant’s motion to dismiss, held that, for the purpose of FACTA, an online register receipt is “printed.” Noting a split in decisions regarding whether such receipts are “printed,” the court interpreted “print” to mean “to display on a surface (as a computer screen).” The court reasoned that, in an Internet transaction, the merchant “published the information in the same way that it would have done had it handed [the plaintiff] a paper receipt in person,” and that the language of § 1681c(g) supported the court’s interpretation. The court also held that whether the merchant acted “willfully” did not require resolution at the motion to dismiss stage (because such facts may be beyond the pleadings) and that the Fair Credit Reporting Act, of which FACTA is an amendment, does not require an injury to allege such willful violations. For a copy of the opinion, please see http://www.buckleysandler.com/Romano_v_Active.pdf.
Virginia Federal Court Finds FCRA, FDCPA Claims Alleged Sufficient Lack of Permissible Purpose; Voluntary Payment Doctrine Does Not Apply. On September 4, the U.S. District Court for the Eastern District of Virginia held that a consumer plaintiff may sue a defendant collection agency under the Fair Credit Reporting Act (FCRA) for allegedly misrepresenting that it had the plaintiff’s social security number and signature on an application for the plaintiff’s estranged husband’s credit card account, as well as under the Fair Debt Collection Practices Act (FDCPA) for allegedly compelling the plaintiff to pay her estranged husband’s credit card debt in order to protect the plaintiff’s credit rating. Cappetta v. GC Servs. Ltd., No. 3:08-CV-288, 2009 WL 2916906 (E.D. Va. Sept. 4, 2009). The court found that the plaintiff sufficiently stated a FCRA claim by alleging facts to show that the collection agency either willfully or negligently obtained her credit report without having a “permissible purpose” because the collection agency reasonably should have known that the plaintiff had not initiated a business transaction with the credit card company and the account did not belong to the plaintiff. In addition, the court found that the plaintiff could bring her FDCPA claim because, although applicable state law recognizes a voluntary payment doctrine, this doctrine does not act as a defense to a federal FDCPA claim. In addition, even if the voluntary payment doctrine applied, the court explained that it likely would follow precedent from other federal courts finding that the FDCPA preempts the voluntary payment doctrine to the extent the doctrine affords less protection to consumers than the FDCPA. For a copy of the opinion, please see http://www.buckleysandler.com/Cappetta_v_GC_Services.pdf.
Firm News
Andrea Mitchell will be speaking on a panel regarding new closed-end credit rules under Regulation Z for Women in Housing and Finance on September 30.
Mark Olson will speak on October 1 at the College of William and Mary as the Executive in Residence during the day, and will also be the featured speaker for the Gibbs Accounting Society Dinner in the evening.
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 spoke at the Electronic Signature and Records Association (ESRA) Annual Meeting on September 23rd on the Mortgage Disclosure Improvement Act requirements and the impact on the electronic delivery of disclosures under the new rules. She also discussed the proposed FHA Electronic Signature Guidelines.
Margo Tank also spoke at a NCHELP Committee Meeting on September 16th on the new Truth in Lending Act requirements for student lending transactions and the impact on the electronic disclosure delivery disclosures under the new rules.
Margo Tank gave an audio conference entitled “Building Effective Electronic Records and Electronic Records Management Systems: Navigating the Legal Traps” on September 10. For more information, please see http://www.alexinformation.com/store/10700909.php.
Chris Witeck gave a presentation at the Mortgage Bankers Association’s Reverse Mortgage Conference in San Diego on September 10 entitled “The HECM Challenge.” He also moderated the “Secondary Market Update” panel on September 11.
Jeff Naimon and Chris Witeck spoke at the Mortgage Bankers Association’s Regulatory Compliance Conference in Washington D.C. held on September 14-16. Jeff Naimon addressed fair lending developments as part of the “Hot Topics” Panel. Chris Witeck spoke on the Secondary Market Panel.
Kirk Jensen and Clint Rockwell participated in a West LegalWorks webcast entitled “Underwater World: The Rippling Effect of California’s Foreclosure Crisis” on September 23.
Mark Olson participated in a panel on Corporate Governance and Securities Regulation at the Labaton Sucharow Symposium in New York City on September 24.
Mortgages
HUD Issues New Appraisal Standards for FHA-Insured Mortgages. On September 18, the Department of Housing and Urban Development (HUD) issued three Mortgagee Letters (ML 09-28, ML 09-29, and ML 09-30) addressing appraiser independence, appraisal portability, and appraisal validity periods. ML 09-28 provides new appraisal requirements for Federal Housing Administration (FHA) insured mortgages and reaffirms existing policy on FHA requirements regarding appraiser independence and geographic competence. The new requirements, which become effective January 1, 2010, prohibit mortgage brokers and commission-based lender staff from participating in the appraisal process, and require lenders to assure that the appraiser who actually conducted the appraisal used for the FHA-insured mortgage is correctly identified in FHA Connection. FHA does not require the use of appraisal management companies or other third party providers for appraisal ordering, but does require that lenders take responsibility to assure appraiser independence. While FHA’s existing policies regarding appraiser independence are consistent with the Home Valuation Code of Conduct (HVCC) (see InfoBytes, March 7, 2008), according to a HUD press release, FHA will adopt language from the HVCC to ensure full alignment of FHA and Government Sponsored Enterprise standards. ML 09-29 addresses the portability of appraisals for the purpose of facilitating the loan process when a borrower switches from one FHA approved lender to another, generally requiring the first lender to transfer to the second lender an appraisal ordered by and completed for the first lender. ML 09-30 announces a change to the validity period for appraisals used for FHA-insured mortgages for all case numbers assigned on or after January 1, 2010 to 120 days for all appraisals on existing, proposed, and under-construction properties - a reduction of the current validity period of six months for an appraisal of an existing property that is complete and 12 months for proposed and under-construction properties. The changes promulgated by ML 09-29 and ML 09-30 become effective January 1, 2010. Finally, on September 23, HUD issued ML 09-36 to remind all approved lenders and appraisers that, as of October 1, 2009, appraisers listed on the FHA Appraiser Roster who are not state certified (certified residential or certified general) will be removed from the Roster. For a copy of the Mortgagee Letters, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-28ml.doc, http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-29ml.doc, http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-30ml.doc, and http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-36ml.doc.
HUD Sets New Principal Limit Factors for Reverse Mortgages, HECMs. On September 23, the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2009-34, to announce a new set of principal limit factors (PLF) for the Federal Housing Administration’s (FHA) Home Equity Conversion Mortgages (HECM) Program. Under the new PLF, the amount seniors can claim in cash withdraws against their home for reverse mortgages or HECMs will decrease by 10 percent. The PLF decreases are meant to address an estimated $800 million short fall in the HECM program’s insurance fund. The PLF changes go into effect for all HECMs assigned an FHA case number on or after October 1, 2009. For a copy of Mortgagee Letter 2009-34, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-34ml.doc.
HUD Mortgagee Letters Address Counterparty Risk Management, Streamlined Refinance Transaction Procedures. On September 18, the U.S. Department of Housing and Urban Development (HUD) released two Mortgagee Letters designed to strengthen the Federal Housing Administration’s (FHA) oversight of approved lenders and to revise the procedures for Streamlined Refinance Transactions. ML 09-31 implements the requirements of Public Law 111-22, the “Helping Families Save Their Homes Act of 2009,” affecting various FHA programs. The letter introduces a number of changes intended to reduce the risk of doing business with counterparties who present significant legal issues, including adding a number of new “ineligibility criteria” for officers, partners, directors, principals, and other personnel of an approved lender or mortgagee who, among other things, (i) have been subject to legal or disciplinary proceedings resulting from violations of the SAFE Mortgage Licensing Act, (ii) have been subject to indictments or convictions for offenses relating to integrity, competence, and fitness, or (iii) are engaged in business practices that do not comport with “generally accepted practices of prudent mortgagees.” The law also imposes notification requirements on approved lenders, including (i) if an individual employee of the lender is subject to any sanction or administrative action, (ii) a revocation of a state-issued loan originator license pursuant to the SAFE Act, or (iii) business changes relating to the debarment, suspension or other penalty against a lender or lender’s personnel or the revocation of a state-issued loan originator license. Additionally, the letter requires all supervised mortgagees to submit an annual audited financial statement within 90 days of their fiscal year end. Finally, the law increases the ability of the FHA to seek civil money penalties in certain situations, including against owners, officers, or directors of an FHA-approved mortgagee for violations of FHA requirements.
