InfoBytes, September 26, 2008
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Miscellany
- Mortgages
- Banking
- Consumer Finance
- Litigation
- Privacy/Data Security
- Credit Cards
Federal Issues
Bailout Talks Continue. On September 26, Congressional Democrats issued a discussion draft of the “Economic Recovery and Corporate Accountability Act of 2008” meant to modify the Treasury’s proposal. The bill would (i) create an Office of Financial Stability within the U.S. Department of Treasury to buy assets from troubled financial institutions, (ii) create an oversight board consisting of the heads of other regulatory agencies and appointees by majority and minority Congressional leadership, (iii) increase the FDIC’s enforcement powers and require the FDIC to manage all Treasury-owned mortgage assets, (iv) expand foreclosure mitigation efforts through the HOPE for Homeowners program, and require loan servicers of assets owned by the Treasury to consent to reasonable loan modification requests, (v) limit executive compensation for entities that sell assets to the Treasury, (vi) require disclosure of the description, amount and pricing of assets acquired by the Treasury within two business days, (vii) permit bankruptcy courts to “cram down” mortgage loans to the security value, and (viii) create a temporary program insuring the money market industry. This bill largely reflects Senator Christopher Dodd’s (D-CT) proposed changes made on September 22. For a copy of the discussion draft, please see http://www.washingtonpost.com/wp-srv/business/documents/discussion_draft_Sept_25.pdf.
House Republicans issued their own alternative plan. This proposal reportedly would, among other items, (i) authorize the Treasury to design a system of mortgage insurance paid by the holders of mortgage backed securities, (ii) provide temporary tax relief and dividend suspension, (iii) require firms to disclose the value of their mortgage assets on their books, the value of any private bids within the last year for such assets, and their last audit report, and (iv) create a blue ribbon panel with representatives of the Treasury, the U.S. Securities and Exchange Commission, and the Federal Reserve Board to make financial services regulatory reform recommendations to Congress by January 1, 2009.
At press time, discussions to reach a compromise are ongoing among Congressional leaders of both parties and the Administration. Notwithstanding the numerous alternative structures that economists, business leaders and former regulators have suggested, the current expectation is that the deal, if a deal is reached, will be based upon the core structure of the original Treasury proposal of a Treasury fund to purchase troubled assets from U.S. financial institutions.
Fed Eases Rules for Minority Equity Investors. On September 22, the Federal Reserve Board issued a policy statement relaxing rules that determine when a minority equity investor exercises “control” for purposes of the Bank Holding Company Act. The previous interpretation allowed minority equity investors to own up to 25% of the voting shares without being required to register as bank holding company. Under the new interpretation, minority investors will be able to own up to 33% of the total voting shares if 18% of the shares are nonvoting. In addition, a minority investor may now have a single representative on the board of directors under any circumstances and two seats on the board if that represents less than 25% of the seats on the board and the majority of seats are the representatives of a registered bank holding company. Minority investors are also now permitted to communicate with the bank’s board in the same manner as any other shareholder. For a copy of the policy statement, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20080922b1.pdf.
House Financial Services Committee Considers FHA Seller-Financed Downpayment Reform and Risk-Based Pricing Authorization Act. On September 16, the House Financial Services Committee conducted a mark-up of the “FHA Seller-Financed Downpayment Reform and Risk-Based Pricing Authorization Act” (H.R. 6694). The bill proposes to (i) revise the requirements for seller-financed downpayments for single-family mortgages to be insured by the Secretary of Housing and Urban Development under Title II of the National Housing Act, (ii) require any entity that provides downpayment assistance for such mortgages to also make available counseling to mortgagors, and (iii) authorize risk-based insurance premiums for certain mortgagors under such mortgages. For a copy of the bill, please see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h6694ih.txt.pdf.
HUD Mortgagee Letter Addresses Underwriting Requirements Related to ”Buy and Bail” Tactic. On September 19, Assistant Secretary for Housing and FHA Commissioner Brian Montgomery issued Mortgagee Letter 2008-25. The mortgagee letter provides that beginning with case number assignments on or after September 19, the underwriting analysis may not consider any rental income from the property being vacated except where (i) the homebuyer is relocating with a new employer, or being transferred by the current employer to an area not within reasonable and locally recognized commuting distance, and a properly executed lease agreement for at least one year’s duration after the loan is closed is provided; or (ii) the homebuyer has a loan-to-value ratio of 75 percent or less. The purpose of the mortgagee letter is to “assure that a homeowner either has sufficient income to make both mortgage payments without any rental income or has an equity position not likely to result in defaulting on the mortgage on the property being vacated.” The restriction, currently temporary, may become permanent pending further review by the FHA. For a copy of the mortgagee letter, please see
http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/08-25ml.doc.
FTC Reaches Settlement with Advance-Fee Credit Card Telemarketers. On September 22, the Federal Trade Commission (FTC) announced a settlement against a Florida-based company regarding an advance fee credit card telemarketing business. The FTC alleged violations of the FTC Act, the FTC’s Telemarketing Sales Rule, and the FTC’s Do Not Call Rule. Factually, the complaint alleged that the defendants’ cards could only be used to buy items from the defendants’ catalog or Web site but were advertised as being similar to a Visa or MasterCard. Additionally, the complaint alleged that the defendants required a downpayment of 10% of the cards’ credit line before issuing the cards. The complaint also alleged that the defendants falsely represented to consumers that they would report consumers’ payment histories to the major credit bureaus. Among other items, the final order requires the defendants to disclose material terms and conditions of any sales offer, including all fees and expenses associated with any credit card offer. Pursuant to the final order, the defendants are expected to pay approximately $1 million to the FTC, and must maintain records evidencing compliance with the order. For a copy of the final order, please see http://www.ftc.gov/os/caselist/0823040/080909financialadvisorsstipfinal.pdf.
