InfoBytes, September 4, 2009
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Securities
- Insurance
- Litigation
- E-Financial Services
- Privacy/Data Security
Federal Issues
Treasury Issues Policy Statement for Reforming Bank Regulatory Capital Framework. On September 3, the U.S. Department of the Treasury (Treasury) announced the issuance of a policy statement on reforming the U.S. and international regulatory capital framework for banking firms. The policy statement sets forth “the core principles that should guide reform of the international regulatory capital and liquidity framework to better protect the safety and soundness of individual banking firms and the stability of the global financial system and economy.” Specifically, the policy statement provides that:
• Capital requirements should be designed to protect the stability of the financial system, not just the solvency of individual banking firms;
• Capital requirements for all banking firms should be increased, and capital requirements for financial firms that could pose a threat to overall financial stability (i.e., Tier 1 financial holding companies) should be higher than those for other banking firms;
• The regulatory capital framework should place greater emphasis on higher quality forms of capital (e.g., voting common equity);
• Risk-based capital requirements should be a function of the relative risk, including systemic risk, of a banking firm’s exposures, and risk-based capital rules should better reflect a banking firm’s current financial condition;
• The procyclicality of the regulatory capital and accounting regimes should be reduced and consideration should be given to introducing countercyclical elements into the regulatory capital regime;
• Banking firms should be subject to a simple, non-risk-based leverage constraint;
• Banking firms should be subject to a conservative, explicit liquidity standard independent from the regulatory capital regime; and
• Stricter capital and liquidity requirements for the banking system should not be allowed to result in the re-emergence of an under-regulated non-bank financial sector that poses a threat to financial stability.
According to the policy statement, a comprehensive agreement on new international capital and liquidity standards should be reached by December 31, 2010 and should be implemented in national jurisdictions by December 31, 2012. For a copy of the press release, please see http://www.treas.gov/press/releases/tg274.htm. For a copy of the policy statement, please see http://www.treas.gov/press/releases/docs/capital-statement_090309.pdf.
HUD Revises FAQs on Revised RESPA Rule. On September 4, 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.
NACHA Proposes to Permit ACH Debits, Payments from Mobile Devices. On September 1, the National Automated Clearing House Association (NACHA) issued a proposed rule that would expand the definition of Internet-Initiated Entries (WEB) to include Automated Clearing House (ACH) debits and payments made from mobile devices (i.e., payments made from smart phones, cell phones, or PDAs). Such wireless payments would be formally authorized and authenticated utilizing the WEB Standard Entry Class code. Among other things, the proposed rule would also (i) define “Wireless Network,” (ii) amend the definition of “Unsecured Electronic Network” to include wireless networks – among other things, effectively prohibiting the use of SMS/text messaging to initiate an ACH debit, and (iii) permit transmission of ACH information by keypad or voice to a live operator or “voice response unit” without requiring an encrypted connection. NACHA intends the proposal to be a temporary approach to wireless payments from mobile devices. Comments must be received by October 16, 2009 and NACHA is proposing a December 17, 2010 implementation date for the final rules. For a copy of the proposal, please see http://www.nacha.org/ACH_Rules/Rule_Making_Process/Rules_Work_Groups/RFC%20-%2009022009/docs/Proposed%20Modifications%20to%20the%20Rules%20-%20Mobile%20ACH%20Payments%20-%20September%201,%202009.pdf. For a copy of the proposal summary, please see http://www.nacha.org/ACH_Rules/Rule_Making_Process/Rules_Work_Groups/RFC%20-%2009022009/docs/NACHA%20Request%20for%20Comment%20-%20Mobile%20ACH%20Payments%20-%209-1-09.pdf.
FinCEN Issues FAQs Regarding its December 2008 Currency Transaction Reports Final Rule. On August 31, the Financial Crimes Enforcement Network (FinCEN) issued guidance clarifying its final rule (reported in InfoBytes, Dec. 5, 2008) on the exemption requirements for currency transaction reports (CTRs). The final rule relaxed the reporting requirements under the Bank Secrecy Act (BSA) by almost completely eliminating CTR requirements for most Phase I customers and by allowing banks to exempt Phase II customers from CTR requirements after two months (or less if the bank conducts a risk based analysis) as long as those customers have made at least five reportable transactions within a year. The August 31 guidance further elucidates the requirements of banks under the final rule by addressing frequently asked questions regarding the scope and application of certain provisions of the rule. Among other things, the guidance addresses how business structure, organization, or reorganization can affect eligibility for an exemption under the rule. Additionally, the guidance discusses the actions a bank should take after it determines that an exempt customer (i) is no longer eligible for an exemption or (ii) is engaging in suspicious activity. Finally, the guidance explicates some of the rule’s more technical requirements, such as how banks should complete Designation of Exempt Person forms and what standards must be met before Phase II customers qualify for a CTR exemption. For a copy of the guidance, please see http://www.fincen.gov/statutes_regs/guidance/pdf/fin-2009-g003.pdf.
State Issues
MMC Issues Report to State Regulators on Multi-State Mortgage Examination Efforts. Recently, the Multi-State Mortgage Committee (MMC) (established by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators) issued its first report to state regulators detailing the progress made by state regulatory agencies with respect to the restructuring of the examination process for state-licensed mortgage companies. The report notes that agencies from all 50 states, plus the District of Columbia and Puerto Rico, have adopted the Nationwide Cooperative Protocol for Mortgage Supervision and the Nationwide Cooperative Agreement for Mortgage Supervision, which, collectively, encourage state regulators to share information in order (i) to conserve examination resources, and (ii) to lower the cost and burden associated with multiple states conducting examinations concurrently. In the report, the MMC emphasizes greater incorporation of safety and soundness reviews, portfolio risk reviews, liquidity considerations, management controls, and fraud investigations into the examination process. The report promotes the use of an automated compliance system by which companies upload their portfolio data to be filtered through a program that confirms whether loans are in compliance with federal, state, and municipal laws and regulations. The process “pre-screens” the entire portfolio, flagging for examiners loans to be reviewed using more traditional examination methods. The report also comments on the status of other multi-state mortgage initiatives, such as (i) state implementation of the requirements of the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008, (ii) development of standardized examination procedures by which to review mortgage lenders’ consideration of a borrower’s ability to repay, and (iii) establishment of an accreditation process for state mortgage regulatory divisions and a certification process for mortgage examiners. Finally, the report recommends that state regulators inform their licensees that future requests for information prior to examinations will be more rigorous and detailed. For a copy of the report, please see http://www.csbs.org/Content/NavigationMenu/Home/2009MMCREPORTTOSTATEREGULATORSFinal.pdf.
Illinois Regulator Reports Results of Statewide Title Loan Compliance Sweep. On September 3, the Illinois Department of Financial and Professional Regulation released a report in conjunction with its recent statewide compliance sweep to enforce new title loan rules that recently became effective (the compliance sweep was reported in InfoBytes, July 31, 2009). The new rules are intended to reduce the likelihood that borrowers will default on their loans and have their cars repossessed, as well as establish a database to prevent borrowers from being forced to take out additional loans to repay outstanding balances. The compliance sweep selected approximately 1,000 title loan files across nine companies at random for review. Examiners found violations at eight of the nine companies, totaling 205. More than 85 percent of the violations were the result of not meeting the requirements of the recent rules. According to the regulator, the violations included (i) failing to provide customers with information about debt management assistance, (ii) not obtaining borrowers’ most recent income statements to ensure the affordability of the title loan, (iii) making a title loan with payments that exceed the limits established in the new rule, (iv) processing a new title loan too quickly after a previous loan had been paid off, and (v) repossessing a borrower’s car without providing the borrower with advance notice to empty the vehicle of personal items or to voluntarily surrender the vehicle. For a copy of the press release, please see http://www.idfpr.com/newsrls/09032009StateRegFindMixComplianceNewTitleLoanRules.asp.