ML 09-32 revises the procedures required for Streamline Refinance transactions. Many of the revisions impose revised underwriting requirements, including imposing (i) a 6-month minimum seasoning requirement, (ii) an “acceptable payment history” requirement based upon the timeliness of the borrower’s payments and the length of payment history; (iii) a maximum combined loan to value ratio if subordinate financing remains in place, and (iv) a maximum insurable mortgage amount for the transaction, depending upon whether an appraisal was used. The requirements also require determination that the refinance will have a net tangible benefit for the borrower, subject to certain determinations. The letter also disallows mortgagees from using an abbreviated uniform residential loan application. For a copy of Mortgage Letter 09-31, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-31ml.doc; for a copy of Mortgagee Letter 09-32, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-32ml.doc.
HUD Revises FAQs on Revised RESPA Rule. On September 18, the U.S. Department of Housing and Urban Development (HUD) revised its “Frequently Asked Questions” regarding its 2008 amendments to Regulation X, the Real Estate Settlement Procedures Act’s (RESPA) implementing regulation. For a copy of the revised FAQs, please see http://www.hud.gov/offices/hsg/ramh/res/resparulefaqs.pdf.
Connecticut “Debt Negotiation” License Required For Certain Activities Performed on Behalf of Connecticut Debtors. Effective October 1, the Connecticut Department of Banking will require licensure for “debt negotiation” - including loan modification, short sales or foreclosure rescue activities - performed on behalf of Connecticut debtors. Persons triggering debt negotiation licensure must license a corporate or “main office,” as well as all branch locations where debt negotiation will occur. The application process requires, among other things, the submission of forms as drafted by the Department, licensing fees, and surety bond and personal forms for “control persons.” Connecticut law exempts from the debt negotiation licensing requirements (i) an attorney admitted to practice in Connecticut, when engaged in such practice, (ii) certain banks and credit unions (however, subsidiaries of such institutions other than operating subsidiaries of federal banks and federally-chartered out-of-state banks are not exempt from licensure), (iii) licensed Connecticut debt adjusters, while performing debt adjuster services, (iv) individuals performing “debt negotiation” under court order, and (v) a “bona fide nonprofit organization.” For a copy of the application and application checklists, please see http://www.ct.gov/dob/cwp/view.asp?a=2232&q=446840.
Kansas Supreme Court Affirms MERS Is Not A Necessary Party in Foreclosure Action. On August 28, the Kansas Supreme Court affirmed two lower court decisions that held that the Mortgage Electronic Registration Systems (MERS) is not a contingently necessary party to a foreclosure action and that due process does not mandate that MERS be allowed to intervene in a foreclosure action. Landmark Nat’l Bank v. Kesler, No. 98,489, 2009 WL 2633640 (D. Kan. Aug. 28, 2009). In this case, the defendant borrower defaulted on his first-lien and subordinate-lien mortgages, and the first lienholder moved to foreclose. The first lienholder served notice on the borrower and on Millennia, the named lender of the subordinate-lien loan. The subordinate mortgage documents also named MERS as the nominee for the lender and the lender’s successors and assigns. Prior to the foreclosure, Millennia had apparently assigned the note to Sovereign, but the assignment was not recorded. The foreclosure notice was not served on either Sovereign or MERS; default judgment was entered against Kesler and Millennia in the foreclosure action. Following the sheriff’s sale, Sovereign and MERS filed suit to vacate the default judgment and recover the surplus proceeds from the sale. The suit claimed that MERS was a necessary party, and, by failing to include MERS, Sovereign had not received notice. The trial court and the appeals court both declined to overturn the default judgment, finding that MERS was only Millennia’s agent and therefore was not a real party in interest. The Kansas Supreme Court affirmed, reasoning that “[i]n attempting to circumvent the statutory registration requirement for notice, MERS creates a system in which the public has no notice of who holds the obligation on a mortgage.” The court also held that MERS’s due process rights were not violated because MERS suffered no injury. The court reasoned that, because MERS did not hold a protected property interest in the mortgage, MERS had no “ascertainable monetary loss as a consequence of the litigation.” For a copy of the opinion, please see http://www.kscourts.org/Cases-and-Opinions/opinions/supct/2009/20090828/98489.htm.
California Federal Court Holds Servicer Not Prohibited From Collecting Unenforceable Mortgage. On September 9, the U.S. District Court for the Northern District of California, ruling on a motion to dismiss a class action complaint, held that California’s debt collection law did not prohibit a servicer from collecting a mortgage debt that was unenforceable under California’s anti-deficiency statute. Herrera v. LCS Fin. Servs. Corp., No. C09-02843, 2009 WL 2912517 (N.D. Cal. Sept. 9, 2009). In Herrera, the defendant servicer attempted to collect on a second mortgage following a non-judicial foreclosure action by the first mortgage holder. According to the plaintiff borrower, the servicer’s collection efforts violated California’s debt collection law and provisions of the federal Fair Debt Collection Practices Act (FDCPA) incorporated into the state law, as California’s anti-deficiency statute had extinguished the second mortgage. The court, however, found that the anti-deficiency statute eliminated the creditor’s ability to seek a deficiency judgment, but did not eliminate the underlying debt. Thus, according to the court, the servicer did not violate California’s debt collection law merely by attempting to collect on the second mortgage. Nonetheless, the court determined that the borrower could still state a claim against the servicer by alleging that the content of the servicer’s letters misrepresented the nature of her debt. For a copy of the opinion, please see http://www.buckleysandler.com/Herrera_v_LCS.pdf.
Banking
FRB Announces Schedules for Term Auction Facility, Term Securities Lending Facility. On September 24, the Federal Reserve Board (FRB) announced schedules for operations under the Term Auction Facility (TAF) and the Term Securities Lending Facility (TSLF) through January 2010, including the scaling back of operations of both facilities pursuant to a previously-issued announcement on June 25 (reported in InfoBytes, June 26, 2009). Under the TAF, the FRB will continue to offer $75 billion per 28-day auction through January 2010. (At its peak, the FRB offered $150 billion through 28-day auctions.) According to the FRB, reductions in 28-day auctions will continue after January 2010. The FRB will also reduce the amounts offered under the existing cycle of auctions of 84-day funds to align the maturity dates of 84-day funds with 28-day funds, such that there will be a single cycle of 28-day funds offered every 28 days. Over the next several months, the FRB will assess whether to maintain a TAF on a permanent basis and will publish a request for public comment regarding a permanent TAF. Additionally, the FRB has discontinued Schedule 1 TSLF operations and TSLF Options Program operations. The FRB has also reduced the frequency and size of its Schedule 2 TSLF operations. TSLF offerings will be reduced to $50 billion in the October auction and to $25 billion in the November, December, and January auctions in the current 28-day cycle of auctions. According to the FRB, the TAF and TSLF schedules reflect the possibility that “market pressures could be heightened over year-end.” For a copy of the press release, including the relevant schedules, please see http://www.federalreserve.gov/newsevents/press/monetary/20090924a.htm.
