InfoBytes, January 27, 2006
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Topics in this issue:
Federal Issues
States Impacted by Hurricanes to Receive $11.5 Billion in HUD Disaster Relief. On January 25, 2006, HUD Secretary Alphonso Jackson said HUD will distribute $11.5 billion in disaster relief funding to 5 states affected by Hurricanes Katrina, Rita and Wilma: Alabama, Florida, Louisiana, Mississippi, and Texas. Legislation allocating the relief funds was signed by President Bush on December 30, 2005. The funds are based on the number of uninsured homeowners and low-income renters in each state whose homes had major or severe damage, and the total number of housing units with major or severe housing damage in counties where 50% or more of units had major or severe damage. Most of the money will be used to support recovery efforts in Louisiana and Mississippi. For more information, see http://www.hud.gov/news/release.cfm?content=pr06-011.cfm.
Interagency Guidance Issued Regarding SAR Information Sharing. On January 20, 2006, the Financial Crimes Enforcement Network (FinCEN), along with the federal banking agencies issued an interagency guidance to sharing Suspicious Activity Reports (SAR) with head offices and controlling companies. It confirms that under the Bank Secrecy Act and its implementing regulations (and parallel regulations issued by the federal banking agencies), a U.S. branch or agency of a foreign bank may disclose SARs to its head office outside the United States and a U.S. bank or savings association may disclose SARs to controlling companies whether domestic or foreign. The guidance marks the first time that FinCEN or the banking agencies has taken a definitive position concerning whether a depository institution can share or disclose SARs (or even the fact that a report was filed) to entities within its corporate structure. See http://www.fincen.gov/sarsharingguidance01122006.pdf.
Final Rule Issued on Enhancing RegFlex Eligibility and Secondary Capital Requirements for Low-Income Credit Unions. On January 19, The National Credit Union Administration Board (NCUA) approved final rule changes to Part 742 which reduces the minimum net worth requirement and extends the time frame minimum net worth must be maintained to qualify for the Regulatory Flexibility Program (RegFlex). NCUA also approved final rules to Section 701.34 which allows low-income designated credit unions to redeem funds in secondary capital accounts within five years of maturity and requires prior approval of a credit union’s plan for the use and repayment of secondary capital. For more information see http://www.ncua.gov/news/press_releases/2006/NR06-0119.htm.
Choicepoint Settles Data Security Breach Charges: Highest Civil Penalty in FTC History. On January 26, 2006, the Federal Trade Commission announced that consumer data broker ChoicePoint, Inc. settled charges that its security and record-handling procedures violated the Fair Credit Reporting Act (FCRA) and FTC Act. At least 800 cases of identity theft have arisen as a result of the 2005 security breach that exposed the financial records of more than 163,000 consumers. The FTC alleges that ChoicePoint did not have reasonable procedures to screen customers who attempted to purchase consumer information from them and, as a result of furnishing consumer reports to customers who did not have a permissible purpose to obtain them, violated the FCRA statute. Moreover, the FTC charged that ChoicePoint violated the FTC Act because it allegedly made false and misleading statements about its privacy policies. In addition to the $10 million in civil penalties and the $5 million in consumer redress, the settlement requires ChoicePoint to implement new procedures to prevent future security breaches, including procedures to ensure that consumer reports are only provided to legitimate business for lawful purposes, establishing and maintaining a comprehensive information security program, and obtaining audits by third-party security professionals every other year until 2026. To view the FTC Press Release, see http://www.ftc.gov/opa/2006/01/choicepoint.htm.
State Issues
States Impacted by Hurricanes to Receive $11.5 Billion in HUD Disaster Relief. On January 25, 2006, HUD Secretary Alphonso Jackson said HUD will distribute $11.5 billion in disaster relief funding to 5 states affected by Hurricanes Katrina, Rita and Wilma: Alabama, Florida, Louisiana, Mississippi, and Texas. Legislation allocating the relief funds was signed by President Bush on December 30, 2005. The funds are based on the number of uninsured homeowners and low-income renters in each state whose homes had major or severe damage, and the total number of housing units with major or severe housing damage in counties where 50% or more of units had major or severe damage. Most of the money will be used to support recovery efforts in Louisiana and Mississippi. For more information, see http://www.hud.gov/news/release.cfm?content=pr06-011.cfm.