FTC Alleges Mortgage Foreclosure Operation Violated FTC Act, Obtains Final Order Against Another. On September 22, the Federal Trade Commission (FTC) issued a press release announcing actions taken against two mortgage foreclosure rescue operations. In the first matter, the FTC filed a complaint against a Florida couple, alleging that the couple violated the FTC Act by falsely representing to consumers that they could stop any mortgage foreclosure sale. The defendants advertised a toll-free hotline, which they claimed could negotiate a solution with the consumers’ mortgage companies and guaranteed that foreclosure would be avoided. The FTC’s complaint also alleged that the defendants promised consumers a refund of their fees if they did not prevent a foreclosure, but frequently did not. The court enjoined the defendants’ alleged unlawful practices pending further litigation. In the second matter, the FTC obtained a final court order against four Texas defendants and their companies charged with violating the FTC Act by “engaging in deceptive acts or practices in connection with the marketing and sale of mortgage foreclosure rescue services.” According to the FTC’s complaint, the defendants often failed to prevent foreclosure for their clients and, in fact, increased the likelihood of foreclosure by failing to advise them to contact their lenders to explore possible options. Among other items, the final order prohibits the defendants from misrepresenting to consumers that they can or will prevent foreclosure in virtually all instances. The final order imposes monetary judgments as well as record-keeping requirements to ensure compliance with the order. For a copy of the FTC press release, please see http://www.ftc.gov/opa/2008/09/uhsnfs.shtm.
FHFA Issues Mortgage Metrics Report. On September 24, the Federal Housing Finance Agency (FHFA) announced the release of its first "Mortgage Metrics Report." The report evidences data for 30.4 million first line residential mortgages serviced on behalf of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The report includes information for all loss mitigation actions in connection with these mortgages, including forbearance plans, short sales, deeds in lieu, assumptions, and charge-offs in lieu of foreclosure. For a copy of the press release, please see http://www.bucklleykolar.com/documents/LoanModMetrics92408. For a copy of the metrics report, please see http://www.ofheo.gov/media/metricsreports/MetricsReport092408.pdf.
State Issues
Massachusetts Issues Cease and Desist Orders to Four Reverse Mortgage Lenders, Brokers. On September 24, the Massachusetts Division of Banks announced it had issued cease and desist orders to four companies for allegedly violating Massachusetts’ reverse mortgage statute. Three of the orders pertained to reverse mortgages made without an “approved plan” while two additional orders alleged “unfair and deceptive practices,” specifically that one company allegedly marketed reverse mortgages as government benefits while another allegedly altered mortgage loan documents and inaccurately reported the incomes of mortgagees. The orders, among other items, forbid the companies from initiating any new mortgage loan transactions and require that pending applications be placed with a qualified lender "at no cost to the consumer." For a copy of the press release, please see http://www.mass.gov/?pageID=ocapressrelease&L=4&L0=Home&L1=Government&L2=Our+Agencies+and+
Divisions&L3=Division+of+Banks&sid=Eoca&b=pressrelease&f=080923_DOB_reversemortgages&csid=Eoca.
Massachusetts Requires Security Program Policies Regarding Personal Information. On September 22, the Massachusetts Office of Consumer Affairs and Business Regulation issued final regulations establishing standards to “own, license, store, or maintain” personal information. The regulations define personal information as a first name or initial and surname in combination with (i) a social security number, (ii) a driver’s license number or other state-issued identification card number, or (iii) a financial account, credit card, or debit card number, irrespective of whether a security code, access code, personal identification number or password accompanies this information. The definition of “personal information “excludes publically available information. The regulations require a “comprehensive, written information security program” applicable to records, and a separate “comprehensive, written information security program” applicable to computers. The regulations enumerate a non-exhaustive list of what the written programs should contain. Notably, a computer security program must address encryption, however, the regulations do not provide for any specific encryption standard. The regulations are effective January 1, 2009. For a copy of the final regulations, please see http://www.mass.gov/?pageID=ocaterminal&L=3&L0=Home&L1=Consumer&L2=Identity+Theft
&sid=Eoca&b=terminalcontent&f=idtheft_201cmr17&csid=Eoca.
New York Awards Home Ownership Assistance and Foreclosure Counseling Grants. On September 24, New York Governor David A. Paterson announced the awarding of over $3 million in grants to facilitate homeownership assistance and foreclosure prevention counseling, advocacy, and legal services. The New York State Division of Housing and Community Renewal and the New York Banking Department awarded the grants to various non-profit agencies. Since July, these entities have awarded over $9 million in similar grants. For a copy of the press release, please see http://www.banking.state.ny.us/pr080924.htm.
