InfoBytes, June 15, 2007
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Miscellany
- Mortgages
- Banking
- Consumer Finance
- Litigation
- E-Financial Services
- Credit Cards
Federal Issues
FTC Releases Staff Report on Improving Consumer Mortgage Disclosures. On June 13, the Federal Trade Commission (FTC) released a Bureau of Economics report presenting the results of a study finding that mortgage disclosure forms fail to convey key mortgage costs and terms to many consumers and that better disclosures can be created to help consumers make informed decisions about mortgage products. The study examined how consumers look for mortgages, how well consumers understand the terms and cost disclosures of their own recently obtained mortgages, and whether better disclosures can help consumers understand mortgage costs, shop for mortgages, and avoid deceptive lending practices. The study was based on 36 in-depth interviews with recent customers and disclosure form testing with 819 customers. The potential for improvement was tested using prototype disclosures developed for fixed-rate loans, including those with interest-only and balloon features, which the authors of the study explain could be extended to incorporate the key features of adjustable-rate, hybrid, and payment option loans. The FTC’s press release, including a link to the report, “Improving Consumer Mortgage Disclosures – An Empirical Assessment of Current and Prototype Disclosure Forms,” can be found at http://www.ftc.gov/opa/2007/06/mortgage.shtm.
OCC Publishes Interim Rule For Special Lending Limits. On June 7, the Office of the Comptroller of the Currency (OCC) issued an interim rule and request for comment designed to continue a pilot program that allows certain national banks to make loans with higher lending limits for 1-4 family residential real estate loans, small business loans, and small farm loans and credit extensions. The pilot program, which was first instituted in September of 2001 and is codified at 12 C.F.R Part 32, permits well-capitalized national banks with composite ratings of 1 or 2 under the Uniform Financial Institutions Rating System (UFIRS) to make residential real estate, small business, and small farm loans to a single borrower in addition to amounts that they may already lend to that borrower under the existing limits in 12 C.F.R. 32.3. The interim rule also would remove the $10 million cap on loans to single borrowers for loans in each of these loan categories. The OCC is seeking comment on the interim rule and on possible ways to expand or enhance special lending limits without undermining safety and soundness. Comments on the Interim Rule are due on July 9, 2007. For information regarding the interim rule, please see http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/pdf/E7-11014.pdf.
House Financial Services Committee to Hold Hearing on FCRA. On June 19, the House Financial Services Committee will hold a hearing entitled “Credit Reports: Consumers’ Ability to Dispute and Change Information.” At the hearing, the Committee will investigate possible factors that create inaccuracies in consumer credit reports and the steps that furnishers, credit bureaus and regulators are taking to improve the accuracy of consumer credit report information. The Committee will also assess the effectiveness of the consumer dispute resolution process under the Fair Credit Reporting Act (FCRA) and will look into ways to improve that process. Additionally, the Committee will review the progress made on key rule makings and studies mandated by the Fair and Accurate Credit Transactions Act of 2003 (FACTA). Witnesses will be by invitation only and the hearing can be viewed via a live webcast. For more information, please see http://www.house.gov/apps/list/hearing/financialsvcs_dem/ht061907.shtml.
FRB Holds Public Hearing on the Home Equity Lending Market under HOEPA. On June 14, the Federal Reserve Board (FRB) held a public hearing on the home equity lending market under HOEPA (see the June 1st, 2007 issue of InfoBytes). The panelists were experts in the field of mortgage marketing, including representatives from non-profit organizations, consumer advocacy groups, GSEs, mortgage lenders, academia and several state attorney generals. For information regarding the panelists and a copy of the agenda, please see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070612/default.htm.
House Financial Services Committee Holds Hearings on Improving Federal Consumer Protection in Financial Services. On June 13, The House Financial Services Committee held a hearing entitled “Improving Federal Consumer Protection in Financial Services.” Witnesses included Randall Kroszner, Governor, Federal Reserve Board; John C. Dugan, Comptroller of the Currency, OCC; Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation (FDIC); Deborah Platt Majoras, Chairman, FTC; Scott M. Polakoff, Deputy Director and Chief Operating Officer, Office of Thrift Supervision; Tom Miller, Attorney General, State of Iowa; and Steven L. Antonakes, Commissioner of Banks, Commonwealth of Massachusetts, on behalf of the Conference of State Bank Supervisors. Comptroller Dugan’s testimony noted that the OCC plays a critical role in ensuring national banks’ compliance with federal consumer protection standards, combining supervisory guidance and enforcement activity. He also announced an initiative with state regulatory agencies that is designed to curb abusive practices by mortgage brokers. Comptroller Dugan also addressed the division of powers between the OCC and state regulators, in light of the Supreme Court’s recent decision in Waters v. Wachovia. To view all of the witness’ testimony, please see http://www.house.gov/apps/list/hearing/financialsvcs_dem/ht061307.shtml. A copy of the OCC’s News Release and Comptroller Dugan’s statements can be found at http://www.occ.gov/ftp/release/2007-57.htm.
FRB Submits Annual Report to Congress. On June 7, the FRB submitted their 93rd annual report covering the 2006 calendar year. Among other issues, the report covers (i) monetary policy and consumer outlook, (ii) economic protections for 2007 and 2008, (iii) economic and financial developments in 2006 and early 2007, (iv) consumer spending, (v) residential investment, (vi) household finance, (vii) the business sector, including fixed investment, inventory investment and corporate profits, (viii) the federal, state and local government sectors, (ix) international trade, and (x) the labor market. For a copy of the complete report, please see http://www.federalreserve.gov/boarddocs/rptcongress/annual06/pdf/ar06.pdf.
Department of Education Proposes Regulations Affecting Electronic Master Promissory Notes. On June 12, the Department of Education published a Notice of Proposed Rulemaking in the Federal Register that addresses, among other things, the certification of electronic signatures on master promissory notes (MPN) that are assigned to the Department of Education pursuant to the Perkins Loan and FFEL programs. In addition, the proposed regulations would require the retention of an original electronically signed Perkins Loan or FFEL Program MPN for a period of 3 years after all loans on the MPN have been satisfied, and would require a guaranty agency to provide the Secretary of Education with the name and location of the entity in possession of an original electronically signed MPN that has been assigned to the Department of Education. For a copy of the Federal Register notice, please see http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/pdf/E7-10826.pdf.
FDIC Chairman Seeks National Standards for Subprime Lending. On June 6, FDIC Chairman Sheila Bair, in a speech at the American Securitization Forum Annual Meeting, spoke of the need to establish national standards for all subprime lenders. She suggested that those standards would consist of two core elements: (i) underwriting standards that truly measure the borrower’s ability to repay the loan, and (ii) marketing standards that require upfront, complete, and clear cost disclosures for adjustable rate and non-traditional loans and prohibit deceptive advertising based on teaser rates or misuse of the word “fixed.” Chairman Bair said that draft subprime guidance, issued by federal banking regulators in March, should be finalized by the end of June. Further, Chairman Bair explained that one of her primary goals is to help borrowers avoid foreclosure by modifying or restructuring existing loans, and that the new standards aim to bring stability to the subprime market, help sustain homeownership, and provide for greater consumer protection in the mortgage backed securities market. Chairman Bair’s complete remarks can be found at http://www.fdic.gov/news/news/speeches/chairman/spjun0607.html.
State Issues
Maine Enacts Anti-Predatory Lending Law. On June 11, Maine Governor John Baldacci signed into law a comprehensive anti-predatory lending bill (LD 1869 (HP 1301) – “An Act To Protect Maine Homeowners from Predatory Lending”). The act restricts “high rate, high fee mortgages,” which are defined to include residential mortgage loans with an APR that equals or exceeds HOEPA’s APR trigger or with total points and fees exceeding 5% of the total loan amount (6% if the total loan amount is less than $40,000). Such loans may not contain, among other things, prepayment penalties, balloon payments, or negative amortization. Under the act, lenders are also prohibited from extending a “subprime mortgage loan” (which is defined to be either a nontraditional mortgage or a rate spread home loan) to a borrower “unless a reasonable creditor would believe at the time the loan is closed that the borrower will be able to make the scheduled payments associated with the loan.” Additionally, the act imposes certain restrictions on residential mortgage loans generally, requires loan brokers to “act in good faith and with fair dealing,” and subjects purchasers or assignees of “high rate, high fee mortgages” to certain claims and defenses in connection with such loans. Most of the provisions of the act become effective January 1, 2008. For a copy of the act, see http://www.mainelegislature.org/legis/bills/chappdfs/PUBLIC273.pdf.
