InfoBytes, November 16, 2007
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Topics in this issue:
- Federal Issues
- State Issues
- Courts
- Firm News
- Miscellany
- Mortgages
- Banking
- Consumer Finance
- Securities
- Litigation
- E-Financial Services
- Privacy/Data Security
- Credit Cards
Federal Issues
House Passes Predatory Lending Bill. On November 15, the U.S. House of Representatives passed the Mortgage Reform and Anti-Predatory Lending Act of 2007, H.R. 3915, by a vote of 291 to 127. The bill significantly restricts loan terms and underwriting practices, and creates expanded liability for lenders as well as assignees. Specifically, the bill would (i) impose a new duty of care and a duty to disclose on originators, (ii) require licensing and registration of loan originators if not provided for by states, (iii) restricts and requires greater disclosure of yield spread premiums and other forms of incentive compensation, (iv) impose a “net tangible benefit” standard for refinancing of residential mortgage loans, (v) create an obligation to consider the borrower’s “reasonable” ability to repay, (vi) expand the availability of rescission as a remedy in civil actions, (vii) lower the thresholds for loans to be covered by the Home Ownership and Equity Protection Act (HOEPA), and (vii) creates new requirements for Truth in Lending Act loan disclosures. During the lengthy floor debate, several amendments were added to the bill. Some of the more significant changes include (i) an amendment introduced by Rep. Frank (D – MA) that, among other things, clarifies the scope of a limited federal preemption for mortgage securitizers, allows consumers to obtain a cure from the assignee of a mortgage if the creditor ceases to exist or goes bankrupt, and adds a monthly mortgage billing disclosure requirement, (ii) an amendment, introduced by Rep. Kanjorski (D – PA) that, among other things, imposes new requirements and restrictions on mortgage servicers, the use of escrow accounts, and appraisals; (iii) an amendment removing civil liability of a lender and canceling the right of rescission for a borrower when a borrower knowingly lies on the mortgage loan application, (iv) an amendment requiring written notice to borrowers with hybrid ARMs six months prior to reset, (v) an amendment providing an exemption from the act for FHA insured loans, and (vi) an amendment capping prepayment penalties and requiring lenders to provide a no prepayment penalty option for “qualified mortgages.” In a House Financial Services Committee press release, Ranking Member Spencer Bachus (R – AL) is quoted stating that while H.R. 3915 “is not a perfect bill – no bill ever is – it has been significantly improved through bipartisan negotiations.” On November 14, the White House released a Statement of Administration Policy regarding the bill which, while supporting “efforts both to improve oversight over the mortgage origination process and to stop predatory lending,” expressed concerns the bill would “unduly restrict access to credit” for consumers. The statement specifically noted concerns over provisions that “overly constrict the primary and secondary markets for finance” such as “specific underwriting standards, assignee liability, and the subjective obligations for mortgage originators.” The bill now heads to the Senate. For a copy of the amended bill, as passed by the House, please see http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.3915.eh:.
FDIC, OCC Approve FACTA Direct-Dispute and Accuracy Proposals. The Federal Deposit Insurance Corporation (FDIC) board of directors recently approved a draft proposal to implement Fair and Accurate Credit Transactions Act of 2003 (FACTA) provisions that (i) allow consumers to dispute credit report items directly with the furnisher of the information and (ii) require furnishers to take steps to ensure the accuracy and the integrity of the information they provide to credit bureaus. FACTA directs the agencies to specify the circumstances under which consumers may dispute items in their credit report directly with the entity that furnished the information, rather than through the consumer reporting agency as FCRA currently requires. The proposed direct-dispute regulation would give consumers a broad right to dispute directly with the furnisher almost all information bearing on the consumer’s relationship with the furnisher. Consumers would have to submit a dispute to the furnisher in writing at a specified address, or electronically if the consumer has agreed to receive electronic disclosures. The agencies are proposing two alternatives for the regulation that would implement the FACTA requirement that the agencies establish guidelines “regarding the accuracy and integrity of the information” they furnish to consumer reporting agencies about consumers. In both alternatives, “accuracy” would mean factual accuracy–i.e., that the information accurately describes the terms of and the consumer’s performance on the account or other relationship between the furnisher and the consumer. The alternatives differ, however, on whether the definition of “integrity” includes the concept of completeness. The first alternative, the Regulatory Definition Approach, would include a definition of “integrity” in the regulation. Under that definition, information that is technically “accurate” but, in the agencies’ view, presents a misleading picture of the customer’s relationship with the consumer–such as reporting balance information without showing the customer’s credit limit–would be considered to lack “integrity.” The agencies note in the preamble to the proposal that lenders argued that this definition goes beyond the statute, because FCRA distinguishes between “accuracy” and “completeness.” Under the second alternative, the Guidelines Definition Approach, the definitions would be included in guidelines that identify objectives for furnishers to assure the accuracy and integrity of the information they provide to consumer reporting agencies. The guidelines would define “integrity” in a way that does not include completeness, but instead addresses the issues of (i) attribution of information to the wrong consumer or account or use of an erroneous date; and (ii) that the furnisher should be able to verify, through its own records, the accuracy of information that is disputed. Comptroller of the Currency John Dugan has announced that he has approved the draft regulations, and discussions at the meeting indicated that the other agencies responsible for the regulation–the Federal Reserve Board, Office of Thrift Supervision, National Credit Union Administration, and Federal Trade Commission–will approve it soon. Comments will be due 60 days after publication in the Federal Register. The FDIC version of the draft proposal is available at http://www.fdic.gov/news/board/07doc3nov5.pdf. Comptroller Dugan’s statement is available at http://www.occ.treas.gov/ftp/release/2007-124.htm. A video and transcript of the FDIC board meeting can be viewed at http://www.vodium.com/goto/fdic/boardmeetings.asp.
In Senate FHA Modernization Stalls and GSE Cap Law Introduced. On November 15, two major pieces of housing legislation failed to come to the Senate floor as hoped. The FHA Modernization Act (S. 2338) is the Senate’s version of two House bills, the “Expanding American Home Ownership Act” (H.R. 1852) and the FHA Manufactured Housing Loan Modernization Act of 2007 (H.R. 2139), which were both passed by the House earlier this year (reported in the September 21 and June 29 issues of InfoBytes, respectively). Senate Democrats had hoped to put the bill to a vote before the Senate’s Thanksgiving recess, but were thwarted by procedural setbacks. Also, the Promoting Refinancing Opportunities for Mortgages Impacted by the Subprime Emergency, or “PROMISE,” Act (S. 2346) was introduced by Sen. Charles Schumer (D – NY) which would temporarily lift the portfolio caps for the government sponsored enterprises (GSEs) to 10%, on the condition that most of the increase be used to refinance homeowners out of subprime mortgages. Sen. Schumer promised to introduce such legislation after Federal Reserve Chairman Bernanke advocated a different change in GSE policy (discussed in the November 9th issue of InfoBytes). The bill was placed on the Senate calendar. For Senate Banking Committee Chairman Christopher Dodd’s (D – CT) public statement on the delay of S. 2338, please see http://banking.senate.gov/index.cfm?Fuseaction=Articles.Detail&Article_id=216.