Federal Banking Regulatory Agencies Request Comment on “Correspondent Concentration Risks” Guidance. On September 25, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision requested comment on proposed “Correspondent Concentration Risks” guidance. In general, the guidance addresses supervisory matters relating to identifying, monitoring, managing and performing appropriate due diligence of correspondent concentration risks. Specifically, the guidance proposes that an institution should (i) identify the totality of the institution’s aggregate credit and funding exposure to other institutions on a standalone basis, (ii) take into account exposures to other institutions’ affiliates, and (iii) be aware of exposures of its affiliates to other institutions and their affiliates. As a result, while the federal bank regulatory agencies generally have considered credit exposures greater than 25 percent of Tier 1 capital as “concentrations,” according to the guidance, funding exposures as low as 5 percent of an institution’s total liabilities could, under some circumstances, be considered a “concentration.” As a result, the guidance proposes for bank management to (i) implement procedures for identifying the totality of an institution’s aggregate credit and funding exposures to other institutions and their affiliates, (ii) specify what information, ratios or trends will be reviewed for each correspondent, (iii) set “prudent” correspondent concentration limits, establish ranges or tolerances for each factor being monitored, (iv) develop plans for managing risks when these limits, ranges or tolerances are met or exceeded, and (v) conduct an independent analysis before entering into any credit or funding transactions with another financial institution. According to the bank regulatory agencies, the proposed guidance would supplement existing guidance. Comments must be submitted by October 26, 2009. For a copy of the FDIC’s Financial Institution Letter regarding the proposal, please see http://www.fdic.gov/news/news/financial/2009/fil09055.pdf. For a copy of the Federal Register notice, please see http://edocket.access.gpo.gov/2009/pdf/E9-23208.pdf.
California Federal Court Holds State Law Claims Not Subject to NBA Preemption. On September 3, the U.S. District Court for the Central District of California held that several state statutory and common law claims leveled against a national bank were not preempted under the National Bank Act (NBA) and regulations promulgated by the Office of the Comptroller of the Currency (OCC). Davis v. Chase Bank U.S.A., N.A., No. CV 06-04804, 2009 WL 2868817 (C.D. Cal. Sept. 3, 2009). In Davis, the plaintiff consumer brought a putative class action alleging, among other claims, that the defendant national bank violated California’s Consumer Legal Remedies Act (CLRA) and Unfair Competition Law (UCL), and breached the implied covenant of good faith and fair dealing in connection with a merchant credit card promotion that the consumer alleged “induce[d] customers into believing that they will have an extended time period in which to pay off their Promotional Purchases.” The national bank moved to dismiss, arguing that the claims were preempted by the NBA and by regulations promulgated by the OCC. In response, the consumer argued that preemption was not applicable because the claims were based on laws of general applicability that have only an incidental effect on bank operations. The court granted in part and denied in part defendant’s motion. The court first found that the consumer’s CLRA claims and UCL advertising claims were not expressly preempted by the NBA and OCC regulations. According to the court, “[t]he predicate duty – to avoid deceptive disclosures – is significantly broader than a specific duty to disclose certain provisions that would fall within the scope of [NBA express preemption].” However, the court held that the consumer’s UCL claims that “challenge the allocation of payments apart from the way that allocation interacts with deceptive advertising” were expressly preempted by the NBA because such a “claim appears to be based on an argument regarding Defendant’s charging of a finance fee and the application of monthly payments.” According to the court, “[a]lthough the claim could be framed as a ‘general’ attack (like any claim could), the result it seeks squarely impedes on the decision to employ certain lending terms.” The court next found that the consumer’s CLRA and UCL claims related to unconscionable provisions and breach of the implied covenant of good faith and fair dealing were based in contract, and therefore were not preempted because those claims do not “seek to impose a specific term of credit, but rather [are] part of a general rule of contract law.” According to the court, “[s]uch a claim does not seek to force [defendant] to set its contracts in a certain way, but rather merely to adhere to the contracts it does create.” For a copy of the opinion, please see http://www.buckleysandler.com/Davis_v_Chase.pdf.
Illinois Federal Court Holds TILA Cardholder Liability Limit Survives Motion for Summary Judgment; Bank Improperly Reported Disputed Information Under FCRA in Case Alleging Unauthorized HELOC Withdrawal. On August 21, the U.S. District Court for the Northern District of Illinois denied summary judgment in a case involving the alleged theft of a borrowers’ password to access their HELOC account, which resulted in an unauthorized electronic withdrawal. Shames-Yeakel v. Citizens Fin. Bank, No. 07 C 5387, 2009 WL 2949500 (N.D.Ill. Aug. 21, 2009). In this case, the plaintiff borrowers opened a $50,000 HELOC account with the defendant bank. The bank denied responsibility for an unauthorized $26,000 withdrawal from the HELOC account, began foreclosure proceedings on the borrowers’ home after the borrowers refused to pay, and reported the delinquent account information to credit reporting agencies. In response, the borrowers filed suit, alleging, among other things, violations of the Truth in Lending Act (TILA), the Electronic Fund Transfer Act (EFTA), and the Fair Credit Reporting Act (FCRA), as well as state law claims including negligence. First, the borrowers claimed that the liability for the $26,000 was limited to $50 because the withdrawal is subject to the cardholder liability limit for unauthorized use of a credit card under TILA. In denying the bank’s motion for summary judgment, the court rejected the bank’s argument that the HELOC account was not for personal purposes - and thus not subject to TILA - when the account was used (i) to buy a loft for the son that generated no income, (ii) to payoff two cars which were in part used for the borrowers’ business and (iii) to repair part of the roof over the plaintiff’s home office. Also, without some evidence that the funds were used for business, the court disagreed with an OTS staff letter stating that linking a HELOC to a business checking account transformed the HELOC into a business account, especially when the business account was primarily used to pay down the line of credit. The court also denied the bank’s motion on the borrowers’ claim that the bank willfully or negligently violated FCRA where the bank reported a debt arising from a theft but failed to note the disputed nature of the debt. However, the court granted the defendant’s motion for summary judgment on the borrowers’ EFTA claim, determining that the HELOC is a credit account not governed by the EFTA. Regarding state law negligence claims, the court held that (i) because of the bank’s apparent delay in complying with Federal Financial Institution Examination Council’s security standards, a reasonable finder of fact could conclude that the bank breached its duty to protect the borrowers’ account against fraudulent access, and (ii) a reasonable finder of fact could conclude that that the bank’s alleged negligence was a proximate cause of the borrowers’ alleged mental and emotional anguish. For a copy of the opinion, please see http://www.buckleysandler.com/SY_v_Citizens.pdf.
Consumer Finance
Dish Network Dealers Settle with FTC over Alleged Telemarketing Sales Rule Violations. On September 22, the Federal Trade Commission (FTC) announced that it had settled charges against two authorized Dish Network dealers for alleged violations of the “Do Not Call” provisions of the FTC Telemarketing Sales Rule (TSR). The litigation arose after the FTC requested that the Department of Justice (DOJ) file a complaint in March of this year against the dealers (reported in InfoBytes, March 27, 2009). The government’s complaint charged that the entities had violated the TSR’s “Do Not Call” provisions by (i) calling consumers with numbers registered on the National Do Not Call Registry, and (ii) leaving pre-recorded telemarketing messages (so-called “robocalls”). Under the terms of the settlement agreements, the dealers and their owners cannot call any number on the Do Not Call Registry, nor violate any other provision of the TSR. Additionally, the settlement allows the FTC to continue to monitor the companies’ compliance with the settlement. Finally, the settlement imposes substantial civil penalties on the dealers, which are currently suspended because of the dealers’ inability to pay. For a copy of the press release, please see http://www.ftc.gov/opa/2009/09/dish.shtm.