Courts
Seventh Circuit Rules TILA Does Not Permit Rescission Remedy in Class Actions. On September 24, the U.S. Court of Appeals for the Seventh Circuit ruled that the Truth in Lending Act (TILA) does not permit the remedy of rescission in class action cases. Andrews v. Chevy Chase Bank, No. 07-1326, 2008 WL 433076 (7th Cir. Sept. 24, 2008). In this case, the plaintiffs obtained an adjustable rate mortgage (ARM) loan with a "cash flow payment option" from the defendant. This option allowed for monthly payments to vary depending on the monthly cash flow of the borrower. The borrower plaintiffs claimed, among other items, that the defendant lender did not provide adequate disclosure of the payment interval for the loan because the disclosure omitted the word “monthly,” thus allowing the loan to be eligible for an extended right to rescission under TILA. The district court granted summary judgment in favor of the borrowers on the rescission issue, certified as a class all borrowers who obtained an ARM loan and a TILA disclosure from the defendant between certain dates, and held that all class members would be eligible to rescind their mortgages. However, the Seventh Circuit reversed the district court’s decision regarding the availability of class-wide rescission, holding that TILA rescission class actions may not be maintained as a matter of law. The court found a “fundamental incompatibility between the statutory-rescission remedy set forth in § 1635 and the class form of action” because TILA’s statutory damages remedy under § 1640(a)(2) specifically references class actions by capping damages while TILA’s rescission remedy under § 1635 does not reference class actions. The court noted that “[t]he variations in the transactional ‘unwinding’ process that may arise from one rescission to the next make it an extremely poor fit for the class-action mechanism.” The Seventh Circuit’s decision in this case follows the First Circuit’s decision in McKenna v. First Horizon Home Loan Corp., 475 F.3d 418 (1st Cir. 2007) and the Fifth Circuit’s decision in James v. Home Constr. Co. of Mobile, Inc., 21 F.2d 727 (5th Cir. 1980). For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=07-1326_025.pdf.
Sixth Circuit Holds Legal Errors Qualify As Bona Fide Errors Under FDCPA. The Court of Appeals for the Sixth Circuit held in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, No. 07-3964, 538 F.3d 469 (6th Cir. 2008) that errors of law can qualify as a “bona fide error” for purposes of the Fair Debt Collection Practices Act (FDCPA). In this case, the defendants sent a foreclosure notice and an FDCPA “validation” notice that informed the homeowner that the debt would be assumed to be valid unless disputed “in writing.” After successfully disputing the debt and having the complaint dismissed, the plaintiff sued under the FDCPA, claiming that the defendants’ validation notice was deceptive because the FDCPA does not require a dispute to be in writing. The district court granted summary judgment to the defendants, stating that, although the defendants’ form violated FDCPA, the form contained a bona fide error. Rejecting the plaintiff’s arguments that the bona fide error defense was available only for clerical errors and not mistakes in law, the Sixth Circuit affirmed. As an issue of first impression in the Sixth Circuit, the court surveyed the relevant precedent from other jurisdictions and found a split of authority. Ultimately, the court relied upon Johnson v. Riddle, 305 F.3d 1107, 1121 n.14 (10th Cir. 2002) in support of the proposition that errors of law qualify as bona fide errors. The decision in Johnson relied heavily upon the FDCPA’s omission to exclude errors of law as bona fide errors in contrast to the Truth in Lending Act’s explicit exclusion for errors in law as bona fide errors. The court further held that the defendants had sufficient procedures designed to avoid the bona fide error, rejecting the plaintiff’s argument that the defendant merely proved that such procedures were in place when the notifications were written and not at the time of the violation. For a copy of the opinion, please see
http://www.ca6.uscourts.gov/opinions.pdf/08a0299p-06.pdf.
California Federal Court Rejects National Bank’s Preemption Claims. On September 11, a California federal district court rejected a motion for summary judgment in which Wells Fargo, N.A. (Wells Fargo) argued that National Bank Act preemption precluded the plaintiffs’ class action lawsuit. Gutierrez v. Wells Fargo Bank, N.A., No. 07-05923, 2008 WL 4279550 (N.D. Cal Sept. 11, 2008). In this case, the plaintiffs alleged that Wells Fargo engaged in two practices prohibited under California law. First, the defendant bank would re-sequence debit card debits made by consumers so that the largest debit was taken from the consumer’s account first, regardless of the order in which the debits were made. This practice resulted in consumers’ believing that they had a larger balance in their account, and Wells Fargo conceded that this practice caused consumers to incur more overdraft fees. Second, the defendant bank would occasionally post pending transactions to a consumer’s account but then, after three days, remove the transaction from the account. This practice, which was not disclosed to consumers, made the consumer’s available balance appear greater and also made consumers more likely to incur overdraft fees. Wells Fargo argued that these state-law allegations were preempted by federal law. The court disagreed, finding that federal law did not explicitly preempt state contract and tort law, and that any interpretations issued by the Office of the Comptroller of the Currency (OCC) emphasized that national banks may be subject to state laws prohibiting unfair or deceptive practices. The court further certified classes for both the re-sequencing claims and for the “including and deleting” claims. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Gutierrez_v_Wells.pdf.
