InfoBytes, May 11, 2007
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Mortgages
- Banking
- Consumer Finance
- Securities
- Litigation
- Privacy/Data Security
- Credit Cards
Federal Issues
Suitability Standard Bill Introduced in Senate. On May 3, Sen. Chuck Schummer (D – N.Y.) and two co-sponsors introduced the “Borrower’s Protection Act of 2007” (S. 1299) that would establish a fiduciary relationship between a mortgage broker and borrower making the broker “subject to all the requirements for fiduciaries otherwise applicable under State or Federal law.” The bill would require, among other things, that brokers (i) verify the “reasonable ability” of a borrower to repay a loan, (ii) document the borrower’s income using specified means, (iii) not make a loan exceeding a debt-to-income ratio to be set by rule by the Department of Veteran’s Affairs, and (iv) utilize escrow accounts to pay taxes and insurance fees. The bill would specify that a “lender shall be liable for the acts, omissions, and representations made by the mortgage broker” regarding a mortgage loan acquired by the lender from the broker. Borrower’s Protection Act would also prohibit mortgage originators from, among other things, steering borrowers to loans “that are not reasonably advantageous to the consumer.” For more information on the status of S. 1299, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:s.01299:.
Senate Bills Require Disclosure of Personal Data Security Breaches. On May 3, the Senate Judiciary Committee approved two bills (S.495 and S.239) requiring, among other items, the notice of personal data security breaches. Both bills require companies to notify individuals if their sensitive personal information has been, or is reasonably believed to have been, accessed by an unauthorized person. Notification under both bills would be required within 30 days, unless a delay is authorized by the Secret Service. The bills also provide for an exemption that if “no significant risk” of harm to individuals exists, a company may seek permission to waive the requirement from the Secret Service. Both bills “supersede any provision of Federal law or any provision of the law of any State” save certain minor details regarding the wording of a notification. S.495, a more contentious bill, also provides for (i) stronger penalties, (ii) mandatory disclosures by data-brokers of an individual’s information at the individual’s request, and (iii) steps for correcting personal information. Both bills now go to the Senate Floor. For more information on the bills, see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:s.00495: and http://thomas.loc.gov/cgi-bin/bdquery/z?d110:s.00239:.
House Passes Bill Limiting Student Lending Incentives. On May 10, the House of Representatives passed the Student Loan Sunshine Act (H.R.890). Among other items, the Act would (i) prohibit student loan companies from providing gifts to school employees or agents, (ii) require preferred lender lists to be maintained based upon the benefits lenders provide to borrowers, (iii) modify the Truth in Lending Act to require the reporting of proposed loans that equal or exceed $1,000 to the relevant school and require the school inform the lender if it exceeds the borrower’s cost of attendance, (iv) require borrowers be informed of federal student loan options when applying for private loans, (v) restrict lenders’ marketing representation of loan arrangements with schools, and (vi) mandate annual reports regarding loan arrangements be provided to the Secretary of Education. The bill now goes to the Senate. For more information on the Act, see http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.890:.
FRB Issues Letter Regarding CAFA Notification. On May 7th, the Federal Reserve Board (FRB) issued a letter to all member banks of the Federal Reserve System regarding their obligation to provide notice to the FRB of proposed settlements of certain class action litigation. The letter serves as reminder to Federal Reserve System-member banks that, under the Class Action Fairness Act (CAFA) (Pub.L. No. 109-2), financial institutions who are defendants in class action litigation must file with their Federal banking regulator notice of any proposed settlement. The letter also points out that notice does not need to be provided regarding litigation not touching on issues subject to regulation by a financial institution’s regulator. For more information view the FRB’s letter at http://www.federalreserve.gov/boarddocs/srletters/2007/SR0707.htm.
SEC Exempts Nasdaq Small Cap Stocks from “Blue Sky” Laws. The Securities and Exchange Commission (SEC) recently announced a final rule exempting securities listed, or authorized for listing, on the Nasdaq Capital Market tier (NCM) of the NASDAQ stock exchange (Nasdaq) effective May 24, 2007. The final rule adopted by the SEC amends a rule under Section 18 of the Securities Act of 1933 to designate securities on the NSM tier, formerly known as the Nasdaq SmallCap Market, of the Nasdaq as “covered securities.” Covered securities are exempted by the Securities Act from state securities, or “blue sky,” law registration requirements. In a related development, on April 18th the SEC approved increased listing standards for the Nasdaq Capital Market. The final rule is available at http://www.sec.gov/rules/final/2007/33-8791.pdf.