Florida Attorney General Sues Mortgage Foreclosure Rescue Services Company. On August 21, Florida Attorney General Bill McCollum sued a mortgage foreclosure rescue services company, JPB Consulting, Inc. (of Kissimmee, FL), and its president for allegedly charging illegal up-front fees for foreclosure relief services that the company allegedly did not actually provide. The lawsuit seeks (i) the dissolution of the company, (ii) a permanent injunction against the defendants from charging illegal up-front fees and failing to provide advertised services, and (iii) civil penalties of $15,000 per violation, full victim restitution, and reimbursement for the cost of the investigation and litigation. For a copy of the press release, please see http://www.buckleysandler.com/FL_AG_082109.pdf.
Courts
ABA Files Complaint to Enjoin FTC from Enforcing “Red Flags” Rule Against Lawyers. On August 27, the American Bar Association (ABA) filed a complaint in federal court seeking to enjoin the Federal Trade Commission (FTC) from enforcing its “Red Flags Rule” against lawyers. American Bar Ass’n v. Federal Trade Commission, No. 09-cv-01636 (D.D.C. Aug. 27, 2009). The Rule implements the Fair and Accurate Credit Transactions Act (FACTA) by requiring “creditors” and “financial institutions” with covered accounts to implement programs to identify, detect, and respond to warning signs, or “red flags,” that could indicate identity theft. The FTC has taken the position that “creditors” subject to the Rule include lawyers and other professionals that bill their clients after services are provided. The ABA’s complaint argues in part that lawyers are not “creditors” because they do not “‘regularly extend’ credit merely by providing services to a client in advance of billing for those services.” According to the complaint, “[w]ithout a clear statement from Congress granting the FTC power to regulate lawyers engaged in the practice of law, the FTC has overstepped the constitutional limitations placed on its regulatory authority.” The enforcement deadline for the Rule is currently November 1, 2009 (reported in InfoBytes, July 31, 2009). For a copy of the complaint, please see http://www.buckleysandler.com/ABA_v_FTC.pdf.
Pennsylvania Federal Court Dismisses Mortgage-Backed Securities Lawsuit Against Investment Bank. On August 20, the U.S. District Court for the Eastern District of Pennsylvania dismissed a securities lawsuit brought by two real estate investment trusts (REITs) against an investment bank and its subsidiaries arising from the purchase of mortgage-backed securities (MBSs). Luminent Mortgage Capital Inc. v. Merrill Lynch & Co., No. 2:07-cv-5423, 2009 WL 2590087 (E.D. Pa. Aug. 20, 2009). In this case, the REITs alleged that the investment bank violated the Securities Exchange Act of 1934 (1934 Act) by failing to disclose material information relating to the MBSs that it sold to the REITs. According to the REITs, the securities that they purchased carried higher risks and offered lower returns than expected. The investment bank moved to dismiss the complaint, arguing that the REITs failed to allege necessary elements of a 1934 Act claim, including scienter, economic loss, and causation. The court agreed. According to the court, while the REITs sold the MBSs, they did not allege that they sold them at a loss, nor did they explain how their losses were any different “from the market-wide losses in mortgage-backed securities generally.” With respect to the causation element, the court held that the REITs had not adequately alleged that the investment bank’s actions – rather than the general collapse of the real estate and mortgage lending markets – caused the securities to underperform. The court also dismissed the REITs’ claims under the Securities Act of 1933 because the REITs failed adequately to allege that the securities were available to the public. Because the court dismissed the REITs’ federal law claims, it further dismissed the REITs’ state law fraud, negligence and securities claims for lack of subject matter jurisdiction. For a copy of the opinion, please see http://www.buckleysandler.com/Luminent_v_ML.pdf.
Eighth Circuit Affirms Dismissal of Lawsuit Against Subprime Lender. On September 1, the U.S. Court of Appeals for the Eighth Circuit affirmed the dismissal of a complaint alleging that a subprime mortgage lender and its principals materially misrepresented the financial condition of the company because the allegations failed to meet the heightened pleading requirements of the 1995 Private Securities Litigation Reform Act (PSLRA). Lester v. Novastar Financial, 08-2452, 2009 WL 2747281 (8th Cir. Sept. 1, 2009). In Lester, several class-action lawsuits were filed against the defendant lender, Novastar Financial Inc., following the lender’s year-end financial results for 2006, which were well-below analyst expectations and resulted in an approximately 30 percent decline in the value of its stock from the previous year’s highs. The complaints, which the district court consolidated into a single action, alleged that the lender’s underwriting and auditing standards had deteriorated, leading to an increasing number of loan defaults during the class period. The complaint reproduced documentation, such as corporate press releases, Securities and Exchange Commission (SEC) filings, and conference call transcripts, to allege loss causation under SEC Rule 10b-5 the Securities Exchange Act of 1934. The lender argued that the complaint did not allege any material misrepresentations of omissions and failed to plead facts establishing a strong inference of scienter under the PSLRA. The district court agreed with the lender, and the circuit court affirmed. The circuit court found that the documentation provided by the plaintiffs did not specifically identify which statements were false and misleading and, by extension, did not establish why these statements were false or misleading, as the PSLRA requires. The circuit court also affirmed the district court’s denial of leave to amend the plaintiff’s complaint because the plaintiffs did not offer a proposed amended complaint to the district court. The court, however, did not reach the question of whether allowing the amendment of the complaint would constitute futility. For a copy of the opinion, please see http://www.ca8.uscourts.gov/opndir/09/09/082452P.pdf.
Florida Court of Appeal Holds TILA Disclosures Required to Both Spouses on Mortgage Secured by Property Titled Solely in One Spouse’s Name. On August 26, the District Court of Appeal of the State of Florida, Fourth District, held that marriage creates an ownership interest in a property by both spouses under “homestead rights”, and as such, TILA disclosure obligations apply to both spouses even if a mortgage is secured by property held solely in one spouse’s name. Gancedo v. Del Carpio, No. 4D08-1735, 2009 WL 2601628 (Fla. 4th DCA Aug. 26, 2009). In this case, the plaintiff lenders loaned money to the defendant husband, Rafael Del Carpio, secured by a second mortgage on residential property held exclusively in his name. The mortgage was executed by both defendants, but the note was signed only by the husband. When the mortgage was executed, the lenders allegedly did not provide the borrowers with certain disclosures required by TILA. The wife subsequently exercised her right to cancel the transaction, asserting that she was entitled to TILA’s extended three-year time period for cancellation. Nearly two years later, the husband defaulted on the note and mortgage, and the lenders filed a foreclosure action. The trial court granted summary judgment for the defendants on the grounds that the wife had successfully rescinded the mortgage. The lenders appealed, arguing that they had no TILA disclosure obligations to her because she had no ownership interest in the property at the time the mortgage was executed. Withdrawing a prior opinion (reported in InfoBytes, June 12, 2009), the court of appeal affirmed the trial court. The court reasoned that, because the borrowers were married when the mortgage was executed, the wife had an ownership interest in the property (a “homestead right”) under the Florida Constitution, which made her a “consumer” entitled to TILA disclosures and the extended cancellation period for TILA non-disclosure. For a copy of the opinion, please see http://www.buckleysandler.com/Gancedo_v_Del_Carpio.pdf.