Ginnie Mae Issues First HECM-Backed Security. On November 9, the Department of Housing and Urban Development (HUD) announced that Ginnie Mae had issued its first security backed by pooled Home Equity Conversion Mortgages (HECMs, Federal Housing Administration insured reverse mortgages). The new class of securities, called HECM Mortgage Backed Securities (HMBS) was initially announced in July, and the program became operational on September 1. Information regarding the payment process, accounting methods and other details of the HMBS program can be found on Ginnie Mae’s website. For the official HUD press release, please see http://www.hud.gov/news/release.cfm?content=2007-11-09.cfm&CFID=541222&CFTOKEN=70449362.
State Issues
Illinois Enacts Predatory Lending Law, Makes Lending Database Final. On November 2, Illinois Governor Rod Blagojevich signed into law S.B. 1167, creating several anti-predatory lending measures and finalizing the Cook County Predatory Lending Database Program (whose suspension was reported in the January 26th issue of InfoBytes). Among its many anti-predatory lending provisions, the bill: (i) provides for a private right of action for borrowers injured by a violation of the Act, subject to two safe harbor provisions provided to licensees; (ii) requires that licensees verify a borrower’s ability to pay before making, arranging or providing for a residential mortgage loan to the licensee; and (iii) eliminates stated-income loans absent mitigating circumstances. With regard to mortgage brokers, the bill creates an automatic agency relationship between brokers and borrowers. Based on this agency relationship, the bill establishes a number of duties that brokers owe to lenders. In addition, the bill allows for prepayment penalties on mortgage loans subject to stringent requirements. The bill also adds new disclosure requirements for mortgage lender and broker licensees and prohibits lenders from engaging in equity stripping, loan flipping, financing of credit insurance, or encouraging defaults. Finally, the bill amends the Cook County Predatory Lending Database Program, removing all references to it as a pilot program and reinstating the reporting requirements beginning July 1, 2008. In a press release, Gov. Blagojevich asserted that the bill implemented the “counseling and pilot program changes” he had advocated when he had halted the program earlier this year. The bill goes into effect June 1, 2008. For text of the bill as enacted, please see http://www.ilga.gov/legislation/95/SB/PDF/09500SB1167lv.pdf.
Mass AG Moves Back Mortgage Regs Effective Date. On November 13, Massachusetts Attorney General Martha Coakley announced that she would delay the effective date of recently promulgated mortgage lender and broker regulations (reported in the October 19th issue of InfoBytes) until January 2, 2008. Most of the provisions of the new regulations had previously been scheduled to become effective on November 15. In announcing the delay, AG Coakley noted in particular that lenders had expressed concern over a portion of the regulations defining making a loan “not in the borrower’s interest” to be an unfair or deceptive act or practice. This section provides as an example of a prohibited “conflict of interest” a situation “where the broker’s compensation will increase directly or indirectly if the borrower obtains a loan with higher interest rates, increased charges or less favorable terms than those for which a borrower would otherwise qualify.” According to AG Coakley many lenders had interpreted this as a “as a blanket prohibition on paying broker costs outside of points or fees paid at closing.” However, she reassured lenders that “this is inaccurate. Not all such compensation poses a conflict between the broker’s financial interest and the interests of the client.” AG Coakley then promised clarifying guidance, “likely in the next few days.” To read the MA AG’s Office’s official press release, please see http://www.mass.gov/?pageID=cagohomepage&L=1&L0=Home&sid=Cago.
Thirty Seven States Agree to Participate in National Licensing System. On November 5, the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) announced that mortgage regulatory agencies in thirty seven states and the District of Columbia have agreed to participate in the Nationwide Mortgage Licensing System (NMLS, most recently discussed in the July 13th issue of InfoBytes). The system is intended to be a “web-based system that will allow state-licensed mortgage lenders, mortgage brokers, and loan officers to apply for, amend, update or renew a license online for all participating state agencies using a single set of uniform applications.” Regulators from the participating states, which include New York, Illinois, and Pennsylvania, signed a statement of intent agreeing to participate in the system in order to (i) “improve the efficiency and effectiveness of state supervision of the U.S. mortgage market,” (ii) “fight mortgage fraud and predatory lending,” (iii) “increase accountability among mortgage industry professionals,” and (iv) “unify and streamline state license processes and standards for mortgage lenders and mortgage brokers.” For the official CSBS press release, please see http://www.csbs.org/AM/Template.cfm?CONTENTID=12840.
Colorado Adopts Rules on E&O Insurance for Mortgage Brokers. On November 12, the Colorado Division of Real Estate adopted rules, as required by Colo. Rev. Stat. § 12-61-903.5, on errors and omissions insurance coverage required to be obtained by licensed mortgage brokers beginning on January 1, 2008. The rules set forth the terms and conditions of coverage required, including the minimum limits of coverage, the permissible deductible and permissible exemptions. The rules are applicable to individuals who broker mortgages or act as mortgage brokers pursuant to Colo. Rev. Stat. §§ 12-61-902(2) and 12-61-902(5). The insurance coverage must not be for less than $100,000 for each licensed individual per covered claim with an annual aggregate limit of not less than $300,000 and the deductible can be no greater than $5,000. Mortgage brokers may also meet the insurance requirements if they are covered under their mortgage company’s policy. A copy of the rules may be obtained at http://www.dora.state.co.us/real-estate/rulemaking/MB/Errors_and_Omissions_Insurance.pdf.
Ohio Senate Passes Credit Freeze and SSN Redaction Bill. On October 24, the Ohio State Senate unanimously passed, and sent for consideration by the House, a bill (S.B. 6) which would, among other things, permit consumer credit report freezes and restrict the use of Social Security Numbers (SSNs) by state government. If enacted the bill would require credit reporting agencies to, within three business days of a consumer’s request, place a security freeze on the consumer’s credit report. The bill will also require the agencies to lift a credit freeze by consumer request within three business days or 15 minutes for requests by telephone or a secure electronic method. The bill allows agencies to charge a fee of $5 for each freeze or lift. Violations of this bill would be enforced by the state attorney general and the bill would allow a private right of action. S.B. 6 also prohibits the Secretary of State from filing any public records without the individual’s SSN or federal tax identification number being redacted. Individuals would also have the right to have identification information redacted from public records that appear on the Internet. Finally, the bill requires state agencies to develop data security and destruction procedures for personal information they maintain. If enacted, the law would go into effect on September 1, 2008. To view the full text of S.B. 6, please visit http://www.legislature.state.oh.us/BillText127/127_SB_6_PS_Y.pdf.
Courts
Court Dismisses Foreclosure Cases for Lack of Proof of Ownership of Loans. On October 31, a federal district court dismissed, without prejudice and with leave to refile, a consolidated set of foreclosure actions brought by Deutsche Bank, because the bank could not prove that it was the current holder of mortgages it apparently acquired in the secondary market. In re Foreclosure Cases, No. 07-cv-2282, 2007 WL 3232430 (N.D. Ohio Oct. 31, 2007). The court found that the documentation presented in the initial complaint did not clearly identify Deutsche Bank in the chain of title/interest. On October 10, the court had issued an order requiring the bank to file a copy of “the executed Assignment demonstrating [Deutsche Bank] was the holder and owner of the Note and Mortgage as of the date the complaint was filed” (court’s emphasis). According to the opinion, the assignments Deutsche Bank subsequently provided “express a present intent to convey” the Mortgage to the plaintiff. The court stated that this “belied” Deutsche Bank’s assertion it had purchased these mortgages months or years before the foreclosure complaint was filed. Further, the court rejected the bank’s argument that it could bring its complaint as a “real party in interest” under Fed.R.Civ.P. 17, noting that according to the rule’s official commentary, the rule “is intended to prevent forfeiture when determination of the proper party to sue is difficult or when an understandable mistake has been made.” The court noted that Deutsche Bank did not allege a mistake or difficulty determining the appropriate party, and that the bank would not suffer forfeiture or injustice by dismissal of “these defective complaints.” In a lengthy footnote, the judge derided what he perceived to be the plaintiff’s condescending arguments. “Unlike the focus of financial institutions, the federal courts must act as gatekeepers, assuring that only those who meet diversity and standing requirements are allowed to pass through. . . . The Court will illustrate in simple terms its decision: ‘Fluidity of the market’-‘X’ dollars, ‘contractual arrangements between institutions and counsel’-‘X’ dollars, ‘purchasing mortgages in bulk and securitizing’-‘X’ dollars, ‘rush to file, slow to record after judgment’-‘X’ dollars, ‘the jurisdictional integrity of United States District Court’-‘Priceless.’” For a copy of this opinion, please contact .