State Issues
South Dakota Enacts Lender / Broker Law Requiring Individual Licensure. On March 26, South Dakota Governor Michael Rounds signed into law SB 165, an act that repealed and reestablished the provisions regulating mortgage lenders and brokers and introduced a new individual loan originator requirement. This act, among other things, will require (i) registration of loan originators, (ii) initial and continuing education of licensees and registrants, (iii) criminal background checks of all applicants, (iv) a $25,000 surety bond for licensees, and (v) licensure of mortgage servicers as mortgage lenders. Under the act, loan originators are defined as any person acting under the supervision of a licensed broker or lender and “who, for compensation or gain, takes or receives a mortgage application, assembles information, and prepares paperwork and documentation necessary for obtaining a mortgage loan or arranges for a conditional mortgage loan commitment between a borrower and a lender, or arranges for a loan commitment from a lender.” Clerical employees who do not process mortgage loans are not considered loan originators. Loan originators do not need to be registered prior to December 31, 2007. Mortgage brokers and mortgage lenders must complete the equivalent of two years of service under the supervision and direction of a licensed mortgage broker or mortgage lender, or another jurisdiction’s equivalent such service, before becoming eligible to apply for a license. Any person licensed as a mortgage broker or mortgage lender prior to July 1, 2007 is exempt from the education requirement. For more information on this bill, please see http://legis.state.sd.us/sessions/2007/165.htm.
Mississippi Creates Mortgage Lender License, Removes Major Exemption. On April 21, Mississippi Governor Harley Barbour signed into law S.B. 2350, which reenacts the Mississippi Mortgage Consumer Protection Law (MMCPL) and revises the state’s mortgage lender licensing scheme. The revisions remove a licensure exemption for “wholesale lenders,” defined to include lenders registered by Fannie Mae or Freddie Mac, Ginnie Mae issuers, or FHA-approved mortgagees. Wholesale lenders, who were previously allowed to hold a “Registration Certificate” will now be required to become fully licensed under the MMCPL. The new law also bifurcates the old “mortgage company” license into separate “mortgage broker” and “mortgage lender” licenses. Loan originators will be required to have at least one year of experience directly in mortgage lending in Mississippi within the two years prior to the date of application or must complete a minimum of twenty-four hours of approved course education. Mortgage broker and lender applicants must also have a principal officer possessing two years’ experience, or who has completed four hours of education, and has passed an examination. All licensees will be required to complete twelve hours of education each year. The law is effective on July 1, 2007. Mississippi Department of Banking and Consumer finance states on its website that any previously registered wholesale lender will not be required to become fully licensed until the time of their 2007 renewal. For more information on S.B. 2350, please see http://billstatus.ls.state.ms.us/2007/html/history/SB/SB2350.htm.
Alabama State Bar Issues Opinion against Using E-Document Metadata. The Office of General Counsel of the Alabama State Bar issued an ethics opinion on March 14 advising that unauthorized mining of “metadata” to uncover confidential information in electronic documents constitutes professional misconduct. Ethics Opinion, Alabama State Bar Office of Gen. Counsel, Op. RO-2007-02, 3/14/07. The opinion cited and agreed with a 2001 New York State Bar Opinion concluding that such mining of metadata to access client confidences and secrets constitutes “an impermissible intrusion on the attorney-client relationship in violation of the Code [of Professional Conduct].” New York State Bar Opinion 749, New York State Bar, 2001. The position of the New York and Alabama State Bars contrasts with the American Bar association, which has stated that the Model Rules of Professional Conduct do not contain any specific prohibition against a lawyer’s reviewing and using embedded information in electronic documents. (See ABA Formal Op. 06-442 (2006), reported in the November 17, 2006 issue of InfoBytes.) The Alabama State Bar also noted that “[l]awyers have a duty under Rule 1.6 to use reasonable care when transmitting electronic documents to prevent the disclosure of metadata containing client confidences or secrets." The standard for determining “reasonable care” varies upon the circumstances, but the panel suggested that relevant factors include (i) steps taken by the attorney to prevent the disclosure of metadata, (ii) the nature and scope of the metadata revealed, (iii) the subject matter of the document, and (iv) the intended recipient. The opinion noted, for example, that an attorney would need to exercise greater care in submitting an electronic document to an opposing party than he or she would if e-filing a pleading with the court since an opposing party is more likely to attempt to mine the document for metadata. To view a copy of the ethics opinion, please go to http://www.alabar.org/ogc/PDF/2007-02.pdf.
