InfoBytes, January 13, 2006
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Topics in this issue:
Federal Issues
Federal Bank and Thrift Agencies Open Proposed Guidance on Commercial Real Estate Lending for Comment. On January 10, 2006, the Board of Governors of the Federal Reserve (the Fed), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) (together, the Agencies) opened for comment proposed guidance on sound risk management practices for concentrations in commercial real estate lending. The proposed guidance aims to minimize the risk that lending institutions are exposed to by unanticipated earnings and capital volatility by reinforcing the need for robust risk-management systems and capital levels higher than the prescribed regulatory minimums. All comments are due 60 days after publication of the proposed guidelines in the Federal Register. For more information on the Agencies request for comment, see http://www.federalreserve.gov/boarddocs/press/bcreg/2006/20060110/default.htm.
AmeriDebt Founder Settles FTC Deception Charges. On January 9, 2006, the FTC announced a comprehensive settlement of its case against Andris Pukke, founder of AmeriDebt, Inc., and his remaining company, DebtWorks, Inc. Pending approval by a federal court in Maryland, the settlement will require the forfeiture of virtually all of Mr. PukkeÂ’s assets for a consumer redress program, which could involve as much as $35 million, and will permanently bar Mr. Pukke from the credit counseling and debt management business. The FTCÂ’s case against Mr. Pukke and related entities was the largest deceptive credit counseling case ever brought by the agency. For a copy of the FTC announcement of the Pukke settlement, see http://www.ftc.gov/opa/2006/01/andrispukke.htm
Two Anti-Spyware Operators Settle FTC Charges. Two anti-spyware operators, MaxTheater, Inc. and Trustsoft, Inc., recently entered into separate settlement agreements with the Federal Trade Commission (FTC) in response to charges by the FTC that the two anti-spyware operators falsely claimed to detect spyware and then sold consumers anti-spyware software that either did not work or did not work as advertised. The settlements require the defendants to give up a total of nearly $2 million (MaxTheater will pay $76,000 and Trustsoft will pay approximately $1.9 million), and prohibit deceptive claims. To view the FTCÂ’s press release in its entirety, see http://www.ftc.gov/opa/2006/01/maxtrust.htm.
HUD Announces Grants for Very Low-Income Groups. On January 5, 2006, the Department of Housing and Urban Development (HUD) pledged over $700 million to grants for very low-income elderly and persons with disabilities. The grants to HUD’s Section 202 program for the elderly, and Section 811 program for persons with disabilities, will improve the availability of affordable housing either through funding the construction and development of new housing or through subsidizing rent for qualifying individuals. To qualify for assistance, a household must be classified as “very low-income,” which requires an income of less than 50 percent of the area median income. For more information, see http://www.hud.gov/news/release.cfm?content=pr06-003.cfm.
State Issues
New Jersey Legislature Enacts Insurance Reform Bill for Health Savings Accounts. A. 4543, approved on December 21, 2005 by acting Governor Codey, permits New Jersey residents to take advantage of the federal tax benefits associated with investing in health savings accounts (HSAs) to pay for medical care. The enacted bill amends existing regulations to bring New JerseyÂ’s HSA laws into compliance with federal requirements. The measure modifies the state’s insurance law to allow for the sale of high-deductible health plans that meet federal requirements for health savings accounts. A copy of the legislation may be obtained at http://www.njleg.state.nj.us/2004/Bills/AL05/248_.HTM.
Courts
Third Circuit Issues Ruling Requiring Lenders to Provide All Required TILA Disclosures. On January 5, 2006, the Third Circuit, in Vallies v. Sky Bank, No. 05-1002 (3rd Cir. Jan. 5, 2006), decided that the Truth in Lending Act (TILA) and its implementing regulation, Regulation Z, require the creditor to provide all required TILA disclosures. The Third Circuit decided that a creditor violates TILA if it does not provide all of the required TILA disclosures, even if the borrower receives them from another source. In Vallies, the plaintiff argued that Sky Bank violated TILA by not including Guaranteed Auto Protection (GAP), a type of debt cancellation coverage, in the calculated total finance charge. Even though Sky Bank did not provide the requisite TILA disclosures regarding the GAP premium, Vallies nevertheless received them from the auto dealership that sold the car. The court, however, determined that the creditor must make all of the required TILA disclosures, emphasizing “that the TILA places a clear and affirmative duty on the actual creditor itself to disclose any and all required information pertaining to GAP coverage and that where the creditor fails to disclose this information, it has violated TILA regardless of the ultimate receipt of information.” To obtain a copy of this decision, see http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=year&court=3rd&YEAR2.