Colorado Adopts Laws Regulating Mortgage Brokers. Colorado Governor Bill Ritter recently signed into law four bills designed to help reduce Colorado’s high foreclosure and mortgage fraud rates. Under S.B. 203, mortgage brokers must now be licensed by the Division of Real Estate of the Colorado Department of Regulatory Agencies (previously, mortgage brokers were only required to be registered with the Division). H.B. 1322 and S.B. 216 provide that a mortgage broker has a statutory duty of good faith and fair dealing in all communications and transactions with a borrower, including a duty to take into consideration a borrower’s financial condition when brokering a loan. Finally, S.B. 85 makes it a deceptive trade practice for a mortgage broker, through coercion, intimidation, or compensation, to influence a real estate appraiser’s judgment with respect to the value of a dwelling. The full text of each of these bills may be accessed by clicking on the hyperlinks above.
Massachusetts AG Issues Emergency Rules Prohibiting Unfair, Deceptive Foreclosure Rescue Schemes. On June 1, Massachusetts Attorney General Martha Coakley issued emergency regulations under the state’s Consumer Protection Act, effective immediately for a period of 90 days, aimed at lenders, brokers and other professionals and designed to prohibit unfair and deceptive mortgage foreclosure rescue schemes carried out for profit. Foreclosure “rescue” schemes are defined in the regulation as transactions (i) designed to avoid or delay foreclosure, and (ii) where the homeowner transferring the home maintains and legal or equitable interest in the home, such as a lease interest or right to reacquire the property. According to the Attorney General, businesses or professionals initiate these schemes by claiming to assist consumers who are facing foreclosure by convincing them to convey their property to straw purchasers, while the straw purchasers subsequently obtain mortgage loans permitting the individuals facing foreclosure to continue living in the property for a limited time. Attorney General Coakley is seeking written comment concerning potential amendments to other regulations on other issues, such as whether existing regulations should be expanded to apply to purchase money mortgage loans, as well as loan refinancings, and whether mortgage brokers and lenders should be prohibited from processing or making mortgage loans that the borrower cannot repay or that are unsuitable. For a copy of the Attorney General’s press release regarding the rules, please see http://www.ago.state.ma.us/sp.cfm?pageid=986&id=1908.
Texas Enacts Campus Credit Card Marketing Bill. Recently, Texas Governor Rick Perry signed into law H.B. 85, a bill that regulates credit card marketing at postsecondary educational institutions. In the bill, “campus credit card marketing activity” includes marketing activities conducted by an agent or employee of the card issuer on the campus, as well as an unmanned display that includes applications. H.B. 85 imposes requirements on both the institution and the card issuer, requiring an institution that permits credit card marketing on campus to designate specific times and places where such marketing can take place. In addition, if the institution permits credit card marketing on its campus, it must provide a debt education and counseling session for new students. Issuers conducting marketing activities on a postsecondary institution campus must develop financial educational material to be available to students on the campus generally and on the internet, and also to be specifically given to any student to whom a credit card is issued at the time the card is provided. The bill also prohibits issuers from offering a gift or other incentive in exchange for completing a card application. Intentional violations of these provisions carry a civil penalty of up to $2500 per violation. The act goes into effect on September 1, 2007. To see the full text of the bill, please see http://www.legis.state.tx.us/tlodocs/80R/billtext/html/HB00085F.htm.
Courts
Credit Reporting Agencies Relying on Inaccurate Information in Public Records not Liable for FCRA Claim. On May 7, the U.S. Court of Appeals for the Ninth Circuit ruled that a credit reporting agency in not liable under the FCRA when it relies on inaccurate information contained in public records and uses “reasonable procedures” to verify the accuracy of the disputed information. Dennis v. BEH-1, LLC, 485 F. 3d 443 (9th Cir. May 7, 2007). In 2002, the plaintiff, Dennis, settled an unlawful detainer complaint by his landlord under the stipulation that no judgment would be entered in connection with the settlement as long as payments were made. Nevertheless, a notation in the court docket indicated that judgment was in fact entered against Dennis in relation to that settlement, possibly as a result of a clerk error. In a subsequent credit report generated by Experian Information Solutions, Inc. (Experian), Dennis challenged the inclusion of the “civil claim judgment” in his credit report. Experian contacted its third-party public records vendor to verify the disputed information and was told that the information was accurate. Dennis subsequently sued Experian alleging violations of the California Consumer Credit Reporting Agencies Act and the FCRA. The District Court granted summary judgment for the defendant on all claims, but Dennis appealed under a FCRA claim that Experian had a duty to use “reasonable procedures” to ensure the accuracy of information in credit reports and a duty to reinvestigate the information Dennis disputed. The Ninth Circuit held that it was reasonable for Experian to rely on the validity of public records and secondary supporting documentation (i.e., trial minutes and the Register of Actions) to reinvestigate Dennis’ disputed claim. We note that Judge Kozinski issued a strong dissent in this case arguing that Experian was required to conduct a more thorough investigation of Dennis’ disputed claim. Judge Kozinski notes that the public records vendor Experian hired to assist in the reinvestigation located a court document that clearly states “No judgment so long as payments made … entry of judgment stayed.” Judge Kozinski notes that the unambiguous nature of this document should have led Experian to conclude that the register of the judgment had been made in error, and, that in ignoring this evidence, a reasonable question for the jury exists as to whether this constituted a “willful” failure to comply with the FCRA. For a copy of the opinion, please see http://caselaw.lp.findlaw.com/data2/circs/9th/0456230p.pdf (free registration required).
Pennsylvania Supreme Court Holds That Arbitration Agreements Allowing Use of Courts in Foreclosures are not Presumptively Unconscionable. On May 31, 2007, the Pennsylvania Supreme Court held that arbitration agreements that permit a lender to pursue foreclosure actions in court while requiring the borrower to arbitrate all disputes are not presumptively unconscionable under Pennsylvania law. In Salley v. Option One Mortgage Corp., the court clarified that “the burden of establishing unconscionability lies with the party seeking to invalidate a contract, including an arbitration agreement, and there is no presumption of unconscionability associated with an arbitration agreement merely on the basis that the agreement reserves judicial remedies associated with foreclosure.” In so holding, the court rejected the Pennsylvania Superior Court’s holding in Lytle v. Citifinancial Services, Inc., 810 A.2d 643 (Pa. Super. 2002), that “the reservation by [a financial institution] of access to the courts for itself to the exclusion of the consumer creates a presumption of unconscionability, which in the absence of ‘business realities’ that compel inclusion of such a provision, renders the arbitration provision unconscionable and unenforceable under Pennsylvania law.” For a copy of the Pennsylvania Supreme Court’s opinion, see http://www.courts.state.pa.us/OpPosting/Supreme/out/J-34-2006mo.pdf.
Arbitration Provision Waived by Delay, Participation in Discovery, Prejudice to Opposing Party. Recently, the U.S. Court of Appeals for the Eighth Circuit held that a loan servicer waived its right to arbitrate claims arising in response to a bankruptcy proof of claim by attempting to litigate the merits of debtor’s claims, participating in discovery, and delaying its motion to compel arbitration. Lewallen v. Green Tree Servicing, L.L.C., No. 06-1925 (8th Cir., opinion filed June 4, 2007). In response to a foreclosure proceeding, a borrower filed for Chapter 13 bankruptcy, and eventually objected to the servicer’s proof of claim alleging violations of various state and federal consumer protection statutes. At the suggestion of counsel for the servicer, the objection was dismissed and debtor filed an adversary proceeding raising substantially similar claims to those asserted in the objection. Eleven months after the filing of the objection, and after serving discovery and moving to dismiss, the servicer moved to compel arbitration on the basis of an arbitration clause contained in debtor’s loan agreement. The bankruptcy court denied the motion, finding that the servicer’s active participation in the adversary proceeding constituted a waiver of its arbitration right. Both the district court and the Eighth Circuit affirmed. Specifically, the Eighth Circuit held that the servicer waived its right to arbitrate by failing to seek arbitration promptly in response to debtor’s initial objection to the proof of claim which raised the claims contemplated in the arbitration provision. The Eighth Circuit also found it significant that, at a hearing on the objection, counsel for the servicer affirmatively requested that the dispute be resolved through an adversary proceeding. Furthermore, the servicer filed discovery requests and a dispositive motion, actions that were inconsistent with its right to arbitrate and that prejudiced debtor by causing her to incur duplicative discovery and merits-related expenses. The Eighth Circuit did not reach an alternative theory advanced by the district court – that a bankruptcy court has the discretion to refuse to enforce an arbitration provision if arbitration would jeopardize a core bankruptcy proceeding. For a copy of the opinion, please see http://caselaw.lp.findlaw.com/data2/circs/8th/061925p.pdf (free registration required).