Courts
Court Holds Credit Card Mailer That Reserves Right to Change Terms After Opening is Valid “Firm Offer.” In Schwartz v. Washington Mutual, Inc., – F. Supp. 2d –, 2007 WL 1288070 (E.D.N.Y. May 1, 2007), the U.S. District Court for the Eastern District of New York granted a credit card issuer’s motion to dismiss in a Fair Credit Reporting Act (FCRA) firm-offer case. In this case, the mailer stated that, if the consumer accepted the lender’s offer, he would “receive a credit line of ‘up to $30,000 or at least $500 at the rates below.’” The mailer went on to note that the lender had the right to “change the APRs, fees and other terms of your account at any time in accordance with applicable law and the Account Agreement.” The court held that the mailer was a valid “firm offer” under FCRA, rejecting the consumer’s argument that the lender’s ability to change the terms after the offer was accepted meant that the offer was not “firm.” The court stated that reserving the right to change the terms after the offer is accepted does not violate FCRA. It accepted the legal reasoning of the U.S. Court of Appeals for the Seventh Circuit and district courts within that circuit in a series of cases beginning with Cole v. U.S. Capital (see the January 5, 2007 and December 3, 2004 issues of InfoBytes, among others) but distinguished the facts in the current case from the facts in those cases. For a copy of the court’s opinion in Schwartz, please contact .
Technical Accuracy is Not a Complete Defense to a FCRA Negligent Reinvestigation Claim. On May 3, a federal district court in Michigan denied Trans Union’s motion for summary judgment in a case in which the plaintiffs allege that the credit bureau negligently reinvestigated the status of a consumer’s account. See Roberts v. Trans Union LLC, No. 05-74224, 2007 WL 1308682 (E.D. Mich. May 3, 2007). The plaintiff in the case alleged that, for approximately one year after he disputed the status of an account listed on his Trans Union credit report, Trans Union continued to inaccurately report that the debt was unpaid, open, and past due. Trans Union admitted that, upon receiving the plaintiff’s dispute letter, it had entered an incorrect account number on the Automated Consumer Dispute Verification form which it submitted to the furnisher of the disputed information. However, relying in part on section 605c(a)(5) of FCRA, which prohibits credit reporting agencies from reporting certain adverse information that antedates the report by more than seven years, Trans Union argued that the information it reported in 2005, although outdated, was nonetheless accurate as of 2003. According to Trans Union, such technical accuracy was an absolute defense to liability. The court disagreed, holding that “Trans Union’s argument that technical accuracy is a complete defense to a claim of negligent reinvestigation where the consumer specifically notifies the CRA that the information is outdated, would completely undermine” FCRA’s reinvestigation requirement. For a copy of the decision, please contact .
Ninth Circuit Issues FCRA Decision on “Reasonable Procedures” to Insure Credit Report Accuracy. A tenant and his landlord settled a dispute out of court and stipulated as part of the settlement that “no judgment” would be entered in court records. Dennis v. BEH-1, LLC, 2007 WL 1309560 (9th Cir. May 7, 2007). On the L.A. Superior Court’s register of Civil Actions, however, the following erroneous entry was made: “11/25/02 Court Trial Concluded – Judgment Entered." Experian, relying on this information, inserted the following notation in the Plaintiff’s credit report: “Civil Claim judgment." Subsequently, the consumer sued Experian arguing that Experian failed to maintain “reasonable procedures” to ensure the accuracy of its reports and that Experian failed to meet its duty to reinvestigate the disputed information. The U.S. Court of Appeals for the Ninth Circuit concluded that it was reasonable as a matter of law for Experian to rely on secondary documents, “namely the trial minutes and the Register of Actions without obtaining a copy of the actual judgment” because such documents are official records issued by the Superior Court. As a result, the Court decided Experian correctly reported the judgment even if the judgment was entered erroneously and that the consumer was in the best position to correct the error. For a copy of this decision, please see http://www.ca9.uscourts.gov.
