InfoBytes, April 11, 2008
Sign up for weekly updates
RSS feed
Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Insurance
- Litigation
- E-Financial Services
- Privacy/Data Security
- Credit Cards
Federal Issues
Senate Passes Bipartisan Legislation to Address Foreclosures. On April 10, the Senate passed the “Foreclosure Prevention Act of 2008” (the “Act"), an amendment to H.R. 3221, an unrelated omnibus energy bill, to address the recent increase in mortgage foreclosures. The Act as passed by the Senate is unavailable as of the date of this publication. However, as originally proposed by Sens. Dodd (D-CT) and Shelby (R-AL), the Act would take a number of steps to alleviate the surge in foreclosures. Among other things, the Act would: (1) reform the Federal Housing Administration (FHA), including authorizing an increase to the FHA loan limit; (2) provide $4 billion for local governments to acquire, renovate, and resell foreclosed and abandoned properties; (3) provide funds for housing counseling on foreclosure prevention; (4) include several protections for persons in the military, including a temporary increase in the maximum loan amount guaranteed by the Veterans Administration (VA), development of a program to counsel members of the military on mortgage foreclosures, and extension of the protection period for members of the military returning from active service before a lender may foreclose; and (5) provide tax relief for individuals who pay property taxes without itemizing their tax deduction, for corporations to apply excess net operating losses to tax returns from prior profitable years, and to individuals who buy homes already in foreclosure. In addition, the Act would amend the disclosure requirements under the Truth in Lending Act (TILA) to: (1) require new disclosures that inform the borrower that he or she is not required to complete the credit agreement solely because of receipt of disclosures or a signed application; (2) require the borrower to receive the disclosures not later than 7 business days before the loan closing; (3) for variable rate loans, require a disclosure on the payment schedule that payments will vary based on interest rate changes, and provide examples of adjustments to the regular required payments; and (4) require the borrower to receive corrected rate disclosure statements if the previous disclosure is no longer accurate. The Act also doubles the possible amount of statutory damages for TILA violations. For a copy of the bill as originally proposed in the Senate, please see http://www.buckleykolar.com/documents/Dodd-ShelbyProposedAmendment.pdf.
Bush Administration Expands FHASecure. On April 9, the Bush Administration announced an expansion in mortgage help for subprime borrowers facing foreclosure through the Federal Housing Administration’s (FHA) FHASecure. The FHASecure plan allows families with strong credit histories who had been making timely mortgage payments before their loans reset, but are now in default, to qualify for refinancing. The Bush Administration’s new plan would expand the FHASecure eligibility standards by creating two new categories of eligible borrowers: (i) borrowers with adjustable rate mortgages who were late on two consecutive monthly mortgage payments or at two different times over the previous twelve months (FHA will require a 97 percent loan-to-value (LTV) ratio for these borrowers to refinance, the same LTV as FHA’s current standard); and (ii) borrowers with adjustable rate mortgages who were late on three consecutive monthly mortgage payments or at three different times over the previous 12 months (FHA will require a 90 percent LTV ratio for these borrowers to refinance). Lenders will be required to ensure borrowers have the capacity to repay their mortgages, show a reasonable credit and employment history, and fully document and verify their incomes. The new loan amount would be based upon a new appraisal by an FHA-approved appraiser. Borrowers will still be required to pay upfront and annual premiums on their loans, to ensure the soundness of FHA’s insurance fund. FHA’s insurance fund will remain self-sustaining and will insure these new, more affordable mortgages in exchange for this equity cushion. For a full copy of the HUD press release, please see http://www.hud.gov/news/release.cfm?content=pr08-050.cfm.
FHFB Approves Set-Aside Programs for Refinancing Subprime Mortgage Loans. On April 9, the Federal Housing Finance Board (FHFB) voted to issue for public comment a proposed rule to authorize the Federal Home Loan Banks to establish Affordable Housing Program (AHP) homeownership set-aside programs for the purpose of refinancing or restructuring low- or moderate-income households’ nontraditional or subprime mortgage loans. The new authority would expire on June 30, 2011. If Federal Home Loan Banks were to use the maximum proposed refinancing set-aside authority in 2008, they could provide almost $75 million to assist some 7,500 households facing possible loss of their homes. The FHFB requests comments on a number of issues, including whether it is generally appropriate for the AHP to provide subsidies for refinancing or restructuring existing owner-occupied mortgage loans. The proposed rule will be open for public comment for 60 days. For a copy of the proposed rule, please see http://www.fhfb.gov/GetFile.aspx?FileID=6725.
House Committee begins hearings on Frank’s Economic, Mortgage, and Housing Rescue Plan. On April 9 and 10, the House Financial Services Committee held hearings on the Economic, Mortgage, and Housing rescue plan announced on March 13 by Committee Chairman Barney Frank (reported in InfoBytes, March 14, 2008). The rescue plan is aimed at stemming the significant rise in mortgage foreclosures by allowing the Federal Housing Administration to insure and guarantee refinanced mortgages that have been significantly written down by mortgage holders and lenders. The plan would permit the FHA to provide up to $300 billion in new guarantees that would help to refinance at-risk borrowers into viable mortgages. The two day hearing included testimony from federal regulators, academics, economists, and representatives of cities and communities being negatively impacted by large numbers of foreclosures.
Foreclosure Prevention and Mortgage Loan Servicing Bill Introduced in House. On April 2, Rep. Maxine Waters (D-CA) introduced the Foreclosure Prevention and Sound Mortgage Servicing Act of 2008 (H.R. 5679) which would amend the Real Estate Settlement Procedures Act (RESPA) to prevent foreclosures and facilitate the relationship between borrowers and mortgage loan servicers. The bill would impose a duty on servicers to engage in reasonable loss mitigation efforts that provide for the long-term affordability of the loan and the maximum retention of the home equity upon default. The bill provides a list of “priority” and “secondary” loss mitigation activities. All loss mitigation efforts must be “affordable” as calculated by a debt-to-income ratio. Mortgage loan servicers would have to report monthly to the Department of Treasury on loss mitigation activities. The bill also would prohibit foreclosures whenever a “qualified written request” is pending, and would allow borrowers to make “qualified written requests” at any time. Finally, the bill strikes the “pattern or practice” standard for imposing damages in addition to actual damages under RESPA. For a copy of this bill, please contact .
FTC Commissioners Testify on “Federal Trade Commission Reauthorization Act of 2008.” On April 8, 2008, the Federal Trade Commission (FTC) Chairman and commissioners testified before the House Commerce, Science, and Transportation Committee on the “Federal Trade Commission Reauthorization Act of 2008.” The proposed legislation would give the FTC authority to seek civil penalties for knowing violations of Section 5 of the FTC Act. Also, the bill would allow the FTC to file its own civil penalty cases without clearing the case through the Department of Justice, and would permit the FTC to represent itself before the Supreme Court in the appeal of any litigation to which the FTC was a party. The Act also enables the FTC to adopt more efficient rulemaking on consumer protection issues generally, and particularly for subprime mortgage lending and nontraditional mortgage loans. The testimony reviewed the FTC’s role in consumer protection and enforcement actions over the previous year, including warning letters concerning possible Truth in Lending Act violations in mortgage advertisements. The testimony also announced three cases against foreclosure rescue scams. For a copy of the FTC press release, please see http://www.ftc.gov/opa/2008/04/reauth.shtm.
FRB Extends Deadline for Requests to Testify at Bank of America’s Countrywide Acquisition Meetings. On April 9, the Federal Reserve Board extended to April 15 the deadline for the submission of requests to testify at public meetings regarding the notice by Bank of America Corporation to acquire Countrywide Financial Corporation. The purpose of these meetings, to be held next month in Los Angeles, California, and Chicago, Illinois, is to collect information relating to factors the Board is required to consider under the Bank Holding Company Act. All persons wishing to testify must submit a written request to testify and include the following information: (i) identification of which meeting the participant wishes to attend; (ii) a brief statement of the nature of the expected testimony and the estimated time required for the presentation; (iii) the address and telephone number of the individual testifying; and (iv) identification of any special needs, such as a physical disability that may require assistance or individuals needing translation services or visual aids for their presentation. For a copy of the FRB press release, please see http://www.federalreserve.gov/newsevents/press/orders/20080409a.htm.