California Federal Court Affirms Murray, Holds FCRA “Firm Offer” Does Not Require Value to Consumer. On September 4, a class action law suit against a division of Countrywide Home Loans was individually settled and the class de-certified when the court, following Murray v. New Cingular Wireless Services, 523 F.3d 719 (7th Cir. 2008), reasoned that an offer of credit may be a “firm offer” under the Fair Credit Reporting Act (FCRA) even if lacking “value” to the person solicited. Holloway v. Full Spectrum Lending, No. 06-5975, 2008 WL 4184648 (C.D. Cal. Sept. 4, 2008). In this case, the plaintiff received prescreened credit solicitations from the defendant unaccompanied by an offer of merchandise. The plaintiff initially argued, relying on Cole v. U.S. Capital, Inc., 389 F.3d 719 (7th Cir. 2004), that the solicitations had no “value” and were mere solicitations, in violation of FCRA. However, the plaintiff conceded that the Murray decision, reached during the present litigation, "seriously weakened the foundation of her case." The court agreed, following Murray’s reasoning that the Cole value test does not apply to “pure offers of credit” and that the defendant offered the plaintiff a “pure offer of credit.” Reasoning that the plaintiff’s case was unlikely to prevail on the merits, and that de-certification was a matter of the court’s discretion, the court de-certified the class and approved an individual settlement, including attorney’s fees, for the plaintiff. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Holloway_v_Full_Spectrum.pdf.
Pennsylvania Federal Court Holds Credit Reports Cannot Be Furnished to Third Parties with a “Legitimate Business Need” Under FCRA. On September 2, the U.S. District Court for the Eastern District of Pennsylvania held that the Fair Credit Reporting Act (FCRA) prevents certified credit users from providing credit reports to third parties in the absence of the certified credit user’s “legitimate business need.” Hernandez v. Lamboy Furniture, Inc., No. 07-00240, 2008 WL 4061344 (E.D. Pa. Sept. 2, 2008). In this case, the defendants Lamboy Furniture, Inc., Lamboy Housing Development, and Candelario Lamboy (Lamboy) had a relationship with a consumer reporting agency and obtained the plaintiff’s credit report pursuant to that relationship. While Lamboy had no business relationship with the plaintiff, Lamboy claimed it obtained the credit report on behalf of a third party who had a “legitimate business need” for the report. Subsequently, the plaintiff discovered that the third party had possession of her credit report. The plaintiff then sued Lamboy and the credit reporting agency that furnished the report, citing claims arising under FCRA. The plaintiff first claimed that Lamboy obtained the credit report without a “permissible purpose,” in violation of § 1681b of FCRA. Lamboy argued that it had a “permissible purpose” when it determined that the third party had a legitimate business need for the report. The court rejected this argument, reasoning that if the defendant’s argument were accepted “’there would be no need for more than a single business entity to contract with a consumer reporting agency to provide consumer credit reports.’” The court also rejected Lamboy’s argument that § 1681b(a)(3)(A) would permit an individual credit user to provide a credit report to a third party, reasoning that that section refers only to the ability of consumer reporting agencies to provide a credit report to an individual. The court held that the credit reporting agency may utilize a blanket certification to ensure that a credit user has a permissible purpose for accessing a consumer report, as long as it does not know or have reason to know that the credit user is requesting a report for an impermissible purpose. Since the plaintiff supplied no evidence that the credit reporting agency knew or had reason to know of the leasing business’ impermissible purpose, the court dismissed the claims against the credit reporting agency. The court also denied summary judgment for the plaintiff regarding “negligent” and “willful” violations of FCRA by Lamboy, holding that triable facts existed regarding these determinations. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Hernandez_v_Lamboy.pdf.
Firm News
Clint Rockwell will be presenting on topics related to recent state and federal mortgage lending developments at the American Financial Services Association’s State Government Affairs Forum / NACCA Annual Meeting on October 2 in Beverly Hills, California. Click here for additional information about this conference.
Colgate Selden will be presenting on topics related to RESPA compliance at the Maryland Association of Mortgage Brokers Continuing Education Forum on October 8. Click here for additional information about this conference.
Jerry Buckley and Jeff Naimon will be speakers at the upcoming Community Reinvestment Act & Fair Lending Colloquium Conference taking place October 26-29 in Orlando, Florida. Jerry will speak on the panel entitled “Identifying Trends and Potential Regulatory Concerns.” Jeff will speak on the panel entitled “Analyzing Your CRA and Fair Lending Risks during Mergers and Acquisitions.” For more information about this conference, see http://www.cracolloquium.com/index.html.
Jerry Buckley and Margo Tank will be conducting a panel discussion on electronic-related legal and regulatory issues at the Electronic Signature and Records Association (ESRA) Second Annual Conference: E-Signatures ’08: Business, Legal and Technology Trends on November 12 and 13th in Washington, DC. This year, the ESRA conference will analyze a remarkably wide range of industries currently employing e-signature and electronic record technologies to improve business processes, including financial services, consumer products, banking, insurance, construction, equipment financing, government systems & services (civilian & military), cable television, mortgages and notarization. For more information on the conference and to register online, go to: http://www.esignrecords.org/events/
Margo Tank was a featured speaker at the New York State Bar Association’s Business Law Fall Meeting on September 12 in Newport, Rhode Island. Ms. Tank’s presentation was entitled “Electronic Signatures – What Does a Business Lawyer Need to Know?”
Jeff Naimon participated in the American Bankers Association Telephone Briefing entitled “Is Your Bank Ready for Regulation Z?” on September 3, discussing the Federal Reserve Board’s recently adopted HOEPA rule.
Matthew Previn presented in a panel discussion entitled “Litigation and Enforcement Update” at the Mortgage Bankers Association’s Regulatory Compliance Conference in Washington D.C. on September 15.