UK-Based Internet Payday Lending Operation Settles FTC, Nevada Charges. On September 21, a United Kingdom-based internet payday lending operation agreed to a $1 million fine to settle claims filed by the Federal Trade Commission (FTC) and the State of Nevada that alleged that the lender failed to disclose key loan terms to its American customers and used unlawful debt collection practices. The lawsuits alleged that the lending operation falsely told customers that loans had to be paid back by the customer’s next payday in order to avoid extended loan terms and fees. Additionally, the lending operation allegedly (i) failed to disclose information to customers prior to completing a transaction, such as the amount financed, interest rate, number of payments, and late fees, in violation of the Truth in Lending Act and Regulation Z, (ii) threatened customers with legal action, arrest, and imprisonment, (iii) repeatedly called customers at their place of business, (iv) used abusive and profane language when communicating threats to customers, and (v) released private information about customers’ debts to third parties. In addition to the $970,125 fine to the FTC and the $29,875 fine to the State of Nevada, the order, among other things, imposes record-keeping and reporting requirements to allow the FTC to ensure compliance with the order. For a copy of the press release, please see http://www.ftc.gov/opa/2009/09/cash.shtm.
Illinois Federal Court Holds TILA Cardholder Liability Limit Survives Motion for Summary Judgment; Bank Improperly Reported Disputed Information Under FCRA in Case Alleging Unauthorized HELOC Withdrawal. On August 21, the U.S. District Court for the Northern District of Illinois denied summary judgment in a case involving the alleged theft of a borrowers’ password to access their HELOC account, which resulted in an unauthorized electronic withdrawal. Shames-Yeakel v. Citizens Fin. Bank, No. 07 C 5387, 2009 WL 2949500 (N.D.Ill. Aug. 21, 2009). In this case, the plaintiff borrowers opened a $50,000 HELOC account with the defendant bank. The bank denied responsibility for an unauthorized $26,000 withdrawal from the HELOC account, began foreclosure proceedings on the borrowers’ home after the borrowers refused to pay, and reported the delinquent account information to credit reporting agencies. In response, the borrowers filed suit, alleging, among other things, violations of the Truth in Lending Act (TILA), the Electronic Fund Transfer Act (EFTA), and the Fair Credit Reporting Act (FCRA), as well as state law claims including negligence. First, the borrowers claimed that the liability for the $26,000 was limited to $50 because the withdrawal is subject to the cardholder liability limit for unauthorized use of a credit card under TILA. In denying the bank’s motion for summary judgment, the court rejected the bank’s argument that the HELOC account was not for personal purposes - and thus not subject to TILA - when the account was used (i) to buy a loft for the son that generated no income, (ii) to payoff two cars which were in part used for the borrowers’ business and (iii) to repair part of the roof over the plaintiff’s home office. Also, without some evidence that the funds were used for business, the court disagreed with an OTS staff letter stating that linking a HELOC to a business checking account transformed the HELOC into a business account, especially when the business account was primarily used to pay down the line of credit. The court also denied the bank’s motion on the borrowers’ claim that the bank willfully or negligently violated FCRA where the bank reported a debt arising from a theft but failed to note the disputed nature of the debt. However, the court granted the defendant’s motion for summary judgment on the borrowers’ EFTA claim, determining that the HELOC is a credit account not governed by the EFTA. Regarding state law negligence claims, the court held that (i) because of the bank’s apparent delay in complying with Federal Financial Institution Examination Council’s security standards, a reasonable finder of fact could conclude that the bank breached its duty to protect the borrowers’ account against fraudulent access, and (ii) a reasonable finder of fact could conclude that that the bank’s alleged negligence was a proximate cause of the borrowers’ alleged mental and emotional anguish. For a copy of the opinion, please see http://www.buckleysandler.com/SY_v_Citizens.pdf.
Seventh Circuit Holds Plaintiff Lacks Standing to Appeal a Denial of Class Certification. On August 31, the U.S. Court of Appeals for the Seventh Circuit held that a named plaintiff lacks standing to appeal a lower court’s denial of class certification if the plaintiff no longer has a personal stake in the definitive adjudication of the class-certification issue. Muro v. Target Corp., No. 08-1256, 2009 WL 2707537 (7th Cir. Aug. 31, 2009). In this case, the plaintiff, Muro, received an unsolicited Target Visa credit card after having previously closed her credit card account with the same retailer. She did not activate the new card, nor did she incur any charges or fees associated with the card. Muro subsequently filed the underlying putative class action against Target, alleging violations of 15 U.S.C. §§ 1637 and 1642 under the Truth in Lending Act (TILA). The trial court denied class certification of the § 1642 claim on typicality grounds and granted Target’s summary judgment motion on the § 1637 claim. Muro and Target subsequently settled the § 1642 claim, but Muro reserved her right to appeal the denial of class certification in the settlement agreement. Muro then appealed the denial of § 1642 class certification and the § 1637 summary judgment ruling. On appeal, the Seventh Circuit addressed whether reservation of the right to appeal a class certification ruling permits a named plaintiff in a putative class action who has settled her individual claim to appeal the ruling. Addressing an issue that has caused disagreement among the circuits, the Muro Court sided with the Fourth and Eighth Circuits to hold that “[o]nly if issues personal to the prospective class representative remain alive in the litigation can a court be assured that there remains sufficient concrete adverseness to ensure that the class certification issue is presented in a truly adversarial manner and, consequently, will be litigated comprehensively and clearly.” The court went on to state that “[a]n abstract interest in a matter never has been considered a sufficient basis for the maintenance of – or the continuation of – litigation in the federal courts.” Accordingly, mere reservation of the right to appeal does not satisfy the necessary case-or-controversy requirement under the U.S. Constitution. With respect to the § 1637 claims, the court upheld the summary judgment ruling in favor of Target because Muro never activated the credit card. TILA establishes card issuer liability only where the cardholder pays a fee prescribed under or where the cardholder uses the credit card or charge card. For a copy of the opinion, please see http://www.buckleysandler.com/Muro_Target.pdf.
Illinois Federal Court Holds Online Register Receipt Is Subject to FACTA. On September 3, the U.S. District Court for the Northern District of Illinois held that an online register receipt is "printed," and, thus, is subject to the requirements of the Fair and Accurate Credit Transactions Act (FACTA). Romano v. Active Network, Inc., No. 09 C 19052009, WL 2916838 (N.D. Ill. Sept. 3, 2009). In Romano, the plaintiff consumer made a transaction using the defendant merchant’s website. The plaintiff argued that the defendant violated FACTA because the online register receipt included more than the last five digits and the expiration date of the consumer’s credit card. The court, in denying the merchant’s motion to dismiss, held that, for the purpose of FACTA, an online register receipt is “printed.” Noting a split in decisions regarding whether such receipts are “printed,” the court interpreted “print” to mean “to display on a surface (as a computer screen).” The court reasoned that, in an Internet transaction, the merchant “published the information in the same way that it would have done had it handed [the plaintiff] a paper receipt in person,” and that the language of § 1681c(g) supported the court’s interpretation. The court also held that whether the merchant acted “willfully” did not require resolution at the motion to dismiss stage (because such facts may be beyond the pleadings) and that the Fair Credit Reporting Act, of which FACTA is an amendment, does not require an injury to allege such willful violations. For a copy of the opinion, please see http://www.buckleysandler.com/Romano_v_Active.pdf.
Virginia Federal Court Finds FCRA, FDCPA Claims Alleged Sufficient Lack of Permissible Purpose; Voluntary Payment Doctrine Does Not Apply. On September 4, the U.S. District Court for the Eastern District of Virginia held that a consumer plaintiff may sue a defendant collection agency under the Fair Credit Reporting Act (FCRA) for allegedly misrepresenting that it had the plaintiff’s social security number and signature on an application for the plaintiff’s estranged husband’s credit card account, as well as under the Fair Debt Collection Practices Act (FDCPA) for allegedly compelling the plaintiff to pay her estranged husband’s credit card debt in order to protect the plaintiff’s credit rating. Cappetta v. GC Servs. Ltd., No. 3:08-CV-288, 2009 WL 2916906 (E.D. Va. Sept. 4, 2009). The court found that the plaintiff sufficiently stated a FCRA claim by alleging facts to show that the collection agency either willfully or negligently obtained her credit report without having a “permissible purpose” because the collection agency reasonably should have known that the plaintiff had not initiated a business transaction with the credit card company and the account did not belong to the plaintiff. In addition, the court found that the plaintiff could bring her FDCPA claim because, although applicable state law recognizes a voluntary payment doctrine, this doctrine does not act as a defense to a federal FDCPA claim. In addition, even if the voluntary payment doctrine applied, the court explained that it likely would follow precedent from other federal courts finding that the FDCPA preempts the voluntary payment doctrine to the extent the doctrine affords less protection to consumers than the FDCPA. For a copy of the opinion, please see http://www.buckleysandler.com/Cappetta_v_GC_Services.pdf.