FDIC to Conduct Survey of Banks’ Efforts to Bring “Unbanked” into Economic Mainstream. On April 11, the Federal Deposit Insurance Corporation announced that this spring it will conduct a survey, the first of its kind nationwide, of FDIC-insured depository institutions to assess their efforts to serve individuals and families who have rarely, if ever, held a checking account, a savings account, or other type of transaction or check-cashing account at an insured depository institution. Questions will focus on: (i) banks’ financial education and outreach strategies; (ii) deposit, payment and credit products offered to entry-level consumers; (iii) challenges faced by insured institutions in serving unbanked and underbanked customers; and (iv) specific institutions’ programs to reach unbanked and underbanked consumers. The FDIC is also considering conducting, along with the U.S. Census Bureau, the first national household survey to collect data on the demographics of unbanked and underbanked households, and their perceived barriers when deciding how and where to conduct financial transactions. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2008/pr08029.html.
State Issues
Michigan Enacts Law Requiring Loan Officer Registration. On April 2, Michigan Governor Jennifer Granholm approved a suite of related bills, including H.B. 5288, which will require the registration of “loan officers” (first reported in InfoBytes, April 4, 2008). Under these new laws, loan officers employed by licensees or registrants must complete 24 hours of pre-licensure education (unless employed as a loan officer during 4 ½ of the previous five years) and pass an initial examination. Loan officers must also complete six hours of continuing education each year. Loan officer registration begins on January 1, 2009. For a copy of H.B. 5288, please see http://www.legislature.mi.gov/documents/2007-2008/publicact/pdf/2008-PA-0060.pdf.
Maryland Enacts Law Imposing Changes to Mortgage Lending and Broker Practices. On April 8, Maryland Governor Martin O’Malley signed S.B. 270 and H.B. 363 (collectively, the “Acts”) to make changes to, and impose restrictions on, mortgage lending and broker practices. The Acts will (i) prohibit the imposition of prepayment penalties on certain mortgage loans; (ii) prohibit certain lenders from making certain mortgage loans without considering the borrower’s ability to repay, which includes consideration of the borrower’s debt to income ratio and verification of income and assets by review of written documentation; (iii) alter the threshold amount of a commercial loan on which prepayment penalties may be charged; and (iv) authorize the Commissioner of Financial Regulation to participate in the implementation of a multi-state automated licensing system for lenders and originators, and to adopt regulations with regard to lender and broker licensing fees, examination requirements, net worth requirements, prior convictions, and surety bonds. The Acts become effective June 1, 2008. For a copy of S.B. 270, please see http://mlis.state.md.us/2008rs/bills/sb/sb0270e.pdf. For a copy of H.B. 363, please see http://mlis.state.md.us/2008rs/bills/hb/hb0363e.pdf.
Philadelphia City Council imposes Moratorium on Residential Foreclosures. On March 27, the Philadelphia City Council issued a resolution calling on Sheriff John Green and President Judge C. Darnell Jones to impose a moratorium on residential foreclosure sales in Philadelphia. The decision to impose a moratorium was based in part on ACORN’s October 2007 study entitled “Foreclosure Exposure 2: The Cost to our Cities and Neighborhoods,” showing that: (i) the costs of foreclosure to all stakeholders involved would amount to more than $345 million; and (ii) widespread foreclosures would potentially increase violent crime in neighborhoods, decrease property value, and reduce city tax revenue. For a copy of the resolution, please see http://webapps.phila.gov/council/attachments/5009.pdf.
Indiana Enacts First Lien Mortgage Lending Act. On March 24, Indiana Governor Mitch Daniels approved, as part of a wide-ranging set of bills relating to mortgage lending, the “First Lien Mortgage Lending Act” (the “Act”). The Act, as included as part of H.B. 1359, requires the licensure of first-lien mortgage lenders and places requirements on a lender’s origination and servicing activities. Also, as part of H.B. 1359, the Indiana Loan Brokers Act was amended to exclude first-lien mortgage lenders. The First Lien Mortgage Lending Act will become effective January 1, 2009. For a copy of the enrolled H.B. 1359, please see http://www.in.gov/legislative/bills/2008/PDF/HE/HE1359.1.pdf.
South Carolina Enacts “Financial Identity Fraud and Identity Theft Protection Act”. On April 2, South Carolina Governor Mark Sanford signed the “Financial Identity Fraud and Identity Theft Protection Act” (the “Act”) protecting against identity theft. Among its provisions, the Act provides for: (i) protection in regard to the use of a consumer’s social security number and personal identifying information on a mortgage and in preparation of documents for public filing; and (ii) provisions on the consumer’s ability to impose a security freeze on his/her credit report if he or she has reason to believe they have been victimized by identity theft. The Act also provides for disclosure by an agency of unauthorized access to personal identifying information of a resident whose information the agency owns. Although the Act will become effective December 31, 2008, the breach of security disclosure requirement section will be effective July 1, 2009. For a copy of the Act, please see http://www.scstatehouse.net/sess117_2007-2008/bills/453.htm.
Wisconsin Enacts Bill Removing Commercial Loans from Licensing Act. On April 7, Wisconsin Governor James Doyle signed S.B. 517. This Act amends the definition of “loan” under the Mortgage Bankers, Loan Originators and Mortgage Brokers Act (the “Act”). Currently under the Act, a “loan” is broadly defined to include loans made for commercial purposes. S.B. 517 narrows the definition of “loan” to mean “a loan for personal, family, or household purposes that is secured by a lien or mortgage, or equivalent security interest, on real property [consisting of 1 to 4 dwelling units, including individual condominium units] located in this state.” S.B. 517 will go into effect on April 22, 2008. A copy of S.B. 517 is available at http://www.legis.state.wi.us/2007/data/acts/07Act211.pdf.
Courts
First Circuit Affirms Dismissal of FCRA “Firm Offer” Lawsuit. The Court of Appeals for the First Circuit held that a solicitation that lacked material loan terms and was conditioned on proof of credit-worthiness was a “firm offer of credit,” and therefore did not violate the Fair Credit Reporting Act (FCRA). Dixon v. Shamrock Financial Corp., No. 07-1896 (1st Cir., April 3, 2008). According to the complaint, the lender accessed plaintiff’s credit report to provide him with a loan solicitation that invited him to receive a free loan consultation. The consumer argued that the solicitation was not a “firm offer of credit,” and therefore violated FCRA, because it did not include any information about the possible interest rate, the method for compounding interest, the loan amount, the term, or the costs and fees associated with the potential transaction, and was subject to the borrower being able to satisfy certain conditions – such as satisfying underwriting guidelines. The district court dismissed the lawsuit (as reported in InfoBytes, April 27, 2007) and the plaintiff appealed. The Court of Appeals affirmed the district court, rejecting the consumer’s argument that a conditional offer cannot be a firm offer by noting that, notwithstanding common-law concepts of “offer” and “acceptance,” FCRA expressly provides that “firm offers of credit” may be conditioned on the borrower meeting certain credit-worthiness criteria. With respect to plaintiff’s argument that the mailer did not include enough material terms for it to constitute a firm offer, the court held that FCRA, which includes “detailed requirement in some areas,” does not mandate that specific loan terms be included in a firm offer. According to the court, such disclosure requirements are set forth in the “related statutory scheme” of the Truth in Lending Act. For a copy of the opinion, please see http://www.buckleykolar.com/documents/DixonvShamrockFinCorp.pdf.
