InfoBytes, July 6, 2007
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Litigation
- Privacy/Data Security
- Credit Cards
Federal Issues
OCC Says Overdraft Activity of National Banks Permitted. Recently, the Office of the Comptroller of the Currency (OCC) released an interpretive letter stating that the National Bank Act and related OCC regulations permit national banks to cover overdrafts and to be reimbursed from a depositor’s account for doing so. OCC regulations specifically authorize national banks to “receive deposits and engage in any activity incidental to receiving deposits”. The letter determined that processing overdrafts is included in such incidental activities. The OCC also stated that national banks are permitted to charge an overdraft fee, provided that the establishment of such a fee is consistent with safety and soundness. Finally, the OCC determined that a bank does not exercise its right to collect a debt by processing an overdraft and recovering an overdraft fee. To view OCC interpretive letter #1082, please see http://www.occ.gov/interp/jun07/int1082.pdf.
Board Exempts Transactions of $15 or Less From Reg E Receipt Requirement. On July 5, the Federal Reserve Board published a final rule that amends Regulation E’s requirement that all electronic fund transfers (EFTs) made at electronic terminals are documented by a receipt from the financial institution. Generally, Regulation E requires financial institutions to make a receipt available at the time a consumer initiates an EFT at an electronic terminal. The final rule would exempt transactions of $15 or less from this requirement, citing as a primary reason that the exemption would help facilitate use and acceptance of debit cards in transactions at retail environments where, until now, compliance burdens prevented merchants from offering that option (such as with vending machines, mass transit single fares, etc.). For more information, please see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070628/default.htm.
State Issues
Connecticut Adds Negligent or Fraudulent Use of “Mortgage Trigger Leads” to UDAP Laws. Connecticut passed new legislation that prohibits mortgage lenders and mortgage brokers from engaging in an unfair or deceptive act or practice when using a “mortgage trigger lead” to solicit an application for a mortgage loan. A “mortgage trigger lead” is defined in the bill to mean a consumer report obtained pursuant to the Fair Credit Reporting Act (FCRA) where the issuance of the report is triggered by an inquiry made with a consumer reporting agency (CRA) in response to an application for credit (but does not extend to existing customers). The acts that are specified in this provision as unfair or deceptive include: the failure to clearly and conspicuously state in the initial phase of the solicitation that the solicitor is not affiliated with the lender or broker with which the consumer initially applied, or that the solicitation is based on personal information about the consumer that was purchased without knowledge or permission of the lender or broker; the failure in the initial solicitation to comply with the prescreening provisions of the FCRA; and to knowingly or negligently use information from a mortgage trigger lead to solicit consumer who have already opted out of prescreened offers of credit (or to call consumers who have registered on the federal or state Do-Not-Call list). For more information on the law, please contact Infobytes.
Maine Repeals “Strict Foreclosure” Laws. On June 21, the Governor of Maine signed into law L.D. 1617, abolishing foreclosures on real property mortgages by possession and by sale. Prior to the act’s ratification, Maine permitted three types of foreclosure: (i) foreclosure by civil action, (ii) foreclosure by possession, and (iii) foreclosure without possession. By repealing 14 MRSA §§ 6201 – 6204B, L.D. 1617 leaves foreclosure by civil action as the only option available to mortgage lenders. The new law becomes effective September 20, 2007. For the official text of L.D. 1617, please see http://janus.state.me.us/legis/LawMakerWeb/externalsiteframe.asp?ID=280024450&LD=1617&Type=1&SessionID=7.
Iowa Enacts Law Prohibiting Improper Influence of Real Estate Appraisers. On July 1, 2007, S.F. 137, which prohibits attempts to improperly influence real estate appraisers’ valuation of a property, went into effect. The new law prohibits any person with an interest in a real estate transaction, including mortgage lenders, brokers and originators, or real estate brokers or salespersons, from “improperly influenc[ing] or attempt[ing] to improperly influence the development, reporting, result or review of a real estate appraisal through coercion, extortion or bribery, or by the withholding or threatened withholding of payment for an apprasial fee, of the conditioning of the payment of an apprasial fee upon the opinion, conclusion or valuation to be reached or a request that the appraiser report a predetermined opinion, conclusion, valuation or the desired valuation o any person, or by any other act or practice that impairs or attempts to impair an appraiser’s independence, objectivity, and impartiality.” It is not a violation to ask an appraiser to consider additional, appropriate information, provide further detail, or to withhold payment based upon a bona fide dispute over the appraiser’s compliance with Iowa’s appraisal standards. Improperly influencing, or attempting to improperly influence, an appraiser’s judgment can constitute a criminal violation and be grounds for discipline under any other Iowa administrative regime. For a copy of the law, please see http://www.legis.state.ia.us/?inpMulti=sf137 and search for “SF137.”