Insurance
HUD Revises FAQs on Revised RESPA Rule. On September 18, the U.S. Department of Housing and Urban Development (HUD) revised its “Frequently Asked Questions” regarding its 2008 amendments to Regulation X, the Real Estate Settlement Procedures Act’s (RESPA) implementing regulation. For a copy of the revised FAQs, please see http://www.hud.gov/offices/hsg/ramh/res/resparulefaqs.pdf.
Litigation
Kansas Supreme Court Affirms MERS Is Not A Necessary Party in Foreclosure Action. On August 28, the Kansas Supreme Court affirmed two lower court decisions that held that the Mortgage Electronic Registration Systems (MERS) is not a contingently necessary party to a foreclosure action and that due process does not mandate that MERS be allowed to intervene in a foreclosure action. Landmark Nat’l Bank v. Kesler, No. 98,489, 2009 WL 2633640 (D. Kan. Aug. 28, 2009). In this case, the defendant borrower defaulted on his first-lien and subordinate-lien mortgages, and the first lienholder moved to foreclose. The first lienholder served notice on the borrower and on Millennia, the named lender of the subordinate-lien loan. The subordinate mortgage documents also named MERS as the nominee for the lender and the lender’s successors and assigns. Prior to the foreclosure, Millennia had apparently assigned the note to Sovereign, but the assignment was not recorded. The foreclosure notice was not served on either Sovereign or MERS; default judgment was entered against Kesler and Millennia in the foreclosure action. Following the sheriff’s sale, Sovereign and MERS filed suit to vacate the default judgment and recover the surplus proceeds from the sale. The suit claimed that MERS was a necessary party, and, by failing to include MERS, Sovereign had not received notice. The trial court and the appeals court both declined to overturn the default judgment, finding that MERS was only Millennia’s agent and therefore was not a real party in interest. The Kansas Supreme Court affirmed, reasoning that “[i]n attempting to circumvent the statutory registration requirement for notice, MERS creates a system in which the public has no notice of who holds the obligation on a mortgage.” The court also held that MERS’s due process rights were not violated because MERS suffered no injury. The court reasoned that, because MERS did not hold a protected property interest in the mortgage, MERS had no “ascertainable monetary loss as a consequence of the litigation.” For a copy of the opinion, please see http://www.kscourts.org/Cases-and-Opinions/opinions/supct/2009/20090828/98489.htm.
California Federal Court Holds State Law Claims Not Subject to NBA Preemption. On September 3, the U.S. District Court for the Central District of California held that several state statutory and common law claims leveled against a national bank were not preempted under the National Bank Act (NBA) and regulations promulgated by the Office of the Comptroller of the Currency (OCC). Davis v. Chase Bank U.S.A., N.A., No. CV 06-04804, 2009 WL 2868817 (C.D. Cal. Sept. 3, 2009). In Davis, the plaintiff consumer brought a putative class action alleging, among other claims, that the defendant national bank violated California’s Consumer Legal Remedies Act (CLRA) and Unfair Competition Law (UCL), and breached the implied covenant of good faith and fair dealing in connection with a merchant credit card promotion that the consumer alleged “induce[d] customers into believing that they will have an extended time period in which to pay off their Promotional Purchases.” The national bank moved to dismiss, arguing that the claims were preempted by the NBA and by regulations promulgated by the OCC. In response, the consumer argued that preemption was not applicable because the claims were based on laws of general applicability that have only an incidental effect on bank operations. The court granted in part and denied in part defendant’s motion. The court first found that the consumer’s CLRA claims and UCL advertising claims were not expressly preempted by the NBA and OCC regulations. According to the court, “[t]he predicate duty – to avoid deceptive disclosures – is significantly broader than a specific duty to disclose certain provisions that would fall within the scope of [NBA express preemption].” However, the court held that the consumer’s UCL claims that “challenge the allocation of payments apart from the way that allocation interacts with deceptive advertising” were expressly preempted by the NBA because such a “claim appears to be based on an argument regarding Defendant’s charging of a finance fee and the application of monthly payments.” According to the court, “[a]lthough the claim could be framed as a ‘general’ attack (like any claim could), the result it seeks squarely impedes on the decision to employ certain lending terms.” The court next found that the consumer’s CLRA and UCL claims related to unconscionable provisions and breach of the implied covenant of good faith and fair dealing were based in contract, and therefore were not preempted because those claims do not “seek to impose a specific term of credit, but rather [are] part of a general rule of contract law.” According to the court, “[s]uch a claim does not seek to force [defendant] to set its contracts in a certain way, but rather merely to adhere to the contracts it does create.” For a copy of the opinion, please see http://www.buckleysandler.com/Davis_v_Chase.pdf.
Illinois Federal Court Holds TILA Cardholder Liability Limit Survives Motion for Summary Judgment; Bank Improperly Reported Disputed Information Under FCRA in Case Alleging Unauthorized HELOC Withdrawal. On August 21, the U.S. District Court for the Northern District of Illinois denied summary judgment in a case involving the alleged theft of a borrowers’ password to access their HELOC account, which resulted in an unauthorized electronic withdrawal. Shames-Yeakel v. Citizens Fin. Bank, No. 07 C 5387, 2009 WL 2949500 (N.D.Ill. Aug. 21, 2009). In this case, the plaintiff borrowers opened a $50,000 HELOC account with the defendant bank. The bank denied responsibility for an unauthorized $26,000 withdrawal from the HELOC account, began foreclosure proceedings on the borrowers’ home after the borrowers refused to pay, and reported the delinquent account information to credit reporting agencies. In response, the borrowers filed suit, alleging, among other things, violations of the Truth in Lending Act (TILA), the Electronic Fund Transfer Act (EFTA), and the Fair Credit Reporting Act (FCRA), as well as state law claims including negligence. First, the borrowers claimed that the liability for the $26,000 was limited to $50 because the withdrawal is subject to the cardholder liability limit for unauthorized use of a credit card under TILA. In denying the bank’s motion for summary judgment, the court rejected the bank’s argument that the HELOC account was not for personal purposes - and thus not subject to TILA - when the account was used (i) to buy a loft for the son that generated no income, (ii) to payoff two cars which were in part used for the borrowers’ business and (iii) to repair part of the roof over the plaintiff’s home office. Also, without some evidence that the funds were used for business, the court disagreed with an OTS staff letter stating that linking a HELOC to a business checking account transformed the HELOC into a business account, especially when the business account was primarily used to pay down the line of credit. The court also denied the bank’s motion on the borrowers’ claim that the bank willfully or negligently violated FCRA where the bank reported a debt arising from a theft but failed to note the disputed nature of the debt. However, the court granted the defendant’s motion for summary judgment on the borrowers’ EFTA claim, determining that the HELOC is a credit account not governed by the EFTA. Regarding state law negligence claims, the court held that (i) because of the bank’s apparent delay in complying with Federal Financial Institution Examination Council’s security standards, a reasonable finder of fact could conclude that the bank breached its duty to protect the borrowers’ account against fraudulent access, and (ii) a reasonable finder of fact could conclude that that the bank’s alleged negligence was a proximate cause of the borrowers’ alleged mental and emotional anguish. For a copy of the opinion, please see http://www.buckleysandler.com/SY_v_Citizens.pdf.