Federal Court Denies Admissibility of E-mail in Comprehensive Decision. On May 4, the Chief Magistrate for the U.S. District Court for the District of Maryland issued a lengthy decision that provides an extensive discussion of the legal regime governing the introduction of electronically stored information into evidence. Lorraine v. Markel American Ins. Co., No. PWG-06-1893 (D. Md. May 4, 2007). The case arose from a dispute between a yacht owner and its insurance company over the construction of an arbitration clause. On summary judgment, both parties introduced e-mails to bolster their case. The magistrate judge excluded both parties’ proffered e-mails because the parties had not authenticated the e-mails or addressed issues pertaining to the hearsay, original writing and prejudicial balancing rules that are contained in the Federal Rules of Evidence. The 101-page decision provides an in-depth analysis of the Federal Rules and their application to various types of electronically-stored evidence. Please contact for a copy of the magistrate’s decision.
Firm News
Attorneys from Buckley Kolar recently presented hour-long audio seminars to banks and financial institutions across the country through Alex eSolutions, a division of A.S. Pratt/Sheshunoff Information Services. The recent seminars include (i) Jeffrey Naimon, “Recent Trends in Loan File Review” (May 10, 2007) and (ii) John P. Kromer and Clinton Rockwell, “Non-Traditional Mortgage Loans and Federal and State Agency Guidance” (April 19, 2007). To learn more about, or purchase recordings of, the A.S. Pratt Audio Conference Series, please see http://www.aspratt.com/audio/wmp/.
Jerry Buckley, Joe Kolar, and Andrea “Lee” Negroni spoke at the MBA Legal Issues and Regulatory Compliance Conference held May 6-9 in New Orleans. Mr. Buckley spoke on legal issues in eMortgages for a panel entitled Update on Industry Technology-Legal Developments and the Road to eMortgages and on May 7 RESPA and on the electronic commerce panels. Mr. Lynyak spoke on May 9th regarding assignee liability on a panel entitled “New Approaches to Anti-Abusive Lending Protections.” Ms. Negroni spoke on the “Hot Topics for Corporate Counsel” panel on May 8 on the subject of “Outsourcing Legal and Compliance Work to Indian Legal Process Outsource (LPO) Companies.”
Jeff Naimon will be speaking on the RESPA panel at the American Conference Institute’s upcoming seminar “Preventing, Defending and Resolving Consumer Credit Litigation” taking place on June 5-6, 2007 in New York. For more information, or to register, go to http://www.americanconference.com/Litigation/creditlit.htm.
Richard DiSalvo moderated the “Solicitation Dos and Don’ts” Workshop on May 7, 2007 at the Executive Enterprise Institute’s 21st Annual Payment Card Institute in Arlington, VA. The half day workshop addressed evolving trends in credit card solicitations.
Frank Supik spoke at the Equipment Leasing and Finance Association’s Legal Forum in Miami, Florida on May 7. Mr. Supik participated in a panel discussion entitled “Doing Deals in a Paperless Society (Electronic Chattel Paper). To e-Business and Beyond!” For more information, go to http://www.elfaonline.org/events/2007/LF/.
Mortgages
Suitability Standard Bill Introduced in Senate. On May 3, Sen. Chuck Schummer (D – N.Y.) and two co-sponsors introduced the “Borrower’s Protection Act of 2007” (S. 1299) that would establish a fiduciary relationship between a mortgage broker and borrower making the broker “subject to all the requirements for fiduciaries otherwise applicable under State or Federal law.” The bill would require, among other things, that brokers (i) verify the “reasonable ability” of a borrower to repay a loan, (ii) document the borrower’s income using specified means, (iii) not make a loan exceeding a debt-to-income ratio to be set by rule by the Department of Veteran’s Affairs, and (iv) utilize escrow accounts to pay taxes and insurance fees. The bill would specify that a “lender shall be liable for the acts, omissions, and representations made by the mortgage broker” regarding a mortgage loan acquired by the lender from the broker. Borrower’s Protection Act would also prohibit mortgage originators from, among other things, steering borrowers to loans “that are not reasonably advantageous to the consumer.” For more information on the status of S. 1299, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:s.01299:.