Sixth Circuit Holds FCRA Private Action Claim Does Not Require Allegation of Actual Injury. On August 28, the U.S. Court of Appeals for the Sixth Circuit ruled that a consumer claiming that a consumer reporting agency willfully violated the Fair Credit Reporting Act (FCRA) was not required to allege any actual damages as a result of the FCRA violation. Beaudry v. Telecheck Services, Inc., No. 08-6428, 2009 WL 2633205 (6th Cir. August 28, 2009). In this case, the plaintiff consumer, on behalf of a putative class, alleged that the defendants (corporations who provide check verifications services) inaccurately reported that she was a first-time check-writer because they failed to incorporate changes Tennessee made to the numbering of its driver’s licenses in 2002 in their systems. The check verification service providers moved to dismiss, arguing that FCRA did not permit a private right of action for a plaintiff claiming no actual damages. The district court granted the motion, and the circuit court reversed. The circuit court explained that, under FCRA, “consumer reporting agencies must ‘follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom’ a credit report relates.” One of the enforcement mechanisms contained in FCRA is a private right of action by individuals for “willful” or “negligent” violations of FCRA. FCRA further provides that any person who willfully fails to comply with FCRA’s requirements is liable to the consumer for any actual damages or statutory damages of $100 to $1,000. In ruling for the plaintiff, the court stated FCRA “does not require a consumer to wait for unreasonable credit reporting procedures to result in the denial of credit or other consequential harm before enforcing her statutory rights. It requires regulated companies to use ‘reasonable procedures’ when ‘prepar[ing] a consumer report’ ‘with respect to’ a given consumer, and creates a cause of action in favor or the consumer when they do not.” For a copy of the opinion, please see http://www.ca6.uscourts.gov/opinions.pdf/09a0315p-06.pdf.
Illinois Federal Court Holds Hyperlinked Terms and Conditions Bound Online Purchaser Where Sufficiently Conspicuous. On August 25, the U.S. District Court for the Central District of Illinois held that the terms and conditions included in an online shipping order agreement were sufficiently conspicuous to bind the purchaser. PDC Laboratories, Inc. v. Hach Co., No. 09-1110, 2009 WL 2605270 (C.D. Ill. Aug. 25, 2009). In this case, PDC Laboratories, Inc. (PDC) ordered a product from Hach Company (Hach) via Hach’s online ordering system. The online order process included a Terms & Conditions of Sale document (the Terms), which included, among other things, a limitation of damages clause and a clause disavowing all warranties beyond the one express written warranty provided by Hach. When PDC sued after determining the product was defective, Hach argued that PDC was bound by the Terms, and therefore recovery was limited as stated in the Terms. PDC argued, among other things, that the Terms were not binding because they were inconspicuous and therefore procedurally unconscionable. The court disagreed and held the Terms to be sufficiently conspicuous, noting that (i) the Terms were hyperlinked on at least three separate occasions in the order process, (ii) the Terms were separated by underlined, blue text, and (iii) Hach expressly included in its order steps a direction to review the terms and to add any comments before submitting the order. The court also rejected PDC’s reliance on various “clickwrap” cases (where a party must affirmatively click or check a button stating “I Agree” in order to be bound), stating that such cases “differ greatly” from hyperlink situations, as well as PDC’s arguments that Hach was required to include language specifying that all sales would be subject to the Terms, finding no support in statutory or common law for such a requirement. In light of these conclusions, the court found that the Terms were not procedurally unconscionable and granted summary judgment as to the inclusion of the limitation of damages clause. However, the court denied summary judgment on other grounds, finding a material issue as to whether the product included latent defects, undiscoverable at the time of purchase, which would cause the Terms’ clause limiting PDC’s damages to its purchase price to fail of its essential purpose. For a copy of the opinion, please see http://www.buckleysandler.com/PDC_v_Hach.pdf.
Texas Court Approves Data Security Breach Settlement. On August 12, a Texas court approved a settlement in a case alleging that a defendant improperly disposed of records containing personal information. Texas v. Cornerstone Fitness Texas LLC, No. C-491-09 (Tex. Dist. Ct., Hidalgo County, Aug. 12, 2009). In this case, the Texas Attorney General alleged that Cornerstone Fitness Texas LLC violated the Texas Identity Theft Enforcement and Protection Act by improperly disposing of customers’ personal information, including Social Security, driver’s license, and financial account numbers. Under the settlement, documents containing personally identifiable information disposed of by the defendant (or on behalf of the defendant by a third-party vendor) must make such information unreadable or undecipherable (e.g, by shredding or erasing the documents) prior to disposal. The settlement further orders the defendant to adopt, implement, and maintain an “Information Security and Safe Disposal Program” to protect from unlawful use, disposal, or disclosure any personal information collected or maintained by the defendant in the regular course of business. In connection with the Program, the defendants must, among other things, (i) designate a corporate-level compliance officer who is responsible for compliance with the program and the terms of the judgment, (ii) train employees to comply with the Program and Texas privacy protection laws, and (iii) post workplace signs stating that employees must dispose of documents in compliance with the Program and Texas privacy protection laws. The settlement further requires the defendant to pay $28,000 (including $8,000 in attorney fees). For a copy of the settlement, please see http://www.oag.state.tx.us/newspubs/releases/2009/081209cornerstone_afj.pdf.
Firm News
Margo Tank will be giving 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 will be giving a presentation at the MBA Reverse Mortgage Conference in San Diego on September 10 entitled “The HECM Challenge,” as well as moderating the “Secondary Market Update” panel on September 11. He will also be speaking on the Secondary Market panel at the MBA Regulatory Compliance Conference in Washington D.C. on September 16.
Jeff Naimon will be speaking at the Mortgage Bankers Association Regulatory Compliance Conference in Washington D.C. He will be addressing fair lending developments as part of the “Hot Topics” Panel on Wednesday September 16. He will also 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.
Andrew Sandler and Jeff Naimon will speak 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.
Jonice Gray Tucker gave a presentation entitled “Trends in Enforcement Actions Against Mortgage Servicers and Recommended Best Practices” at the California Mortgage Bankers Association’s Loan Servicing Conference on August 10 in Las Vegas.
John Kromer spoke on a panel addressing “The Changing Standards in the Regulation of the Mortgage Industry” at the American Association of Residential Mortgage Regulator’s annual conference in Savannah, GA on August 12.
Mortgages
HUD Revises FAQs on Revised RESPA Rule. On September 4, 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.
MMC Issues Report to State Regulators on Multi-State Mortgage Examination Efforts. Recently, the Multi-State Mortgage Committee (MMC) (established by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators) issued its first report to state regulators detailing the progress made by state regulatory agencies with respect to the restructuring of the examination process for state-licensed mortgage companies. The report notes that agencies from all 50 states, plus the District of Columbia and Puerto Rico, have adopted the Nationwide Cooperative Protocol for Mortgage Supervision and the Nationwide Cooperative Agreement for Mortgage Supervision, which, collectively, encourage state regulators to share information in order (i) to conserve examination resources, and (ii) to lower the cost and burden associated with multiple states conducting examinations concurrently. In the report, the MMC emphasizes greater incorporation of safety and soundness reviews, portfolio risk reviews, liquidity considerations, management controls, and fraud investigations into the examination process. The report promotes the use of an automated compliance system by which companies upload their portfolio data to be filtered through a program that confirms whether loans are in compliance with federal, state, and municipal laws and regulations. The process “pre-screens” the entire portfolio, flagging for examiners loans to be reviewed using more traditional examination methods. The report also comments on the status of other multi-state mortgage initiatives, such as (i) state implementation of the requirements of the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008, (ii) development of standardized examination procedures by which to review mortgage lenders’ consideration of a borrower’s ability to repay, and (iii) establishment of an accreditation process for state mortgage regulatory divisions and a certification process for mortgage examiners. Finally, the report recommends that state regulators inform their licensees that future requests for information prior to examinations will be more rigorous and detailed. For a copy of the report, please see http://www.csbs.org/Content/NavigationMenu/Home/2009MMCREPORTTOSTATEREGULATORSFinal.pdf.