FCRA Preempts Private Right of Action under MA Credit Reporting Act. On October 24, a federal district court in Massachusetts held that the federal Fair Credit Reporting Act (FCRA) preempts a provision of the Massachusetts Credit Reporting Act (MCRA) that creates a private cause of action for certain violations of the MCRA involving the responsibilities of furnishers of information to credit bureaus. Dawe v. Capital One Bank, No. 04-40192-FDS, 2007 WL 3332810 (D. Mass. Oct. 24, 2007). The plaintiff in the case alleged, among other things, that defendant Capital One Bank violated the MCRA by improperly continuing to collect on a debt and reporting the debt to consumer credit agencies after collection proceedings on the debt had been dismissed in state court. Section 54A(a) of the MCRA requires every person that furnishes information to a consumer reporting agency to follow reasonable procedures to ensure that the information is accurate and complete, and it prohibits furnishers from providing inaccurate or incomplete information. The court, however, quoting its ruling in Leet v. Cellco Partnership, 480 F.Supp.2d 422, 434 (D.Mass. 2007), held that “while the FCRA expressly exempts § 54A(a) from its preemptive reach, it includes no such exemption for § 54A(g)--the provision that creates a private cause of action for violations of § 54A(a).” Therefore, the court concluded that FCRA preempts the plaintiff’s MCRA claim. The plaintiff’s unfair trade practices claim under Chapter 93A of the Massachusetts General Laws was likewise preempted by FCRA, as it was based on the defendant’s alleged actions related to its reporting of information to consumer credit agencies. For a copy of the opinion, please contact .
Title Insurer Settles RESPA Claim with HUD and Florida Regulators. On November 16, the U.S. Department of Housing and Urban Development (HUD) issued a press release announcing that HUD, the Florida Department of Financial Services, and the Florida Office of Insurance Regulation had reached a settlement with First American Title Insurance Company for alleged violations of the Real Estate Settlement Procedures Act (RESPA) and similar state laws. The agencies claim that First American paid 84 affiliated partnerships for the referral of business to the company. Under the terms of the settlement, in which First American denied any violation of federal or state law, First American must close down the 84 partnerships and pay $5 million to the federal and Florida state governments. According to the press release, over a number of years, First American formed or acquired limited partnerships in Florida to act as title insurance agencies. However, the investigation showed that all regular title services were performed by First American, and the partnerships acted merely as “pass-throughs” to pay real estate agents, mortgage brokers, builders, and other limited partners for referring business to First American. The agencies claim that this practice violates Section 8 of RESPA, which prohibits the giving or accepting of anything of value in exchange for the referral of settlement service business. For a copy of the news release, see http://www.hud.gov/news/release.cfm?content=pr07-170.cfm.
Seventh Circuit Rules on FCRA, FACTA Retroactivity. In a case consolidating two separate lawsuits, the Seventh Circuit has found that causes of action that arose before the private right of action under the Fair Credit Reporting Act (FCRA) was eliminated may still go forward, even though the suits were filed after the right to action was removed. Killingsworth v. HSBC Bank Nevada, N.A., Nos. 06-1616, 06-2178, 2007 WL 3307084 (7th Cir. Nov. 9, 2007). In these cases, each plaintiff alleged a violation of FCRA, and that the violation occurred prior to the effective date of the Fair and Accurate Credit Transactions Act (FACTA), which, on December 1, 2004, eliminated a private right to action for certain violations of the FCRA. Plaintiff Killingsworth alleged that she received a prescreened credit card offer containing FCRA disclosures that were not clear and conspicuous. Plaintiff Sawyer claimed that defendant Ensurance violated FCRA by accessing his credit report and charging him a higher rate for insurance, but without providing him with a notice of adverse action. Both plaintiffs had filed class action lawsuits, claiming that the FACTA amendments had the impermissible retroactive effect of denying them the right to pursue a cause of action that arose before the private right was eliminated. The district court had ruled against both plaintiffs. The Seventh Circuit reversed, finding that, in the case of Killingsworth, the statute had an impermissibly retroactive effect of taking away her preexisting substantive right. In Sawyer’s case, the court noted that it could be the case that his cause of action would be barred, because he initially took out the insurance policy prior to the effective date of FACTA, but his policy was renewed, with the allegedly illegal increased rate, after the effective date. Thus his claims straddled the date the right of action was removed, and his case should continue. The court also found that, as an initial matter, the plaintiffs had alleged sufficient facts to defeat the defendants’ motions for summary judgment on the issue of the willfulness of the FCRA violations. For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=06-1616_027.pdf.
Firm News
Margo Tank will be speaking on a panel titled Key Legal requirements for the Mortgage Industry at the MBA’s Legal Issues in Mortgage Technology Conference 2007 November 28th and 29th in San Diego, California. To learn more or register, http://events.mortgagebankers.org/email/57679.html.
Jon Jerison spoke at an A.S. Pratt audio conference on “Recent Developments under the Fair Credit Reporting Act – Red Flags, Affiliate Marketing, and Much More,” on Thursday, November 15. For details, and to order a recording of this conference, please see http://www.aspratt.com/store/55A.php.
Joe Lynyak spoke at the International Quality and Productivity Center’s (IQPC) 3rd Conference on Securities Litigation in NYC on November 14, 2007. He was copresenting in a workshop on Exploring Strategies in Subprime Mortgage Markets. To learn more about this event, please see http://www.iqpc.com/cgi-bin/templates/genevent.html?event=14168&topic=672.
Miscellany
ESRA Holds Conference on E-Signatures, Rep. Inslee Calls for CRS Study. On November 13 and 14, the Electronic Signatures & Records Association (ESRA) held a conference entitled “Getting E-Signatures Right: Key Business, Technology, and Legal Developments.” Representative Jay Inslee (D – WA) called for a Congressional Research Service (CRS) study on the use and acceptance of electronic records and signatures since the enactment of the federal Electronic Signatures in Global and National Commerce Act (ESIGN) in 2000. Jeremiah Buckley and Margo Tank of Buckley Kolar LLP were conference speakers. Conference presentations are posted on the ESRA website www.esignrecords.org.