Standard Commercial Liability Insurance Policy Covers FCRA Violation. On March 31, 2008, the United States District Court for the Southern District of Indiana found that a standard commercial liability insurance policy provided coverage for claims made against an insured under the Fair Credit Reporting Act (FCRA). Am. Family Mut. Ins. Co. v. C.M.A. Mortgage, Inc., No. 1:06-cv-1044-SEB-JMS, 2008 WL 906230 (S.D. Ind. Mar. 31, 2008). American Family Insurance Company sought a declaration that it owed no defense or indemnity to C.M.A. Mortgage, Inc. d/b/a/ Eminent Mortgage Company (C.M.A.) in connection with a class action lawsuit filed by a consumer plaintiff against C.M.A. The plaintiff alleged that C.M.A. violated the FCRA by accessing his and other consumers’ credit reports without their permission and without a permissible purpose, such as to make a “firm offer of credit.” Following Zurich Am. Ins. Co. v. Fieldstone Mortgage Co., 2007 WL 3268460 (D. Md. Oct. 26, 2007) and Pietras v. Sentry Ins. Co., 2007 WL 715759 (N.D. Ill. Mar. 6, 2007), the court ruled in favor of the insured. Noting that, in interpreting insurance contracts, any ambiguity must be resolved in favor of the insured, the court found that a reasonable person who read the advertising injury provisions of the policies would conclude that coverage existed for a claim arising out of a violation of FCRA’s privacy protection rights in a solicitation letter because the policies covered liability for “[o]ral or written publication, in any manner, of material that violates a person’s right of privacy” and the solicitation letter at issue fell squarely within the insurance policy’s definition of advertisement. In addition, citing the Safeco Inc. Co. of Am. v. Burr, 127 S.Ct. 2201(2007), which determined that the state of mind necessary for statutory damages liability to attach in a FCRA case can be as minimal as carelessness, the court held that policy exclusions applying to “intentional” conduct did not exclude coverage for the FCRA violation alleged in the complaint. For a copy of this decision, please see http://www.buckleykolar.com/documents/AmerFamilyvCMA.pdf.
Federal Court Allows FCRA “Firm Offer” Case to Go Forward. On April 1, 2008, a federal district court denied a lender’s motion for summary judgment in a Fair Credit Reporting Act (FCRA) claim where the lender accessed a potential borrower’s credit report without authorization. McDonald v. NextStudent, Inc., No. 4:07CV0001, 2008 WL 906814 (E.D. Mo. Apr. 1, 2008). The plaintiff alleged that she received a mailing from the lender regarding her student loans that was not a firm offer of credit under FCRA. The borrower further alleged that this constituted a willful violation of FCRA, and she represented a class of borrowers similarly situated. The lender moved for summary judgment, claiming that while the initial letter mailed to the borrower was not a firm offer of credit, the mailing was the invitation to begin a “multi-step” process and a firm offer of credit would later be made orally. The district court found no precedent or legal support for this argument and allowed the case to go forward for a determination of “willfulness.” For a copy of this decision, please see http://www.buckleykolar.com/documents/McDonaldvNextStudent.pdf.
Court Rejects FCRA and ECOA Adverse Action Claims as Time Barred. On March 31, a federal district court rejected a borrower’s adverse action claims against a car dealership based on the two year statute of limitations period under each of the Fair Credit Reporting Act (FCRA) and Equal Credit Opportunity Act (ECOA). Clemons v. Cutler Ridge Automotive, Inc. 2008 WL 879324 (S.D. Fla. March 31, 2008). The consumer alleged that, when in the process of purchasing an automobile, the defendant car dealership violated FCRA by unlawfully accessing her credit, and violated FCRA and ECOA by failing to issue an adverse action notice when credit was denied. The court held that the plaintiff could not amend her complaint regarding a four year old incident with FCRA and ECOA adverse action claims, reasoning that those claims were new causes of action that did not “relate back” to a timely filed FCRA credit reporting claim and were therefore barred by the two year limitations period under both statutes. In granting summary judgment for the lender, the court also ruled against the plaintiff on her FCRA credit reporting claim, rejecting her contention that her signed credit application was the result of a subterfuge on the part of the lender and therefore not a permissible purpose to obtain a credit report under the FCRA. For a copy of the court’s ruling, please see http://www.buckleykolar.com/documents/ClemonsvCutlerRidgeAutomotive.pdf.
Court Rules No Private Right of Action Under Administration Enforcement Provisions of FCRA. On March 31, the federal District Court for the Northern District of Oklahoma granted summary judgment to a lender for a claim under the Fair Credit Reporting Act (FCRA). Pinson v. Equifax Credit Information Services, Inc., 2008 WL 906222 (N.D. Okla.). Consumer plaintiffs alleged that the lender made inaccurate reports to consumer credit reporting agencies. The court held that a consumer does not have a private right of action against furnishers of information under the administrative enforcement section of the FCRA. The court then held that plaintiffs do have a limited private right of action against furnishers of information under a different part of FCRA, but indicated that this right could only arise after the furnisher of information receives notice of a consumer dispute from a credit agency. The court went on to state that the plaintiff had failed to meet the two-year statute of limitations that applied to FCRA at the time the suit was filed. The court explained that while FCRA was later amended to extend the statute of limitations to either two years following discovery of a violation, or five years following the occurrence of the violation, the court could not retroactively apply the amendments to the plaintiff’s complaint. Because the plaintiffs had failed to file a claim within two years of the violation in question, the court granted summary judgment not only to Defendant Litton Loan Services, Inc., but also to the defendant credit agencies. For a copy of these opinions, please see http://www.buckleykolar.com/documents/PinsonvEquifax1.pdf, http://www.buckleykolar.com/documents/PinsonvEquifax2.pdf, http://www.buckleykolar.com/documents/PinsonvEquifax3.pdf, and http://www.buckleykolar.com/documents/PinsonvEquifax4.pdf.
Court Rules Against Creditor’s First Amendment Defense in FACTA Case. In a class action case against Jewel Food Stores (Jewel) brought by various customers of Jewel, the U.S. District Court for the Northern District of Illinois granted the plaintiffs’ motions for summary judgment on two of Jewel’s affirmative defenses. Cicilline v. Jewel Food Stores, Inc., No. 07-CV-2333, 2008 WL 895677 (N.D.Ill. March 31, 2008). In their complaint, the plaintiffs allege that Jewel violated the Fair and Accurate Credit Transactions Act of 2003 (FACTA), 15 U.S.C. § 1681c(g), by printing the expiration date on their credit card receipts. The FACTA truncation section provides: “No person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder.” Jewel argued that this provision of FACTA interferes with Jewel’s First Amendment rights by unnecessarily impeding Jewel’s ability as a retailer to confirm to its customers that the transaction has been appropriately charged and prohibits more speech than is necessary to serve the government’s interest in deterring identity theft. The court acknowledged that the receipts constitute protected commercial speech under the First Amendment and that the FACTA truncation restrictions would be unconstitutional if they were determined to be excessive. Commercial speech may not be restricted if the restriction does not directly advance the state interest involved and if the government interest could be served as well by a more limited restriction on commercial speech. In this case, the court found that the redaction of a credit card’s expiration date serves as an added safeguard against identity theft, thus meeting the state interest test, and that Jewel has not demonstrated that a feasible alternative to truncation exists. Therefore, the court held that FACTA’s truncation requirements are constitutionally permissible. Jewel also argued that the FACTA truncation provision was ambiguous and should be construed to allow the printing of the expiration date together with no more than five digits of the account number. However, the court held that no ambiguity exists and that both the courts and the Federal Trade Commission have consistently indicated that under FACTA a merchant may print no more than five digits and may not print the expiration date on the receipt. The court granted the plaintiffs’ motions on these two affirmative defenses. For a copy of the opinion, please see http://www.buckleykolar.com/documents/CicillinevJewelFoodStores2.pdf.
Supreme Court Denies Certiorari in TILA Case. On March 24, 2008, the United States Supreme Court denied a writ of certiorari to a Seventh Circuit case concerning the specificity requirement of the Truth in Lending Act (TILA). Ameriquest Mortgage Securities Inc. v. Hamm, U.S., No. 07-941, cert. denied (Mar. 24, 2008). The Seventh Circuit held that a lender must specifically include the requirements of loan term payments, and that a disclosure statement that does not mention monthly payments is insufficient (see InfoBytes, October 19, 2007.) According to the Court of Appeals, “hypertechnicality” reigns in interpreting TILA. Despite the fact that not all Circuits have adopted this “hypertechnical” analysis, the Supreme Court declined to hear the case. For a copy of the Seventh Circuit’s opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=05-3984_029.pdf.
Firm News
Margo Tank will be speaking at the American Land Title Association’s 2008 Tech Forum being held April 12-15 in Las Vegas, NV. The panel is entitled “eEvidence and Legal Issues.” For a complete list of the sessions and speakers, visit www.alta.org/meetings/techforum. For registration information, please see www.alta.org/meetings/techforum/register.