District Court Rejects “Material Terms,” “Value” Tests for FCRA Firm Offers. The U.S. District Court for the Eastern District of Michigan held that the Fair Credit Reporting Act (FCRA) does not require that the mailer in a prescreened credit solicitation contain the “material terms” of the offer. It cited with approval the discussion by the U.S. District Court for the Southern District of New York in Nasca v. J.P. Morgan Chase Bank that noted that FCRA already requires certain disclosures in the mailer and that the courts should not read other mandated disclosures into the statute. The court also rejected the requirement that firm offers must have “value” that was articulated in the U.S. Court of Appeals for the Seventh Circuit’s Cole v. U.S. Capital case, the court noted that even the Seventh Circuit’s Murray v. GMAC Mortgage case limited Cole to “sham offer[s] used to pitch a product rather than extend credit.” Phinn v. Capital One Auto Finance, Inc., No. 07-CV-10940, 2007 WL 1675282 (E.D. Mich. June 11, 2007). See InfoBytes for March 16, 2007, December 3, 2004, and January 20, 2006, for discussions of the Nasca, Cole, and Murray cases, respectively. For a copy of the Phinn decision, please contact .
District Court Dismisses ECOA, FCRA, Illinois Consumer Fraud Act, Conversion Claims. On June 7, the U.S. District Court for the Central District of Illinois, in a case that “barely passes the red face test and borders on sanctionable,” rejected an attempt by two consumers to recharacterize their abandonment of a purchased automobile as a denial of financing. Logsdon v. Dennison Corp., No. 05-1242, 2007 WL 1655239 (C.D. Ill., June 7, 2007). In this case, the plaintiffs, Mr. and Mrs. Logsdon, purchased a pre-owned vehicle from defendant Dennison’s dealership. The plaintiffs obtained financing from CitiFinancial, signed a retail installment sales contract (RISC), traded in their old vehicle, and made a $200 down payment. Dennison paid off an $884 personal loan that had been secured by the old vehicle. About two weeks later, the plaintiffs purchased another vehicle from a different dealership, and, at Mr. Logdson’s request, the dealership returned the previously acquired vehicle to Dennison. Dennison concluded that the plaintiffs had abandoned the vehicle. Just days before the return of the vehicle, Dennison had asked the plaintiffs, at CitiFinancial’s request, to clarify an item on the RISC. The plaintiffs refused to do so and shortly thereafter filed suit. The suit claimed that Dennison (i) violated the Equal Credit Opportunity Act (ECOA) by not providing Mr. Logsdon with a statement of reasons for the denial of credit and providing him with a false notice of approval; (ii) violated the Fair Credit Reporting Act (FCRA) by failing to provide him with required information; (iii) wrongfully converted his old vehicle; and (iv) violated the Illinois Consumer Fraud Act (ICFA). The court concluded that Dennison did not violate the ECOA or the FCRA, since Dennison was not a creditor in the transaction and did not take an adverse action against the plaintiffs. The court also held that the plaintiffs’ filings were “utterly devoid of any citation to legal authority, other legal or factual support, or any attempt to demonstrate how Dennison’s conduct establishes a prima facie case of conversion.” Finally, the court held that the plaintiffs’ filings were also “devoid of citation to any legal authority and [made] no attempt to demonstrate how Dennison allegedly violated the ICFA.” The court granted the defendant’s motion for summary judgment on all counts. For a copy of the opinion, please contact .
Federal Court Allows Discovery of Information Stored in RAM. On May 29, the U.S. District Court for the Central District of California held that information stored in a computer’s RAM is subject to discovery under the Federal Rules of Civil Procedure. Columbia Pictures Indus. v. Bunnell, No. CV 06-1093 (C.D. Cal. May 29, 2007). In this case, the plaintiff sought discovery from the defendants (who operate the TorrentSpy website), alleging that the RAM in defendants’ web servers could contain information that would be necessary to prove plaintiff’s allegations of copyright infringement. RAM is generally more volatile than other forms of electronic storage, such as CD-ROM or hard disk storage media. Defendants plan to appeal the court’s ruling. If it is upheld, the decision could have a significant impact on litigation practices and may impact the breadth of a litigant’s duty to preserve information for discovery. For a copy of the opinion, please contact .
Collection Fees by Contract Assignee Without Referral to Third Party Collection Agency Violated FDCPA. On June 1, 2007, the U.S. District Court for the Eastern District of Wisconsin held that AFNI, Inc. (AFNI) violated the Fair Dept Collection Practices Act (FDCPA), when fees at issue were not authorized by the applicable contracts, and were not permitted by state law. Seeger v. AFNI, Inc., No. 05-C-714, 2007 WL 1598618 (E.D. Wis. June 1, 2007). Plaintiffs, a class comprised of Wisconsin residents, had previously entered into cellular wireless agreements with Cingular Wireless, Ameritech Mobile Communications, and/or Worldcom. Defendant AFNI had purchased the class members’ accounts from Cingular. Between September 2004 and June 2005, AFNI sent debt collection letters to the class members, seeking a “Collection Fee” of 15% of the amount of the original balance. The class members filed suit, alleging, inter alia, that AFNI violated the FDCPA by assessing a 15% collection fee that was not authorized by any customer service agreements or permitted by law. Under the FDCPA, “[a] debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt”…“unless such amount is expressly authorized by the agreement creating the debt or by law.” 15 U.S.C. § 1692f(1). Both AFNI and the class members agreed that the contracts did explicitly provide for the recovery of amounts charged for collection fees by a third party collection agency. The dispute was whether AFNI, as both Cingular’s assignee and the collection agency, could also recover a collection fee. AFNI argued that, as the assignee of the debt, it had the right to recover any amounts that would have been recoverable by Cingular, the assignor. Therefore, AFNI argued that it would have the right to charge a collection fee as the debt collector and to recover this collection fee as the assignee to the contract. The court disagreed with AFNI, holding that AFNI was not authorized to charge the collection fee because there was no referral to an outside party (e.g., AFNI’s status as a debt collector did not change the fact that it did not refer the accounts to a third party). In addition, the court also found that state law would not allow for the recovery of the collection fee because “there [were] no losses or expenses for which AFNI need[ed] to be compensated.” While the court found in favor of plaintiffs’ FDCPA argument, the court granted a separate AFNI motion for summary judgment concerning a separate state law argument. The state law argument was that the collection fee on these types of transactions was prohibited by the Wisconsin Consumer Act (WCA). In this regard, the court held that the WCA did not apply to the cellular phone contracts because the obligations were not payable in installments, and therefore, did not constitute “consumer credit transactions.” For a copy of this decision, please contact .
Firm News
Andrea Lee Negroni will be speaking on the subject of “mortgage brokers as agents of borrowers and lenders” on June 20, 2007 at the annual convention of the National Association of Mortgage Brokers in Seattle, Washington.
Miscellany
Industry Group Issues Subprime Loan Modification Guidelines. On June 5, the American Securitization Forum published the Statement of Principles, Recommendation and Guidelines for the Modification of Securitized Subprime Residential Mortgage Loans (Principles). The Principles are designed to create a common framework for structuring and interpreting loan modification provisions that are in securitization documents, but are not intended to promote a single “across-the-board approach to loan modifications.” The Principles advocate early communication with borrowers who are, or are likely to be, in default. In addition, the Principles suggest, among other things, that any modifications be consistent with the applicable securitization documents, be structured to avoid materially adverse tax or accounting consequences, and be in the best interests of the borrower. For additional information, please see http://www.americansecuritization.com/story.aspx?id=1741.
Mortgages
FTC Releases Staff Report on Improving Consumer Mortgage Disclosures. On June 13, the Federal Trade Commission (FTC) released a Bureau of Economics report presenting the results of a study finding that mortgage disclosure forms fail to convey key mortgage costs and terms to many consumers and that better disclosures can be created to help consumers make informed decisions about mortgage products. The study examined how consumers look for mortgages, how well consumers understand the terms and cost disclosures of their own recently obtained mortgages, and whether better disclosures can help consumers understand mortgage costs, shop for mortgages, and avoid deceptive lending practices. The study was based on 36 in-depth interviews with recent customers and disclosure form testing with 819 customers. The potential for improvement was tested using prototype disclosures developed for fixed-rate loans, including those with interest-only and balloon features, which the authors of the study explain could be extended to incorporate the key features of adjustable-rate, hybrid, and payment option loans. The FTC’s press release, including a link to the report, “Improving Consumer Mortgage Disclosures – An Empirical Assessment of Current and Prototype Disclosure Forms,” can be found at http://www.ftc.gov/opa/2007/06/mortgage.shtm.
House Financial Services Committee to Hold Hearing on FCRA. On June 19, the House Financial Services Committee will hold a hearing entitled “Credit Reports: Consumers’ Ability to Dispute and Change Information.” At the hearing, the Committee will investigate possible factors that create inaccuracies in consumer credit reports and the steps that furnishers, credit bureaus and regulators are taking to improve the accuracy of consumer credit report information. The Committee will also assess the effectiveness of the consumer dispute resolution process under the Fair Credit Reporting Act (FCRA) and will look into ways to improve that process. Additionally, the Committee will review the progress made on key rule makings and studies mandated by the Fair and Accurate Credit Transactions Act of 2003 (FACTA). Witnesses will be by invitation only and the hearing can be viewed via a live webcast. For more information, please see http://www.house.gov/apps/list/hearing/financialsvcs_dem/ht061907.shtml.