Maine Amends Mortgage Lending Statutes. The State of Maine enacted Public Law, Chapter 273, legislation that places additional requirements on making mortgage loans. Among other things, the law prohibits numerous acts relating to high-rate, high-fee mortgages, including: (i) financing points and fees; (ii) including prepayment fees or penalties; (iii) balloon payments; (iv) negative amortization; (v) increasing the interest rate after default; (vi) combining and paying to borrower in advance more than 2 periodic payments from the loan proceeds provided to borrower. In addition, the new law requires that creditors must receive certification from a third-party non-profit, HUD-approved counselor before making a high-rate high-fee mortgage. In addition, all high-rate, high-fee mortgages must include on any mortgage document, on the first page in a conspicuous manner, a disclosure that the mortgage is a high-rate, high fee mortgage. The law also includes an assignee-liability provision (with some carve-outs). The law also places new restrictions on residential mortgage loans that are not high-rate, high-fee mortgages. In particular, creditors may not: (i) recommend or encourage default; knowingly or intentionally engage in flipping; (iii) charge a late payment unless the loan specifically authorizes it, the charge is not imposed unless payment is more than 10 days past due, and the charge does not exceed 5% of the amount past due; (iv) accelerate the debt in its sole discretion; (v) finance single-premium credit insurance; (vi) charge a payoff fee beyond the actual public discharge fee; and (vii) make a subprime loan unless a reasonable creditor would believe at the time the loan is closed that the borrower will be able to make the scheduled payments. The full text of Public Law Chapter 273 is available at http://janus.state.me.us/legis/LawMakerWeb/externalsiteframe.asp?ID=280025131&LD=1869&Type=1&SessionID=7.
Arizona and Florida Make “Mortgage Fraud" a Felony. Two states recently enacted legislation to add the crime of “mortgage fraud” to their statutes. Arizona H.B. 2040 and Florida S.B. 1824 both now make it is a felony to do any of the following actions with the intent to defraud: (i) knowingly make a deliberate misstatement, misrepresentation or material omission during the mortgage lending process on which a borrower, lender or other party relies; (ii) knowingly use or facilitate the use of a deliberate misstatement, misrepresentation or material omission during the mortgage lending process on which a lender, borrower or other party relies; (iii) receive any proceeds or other monies in connection with a residential mortgage loan that the person knows resulted from a deliberate misstatement, misrepresentation or material omission; or (iv) files or causes to be filed at the county recorder a document that the person knows to contain a deliberate misstatement, misrepresentation or material omission.
In addition to criminalizing mortgage fraud, the Florida bill also amends the state mortgage lender and broker licensing laws to provide that, among other things: (i) mortgage broker fees may only be received per a written agreement signed by the borrower; (ii) the broker must disclose to the borrower the maximum total dollar amount that it may receive from the lender, how the compensation is paid by the lender, and how the interest rate affects the compensation paid by the lender; (iii) the exact amount of payment be disclosed to borrower not later than 3 days before closing; and (iv) additional disclosures regarding material changes in loan terms. To see the text of these bills, please see http://www.azleg.gov/ and http://www.leg.state.fl.us/Welcome/index.cfm?CFID=22042180&CFTOKEN=40204480.
Arizona State Bar Opinion Permits Lawyers to Keep Some Files in Electronic Format Only. In a recent opinion, the State Bar of Arizona held that it is not unethical to keep active and closed client files as electronic images. The opinion draws a distinction between documents obtained from the client and those that are part of “the balance of the file." For documents obtained from the client, the opinion states that the electronic version is not the same as the original, and that the client has an interest in maintaining the integrity of the original documents. Therefore, the originals may not be destroyed without client consent. For photocopies of the original paper documents, the lawyer may destroy the hard copy after creating an electronic image unless the lawyer has reason to know that the client does not or would not want the lawyer to destroy it. By contrast, for documents that are part of the balance of the file, the opinion states that there is nothing per se unethical for a lawyer to keep the records only in electronic form, and the lawyer need not obtain client consent to maintain those records only in electronic form. The opinion cautions that the lawyer must still determine whether if it is in the client’s best interest to maintain a file solely in electronic form. In addition, the lawyer must still be able to provide the client with all of the client’s documents and all documents reflecting work for the client upon request, including, if necessary, bearing the expense to provide those documents in hard copy. Finally, if digitizing the file, the lawyer must take reasonable precautions not to damage the documents and to ensure that the file is complete when digitized. For a copy of the opinion, please see http://www.myazbar.org/Ethics/opinionview.cfm?id=694.
Courts
Eleventh Circuit Holds for Lender in Culpepper: YSPs Not Illegal Under RESPA. On July 2, the Eleventh Circuit handed down its fourth opinion in Culpepper, a class action brought by borrowers alleging that Irwin Mortgage Corporation violated RESPA by paying yield spread premiums to their mortgage brokers. Culpepper v. Irwin Mortgage Corp., No. 06-11105, 2007 WL 1879710 (11th Cir. July 2, 2007). The court rejected the borrowers’ argument that it was bound by Culpepper III (the court’s previous opinion in the case), concluding that (i) HUD’s 2001 Statement of Policy—in which HUD expressly disagreed with the reasoning in Culpepper III—constituted “‘controlling authority’ carrying the force of law,” and (ii) the approach to RESPA liability taken in Culpepper III was “clearly erroneous,” such that it “would work manifest injustice” if followed. Thus, rather than inquiring into the link between the broker’s services and the yield spread premium, the court asked whether the broker performed “actual services” and whether the total compensation paid to the broker was reasonable. According to the court, because the borrowers failed to satisfy their “burden of demonstrating, with specific evidence, that the total remuneration that their brokers received was unreasonable,” Irwin was entitled to summary judgment on the issue of illegal yield spread premiums. The court also found that “individual issues of fact predominate in these types of RESPA actions”; therefore, the district court did not abuse its discretion in decertifying the class of plaintiffs in the case. For a copy of the decision, please contact .