Jonathan Jerison participated in two events at the Mortgage Bankers Association’s Regulatory Compliance Conference in Washington, D.C. on September 15 & 16.
Jeff Naimon facilitated a roundtable discussion entitled “Miscellaneous Regulatory Concerns: RESPA and TILA Issues (including Right of Rescission)” at the Mortgage Bankers Association’s Regulatory Compliance Conference Roundtable on September 15.
Margo Tank was featured in a panel discussion on eLegal Issues at the Mortgage Bankers Association’s Document Management & Custody Conference on September 23 in Charlotte, North Carolina.
Jeff Naimon moderated a panel entitled “Ensuring Your Practices Keep Pace with Emerging Legislative and Regulatory Initiatives” at the American Conference Institute’s 5th National Forum on Preventing, Detecting And Resolving Mortgage Fraud on September 23 in Phoenix, Arizona. Bill Heller of Akerman, Senterfitt chaired the conference.
Joe Kolar participated in an audio presentation on the Housing and Economic Recovery Act of 2008 (HERA) sponsored by the American Bar Association on September 25.
Miscellany
JPMorgan Chase Acquires WaMu. On September 25, JPMorgan Chase & Co. (JPMorgan) announced it had acquired the all deposits, assets and certain liabilities of Washington Mutual Bank (WaMu) for approximately $1.9 billion. JPMorgan acquired the banking operations from the Federal Insurance Deposit Corporation (FDIC) after, on the same day, the Office of Thrift Supervision closed WaMu and named the FDIC as receiver. For a copy of the press release, please see http://www.buckleykolar.com/documents /JPMorgan_Wa_Mu.pdf.
Mortgages
House Financial Services Committee Considers FHA Seller-Financed Downpayment Reform and Risk-Based Pricing Authorization Act. On September 16, the House Financial Services Committee conducted a mark-up of the “FHA Seller-Financed Downpayment Reform and Risk-Based Pricing Authorization Act” (H.R. 6694). The bill proposes to (i) revise the requirements for seller-financed downpayments for single-family mortgages to be insured by the Secretary of Housing and Urban Development under Title II of the National Housing Act, (ii) require any entity that provides downpayment assistance for such mortgages to also make available counseling to mortgagors, and (iii) authorize risk-based insurance premiums for certain mortgagors under such mortgages. For a copy of the bill, please see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h6694ih.txt.pdf.
HUD Mortgagee Letter Addresses Underwriting Requirements Related to ”Buy and Bail” Tactic. On September 19, Assistant Secretary for Housing and FHA Commissioner Brian Montgomery issued Mortgagee Letter 2008-25. The mortgagee letter provides that beginning with case number assignments on or after September 19, the underwriting analysis may not consider any rental income from the property being vacated except where (i) the homebuyer is relocating with a new employer, or being transferred by the current employer to an area not within reasonable and locally recognized commuting distance, and a properly executed lease agreement for at least one year’s duration after the loan is closed is provided; or (ii) the homebuyer has a loan-to-value ratio of 75 percent or less. The purpose of the mortgagee letter is to “assure that a homeowner either has sufficient income to make both mortgage payments without any rental income or has an equity position not likely to result in defaulting on the mortgage on the property being vacated.” The restriction, currently temporary, may become permanent pending further review by the FHA. For a copy of the mortgagee letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/08-25ml.doc.
FTC Alleges Mortgage Foreclosure Operation Violated FTC Act, Obtains Final Order Against Another. On September 22, the Federal Trade Commission (FTC) issued a press release announcing actions taken against two mortgage foreclosure rescue operations. In the first matter, the FTC filed a complaint against a Florida couple, alleging that the couple violated the FTC Act by falsely representing to consumers that they could stop any mortgage foreclosure sale. The defendants advertised a toll-free hotline, which they claimed could negotiate a solution with the consumers’ mortgage companies and guaranteed that foreclosure would be avoided. The FTC’s complaint also alleged that the defendants promised consumers a refund of their fees if they did not prevent a foreclosure, but frequently did not. The court enjoined the defendants’ alleged unlawful practices pending further litigation. In the second matter, the FTC obtained a final court order against four Texas defendants and their companies charged with violating the FTC Act by “engaging in deceptive acts or practices in connection with the marketing and sale of mortgage foreclosure rescue services.” According to the FTC’s complaint, the defendants often failed to prevent foreclosure for their clients and, in fact, increased the likelihood of foreclosure by failing to advise them to contact their lenders to explore possible options. Among other items, the final order prohibits the defendants from misrepresenting to consumers that they can or will prevent foreclosure in virtually all instances. The final order imposes monetary judgments as well as record-keeping requirements to ensure compliance with the order. For a copy of the FTC press release, please see http://www.ftc.gov/opa/2008/09/uhsnfs.shtm.
FHFA Issues Mortgage Metrics Report. On September 24, the Federal Housing Finance Agency (FHFA) announced the release of its first "Mortgage Metrics Report." The report evidences data for 30.4 million first line residential mortgages serviced on behalf of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The report includes information for all loss mitigation actions in connection with these mortgages, including forbearance plans, short sales, deeds in lieu, assumptions, and charge-offs in lieu of foreclosure. For a copy of the press release, please see http://www.bucklleykolar.com/documents/LoanModMetrics92408. For a copy of the metrics report, please see http://www.ofheo.gov/media/metricsreports/MetricsReport092408.pdf.