Grant Mitchell was quoted in the April 2 issue of the Consumer Financial Services Law Report. The article was entitled, “HUD proposes RESPA rule changes, seeks civil money penalty power.” Mr. Mitchell was quoted as saying, “[t]he changes are in part a recognition by the ‘good guys’ who remain in the mortgage business that the process has got to become more transparent to the consumer, or it will get worse.” He went on to say, “[b]ack when the industry was writing $3 trillion in loans, there was not a real push to change anything. Now that the industry will be writing perhaps $1.5 trillion in business and everyone’s attention is focused on the mortgage situation, there’s a different atmosphere.”
Jon Jerison will be the featured speaker on an A.S. Pratt audio conference series entitled, “Fair Credit Reporting Act Developments: How They Affect Your Institution,” on April 24 from 1-2:30 p.m. EST. Mr. Jerison will review current developments under the Fair Credit Reporting Act, how these developments affect institutions and how they can avoid penalties. For more information or to register, please see http://www.aspratt.com/store/15D.php.
Robert Serino will be speaking at the “National Institute on Banking Law II: Risk as the Centerpiece of Bank Regulation” seminar being held May 8-9 in Chicago, Illinois. Mr. Serino’s speech is entitled, “Anti-money Laundering and Bank Secrecy.” For more information or to register, please see www.abanet.org/cle/programs/n08bla1.html.
Jeremiah Buckley, Margo Tank, and Lane Macalester will be speaking at the National Conference on Managing Electronic Records on May 19-21 in Chicago, Illinois. Their panel entitled, “Legal Considerations for Conducting Business Electronically: Practical Guidance,” will focus on how the Electronic Signatures and Global and National Commerce Act (ESIGN) and the Uniform Electronic Transactions Act (UETA) now make it possible to present and store information and to sign agreements electronically in circumstances where, in the past, paper documents and wet signatures would have been required. Mr. Buckley, Ms. Tank, and Ms. Macalester will discuss the new challenges presented and provide practical guidance to the industry. For more information or to register, please visit www.merconference.com.
Joseph Kolar will be speaking at the Mealey’s Subprime Mortgage Litigation & Insurance Coverage Conference on June 20 in Washington, DC. Mr. Kolar’s presentation is entitled, “The New Structure of the Mortgage Lending Industry,” and will discuss a smaller mortgage origination market, the economic impact on home building and home ownership and his experiences representing Bank of America and Countrywide. For more information or to register, please see http://bookstore.lexis.com/bookstore/product/69880t.html.
Matthew Previn and Jeffrey Naimon presented a webinar entitled “Subprime Mortgage Litigation and Enforcement Action Update,” on April 3. Mr. Previn and Mr. Naimon discussed the meltdown of the subprime mortgage market and the ensuing credit crunch which has brought an onslaught of litigation against all sectors of the mortgage industry. Mr. Previn and Mr. Naimon also addressed increased scrutiny of mortgage brokers, lenders, servicers, and insurers by federal and state government agencies. Mr. Previn and Mr. Naimon, along with Jeff Nielsen of Navigant Consulting, Inc., also covered major litigation and enforcement developments. For a copy of the Power Point presentations, please see http://www.buckleykolar.com/documents/SubprimeMortgageLitigationWebinar04032008.pdf. The audio portion of the presentation can be heard here.
Mortgages
Senate Passes Bipartisan Legislation to Address Foreclosures. On April 10, the Senate passed the “Foreclosure Prevention Act of 2008” (the “Act"), an amendment to H.R. 3221, an unrelated omnibus energy bill, to address the recent increase in mortgage foreclosures. The Act as passed by the Senate is unavailable as of the date of this publication. However, as originally proposed by Sens. Dodd (D-CT) and Shelby (R-AL), the Act would take a number of steps to alleviate the surge in foreclosures. Among other things, the Act would: (1) reform the Federal Housing Administration (FHA), including authorizing an increase to the FHA loan limit; (2) provide $4 billion for local governments to acquire, renovate, and resell foreclosed and abandoned properties; (3) provide funds for housing counseling on foreclosure prevention; (4) include several protections for persons in the military, including a temporary increase in the maximum loan amount guaranteed by the Veterans Administration (VA), development of a program to counsel members of the military on mortgage foreclosures, and extension of the protection period for members of the military returning from active service before a lender may foreclose; and (5) provide tax relief for individuals who pay property taxes without itemizing their tax deduction, for corporations to apply excess net operating losses to tax returns from prior profitable years, and to individuals who buy homes already in foreclosure. In addition, the Act would amend the disclosure requirements under the Truth in Lending Act (TILA) to: (1) require new disclosures that inform the borrower that he or she is not required to complete the credit agreement solely because of receipt of disclosures or a signed application; (2) require the borrower to receive the disclosures not later than 7 business days before the loan closing; (3) for variable rate loans, require a disclosure on the payment schedule that payments will vary based on interest rate changes, and provide examples of adjustments to the regular required payments; and (4) require the borrower to receive corrected rate disclosure statements if the previous disclosure is no longer accurate. The Act also doubles the possible amount of statutory damages for TILA violations. For a copy of the bill as originally proposed in the Senate, please see http://www.buckleykolar.com/documents/Dodd-ShelbyProposedAmendment.pdf.
Bush Administration Expands FHASecure. On April 9, the Bush Administration announced an expansion in mortgage help for subprime borrowers facing foreclosure through the Federal Housing Administration’s (FHA) FHASecure. The FHASecure plan allows families with strong credit histories who had been making timely mortgage payments before their loans reset, but are now in default, to qualify for refinancing. The Bush Administration’s new plan would expand the FHASecure eligibility standards by creating two new categories of eligible borrowers: (i) borrowers with adjustable rate mortgages who were late on two consecutive monthly mortgage payments or at two different times over the previous twelve months (FHA will require a 97 percent loan-to-value (LTV) ratio for these borrowers to refinance, the same LTV as FHA’s current standard); and (ii) borrowers with adjustable rate mortgages who were late on three consecutive monthly mortgage payments or at three different times over the previous 12 months (FHA will require a 90 percent LTV ratio for these borrowers to refinance). Lenders will be required to ensure borrowers have the capacity to repay their mortgages, show a reasonable credit and employment history, and fully document and verify their incomes. The new loan amount would be based upon a new appraisal by an FHA-approved appraiser. Borrowers will still be required to pay upfront and annual premiums on their loans, to ensure the soundness of FHA’s insurance fund. FHA’s insurance fund will remain self-sustaining and will insure these new, more affordable mortgages in exchange for this equity cushion. For a full copy of the HUD press release, please see http://www.hud.gov/news/release.cfm?content=pr08-050.cfm.
FHFB Approves Set-Aside Programs for Refinancing Subprime Mortgage Loans. On April 9, the Federal Housing Finance Board (FHFB) voted to issue for public comment a proposed rule to authorize the Federal Home Loan Banks to establish Affordable Housing Program (AHP) homeownership set-aside programs for the purpose of refinancing or restructuring low- or moderate-income households’ nontraditional or subprime mortgage loans. The new authority would expire on June 30, 2011. If Federal Home Loan Banks were to use the maximum proposed refinancing set-aside authority in 2008, they could provide almost $75 million to assist some 7,500 households facing possible loss of their homes. The FHFB requests comments on a number of issues, including whether it is generally appropriate for the AHP to provide subsidies for refinancing or restructuring existing owner-occupied mortgage loans. The proposed rule will be open for public comment for 60 days. For a copy of the proposed rule, please see http://www.fhfb.gov/GetFile.aspx?FileID=6725.
House Committee begins hearings on Frank’s Economic, Mortgage, and Housing Rescue Plan. On April 9 and 10, the House Financial Services Committee held hearings on the Economic, Mortgage, and Housing rescue plan announced on March 13 by Committee Chairman Barney Frank (reported in InfoBytes, March 14, 2008). The rescue plan is aimed at stemming the significant rise in mortgage foreclosures by allowing the Federal Housing Administration to insure and guarantee refinanced mortgages that have been significantly written down by mortgage holders and lenders. The plan would permit the FHA to provide up to $300 billion in new guarantees that would help to refinance at-risk borrowers into viable mortgages. The two day hearing included testimony from federal regulators, academics, economists, and representatives of cities and communities being negatively impacted by large numbers of foreclosures.