Florida Attorney General Sues Mortgage Foreclosure Rescue Services Company. On August 21, Florida Attorney General Bill McCollum sued a mortgage foreclosure rescue services company, JPB Consulting, Inc. (of Kissimmee, FL), and its president for allegedly charging illegal up-front fees for foreclosure relief services that the company allegedly did not actually provide. The lawsuit seeks (i) the dissolution of the company, (ii) a permanent injunction against the defendants from charging illegal up-front fees and failing to provide advertised services, and (iii) civil penalties of $15,000 per violation, full victim restitution, and reimbursement for the cost of the investigation and litigation. For a copy of the press release, please see http://www.buckleysandler.com/FL_AG_082109.pdf.
Pennsylvania Federal Court Dismisses Mortgage-Backed Securities Lawsuit Against Investment Bank. On August 20, the U.S. District Court for the Eastern District of Pennsylvania dismissed a securities lawsuit brought by two real estate investment trusts (REITs) against an investment bank and its subsidiaries arising from the purchase of mortgage-backed securities (MBSs). Luminent Mortgage Capital Inc. v. Merrill Lynch & Co., No. 2:07-cv-5423, 2009 WL 2590087 (E.D. Pa. Aug. 20, 2009). In this case, the REITs alleged that the investment bank violated the Securities Exchange Act of 1934 (1934 Act) by failing to disclose material information relating to the MBSs that it sold to the REITs. According to the REITs, the securities that they purchased carried higher risks and offered lower returns than expected. The investment bank moved to dismiss the complaint, arguing that the REITs failed to allege necessary elements of a 1934 Act claim, including scienter, economic loss, and causation. The court agreed. According to the court, while the REITs sold the MBSs, they did not allege that they sold them at a loss, nor did they explain how their losses were any different “from the market-wide losses in mortgage-backed securities generally.” With respect to the causation element, the court held that the REITs had not adequately alleged that the investment bank’s actions – rather than the general collapse of the real estate and mortgage lending markets – caused the securities to underperform. The court also dismissed the REITs’ claims under the Securities Act of 1933 because the REITs failed adequately to allege that the securities were available to the public. Because the court dismissed the REITs’ federal law claims, it further dismissed the REITs’ state law fraud, negligence and securities claims for lack of subject matter jurisdiction. For a copy of the opinion, please see http://www.buckleysandler.com/Luminent_v_ML.pdf.
Eighth Circuit Affirms Dismissal of Lawsuit Against Subprime Lender. On September 1, the U.S. Court of Appeals for the Eighth Circuit affirmed the dismissal of a complaint alleging that a subprime mortgage lender and its principals materially misrepresented the financial condition of the company because the allegations failed to meet the heightened pleading requirements of the 1995 Private Securities Litigation Reform Act (PSLRA). Lester v. Novastar Financial, 08-2452, 2009 WL 2747281 (8th Cir. Sept. 1, 2009). In Lester, several class-action lawsuits were filed against the defendant lender, Novastar Financial Inc., following the lender’s year-end financial results for 2006, which were well-below analyst expectations and resulted in an approximately 30 percent decline in the value of its stock from the previous year’s highs. The complaints, which the district court consolidated into a single action, alleged that the lender’s underwriting and auditing standards had deteriorated, leading to an increasing number of loan defaults during the class period. The complaint reproduced documentation, such as corporate press releases, Securities and Exchange Commission (SEC) filings, and conference call transcripts, to allege loss causation under SEC Rule 10b-5 the Securities Exchange Act of 1934. The lender argued that the complaint did not allege any material misrepresentations of omissions and failed to plead facts establishing a strong inference of scienter under the PSLRA. The district court agreed with the lender, and the circuit court affirmed. The circuit court found that the documentation provided by the plaintiffs did not specifically identify which statements were false and misleading and, by extension, did not establish why these statements were false or misleading, as the PSLRA requires. The circuit court also affirmed the district court’s denial of leave to amend the plaintiff’s complaint because the plaintiffs did not offer a proposed amended complaint to the district court. The court, however, did not reach the question of whether allowing the amendment of the complaint would constitute futility. For a copy of the opinion, please see http://www.ca8.uscourts.gov/opndir/09/09/082452P.pdf.
Florida Court of Appeal Holds TILA Disclosures Required to Both Spouses on Mortgage Secured by Property Titled Solely in One Spouse’s Name. On August 26, the District Court of Appeal of the State of Florida, Fourth District, held that marriage creates an ownership interest in a property by both spouses under “homestead rights”, and as such, TILA disclosure obligations apply to both spouses even if a mortgage is secured by property held solely in one spouse’s name. Gancedo v. Del Carpio, No. 4D08-1735, 2009 WL 2601628 (Fla. 4th DCA Aug. 26, 2009). In this case, the plaintiff lenders loaned money to the defendant husband, Rafael Del Carpio, secured by a second mortgage on residential property held exclusively in his name. The mortgage was executed by both defendants, but the note was signed only by the husband. When the mortgage was executed, the lenders allegedly did not provide the borrowers with certain disclosures required by TILA. The wife subsequently exercised her right to cancel the transaction, asserting that she was entitled to TILA’s extended three-year time period for cancellation. Nearly two years later, the husband defaulted on the note and mortgage, and the lenders filed a foreclosure action. The trial court granted summary judgment for the defendants on the grounds that the wife had successfully rescinded the mortgage. The lenders appealed, arguing that they had no TILA disclosure obligations to her because she had no ownership interest in the property at the time the mortgage was executed. Withdrawing a prior opinion (reported inInfoBytes, June 12, 2009), the court of appeal affirmed the trial court. The court reasoned that, because the borrowers were married when the mortgage was executed, the wife had an ownership interest in the property (a “homestead right”) under the Florida Constitution, which made her a “consumer” entitled to TILA disclosures and the extended cancellation period for TILA non-disclosure. For a copy of the opinion, please see http://www.buckleysandler.com/Gancedo_v_Del_Carpio.pdf.
Banking
Treasury Issues Policy Statement for Reforming Bank Regulatory Capital Framework. On September 3, the U.S. Department of the Treasury (Treasury) announced the issuance of a policy statement on reforming the U.S. and international regulatory capital framework for banking firms. The policy statement sets forth “the core principles that should guide reform of the international regulatory capital and liquidity framework to better protect the safety and soundness of individual banking firms and the stability of the global financial system and economy.” Specifically, the policy statement provides that:
• Capital requirements should be designed to protect the stability of the financial system, not just the solvency of individual banking firms;
• Capital requirements for all banking firms should be increased, and capital requirements for financial firms that could pose a threat to overall financial stability (i.e., Tier 1 financial holding companies) should be higher than those for other banking firms;
• The regulatory capital framework should place greater emphasis on higher quality forms of capital (e.g., voting common equity);
• Risk-based capital requirements should be a function of the relative risk, including systemic risk, of a banking firm’s exposures, and risk-based capital rules should better reflect a banking firm’s current financial condition;
• The procyclicality of the regulatory capital and accounting regimes should be reduced and consideration should be given to introducing countercyclical elements into the regulatory capital regime;
• Banking firms should be subject to a simple, non-risk-based leverage constraint;
• Banking firms should be subject to a conservative, explicit liquidity standard independent from the regulatory capital regime; and
• Stricter capital and liquidity requirements for the banking system should not be allowed to result in the re-emergence of an under-regulated non-bank financial sector that poses a threat to financial stability.