Mortgages
House Passes Predatory Lending Bill. On November 15, the U.S. House of Representatives passed the Mortgage Reform and Anti-Predatory Lending Act of 2007, H.R. 3915, by a vote of 291 to 127. The bill significantly restricts loan terms and underwriting practices, and creates expanded liability for lenders as well as assignees. Specifically, the bill would (i) impose a new duty of care and a duty to disclose on originators, (ii) require licensing and registration of loan originators if not provided for by states, (iii) restricts and requires greater disclosure of yield spread premiums and other forms of incentive compensation, (iv) impose a “net tangible benefit” standard for refinancing of residential mortgage loans, (v) create an obligation to consider the borrower’s “reasonable” ability to repay, (vi) expand the availability of rescission as a remedy in civil actions, (vii) lower the thresholds for loans to be covered by the Home Ownership and Equity Protection Act (HOEPA), and (vii) creates new requirements for Truth in Lending Act loan disclosures. During the lengthy floor debate, several amendments were added to the bill. Some of the more significant changes include (i) an amendment introduced by Rep. Frank (D – MA) that, among other things, clarifies the scope of a limited federal preemption for mortgage securitizers, allows consumers to obtain a cure from the assignee of a mortgage if the creditor ceases to exist or goes bankrupt, and adds a monthly mortgage billing disclosure requirement, (ii) an amendment, introduced by Rep. Kanjorski (D – PA) that, among other things, imposes new requirements and restrictions on mortgage servicers, the use of escrow accounts, and appraisals; (iii) an amendment removing civil liability of a lender and canceling the right of rescission for a borrower when a borrower knowingly lies on the mortgage loan application, (iv) an amendment requiring written notice to borrowers with hybrid ARMs six months prior to reset, (v) an amendment providing an exemption from the act for FHA insured loans, and (vi) an amendment capping prepayment penalties and requiring lenders to provide a no prepayment penalty option for “qualified mortgages.” In a House Financial Services Committee press release, Ranking Member Spencer Bachus (R – AL) is quoted stating that while H.R. 3915 “is not a perfect bill – no bill ever is – it has been significantly improved through bipartisan negotiations.” On November 14, the White House released a Statement of Administration Policy regarding the bill which, while supporting “efforts both to improve oversight over the mortgage origination process and to stop predatory lending,” expressed concerns the bill would “unduly restrict access to credit” for consumers. The statement specifically noted concerns over provisions that “overly constrict the primary and secondary markets for finance” such as “specific underwriting standards, assignee liability, and the subjective obligations for mortgage originators.” The bill now heads to the Senate. For a copy of the amended bill, as passed by the House, please see http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.3915.eh:.
Court Dismisses Foreclosure Cases for Lack of Proof of Ownership of Loans. On October 31, a federal district court dismissed, without prejudice and with leave to refile, a consolidated set of foreclosure actions brought by Deutsche Bank, because the bank could not prove that it was the current holder of mortgages it apparently acquired in the secondary market. In re Foreclosure Cases, No. 07-cv-2282, 2007 WL 3232430 (N.D. Ohio Oct. 31, 2007). The court found that the documentation presented in the initial complaint did not clearly identify Deutsche Bank in the chain of title/interest. On October 10, the court had issued an order requiring the bank to file a copy of “the executed Assignment demonstrating [Deutsche Bank] was the holder and owner of the Note and Mortgage as of the date the complaint was filed” (court’s emphasis). According to the opinion, the assignments Deutsche Bank subsequently provided “express a present intent to convey” the Mortgage to the plaintiff. The court stated that this “belied” Deutsche Bank’s assertion it had purchased these mortgages months or years before the foreclosure complaint was filed. Further, the court rejected the bank’s argument that it could bring its complaint as a “real party in interest” under Fed.R.Civ.P. 17, noting that according to the rule’s official commentary, the rule “is intended to prevent forfeiture when determination of the proper party to sue is difficult or when an understandable mistake has been made.” The court noted that Deutsche Bank did not allege a mistake or difficulty determining the appropriate party, and that the bank would not suffer forfeiture or injustice by dismissal of “these defective complaints.” In a lengthy footnote, the judge derided what he perceived to be the plaintiff’s condescending arguments. “Unlike the focus of financial institutions, the federal courts must act as gatekeepers, assuring that only those who meet diversity and standing requirements are allowed to pass through. . . . The Court will illustrate in simple terms its decision: ‘Fluidity of the market’-‘X’ dollars, ‘contractual arrangements between institutions and counsel’-‘X’ dollars, ‘purchasing mortgages in bulk and securitizing’-‘X’ dollars, ‘rush to file, slow to record after judgment’-‘X’ dollars, ‘the jurisdictional integrity of United States District Court’-‘Priceless.’” For a copy of this opinion, please contact .
Illinois Enacts Predatory Lending Law, Makes Lending Database Final. On November 2, Illinois Governor Rod Blagojevich signed into law S.B. 1167, creating several anti-predatory lending measures and finalizing the Cook County Predatory Lending Database Program (whose suspension was reported in the January 26th issue of InfoBytes). Among its many anti-predatory lending provisions, the bill: (i) provides for a private right of action for borrowers injured by a violation of the Act, subject to two safe harbor provisions provided to licensees; (ii) requires that licensees verify a borrower’s ability to pay before making, arranging or providing for a residential mortgage loan to the licensee; and (iii) eliminates stated-income loans absent mitigating circumstances. With regard to mortgage brokers, the bill creates an automatic agency relationship between brokers and borrowers. Based on this agency relationship, the bill establishes a number of duties that brokers owe to lenders. In addition, the bill allows for prepayment penalties on mortgage loans subject to stringent requirements. The bill also adds new disclosure requirements for mortgage lender and broker licensees and prohibits lenders from engaging in equity stripping, loan flipping, financing of credit insurance, or encouraging defaults. Finally, the bill amends the Cook County Predatory Lending Database Program, removing all references to it as a pilot program and reinstating the reporting requirements beginning July 1, 2008. In a press release, Gov. Blagojevich asserted that the bill implemented the “counseling and pilot program changes” he had advocated when he had halted the program earlier this year. The bill goes into effect June 1, 2008. For text of the bill as enacted, please see http://www.ilga.gov/legislation/95/SB/PDF/09500SB1167lv.pdf.
Mass AG Moves Back Mortgage Regs Effective Date. On November 13, Massachusetts Attorney General Martha Coakley announced that she would delay the effective date of recently promulgated mortgage lender and broker regulations (reported in the October 19th issue of InfoBytes) until January 2, 2008. Most of the provisions of the new regulations had previously been scheduled to become effective on November 15. In announcing the delay, AG Coakley noted in particular that lenders had expressed concern over a portion of the regulations defining making a loan “not in the borrower’s interest” to be an unfair or deceptive act or practice. This section provides as an example of a prohibited “conflict of interest” a situation “where the broker’s compensation will increase directly or indirectly if the borrower obtains a loan with higher interest rates, increased charges or less favorable terms than those for which a borrower would otherwise qualify.” According to AG Coakley many lenders had interpreted this as a “as a blanket prohibition on paying broker costs outside of points or fees paid at closing.” However, she reassured lenders that “this is inaccurate. Not all such compensation poses a conflict between the broker’s financial interest and the interests of the client.” AG Coakley then promised clarifying guidance, “likely in the next few days.” To read the MA AG’s Office’s official press release, please see http://www.mass.gov/?pageID=cagohomepage&L=1&L0=Home&sid=Cago.