Massachusetts Issues Cease and Desist Orders to Four Reverse Mortgage Lenders, Brokers. On September 24, the Massachusetts Division of Banks announced it had issued cease and desist orders to four companies for allegedly violating Massachusetts’ reverse mortgage statute. Three of the orders pertained to reverse mortgages made without an “approved plan” while two additional orders alleged “unfair and deceptive practices,” specifically that one company allegedly marketed reverse mortgages as government benefits while another allegedly altered mortgage loan documents and inaccurately reported the incomes of mortgagees. The orders, among other items, forbid the companies from initiating any new mortgage loan transactions and require that pending applications be placed with a qualified lender "at no cost to the consumer." For a copy of the press release, please see http://www.mass.gov/?pageID=ocapressrelease&L=4&L0=Home&L1=Government&L2=Our+Agencies+and+
Divisions&L3=Division+of+Banks&sid=Eoca&b=pressrelease&f=080923_DOB_reversemortgages&csid=Eoca.
Banking
Bailout Talks Continue. On September 26, Congressional Democrats issued a discussion draft of the “Economic Recovery and Corporate Accountability Act of 2008” meant to modify the Treasury’s proposal. The bill would (i) create an Office of Financial Stability within the U.S. Department of Treasury to buy assets from troubled financial institutions, (ii) create an oversight board consisting of the heads of other regulatory agencies and appointees by majority and minority Congressional leadership, (iii) increase the FDIC’s enforcement powers and require the FDIC to manage all Treasury-owned mortgage assets, (iv) expand foreclosure mitigation efforts through the HOPE for Homeowners program, and require loan servicers of assets owned by the Treasury to consent to reasonable loan modification requests, (v) limit executive compensation for entities that sell assets to the Treasury, (vi) require disclosure of the description, amount and pricing of assets acquired by the Treasury within two business days, (vii) permit bankruptcy courts to “cram down” mortgage loans to the security value, and (viii) create a temporary program insuring the money market industry. This bill largely reflects Senator Christopher Dodd’s (D-CT) proposed changes made on September 22. For a copy of the discussion draft, please see http://www.washingtonpost.com/wp-srv/business/documents/discussion_draft_Sept_25.pdf.
House Republicans issued their own alternative plan. This proposal reportedly would, among other items, (i) authorize the Treasury to design a system of mortgage insurance paid by the holders of mortgage backed securities, (ii) provide temporary tax relief and dividend suspension, (iii) require firms to disclose the value of their mortgage assets on their books, the value of any private bids within the last year for such assets, and their last audit report, and (iv) create a blue ribbon panel with representatives of the Treasury, the U.S. Securities and Exchange Commission, and the Federal Reserve Board to make financial services regulatory reform recommendations to Congress by January 1, 2009.
At press time, discussions to reach a compromise are ongoing among Congressional leaders of both parties and the Administration. Notwithstanding the numerous alternative structures that economists, business leaders and former regulators have suggested, the current expectation is that the deal, if a deal is reached, will be based upon the core structure of the original Treasury proposal of a Treasury fund to purchase troubled assets from U.S. financial institutions.
Fed Eases Rules for Minority Equity Investors. On September 22, the Federal Reserve Board issued a policy statement relaxing rules that determine when a minority equity investor exercises “control” for purposes of the Bank Holding Company Act. The previous interpretation allowed minority equity investors to own up to 25% of the voting shares without being required to register as bank holding company. Under the new interpretation, minority investors will be able to own up to 33% of the total voting shares if 18% of the shares are nonvoting. In addition, a minority investor may now have a single representative on the board of directors under any circumstances and two seats on the board if that represents less than 25% of the seats on the board and the majority of seats are the representatives of a registered bank holding company. Minority investors are also now permitted to communicate with the bank’s board in the same manner as any other shareholder. For a copy of the policy statement, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20080922b1.pdf.
JPMorgan Chase Acquires WaMu. On September 25, JPMorgan Chase & Co. (JPMorgan) announced it had acquired the all deposits, assets and certain liabilities of Washington Mutual Bank (WaMu) for approximately $1.9 billion. JPMorgan acquired the banking operations from the Federal Insurance Deposit Corporation (FDIC) after, on the same day, the Office of Thrift Supervision closed WaMu and named the FDIC as receiver. For a copy of the press release, please see http://www.buckleykolar.com/documents/JPMorgan_Wa_Mu.pdf.
Consumer Finance
New York Awards Home Ownership Assistance and Foreclosure Counseling Grants. On September 24, New York Governor David A. Paterson announced the awarding of over $3 million in grants to facilitate homeownership assistance and foreclosure prevention counseling, advocacy, and legal services. The New York State Division of Housing and Community Renewal and the New York Banking Department awarded the grants to various non-profit agencies. Since July, these entities have awarded over $9 million in similar grants. For a copy of the press release, please see http://www.banking.state.ny.us/pr080924.htm.