South Dakota Enacts Lender / Broker Law Requiring Individual Licensure. On March 26, South Dakota Governor Michael Rounds signed into law SB 165, an act that repealed and reestablished the provisions regulating mortgage lenders and brokers and introduced a new individual loan originator requirement. This act, among other things, will require (i) registration of loan originators, (ii) initial and continuing education of licensees and registrants, (iii) criminal background checks of all applicants, (iv) a $25,000 surety bond for licensees, and (v) licensure of mortgage servicers as mortgage lenders. Under the act, loan originators are defined as any person acting under the supervision of a licensed broker or lender and “who, for compensation or gain, takes or receives a mortgage application, assembles information, and prepares paperwork and documentation necessary for obtaining a mortgage loan or arranges for a conditional mortgage loan commitment between a borrower and a lender, or arranges for a loan commitment from a lender.” Clerical employees who do not process mortgage loans are not considered loan originators. Loan originators do not need to be registered prior to December 31, 2007. Mortgage brokers and mortgage lenders must complete the equivalent of two years of service under the supervision and direction of a licensed mortgage broker or mortgage lender, or another jurisdiction’s equivalent such service, before becoming eligible to apply for a license. Any person licensed as a mortgage broker or mortgage lender prior to July 1, 2007 is exempt from the education requirement. For more information on this bill, please see http://legis.state.sd.us/sessions/2007/165.htm.
Mississippi Creates Mortgage Lender License, Removes Major Exemption. On April 21, Mississippi Governor Harley Barbour signed into law S.B. 2350, which reenacts the Mississippi Mortgage Consumer Protection Law (MMCPL) and revises the state’s mortgage lender licensing scheme. The revisions remove a licensure exemption for “wholesale lenders,” defined to include lenders registered by Fannie Mae or Freddie Mac, Ginnie Mae issuers, or FHA-approved mortgagees. Wholesale lenders, who were previously allowed to hold a “Registration Certificate” will now be required to become fully licensed under the MMCPL. The new law also bifurcates the old “mortgage company” license into separate “mortgage broker” and “mortgage lender” licenses. Loan originators will be required to have at least one year of experience directly in mortgage lending in Mississippi within the two years prior to the date of application or must complete a minimum of twenty-four hours of approved course education. Mortgage broker and lender applicants must also have a principal officer possessing two years’ experience, or who has completed four hours of education, and has passed an examination. All licensees will be required to complete twelve hours of education each year. The law is effective on July 1, 2007. Mississippi Department of Banking and Consumer finance states on its website that any previously registered wholesale lender will not be required to become fully licensed until the time of their 2007 renewal. For more information on S.B. 2350, please see http://billstatus.ls.state.ms.us/2007/html/history/SB/SB2350.htm.
Banking
FRB Issues Letter Regarding CAFA Notification. On May 7th, the Federal Reserve Board (FRB) issued a letter to all member banks of the Federal Reserve System regarding their obligation to provide notice to the FRB of proposed settlements of certain class action litigation. The letter serves as reminder to Federal Reserve System-member banks that, under the Class Action Fairness Act (CAFA) (Pub.L. No. 109-2), financial institutions who are defendants in class action litigation must file with their Federal banking regulator notice of any proposed settlement. The letter also points out that notice does not need to be provided regarding litigation not touching on issues subject to regulation by a financial institution’s regulator. For more information view the FRB’s letter at http://www.federalreserve.gov/boarddocs/srletters/2007/SR0707.htm.