Foreclosure Prevention and Mortgage Loan Servicing Bill Introduced in House. On April 2, Rep. Maxine Waters (D-CA) introduced the Foreclosure Prevention and Sound Mortgage Servicing Act of 2008 (H.R. 5679) which would amend the Real Estate Settlement Procedures Act (RESPA) to prevent foreclosures and facilitate the relationship between borrowers and mortgage loan servicers. The bill would impose a duty on servicers to engage in reasonable loss mitigation efforts that provide for the long-term affordability of the loan and the maximum retention of the home equity upon default. The bill provides a list of “priority” and “secondary” loss mitigation activities. All loss mitigation efforts must be “affordable” as calculated by a debt-to-income ratio. Mortgage loan servicers would have to report monthly to the Department of Treasury on loss mitigation activities. The bill also would prohibit foreclosures whenever a “qualified written request” is pending, and would allow borrowers to make “qualified written requests” at any time. Finally, the bill strikes the “pattern or practice” standard for imposing damages in addition to actual damages under RESPA. For a copy of this bill, please contact .
FTC Commissioners Testify on “Federal Trade Commission Reauthorization Act of 2008.” On April 8, 2008, the Federal Trade Commission (FTC) Chairman and commissioners testified before the House Commerce, Science, and Transportation Committee on the “Federal Trade Commission Reauthorization Act of 2008.” The proposed legislation would give the FTC authority to seek civil penalties for knowing violations of Section 5 of the FTC Act. Also, the bill would allow the FTC to file its own civil penalty cases without clearing the case through the Department of Justice, and would permit the FTC to represent itself before the Supreme Court in the appeal of any litigation to which the FTC was a party. The Act also enables the FTC to adopt more efficient rulemaking on consumer protection issues generally, and particularly for subprime mortgage lending and nontraditional mortgage loans. The testimony reviewed the FTC’s role in consumer protection and enforcement actions over the previous year, including warning letters concerning possible Truth in Lending Act violations in mortgage advertisements. The testimony also announced three cases against foreclosure rescue scams. For a copy of the FTC press release, please see http://www.ftc.gov/opa/2008/04/reauth.shtm.
FRB Extends Deadline for Requests to Testify at Bank of America’s Countrywide Acquisition Meetings. On April 9, the Federal Reserve Board extended to April 15 the deadline for the submission of requests to testify at public meetings regarding the notice by Bank of America Corporation to acquire Countrywide Financial Corporation. The purpose of these meetings, to be held next month in Los Angeles, California, and Chicago, Illinois, is to collect information relating to factors the Board is required to consider under the Bank Holding Company Act. All persons wishing to testify must submit a written request to testify and include the following information: (i) identification of which meeting the participant wishes to attend; (ii) a brief statement of the nature of the expected testimony and the estimated time required for the presentation; (iii) the address and telephone number of the individual testifying; and (iv) identification of any special needs, such as a physical disability that may require assistance or individuals needing translation services or visual aids for their presentation. For a copy of the FRB press release, please see http://www.federalreserve.gov/newsevents/press/orders/20080409a.htm.
Michigan Enacts Law Requiring Loan Officer Registration. On April 2, Michigan Governor Jennifer Granholm approved a suite of related bills, including H.B. 5288, which will require the registration of “loan officers” (first reported in InfoBytes, April 4, 2008). Under these new laws, loan officers employed by licensees or registrants must complete 24 hours of pre-licensure education (unless employed as a loan officer during 4 ½ of the previous five years) and pass an initial examination. Loan officers must also complete six hours of continuing education each year. Loan officer registration begins on January 1, 2009. For a copy of H.B. 5288, please see http://www.legislature.mi.gov/documents/2007-2008/publicact/pdf/2008-PA-0060.pdf.
Maryland Enacts Law Imposing Changes to Mortgage Lending and Broker Practices. On April 8, Maryland Governor Martin O’Malley signed S.B. 270 and H.B. 363 (collectively, the “Acts”) to make changes to, and impose restrictions on, mortgage lending and broker practices. The Acts will (i) prohibit the imposition of prepayment penalties on certain mortgage loans; (ii) prohibit certain lenders from making certain mortgage loans without considering the borrower’s ability to repay, which includes consideration of the borrower’s debt to income ratio and verification of income and assets by review of written documentation; (iii) alter the threshold amount of a commercial loan on which prepayment penalties may be charged; and (iv) authorize the Commissioner of Financial Regulation to participate in the implementation of a multi-state automated licensing system for lenders and originators, and to adopt regulations with regard to lender and broker licensing fees, examination requirements, net worth requirements, prior convictions, and surety bonds. The Acts become effective June 1, 2008. For a copy of S.B. 270, please see http://mlis.state.md.us/2008rs/bills/sb/sb0270e.pdf. For a copy of H.B. 363, please see http://mlis.state.md.us/2008rs/bills/hb/hb0363e.pdf.
Philadelphia City Council imposes Moratorium on Residential Foreclosures. On March 27, the Philadelphia City Council issued a resolution calling on Sheriff John Green and President Judge C. Darnell Jones to impose a moratorium on residential foreclosure sales in Philadelphia. The decision to impose a moratorium was based in part on ACORN’s October 2007 study entitled “Foreclosure Exposure 2: The Cost to our Cities and Neighborhoods,” showing that: (i) the costs of foreclosure to all stakeholders involved would amount to more than $345 million; and (ii) widespread foreclosures would potentially increase violent crime in neighborhoods, decrease property value, and reduce city tax revenue. For a copy of the resolution, please see http://webapps.phila.gov/council/attachments/5009.pdf.
Indiana Enacts First Lien Mortgage Lending Act. On March 24, Indiana Governor Mitch Daniels approved, as part of a wide-ranging set of bills relating to mortgage lending, the “First Lien Mortgage Lending Act” (the “Act”). The Act, as included as part of H.B. 1359, requires the licensure of first-lien mortgage lenders and places requirements on a lender’s origination and servicing activities. Also, as part of H.B. 1359, the Indiana Loan Brokers Act was amended to exclude first-lien mortgage lenders. The First Lien Mortgage Lending Act will become effective January 1, 2009. For a copy of the enrolled H.B. 1359, please see http://www.in.gov/legislative/bills/2008/PDF/HE/HE1359.1.pdf.
Wisconsin Enacts Bill Removing Commercial Loans from Licensing Act. On April 7, Wisconsin Governor James Doyle signed S.B. 517. This Act amends the definition of “loan” under the Mortgage Bankers, Loan Originators and Mortgage Brokers Act (the “Act”). Currently under the Act, a “loan” is broadly defined to include loans made for commercial purposes. S.B. 517 narrows the definition of “loan” to mean “a loan for personal, family, or household purposes that is secured by a lien or mortgage, or equivalent security interest, on real property [consisting of 1 to 4 dwelling units, including individual condominium units] located in this state.” S.B. 517 will go into effect on April 22, 2008. A copy of S.B. 517 is available at http://www.legis.state.wi.us/2007/data/acts/07Act211.pdf.
Supreme Court Denies Certiorari in TILA Case. On March 24, 2008, the United States Supreme Court denied a writ of certiorari to a Seventh Circuit case concerning the specificity requirement of the Truth in Lending Act (TILA). Ameriquest Mortgage Securities Inc. v. Hamm, U.S., No. 07-941, cert. denied (Mar. 24, 2008). The Seventh Circuit held that a lender must specifically include the requirements of loan term payments, and that a disclosure statement that does not mention monthly payments is insufficient (see InfoBytes, October 19, 2007.) According to the Court of Appeals, “hypertechnicality” reigns in interpreting TILA. Despite the fact that not all Circuits have adopted this “hypertechnical” analysis, the Supreme Court declined to hear the case. For a copy of the Seventh Circuit’s opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=05-3984_029.pdf.