Litigation
Seventh Circuit Rules TILA Does Not Permit Rescission Remedy in Class Actions. On September 24, the U.S. Court of Appeals for the Seventh Circuit ruled that the Truth in Lending Act (TILA) does not permit the remedy of rescission in class action cases. Andrews v. Chevy Chase Bank, No. 07-1326, 2008 WL 433076 (7th Cir. Sept. 24, 2008). In this case, the plaintiffs obtained an adjustable rate mortgage (ARM) loan with a "cash flow payment option" from the defendant. This option allowed for monthly payments to vary depending on the monthly cash flow of the borrower. The borrower plaintiffs claimed, among other items, that the defendant lender did not provide adequate disclosure of the payment interval for the loan because the disclosure omitted the word “monthly,” thus allowing the loan to be eligible for an extended right to rescission under TILA. The district court granted summary judgment in favor of the borrowers on the rescission issue, certified as a class all borrowers who obtained an ARM loan and a TILA disclosure from the defendant between certain dates, and held that all class members would be eligible to rescind their mortgages. However, the Seventh Circuit reversed the district court’s decision regarding the availability of class-wide rescission, holding that TILA rescission class actions may not be maintained as a matter of law. The court found a “fundamental incompatibility between the statutory-rescission remedy set forth in § 1635 and the class form of action” because TILA’s statutory damages remedy under § 1640(a)(2) specifically references class actions by capping damages while TILA’s rescission remedy under § 1635 does not reference class actions. The court noted that “[t]he variations in the transactional ‘unwinding’ process that may arise from one rescission to the next make it an extremely poor fit for the class-action mechanism.” The Seventh Circuit’s decision in this case follows the First Circuit’s decision in McKenna v. First Horizon Home Loan Corp., 475 F.3d 418 (1st Cir. 2007) and the Fifth Circuit’s decision in James v. Home Constr. Co. of Mobile, Inc., 21 F.2d 727 (5th Cir. 1980). For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=07-1326_025.pdf.
Sixth Circuit Holds Legal Errors Qualify As Bona Fide Errors Under FDCPA. The Court of Appeals for the Sixth Circuit held in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, No. 07-3964, 538 F.3d 469 (6th Cir. 2008) that errors of law can qualify as a “bona fide error” for purposes of the Fair Debt Collection Practices Act (FDCPA). In this case, the defendants sent a foreclosure notice and an FDCPA “validation” notice that informed the homeowner that the debt would be assumed to be valid unless disputed “in writing.” After successfully disputing the debt and having the complaint dismissed, the plaintiff sued under the FDCPA, claiming that the defendants’ validation notice was deceptive because the FDCPA does not require a dispute to be in writing. The district court granted summary judgment to the defendants, stating that, although the defendants’ form violated FDCPA, the form contained a bona fide error. Rejecting the plaintiff’s arguments that the bona fide error defense was available only for clerical errors and not mistakes in law, the Sixth Circuit affirmed. As an issue of first impression in the Sixth Circuit, the court surveyed the relevant precedent from other jurisdictions and found a split of authority. Ultimately, the court relied upon Johnson v. Riddle, 305 F.3d 1107, 1121 n.14 (10th Cir. 2002) in support of the proposition that errors of law qualify as bona fide errors. The decision in Johnson relied heavily upon the FDCPA’s omission to exclude errors of law as bona fide errors in contrast to the Truth in Lending Act’s explicit exclusion for errors in law as bona fide errors. The court further held that the defendants had sufficient procedures designed to avoid the bona fide error, rejecting the plaintiff’s argument that the defendant merely proved that such procedures were in place when the notifications were written and not at the time of the violation. For a copy of the opinion, please see http://www.ca6.uscourts.gov/opinions.pdf/08a0299p-06.pdf.
California Federal Court Rejects National Bank’s Preemption Claims. On September 11, a California federal district court rejected a motion for summary judgment in which Wells Fargo, N.A. (Wells Fargo) argued that National Bank Act preemption precluded the plaintiffs’ class action lawsuit. Gutierrez v. Wells Fargo Bank, N.A., No. 07-05923, 2008 WL 4279550 (N.D. Cal Sept. 11, 2008). In this case, the plaintiffs alleged that Wells Fargo engaged in two practices prohibited under California law. First, the defendant bank would re-sequence debit card debits made by consumers so that the largest debit was taken from the consumer’s account first, regardless of the order in which the debits were made. This practice resulted in consumers’ believing that they had a larger balance in their account, and Wells Fargo conceded that this practice caused consumers to incur more overdraft fees. Second, the defendant bank would occasionally post pending transactions to a consumer’s account but then, after three days, remove the transaction from the account. This practice, which was not disclosed to consumers, made the consumer’s available balance appear greater and also made consumers more likely to incur overdraft fees. Wells Fargo argued that these state-law allegations were preempted by federal law. The court disagreed, finding that federal law did not explicitly preempt state contract and tort law, and that any interpretations issued by the Office of the Comptroller of the Currency (OCC) emphasized that national banks may be subject to state laws prohibiting unfair or deceptive practices. The court further certified classes for both the re-sequencing claims and for the “including and deleting” claims. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Gutierrez_v_Wells.pdf.