Interagency Guidance Issued Regarding SAR Information Sharing. On January 20, 2006, the Financial Crimes Enforcement Network (FinCEN), along with the federal banking agencies issued an interagency guidance to sharing Suspicious Activity Reports (SAR) with head offices and controlling companies. It confirms that under the Bank Secrecy Act and its implementing regulations (and parallel regulations issued by the federal banking agencies), a U.S. branch or agency of a foreign bank may disclose SARs to its head office outside the United States and a U.S. bank or savings association may disclose SARs to controlling companies whether domestic or foreign. The guidance marks the first time that FinCEN or the banking agencies has taken a definitive position concerning whether a depository institution can share or disclose SARs (or even the fact that a report was filed) to entities within its corporate structure. See http://www.fincen.gov/sarsharingguidance01122006.pdf.
Final Rule Issued on Enhancing RegFlex Eligibility and Secondary Capital Requirements for Low-Income Credit Unions. On January 19, The National Credit Union Administration Board (NCUA) approved final rule changes to Part 742 which reduces the minimum net worth requirement and extends the time frame minimum net worth must be maintained to qualify for the Regulatory Flexibility Program (RegFlex). NCUA also approved final rules to Section 701.34 which allows low-income designated credit unions to redeem funds in secondary capital accounts within five years of maturity and requires prior approval of a credit union’s plan for the use and repayment of secondary capital. For more information see http://www.ncua.gov/news/press_releases/2006/NR06-0119.htm.
Choicepoint Settles Data Security Breach Charges: Highest Civil Penalty in FTC History. On January 26, 2006, the Federal Trade Commission announced that consumer data broker ChoicePoint, Inc. settled charges that its security and record-handling procedures violated the Fair Credit Reporting Act (FCRA) and FTC Act. At least 800 cases of identity theft have arisen as a result of the 2005 security breach that exposed the financial records of more than 163,000 consumers. The FTC alleges that ChoicePoint did not have reasonable procedures to screen customers who attempted to purchase consumer information from them and, as a result of furnishing consumer reports to customers who did not have a permissible purpose to obtain them, violated the FCRA statute. Moreover, the FTC charged that ChoicePoint violated the FTC Act because it allegedly made false and misleading statements about its privacy policies. In addition to the $10 million in civil penalties and the $5 million in consumer redress, the settlement requires ChoicePoint to implement new procedures to prevent future security breaches, including procedures to ensure that consumer reports are only provided to legitimate business for lawful purposes, establishing and maintaining a comprehensive information security program, and obtaining audits by third-party security professionals every other year until 2026. To view the FTC Press Release, see http://www.ftc.gov/opa/2006/01/choicepoint.htm.
Courts
Connecticut Statute Regulating Gift Card Fees Does Not Violate Commerce Clause. On January 5, 2006, the United States District Court issued a ruling against SPGGC, Inc. in SPGGC, Inc. v. Blumenthal, 3:04cv1919 (SRU), in connection with SPGGC’s claims that the Connecticut Gift Card Law (“CGCL”) violated the Commerce Clause of the U.S. Constitution. SPGGC operates malls and sells gift cards that are issued by Bank of America. SPGGC alleged that the CGCL’s restrictions on gift card fees and expiration dates disparately impacted Connecticut commerce and could regulate gift cards sold outside Connecticut, thereby violating the Commerce Clause. The District Court determined that SPGGC “failed to state a claim that the CGCL has an extraterritorial reach, such that it has a disparate impact on interstate commerce as compared to commerce within Connecticut.” SPGGC also claimed that the National Bank Act preempts the CGCL. However, the court did not address the bank act argument on its merits because SPGGC is not a national bank. For a copy of the court’s decision, see http://www.ctd.uscourts.gov/Opinions/010606.SRU.SPGGC3.pdf.