Banking
FHFB Approves Set-Aside Programs for Refinancing Subprime Mortgage Loans. On April 9, the Federal Housing Finance Board (FHFB) voted to issue for public comment a proposed rule to authorize the Federal Home Loan Banks to establish Affordable Housing Program (AHP) homeownership set-aside programs for the purpose of refinancing or restructuring low- or moderate-income households’ nontraditional or subprime mortgage loans. The new authority would expire on June 30, 2011. If Federal Home Loan Banks were to use the maximum proposed refinancing set-aside authority in 2008, they could provide almost $75 million to assist some 7,500 households facing possible loss of their homes. The FHFB requests comments on a number of issues, including whether it is generally appropriate for the AHP to provide subsidies for refinancing or restructuring existing owner-occupied mortgage loans. The proposed rule will be open for public comment for 60 days. For a copy of the proposed rule, please see http://www.fhfb.gov/GetFile.aspx?FileID=6725.
FRB Extends Deadline for Requests to Testify at Bank of America’s Countrywide Acquisition Meetings. On April 9, the Federal Reserve Board extended to April 15 the deadline for the submission of requests to testify at public meetings regarding the notice by Bank of America Corporation to acquire Countrywide Financial Corporation. The purpose of these meetings, to be held next month in Los Angeles, California, and Chicago, Illinois, is to collect information relating to factors the Board is required to consider under the Bank Holding Company Act. All persons wishing to testify must submit a written request to testify and include the following information: (i) identification of which meeting the participant wishes to attend; (ii) a brief statement of the nature of the expected testimony and the estimated time required for the presentation; (iii) the address and telephone number of the individual testifying; and (iv) identification of any special needs, such as a physical disability that may require assistance or individuals needing translation services or visual aids for their presentation. For a copy of the FRB press release, please see http://www.federalreserve.gov/newsevents/press/orders/20080409a.htm.
FDIC to Conduct Survey of Banks’ Efforts to Bring “Unbanked” into Economic Mainstream. On April 11, the Federal Deposit Insurance Corporation announced that this spring it will conduct a survey, the first of its kind nationwide, of FDIC-insured depository institutions to assess their efforts to serve individuals and families who have rarely, if ever, held a checking account, a savings account, or other type of transaction or check-cashing account at an insured depository institution. Questions will focus on: (i) banks’ financial education and outreach strategies; (ii) deposit, payment and credit products offered to entry-level consumers; (iii) challenges faced by insured institutions in serving unbanked and underbanked customers; and (iv) specific institutions’ programs to reach unbanked and underbanked consumers. The FDIC is also considering conducting, along with the U.S. Census Bureau, the first national household survey to collect data on the demographics of unbanked and underbanked households, and their perceived barriers when deciding how and where to conduct financial transactions. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2008/pr08029.html.
Consumer Finance
FHFB Approves Set-Aside Programs for Refinancing Subprime Mortgage Loans. On April 9, the Federal Housing Finance Board (FHFB) voted to issue for public comment a proposed rule to authorize the Federal Home Loan Banks to establish Affordable Housing Program (AHP) homeownership set-aside programs for the purpose of refinancing or restructuring low- or moderate-income households’ nontraditional or subprime mortgage loans. The new authority would expire on June 30, 2011. If Federal Home Loan Banks were to use the maximum proposed refinancing set-aside authority in 2008, they could provide almost $75 million to assist some 7,500 households facing possible loss of their homes. The FHFB requests comments on a number of issues, including whether it is generally appropriate for the AHP to provide subsidies for refinancing or restructuring existing owner-occupied mortgage loans. The proposed rule will be open for public comment for 60 days. For a copy of the proposed rule, please see http://www.fhfb.gov/GetFile.aspx?FileID=6725.
FRB Extends Deadline for Requests to Testify at Bank of America’s Countrywide Acquisition Meetings. On April 9, the Federal Reserve Board extended to April 15 the deadline for the submission of requests to testify at public meetings regarding the notice by Bank of America Corporation to acquire Countrywide Financial Corporation. The purpose of these meetings, to be held next month in Los Angeles, California, and Chicago, Illinois, is to collect information relating to factors the Board is required to consider under the Bank Holding Company Act. All persons wishing to testify must submit a written request to testify and include the following information: (i) identification of which meeting the participant wishes to attend; (ii) a brief statement of the nature of the expected testimony and the estimated time required for the presentation; (iii) the address and telephone number of the individual testifying; and (iv) identification of any special needs, such as a physical disability that may require assistance or individuals needing translation services or visual aids for their presentation. For a copy of the FRB press release, please see http://www.federalreserve.gov/newsevents/press/orders/20080409a.htm.
FDIC to Conduct Survey of Banks’ Efforts to Bring “Unbanked” into Economic Mainstream. On April 11, the Federal Deposit Insurance Corporation announced that this spring it will conduct a survey, the first of its kind nationwide, of FDIC-insured depository institutions to assess their efforts to serve individuals and families who have rarely, if ever, held a checking account, a savings account, or other type of transaction or check-cashing account at an insured depository institution. Questions will focus on: (i) banks’ financial education and outreach strategies; (ii) deposit, payment and credit products offered to entry-level consumers; (iii) challenges faced by insured institutions in serving unbanked and underbanked customers; and (iv) specific institutions’ programs to reach unbanked and underbanked consumers. The FDIC is also considering conducting, along with the U.S. Census Bureau, the first national household survey to collect data on the demographics of unbanked and underbanked households, and their perceived barriers when deciding how and where to conduct financial transactions. For a copy of the press release, please see http://www.fdic.gov/news/news/press/2008/pr08029.html.
Insurance
Standard Commercial Liability Insurance Policy Covers FCRA Violation. On March 31, 2008, the United States District Court for the Southern District of Indiana found that a standard commercial liability insurance policy provided coverage for claims made against an insured under the Fair Credit Reporting Act (FCRA). Am. Family Mut. Ins. Co. v. C.M.A. Mortgage, Inc., No. 1:06-cv-1044-SEB-JMS, 2008 WL 906230 (S.D. Ind. Mar. 31, 2008). American Family Insurance Company sought a declaration that it owed no defense or indemnity to C.M.A. Mortgage, Inc. d/b/a/ Eminent Mortgage Company (C.M.A.) in connection with a class action lawsuit filed by a consumer plaintiff against C.M.A. The plaintiff alleged that C.M.A. violated the FCRA by accessing his and other consumers’ credit reports without their permission and without a permissible purpose, such as to make a “firm offer of credit.” Following Zurich Am. Ins. Co. v. Fieldstone Mortgage Co., 2007 WL 3268460 (D. Md. Oct. 26, 2007) and Pietras v. Sentry Ins. Co., 2007 WL 715759 (N.D. Ill. Mar. 6, 2007), the court ruled in favor of the insured. Noting that, in interpreting insurance contracts, any ambiguity must be resolved in favor of the insured, the court found that a reasonable person who read the advertising injury provisions of the policies would conclude that coverage existed for a claim arising out of a violation of FCRA’s privacy protection rights in a solicitation letter because the policies covered liability for “[o]ral or written publication, in any manner, of material that violates a person’s right of privacy” and the solicitation letter at issue fell squarely within the insurance policy’s definition of advertisement. In addition, citing the Safeco Inc. Co. of Am. v. Burr, 127 S.Ct. 2201(2007), which determined that the state of mind necessary for statutory damages liability to attach in a FCRA case can be as minimal as carelessness, the court held that policy exclusions applying to “intentional” conduct did not exclude coverage for the FCRA violation alleged in the complaint. For a copy of this decision, please see http://www.buckleykolar.com/documents/AmerFamilyvCMA.pdf.
Litigation
First Circuit Affirms Dismissal of FCRA “Firm Offer” Lawsuit. The Court of Appeals for the First Circuit held that a solicitation that lacked material loan terms and was conditioned on proof of credit-worthiness was a “firm offer of credit,” and therefore did not violate the Fair Credit Reporting Act (FCRA). Dixon v. Shamrock Financial Corp., No. 07-1896 (1st Cir., April 3, 2008). According to the complaint, the lender accessed plaintiff’s credit report to provide him with a loan solicitation that invited him to receive a free loan consultation. The consumer argued that the solicitation was not a “firm offer of credit,” and therefore violated FCRA, because it did not include any information about the possible interest rate, the method for compounding interest, the loan amount, the term, or the costs and fees associated with the potential transaction, and was subject to the borrower being able to satisfy certain conditions – such as satisfying underwriting guidelines. The district court dismissed the lawsuit (as reported in InfoBytes, April 27, 2007) and the plaintiff appealed. The Court of Appeals affirmed the district court, rejecting the consumer’s argument that a conditional offer cannot be a firm offer by noting that, notwithstanding common-law concepts of “offer” and “acceptance,” FCRA expressly provides that “firm offers of credit” may be conditioned on the borrower meeting certain credit-worthiness criteria. With respect to plaintiff’s argument that the mailer did not include enough material terms for it to constitute a firm offer, the court held that FCRA, which includes “detailed requirement in some areas,” does not mandate that specific loan terms be included in a firm offer. According to the court, such disclosure requirements are set forth in the “related statutory scheme” of the Truth in Lending Act. For a copy of the opinion, please see http://www.buckleykolar.com/documents/DixonvShamrockFinCorp.pdf.