Court Implies Credit Bureaus Must Report Credit Limit Along with High Balance. The U.S. District Court for the District of South Carolina issued opinions in two similar cases, brought by the same consumer under the FCRA, which could have significant implications for lenders that wish to restrict the amount of information they report to credit bureaus. Harris v. Experian Information Solutions, Inc., 2007 WL 1863025 (D.S.C. June 26, 2007), and Harris v. Equifax Information Services, LLC, 2007 WL 1862826 (D.S.C. June 26, 2007), both involved the FCRA requirement in 15 U.S.C. § 1681e(b) that a CRA maintain reasonable procedures to assure the maximum possible accuracy of the information it reports. In these cases, the consumer alleged that the CRAs had violated the accuracy requirement when they reported the “high balance” on the consumer’s Capital One credit card account, but did not report the consumer’s credit limit on his credit card accounts because Capital One did not provide it to them.
Both CRAs sought summary judgment to the effect that a report that includes the correct high balance but not the credit limit is not “inaccurate” within the meaning of FCRA. In denying the CRAs’ motions, the court noted that, if the credit limit is missing, the credit score model instead uses the high balance, which is generally lower than the credit limit, with the result that the consumer appears to have used a higher proportion of his or her available credit lines and receives a lower score. The court agreed with the consumer’s allegation that each CRA had failed to include credit limit information in credit reports pertaining to the consumer and others, and held that there was, therefore, a genuine issue of material fact as to the accuracy issue. The court, citing the Safeco U.S. Supreme Court case (see InfoBytes Special Alert for June 4, 2007), applied a “reckless disregard” standard for determining willfulness under FCRA, which subjects a CRA to statutory damages of $100-$1000 per violation as well as potential punitive damages. It denied both CRAs’ motions for summary judgment on whether they acted willfully, stating that the consumer had “made a sufficient showing that [the CRAs] displayed a reckless disregard for consumer rights in this matter.” It noted evidence that Equifax had previously taken action against other creditors that did not provide the credit limit and that Experian “has long been aware that missing credit limits in credit reports can unfairly depress consumer credit scores.” Finally, the court adopted the minority position that injunctive relief is available to private plaintiffs under FCRA. For a copy of this decision, please contact .
Court Holds Parity Act Preempts Maryland Prohibition on Balloon Loans. On July 5, the United States District Court for the District of Maryland held that the Alternative Mortgage Transactions Parity Act (Parity Act) preempted Maryland state law prohibiting balloon loans. In Cabrejas v. Accredited Home Lenders, Inc., the plaintiff claimed that the defendant, a state licensed mortgage lender, violated Section 12-404(c) of Maryland’s Commercial Law by making a loan with a balloon payment. The lender moved to dismiss this claim, arguing that the Maryland law is preempted by the Parity Act. The district court held that balloon loans “are properly classified as alternative mortgage transactions” and that the Parity Act preempts the Maryland law prohibiting balloon loans. Buckley Kolar served as counsel to the lender. For a copy of the court’s order or for more information, please contact Matthew P. Previn () or Kirk D. Jensen ().
Court Rules That Each Transmittal of Error Is Separate FCRA Violation. A federal district court has held that each successive transmission of erroneous credit information constitutes a separate violation of the Fair Credit Reporting Act (FCRA), for the purpose of determining the statute of limitations period. Larson v. Ford Credit, No. 06-CV-1811, 2007 WL 1875989 (D. Minn., June 28, 2007). In this case, the plaintiff reviewed her credit report in January 2004 and noted that defendant Ford Credit had reported inaccurate information. Despite contacting Ford and the credit reporting agencies on multiple occasions, Ford had not corrected the information as late as March 2005. Plaintiff filed suit in May 2006, alleging, among other things, violations of the FCRA. Ford Credit moved to dismiss the case as untimely because the FCRA imposes a two-year limitations period from the date of discovery by the plaintiff of the violation. The defendant argued that the court should adopt the minority “single-publication rule,” in which the limitations period begins to run from the discovery of the initial violation, irrespective of any subsequent republication. The court rejected this argument and affirmed instead the “multiple-publication rule,” in which each subsequent republication resets the limitations period clock. The court said, “[E]ach re-report of inaccurate information, and each failure to conduct a reasonable investigation in response to a dispute, is a separate FCRA violation subject to its own statute of limitations.” For a copy of the opinion, please contact .