According to the policy statement, a comprehensive agreement on new international capital and liquidity standards should be reached by December 31, 2010 and should be implemented in national jurisdictions by December 31, 2012. For a copy of the press release, please see http://www.treas.gov/press/releases/tg274.htm. For a copy of the policy statement, please see http://www.treas.gov/press/releases/docs/capital-statement_090309.pdf.
NACHA Proposes to Permit ACH Debits, Payments from Mobile Devices. On September 1, the National Automated Clearing House Association (NACHA) issued a proposed rule that would expand the definition of Internet-Initiated Entries (WEB) to include Automated Clearing House (ACH) debits and payments made from mobile devices (i.e., payments made from smart phones, cell phones, or PDAs). Such wireless payments would be formally authorized and authenticated utilizing the WEB Standard Entry Class code. Among other things, the proposed rule would also (i) define “Wireless Network,” (ii) amend the definition of “Unsecured Electronic Network” to include wireless networks – among other things, effectively prohibiting the use of SMS/text messaging to initiate an ACH debit, and (iii) permit transmission of ACH information by keypad or voice to a live operator or “voice response unit” without requiring an encrypted connection. NACHA intends the proposal to be a temporary approach to wireless payments from mobile devices. Comments must be received by October 16, 2009 and NACHA is proposing a December 17, 2010 implementation date for the final rules. For a copy of the proposal, please see http://www.nacha.org/ACH_Rules/Rule_Making_Process/Rules_Work_Groups/RFC%20-%2009022009/docs/Proposed%20Modifications%20to%20the%20Rules%20-%20Mobile%20ACH%20Payments%20-%20September%201,%202009.pdf. For a copy of the proposal summary, please see http://www.nacha.org/ACH_Rules/Rule_Making_Process/Rules_Work_Groups/RFC%20-%2009022009/docs/NACHA%20Request%20for%20Comment%20-%20Mobile%20ACH%20Payments%20-%209-1-09.pdf.
FinCEN Issues FAQs Regarding its December 2008 Currency Transaction Reports Final Rule. On August 31, the Financial Crimes Enforcement Network (FinCEN) issued guidance clarifying its final rule (reported in InfoBytes, Dec. 5, 2008) on the exemption requirements for currency transaction reports (CTRs). The final rule relaxed the reporting requirements under the Bank Secrecy Act (BSA) by almost completely eliminating CTR requirements for most Phase I customers and by allowing banks to exempt Phase II customers from CTR requirements after two months (or less if the bank conducts a risk based analysis) as long as those customers have made at least five reportable transactions within a year. The August 31 guidance further elucidates the requirements of banks under the final rule by addressing frequently asked questions regarding the scope and application of certain provisions of the rule. Among other things, the guidance addresses how business structure, organization, or reorganization can affect eligibility for an exemption under the rule. Additionally, the guidance discusses the actions a bank should take after it determines that an exempt customer (i) is no longer eligible for an exemption or (ii) is engaging in suspicious activity. Finally, the guidance explicates some of the rule’s more technical requirements, such as how banks should complete Designation of Exempt Person forms and what standards must be met before Phase II customers qualify for a CTR exemption. For a copy of the guidance, please see http://www.fincen.gov/statutes_regs/guidance/pdf/fin-2009-g003.pdf.
Consumer Finance
Illinois Regulator Reports Results of Statewide Title Loan Compliance Sweep. On September 3, the Illinois Department of Financial and Professional Regulation released a report in conjunction with its recent statewide compliance sweep to enforce new title loan rules that recently became effective (the compliance sweep was reported in InfoBytes, July 31, 2009). The new rules are intended to reduce the likelihood that borrowers will default on their loans and have their cars repossessed, as well as establish a database to prevent borrowers from being forced to take out additional loans to repay outstanding balances. The compliance sweep selected approximately 1,000 title loan files across nine companies at random for review. Examiners found violations at eight of the nine companies, totaling 205. More than 85 percent of the violations were the result of not meeting the requirements of the recent rules. According to the regulator, the violations included (i) failing to provide customers with information about debt management assistance, (ii) not obtaining borrowers’ most recent income statements to ensure the affordability of the title loan, (iii) making a title loan with payments that exceed the limits established in the new rule, (iv) processing a new title loan too quickly after a previous loan had been paid off, and (v) repossessing a borrower’s car without providing the borrower with advance notice to empty the vehicle of personal items or to voluntarily surrender the vehicle. For a copy of the press release, please see http://www.idfpr.com/newsrls/09032009StateRegFindMixComplianceNewTitleLoanRules.asp.
Sixth Circuit Holds FCRA Private Action Claim Does Not Require Allegation of Actual Injury. On August 28, the U.S. Court of Appeals for the Sixth Circuit ruled that a consumer claiming that a consumer reporting agency willfully violated the Fair Credit Reporting Act (FCRA) was not required to allege any actual damages as a result of the FCRA violation. Beaudry v. Telecheck Services, Inc., No. 08-6428, 2009 WL 2633205 (6th Cir. August 28, 2009). In this case, the plaintiff consumer, on behalf of a putative class, alleged that the defendants (corporations who provide check verifications services) inaccurately reported that she was a first-time check-writer because they failed to incorporate changes Tennessee made to the numbering of its driver’s licenses in 2002 in their systems. The check verification service providers moved to dismiss, arguing that FCRA did not permit a private right of action for a plaintiff claiming no actual damages. The district court granted the motion, and the circuit court reversed. The circuit court explained that, under FCRA, “consumer reporting agencies must ‘follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom’ a credit report relates.” One of the enforcement mechanisms contained in FCRA is a private right of action by individuals for “willful” or “negligent” violations of FCRA. FCRA further provides that any person who willfully fails to comply with FCRA’s requirements is liable to the consumer for any actual damages or statutory damages of $100 to $1,000. In ruling for the plaintiff, the court stated FCRA “does not require a consumer to wait for unreasonable credit reporting procedures to result in the denial of credit or other consequential harm before enforcing her statutory rights. It requires regulated companies to use ‘reasonable procedures’ when ‘prepar[ing] a consumer report’ ‘with respect to’ a given consumer, and creates a cause of action in favor or the consumer when they do not.” For a copy of the opinion, please see http://www.ca6.uscourts.gov/opinions.pdf/09a0315p-06.pdf.
Securities
Pennsylvania Federal Court Dismisses Mortgage-Backed Securities Lawsuit Against Investment Bank. On August 20, the U.S. District Court for the Eastern District of Pennsylvania dismissed a securities lawsuit brought by two real estate investment trusts (REITs) against an investment bank and its subsidiaries arising from the purchase of mortgage-backed securities (MBSs). Luminent Mortgage Capital Inc. v. Merrill Lynch & Co., No. 2:07-cv-5423, 2009 WL 2590087 (E.D. Pa. Aug. 20, 2009). In this case, the REITs alleged that the investment bank violated the Securities Exchange Act of 1934 (1934 Act) by failing to disclose material information relating to the MBSs that it sold to the REITs. According to the REITs, the securities that they purchased carried higher risks and offered lower returns than expected. The investment bank moved to dismiss the complaint, arguing that the REITs failed to allege necessary elements of a 1934 Act claim, including scienter, economic loss, and causation. The court agreed. According to the court, while the REITs sold the MBSs, they did not allege that they sold them at a loss, nor did they explain how their losses were any different “from the market-wide losses in mortgage-backed securities generally.” With respect to the causation element, the court held that the REITs had not adequately alleged that the investment bank’s actions – rather than the general collapse of the real estate and mortgage lending markets – caused the securities to underperform. The court also dismissed the REITs’ claims under the Securities Act of 1933 because the REITs failed adequately to allege that the securities were available to the public. Because the court dismissed the REITs’ federal law claims, it further dismissed the REITs’ state law fraud, negligence and securities claims for lack of subject matter jurisdiction. For a copy of the opinion, please see http://www.buckleysandler.com/Luminent_v_ML.pdf.