Thirty Seven States Agree to Participate in National Licensing System. On November 5, the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) announced that mortgage regulatory agencies in thirty seven states and the District of Columbia have agreed to participate in the Nationwide Mortgage Licensing System (NMLS, most recently discussed in the July 13th issue of InfoBytes). The system is intended to be a “web-based system that will allow state-licensed mortgage lenders, mortgage brokers, and loan officers to apply for, amend, update or renew a license online for all participating state agencies using a single set of uniform applications.” Regulators from the participating states, which include New York, Illinois, and Pennsylvania, signed a statement of intent agreeing to participate in the system in order to (i) “improve the efficiency and effectiveness of state supervision of the U.S. mortgage market,” (ii) “fight mortgage fraud and predatory lending,” (iii) “increase accountability among mortgage industry professionals,” and (iv) “unify and streamline state license processes and standards for mortgage lenders and mortgage brokers.” For the official CSBS press release, please see http://www.csbs.org/AM/Template.cfm?CONTENTID=12840.
Colorado Adopts Rules on E&O Insurance for Mortgage Brokers. On November 12, the Colorado Division of Real Estate adopted rules, as required by Colo. Rev. Stat. § 12-61-903.5, on errors and omissions insurance coverage required to be obtained by licensed mortgage brokers beginning on January 1, 2008. The rules set forth the terms and conditions of coverage required, including the minimum limits of coverage, the permissible deductible and permissible exemptions. The rules are applicable to individuals who broker mortgages or act as mortgage brokers pursuant to Colo. Rev. Stat. §§ 12-61-902(2) and 12-61-902(5). The insurance coverage must not be for less than $100,000 for each licensed individual per covered claim with an annual aggregate limit of not less than $300,000 and the deductible can be no greater than $5,000. Mortgage brokers may also meet the insurance requirements if they are covered under their mortgage company’s policy. A copy of the rules may be obtained at http://www.dora.state.co.us/real-estate/rulemaking/MB/Errors_and_Omissions_Insurance.pdf.
In Senate FHA Modernization Stalls and GSE Cap Law Introduced. On November 15, two major pieces of housing legislation failed to come to the Senate floor as hoped. The FHA Modernization Act (S. 2338) is the Senate’s version of two House bills, the “Expanding American Home Ownership Act” (H.R. 1852) and the FHA Manufactured Housing Loan Modernization Act of 2007 (H.R. 2139), which were both passed by the House earlier this year (reported in the September 21 and June 29 issues of InfoBytes, respectively). Senate Democrats had hoped to put the bill to a vote before the Senate’s Thanksgiving recess, but were thwarted by procedural setbacks. Also, the Promoting Refinancing Opportunities for Mortgages Impacted by the Subprime Emergency, or “PROMISE,” Act (S. 2346) was introduced by Sen. Charles Schumer (D – NY) which would temporarily lift the portfolio caps for the government sponsored enterprises (GSEs) to 10%, on the condition that most of the increase be used to refinance homeowners out of subprime mortgages. Sen. Schumer promised to introduce such legislation after Federal Reserve Chairman Bernanke advocated a different change in GSE policy (discussed in the November 9th issue of InfoBytes). The bill was placed on the Senate calendar. For Senate Banking Committee Chairman Christopher Dodd’s (D – CT) public statement on the delay of S. 2338, please see http://banking.senate.gov/index.cfm?Fuseaction=Articles.Detail&Article_id=216.
Title Insurer Settles RESPA Claim with HUD and Florida Regulators. On November 16, the U.S. Department of Housing and Urban Development (HUD) issued a press release announcing that HUD, the Florida Department of Financial Services, and the Florida Office of Insurance Regulation had reached a settlement with First American Title Insurance Company for alleged violations of the Real Estate Settlement Procedures Act (RESPA) and similar state laws. The agencies claim that First American paid 84 affiliated partnerships for the referral of business to the company. Under the terms of the settlement, in which First American denied any violation of federal or state law, First American must close down the 84 partnerships and pay $5 million to the federal and Florida state governments. According to the press release, over a number of years, First American formed or acquired limited partnerships in Florida to act as title insurance agencies. However, the investigation showed that all regular title services were performed by First American, and the partnerships acted merely as “pass-throughs” to pay real estate agents, mortgage brokers, builders, and other limited partners for referring business to First American. The agencies claim that this practice violates Section 8 of RESPA, which prohibits the giving or accepting of anything of value in exchange for the referral of settlement service business. For a copy of the news release, see http://www.hud.gov/news/release.cfm?content=pr07-170.cfm.
Ginnie Mae Issues First HECM-Backed Security. On November 9, the Department of Housing and Urban Development (HUD) announced that Ginnie Mae had issued its first security backed by pooled Home Equity Conversion Mortgages (HECMs, Federal Housing Administration insured reverse mortgages). The new class of securities, called HECM Mortgage Backed Securities (HMBS) was initially announced in July, and the program became operational on September 1. Information regarding the payment process, accounting methods and other details of the HMBS program can be found on Ginnie Mae’s website. For the official HUD press release, please see http://www.hud.gov/news/release.cfm?content=2007-11-09.cfm&CFID=541222&CFTOKEN=70449362.
Banking
FDIC, OCC Approve FACTA Direct-Dispute and Accuracy Proposals. The Federal Deposit Insurance Corporation (FDIC) board of directors recently approved a draft proposal to implement Fair and Accurate Credit Transactions Act of 2003 (FACTA) provisions that (i) allow consumers to dispute credit report items directly with the furnisher of the information and (ii) require furnishers to take steps to ensure the accuracy and the integrity of the information they provide to credit bureaus. FACTA directs the agencies to specify the circumstances under which consumers may dispute items in their credit report directly with the entity that furnished the information, rather than through the consumer reporting agency as FCRA currently requires. The proposed direct-dispute regulation would give consumers a broad right to dispute directly with the furnisher almost all information bearing on the consumer’s relationship with the furnisher. Consumers would have to submit a dispute to the furnisher in writing at a specified address, or electronically if the consumer has agreed to receive electronic disclosures. The agencies are proposing two alternatives for the regulation that would implement the FACTA requirement that the agencies establish guidelines “regarding the accuracy and integrity of the information” they furnish to consumer reporting agencies about consumers. In both alternatives, “accuracy” would mean factual accuracy–i.e., that the information accurately describes the terms of and the consumer’s performance on the account or other relationship between the furnisher and the consumer. The alternatives differ, however, on whether the definition of “integrity” includes the concept of completeness. The first alternative, the Regulatory Definition Approach, would include a definition of “integrity” in the regulation. Under that definition, information that is technically “accurate” but, in the agencies’ view, presents a misleading picture of the customer’s relationship with the consumer–such as reporting balance information without showing the customer’s credit limit–would be considered to lack “integrity.” The agencies note in the preamble to the proposal that lenders argued that this definition goes beyond the statute, because FCRA distinguishes between “accuracy” and “completeness.” Under the second alternative, the Guidelines Definition Approach, the definitions would be included in guidelines that identify objectives for furnishers to assure the accuracy and integrity of the information they provide to consumer reporting agencies. The guidelines would define “integrity” in a way that does not include completeness, but instead addresses the issues of (i) attribution of information to the wrong consumer or account or use of an erroneous date; and (ii) that the furnisher should be able to verify, through its own records, the accuracy of information that is disputed. Comptroller of the Currency John Dugan has announced that he has approved the draft regulations, and discussions at the meeting indicated that the other agencies responsible for the regulation–the Federal Reserve Board, Office of Thrift Supervision, National Credit Union Administration, and Federal Trade Commission–will approve it soon. Comments will be due 60 days after publication in the Federal Register. The FDIC version of the draft proposal is available at http://www.fdic.gov/news/board/07doc3nov5.pdf. Comptroller Dugan’s statement is available at http://www.occ.treas.gov/ftp/release/2007-124.htm. A video and transcript of the FDIC board meeting can be viewed at http://www.vodium.com/goto/fdic/boardmeetings.asp.