Firm News
Robert Serino was quoted in an article entitled “Regulatory Look-Backs on Rise, So Is Their Cost” in today’s American Banker. Mr. Serino discussed the dubious value of “look-back” analysis when assessing banks’ anti-money laundering compliance schemes and the practice’s inevitable increase in suspicious activity report filings.
Mortgages
Eleventh Circuit Holds for Lender in Culpepper: YSPs Not Illegal Under RESPA. On July 2, the Eleventh Circuit handed down its fourth opinion in Culpepper, a class action brought by borrowers alleging that Irwin Mortgage Corporation violated RESPA by paying yield spread premiums to their mortgage brokers. Culpepper v. Irwin Mortgage Corp., No. 06-11105, 2007 WL 1879710 (11th Cir. July 2, 2007). The court rejected the borrowers’ argument that it was bound by Culpepper III (the court’s previous opinion in the case), concluding that (i) HUD’s 2001 Statement of Policy—in which HUD expressly disagreed with the reasoning in Culpepper III—constituted “‘controlling authority’ carrying the force of law,” and (ii) the approach to RESPA liability taken in Culpepper III was “clearly erroneous,” such that it “would work manifest injustice” if followed. Thus, rather than inquiring into the link between the broker’s services and the yield spread premium, the court asked whether the broker performed “actual services” and whether the total compensation paid to the broker was reasonable. According to the court, because the borrowers failed to satisfy their “burden of demonstrating, with specific evidence, that the total remuneration that their brokers received was unreasonable,” Irwin was entitled to summary judgment on the issue of illegal yield spread premiums. The court also found that “individual issues of fact predominate in these types of RESPA actions”; therefore, the district court did not abuse its discretion in decertifying the class of plaintiffs in the case. For a copy of the decision, please contact .
Court Holds Parity Act Preempts Maryland Prohibition on Balloon Loans. On July 5, the United States District Court for the District of Maryland held that the Alternative Mortgage Transactions Parity Act (Parity Act) preempted Maryland state law prohibiting balloon loans. In Cabrejas v. Accredited Home Lenders, Inc., the plaintiff claimed that the defendant, a state licensed mortgage lender, violated Section 12-404(c) of Maryland’s Commercial Law by making a loan with a balloon payment. The lender moved to dismiss this claim, arguing that the Maryland law is preempted by the Parity Act. The district court held that balloon loans “are properly classified as alternative mortgage transactions” and that the Parity Act preempts the Maryland law prohibiting balloon loans. Buckley Kolar served as counsel to the lender. For a copy of the court’s order or for more information, please contact Matthew P. Previn () or Kirk D. Jensen ().
Connecticut Adds Negligent or Fraudulent Use of “Mortgage Trigger Leads” to UDAP Laws. Connecticut passed new legislation that prohibits mortgage lenders and mortgage brokers from engaging in an unfair or deceptive act or practice when using a “mortgage trigger lead” to solicit an application for a mortgage loan. A “mortgage trigger lead” is defined in the bill to mean a consumer report obtained pursuant to the Fair Credit Reporting Act (FCRA) where the issuance of the report is triggered by an inquiry made with a consumer reporting agency (CRA) in response to an application for credit (but does not extend to existing customers). The acts that are specified in this provision as unfair or deceptive include: the failure to clearly and conspicuously state in the initial phase of the solicitation that the solicitor is not affiliated with the lender or broker with which the consumer initially applied, or that the solicitation is based on personal information about the consumer that was purchased without knowledge or permission of the lender or broker; the failure in the initial solicitation to comply with the prescreening provisions of the FCRA; and to knowingly or negligently use information from a mortgage trigger lead to solicit consumer who have already opted out of prescreened offers of credit (or to call consumers who have registered on the federal or state Do-Not-Call list). For more information on the law, please contact Infobytes.
Maine Repeals “Strict Foreclosure” Laws. On June 21, the Governor of Maine signed into law L.D. 1617, abolishing foreclosures on real property mortgages by possession and by sale. Prior to the act’s ratification, Maine permitted three types of foreclosure: (i) foreclosure by civil action, (ii) foreclosure by possession, and (iii) foreclosure without possession. By repealing 14 MRSA §§ 6201 – 6204B, L.D. 1617 leaves foreclosure by civil action as the only option available to mortgage lenders. The new law becomes effective September 20, 2007. For the official text of L.D. 1617, please see http://janus.state.me.us/legis/LawMakerWeb/externalsiteframe.asp?ID=280024450&LD=1617&Type=1&SessionID=7.