FRB Holds Public Hearing on the Home Equity Lending Market under HOEPA. On June 14, the Federal Reserve Board (FRB) held a public hearing on the home equity lending market under HOEPA (see the June 1st, 2007 issue of InfoBytes). The panelists were experts in the field of mortgage marketing, including representatives from non-profit organizations, consumer advocacy groups, GSEs, mortgage lenders, academia and several state attorney generals. For information regarding the panelists and a copy of the agenda, please see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070612/default.htm.
FDIC Chairman Seeks National Standards for Subprime Lending. On June 6, FDIC Chairman Sheila Bair, in a speech at the American Securitization Forum Annual Meeting, spoke of the need to establish national standards for all subprime lenders. She suggested that those standards would consist of two core elements: (i) underwriting standards that truly measure the borrower’s ability to repay the loan, and (ii) marketing standards that require upfront, complete, and clear cost disclosures for adjustable rate and non-traditional loans and prohibit deceptive advertising based on teaser rates or misuse of the word “fixed.” Chairman Bair said that draft subprime guidance, issued by federal banking regulators in March, should be finalized by the end of June. Further, Chairman Bair explained that one of her primary goals is to help borrowers avoid foreclosure by modifying or restructuring existing loans, and that the new standards aim to bring stability to the subprime market, help sustain homeownership, and provide for greater consumer protection in the mortgage backed securities market. Chairman Bair’s complete remarks can be found at http://www.fdic.gov/news/news/speeches/chairman/spjun0607.html.
Maine Enacts Anti-Predatory Lending Law. On June 11, Maine Governor John Baldacci signed into law a comprehensive anti-predatory lending bill (LD 1869 (HP 1301) – “An Act To Protect Maine Homeowners from Predatory Lending”). The act restricts “high rate, high fee mortgages,” which are defined to include residential mortgage loans with an APR that equals or exceeds HOEPA’s APR trigger or with total points and fees exceeding 5% of the total loan amount (6% if the total loan amount is less than $40,000). Such loans may not contain, among other things, prepayment penalties, balloon payments, or negative amortization. Under the act, lenders are also prohibited from extending a “subprime mortgage loan” (which is defined to be either a nontraditional mortgage or a rate spread home loan) to a borrower “unless a reasonable creditor would believe at the time the loan is closed that the borrower will be able to make the scheduled payments associated with the loan.” Additionally, the act imposes certain restrictions on residential mortgage loans generally, requires loan brokers to “act in good faith and with fair dealing,” and subjects purchasers or assignees of “high rate, high fee mortgages” to certain claims and defenses in connection with such loans. Most of the provisions of the act become effective January 1, 2008. For a copy of the act, see http://www.mainelegislature.org/legis/bills/chappdfs/PUBLIC273.pdf.
Colorado Adopts Laws Regulating Mortgage Brokers. Colorado Governor Bill Ritter recently signed into law four bills designed to help reduce Colorado’s high foreclosure and mortgage fraud rates. Under S.B. 203, mortgage brokers must now be licensed by the Division of Real Estate of the Colorado Department of Regulatory Agencies (previously, mortgage brokers were only required to be registered with the Division). H.B. 1322 and S.B. 216 provide that a mortgage broker has a statutory duty of good faith and fair dealing in all communications and transactions with a borrower, including a duty to take into consideration a borrower’s financial condition when brokering a loan. Finally, S.B. 85 makes it a deceptive trade practice for a mortgage broker, through coercion, intimidation, or compensation, to influence a real estate appraiser’s judgment with respect to the value of a dwelling. The full text of each of these bills may be accessed by clicking on the hyperlinks above.
Massachusetts AG Issues Emergency Rules Prohibiting Unfair, Deceptive Foreclosure Rescue Schemes. On June 1, Massachusetts Attorney General Martha Coakley issued emergency regulations under the state’s Consumer Protection Act, effective immediately for a period of 90 days, aimed at lenders, brokers and other professionals and designed to prohibit unfair and deceptive mortgage foreclosure rescue schemes carried out for profit. Foreclosure “rescue” schemes are defined in the regulation as transactions (i) designed to avoid or delay foreclosure, and (ii) where the homeowner transferring the home maintains and legal or equitable interest in the home, such as a lease interest or right to reacquire the property. According to the Attorney General, businesses or professionals initiate these schemes by claiming to assist consumers who are facing foreclosure by convincing them to convey their property to straw purchasers, while the straw purchasers subsequently obtain mortgage loans permitting the individuals facing foreclosure to continue living in the property for a limited time. Attorney General Coakley is seeking written comment concerning potential amendments to other regulations on other issues, such as whether existing regulations should be expanded to apply to purchase money mortgage loans, as well as loan refinancings, and whether mortgage brokers and lenders should be prohibited from processing or making mortgage loans that the borrower cannot repay or that are unsuitable. For a copy of the Attorney General’s press release regarding the rules, please see http://www.ago.state.ma.us/sp.cfm?pageid=986&id=1908.
Pennsylvania Supreme Court Holds That Arbitration Agreements Allowing Use of Courts in Foreclosures are not Presumptively Unconscionable. On May 31, 2007, the Pennsylvania Supreme Court held that arbitration agreements that permit a lender to pursue foreclosure actions in court while requiring the borrower to arbitrate all disputes are not presumptively unconscionable under Pennsylvania law. In Salley v. Option One Mortgage Corp., the court clarified that “the burden of establishing unconscionability lies with the party seeking to invalidate a contract, including an arbitration agreement, and there is no presumption of unconscionability associated with an arbitration agreement merely on the basis that the agreement reserves judicial remedies associated with foreclosure.” In so holding, the court rejected the Pennsylvania Superior Court’s holding in Lytle v. Citifinancial Services, Inc., 810 A.2d 643 (Pa. Super. 2002), that “the reservation by [a financial institution] of access to the courts for itself to the exclusion of the consumer creates a presumption of unconscionability, which in the absence of ‘business realities’ that compel inclusion of such a provision, renders the arbitration provision unconscionable and unenforceable under Pennsylvania law.” For a copy of the Pennsylvania Supreme Court’s opinion, see http://www.courts.state.pa.us/OpPosting/Supreme/out/J-34-2006mo.pdf.
Banking
OCC Publishes Interim Rule For Special Lending Limits. On June 7, the Office of the Comptroller of the Currency (OCC) issued an interim rule and request for comment designed to continue a pilot program that allows certain national banks to make loans with higher lending limits for 1-4 family residential real estate loans, small business loans, and small farm loans and credit extensions. The pilot program, which was first instituted in September of 2001 and is codified at 12 C.F.R Part 32, permits well-capitalized national banks with composite ratings of 1 or 2 under the Uniform Financial Institutions Rating System (UFIRS) to make residential real estate, small business, and small farm loans to a single borrower in addition to amounts that they may already lend to that borrower under the existing limits in 12 C.F.R. 32.3. The interim rule also would remove the $10 million cap on loans to single borrowers for loans in each of these loan categories. The OCC is seeking comment on the interim rule and on possible ways to expand or enhance special lending limits without undermining safety and soundness. Comments on the Interim Rule are due on July 9, 2007. For information regarding the interim rule, please see http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/pdf/E7-11014.pdf.
House Financial Services Committee Holds Hearings on Improving Federal Consumer Protection in Financial Services. On June 13, The House Financial Services Committee held a hearing entitled “Improving Federal Consumer Protection in Financial Services.” Witnesses included Randall Kroszner, Governor, Federal Reserve Board; John C. Dugan, Comptroller of the Currency, OCC; Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation (FDIC); Deborah Platt Majoras, Chairman, FTC; Scott M. Polakoff, Deputy Director and Chief Operating Officer, Office of Thrift Supervision; Tom Miller, Attorney General, State of Iowa; and Steven L. Antonakes, Commissioner of Banks, Commonwealth of Massachusetts, on behalf of the Conference of State Bank Supervisors. Comptroller Dugan’s testimony noted that the OCC plays a critical role in ensuring national banks’ compliance with federal consumer protection standards, combining supervisory guidance and enforcement activity. He also announced an initiative with state regulatory agencies that is designed to curb abusive practices by mortgage brokers. Comptroller Dugan also addressed the division of powers between the OCC and state regulators, in light of the Supreme Court’s recent decision in Waters v. Wachovia. To view all of the witness’ testimony, please see http://www.house.gov/apps/list/hearing/financialsvcs_dem/ht061307.shtml. A copy of the OCC’s News Release and Comptroller Dugan’s statements can be found at http://www.occ.gov/ftp/release/2007-57.htm.