Ninth Circuit Reiterates That Offer of Insurance Premium Above Best Available is FCRA Adverse Action; Remands Willfulness Issue to District Court. In the latest chapter in its consideration of the “Insurance Prong” of FCRA’s definition of adverse action, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit, issued a third revised opinion in Reynolds v. Hartford Financial Services Group, 2006 WL 171920 (1/25/06). The panel did not change its previous unanimous opinion that FCRA adverse action in insurance transactions occurs when a premium initially offered to a customer is higher than it would have been absent information in a consumer report, but the two judges who had previously held that the defendants’ conduct was “willful,” resulting in statutory damages of $100-$1,000 per violation, now agree with the dissenter in the earlier versions of the opinion that the case should be remanded to the district court for further proceedings to determine whether the insurance companies’ FCRA violations were “willful.” The court also did not disturb its other substantive holdings: (1) a “no-hit” is a consumer report, triggering an adverse action notice, as does an offer at a better premium rate than the rate offered to consumers with average scores if some consumers were offered a still better rate; (2) the adverse action notice must explain that “an adverse action based on a consumer report was taken, describe the action, specify the effect of the action upon the consumer, and explain the role played by the various affiliates; and (3) any company within a family of companies that was involved in the adverse action decision can be sued for failing to provide a notice, not just the policy-issuing company. A petition for rehearing en banc on the earlier versions of the opinion is still pending, and the panel gave the parties 14 days to decide whether to (1) let their existing petitions for rehearing stand, (2) file revised petitions for rehearing, or (3) withdraw their petitions for rehearing. Because the opinion is now unanimous and the case has been remanded, the chances that an en banc hearing would be granted have been reduced dramatically.
Prescreened Offer That Is Subject to Change at Any Time Is Willful Violation of FCRA. In a brief order, the U.S. District Court for the Northern District of Illinois held that a lender whose solicitation letter stated, “Rates and terms subject to change at any time,” violated the requirement that a lender make a “firm offer” of credit in order to have a permissible purpose to access credit information under FCRA. Citing a reference in the recent Seventh Circuit opinion in Murray v. GMAC Mortgage Corp., — F.3d —, 2006 WL 90081 (7th Cir. Jan. 17, 2006) (see InfoBytes, Jan. 20, 2006, available at http://www.buckleykolar.com/publications/InfoBytes012006.html, to the need for the “four corners of the offer” to satisfy the FCRA definition of a “firm offer,” the court held that the offer could not be “firm” because it was subject to change at any time. The court interpreted the “offer” as synonymous with the initial solicitation letter, dismissing the defendant’s contention that “circumstances outside the contents of the mailer are relevant to a determination of whether defendant has extended a ‘firm offer of credit.Ҕ Furthermore, the court held that the lender’s violation was “willful” as a matter of law, although the solicitation was reviewed by the lender’s compliance officer and by the consumer reporting agency that provided the information. This subjects the lender to statutory damages of $100 to $1,000 per violation, plus potential additional punitive damages, as well as any actual damages and attorney’s fees and court costs. Although the court’s implication that the entire “firm offer” must be contained in the initial solicitation has troubling implications for the ability of mortgage lenders to conduct prescreened credit solicitations, this decision could have a more limited impact if it is read as only applying to solicitations that state that the rates and terms are subject to change at any time. See Kudlicki v. Farragut Financial Corp., No. 05-C-2459 (N.D. Ill. Jan. 20, 2006).