Iowa Enacts Law Prohibiting Improper Influence of Real Estate Appraisers. On July 1, 2007, S.F. 137, which prohibits attempts to improperly influence real estate appraisers’ valuation of a property, went into effect. The new law prohibits any person with an interest in a real estate transaction, including mortgage lenders, brokers and originators, or real estate brokers or salespersons, from “improperly influenc[ing] or attempt[ing] to improperly influence the development, reporting, result, or review of a real estate appraisal through coercion, extortion, or bribery, or by the withholding or threatened withholding of payment for an appraisal fee, or the conditioning of the payment of an appraisal fee upon the opinion, conclusion, or valuation to be reached, or a request that the appraiser report a predetermined opinion, conclusion, or valuation, or the desired valuation of any person, or by any other act or practice that impairs or attempts to impair an appraiser’s independence, objectivity, and impartiality.” It is not a violation to ask an appraiser to consider additional, appropriate information, provide further detail, or to withhold payment based upon a bona fide dispute over the appraiser’s compliance with Iowa’s appraisal standards. Improperly influencing, or attempting to improperly influence, an appraiser’s judgment can constitute a criminal violation and be grounds for discipline under any other Iowa administrative regime. For a copy of the law, please see http://www.legis.state.ia.us/?inpMulti=sf137 and search for “SF137.”
Maine Amends Mortgage Lending Statutes. The State of Maine enacted Public Law, Chapter 273, legislation that places additional requirements on making mortgage loans. Among other things, the law prohibits numerous acts relating to high-rate, high-fee mortgages, including: (i) financing points and fees; (ii) including prepayment fees or penalties; (iii) balloon payments; (iv) negative amortization; (v) increasing the interest rate after default; (vi) combining and paying to borrower in advance more than 2 periodic payments from the loan proceeds provided to borrower. In addition, the new law requires that creditors must receive certification from a third-party non-profit, HUD-approved counselor before making a high-rate high-fee mortgage. In addition, all high-rate, high-fee mortgages must include on any mortgage document, on the first page in a conspicuous manner, a disclosure that the mortgage is a high-rate, high fee mortgage. The law also includes an assignee-liability provision (with some carve-outs). The law also places new restrictions on residential mortgage loans that are not high-rate, high-fee mortgages. In particular, creditors may not: (i) recommend or encourage default; knowingly or intentionally engage in flipping; (iii) charge a late payment unless the loan specifically authorizes it, the charge is not imposed unless payment is more than 10 days past due, and the charge does not exceed 5% of the amount past due; (iv) accelerate the debt in its sole discretion; (v) finance single-premium credit insurance; (vi) charge a payoff fee beyond the actual public discharge fee; and (vii) make a subprime loan unless a reasonable creditor would believe at the time the loan is closed that the borrower will be able to make the scheduled payments. The full text of Public Law Chapter 273 is available at http://janus.state.me.us/legis/LawMakerWeb/externalsiteframe.asp?ID=280025131&LD=1869&Type=1&SessionID=7.
Arizona and Florida Make “Mortgage Fraud" a Felony. Two states recently enacted legislation to add the crime of “mortgage fraud” to their statutes. Arizona H.B. 2040 and Florida S.B. 1824 both now make it is a felony to do any of the following actions with the intent to defraud: (i) knowingly make a deliberate misstatement, misrepresentation or material omission during the mortgage lending process on which a borrower, lender or other party relies; (ii) knowingly use or facilitate the use of a deliberate misstatement, misrepresentation or material omission during the mortgage lending process on which a lender, borrower or other party relies; (iii) receive any proceeds or other monies in connection with a residential mortgage loan that the person knows resulted from a deliberate misstatement, misrepresentation or material omission; or (iv) files or causes to be filed at the county recorder a document that the person knows to contain a deliberate misstatement, misrepresentation or material omission.
In addition to criminalizing mortgage fraud, the Florida bill also amends the state mortgage lender and broker licensing laws to provide that, among other things: (i) mortgage broker fees may only be received per a written agreement signed by the borrower; (ii) the broker must disclose to the borrower the maximum total dollar amount that it may receive from the lender, how the compensation is paid by the lender, and how the interest rate affects the compensation paid by the lender; (iii) the exact amount of payment be disclosed to borrower not later than 3 days before closing; and (iv) additional disclosures regarding material changes in loan terms. To see the text of these bills, please see http://www.azleg.gov/ and http://www.leg.state.fl.us/Welcome/index.cfm?CFID=22042180&CFTOKEN=40204480.
Banking
OCC Says Overdraft Activity of National Banks Permitted. Recently, the Office of the Comptroller of the Currency (OCC) released an interpretive letter stating that the National Bank Act and related OCC regulations permit national banks to cover overdrafts and to be reimbursed from a depositor’s account for doing so. OCC regulations specifically authorize national banks to “receive deposits and engage in any activity incidental to receiving deposits”. The letter determined that processing overdrafts is included in such incidental activities. The OCC also stated that national banks are permitted to charge an overdraft fee, provided that the establishment of such a fee is consistent with safety and soundness. Finally, the OCC determined that a bank does not exercise its right to collect a debt by processing an overdraft and recovering an overdraft fee. To view OCC interpretive letter #1082, please see http://www.occ.gov/interp/jun07/int1082.pdf.
Board Exempts Transactions of $15 or Less From Reg E Receipt Requirement. On July 5, the Federal Reserve Board published a final rule that amends Regulation E’s requirement that all electronic fund transfers (EFTs) made at electronic terminals are documented by a receipt from the financial institution. Generally, Regulation E requires financial institutions to make a receipt available at the time a consumer initiates an EFT at an electronic terminal. The final rule would exempt transactions of $15 or less from this requirement, citing as a primary reason that the exemption would help facilitate use and acceptance of debit cards in transactions at retail environments where, until now, compliance burdens prevented merchants from offering that option (such as with vending machines, mass transit single fares, etc.). For more information, please see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070628/default.htm.