Consumer Finance
House Passes Bill Limiting Student Lending Incentives. On May 10, the House of Representatives passed the Student Loan Sunshine Act (H.R.890). Among other items, the Act would (i) prohibit student loan companies from providing gifts to school employees or agents, (ii) require preferred lender lists to be maintained based upon the benefits lenders provide to borrowers, (iii) modify the Truth in Lending Act to require the reporting of proposed loans that equal or exceed $1,000 to the relevant school and require the school inform the lender if it exceeds the borrower’s cost of attendance, (iv) require borrowers be informed of federal student loan options when applying for private loans, (v) restrict lenders’ marketing representation of loan arrangements with schools, and (vi) mandate annual reports regarding loan arrangements be provided to the Secretary of Education. The bill now goes to the Senate. For more information on the Act, see http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.890:.
Technical Accuracy is Not a Complete Defense to a FCRA Negligent Reinvestigation Claim. On May 3, a federal district court in Michigan denied Trans Union’s motion for summary judgment in a case in which the plaintiffs allege that the credit bureau negligently reinvestigated the status of a consumer’s account. See Roberts v. Trans Union LLC, No. 05-74224, 2007 WL 1308682 (E.D. Mich. May 3, 2007). The plaintiff in the case alleged that, for approximately one year after he disputed the status of an account listed on his Trans Union credit report, Trans Union continued to inaccurately report that the debt was unpaid, open, and past due. Trans Union admitted that, upon receiving the plaintiff’s dispute letter, it had entered an incorrect account number on the Automated Consumer Dispute Verification form which it submitted to the furnisher of the disputed information. However, relying in part on section 605c(a)(5) of FCRA, which prohibits credit reporting agencies from reporting certain adverse information that antedates the report by more than seven years, Trans Union argued that the information it reported in 2005, although outdated, was nonetheless accurate as of 2003. According to Trans Union, such technical accuracy was an absolute defense to liability. The court disagreed, holding that “Trans Union’s argument that technical accuracy is a complete defense to a claim of negligent reinvestigation where the consumer specifically notifies the CRA that the information is outdated, would completely undermine” FCRA’s reinvestigation requirement. For a copy of the decision, please contact .
Securities
SEC Exempts Nasdaq Small Cap Stocks from “Blue Sky” Laws. The Securities and Exchange Commission (SEC) recently announced a final rule exempting securities listed, or authorized for listing, on the Nasdaq Capital Market tier (NCM) of the NASDAQ stock exchange (Nasdaq) effective May 24, 2007. The final rule adopted by the SEC amends a rule under Section 18 of the Securities Act of 1933 to designate securities on the NSM tier, formerly known as the Nasdaq SmallCap Market, of the Nasdaq as “covered securities.” Covered securities are exempted by the Securities Act from state securities, or “blue sky,” law registration requirements. In a related development, on April 18th the SEC approved increased listing standards for the Nasdaq Capital Market. The final rule is available at http://www.sec.gov/rules/final/2007/33-8791.pdf.
Litigation
FRB Issues Letter Regarding CAFA Notification. On May 7th, the Federal Reserve Board (FRB) issued a letter to all member banks of the Federal Reserve System regarding their obligation to provide notice to the FRB of proposed settlements of certain class action litigation. The letter serves as reminder to Federal Reserve System-member banks that, under the Class Action Fairness Act (CAFA) (Pub.L. No. 109-2), financial institutions who are defendants in class action litigation must file with their Federal banking regulator notice of any proposed settlement. The letter also points out that notice does not need to be provided regarding litigation not touching on issues subject to regulation by a financial institution’s regulator. For more information view the FRB’s letter at http://www.federalreserve.gov/boarddocs/srletters/2007/SR0707.htm.