California Federal Court Holds Servicer Not Prohibited From Collecting Unenforceable Mortgage. On September 9, the U.S. District Court for the Northern District of California, ruling on a motion to dismiss a class action complaint, held that California’s debt collection law did not prohibit a servicer from collecting a mortgage debt that was unenforceable under California’s anti-deficiency statute. Herrera v. LCS Fin. Servs. Corp., No. C09-02843, 2009 WL 2912517 (N.D. Cal. Sept. 9, 2009). In Herrera, the defendant servicer attempted to collect on a second mortgage following a non-judicial foreclosure action by the first mortgage holder. According to the plaintiff borrower, the servicer’s collection efforts violated California’s debt collection law and provisions of the federal Fair Debt Collection Practices Act (FDCPA) incorporated into the state law, as California’s anti-deficiency statute had extinguished the second mortgage. The court, however, found that the anti-deficiency statute eliminated the creditor’s ability to seek a deficiency judgment, but did not eliminate the underlying debt. Thus, according to the court, the servicer did not violate California’s debt collection law merely by attempting to collect on the second mortgage. Nonetheless, the court determined that the borrower could still state a claim against the servicer by alleging that the content of the servicer’s letters misrepresented the nature of her debt. For a copy of the opinion, please see http://www.buckleysandler.com/Herrera_v_LCS.pdf.
Seventh Circuit Holds Plaintiff Lacks Standing to Appeal a Denial of Class Certification. On August 31, the U.S. Court of Appeals for the Seventh Circuit held that a named plaintiff lacks standing to appeal a lower court’s denial of class certification if the plaintiff no longer has a personal stake in the definitive adjudication of the class-certification issue. Muro v. Target Corp., No. 08-1256, 2009 WL 2707537 (7th Cir. Aug. 31, 2009). In this case, the plaintiff, Muro, received an unsolicited Target Visa credit card after having previously closed her credit card account with the same retailer. She did not activate the new card, nor did she incur any charges or fees associated with the card. Muro subsequently filed the underlying putative class action against Target, alleging violations of 15 U.S.C. §§ 1637 and 1642 under the Truth in Lending Act (TILA). The trial court denied class certification of the § 1642 claim on typicality grounds and granted Target’s summary judgment motion on the § 1637 claim. Muro and Target subsequently settled the § 1642 claim, but Muro reserved her right to appeal the denial of class certification in the settlement agreement. Muro then appealed the denial of § 1642 class certification and the § 1637 summary judgment ruling. On appeal, the Seventh Circuit addressed whether reservation of the right to appeal a class certification ruling permits a named plaintiff in a putative class action who has settled her individual claim to appeal the ruling. Addressing an issue that has caused disagreement among the circuits, the Muro Court sided with the Fourth and Eighth Circuits to hold that “[o]nly if issues personal to the prospective class representative remain alive in the litigation can a court be assured that there remains sufficient concrete adverseness to ensure that the class certification issue is presented in a truly adversarial manner and, consequently, will be litigated comprehensively and clearly.” The court went on to state that “[a]n abstract interest in a matter never has been considered a sufficient basis for the maintenance of – or the continuation of – litigation in the federal courts.” Accordingly, mere reservation of the right to appeal does not satisfy the necessary case-or-controversy requirement under the U.S. Constitution. With respect to the § 1637 claims, the court upheld the summary judgment ruling in favor of Target because Muro never activated the credit card. TILA establishes card issuer liability only where the cardholder pays a fee prescribed under or where the cardholder uses the credit card or charge card. For a copy of the opinion, please see http://www.buckleysandler.com/Muro_Target.pdf.
Illinois Federal Court Holds Online Register Receipt Is Subject to FACTA. On September 3, the U.S. District Court for the Northern District of Illinois held that an online register receipt is "printed," and, thus, is subject to the requirements of the Fair and Accurate Credit Transactions Act (FACTA). Romano v. Active Network, Inc., No. 09 C 19052009, WL 2916838 (N.D. Ill. Sept. 3, 2009). In Romano, the plaintiff consumer made a transaction using the defendant merchant’s website. The plaintiff argued that the defendant violated FACTA because the online register receipt included more than the last five digits and the expiration date of the consumer’s credit card. The court, in denying the merchant’s motion to dismiss, held that, for the purpose of FACTA, an online register receipt is “printed.” Noting a split in decisions regarding whether such receipts are “printed,” the court interpreted “print” to mean “to display on a surface (as a computer screen).” The court reasoned that, in an Internet transaction, the merchant “published the information in the same way that it would have done had it handed [the plaintiff] a paper receipt in person,” and that the language of § 1681c(g) supported the court’s interpretation. The court also held that whether the merchant acted “willfully” did not require resolution at the motion to dismiss stage (because such facts may be beyond the pleadings) and that the Fair Credit Reporting Act, of which FACTA is an amendment, does not require an injury to allege such willful violations. For a copy of the opinion, please see http://www.buckleysandler.com/Romano_v_Active.pdf.
Virginia Federal Court Finds FCRA, FDCPA Claims Alleged Sufficient Lack of Permissible Purpose; Voluntary Payment Doctrine Does Not Apply. On September 4, the U.S. District Court for the Eastern District of Virginia held that a consumer plaintiff may sue a defendant collection agency under the Fair Credit Reporting Act (FCRA) for allegedly misrepresenting that it had the plaintiff’s social security number and signature on an application for the plaintiff’s estranged husband’s credit card account, as well as under the Fair Debt Collection Practices Act (FDCPA) for allegedly compelling the plaintiff to pay her estranged husband’s credit card debt in order to protect the plaintiff’s credit rating. Cappetta v. GC Servs. Ltd., No. 3:08-CV-288, 2009 WL 2916906 (E.D. Va. Sept. 4, 2009). The court found that the plaintiff sufficiently stated a FCRA claim by alleging facts to show that the collection agency either willfully or negligently obtained her credit report without having a “permissible purpose” because the collection agency reasonably should have known that the plaintiff had not initiated a business transaction with the credit card company and the account did not belong to the plaintiff. In addition, the court found that the plaintiff could bring her FDCPA claim because, although applicable state law recognizes a voluntary payment doctrine, this doctrine does not act as a defense to a federal FDCPA claim. In addition, even if the voluntary payment doctrine applied, the court explained that it likely would follow precedent from other federal courts finding that the FDCPA preempts the voluntary payment doctrine to the extent the doctrine affords less protection to consumers than the FDCPA. For a copy of the opinion, please see http://www.buckleysandler.com/Cappetta_v_GC_Services.pdf.
E-Financial Services
Illinois Federal Court Holds TILA Cardholder Liability Limit Survives Motion for Summary Judgment; Bank Improperly Reported Disputed Information Under FCRA in Case Alleging Unauthorized HELOC Withdrawal. On August 21, the U.S. District Court for the Northern District of Illinois denied summary judgment in a case involving the alleged theft of a borrowers’ password to access their HELOC account, which resulted in an unauthorized electronic withdrawal. Shames-Yeakel v. Citizens Fin. Bank, No. 07 C 5387, 2009 WL 2949500 (N.D.Ill. Aug. 21, 2009). In this case, the plaintiff borrowers opened a $50,000 HELOC account with the defendant bank. The bank denied responsibility for an unauthorized $26,000 withdrawal from the HELOC account, began foreclosure proceedings on the borrowers’ home after the borrowers refused to pay, and reported the delinquent account information to credit reporting agencies. In response, the borrowers filed suit, alleging, among other things, violations of the Truth in Lending Act (TILA), the Electronic Fund Transfer Act (EFTA), and the Fair Credit Reporting Act (FCRA), as well as state law claims including negligence. First, the borrowers claimed that the liability for the $26,000 was limited to $50 because the withdrawal is subject to the cardholder liability limit for unauthorized use of a credit card under TILA. In denying the bank’s motion for summary judgment, the court rejected the bank’s argument that the HELOC account was not for personal purposes - and thus not subject to TILA - when the account was used (i) to buy a loft for the son that generated no income, (ii) to payoff two cars which were in part used for the borrowers’ business and (iii) to repair part of the roof over the plaintiff’s home office. Also, without some evidence that the funds were used for business, the court disagreed with an OTS staff letter stating that linking a HELOC to a business checking account transformed the HELOC into a business account, especially when the business account was primarily used to pay down the line of credit. The court also denied the bank’s motion on the borrowers’ claim that the bank willfully or negligently violated FCRA where the bank reported a debt arising from a theft but failed to note the disputed nature of the debt. However, the court granted the defendant’s motion for summary judgment on the borrowers’ EFTA claim, determining that the HELOC is a credit account not governed by the EFTA. Regarding state law negligence claims, the court held that (i) because of the bank’s apparent delay in complying with Federal Financial Institution Examination Council’s security standards, a reasonable finder of fact could conclude that the bank breached its duty to protect the borrowers’ account against fraudulent access, and (ii) a reasonable finder of fact could conclude that that the bank’s alleged negligence was a proximate cause of the borrowers’ alleged mental and emotional anguish. For a copy of the opinion, please see http://www.buckleysandler.com/SY_v_Citizens.pdf.