Ameriquest Agrees to Settlement Over Predatory Lending Practices. A nationwide settlement was announced in which Ameriquest Mortgage Company agreed to pay $325 million to resolve claims that its predatory lending practices harmed consumers. In addition to the settlements payment structure, which will pay $295 million to consumers in all 50 states, except Virginia, and $30 million to the District of Columbia, the settlement requires Ameriquest reforms its lending practices. It must provide accurate good faith estimates, limit prepayment penalty periods on variable rate mortgages, and use independent loan closers. An independent monitor will be appointed and given broad authority to review AmeriquestÂ’s lending operations. The monitor is expected to document for the next five years. Ameriquest will pay the costs associated with the independent monitor. The settlement includes AmeriquestÂ’s holding company, ACC Capital Holding Corporation, and its subsidiaries, Ameriquest Mortgage Company, Town & Country Credit Corporation and AMC Mortgage Services, Inc. For a copy of text of the unexecuted settlement, contact
Firm News
On February 2-3, 2006, Bob Serino will speak at the American Law Institute-American Bar Association’s Financial Services Institute 2006 in Washington, DC. His panel will address the USA Patriot Act, Bank Secrecy Act, and Anti-Money Laundering Initiatives from a multi-industry perspective. Information on the seminar is available at http://www.ali-aba.org/aliaba/CL015.htm.
On February 11, 2006, Kirk Jensen will be a speaker at the 5th Annual Consumer Law and Consumer Credit Symposium at the UNC Chapel Hill School of Law on the topic of "Consumer Arbitration: For Better or For Worse." For more information, see http://www.law.unc.edu/SearchDetails.aspx?ID=494.
An article co-authored by Margo Tank entitled “It’s the Message, Not the Medium! Electronic Record and Electronic Signature Rules Preserve Existing Focus of the Law on Content, Not Medium of Recorded Land Title Instruments” was published in the American Bar Association’s “The Business Lawyer.
Miscellany
IMX Announces Verdict Against LendingTree for Intellectual Property Infringement. On January 23, IMX, Inc., a technology solutions company announced that it won a favorable jury verdict in a case against LendingTree, LLC. IMX claimed LendingTree infringed its patent for an internet accessible, interactive network through which borrowers and lenders exchange information. The case was heard in the U.S. District Court of Delaware. Damages awarded to IMX are reputed to be over $5 million and the company also expects the court to issue an injunction to prevent the infringing activity. See http://houston.bizjournals.com/houston/stories/2006/01/23/daily21.html for the story as reported in the Houston Business Journal.
FTC Continues Campaign to Fight Fraud Targeting Hispanics. On Thursday, January 26, 2006, the Federal Trade Commission (“FTC”) and the United States Postal Inspection Service (“USPIS”) held a workshop for law enforcement, government, and community groups promoting education and awareness of fraud aimed at Spanish-Speaking consumers. The Cleveland workshop included discussion on developing a law enforcement response to such fraud, demonstrations of the OnGuard Online (http://www.onguardonline.gov) and Alerta en Linea (http://www.alertaenlineas.gov), and the introduction of a new quiz in Spanish which teaches consumers about online safety. The “Hispanic Law Enforcement and Outreach Forum” was one in a series of workshops being held across the country by the FTC and USPIS. For more information on this and other workshops, see http://www.ftc.gov/opa/2006/01/ohiorelease.htm.
Greenspan Urges Review of Industrial Loan Company Loophole. In a letter to Representative James A. Leach, outgoing Federal Reserve Chairman Alan Greenspan stated his opposition to a regulatory loophole that allows corporations to own industrial loan corporations (“ILCs”). The issue has been much debated of late because of Wal-Mart’s controversial attempt to use the loophole to establish a bank in Utah. ILCs are state-chartered, FDIC-insured banks that may be acquired by unregulated business entities under an exemption in federal law. The exemption was adopted in 1987 and applies in only a limited number of states, principally Utah, California, and Nevada. When the exemption was created, ILCs were small local institutions with only limited deposit and loan powers. However, as Greenspan noted in his letter, the total assets controlled by ILCs increased 3,500 % between 1987 and 2005. Greenspan warned that these developments undermine the regulatory scheme Congress has established for corporate owners of other banks, creates an unlevel competitive playing field, and breaches the general separation of banking and commerce. He concluded by strongly urging Congress to review the exemption.