Alabama State Bar Issues Opinion against Using E-Document Metadata. The Office of General Counsel of the Alabama State Bar issued an ethics opinion on March 14 advising that unauthorized mining of “metadata” to uncover confidential information in electronic documents constitutes professional misconduct. Ethics Opinion, Alabama State Bar Office of Gen. Counsel, Op. RO-2007-02, 3/14/07. The opinion cited and agreed with a 2001 New York State Bar Opinion concluding that such mining of metadata to access client confidences and secrets constitutes “an impermissible intrusion on the attorney-client relationship in violation of the Code [of Professional Conduct]." New York State Bar Opinion 749, New York State Bar, 2001. The position of the New York and Alabama State Bars contrasts with the American Bar association, which has stated that the Model Rules of Professional Conduct do not contain any specific prohibition against a lawyer’s reviewing and using embedded information in electronic documents. (See ABA Formal Op. 06-442 (2006), reported in the November 17, 2006 issue of InfoBytes.) The Alabama State Bar also noted that “[l]awyers have a duty under Rule 1.6 to use reasonable care when transmitting electronic documents to prevent the disclosure of metadata containing client confidences or secrets." The standard for determining “reasonable care” varies upon the circumstances, but the panel suggested that relevant factors include (i) steps taken by the attorney to prevent the disclosure of metadata, (ii) the nature and scope of the metadata revealed, (iii) the subject matter of the document, and (iv) the intended recipient. The opinion noted, for example, that an attorney would need to exercise greater care in submitting an electronic document to an opposing party than he or she would if e-filing a pleading with the court since an opposing party is more likely to attempt to mine the document for metadata. To view a copy of the ethics opinion, please go to http://www.alabar.org/ogc/PDF/2007-02.pdf.
Privacy/Data Security
Senate Bills Require Disclosure of Personal Data Security Breaches. On May 3, the Senate Judiciary Committee approved two bills (S.495 and S.239) requiring, among other items, the notice of personal data security breaches. Both bills require companies to notify individuals if their sensitive personal information has been, or is reasonably believed to have been, accessed by an unauthorized person. Notification under both bills would be required within 30 days, unless a delay is authorized by the Secret Service. The bills also provide for an exemption that if “no significant risk” of harm to individuals exists, a company may seek permission to waive the requirement from the Secret Service. Both bills “supersede any provision of Federal law or any provision of the law of any State” save certain minor details regarding the wording of a notification. S.495, a more contentious bill, also provides for (i) stronger penalties, (ii) mandatory disclosures by data-brokers of an individual’s information at the individual’s request, and (iii) steps for correcting personal information. Both bills now go to the Senate Floor. For more information on the bills, see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:s.00495: and http://thomas.loc.gov/cgi-bin/bdquery/z?d110:s.00239:.
Federal Court Denies Admissibility of E-mail in Comprehensive Decision. On May 4, the Chief Magistrate for the U.S. District Court for the District of Maryland issued a lengthy decision that provides an extensive discussion of the legal regime governing the introduction of electronically stored information into evidence. Lorraine v. Markel American Ins. Co., No. PWG-06-1893 (D. Md. May 4, 2007). The case arose from a dispute between a yacht owner and its insurance company over the construction of an arbitration clause. On summary judgment, both parties introduced e-mails to bolster their case. The magistrate judge excluded both parties’ proffered e-mails because the parties had not authenticated the e-mails or addressed issues pertaining to the hearsay, original writing and prejudicial balancing rules that are contained in the Federal Rules of Evidence. The 101-page decision provides an in-depth analysis of the Federal Rules and their application to various types of electronically-stored evidence. Please contact for a copy of the magistrate’s decision.
Credit Cards
Court Holds Credit Card Mailer That Reserves Right to Change Terms After Opening is Valid “Firm Offer.” In Schwartz v. Washington Mutual, Inc., – F. Supp. 2d –, 2007 WL 1288070 (E.D.N.Y. May 1, 2007), the U.S. District Court for the Eastern District of New York granted a credit card issuer’s motion to dismiss in a Fair Credit Reporting Act (FCRA) firm-offer case. In this case, the mailer stated that, if the consumer accepted the lender’s offer, he would “receive a credit line of ‘up to $30,000 or at least $500 at the rates below.’” The mailer went on to note that the lender had the right to “change the APRs, fees and other terms of your account at any time in accordance with applicable law and the Account Agreement.” The court held that the mailer was a valid “firm offer” under FCRA, rejecting the consumer’s argument that the lender’s ability to change the terms after the offer was accepted meant that the offer was not “firm.” The court stated that reserving the right to change the terms after the offer is accepted does not violate FCRA. It accepted the legal reasoning of the U.S. Court of Appeals for the Seventh Circuit and district courts within that circuit in a series of cases beginning with Cole v. U.S. Capital (see the January 5, 2007 and December 3, 2004 issues of InfoBytes, among others) but distinguished the facts in the current case from the facts in those cases. For a copy of the court’s opinion in Schwartz, please contact .