California Federal Court Affirms Murray, Holds FCRA “Firm Offer” Does Not Require Value to Consumer. On September 4, a class action law suit against a division of Countrywide Home Loans was individually settled and the class de-certified when the court, following Murray v. New Cingular Wireless Services, 523 F.3d 719 (7th Cir. 2008), reasoned that an offer of credit may be a “firm offer” under the Fair Credit Reporting Act (FCRA) even if lacking “value” to the person solicited. Holloway v. Full Spectrum Lending, No. 06-5975, 2008 WL 4184648 (C.D. Cal. Sept. 4, 2008). In this case, the plaintiff received prescreened credit solicitations from the defendant unaccompanied by an offer of merchandise. The plaintiff initially argued, relying on Cole v. U.S. Capital, Inc., 389 F.3d 719 (7th Cir. 2004), that the solicitations had no “value” and were mere solicitations, in violation of FCRA. However, the plaintiff conceded that the Murray decision, reached during the present litigation, "seriously weakened the foundation of her case." The court agreed, following Murray’s reasoning that the Cole value test does not apply to “pure offers of credit” and that the defendant offered the plaintiff a “pure offer of credit.” Reasoning that the plaintiff’s case was unlikely to prevail on the merits, and that de-certification was a matter of the court’s discretion, the court de-certified the class and approved an individual settlement, including attorney’s fees, for the plaintiff. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Holloway_v_Full_Spectrum.pdf.
Pennsylvania Federal Court Holds Credit Reports Cannot Be Furnished to Third Parties with a “Legitimate Business Need” Under FCRA. On September 2, the U.S. District Court for the Eastern District of Pennsylvania held that the Fair Credit Reporting Act (FCRA) prevents certified credit users from providing credit reports to third parties in the absence of the certified credit user’s “legitimate business need.” Hernandez v. Lamboy Furniture, Inc., No. 07-00240, 2008 WL 4061344 (E.D. Pa. Sept. 2, 2008). In this case, the defendants Lamboy Furniture, Inc., Lamboy Housing Development, and Candelario Lamboy (Lamboy) had a relationship with a consumer reporting agency and obtained the plaintiff’s credit report pursuant to that relationship. While Lamboy had no business relationship with the plaintiff, Lamboy claimed it obtained the credit report on behalf of a third party who had a “legitimate business need” for the report. Subsequently, the plaintiff discovered that the third party had possession of her credit report. The plaintiff then sued Lamboy and the credit reporting agency that furnished the report, citing claims arising under FCRA. The plaintiff first claimed that Lamboy obtained the credit report without a “permissible purpose,” in violation of § 1681b of FCRA. Lamboy argued that it had a “permissible purpose” when it determined that the third party had a legitimate business need for the report. The court rejected this argument, reasoning that if the defendant’s argument were accepted “’there would be no need for more than a single business entity to contract with a consumer reporting agency to provide consumer credit reports.’” The court also rejected Lamboy’s argument that § 1681b(a)(3)(A) would permit an individual credit user to provide a credit report to a third party, reasoning that that section refers only to the ability of consumer reporting agencies to provide a credit report to an individual. The court held that the credit reporting agency may utilize a blanket certification to ensure that a credit user has a permissible purpose for accessing a consumer report, as long as it does not know or have reason to know that the credit user is requesting a report for an impermissible purpose. Since the plaintiff supplied no evidence that the credit reporting agency knew or had reason to know of the leasing business’ impermissible purpose, the court dismissed the claims against the credit reporting agency. The court also denied summary judgment for the plaintiff regarding “negligent” and “willful” violations of FCRA by Lamboy, holding that triable facts existed regarding these determinations. For a copy of the opinion, please see http://www.buckleykolar.com/documents/Hernandez_v_Lamboy.pdf.
Privacy/Data Security
Massachusetts Requires Security Program Policies Regarding Personal Information. On September 22, the Massachusetts Office of Consumer Affairs and Business Regulation issued final regulations establishing standards to “own, license, store, or maintain” personal information. The regulations define personal information as a first name or initial and surname in combination with (i) a social security number, (ii) a driver’s license number or other state-issued identification card number, or (iii) afinancial account, credit card, or debit card number, irrespective of whether a security code, access code, personal identification number or password accompanies this information. The definition of “personal information “excludes publically available information. The regulations require a “comprehensive, written information security program” applicable to records, and a separate “comprehensive, written information security program” applicable to computers. The regulations enumerate a non-exhaustive list of what the written programs should contain. Notably, a computer security program must address encryption, however, the regulations do not provide for any specific encryption standard. The regulations are effective January 1, 2009. For a copy of the final regulations, please see http://www.mass.gov/?pageID=ocaterminal&L=3&L0=Home&L1=Consumer&L2=Identity+Theft&sid=Eoca&b=terminalcontent&f=idtheft_201cmr17&csid=Eoca.
Credit Cards
FTC Reaches Settlement with Advance-Fee Credit Card Telemarketers. On September 22, the Federal Trade Commission (FTC) announced a settlement against a Florida-based company regarding an advance fee credit card telemarketing business. The FTC alleged violations of the FTC Act, the FTC’s Telemarketing Sales Rule, and the FTC’s Do Not Call Rule. Factually, the complaint alleged that the defendants’ cards could only be used to buy items from the defendants’ catalog or Web site but were advertised as being similar to a Visa or MasterCard. Additionally, the complaint alleged that the defendants required a downpayment of 10% of the cards’ credit line before issuing the cards. The complaint also alleged that the defendants falsely represented to consumers that they would report consumers’ payment histories to the major credit bureaus. Among other items, the final order requires the defendants to disclose material terms and conditions of any sales offer, including all fees and expenses associated with any credit card offer. Pursuant to the final order, the defendants are expected to pay approximately $1 million to the FTC, and must maintain records evidencing compliance with the order. For a copy of the final order, please see http://www.ftc.gov/os/caselist/0823040/080909financialadvisorsstipfinal.pdf.