Court Upholds Citigroup Arbitration Agreement Barring Class Action Suits. On December 16, 2005, the United States District Court for the District of New Jersey upheld a Citigroup (Defendant) Arbitration Agreement which required Plaintiffs to arbitrate their claims and barred the possibility of a class action lawsuit. Cunningham v. Citigroup, D.N.J., No. 05-3476, unpublished opinion 12/16/05. The case arose out of a security breach where a third party courier (United Parcel Service) lost possession of Citigroup computer tapes containing confidential information regarding Plaintiffs’ loans and accounts. The Plaintiffs sought to certify a class action and, among other claims, asserted a negligence claim against the financial institution. In order to escape the provisions of the Arbitration Agreement, Plaintiffs argued that the Agreement was substantively unconscionable on the grounds that (1) they were exposed to undue expense in challenging the financial institution’s business practices, (2) that the Agreement lacked mutuality because certain claims are excluded in favor of the financial institution and, (3) that the anti-class action provision is inconsistent with public policy favoring class actions to protect common law consumer rights. With respect to the first claim, the Court found that the arbitration costs to the Plaintiffs are speculative and the “mere possibility” that an arbitrator may require the Plaintiff to bear excessive fees is not sufficient to invalidate an otherwise valid arbitration agreement. As to the Agreement’s provision that excludes certain types of claims from arbitration, the Court also was not persuaded by Plaintiff’s arguments, including the claim that arbitration is “less desirable” or a “substandard forum.” The Court cited the liberal federal policy favoring arbitration and the rejection of “generalized attacks on arbitration that rest on ‘suspicion of arbitration as a method of weakening the protections afforded in the substantive law to would be complainants.’ Finally, the Court held that the anti-class action provision did not render the Agreement unconscionable. Under New Jersey state law, such an anti-class action provision was not found to be per se contrary to public policy. Furthermore, the Court rejected the Plaintiff’s claim that individual claimants would lack an incentive to bring suit against the defendant since the potential recovery for an individual was relatively small. The Court first noted that small claims (under $15,000) were excluded from the mandatory arbitration provision. In addition, the Court, citing precedent from the Third Circuit, noted that there is no reason to conclude that recovery available to individual claimants is “automatically increased by use of the class forum.” Thus, the Court found that the plaintiffs had a “viable means” to pursue their claim in small claims court under the terms of the Agreement.
Declaration of Hardship in Chapter 13 Plan Insufficient to Discharge Student Loan According. On December 15, 2005, the Second Circuit Court of Appeals held that the inclusion of a “declaration of hardship” in a debtor’s Chapter 13 plan did not discharge the debtor’s student loan debt. The debtor’s Chapter 13 plan included a clause providing that the exclusion of educational loans from discharge would impose an undue hardship upon the debtor. Although the creditor did not object to the plan, and failed to attend the creditors’ meeting, the court held that under the U.S. Bankruptcy Code, the debtor was required to “initiate adversary proceedings with proper service of a summons and complaint” in order to attempt to defeat the statutory presumption against student loan discharge. Thus, according to the court, a mere declaration of hardship did not provide the creditor with sufficient notice of the debtor’s attempt to discharge the loan. See Whelton v. Educational Credit Management Corp., No. 04-4844-CV, 2005 WL 3436663 (2nd Cir. Dec. 15, 2005).
Firm News
This past week, at a meeting of the Consumer Financial Services Committee of the American Bar Association in Park City, Utah, Joe Kolar moderated a panel discussing the issue “Do RESPA and TILA Clash,” an inquiry into the harmonization of the two statutes in the context of possible RESPA reform.
Miscellany
Comptroller Dugan Issues Statement Regarding Real Estate Rulings. On January 11, 2006, Comptroller of the Currency John C. Dugan issued a statement in an effort to correct a fundamental misunderstanding of the effect of three recent OCC interpretive letters. The referenced interpretative letters include two letters dealing with the ability of two different banks to establish facilities on property currently owned by each bank, and a third letter regarding a bank financing an LLC in the form of holding an interest in the LLC, in order to utilize tax credits. The Comptroller stated that the letters regarding the ability of banks to hold real estate used for the banksÂ’ business and to provide financing involving an indirect interest in real estate were not intended to expand, nor do they expand, the authority of national banks to hold real estate. The Comptroller further stated that the letters have nothing to do with real estate brokerage or preemption, and they do not represent an erosion of the separation of banking and commerce. For the complete text of the statement, see http://www.occ.treas.gov/toolkit/newsrelease.aspx?Doc=9N8ZI1XU.xml.
Subsidiary of Bank to Follow Islamic Law. University Bank of Ann Arbor, Michigan has formed University Islamic Financial Corp., a subsidiary organized to serve the financial needs of Muslims. The subsidiary will focus on home financing, deposit accounts, and selling Islamic mutual fund shares. The bankÂ’s operations will be in full compliance with Shariah, which prohibits receiving or paying interest. To do so, University Islamic Financial Corp. will offer deposit accounts in which profits are shared rather than paid into individual accounts as interest. The subsidiary will also offer an alternative mortgage loan in which the bank holds the home in trust and a home buyer makes monthly payments into the trust. There are currently more than 250 Islamic banks around the world managing more than $200 billion. This is the first such bank in the United States. For more information, see http://www.myrtlebeachonline.com/mld/myrtlebeachonline/news/nation/13537518.htm.
New Identity Theft Quiz Helps Teach Users to Be On Guard Online. On January 10, 2006, the Federal Trade Commission unveiled an interactive online quiz designed to test consumers’ knowledge about protecting their personal information and responding if their identity is stolen. The new quiz is one of several offered by OnGuard Online, a new multimedia, interactive consumer education campaign launched by the FTC and a partnership of other federal agencies and the technology industry. The quizzes and other information on the website, OnGuardOnline.gov, may be downloaded by companies and other organizations to use in their own computer security programs. To access the identity theft quiz, see http://onguardonline.gov/quiz/idtheft_quiz.html. To access all of the quizzes, which include information on “phishing scams” and spyware, see http://www.onguardonline.gov/quiz/.