FRB Submits Annual Report to Congress. On June 7, the FRB submitted their 93rd annual report covering the 2006 calendar year. Among other issues, the report covers (i) monetary policy and consumer outlook, (ii) economic protections for 2007 and 2008, (iii) economic and financial developments in 2006 and early 2007, (iv) consumer spending, (v) residential investment, (vi) household finance, (vii) the business sector, including fixed investment, inventory investment and corporate profits, (viii) the federal, state and local government sectors, (ix) international trade, and (x) the labor market. For a copy of the complete report, please see http://www.federalreserve.gov/boarddocs/rptcongress/annual06/pdf/ar06.pdf.
FDIC Chairman Seeks National Standards for Subprime Lending. On June 6, FDIC Chairman Sheila Bair, in a speech at the American Securitization Forum Annual Meeting, spoke of the need to establish national standards for all subprime lenders. She suggested that those standards would consist of two core elements: (i) underwriting standards that truly measure the borrower’s ability to repay the loan, and (ii) marketing standards that require upfront, complete, and clear cost disclosures for adjustable rate and non-traditional loans and prohibit deceptive advertising based on teaser rates or misuse of the word “fixed.” Chairman Bair said that draft subprime guidance, issued by federal banking regulators in March, should be finalized by the end of June. Further, Chairman Bair explained that one of her primary goals is to help borrowers avoid foreclosure by modifying or restructuring existing loans, and that the new standards aim to bring stability to the subprime market, help sustain homeownership, and provide for greater consumer protection in the mortgage backed securities market. Chairman Bair’s complete remarks can be found at http://www.fdic.gov/news/news/speeches/chairman/spjun0607.html.
Industry Group Issues Subprime Loan Modification Guidelines. On June 5, the American Securitization Forum published the Statement of Principles, Recommendation and Guidelines for the Modification of Securitized Subprime Residential Mortgage Loans (Principles). The Principles are designed to create a common framework for structuring and interpreting loan modification provisions that are in securitization documents, but are not intended to promote a single “across-the-board approach to loan modifications.” The Principles advocate early communication with borrowers who are, or are likely to be, in default. In addition, the Principles suggest, among other things, that any modifications be consistent with the applicable securitization documents, be structured to avoid materially adverse tax or accounting consequences, and be in the best interests of the borrower. For additional information, please see http://www.americansecuritization.com/story.aspx?id=1741.
Consumer Finance
House Financial Services Committee to Hold Hearing on FCRA. On June 19, the House Financial Services Committee will hold a hearing entitled “Credit Reports: Consumers’ Ability to Dispute and Change Information.” At the hearing, the Committee will investigate possible factors that create inaccuracies in consumer credit reports and the steps that furnishers, credit bureaus and regulators are taking to improve the accuracy of consumer credit report information. The Committee will also assess the effectiveness of the consumer dispute resolution process under the Fair Credit Reporting Act (FCRA) and will look into ways to improve that process. Additionally, the Committee will review the progress made on key rule makings and studies mandated by the Fair and Accurate Credit Transactions Act of 2003 (FACTA). Witnesses will be by invitation only and the hearing can be viewed via a live webcast. For more information, please see http://www.house.gov/apps/list/hearing/financialsvcs_dem/ht061907.shtml.
FRB Holds Public Hearing on the Home Equity Lending Market under HOEPA. On June 14, the Federal Reserve Board (FRB) held a public hearing on the home equity lending market under HOEPA (see the June 1st, 2007 issue of InfoBytes). The panelists were experts in the field of mortgage marketing, including representatives from non-profit organizations, consumer advocacy groups, GSEs, mortgage lenders, academia and several state attorney generals. For information regarding the panelists and a copy of the agenda, please see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070612/default.htm.
House Financial Services Committee Holds Hearings on Improving Federal Consumer Protection in Financial Services. On June 13, The House Financial Services Committee held a hearing entitled “Improving Federal Consumer Protection in Financial Services.” Witnesses included Randall Kroszner, Governor, Federal Reserve Board; John C. Dugan, Comptroller of the Currency, OCC; Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation (FDIC); Deborah Platt Majoras, Chairman, FTC; Scott M. Polakoff, Deputy Director and Chief Operating Officer, Office of Thrift Supervision; Tom Miller, Attorney General, State of Iowa; and Steven L. Antonakes, Commissioner of Banks, Commonwealth of Massachusetts, on behalf of the Conference of State Bank Supervisors. Comptroller Dugan’s testimony noted that the OCC plays a critical role in ensuring national banks’ compliance with federal consumer protection standards, combining supervisory guidance and enforcement activity. He also announced an initiative with state regulatory agencies that is designed to curb abusive practices by mortgage brokers. Comptroller Dugan also addressed the division of powers between the OCC and state regulators, in light of the Supreme Court’s recent decision in Waters v. Wachovia. To view all of the witness’ testimony, please see http://www.house.gov/apps/list/hearing/financialsvcs_dem/ht061307.shtml. A copy of the OCC’s News Release and Comptroller Dugan’s statements can be found at http://www.occ.gov/ftp/release/2007-57.htm.
Maine Enacts Anti-Predatory Lending Law. On June 11, Maine Governor John Baldacci signed into law a comprehensive anti-predatory lending bill (LD 1869 (HP 1301) – “An Act To Protect Maine Homeowners from Predatory Lending”). The act restricts “high rate, high fee mortgages,” which are defined to include residential mortgage loans with an APR that equals or exceeds HOEPA’s APR trigger or with total points and fees exceeding 5% of the total loan amount (6% if the total loan amount is less than $40,000). Such loans may not contain, among other things, prepayment penalties, balloon payments, or negative amortization. Under the act, lenders are also prohibited from extending a “subprime mortgage loan” (which is defined to be either a nontraditional mortgage or a rate spread home loan) to a borrower “unless a reasonable creditor would believe at the time the loan is closed that the borrower will be able to make the scheduled payments associated with the loan.” Additionally, the act imposes certain restrictions on residential mortgage loans generally, requires loan brokers to “act in good faith and with fair dealing,” and subjects purchasers or assignees of “high rate, high fee mortgages” to certain claims and defenses in connection with such loans. Most of the provisions of the act become effective January 1, 2008. For a copy of the act, see http://www.mainelegislature.org/legis/bills/chappdfs/PUBLIC273.pdf.
Colorado Adopts Laws Regulating Mortgage Brokers. Colorado Governor Bill Ritter recently signed into law four bills designed to help reduce Colorado’s high foreclosure and mortgage fraud rates. Under S.B. 203, mortgage brokers must now be licensed by the Division of Real Estate of the Colorado Department of Regulatory Agencies (previously, mortgage brokers were only required to be registered with the Division). H.B. 1322 and S.B. 216 provide that a mortgage broker has a statutory duty of good faith and fair dealing in all communications and transactions with a borrower, including a duty to take into consideration a borrower’s financial condition when brokering a loan. Finally, S.B. 85 makes it a deceptive trade practice for a mortgage broker, through coercion, intimidation, or compensation, to influence a real estate appraiser’s judgment with respect to the value of a dwelling. The full text of each of these bills may be accessed by clicking on the hyperlinks above.
Massachusetts AG Issues Emergency Rules Prohibiting Unfair, Deceptive Foreclosure Rescue Schemes. On June 1, Massachusetts Attorney General Martha Coakley issued emergency regulations under the state’s Consumer Protection Act, effective immediately for a period of 90 days, aimed at lenders, brokers and other professionals and designed to prohibit unfair and deceptive mortgage foreclosure rescue schemes carried out for profit. Foreclosure “rescue” schemes are defined in the regulation as transactions (i) designed to avoid or delay foreclosure, and (ii) where the homeowner transferring the home maintains and legal or equitable interest in the home, such as a lease interest or right to reacquire the property. According to the Attorney General, businesses or professionals initiate these schemes by claiming to assist consumers who are facing foreclosure by convincing them to convey their property to straw purchasers, while the straw purchasers subsequently obtain mortgage loans permitting the individuals facing foreclosure to continue living in the property for a limited time. Attorney General Coakley is seeking written comment concerning potential amendments to other regulations on other issues, such as whether existing regulations should be expanded to apply to purchase money mortgage loans, as well as loan refinancings, and whether mortgage brokers and lenders should be prohibited from processing or making mortgage loans that the borrower cannot repay or that are unsuitable. For a copy of the Attorney General’s press release regarding the rules, please see http://www.ago.state.ma.us/sp.cfm?pageid=986&id=1908.