Consumer Finance
Court Implies Credit Bureaus Must Report Credit Limit Along with High Balance. The U.S. District Court for the District of South Carolina issued opinions in two similar cases, brought by the same consumer under the FCRA, which could have significant implications for lenders that wish to restrict the amount of information they report to credit bureaus. Harris v. Experian Information Solutions, Inc., 2007 WL 1863025 (D.S.C. June 26, 2007), and Harris v. Equifax Information Services, LLC, 2007 WL 1862826 (D.S.C. June 26, 2007), both involved the FCRA requirement in 15 U.S.C. § 1681e(b) that a CRA maintain reasonable procedures to assure the maximum possible accuracy of the information it reports. In these cases, the consumer alleged that the CRAs had violated the accuracy requirement when they reported the “high balance” on the consumer’s Capital One credit card account, but did not report the consumer’s credit limit on his credit card accounts because Capital One did not provide it to them.
Both CRAs sought summary judgment to the effect that a report that includes the correct high balance but not the credit limit is not “inaccurate” within the meaning of FCRA. In denying the CRAs’ motions, the court noted that, if the credit limit is missing, the credit score model instead uses the high balance, which is generally lower than the credit limit, with the result that the consumer appears to have used a higher proportion of his or her available credit lines and receives a lower score. The court agreed with the consumer’s allegation that each CRA had failed to include credit limit information in credit reports pertaining to the consumer and others, and held that there was, therefore, a genuine issue of material fact as to the accuracy issue. The court, citing the Safeco U.S. Supreme Court case (see InfoBytes Special Alert for June 4, 2007), applied a “reckless disregard” standard for determining willfulness under FCRA, which subjects a CRA to statutory damages of $100-$1000 per violation as well as potential punitive damages. It denied both CRAs’ motions for summary judgment on whether they acted willfully, stating that the consumer had “made a sufficient showing that [the CRAs] displayed a reckless disregard for consumer rights in this matter.” It noted evidence that Equifax had previously taken action against other creditors that did not provide the credit limit and that Experian “has long been aware that missing credit limits in credit reports can unfairly depress consumer credit scores.” Finally, the court adopted the minority position that injunctive relief is available to private plaintiffs under FCRA. For a copy of this decision, please contact .
Board Exempts Transactions of $15 or Less From Reg E Receipt Requirement. On July 5, the Federal Reserve Board published a final rule that amends Regulation E’s requirement that all electronic fund transfers (EFTs) made at electronic terminals are documented by a receipt from the financial institution. Generally, Regulation E requires financial institutions to make a receipt available at the time a consumer initiates an EFT at an electronic terminal. The final rule would exempt transactions of $15 or less from this requirement, citing as a primary reason that the exemption would help facilitate use and acceptance of debit cards in transactions at retail environments where, until now, compliance burdens prevented merchants from offering that option (such as with vending machines, mass transit single fares, etc.). For more information, please see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070628/default.htm.
Court Rules That Each Transmittal of Error Is Separate FCRA Violation. A federal district court has held that each successive transmission of erroneous credit information constitutes a separate violation of the Fair Credit Reporting Act (FCRA), for the purpose of determining the statute of limitations period. Larson v. Ford Credit, No. 06-CV-1811, 2007 WL 1875989 (D. Minn., June 28, 2007). In this case, the plaintiff reviewed her credit report in January 2004 and noted that defendant Ford Credit had reported inaccurate information. Despite contacting Ford and the credit reporting agencies on multiple occasions, Ford had not corrected the information as late as March 2005. Plaintiff filed suit in May 2006, alleging, among other things, violations of the FCRA. Ford Credit moved to dismiss the case as untimely because the FCRA imposes a two-year limitations period from the date of discovery by the plaintiff of the violation. The defendant argued that the court should adopt the minority “single-publication rule,” in which the limitations period begins to run from the discovery of the initial violation, irrespective of any subsequent republication. The court rejected this argument and affirmed instead the “multiple-publication rule,” in which each subsequent republication resets the limitations period clock. The court said, “[E]ach re-report of inaccurate information, and each failure to conduct a reasonable investigation in response to a dispute, is a separate FCRA violation subject to its own statute of limitations.” For a copy of the opinion, please contact .