Eighth Circuit Affirms Dismissal of Lawsuit Against Subprime Lender. On September 1, the U.S. Court of Appeals for the Eighth Circuit affirmed the dismissal of a complaint alleging that a subprime mortgage lender and its principals materially misrepresented the financial condition of the company because the allegations failed to meet the heightened pleading requirements of the 1995 Private Securities Litigation Reform Act (PSLRA). Lester v. Novastar Financial, 08-2452, 2009 WL 2747281 (8th Cir. Sept. 1, 2009). In Lester, several class-action lawsuits were filed against the defendant lender, Novastar Financial Inc., following the lender’s year-end financial results for 2006, which were well-below analyst expectations and resulted in an approximately 30 percent decline in the value of its stock from the previous year’s highs. The complaints, which the district court consolidated into a single action, alleged that the lender’s underwriting and auditing standards had deteriorated, leading to an increasing number of loan defaults during the class period. The complaint reproduced documentation, such as corporate press releases, Securities and Exchange Commission (SEC) filings, and conference call transcripts, to allege loss causation under SEC Rule 10b-5 the Securities Exchange Act of 1934. The lender argued that the complaint did not allege any material misrepresentations of omissions and failed to plead facts establishing a strong inference of scienter under the PSLRA. The district court agreed with the lender, and the circuit court affirmed. The circuit court found that the documentation provided by the plaintiffs did not specifically identify which statements were false and misleading and, by extension, did not establish why these statements were false or misleading, as the PSLRA requires. The circuit court also affirmed the district court’s denial of leave to amend the plaintiff’s complaint because the plaintiffs did not offer a proposed amended complaint to the district court. The court, however, did not reach the question of whether allowing the amendment of the complaint would constitute futility. For a copy of the opinion, please see http://www.ca8.uscourts.gov/opndir/09/09/082452P.pdf.
Insurance
HUD Revises FAQs on Revised RESPA Rule. On September 4, 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
ABA Files Complaint to Enjoin FTC from Enforcing “Red Flags” Rule Against Lawyers. On August 27, the American Bar Association (ABA) filed a complaint in federal court seeking to enjoin the Federal Trade Commission (FTC) from enforcing its “Red Flags Rule” against lawyers. American Bar Ass’n v. Federal Trade Commission, No. 09-cv-01636 (D.D.C. Aug. 27, 2009). The Rule implements the Fair and Accurate Credit Transactions Act (FACTA) by requiring “creditors” and “financial institutions” with covered accounts to implement programs to identify, detect, and respond to warning signs, or “red flags,” that could indicate identity theft. The FTC has taken the position that “creditors” subject to the Rule include lawyers and other professionals that bill their clients after services are provided. The ABA’s complaint argues in part that lawyers are not “creditors” because they do not “‘regularly extend’ credit merely by providing services to a client in advance of billing for those services.” According to the complaint, “[w]ithout a clear statement from Congress granting the FTC power to regulate lawyers engaged in the practice of law, the FTC has overstepped the constitutional limitations placed on its regulatory authority.” The enforcement deadline for the Rule is currently November 1, 2009 (reported in InfoBytes, July 31, 2009). For a copy of the complaint, please see http://www.buckleysandler.com/ABA_v_FTC.pdf.
Pennsylvania Federal Court Dismisses Mortgage-Backed Securities Lawsuit Against Investment Bank. On August 20, the U.S. District Court for the Eastern District of Pennsylvania dismissed a securities lawsuit brought by two real estate investment trusts (REITs) against an investment bank and its subsidiaries arising from the purchase of mortgage-backed securities (MBSs). Luminent Mortgage Capital Inc. v. Merrill Lynch & Co., No. 2:07-cv-5423, 2009 WL 2590087 (E.D. Pa. Aug. 20, 2009). In this case, the REITs alleged that the investment bank violated the Securities Exchange Act of 1934 (1934 Act) by failing to disclose material information relating to the MBSs that it sold to the REITs. According to the REITs, the securities that they purchased carried higher risks and offered lower returns than expected. The investment bank moved to dismiss the complaint, arguing that the REITs failed to allege necessary elements of a 1934 Act claim, including scienter, economic loss, and causation. The court agreed. According to the court, while the REITs sold the MBSs, they did not allege that they sold them at a loss, nor did they explain how their losses were any different “from the market-wide losses in mortgage-backed securities generally.” With respect to the causation element, the court held that the REITs had not adequately alleged that the investment bank’s actions – rather than the general collapse of the real estate and mortgage lending markets – caused the securities to underperform. The court also dismissed the REITs’ claims under the Securities Act of 1933 because the REITs failed adequately to allege that the securities were available to the public. Because the court dismissed the REITs’ federal law claims, it further dismissed the REITs’ state law fraud, negligence and securities claims for lack of subject matter jurisdiction. For a copy of the opinion, please see http://www.buckleysandler.com/Luminent_v_ML.pdf.
Eighth Circuit Affirms Dismissal of Lawsuit Against Subprime Lender. On September 1, the U.S. Court of Appeals for the Eighth Circuit affirmed the dismissal of a complaint alleging that a subprime mortgage lender and its principals materially misrepresented the financial condition of the company because the allegations failed to meet the heightened pleading requirements of the 1995 Private Securities Litigation Reform Act (PSLRA). Lester v. Novastar Financial, 08-2452, 2009 WL 2747281 (8th Cir. Sept. 1, 2009). In Lester, several class-action lawsuits were filed against the defendant lender, Novastar Financial Inc., following the lender’s year-end financial results for 2006, which were well-below analyst expectations and resulted in an approximately 30 percent decline in the value of its stock from the previous year’s highs. The complaints, which the district court consolidated into a single action, alleged that the lender’s underwriting and auditing standards had deteriorated, leading to an increasing number of loan defaults during the class period. The complaint reproduced documentation, such as corporate press releases, Securities and Exchange Commission (SEC) filings, and conference call transcripts, to allege loss causation under SEC Rule 10b-5 the Securities Exchange Act of 1934. The lender argued that the complaint did not allege any material misrepresentations of omissions and failed to plead facts establishing a strong inference of scienter under the PSLRA. The district court agreed with the lender, and the circuit court affirmed. The circuit court found that the documentation provided by the plaintiffs did not specifically identify which statements were false and misleading and, by extension, did not establish why these statements were false or misleading, as the PSLRA requires. The circuit court also affirmed the district court’s denial of leave to amend the plaintiff’s complaint because the plaintiffs did not offer a proposed amended complaint to the district court. The court, however, did not reach the question of whether allowing the amendment of the complaint would constitute futility. For a copy of the opinion, please see http://www.ca8.uscourts.gov/opndir/09/09/082452P.pdf.