Credit Reporting Agencies Relying on Inaccurate Information in Public Records not Liable for FCRA Claim. On May 7, the U.S. Court of Appeals for the Ninth Circuit ruled that a credit reporting agency in not liable under the FCRA when it relies on inaccurate information contained in public records and uses “reasonable procedures” to verify the accuracy of the disputed information. Dennis v. BEH-1, LLC, 485 F. 3d 443 (9th Cir. May 7, 2007). In 2002, the plaintiff, Dennis, settled an unlawful detainer complaint by his landlord under the stipulation that no judgment would be entered in connection with the settlement as long as payments were made. Nevertheless, a notation in the court docket indicated that judgment was in fact entered against Dennis in relation to that settlement, possibly as a result of a clerk error. In a subsequent credit report generated by Experian Information Solutions, Inc. (Experian), Dennis challenged the inclusion of the “civil claim judgment” in his credit report. Experian contacted its third-party public records vendor to verify the disputed information and was told that the information was accurate. Dennis subsequently sued Experian alleging violations of the California Consumer Credit Reporting Agencies Act and the FCRA. The District Court granted summary judgment for the defendant on all claims, but Dennis appealed under a FCRA claim that Experian had a duty to use “reasonable procedures” to ensure the accuracy of information in credit reports and a duty to reinvestigate the information Dennis disputed. The Ninth Circuit held that it was reasonable for Experian to rely on the validity of public records and secondary supporting documentation (i.e., trial minutes and the Register of Actions) to reinvestigate Dennis’ disputed claim. We note that Judge Kozinski issued a strong dissent in this case arguing that Experian was required to conduct a more thorough investigation of Dennis’ disputed claim. Judge Kozinski notes that the public records vendor Experian hired to assist in the reinvestigation located a court document that clearly states “No judgment so long as payments made … entry of judgment stayed.” Judge Kozinski notes that the unambiguous nature of this document should have led Experian to conclude that the register of the judgment had been made in error, and, that in ignoring this evidence, a reasonable question for the jury exists as to whether this constituted a “willful” failure to comply with the FCRA. For a copy of the opinion, please see http://caselaw.lp.findlaw.com/data2/circs/9th/0456230p.pdf (free registration required).
Pennsylvania Supreme Court Holds That Arbitration Agreements Allowing Use of Courts in Foreclosures are not Presumptively Unconscionable. On May 31, 2007, the Pennsylvania Supreme Court held that arbitration agreements that permit a lender to pursue foreclosure actions in court while requiring the borrower to arbitrate all disputes are not presumptively unconscionable under Pennsylvania law. In Salley v. Option One Mortgage Corp., the court clarified that “the burden of establishing unconscionability lies with the party seeking to invalidate a contract, including an arbitration agreement, and there is no presumption of unconscionability associated with an arbitration agreement merely on the basis that the agreement reserves judicial remedies associated with foreclosure.” In so holding, the court rejected the Pennsylvania Superior Court’s holding in Lytle v. Citifinancial Services, Inc., 810 A.2d 643 (Pa. Super. 2002), that “the reservation by [a financial institution] of access to the courts for itself to the exclusion of the consumer creates a presumption of unconscionability, which in the absence of ‘business realities’ that compel inclusion of such a provision, renders the arbitration provision unconscionable and unenforceable under Pennsylvania law.” For a copy of the Pennsylvania Supreme Court’s opinion, see http://www.courts.state.pa.us/OpPosting/Supreme/out/J-34-2006mo.pdf.
Arbitration Provision Waived by Delay, Participation in Discovery, Prejudice to Opposing Party. Recently, the U.S. Court of Appeals for the Eighth Circuit held that a loan servicer waived its right to arbitrate claims arising in response to a bankruptcy proof of claim by attempting to litigate the merits of debtor’s claims, participating in discovery, and delaying its motion to compel arbitration. Lewallen v. Green Tree Servicing, L.L.C., No. 06-1925 (8th Cir., opinion filed June 4, 2007). In response to a foreclosure proceeding, a borrower filed for Chapter 13 bankruptcy, and eventually objected to the servicer’s proof of claim alleging violations of various state and federal consumer protection statutes. At the suggestion of counsel for the servicer, the objection was dismissed and debtor filed an adversary proceeding raising substantially similar claims to those asserted in the objection. Eleven months after the filing of the objection, and after serving discovery and moving to dismiss, the servicer moved to compel arbitration on the basis of an arbitration clause contained in debtor’s loan agreement. The bankruptcy court denied the motion, finding that the servicer’s active participation in the adversary proceeding constituted a waiver of its arbitration right. Both the district court and the Eighth Circuit affirmed. Specifically, the Eighth Circuit held that the servicer waived its right to arbitrate by failing to seek arbitration promptly in response to debtor’s initial objection to the proof of claim which raised the claims contemplated in the arbitration provision. The Eighth Circuit also found it significant that, at a hearing on the objection, counsel for the servicer affirmatively requested that the dispute be resolved through an adversary proceeding. Furthermore, the servicer filed discovery requests and a dispositive motion, actions that were inconsistent with its right to arbitrate and that prejudiced debtor by causing her to incur duplicative discovery and merits-related expenses. The Eighth Circuit did not reach an alternative theory advanced by the district court – that a bankruptcy court has the discretion to refuse to enforce an arbitration provision if arbitration would jeopardize a core bankruptcy proceeding. For a copy of the opinion, please see http://caselaw.lp.findlaw.com/data2/circs/8th/061925p.pdf (free registration required).
District Court Rejects “Material Terms,” “Value” Tests for FCRA Firm Offers. The U.S. District Court for the Eastern District of Michigan held that the Fair Credit Reporting Act (FCRA) does not require that the mailer in a prescreened credit solicitation contain the “material terms” of the offer. It cited with approval the discussion by the U.S. District Court for the Southern District of New York in Nasca v. J.P. Morgan Chase Bank that noted that FCRA already requires certain disclosures in the mailer and that the courts should not read other mandated disclosures into the statute. The court also rejected the requirement that firm offers must have “value” that was articulated in the U.S. Court of Appeals for the Seventh Circuit’s Cole v. U.S. Capital case, the court noted that even the Seventh Circuit’s Murray v. GMAC Mortgage case limited Cole to “sham offer[s] used to pitch a product rather than extend credit.” Phinn v. Capital One Auto Finance, Inc., No. 07-CV-10940, 2007 WL 1675282 (E.D. Mich. June 11, 2007). See InfoBytes for March 16, 2007, December 3, 2004, and January 20, 2006, for discussions of the Nasca, Cole, and Murray cases, respectively. For a copy of the Phinn decision, please contact .
District Court Dismisses ECOA, FCRA, Illinois Consumer Fraud Act, Conversion Claims. On June 7, the U.S. District Court for the Central District of Illinois, in a case that “barely passes the red face test and borders on sanctionable,” rejected an attempt by two consumers to recharacterize their abandonment of a purchased automobile as a denial of financing. Logsdon v. Dennison Corp., No. 05-1242, 2007 WL 1655239 (C.D. Ill., June 7, 2007). In this case, the plaintiffs, Mr. and Mrs. Logsdon, purchased a pre-owned vehicle from defendant Dennison’s dealership. The plaintiffs obtained financing from CitiFinancial, signed a retail installment sales contract (RISC), traded in their old vehicle, and made a $200 down payment. Dennison paid off an $884 personal loan that had been secured by the old vehicle. About two weeks later, the plaintiffs purchased another vehicle from a different dealership, and, at Mr. Logdson’s request, the dealership returned the previously acquired vehicle to Dennison. Dennison concluded that the plaintiffs had abandoned the vehicle. Just days before the return of the vehicle, Dennison had asked the plaintiffs, at CitiFinancial’s request, to clarify an item on the RISC. The plaintiffs refused to do so and shortly thereafter filed suit. The suit claimed that Dennison (i) violated the Equal Credit Opportunity Act (ECOA) by not providing Mr. Logsdon with a statement of reasons for the denial of credit and providing him with a false notice of approval; (ii) violated the Fair Credit Reporting Act (FCRA) by failing to provide him with required information; (iii) wrongfully converted his old vehicle; and (iv) violated the Illinois Consumer Fraud Act (ICFA). The court concluded that Dennison did not violate the ECOA or the FCRA, since Dennison was not a creditor in the transaction and did not take an adverse action against the plaintiffs. The court also held that the plaintiffs’ filings were “utterly devoid of any citation to legal authority, other legal or factual support, or any attempt to demonstrate how Dennison’s conduct establishes a prima facie case of conversion.” Finally, the court held that the plaintiffs’ filings were also “devoid of citation to any legal authority and [made] no attempt to demonstrate how Dennison allegedly violated the ICFA.” The court granted the defendant’s motion for summary judgment on all counts. For a copy of the opinion, please contact .