Litigation
Eleventh Circuit Holds for Lender in Culpepper: YSPs Not Illegal Under RESPA. On July 2, the Eleventh Circuit handed down its fourth opinion in Culpepper, a class action brought by borrowers alleging that Irwin Mortgage Corporation violated RESPA by paying yield spread premiums to their mortgage brokers. Culpepper v. Irwin Mortgage Corp., No. 06-11105, 2007 WL 1879710 (11th Cir. July 2, 2007). The court rejected the borrowers’ argument that it was bound by Culpepper III (the court’s previous opinion in the case), concluding that (i) HUD’s 2001 Statement of Policy—in which HUD expressly disagreed with the reasoning in Culpepper III—constituted “‘controlling authority’ carrying the force of law,” and (ii) the approach to RESPA liability taken in Culpepper III was “clearly erroneous,” such that it “would work manifest injustice” if followed. Thus, rather than inquiring into the link between the broker’s services and the yield spread premium, the court asked whether the broker performed “actual services” and whether the total compensation paid to the broker was reasonable. According to the court, because the borrowers failed to satisfy their “burden of demonstrating, with specific evidence, that the total remuneration that their brokers received was unreasonable,” Irwin was entitled to summary judgment on the issue of illegal yield spread premiums. The court also found that “individual issues of fact predominate in these types of RESPA actions”; therefore, the district court did not abuse its discretion in decertifying the class of plaintiffs in the case. For a copy of the decision, please contact .
Court Implies Credit Bureaus Must Report Credit Limit Along with High Balance. The U.S. District Court for the District of South Carolina issued opinions in two similar cases, brought by the same consumer under the FCRA, which could have significant implications for lenders that wish to restrict the amount of information they report to credit bureaus. Harris v. Experian Information Solutions, Inc., 2007 WL 1863025 (D.S.C. June 26, 2007), and Harris v. Equifax Information Services, LLC, 2007 WL 1862826 (D.S.C. June 26, 2007), both involved the FCRA requirement in 15 U.S.C. § 1681e(b) that a CRA maintain reasonable procedures to assure the maximum possible accuracy of the information it reports. In these cases, the consumer alleged that the CRAs had violated the accuracy requirement when they reported the “high balance” on the consumer’s Capital One credit card account, but did not report the consumer’s credit limit on his credit card accounts because Capital One did not provide it to them.
Both CRAs sought summary judgment to the effect that a report that includes the correct high balance but not the credit limit is not “inaccurate” within the meaning of FCRA. In denying the CRAs’ motions, the court noted that, if the credit limit is missing, the credit score model instead uses the high balance, which is generally lower than the credit limit, with the result that the consumer appears to have used a higher proportion of his or her available credit lines and receives a lower score. The court agreed with the consumer’s allegation that each CRA had failed to include credit limit information in credit reports pertaining to the consumer and others, and held that there was, therefore, a genuine issue of material fact as to the accuracy issue. The court, citing the Safeco U.S. Supreme Court case (see InfoBytes Special Alert for June 4, 2007), applied a “reckless disregard” standard for determining willfulness under FCRA, which subjects a CRA to statutory damages of $100-$1000 per violation as well as potential punitive damages. It denied both CRAs’ motions for summary judgment on whether they acted willfully, stating that the consumer had “made a sufficient showing that [the CRAs] displayed a reckless disregard for consumer rights in this matter.” It noted evidence that Equifax had previously taken action against other creditors that did not provide the credit limit and that Experian “has long been aware that missing credit limits in credit reports can unfairly depress consumer credit scores.” Finally, the court adopted the minority position that injunctive relief is available to private plaintiffs under FCRA. For a copy of this decision, please contact .
Court Holds Parity Act Preempts Maryland Prohibition on Balloon Loans. On July 5, the United States District Court for the District of Maryland held that the Alternative Mortgage Transactions Parity Act (Parity Act) preempted Maryland state law prohibiting balloon loans. In Cabrejas v. Accredited Home Lenders, Inc., the plaintiff claimed that the defendant, a state licensed mortgage lender, violated Section 12-404(c) of Maryland’s Commercial Law by making a loan with a balloon payment. The lender moved to dismiss this claim, arguing that the Maryland law is preempted by the Parity Act. The district court held that balloon loans “are properly classified as alternative mortgage transactions” and that the Parity Act preempts the Maryland law prohibiting balloon loans. Buckley Kolar served as counsel to the lender. For a copy of the court’s order or for more information, please contact Matthew P. Previn () or Kirk D. Jensen ().
Court Rules That Each Transmittal of Error Is Separate FCRA Violation. A federal district court has held that each successive transmission of erroneous credit information constitutes a separate violation of the Fair Credit Reporting Act (FCRA), for the purpose of determining the statute of limitations period. Larson v. Ford Credit, No. 06-CV-1811, 2007 WL 1875989 (D. Minn., June 28, 2007). In this case, the plaintiff reviewed her credit report in January 2004 and noted that defendant Ford Credit had reported inaccurate information. Despite contacting Ford and the credit reporting agencies on multiple occasions, Ford had not corrected the information as late as March 2005. Plaintiff filed suit in May 2006, alleging, among other things, violations of the FCRA. Ford Credit moved to dismiss the case as untimely because the FCRA imposes a two-year limitations period from the date of discovery by the plaintiff of the violation. The defendant argued that the court should adopt the minority “single-publication rule,” in which the limitations period begins to run from the discovery of the initial violation, irrespective of any subsequent republication. The court rejected this argument and affirmed instead the “multiple-publication rule,” in which each subsequent republication resets the limitations period clock. The court said, “[E]ach re-report of inaccurate information, and each failure to conduct a reasonable investigation in response to a dispute, is a separate FCRA violation subject to its own statute of limitations.” For a copy of the opinion, please contact .