Florida Court of Appeal Holds TILA Disclosures Required to Both Spouses on Mortgage Secured by Property Titled Solely in One Spouse’s Name. On August 26, the District Court of Appeal of the State of Florida, Fourth District, held that marriage creates an ownership interest in a property by both spouses under “homestead rights”, and as such, TILA disclosure obligations apply to both spouses even if a mortgage is secured by property held solely in one spouse’s name. Gancedo v. Del Carpio, No. 4D08-1735, 2009 WL 2601628 (Fla. 4th DCA Aug. 26, 2009). In this case, the plaintiff lenders loaned money to the defendant husband, Rafael Del Carpio, secured by a second mortgage on residential property held exclusively in his name. The mortgage was executed by both defendants, but the note was signed only by the husband. When the mortgage was executed, the lenders allegedly did not provide the borrowers with certain disclosures required by TILA. The wife subsequently exercised her right to cancel the transaction, asserting that she was entitled to TILA’s extended three-year time period for cancellation. Nearly two years later, the husband defaulted on the note and mortgage, and the lenders filed a foreclosure action. The trial court granted summary judgment for the defendants on the grounds that the wife had successfully rescinded the mortgage. The lenders appealed, arguing that they had no TILA disclosure obligations to her because she had no ownership interest in the property at the time the mortgage was executed. Withdrawing a prior opinion (reported in InfoBytes, June 12, 2009), the court of appeal affirmed the trial court. The court reasoned that, because the borrowers were married when the mortgage was executed, the wife had an ownership interest in the property (a “homestead right”) under the Florida Constitution, which made her a “consumer” entitled to TILA disclosures and the extended cancellation period for TILA non-disclosure. For a copy of the opinion, please see http://www.buckleysandler.com/Gancedo_v_Del_Carpio.pdf.
Sixth Circuit Holds FCRA Private Action Claim Does Not Require Allegation of Actual Injury. On August 28, the U.S. Court of Appeals for the Sixth Circuit ruled that a consumer claiming that a consumer reporting agency willfully violated the Fair Credit Reporting Act (FCRA) was not required to allege any actual damages as a result of the FCRA violation. Beaudry v. Telecheck Services, Inc., No. 08-6428, 2009 WL 2633205 (6th Cir. August 28, 2009). In this case, the plaintiff consumer, on behalf of a putative class, alleged that the defendants (corporations who provide check verifications services) inaccurately reported that she was a first-time check-writer because they failed to incorporate changes Tennessee made to the numbering of its driver’s licenses in 2002 in their systems. The check verification service providers moved to dismiss, arguing that FCRA did not permit a private right of action for a plaintiff claiming no actual damages. The district court granted the motion, and the circuit court reversed. The circuit court explained that, under FCRA, “consumer reporting agencies must ‘follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom’ a credit report relates.” One of the enforcement mechanisms contained in FCRA is a private right of action by individuals for “willful” or “negligent” violations of FCRA. FCRA further provides that any person who willfully fails to comply with FCRA’s requirements is liable to the consumer for any actual damages or statutory damages of $100 to $1,000. In ruling for the plaintiff, the court stated FCRA “does not require a consumer to wait for unreasonable credit reporting procedures to result in the denial of credit or other consequential harm before enforcing her statutory rights. It requires regulated companies to use ‘reasonable procedures’ when ‘prepar[ing] a consumer report’ ‘with respect to’ a given consumer, and creates a cause of action in favor or the consumer when they do not.” For a copy of the opinion, please see http://www.ca6.uscourts.gov/opinions.pdf/09a0315p-06.pdf.
Illinois Federal Court Holds Hyperlinked Terms and Conditions Bound Online Purchaser Where Sufficiently Conspicuous. On August 25, the U.S. District Court for the Central District of Illinois held that the terms and conditions included in an online shipping order agreement were sufficiently conspicuous to bind the purchaser. PDC Laboratories, Inc. v. Hach Co., No. 09-1110, 2009 WL 2605270 (C.D. Ill. Aug. 25, 2009). In this case, PDC Laboratories, Inc. (PDC) ordered a product from Hach Company (Hach) via Hach’s online ordering system. The online order process included a Terms & Conditions of Sale document (the Terms), which included, among other things, a limitation of damages clause and a clause disavowing all warranties beyond the one express written warranty provided by Hach. When PDC sued after determining the product was defective, Hach argued that PDC was bound by the Terms, and therefore recovery was limited as stated in the Terms. PDC argued, among other things, that the Terms were not binding because they were inconspicuous and therefore procedurally unconscionable. The court disagreed and held the Terms to be sufficiently conspicuous, noting that (i) the Terms were hyperlinked on at least three separate occasions in the order process, (ii) the Terms were separated by underlined, blue text, and (iii) Hach expressly included in its order steps a direction to review the terms and to add any comments before submitting the order. The court also rejected PDC’s reliance on various “clickwrap” cases (where a party must affirmatively click or check a button stating “I Agree” in order to be bound), stating that such cases “differ greatly” from hyperlink situations, as well as PDC’s arguments that Hach was required to include language specifying that all sales would be subject to the Terms, finding no support in statutory or common law for such a requirement. In light of these conclusions, the court found that the Terms were not procedurally unconscionable and granted summary judgment as to the inclusion of the limitation of damages clause. However, the court denied summary judgment on other grounds, finding a material issue as to whether the product included latent defects, undiscoverable at the time of purchase, which would cause the Terms’ clause limiting PDC’s damages to its purchase price to fail of its essential purpose. For a copy of the opinion, please see http://www.buckleysandler.com/PDC_v_Hach.pdf.
Texas Court Approves Data Security Breach Settlement. On August 12, a Texas court approved a settlement in a case alleging that a defendant improperly disposed of records containing personal information. Texas v. Cornerstone Fitness Texas LLC, No. C-491-09 (Tex. Dist. Ct., Hidalgo County, Aug. 12, 2009). In this case, the Texas Attorney General alleged that Cornerstone Fitness Texas LLC violated the Texas Identity Theft Enforcement and Protection Act by improperly disposing of customers’ personal information, including Social Security, driver’s license, and financial account numbers. Under the settlement, documents containing personally identifiable information disposed of by the defendant (or on behalf of the defendant by a third-party vendor) must make such information unreadable or undecipherable (e.g, by shredding or erasing the documents) prior to disposal. The settlement further orders the defendant to adopt, implement, and maintain an “Information Security and Safe Disposal Program” to protect from unlawful use, disposal, or disclosure any personal information collected or maintained by the defendant in the regular course of business. In connection with the Program, the defendants must, among other things, (i) designate a corporate-level compliance officer who is responsible for compliance with the program and the terms of the judgment, (ii) train employees to comply with the Program and Texas privacy protection laws, and (iii) post workplace signs stating that employees must dispose of documents in compliance with the Program and Texas privacy protection laws. The settlement further requires the defendant to pay $28,000 (including $8,000 in attorney fees). For a copy of the settlement, please see http://www.oag.state.tx.us/newspubs/releases/2009/081209cornerstone_afj.pdf.