Collection Fees by Contract Assignee Without Referral to Third Party Collection Agency Violated FDCPA. On June 1, 2007, the U.S. District Court for the Eastern District of Wisconsin held that AFNI, Inc. (AFNI) violated the Fair Dept Collection Practices Act (FDCPA), when fees at issue were not authorized by the applicable contracts, and were not permitted by state law. Seeger v. AFNI, Inc., No. 05-C-714, 2007 WL 1598618 (E.D. Wis. June 1, 2007). Plaintiffs, a class comprised of Wisconsin residents, had previously entered into cellular wireless agreements with Cingular Wireless, Ameritech Mobile Communications, and/or Worldcom. Defendant AFNI had purchased the class members’ accounts from Cingular. Between September 2004 and June 2005, AFNI sent debt collection letters to the class members, seeking a “Collection Fee” of 15% of the amount of the original balance. The class members filed suit, alleging, inter alia, that AFNI violated the FDCPA by assessing a 15% collection fee that was not authorized by any customer service agreements or permitted by law. Under the FDCPA, “[a] debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt”…“unless such amount is expressly authorized by the agreement creating the debt or by law.” 15 U.S.C. § 1692f(1). Both AFNI and the class members agreed that the contracts did explicitly provide for the recovery of amounts charged for collection fees by a third party collection agency. The dispute was whether AFNI, as both Cingular’s assignee and the collection agency, could also recover a collection fee. AFNI argued that, as the assignee of the debt, it had the right to recover any amounts that would have been recoverable by Cingular, the assignor. Therefore, AFNI argued that it would have the right to charge a collection fee as the debt collector and to recover this collection fee as the assignee to the contract. The court disagreed with AFNI, holding that AFNI was not authorized to charge the collection fee because there was no referral to an outside party (e.g., AFNI’s status as a debt collector did not change the fact that it did not refer the accounts to a third party). In addition, the court also found that state law would not allow for the recovery of the collection fee because “there [were] no losses or expenses for which AFNI need[ed] to be compensated.” While the court found in favor of plaintiffs’ FDCPA argument, the court granted a separate AFNI motion for summary judgment concerning a separate state law argument. The state law argument was that the collection fee on these types of transactions was prohibited by the Wisconsin Consumer Act (WCA). In this regard, the court held that the WCA did not apply to the cellular phone contracts because the obligations were not payable in installments, and therefore, did not constitute “consumer credit transactions.” For a copy of this decision, please contact .
Industry Group Issues Subprime Loan Modification Guidelines. On June 5, the American Securitization Forum published the Statement of Principles, Recommendation and Guidelines for the Modification of Securitized Subprime Residential Mortgage Loans (Principles). The Principles are designed to create a common framework for structuring and interpreting loan modification provisions that are in securitization documents, but are not intended to promote a single “across-the-board approach to loan modifications.” The Principles advocate early communication with borrowers who are, or are likely to be, in default. In addition, the Principles suggest, among other things, that any modifications be consistent with the applicable securitization documents, be structured to avoid materially adverse tax or accounting consequences, and be in the best interests of the borrower. For additional information, please see http://www.americansecuritization.com/story.aspx?id=1741.
Litigation
Credit Reporting Agencies Relying on Inaccurate Information in Public Records not Liable for FCRA Claim. On May 7, the U.S. Court of Appeals for the Ninth Circuit ruled that a credit reporting agency in not liable under the FCRA when it relies on inaccurate information contained in public records and uses “reasonable procedures” to verify the accuracy of the disputed information. Dennis v. BEH-1, LLC, 485 F. 3d 443 (9th Cir. May 7, 2007). In 2002, the plaintiff, Dennis, settled an unlawful detainer complaint by his landlord under the stipulation that no judgment would be entered in connection with the settlement as long as payments were made. Nevertheless, a notation in the court docket indicated that judgment was in fact entered against Dennis in relation to that settlement, possibly as a result of a clerk error. In a subsequent credit report generated by Experian Information Solutions, Inc. (Experian), Dennis challenged the inclusion of the “civil claim judgment” in his credit report. Experian contacted its third-party public records vendor to verify the disputed information and was told that the information was accurate. Dennis subsequently sued Experian alleging violations of the California Consumer Credit Reporting Agencies Act and the FCRA. The District Court granted summary judgment for the defendant on all claims, but Dennis appealed under a FCRA claim that Experian had a duty to use “reasonable procedures” to ensure the accuracy of information in credit reports and a duty to reinvestigate the information Dennis disputed. The Ninth Circuit held that it was reasonable for Experian to rely on the validity of public records and secondary supporting documentation (i.e., trial minutes and the Register of Actions) to reinvestigate Dennis’ disputed claim. We note that Judge Kozinski issued a strong dissent in this case arguing that Experian was required to conduct a more thorough investigation of Dennis’ disputed claim. Judge Kozinski notes that the public records vendor Experian hired to assist in the reinvestigation located a court document that clearly states “No judgment so long as payments made … entry of judgment stayed.” Judge Kozinski notes that the unambiguous nature of this document should have led Experian to conclude that the register of the judgment had been made in error, and, that in ignoring this evidence, a reasonable question for the jury exists as to whether this constituted a “willful” failure to comply with the FCRA. For a copy of the opinion, please see http://caselaw.lp.findlaw.com/data2/circs/9th/0456230p.pdf (free registration required).
Pennsylvania Supreme Court Holds That Arbitration Agreements Allowing Use of Courts in Foreclosures are not Presumptively Unconscionable. On May 31, 2007, the Pennsylvania Supreme Court held that arbitration agreements that permit a lender to pursue foreclosure actions in court while requiring the borrower to arbitrate all disputes are not presumptively unconscionable under Pennsylvania law. In Salley v. Option One Mortgage Corp., the court clarified that “the burden of establishing unconscionability lies with the party seeking to invalidate a contract, including an arbitration agreement, and there is no presumption of unconscionability associated with an arbitration agreement merely on the basis that the agreement reserves judicial remedies associated with foreclosure.” In so holding, the court rejected the Pennsylvania Superior Court’s holding in Lytle v. Citifinancial Services, Inc., 810 A.2d 643 (Pa. Super. 2002), that “the reservation by [a financial institution] of access to the courts for itself to the exclusion of the consumer creates a presumption of unconscionability, which in the absence of ‘business realities’ that compel inclusion of such a provision, renders the arbitration provision unconscionable and unenforceable under Pennsylvania law.” For a copy of the Pennsylvania Supreme Court’s opinion, see http://www.courts.state.pa.us/OpPosting/Supreme/out/J-34-2006mo.pdf.
Arbitration Provision Waived by Delay, Participation in Discovery, Prejudice to Opposing Party. Recently, the U.S. Court of Appeals for the Eighth Circuit held that a loan servicer waived its right to arbitrate claims arising in response to a bankruptcy proof of claim by attempting to litigate the merits of debtor’s claims, participating in discovery, and delaying its motion to compel arbitration. Lewallen v. Green Tree Servicing, L.L.C., No. 06-1925 (8th Cir., opinion filed June 4, 2007). In response to a foreclosure proceeding, a borrower filed for Chapter 13 bankruptcy, and eventually objected to the servicer’s proof of claim alleging violations of various state and federal consumer protection statutes. At the suggestion of counsel for the servicer, the objection was dismissed and debtor filed an adversary proceeding raising substantially similar claims to those asserted in the objection. Eleven months after the filing of the objection, and after serving discovery and moving to dismiss, the servicer moved to compel arbitration on the basis of an arbitration clause contained in debtor’s loan agreement. The bankruptcy court denied the motion, finding that the servicer’s active participation in the adversary proceeding constituted a waiver of its arbitration right. Both the district court and the Eighth Circuit affirmed. Specifically, the Eighth Circuit held that the servicer waived its right to arbitrate by failing to seek arbitration promptly in response to debtor’s initial objection to the proof of claim which raised the claims contemplated in the arbitration provision. The Eighth Circuit also found it significant that, at a hearing on the objection, counsel for the servicer affirmatively requested that the dispute be resolved through an adversary proceeding. Furthermore, the servicer filed discovery requests and a dispositive motion, actions that were inconsistent with its right to arbitrate and that prejudiced debtor by causing her to incur duplicative discovery and merits-related expenses. The Eighth Circuit did not reach an alternative theory advanced by the district court – that a bankruptcy court has the discretion to refuse to enforce an arbitration provision if arbitration would jeopardize a core bankruptcy proceeding. For a copy of the opinion, please see http://caselaw.lp.findlaw.com/data2/circs/8th/061925p.pdf (free registration required).