Consumer Finance
FCRA Preempts Private Right of Action under MA Credit Reporting Act. On October 24, a federal district court in Massachusetts held that the federal Fair Credit Reporting Act (FCRA) preempts a provision of the Massachusetts Credit Reporting Act (MCRA) that creates a private cause of action for certain violations of the MCRA involving the responsibilities of furnishers of information to credit bureaus. Dawe v. Capital One Bank, No. 04-40192-FDS, 2007 WL 3332810 (D. Mass. Oct. 24, 2007). The plaintiff in the case alleged, among other things, that defendant Capital One Bank violated the MCRA by improperly continuing to collect on a debt and reporting the debt to consumer credit agencies after collection proceedings on the debt had been dismissed in state court. Section 54A(a) of the MCRA requires every person that furnishes information to a consumer reporting agency to follow reasonable procedures to ensure that the information is accurate and complete, and it prohibits furnishers from providing inaccurate or incomplete information. The court, however, quoting its ruling in Leet v. Cellco Partnership, 480 F.Supp.2d 422, 434 (D.Mass. 2007), held that “while the FCRA expressly exempts § 54A(a) from its preemptive reach, it includes no such exemption for § 54A(g)--the provision that creates a private cause of action for violations of § 54A(a).” Therefore, the court concluded that FCRA preempts the plaintiff’s MCRA claim. The plaintiff’s unfair trade practices claim under Chapter 93A of the Massachusetts General Laws was likewise preempted by FCRA, as it was based on the defendant’s alleged actions related to its reporting of information to consumer credit agencies. For a copy of the opinion, please contact .
Seventh Circuit Rules on FCRA, FACTA Retroactivity. In a case consolidating two separate lawsuits, the Seventh Circuit has found that causes of action that arose before the private right of action under the Fair Credit Reporting Act (FCRA) was eliminated may still go forward, even though the suits were filed after the right to action was removed. Killingsworth v. HSBC Bank Nevada, N.A., Nos. 06-1616, 06-2178, 2007 WL 3307084 (7th Cir. Nov. 9, 2007). In these cases, each plaintiff alleged a violation of FCRA, and that the violation occurred prior to the effective date of the Fair and Accurate Credit Transactions Act (FACTA), which, on December 1, 2004, eliminated a private right to action for certain violations of the FCRA. Plaintiff Killingsworth alleged that she received a prescreened credit card offer containing FCRA disclosures that were not clear and conspicuous. Plaintiff Sawyer claimed that defendant Ensurance violated FCRA by accessing his credit report and charging him a higher rate for insurance, but without providing him with a notice of adverse action. Both plaintiffs had filed class action lawsuits, claiming that the FACTA amendments had the impermissible retroactive effect of denying them the right to pursue a cause of action that arose before the private right was eliminated. The district court had ruled against both plaintiffs. The Seventh Circuit reversed, finding that, in the case of Killingsworth, the statute had an impermissibly retroactive effect of taking away her preexisting substantive right. In Sawyer’s case, the court noted that it could be the case that his cause of action would be barred, because he initially took out the insurance policy prior to the effective date of FACTA, but his policy was renewed, with the allegedly illegal increased rate, after the effective date. Thus his claims straddled the date the right of action was removed, and his case should continue. The court also found that, as an initial matter, the plaintiffs had alleged sufficient facts to defeat the defendants’ motions for summary judgment on the issue of the willfulness of the FCRA violations. For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=06-1616_027.pdf.
Securities
Court Dismisses Foreclosure Cases for Lack of Proof of Ownership of Loans. On October 31, a federal district court dismissed, without prejudice and with leave to refile, a consolidated set of foreclosure actions brought by Deutsche Bank, because the bank could not prove that it was the current holder of mortgages it apparently acquired in the secondary market. In re Foreclosure Cases, No. 07-cv-2282, 2007 WL 3232430 (N.D. Ohio Oct. 31, 2007). The court found that the documentation presented in the initial complaint did not clearly identify Deutsche Bank in the chain of title/interest. On October 10, the court had issued an order requiring the bank to file a copy of “the executed Assignment demonstrating [Deutsche Bank] was the holder and owner of the Note and Mortgage as of the date the complaint was filed” (court’s emphasis). According to the opinion, the assignments Deutsche Bank subsequently provided “express a present intent to convey” the Mortgage to the plaintiff. The court stated that this “belied” Deutsche Bank’s assertion it had purchased these mortgages months or years before the foreclosure complaint was filed. Further, the court rejected the bank’s argument that it could bring its complaint as a “real party in interest” under Fed.R.Civ.P. 17, noting that according to the rule’s official commentary, the rule “is intended to prevent forfeiture when determination of the proper party to sue is difficult or when an understandable mistake has been made.” The court noted that Deutsche Bank did not allege a mistake or difficulty determining the appropriate party, and that the bank would not suffer forfeiture or injustice by dismissal of “these defective complaints.” In a lengthy footnote, the judge derided what he perceived to be the plaintiff’s condescending arguments. “Unlike the focus of financial institutions, the federal courts must act as gatekeepers, assuring that only those who meet diversity and standing requirements are allowed to pass through. . . . The Court will illustrate in simple terms its decision: ‘Fluidity of the market’-‘X’ dollars, ‘contractual arrangements between institutions and counsel’-‘X’ dollars, ‘purchasing mortgages in bulk and securitizing’-‘X’ dollars, ‘rush to file, slow to record after judgment’-‘X’ dollars, ‘the jurisdictional integrity of United States District Court’-‘Priceless.’” For a copy of this opinion, please contact .
House Passes Predatory Lending Bill. On November 15, the U.S. House of Representatives passed the Mortgage Reform and Anti-Predatory Lending Act of 2007, H.R. 3915, by a vote of 291 to 127. The bill significantly restricts loan terms and underwriting practices, and creates expanded liability for lenders as well as assignees. Specifically, the bill would (i) impose a new duty of care and a duty to disclose on originators, (ii) require licensing and registration of loan originators if not provided for by states, (iii) restricts and requires greater disclosure of yield spread premiums and other forms of incentive compensation, (iv) impose a “net tangible benefit” standard for refinancing of residential mortgage loans, (v) create an obligation to consider the borrower’s “reasonable” ability to repay, (vi) expand the availability of rescission as a remedy in civil actions, (vii) lower the thresholds for loans to be covered by the Home Ownership and Equity Protection Act (HOEPA), and (vii) creates new requirements for Truth in Lending Act loan disclosures. During the lengthy floor debate, several amendments were added to the bill. Some of the more significant changes include (i) an amendment introduced by Rep. Frank (D – MA) that, among other things, clarifies the scope of a limited federal preemption for mortgage securitizers, allows consumers to obtain a cure from the assignee of a mortgage if the creditor ceases to exist or goes bankrupt, and adds a monthly mortgage billing disclosure requirement, (ii) an amendment, introduced by Rep. Kanjorski (D – PA) that, among other things, imposes new requirements and restrictions on mortgage servicers, the use of escrow accounts, and appraisals; (iii) an amendment removing civil liability of a lender and canceling the right of rescission for a borrower when a borrower knowingly lies on the mortgage loan application, (iv) an amendment requiring written notice to borrowers with hybrid ARMs six months prior to reset, (v) an amendment providing an exemption from the act for FHA insured loans, and (vi) an amendment capping prepayment penalties and requiring lenders to provide a no prepayment penalty option for “qualified mortgages.” In a House Financial Services Committee press release, Ranking Member Spencer Bachus (R – AL) is quoted stating that while H.R. 3915 “is not a perfect bill – no bill ever is – it has been significantly improved through bipartisan negotiations.” On November 14, the White House released a Statement of Administration Policy regarding the bill which, while supporting “efforts both to improve oversight over the mortgage origination process and to stop predatory lending,” expressed concerns the bill would “unduly restrict access to credit” for consumers. The statement specifically noted concerns over provisions that “overly constrict the primary and secondary markets for finance” such as “specific underwriting standards, assignee liability, and the subjective obligations for mortgage originators.” The bill now heads to the Senate. For a copy of the amended bill, as passed by the House, please see http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.3915.eh:.