Arizona State Bar Opinion Permits Lawyers to Keep Some Files in Electronic Format Only. In a recent opinion, the State Bar of Arizona held that it is not unethical to keep active and closed client files as electronic images. The opinion draws a distinction between documents obtained from the client and those that are part of “the balance of the file." For documents obtained from the client, the opinion states that the electronic version is not the same as the original, and that the client has an interest in maintaining the integrity of the original documents. Therefore, the originals may not be destroyed without client consent. For photocopies of the original paper documents, the lawyer may destroy the hard copy after creating an electronic image unless the lawyer has reason to know that the client does not or would not want the lawyer to destroy it. By contrast, for documents that are part of the balance of the file, the opinion states that there is nothing per se unethical for a lawyer to keep the records only in electronic form, and the lawyer need not obtain client consent to maintain those records only in electronic form. The opinion cautions that the lawyer must still determine whether if it is in the client’s best interest to maintain a file solely in electronic form. In addition, the lawyer must still be able to provide the client with all of the client’s documents and all documents reflecting work for the client upon request, including, if necessary, bearing the expense to provide those documents in hard copy. Finally, if digitizing the file, the lawyer must take reasonable precautions not to damage the documents and to ensure that the file is complete when digitized. For a copy of the opinion, please see http://www.myazbar.org/Ethics/opinionview.cfm?id=694.
Privacy/Data Security
Arizona State Bar Opinion Permits Lawyers to Keep Some Files in Electronic Format Only. In a recent opinion, the State Bar of Arizona held that it is not unethical to keep active and closed client files as electronic images. The opinion draws a distinction between documents obtained from the client and those that are part of “the balance of the file." For documents obtained from the client, the opinion states that the electronic version is not the same as the original, and that the client has an interest in maintaining the integrity of the original documents. Therefore, the originals may not be destroyed without client consent. For photocopies of the original paper documents, the lawyer may destroy the hard copy after creating an electronic image unless the lawyer has reason to know that the client does not or would not want the lawyer to destroy it. By contrast, for documents that are part of the balance of the file, the opinion states that there is nothing per se unethical for a lawyer to keep the records only in electronic form, and the lawyer need not obtain client consent to maintain those records only in electronic form. The opinion cautions that the lawyer must still determine whether if it is in the client’s best interest to maintain a file solely in electronic form. In addition, the lawyer must still be able to provide the client with all of the client’s documents and all documents reflecting work for the client upon request, including, if necessary, bearing the expense to provide those documents in hard copy. Finally, if digitizing the file, the lawyer must take reasonable precautions not to damage the documents and to ensure that the file is complete when digitized. For a copy of the opinion, please see http://www.myazbar.org/Ethics/opinionview.cfm?id=694.
Credit Cards
Court Implies Credit Bureaus Must Report Credit Limit Along with High Balance. The U.S. District Court for the District of South Carolina issued opinions in two similar cases, brought by the same consumer under the FCRA, which could have significant implications for lenders that wish to restrict the amount of information they report to credit bureaus. Harris v. Experian Information Solutions, Inc., 2007 WL 1863025 (D.S.C. June 26, 2007), and Harris v. Equifax Information Services, LLC, 2007 WL 1862826 (D.S.C. June 26, 2007), both involved the FCRA requirement in 15 U.S.C. § 1681e(b) that a CRA maintain reasonable procedures to assure the maximum possible accuracy of the information it reports. In these cases, the consumer alleged that the CRAs had violated the accuracy requirement when they reported the “high balance” on the consumer’s Capital One credit card account, but did not report the consumer’s credit limit on his credit card accounts because Capital One did not provide it to them.
Both CRAs sought summary judgment to the effect that a report that includes the correct high balance but not the credit limit is not “inaccurate” within the meaning of FCRA. In denying the CRAs’ motions, the court noted that, if the credit limit is missing, the credit score model instead uses the high balance, which is generally lower than the credit limit, with the result that the consumer appears to have used a higher proportion of his or her available credit lines and receives a lower score. The court agreed with the consumer’s allegation that each CRA had failed to include credit limit information in credit reports pertaining to the consumer and others, and held that there was, therefore, a genuine issue of material fact as to the accuracy issue. The court, citing the Safeco U.S. Supreme Court case (see InfoBytes Special Alert for June 4, 2007), applied a “reckless disregard” standard for determining willfulness under FCRA, which subjects a CRA to statutory damages of $100-$1000 per violation as well as potential punitive damages. It denied both CRAs’ motions for summary judgment on whether they acted willfully, stating that the consumer had “made a sufficient showing that [the CRAs] displayed a reckless disregard for consumer rights in this matter.” It noted evidence that Equifax had previously taken action against other creditors that did not provide the credit limit and that Experian “has long been aware that missing credit limits in credit reports can unfairly depress consumer credit scores.” Finally, the court adopted the minority position that injunctive relief is available to private plaintiffs under FCRA. For a copy of this decision, please contact .