E-Financial Services
NACHA Proposes to Permit ACH Debits, Payments from Mobile Devices. On September 1, the National Automated Clearing House Association (NACHA) issued a proposed rule that would expand the definition of Internet-Initiated Entries (WEB) to include Automated Clearing House (ACH) debits and payments made from mobile devices (i.e., payments made from smart phones, cell phones, or PDAs). Such wireless payments would be formally authorized and authenticated utilizing the WEB Standard Entry Class code. Among other things, the proposed rule would also (i) define “Wireless Network,” (ii) amend the definition of “Unsecured Electronic Network” to include wireless networks – among other things, effectively prohibiting the use of SMS/text messaging to initiate an ACH debit, and (iii) permit transmission of ACH information by keypad or voice to a live operator or “voice response unit” without requiring an encrypted connection. NACHA intends the proposal to be a temporary approach to wireless payments from mobile devices. Comments must be received by October 16, 2009 and NACHA is proposing a December 17, 2010 implementation date for the final rules. For a copy of the proposal, please see http://www.nacha.org/ACH_Rules/Rule_Making_Process/Rules_Work_Groups/RFC%20-%2009022009/docs/Proposed%20Modifications%20to%20the%20Rules%20-%20Mobile%20ACH%20Payments%20-%20September%201,%202009.pdf. For a copy of the proposal summary, please see http://www.nacha.org/ACH_Rules/Rule_Making_Process/Rules_Work_Groups/RFC%20-%2009022009/docs/NACHA%20Request%20for%20Comment%20-%20Mobile%20ACH%20Payments%20-%209-1-09.pdf.
Illinois Federal Court Holds Hyperlinked Terms and Conditions Bound Online Purchaser Where Sufficiently Conspicuous. On August 25, the U.S. District Court for the Central District of Illinois held that the terms and conditions included in an online shipping order agreement were sufficiently conspicuous to bind the purchaser. PDC Laboratories, Inc. v. Hach Co., No. 09-1110, 2009 WL 2605270 (C.D. Ill. Aug. 25, 2009). In this case, PDC Laboratories, Inc. (PDC) ordered a product from Hach Company (Hach) via Hach’s online ordering system. The online order process included a Terms & Conditions of Sale document (the Terms), which included, among other things, a limitation of damages clause and a clause disavowing all warranties beyond the one express written warranty provided by Hach. When PDC sued after determining the product was defective, Hach argued that PDC was bound by the Terms, and therefore recovery was limited as stated in the Terms. PDC argued, among other things, that the Terms were not binding because they were inconspicuous and therefore procedurally unconscionable. The court disagreed and held the Terms to be sufficiently conspicuous, noting that (i) the Terms were hyperlinked on at least three separate occasions in the order process, (ii) the Terms were separated by underlined, blue text, and (iii) Hach expressly included in its order steps a direction to review the terms and to add any comments before submitting the order. The court also rejected PDC’s reliance on various “clickwrap” cases (where a party must affirmatively click or check a button stating “I Agree” in order to be bound), stating that such cases “differ greatly” from hyperlink situations, as well as PDC’s arguments that Hach was required to include language specifying that all sales would be subject to the Terms, finding no support in statutory or common law for such a requirement. In light of these conclusions, the court found that the Terms were not procedurally unconscionable and granted summary judgment as to the inclusion of the limitation of damages clause. However, the court denied summary judgment on other grounds, finding a material issue as to whether the product included latent defects, undiscoverable at the time of purchase, which would cause the Terms’ clause limiting PDC’s damages to its purchase price to fail of its essential purpose. For a copy of the opinion, please see http://www.buckleysandler.com/PDC_v_Hach.pdf.
Privacy/Data Security
ABA Files Complaint to Enjoin FTC from Enforcing “Red Flags” Rule Against Lawyers. On August 27, the American Bar Association (ABA) filed a complaint in federal court seeking to enjoin the Federal Trade Commission (FTC) from enforcing its “Red Flags Rule” against lawyers. American Bar Ass’n v. Federal Trade Commission, No. 09-cv-01636 (D.D.C. Aug. 27, 2009). The Rule implements the Fair and Accurate Credit Transactions Act (FACTA) by requiring “creditors” and “financial institutions” with covered accounts to implement programs to identify, detect, and respond to warning signs, or “red flags,” that could indicate identity theft. The FTC has taken the position that “creditors” subject to the Rule include lawyers and other professionals that bill their clients after services are provided. The ABA’s complaint argues in part that lawyers are not “creditors” because they do not “‘regularly extend’ credit merely by providing services to a client in advance of billing for those services.” According to the complaint, “[w]ithout a clear statement from Congress granting the FTC power to regulate lawyers engaged in the practice of law, the FTC has overstepped the constitutional limitations placed on its regulatory authority.” The enforcement deadline for the Rule is currently November 1, 2009 (reported in InfoBytes, July 31, 2009). For a copy of the complaint, please see http://www.buckleysandler.com/ABA_v_FTC.pdf.
Sixth Circuit Holds FCRA Private Action Claim Does Not Require Allegation of Actual Injury. On August 28, the U.S. Court of Appeals for the Sixth Circuit ruled that a consumer claiming that a consumer reporting agency willfully violated the Fair Credit Reporting Act (FCRA) was not required to allege any actual damages as a result of the FCRA violation. Beaudry v. Telecheck Services, Inc., No. 08-6428, 2009 WL 2633205 (6th Cir. August 28, 2009). In this case, the plaintiff consumer, on behalf of a putative class, alleged that the defendants (corporations who provide check verifications services) inaccurately reported that she was a first-time check-writer because they failed to incorporate changes Tennessee made to the numbering of its driver’s licenses in 2002 in their systems. The check verification service providers moved to dismiss, arguing that FCRA did not permit a private right of action for a plaintiff claiming no actual damages. The district court granted the motion, and the circuit court reversed. The circuit court explained that, under FCRA, “consumer reporting agencies must ‘follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom’ a credit report relates.” One of the enforcement mechanisms contained in FCRA is a private right of action by individuals for “willful” or “negligent” violations of FCRA. FCRA further provides that any person who willfully fails to comply with FCRA’s requirements is liable to the consumer for any actual damages or statutory damages of $100 to $1,000. In ruling for the plaintiff, the court stated FCRA “does not require a consumer to wait for unreasonable credit reporting procedures to result in the denial of credit or other consequential harm before enforcing her statutory rights. It requires regulated companies to use ‘reasonable procedures’ when ‘prepar[ing] a consumer report’ ‘with respect to’ a given consumer, and creates a cause of action in favor or the consumer when they do not.” For a copy of the opinion, please see http://www.ca6.uscourts.gov/opinions.pdf/09a0315p-06.pdf.
Texas Court Approves Data Security Breach Settlement. On August 12, a Texas court approved a settlement in a case alleging that a defendant improperly disposed of records containing personal information. Texas v. Cornerstone Fitness Texas LLC, No. C-491-09 (Tex. Dist. Ct., Hidalgo County, Aug. 12, 2009). In this case, the Texas Attorney General alleged that Cornerstone Fitness Texas LLC violated the Texas Identity Theft Enforcement and Protection Act by improperly disposing of customers’ personal information, including Social Security, driver’s license, and financial account numbers. Under the settlement, documents containing personally identifiable information disposed of by the defendant (or on behalf of the defendant by a third-party vendor) must make such information unreadable or undecipherable (e.g, by shredding or erasing the documents) prior to disposal. The settlement further orders the defendant to adopt, implement, and maintain an “Information Security and Safe Disposal Program” to protect from unlawful use, disposal, or disclosure any personal information collected or maintained by the defendant in the regular course of business. In connection with the Program, the defendants must, among other things, (i) designate a corporate-level compliance officer who is responsible for compliance with the program and the terms of the judgment, (ii) train employees to comply with the Program and Texas privacy protection laws, and (iii) post workplace signs stating that employees must dispose of documents in compliance with the Program and Texas privacy protection laws. The settlement further requires the defendant to pay $28,000 (including $8,000 in attorney fees). For a copy of the settlement, please see http://www.oag.state.tx.us/newspubs/releases/2009/081209cornerstone_afj.pdf.