Ginnie Mae Issues First HECM-Backed Security. On November 9, the Department of Housing and Urban Development (HUD) announced that Ginnie Mae had issued its first security backed by pooled Home Equity Conversion Mortgages (HECMs, Federal Housing Administration insured reverse mortgages). The new class of securities, called HECM Mortgage Backed Securities (HMBS) was initially announced in July, and the program became operational on September 1. Information regarding the payment process, accounting methods and other details of the HMBS program can be found on Ginnie Mae’s website. For the official HUD press release, please see http://www.hud.gov/news/release.cfm?content=2007-11-09.cfm&CFID=541222&CFTOKEN=70449362.
Litigation
Court Dismisses Foreclosure Cases for Lack of Proof of Ownership of Loans. On October 31, a federal district court dismissed, without prejudice and with leave to refile, a consolidated set of foreclosure actions brought by Deutsche Bank, because the bank could not prove that it was the current holder of mortgages it apparently acquired in the secondary market. In re Foreclosure Cases, No. 07-cv-2282, 2007 WL 3232430 (N.D. Ohio Oct. 31, 2007). The court found that the documentation presented in the initial complaint did not clearly identify Deutsche Bank in the chain of title/interest. On October 10, the court had issued an order requiring the bank to file a copy of “the executed Assignment demonstrating [Deutsche Bank] was the holder and owner of the Note and Mortgage as of the date the complaint was filed” (court’s emphasis). According to the opinion, the assignments Deutsche Bank subsequently provided “express a present intent to convey” the Mortgage to the plaintiff. The court stated that this “belied” Deutsche Bank’s assertion it had purchased these mortgages months or years before the foreclosure complaint was filed. Further, the court rejected the bank’s argument that it could bring its complaint as a “real party in interest” under Fed.R.Civ.P. 17, noting that according to the rule’s official commentary, the rule “is intended to prevent forfeiture when determination of the proper party to sue is difficult or when an understandable mistake has been made.” The court noted that Deutsche Bank did not allege a mistake or difficulty determining the appropriate party, and that the bank would not suffer forfeiture or injustice by dismissal of “these defective complaints.” In a lengthy footnote, the judge derided what he perceived to be the plaintiff’s condescending arguments. “Unlike the focus of financial institutions, the federal courts must act as gatekeepers, assuring that only those who meet diversity and standing requirements are allowed to pass through. . . . The Court will illustrate in simple terms its decision: ‘Fluidity of the market’-‘X’ dollars, ‘contractual arrangements between institutions and counsel’-‘X’ dollars, ‘purchasing mortgages in bulk and securitizing’-‘X’ dollars, ‘rush to file, slow to record after judgment’-‘X’ dollars, ‘the jurisdictional integrity of United States District Court’-‘Priceless.’” For a copy of this opinion, please contact .
FCRA Preempts Private Right of Action under MA Credit Reporting Act. On October 24, a federal district court in Massachusetts held that the federal Fair Credit Reporting Act (FCRA) preempts a provision of the Massachusetts Credit Reporting Act (MCRA) that creates a private cause of action for certain violations of the MCRA involving the responsibilities of furnishers of information to credit bureaus. Dawe v. Capital One Bank, No. 04-40192-FDS, 2007 WL 3332810 (D. Mass. Oct. 24, 2007). The plaintiff in the case alleged, among other things, that defendant Capital One Bank violated the MCRA by improperly continuing to collect on a debt and reporting the debt to consumer credit agencies after collection proceedings on the debt had been dismissed in state court. Section 54A(a) of the MCRA requires every person that furnishes information to a consumer reporting agency to follow reasonable procedures to ensure that the information is accurate and complete, and it prohibits furnishers from providing inaccurate or incomplete information. The court, however, quoting its ruling in Leet v. Cellco Partnership, 480 F.Supp.2d 422, 434 (D.Mass. 2007), held that “while the FCRA expressly exempts § 54A(a) from its preemptive reach, it includes no such exemption for § 54A(g)--the provision that creates a private cause of action for violations of § 54A(a).” Therefore, the court concluded that FCRA preempts the plaintiff’s MCRA claim. The plaintiff’s unfair trade practices claim under Chapter 93A of the Massachusetts General Laws was likewise preempted by FCRA, as it was based on the defendant’s alleged actions related to its reporting of information to consumer credit agencies. For a copy of the opinion, please contact .
Title Insurer Settles RESPA Claim with HUD and Florida Regulators. On November 16, the U.S. Department of Housing and Urban Development (HUD) issued a press release announcing that HUD, the Florida Department of Financial Services, and the Florida Office of Insurance Regulation had reached a settlement with First American Title Insurance Company for alleged violations of the Real Estate Settlement Procedures Act (RESPA) and similar state laws. The agencies claim that First American paid 84 affiliated partnerships for the referral of business to the company. Under the terms of the settlement, in which First American denied any violation of federal or state law, First American must close down the 84 partnerships and pay $5 million to the federal and Florida state governments. According to the press release, over a number of years, First American formed or acquired limited partnerships in Florida to act as title insurance agencies. However, the investigation showed that all regular title services were performed by First American, and the partnerships acted merely as “pass-throughs” to pay real estate agents, mortgage brokers, builders, and other limited partners for referring business to First American. The agencies claim that this practice violates Section 8 of RESPA, which prohibits the giving or accepting of anything of value in exchange for the referral of settlement service business. For a copy of the news release, see http://www.hud.gov/news/release.cfm?content=pr07-170.cfm.
Seventh Circuit Rules on FCRA, FACTA Retroactivity. In a case consolidating two separate lawsuits, the Seventh Circuit has found that causes of action that arose before the private right of action under the Fair Credit Reporting Act (FCRA) was eliminated may still go forward, even though the suits were filed after the right to action was removed. Killingsworth v. HSBC Bank Nevada, N.A., Nos. 06-1616, 06-2178, 2007 WL 3307084 (7th Cir. Nov. 9, 2007). In these cases, each plaintiff alleged a violation of FCRA, and that the violation occurred prior to the effective date of the Fair and Accurate Credit Transactions Act (FACTA), which, on December 1, 2004, eliminated a private right to action for certain violations of the FCRA. Plaintiff Killingsworth alleged that she received a prescreened credit card offer containing FCRA disclosures that were not clear and conspicuous. Plaintiff Sawyer claimed that defendant Ensurance violated FCRA by accessing his credit report and charging him a higher rate for insurance, but without providing him with a notice of adverse action. Both plaintiffs had filed class action lawsuits, claiming that the FACTA amendments had the impermissible retroactive effect of denying them the right to pursue a cause of action that arose before the private right was eliminated. The district court had ruled against both plaintiffs. The Seventh Circuit reversed, finding that, in the case of Killingsworth, the statute had an impermissibly retroactive effect of taking away her preexisting substantive right. In Sawyer’s case, the court noted that it could be the case that his cause of action would be barred, because he initially took out the insurance policy prior to the effective date of FACTA, but his policy was renewed, with the allegedly illegal increased rate, after the effective date. Thus his claims straddled the date the right of action was removed, and his case should continue. The court also found that, as an initial matter, the plaintiffs had alleged sufficient facts to defeat the defendants’ motions for summary judgment on the issue of the willfulness of the FCRA violations. For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=06-1616_027.pdf.