District Court Rejects “Material Terms,” “Value” Tests for FCRA Firm Offers. The U.S. District Court for the Eastern District of Michigan held that the Fair Credit Reporting Act (FCRA) does not require that the mailer in a prescreened credit solicitation contain the “material terms” of the offer. It cited with approval the discussion by the U.S. District Court for the Southern District of New York in Nasca v. J.P. Morgan Chase Bank that noted that FCRA already requires certain disclosures in the mailer and that the courts should not read other mandated disclosures into the statute. The court also rejected the requirement that firm offers must have “value” that was articulated in the U.S. Court of Appeals for the Seventh Circuit’s Cole v. U.S. Capital case, the court noted that even the Seventh Circuit’s Murray v. GMAC Mortgage case limited Cole to “sham offer[s] used to pitch a product rather than extend credit.” Phinn v. Capital One Auto Finance, Inc., No. 07-CV-10940, 2007 WL 1675282 (E.D. Mich. June 11, 2007). See InfoBytes for March 16, 2007, December 3, 2004, and January 20, 2006, for discussions of the Nasca, Cole, and Murray cases, respectively. For a copy of the Phinn decision, please contact .
District Court Dismisses ECOA, FCRA, Illinois Consumer Fraud Act, Conversion Claims. On June 7, the U.S. District Court for the Central District of Illinois, in a case that “barely passes the red face test and borders on sanctionable,” rejected an attempt by two consumers to recharacterize their abandonment of a purchased automobile as a denial of financing. Logsdon v. Dennison Corp., No. 05-1242, 2007 WL 1655239 (C.D. Ill., June 7, 2007). In this case, the plaintiffs, Mr. and Mrs. Logsdon, purchased a pre-owned vehicle from defendant Dennison’s dealership. The plaintiffs obtained financing from CitiFinancial, signed a retail installment sales contract (RISC), traded in their old vehicle, and made a $200 down payment. Dennison paid off an $884 personal loan that had been secured by the old vehicle. About two weeks later, the plaintiffs purchased another vehicle from a different dealership, and, at Mr. Logdson’s request, the dealership returned the previously acquired vehicle to Dennison. Dennison concluded that the plaintiffs had abandoned the vehicle. Just days before the return of the vehicle, Dennison had asked the plaintiffs, at CitiFinancial’s request, to clarify an item on the RISC. The plaintiffs refused to do so and shortly thereafter filed suit. The suit claimed that Dennison (i) violated the Equal Credit Opportunity Act (ECOA) by not providing Mr. Logsdon with a statement of reasons for the denial of credit and providing him with a false notice of approval; (ii) violated the Fair Credit Reporting Act (FCRA) by failing to provide him with required information; (iii) wrongfully converted his old vehicle; and (iv) violated the Illinois Consumer Fraud Act (ICFA). The court concluded that Dennison did not violate the ECOA or the FCRA, since Dennison was not a creditor in the transaction and did not take an adverse action against the plaintiffs. The court also held that the plaintiffs’ filings were “utterly devoid of any citation to legal authority, other legal or factual support, or any attempt to demonstrate how Dennison’s conduct establishes a prima facie case of conversion.” Finally, the court held that the plaintiffs’ filings were also “devoid of citation to any legal authority and [made] no attempt to demonstrate how Dennison allegedly violated the ICFA.” The court granted the defendant’s motion for summary judgment on all counts. For a copy of the opinion, please contact .
Federal Court Allows Discovery of Information Stored in RAM. On May 29, the U.S. District Court for the Central District of California held that information stored in a computer’s RAM is subject to discovery under the Federal Rules of Civil Procedure. Columbia Pictures Indus. v. Bunnell, No. CV 06-1093 (C.D. Cal. May 29, 2007). In this case, the plaintiff sought discovery from the defendants (who operate the TorrentSpy website), alleging that the RAM in defendants’ web servers could contain information that would be necessary to prove plaintiff’s allegations of copyright infringement. RAM is generally more volatile than other forms of electronic storage, such as CD-ROM or hard disk storage media. Defendants plan to appeal the court’s ruling. If it is upheld, the decision could have a significant impact on litigation practices and may impact the breadth of a litigant’s duty to preserve information for discovery. For a copy of the opinion, please contact .
Collection Fees by Contract Assignee Without Referral to Third Party Collection Agency Violated FDCPA. On June 1, 2007, the U.S. District Court for the Eastern District of Wisconsin held that AFNI, Inc. (AFNI) violated the Fair Dept Collection Practices Act (FDCPA), when fees at issue were not authorized by the applicable contracts, and were not permitted by state law. Seeger v. AFNI, Inc., No. 05-C-714, 2007 WL 1598618 (E.D. Wis. June 1, 2007). Plaintiffs, a class comprised of Wisconsin residents, had previously entered into cellular wireless agreements with Cingular Wireless, Ameritech Mobile Communications, and/or Worldcom. Defendant AFNI had purchased the class members’ accounts from Cingular. Between September 2004 and June 2005, AFNI sent debt collection letters to the class members, seeking a “Collection Fee” of 15% of the amount of the original balance. The class members filed suit, alleging, inter alia, that AFNI violated the FDCPA by assessing a 15% collection fee that was not authorized by any customer service agreements or permitted by law. Under the FDCPA, “[a] debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt”…“unless such amount is expressly authorized by the agreement creating the debt or by law.” 15 U.S.C. § 1692f(1). Both AFNI and the class members agreed that the contracts did explicitly provide for the recovery of amounts charged for collection fees by a third party collection agency. The dispute was whether AFNI, as both Cingular’s assignee and the collection agency, could also recover a collection fee. AFNI argued that, as the assignee of the debt, it had the right to recover any amounts that would have been recoverable by Cingular, the assignor. Therefore, AFNI argued that it would have the right to charge a collection fee as the debt collector and to recover this collection fee as the assignee to the contract. The court disagreed with AFNI, holding that AFNI was not authorized to charge the collection fee because there was no referral to an outside party (e.g., AFNI’s status as a debt collector did not change the fact that it did not refer the accounts to a third party). In addition, the court also found that state law would not allow for the recovery of the collection fee because “there [were] no losses or expenses for which AFNI need[ed] to be compensated.” While the court found in favor of plaintiffs’ FDCPA argument, the court granted a separate AFNI motion for summary judgment concerning a separate state law argument. The state law argument was that the collection fee on these types of transactions was prohibited by the Wisconsin Consumer Act (WCA). In this regard, the court held that the WCA did not apply to the cellular phone contracts because the obligations were not payable in installments, and therefore, did not constitute “consumer credit transactions.” For a copy of this decision, please contact .
E-Financial Services
Department of Education Proposes Regulations Affecting Electronic Master Promissory Notes. On June 12, the Department of Education published a Notice of Proposed Rulemaking in the Federal Register that addresses, among other things, the certification of electronic signatures on master promissory notes (MPN) that are assigned to the Department of Education pursuant to the Perkins Loan and FFEL programs. In addition, the proposed regulations would require the retention of an original electronically signed Perkins Loan or FFEL Program MPN for a period of 3 years after all loans on the MPN have been satisfied, and would require a guaranty agency to provide the Secretary of Education with the name and location of the entity in possession of an original electronically signed MPN that has been assigned to the Department of Education. For a copy of the Federal Register notice, please see http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/pdf/E7-10826.pdf.
Federal Court Allows Discovery of Information Stored in RAM. On May 29, the U.S. District Court for the Central District of California held that information stored in a computer’s RAM is subject to discovery under the Federal Rules of Civil Procedure. Columbia Pictures Indus. v. Bunnell, No. CV 06-1093 (C.D. Cal. May 29, 2007). In this case, the plaintiff sought discovery from the defendants (who operate the TorrentSpy website), alleging that the RAM in defendants’ web servers could contain information that would be necessary to prove plaintiff’s allegations of copyright infringement. RAM is generally more volatile than other forms of electronic storage, such as CD-ROM or hard disk storage media. Defendants plan to appeal the court’s ruling. If it is upheld, the decision could have a significant impact on litigation practices and may impact the breadth of a litigant’s duty to preserve information for discovery. For a copy of the opinion, please contact .
Credit Cards
Texas Enacts Campus Credit Card Marketing Bill. Recently, Texas Governor Rick Perry signed into law H.B. 85, a bill that regulates credit card marketing at postsecondary educational institutions. In the bill, “campus credit card marketing activity” includes marketing activities conducted by an agent or employee of the card issuer on the campus, as well as an unmanned display that includes applications. H.B. 85 imposes requirements on both the institution and the card issuer, requiring an institution that permits credit card marketing on campus to designate specific times and places where such marketing can take place. In addition, if the institution permits credit card marketing on its campus, it must provide a debt education and counseling session for new students. Issuers conducting marketing activities on a postsecondary institution campus must develop financial educational material to be available to students on the campus generally and on the internet, and also to be specifically given to any student to whom a credit card is issued at the time the card is provided. The bill also prohibits issuers from offering a gift or other incentive in exchange for completing a card application. Intentional violations of these provisions carry a civil penalty of up to $2500 per violation. The act goes into effect on September 1, 2007. To see the full text of the bill, please see http://www.legis.state.tx.us/tlodocs/80R/billtext/html/HB00085F.htm.