Standard Commercial Liability Insurance Policy Covers FCRA Violation. On March 31, 2008, the United States District Court for the Southern District of Indiana found that a standard commercial liability insurance policy provided coverage for claims made against an insured under the Fair Credit Reporting Act (FCRA). Am. Family Mut. Ins. Co. v. C.M.A. Mortgage, Inc., No. 1:06-cv-1044-SEB-JMS, 2008 WL 906230 (S.D. Ind. Mar. 31, 2008). American Family Insurance Company sought a declaration that it owed no defense or indemnity to C.M.A. Mortgage, Inc. d/b/a/ Eminent Mortgage Company (C.M.A.) in connection with a class action lawsuit filed by a consumer plaintiff against C.M.A. The plaintiff alleged that C.M.A. violated the FCRA by accessing his and other consumers’ credit reports without their permission and without a permissible purpose, such as to make a “firm offer of credit.” Following Zurich Am. Ins. Co. v. Fieldstone Mortgage Co., 2007 WL 3268460 (D. Md. Oct. 26, 2007) and Pietras v. Sentry Ins. Co., 2007 WL 715759 (N.D. Ill. Mar. 6, 2007), the court ruled in favor of the insured. Noting that, in interpreting insurance contracts, any ambiguity must be resolved in favor of the insured, the court found that a reasonable person who read the advertising injury provisions of the policies would conclude that coverage existed for a claim arising out of a violation of FCRA’s privacy protection rights in a solicitation letter because the policies covered liability for “[o]ral or written publication, in any manner, of material that violates a person’s right of privacy” and the solicitation letter at issue fell squarely within the insurance policy’s definition of advertisement. In addition, citing the Safeco Inc. Co. of Am. v. Burr, 127 S.Ct. 2201(2007), which determined that the state of mind necessary for statutory damages liability to attach in a FCRA case can be as minimal as carelessness, the court held that policy exclusions applying to “intentional” conduct did not exclude coverage for the FCRA violation alleged in the complaint. For a copy of this decision, please see http://www.buckleykolar.com/documents/AmerFamilyvCMA.pdf.
Federal Court Allows FCRA “Firm Offer” Case to Go Forward. On April 1, 2008, a federal district court denied a lender’s motion for summary judgment in a Fair Credit Reporting Act (FCRA) claim where the lender accessed a potential borrower’s credit report without authorization. McDonald v. NextStudent, Inc., No. 4:07CV0001, 2008 WL 906814 (E.D. Mo. Apr. 1, 2008). The plaintiff alleged that she received a mailing from the lender regarding her student loans that was not a firm offer of credit under FCRA. The borrower further alleged that this constituted a willful violation of FCRA, and she represented a class of borrowers similarly situated. The lender moved for summary judgment, claiming that while the initial letter mailed to the borrower was not a firm offer of credit, the mailing was the invitation to begin a “multi-step” process and a firm offer of credit would later be made orally. The district court found no precedent or legal support for this argument and allowed the case to go forward for a determination of “willfulness.” For a copy of this decision, please see http://www.buckleykolar.com/documents/McDonaldvNextStudent.pdf.
Court Rejects FCRA and ECOA Adverse Action Claims as Time Barred. On March 31, a federal district court rejected a borrower’s adverse action claims against a car dealership based on the two year statute of limitations period under each of the Fair Credit Reporting Act (FCRA) and Equal Credit Opportunity Act (ECOA). Clemons v. Cutler Ridge Automotive, Inc. 2008 WL 879324 (S.D. Fla. March 31, 2008). The consumer alleged that, when in the process of purchasing an automobile, the defendant car dealership violated FCRA by unlawfully accessing her credit, and violated FCRA and ECOA by failing to issue an adverse action notice when credit was denied. The court held that the plaintiff could not amend her complaint regarding a four year old incident with FCRA and ECOA adverse action claims, reasoning that those claims were new causes of action that did not “relate back” to a timely filed FCRA credit reporting claim and were therefore barred by the two year limitations period under both statutes. In granting summary judgment for the lender, the court also ruled against the plaintiff on her FCRA credit reporting claim, rejecting her contention that her signed credit application was the result of a subterfuge on the part of the lender and therefore not a permissible purpose to obtain a credit report under the FCRA. For a copy of the court’s ruling, please see http://www.buckleykolar.com/documents/ClemonsvCutlerRidgeAutomotive.pdf.
Court Rules No Private Right of Action Under Administration Enforcement Provisions of FCRA. On March 31, the federal District Court for the Northern District of Oklahoma granted summary judgment to a lender for a claim under the Fair Credit Reporting Act (FCRA). Pinson v. Equifax Credit Information Services, Inc., 2008 WL 906222 (N.D. Okla.). Consumer plaintiffs alleged that the lender made inaccurate reports to consumer credit reporting agencies. The court held that a consumer does not have a private right of action against furnishers of information under the administrative enforcement section of the FCRA. The court then held that plaintiffs do have a limited private right of action against furnishers of information under a different part of FCRA, but indicated that this right could only arise after the furnisher of information receives notice of a consumer dispute from a credit agency. The court went on to state that the plaintiff had failed to meet the two-year statute of limitations that applied to FCRA at the time the suit was filed. The court explained that while FCRA was later amended to extend the statute of limitations to either two years following discovery of a violation, or five years following the occurrence of the violation, the court could not retroactively apply the amendments to the plaintiff’s complaint. Because the plaintiffs had failed to file a claim within two years of the violation in question, the court granted summary judgment not only to Defendant Litton Loan Services, Inc., but also to the defendant credit agencies. For a copy of these opinions, please see http://www.buckleykolar.com/documents/PinsonvEquifax1.pdf, http://www.buckleykolar.com/documents/PinsonvEquifax2.pdf, http://www.buckleykolar.com/documents/PinsonvEquifax3.pdf, and http://www.buckleykolar.com/documents/PinsonvEquifax4.pdf.
Court Rules Against Creditor’s First Amendment Defense in FACTA Case. In a class action case against Jewel Food Stores (Jewel) brought by various customers of Jewel, the U.S. District Court for the Northern District of Illinois granted the plaintiffs’ motions for summary judgment on two of Jewel’s affirmative defenses. Cicilline v. Jewel Food Stores, Inc., No. 07-CV-2333, 2008 WL 895677 (N.D.Ill. March 31, 2008). In their complaint, the plaintiffs allege that Jewel violated the Fair and Accurate Credit Transactions Act of 2003 (FACTA), 15 U.S.C. § 1681c(g), by printing the expiration date on their credit card receipts. The FACTA truncation section provides: “No person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder.” Jewel argued that this provision of FACTA interferes with Jewel’s First Amendment rights by unnecessarily impeding Jewel’s ability as a retailer to confirm to its customers that the transaction has been appropriately charged and prohibits more speech than is necessary to serve the government’s interest in deterring identity theft. The court acknowledged that the receipts constitute protected commercial speech under the First Amendment and that the FACTA truncation restrictions would be unconstitutional if they were determined to be excessive. Commercial speech may not be restricted if the restriction does not directly advance the state interest involved and if the government interest could be served as well by a more limited restriction on commercial speech. In this case, the court found that the redaction of a credit card’s expiration date serves as an added safeguard against identity theft, thus meeting the state interest test, and that Jewel has not demonstrated that a feasible alternative to truncation exists. Therefore, the court held that FACTA’s truncation requirements are constitutionally permissible. Jewel also argued that the FACTA truncation provision was ambiguous and should be construed to allow the printing of the expiration date together with no more than five digits of the account number. However, the court held that no ambiguity exists and that both the courts and the Federal Trade Commission have consistently indicated that under FACTA a merchant may print no more than five digits and may not print the expiration date on the receipt. The court granted the plaintiffs’ motions on these two affirmative defenses. For a copy of the opinion, please see http://www.buckleykolar.com/documents/CicillinevJewelFoodStores2.pdf.