E-Financial Services
ESRA Holds Conference on E-Signatures, Rep. Inslee Calls for CRS Study. On November 13 and 14, the Electronic Signatures & Records Association (ESRA) held a conference entitled “Getting E-Signatures Right: Key Business, Technology, and Legal Developments.” Representative Jay Inslee (D – WA) called for a Congressional Research Service (CRS) study on the use and acceptance of electronic records and signatures since the enactment of the federal Electronic Signatures in Global and National Commerce Act (ESIGN) in 2000. Jeremiah Buckley and Margo Tank of Buckley Kolar LLP were conference speakers. Conference presentations are posted on the ESRA website www.esignrecords.org.
Privacy/Data Security
Ohio Senate Passes Credit Freeze and SSN Redaction Bill. On October 24, the Ohio State Senate unanimously passed, and sent for consideration by the House, a bill (S.B. 6) which would, among other things, permit consumer credit report freezes and restrict the use of Social Security Numbers (SSNs) by state government. If enacted the bill would require credit reporting agencies to, within three business days of a consumer’s request, place a security freeze on the consumer’s credit report. The bill will also require the agencies to lift a credit freeze by consumer request within three business days or 15 minutes for requests by telephone or a secure electronic method. The bill allows agencies to charge a fee of $5 for each freeze or lift. Violations of this bill would be enforced by the state attorney general and the bill would allow a private right of action. S.B. 6 also prohibits the Secretary of State from filing any public records without the individual’s SSN or federal tax identification number being redacted. Individuals would also have the right to have identification information redacted from public records that appear on the Internet. Finally, the bill requires state agencies to develop data security and destruction procedures for personal information they maintain. If enacted, the law would go into effect on September 1, 2008. To view the full text of S.B. 6, please visit http://www.legislature.state.oh.us/BillText127/127_SB_6_PS_Y.pdf.
ESRA Holds Conference on E-Signatures, Rep. Inslee Calls for CRS Study. On November 13 and 14, the Electronic Signatures & Records Association (ESRA) held a conference entitled “Getting E-Signatures Right: Key Business, Technology, and Legal Developments.” Representative Jay Inslee (D – WA) called for a Congressional Research Service (CRS) study on the use and acceptance of electronic records and signatures since the enactment of the federal Electronic Signatures in Global and National Commerce Act (ESIGN) in 2000. Jeremiah Buckley and Margo Tank of Buckley Kolar LLP were conference speakers. Conference presentations are posted on the ESRA website www.esignrecords.org.
Credit Cards
FDIC, OCC Approve FACTA Direct-Dispute and Accuracy Proposals. The Federal Deposit Insurance Corporation (FDIC) board of directors recently approved a draft proposal to implement Fair and Accurate Credit Transactions Act of 2003 (FACTA) provisions that (i) allow consumers to dispute credit report items directly with the furnisher of the information and (ii) require furnishers to take steps to ensure the accuracy and the integrity of the information they provide to credit bureaus. FACTA directs the agencies to specify the circumstances under which consumers may dispute items in their credit report directly with the entity that furnished the information, rather than through the consumer reporting agency as FCRA currently requires. The proposed direct-dispute regulation would give consumers a broad right to dispute directly with the furnisher almost all information bearing on the consumer’s relationship with the furnisher. Consumers would have to submit a dispute to the furnisher in writing at a specified address, or electronically if the consumer has agreed to receive electronic disclosures. The agencies are proposing two alternatives for the regulation that would implement the FACTA requirement that the agencies establish guidelines “regarding the accuracy and integrity of the information” they furnish to consumer reporting agencies about consumers. In both alternatives, “accuracy” would mean factual accuracy–i.e., that the information accurately describes the terms of and the consumer’s performance on the account or other relationship between the furnisher and the consumer. The alternatives differ, however, on whether the definition of “integrity” includes the concept of completeness. The first alternative, the Regulatory Definition Approach, would include a definition of “integrity” in the regulation. Under that definition, information that is technically “accurate” but, in the agencies’ view, presents a misleading picture of the customer’s relationship with the consumer–such as reporting balance information without showing the customer’s credit limit–would be considered to lack “integrity.” The agencies note in the preamble to the proposal that lenders argued that this definition goes beyond the statute, because FCRA distinguishes between “accuracy” and “completeness.” Under the second alternative, the Guidelines Definition Approach, the definitions would be included in guidelines that identify objectives for furnishers to assure the accuracy and integrity of the information they provide to consumer reporting agencies. The guidelines would define “integrity” in a way that does not include completeness, but instead addresses the issues of (i) attribution of information to the wrong consumer or account or use of an erroneous date; and (ii) that the furnisher should be able to verify, through its own records, the accuracy of information that is disputed. Comptroller of the Currency John Dugan has announced that he has approved the draft regulations, and discussions at the meeting indicated that the other agencies responsible for the regulation–the Federal Reserve Board, Office of Thrift Supervision, National Credit Union Administration, and Federal Trade Commission–will approve it soon. Comments will be due 60 days after publication in the Federal Register. The FDIC version of the draft proposal is available at http://www.fdic.gov/news/board/07doc3nov5.pdf. Comptroller Dugan’s statement is available at http://www.occ.treas.gov/ftp/release/2007-124.htm. A video and transcript of the FDIC board meeting can be viewed at http://www.vodium.com/goto/fdic/boardmeetings.asp.
FCRA Preempts Private Right of Action under MA Credit Reporting Act. On October 24, a federal district court in Massachusetts held that the federal Fair Credit Reporting Act (FCRA) preempts a provision of the Massachusetts Credit Reporting Act (MCRA) that creates a private cause of action for certain violations of the MCRA involving the responsibilities of furnishers of information to credit bureaus. Dawe v. Capital One Bank, No. 04-40192-FDS, 2007 WL 3332810 (D. Mass. Oct. 24, 2007). The plaintiff in the case alleged, among other things, that defendant Capital One Bank violated the MCRA by improperly continuing to collect on a debt and reporting the debt to consumer credit agencies after collection proceedings on the debt had been dismissed in state court. Section 54A(a) of the MCRA requires every person that furnishes information to a consumer reporting agency to follow reasonable procedures to ensure that the information is accurate and complete, and it prohibits furnishers from providing inaccurate or incomplete information. The court, however, quoting its ruling in Leet v. Cellco Partnership, 480 F.Supp.2d 422, 434 (D.Mass. 2007), held that “while the FCRA expressly exempts § 54A(a) from its preemptive reach, it includes no such exemption for § 54A(g)--the provision that creates a private cause of action for violations of § 54A(a).” Therefore, the court concluded that FCRA preempts the plaintiff’s MCRA claim. The plaintiff’s unfair trade practices claim under Chapter 93A of the Massachusetts General Laws was likewise preempted by FCRA, as it was based on the defendant’s alleged actions related to its reporting of information to consumer credit agencies. For a copy of the opinion, please contact .