Illinois Federal Court Holds Online Register Receipt Is Subject to FACTA. On September 3, the U.S. District Court for the Northern District of Illinois held that an online register receipt is "printed," and, thus, is subject to the requirements of the Fair and Accurate Credit Transactions Act (FACTA). Romano v. Active Network, Inc., No. 09 C 19052009, WL 2916838 (N.D. Ill. Sept. 3, 2009). In Romano, the plaintiff consumer made a transaction using the defendant merchant’s website. The plaintiff argued that the defendant violated FACTA because the online register receipt included more than the last five digits and the expiration date of the consumer’s credit card. The court, in denying the merchant’s motion to dismiss, held that, for the purpose of FACTA, an online register receipt is “printed.” Noting a split in decisions regarding whether such receipts are “printed,” the court interpreted “print” to mean “to display on a surface (as a computer screen).” The court reasoned that, in an Internet transaction, the merchant “published the information in the same way that it would have done had it handed [the plaintiff] a paper receipt in person,” and that the language of § 1681c(g) supported the court’s interpretation. The court also held that whether the merchant acted “willfully” did not require resolution at the motion to dismiss stage (because such facts may be beyond the pleadings) and that the Fair Credit Reporting Act, of which FACTA is an amendment, does not require an injury to allege such willful violations. For a copy of the opinion, please see http://www.buckleysandler.com/Romano_v_Active.pdf.
Privacy/Data Security
Illinois Federal Court Holds TILA Cardholder Liability Limit Survives Motion for Summary Judgment; Bank Improperly Reported Disputed Information Under FCRA in Case Alleging Unauthorized HELOC Withdrawal. On August 21, the U.S. District Court for the Northern District of Illinois denied summary judgment in a case involving the alleged theft of a borrowers’ password to access their HELOC account, which resulted in an unauthorized electronic withdrawal. Shames-Yeakel v. Citizens Fin. Bank, No. 07 C 5387, 2009 WL 2949500 (N.D.Ill. Aug. 21, 2009). In this case, the plaintiff borrowers opened a $50,000 HELOC account with the defendant bank. The bank denied responsibility for an unauthorized $26,000 withdrawal from the HELOC account, began foreclosure proceedings on the borrowers’ home after the borrowers refused to pay, and reported the delinquent account information to credit reporting agencies. In response, the borrowers filed suit, alleging, among other things, violations of the Truth in Lending Act (TILA), the Electronic Fund Transfer Act (EFTA), and the Fair Credit Reporting Act (FCRA), as well as state law claims including negligence. First, the borrowers claimed that the liability for the $26,000 was limited to $50 because the withdrawal is subject to the cardholder liability limit for unauthorized use of a credit card under TILA. In denying the bank’s motion for summary judgment, the court rejected the bank’s argument that the HELOC account was not for personal purposes - and thus not subject to TILA - when the account was used (i) to buy a loft for the son that generated no income, (ii) to payoff two cars which were in part used for the borrowers’ business and (iii) to repair part of the roof over the plaintiff’s home office. Also, without some evidence that the funds were used for business, the court disagreed with an OTS staff letter stating that linking a HELOC to a business checking account transformed the HELOC into a business account, especially when the business account was primarily used to pay down the line of credit. The court also denied the bank’s motion on the borrowers’ claim that the bank willfully or negligently violated FCRA where the bank reported a debt arising from a theft but failed to note the disputed nature of the debt. However, the court granted the defendant’s motion for summary judgment on the borrowers’ EFTA claim, determining that the HELOC is a credit account not governed by the EFTA. Regarding state law negligence claims, the court held that (i) because of the bank’s apparent delay in complying with Federal Financial Institution Examination Council’s security standards, a reasonable finder of fact could conclude that the bank breached its duty to protect the borrowers’ account against fraudulent access, and (ii) a reasonable finder of fact could conclude that that the bank’s alleged negligence was a proximate cause of the borrowers’ alleged mental and emotional anguish. For a copy of the opinion, please see http://www.buckleysandler.com/SY_v_Citizens.pdf.
Illinois Federal Court Holds Online Register Receipt Is Subject to FACTA. On September 3, the U.S. District Court for the Northern District of Illinois held that an online register receipt is "printed," and, thus, is subject to the requirements of the Fair and Accurate Credit Transactions Act (FACTA). Romano v. Active Network, Inc., No. 09 C 19052009, WL 2916838 (N.D. Ill. Sept. 3, 2009). In Romano, the plaintiff consumer made a transaction using the defendant merchant’s website. The plaintiff argued that the defendant violated FACTA because the online register receipt included more than the last five digits and the expiration date of the consumer’s credit card. The court, in denying the merchant’s motion to dismiss, held that, for the purpose of FACTA, an online register receipt is “printed.” Noting a split in decisions regarding whether such receipts are “printed,” the court interpreted “print” to mean “to display on a surface (as a computer screen).” The court reasoned that, in an Internet transaction, the merchant “published the information in the same way that it would have done had it handed [the plaintiff] a paper receipt in person,” and that the language of § 1681c(g) supported the court’s interpretation. The court also held that whether the merchant acted “willfully” did not require resolution at the motion to dismiss stage (because such facts may be beyond the pleadings) and that the Fair Credit Reporting Act, of which FACTA is an amendment, does not require an injury to allege such willful violations. For a copy of the opinion, please see http://www.buckleysandler.com/Romano_v_Active.pdf.
Virginia Federal Court Finds FCRA, FDCPA Claims Alleged Sufficient Lack of Permissible Purpose; Voluntary Payment Doctrine Does Not Apply. On September 4, the U.S. District Court for the Eastern District of Virginia held that a consumer plaintiff may sue a defendant collection agency under the Fair Credit Reporting Act (FCRA) for allegedly misrepresenting that it had the plaintiff’s social security number and signature on an application for the plaintiff’s estranged husband’s credit card account, as well as under the Fair Debt Collection Practices Act (FDCPA) for allegedly compelling the plaintiff to pay her estranged husband’s credit card debt in order to protect the plaintiff’s credit rating. Cappetta v. GC Servs. Ltd., No. 3:08-CV-288, 2009 WL 2916906 (E.D. Va. Sept. 4, 2009). The court found that the plaintiff sufficiently stated a FCRA claim by alleging facts to show that the collection agency either willfully or negligently obtained her credit report without having a “permissible purpose” because the collection agency reasonably should have known that the plaintiff had not initiated a business transaction with the credit card company and the account did not belong to the plaintiff. In addition, the court found that the plaintiff could bring her FDCPA claim because, although applicable state law recognizes a voluntary payment doctrine, this doctrine does not act as a defense to a federal FDCPA claim. In addition, even if the voluntary payment doctrine applied, the court explained that it likely would follow precedent from other federal courts finding that the FDCPA preempts the voluntary payment doctrine to the extent the doctrine affords less protection to consumers than the FDCPA. For a copy of the opinion, please see http://www.buckleysandler.com/Cappetta_v_GC_Services.pdf.