Supreme Court Denies Certiorari in TILA Case. On March 24, 2008, the United States Supreme Court denied a writ of certiorari to a Seventh Circuit case concerning the specificity requirement of the Truth in Lending Act (TILA). Ameriquest Mortgage Securities Inc. v. Hamm, U.S., No. 07-941, cert. denied (Mar. 24, 2008). The Seventh Circuit held that a lender must specifically include the requirements of loan term payments, and that a disclosure statement that does not mention monthly payments is insufficient (see InfoBytes, October 19, 2007.) According to the Court of Appeals, “hypertechnicality” reigns in interpreting TILA. Despite the fact that not all Circuits have adopted this “hypertechnical” analysis, the Supreme Court declined to hear the case. For a copy of the Seventh Circuit’s opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=05-3984_029.pdf.
E-Financial Services
Court Rules Against Creditor’s First Amendment Defense in FACTA Case. In a class action case against Jewel Food Stores (Jewel) brought by various customers of Jewel, the U.S. District Court for the Northern District of Illinois granted the plaintiffs’ motions for summary judgment on two of Jewel’s affirmative defenses. Cicilline v. Jewel Food Stores, Inc., No. 07-CV-2333, 2008 WL 895677 (N.D.Ill. March 31, 2008). In their complaint, the plaintiffs allege that Jewel violated the Fair and Accurate Credit Transactions Act of 2003 (FACTA), 15 U.S.C. § 1681c(g), by printing the expiration date on their credit card receipts. The FACTA truncation section provides: “No person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder.” Jewel argued that this provision of FACTA interferes with Jewel’s First Amendment rights by unnecessarily impeding Jewel’s ability as a retailer to confirm to its customers that the transaction has been appropriately charged and prohibits more speech than is necessary to serve the government’s interest in deterring identity theft. The court acknowledged that the receipts constitute protected commercial speech under the First Amendment and that the FACTA truncation restrictions would be unconstitutional if they were determined to be excessive. Commercial speech may not be restricted if the restriction does not directly advance the state interest involved and if the government interest could be served as well by a more limited restriction on commercial speech. In this case, the court found that the redaction of a credit card’s expiration date serves as an added safeguard against identity theft, thus meeting the state interest test, and that Jewel has not demonstrated that a feasible alternative to truncation exists. Therefore, the court held that FACTA’s truncation requirements are constitutionally permissible. Jewel also argued that the FACTA truncation provision was ambiguous and should be construed to allow the printing of the expiration date together with no more than five digits of the account number. However, the court held that no ambiguity exists and that both the courts and the Federal Trade Commission have consistently indicated that under FACTA a merchant may print no more than five digits and may not print the expiration date on the receipt. The court granted the plaintiffs’ motions on these two affirmative defenses. For a copy of the opinion, please see http://www.buckleykolar.com/documents/CicillinevJewelFoodStores2.pdf.
Privacy/Data Security
South Carolina Enacts “Financial Identity Fraud and Identity Theft Protection Act”. On April 2, South Carolina Governor Mark Sanford signed the “Financial Identity Fraud and Identity Theft Protection Act” (the “Act”) protecting against identity theft. Among its provisions, the Act provides for: (i) protection in regard to the use of a consumer’s social security number and personal identifying information on a mortgage and in preparation of documents for public filing; and (ii) provisions on the consumer’s ability to impose a security freeze on his/her credit report if he or she has reason to believe they have been victimized by identity theft. The Act also provides for disclosure by an agency of unauthorized access to personal identifying information of a resident whose information the agency owns. Although the Act will become effective December 31, 2008, the breach of security disclosure requirement section will be effective July 1, 2009. For a copy of the Act, please see http://www.scstatehouse.net/sess117_2007-2008/bills/453.htm.
Federal Court Allows FCRA “Firm Offer” Case to Go Forward. On April 1, 2008, a federal district court denied a lender’s motion for summary judgment in a Fair Credit Reporting Act (FCRA) claim where the lender accessed a potential borrower’s credit report without authorization. McDonald v. NextStudent, Inc., No. 4:07CV0001, 2008 WL 906814 (E.D. Mo. Apr. 1, 2008). The plaintiff alleged that she received a mailing from the lender regarding her student loans that was not a firm offer of credit under FCRA. The borrower further alleged that this constituted a willful violation of FCRA, and she represented a class of borrowers similarly situated. The lender moved for summary judgment, claiming that while the initial letter mailed to the borrower was not a firm offer of credit, the mailing was the invitation to begin a “multi-step” process and a firm offer of credit would later be made orally. The district court found no precedent or legal support for this argument and allowed the case to go forward for a determination of “willfulness.” For a copy of this decision, please see http://www.buckleykolar.com/documents/McDonaldvNextStudent.pdf.
Court Rejects FCRA and ECOA Adverse Action Claims as Time Barred. On March 31, a federal district court rejected a borrower’s adverse action claims against a car dealership based on the two year statute of limitations period under each of the Fair Credit Reporting Act (FCRA) and Equal Credit Opportunity Act (ECOA). Clemons v. Cutler Ridge Automotive, Inc. 2008 WL 879324 (S.D. Fla. March 31, 2008). The consumer alleged that, when in the process of purchasing an automobile, the defendant car dealership violated FCRA by unlawfully accessing her credit, and violated FCRA and ECOA by failing to issue an adverse action notice when credit was denied. The court held that the plaintiff could not amend her complaint regarding a four year old incident with FCRA and ECOA adverse action claims, reasoning that those claims were new causes of action that did not “relate back” to a timely filed FCRA credit reporting claim and were therefore barred by the two year limitations period under both statutes. In granting summary judgment for the lender, the court also ruled against the plaintiff on her FCRA credit reporting claim, rejecting her contention that her signed credit application was the result of a subterfuge on the part of the lender and therefore not a permissible purpose to obtain a credit report under the FCRA. For a copy of the court’s ruling, please see http://www.buckleykolar.com/documents/ClemonsvCutlerRidgeAutomotive.pdf.
Credit Cards
Court Rules Against Creditor’s First Amendment Defense in FACTA Case. In a class action case against Jewel Food Stores (Jewel) brought by various customers of Jewel, the U.S. District Court for the Northern District of Illinois granted the plaintiffs’ motions for summary judgment on two of Jewel’s affirmative defenses. Cicilline v. Jewel Food Stores, Inc., No. 07-CV-2333, 2008 WL 895677 (N.D.Ill. March 31, 2008). In their complaint, the plaintiffs allege that Jewel violated the Fair and Accurate Credit Transactions Act of 2003 (FACTA), 15 U.S.C. § 1681c(g), by printing the expiration date on their credit card receipts. The FACTA truncation section provides: “No person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder.” Jewel argued that this provision of FACTA interferes with Jewel’s First Amendment rights by unnecessarily impeding Jewel’s ability as a retailer to confirm to its customers that the transaction has been appropriately charged and prohibits more speech than is necessary to serve the government’s interest in deterring identity theft. The court acknowledged that the receipts constitute protected commercial speech under the First Amendment and that the FACTA truncation restrictions would be unconstitutional if they were determined to be excessive. Commercial speech may not be restricted if the restriction does not directly advance the state interest involved and if the government interest could be served as well by a more limited restriction on commercial speech. In this case, the court found that the redaction of a credit card’s expiration date serves as an added safeguard against identity theft, thus meeting the state interest test, and that Jewel has not demonstrated that a feasible alternative to truncation exists. Therefore, the court held that FACTA’s truncation requirements are constitutionally permissible. Jewel also argued that the FACTA truncation provision was ambiguous and should be construed to allow the printing of the expiration date together with no more than five digits of the account number. However, the court held that no ambiguity exists and that both the courts and the Federal Trade Commission have consistently indicated that under FACTA a merchant may print no more than five digits and may not print the expiration date on the receipt. The court granted the plaintiffs’ motions on these two affirmative defenses. For a copy of the opinion, please see http://www.buckleykolar.com/documents/CicillinevJewelFoodStores2.pdf.