Credit Cards
California Federal Court Holds State Law Claims Not Subject to NBA Preemption. On September 3, the U.S. District Court for the Central District of California held that several state statutory and common law claims leveled against a national bank were not preempted under the National Bank Act (NBA) and regulations promulgated by the Office of the Comptroller of the Currency (OCC). Davis v. Chase Bank U.S.A., N.A., No. CV 06-04804, 2009 WL 2868817 (C.D. Cal. Sept. 3, 2009). In Davis, the plaintiff consumer brought a putative class action alleging, among other claims, that the defendant national bank violated California’s Consumer Legal Remedies Act (CLRA) and Unfair Competition Law (UCL), and breached the implied covenant of good faith and fair dealing in connection with a merchant credit card promotion that the consumer alleged “induce[d] customers into believing that they will have an extended time period in which to pay off their Promotional Purchases.” The national bank moved to dismiss, arguing that the claims were preempted by the NBA and by regulations promulgated by the OCC. In response, the consumer argued that preemption was not applicable because the claims were based on laws of general applicability that have only an incidental effect on bank operations. The court granted in part and denied in part defendant’s motion. The court first found that the consumer’s CLRA claims and UCL advertising claims were not expressly preempted by the NBA and OCC regulations. According to the court, “[t]he predicate duty – to avoid deceptive disclosures – is significantly broader than a specific duty to disclose certain provisions that would fall within the scope of [NBA express preemption].” However, the court held that the consumer’s UCL claims that “challenge the allocation of payments apart from the way that allocation interacts with deceptive advertising” were expressly preempted by the NBA because such a “claim appears to be based on an argument regarding Defendant’s charging of a finance fee and the application of monthly payments.” According to the court, “[a]lthough the claim could be framed as a ‘general’ attack (like any claim could), the result it seeks squarely impedes on the decision to employ certain lending terms.” The court next found that the consumer’s CLRA and UCL claims related to unconscionable provisions and breach of the implied covenant of good faith and fair dealing were based in contract, and therefore were not preempted because those claims do not “seek to impose a specific term of credit, but rather [are] part of a general rule of contract law.” According to the court, “[s]uch a claim does not seek to force [defendant] to set its contracts in a certain way, but rather merely to adhere to the contracts it does create.” For a copy of the opinion, please see http://www.buckleysandler.com/Davis_v_Chase.pdf.
Seventh Circuit Holds Plaintiff Lacks Standing to Appeal a Denial of Class Certification. On August 31, the U.S. Court of Appeals for the Seventh Circuit held that a named plaintiff lacks standing to appeal a lower court’s denial of class certification if the plaintiff no longer has a personal stake in the definitive adjudication of the class-certification issue. Muro v. Target Corp., No. 08-1256, 2009 WL 2707537 (7th Cir. Aug. 31, 2009). In this case, the plaintiff, Muro, received an unsolicited Target Visa credit card after having previously closed her credit card account with the same retailer. She did not activate the new card, nor did she incur any charges or fees associated with the card. Muro subsequently filed the underlying putative class action against Target, alleging violations of 15 U.S.C. §§ 1637 and 1642 under the Truth in Lending Act (TILA). The trial court denied class certification of the § 1642 claim on typicality grounds and granted Target’s summary judgment motion on the § 1637 claim. Muro and Target subsequently settled the § 1642 claim, but Muro reserved her right to appeal the denial of class certification in the settlement agreement. Muro then appealed the denial of § 1642 class certification and the § 1637 summary judgment ruling. On appeal, the Seventh Circuit addressed whether reservation of the right to appeal a class certification ruling permits a named plaintiff in a putative class action who has settled her individual claim to appeal the ruling. Addressing an issue that has caused disagreement among the circuits, the Muro Court sided with the Fourth and Eighth Circuits to hold that “[o]nly if issues personal to the prospective class representative remain alive in the litigation can a court be assured that there remains sufficient concrete adverseness to ensure that the class certification issue is presented in a truly adversarial manner and, consequently, will be litigated comprehensively and clearly.” The court went on to state that “[a]n abstract interest in a matter never has been considered a sufficient basis for the maintenance of – or the continuation of – litigation in the federal courts.” Accordingly, mere reservation of the right to appeal does not satisfy the necessary case-or-controversy requirement under the U.S. Constitution. With respect to the § 1637 claims, the court upheld the summary judgment ruling in favor of Target because Muro never activated the credit card. TILA establishes card issuer liability only where the cardholder pays a fee prescribed under or where the cardholder uses the credit card or charge card. For a copy of the opinion, please see http://www.buckleysandler.com/Muro_Target.pdf.
Illinois Federal Court Holds Online Register Receipt Is Subject to FACTA. On September 3, the U.S. District Court for the Northern District of Illinois held that an online register receipt is "printed," and, thus, is subject to the requirements of the Fair and Accurate Credit Transactions Act (FACTA). Romano v. Active Network, Inc., No. 09 C 19052009, WL 2916838 (N.D. Ill. Sept. 3, 2009). In Romano, the plaintiff consumer made a transaction using the defendant merchant’s website. The plaintiff argued that the defendant violated FACTA because the online register receipt included more than the last five digits and the expiration date of the consumer’s credit card. The court, in denying the merchant’s motion to dismiss, held that, for the purpose of FACTA, an online register receipt is “printed.” Noting a split in decisions regarding whether such receipts are “printed,” the court interpreted “print” to mean “to display on a surface (as a computer screen).” The court reasoned that, in an Internet transaction, the merchant “published the information in the same way that it would have done had it handed [the plaintiff] a paper receipt in person,” and that the language of § 1681c(g) supported the court’s interpretation. The court also held that whether the merchant acted “willfully” did not require resolution at the motion to dismiss stage (because such facts may be beyond the pleadings) and that the Fair Credit Reporting Act, of which FACTA is an amendment, does not require an injury to allege such willful violations. For a copy of the opinion, please see http://www.buckleysandler.com/Romano_v_Active.pdf.
Virginia Federal Court Finds FCRA, FDCPA Claims Alleged Sufficient Lack of Permissible Purpose; Voluntary Payment Doctrine Does Not Apply. On September 4, the U.S. District Court for the Eastern District of Virginia held that a consumer plaintiff may sue a defendant collection agency under the Fair Credit Reporting Act (FCRA) for allegedly misrepresenting that it had the plaintiff’s social security number and signature on an application for the plaintiff’s estranged husband’s credit card account, as well as under the Fair Debt Collection Practices Act (FDCPA) for allegedly compelling the plaintiff to pay her estranged husband’s credit card debt in order to protect the plaintiff’s credit rating. Cappetta v. GC Servs. Ltd., No. 3:08-CV-288, 2009 WL 2916906 (E.D. Va. Sept. 4, 2009). The court found that the plaintiff sufficiently stated a FCRA claim by alleging facts to show that the collection agency either willfully or negligently obtained her credit report without having a “permissible purpose” because the collection agency reasonably should have known that the plaintiff had not initiated a business transaction with the credit card company and the account did not belong to the plaintiff. In addition, the court found that the plaintiff could bring her FDCPA claim because, although applicable state law recognizes a voluntary payment doctrine, this doctrine does not act as a defense to a federal FDCPA claim. In addition, even if the voluntary payment doctrine applied, the court explained that it likely would follow precedent from other federal courts finding that the FDCPA preempts the voluntary payment doctrine to the extent the doctrine affords less protection to consumers than the FDCPA. For a copy of the opinion, please see http://www.buckleysandler.com/Cappetta_v_GC_Services.pdf.