InfoBytes, September 28, 2007

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Announcements

Web Seminar – Release of 2006 HMDA Data and Screening Procedures Used by Federal Regulators

Wednesday, October 3rd at 12 PM EST (9:00 AM PST) 

The Federal Reserve Board has released the 2006 HMDA data. Buckley Kolar will present a free 45-minute web-based seminar that will address the current status of fair lending enforcement actions, including referrals to the Department of Justice by the federal regulatory agencies and private civil litigation such as the recent cases instigated by advocacy organizations. Particular emphasis will be placed on the evolving screening methodologies used by the federal agencies—including recommendations to monitor a lender’s fair lending performance to avoid being targeted for further inquiry and investigation. The webinar will be moderated by Joseph Lynyak, who is one of Buckley Kolar’s partners practicing in the fair lending area. The guest speaker will be Dr. Marsha Courchane¸ Vice-President of CRA International, Inc. specializing in fair lending analysis and litigation.  To register for the webinar, please go to http://showvisuals.mshow.com/findshow.aspx?usertype=0&cobrand=128&shownumber=336863

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Federal Issues

FTC Requires Medical Data Firms to Comply with FCRA. On September 17, the Federal Trade Commission (FTC) announced it was issuing complaints against two consumer medical data providers, accusing them of failing to comply with the Fair Credit Reporting Act (FCRA). The two firms, Milliman Inc. and Ingenix Inc., provide individual medical profiles to health insurers on consumers. These profiles, which are sought with the permission of the consumer being reported on, are then used by health insurance companies in their underwriting processes. As these reports bear on a consumer’s personal characteristics, and are obtained in connection with considering a consumer’s eligibility for insurance, the FTC believes that the two companies were consumer reporting agencies as defined by FCRA, and therefore must comply with the act. Therefore, the FTC issued complaints against both companies alleging FCRA violations due to the companies’ failure to provide the notices or implement the procedures required by statute. In the proposed settlement agreements, the two companies, without admission of wrongdoing, agree to (i) provide users with the required notice, (ii) maintain reasonable procedures to determine if reports are sought for a permissible purpose, and (iii) maintain reasonable policies for investigating and resolving cases of disputed consumer information accuracy.  For the official FTC press release, and links to the complaints and settlements, please see http://www.ftc.gov/opa/2007/09/ingenixmilliman.shtm.

Federal Bank Regulators Issue Final Relaxed Examination Rule.  On September 21, the federal banking agencies (the Federal Reserve, FDIC, OCC, and OTS) announced final rulemaking to implement the Financial Services Regulatory Relief Act’s reduced examination frequency for certain small, highly rated banks. The final would reduce on-site examinations to every 18 months, in lieu of the standard 12 months, for banks with less than half a billion dollars in assets and a CAMELS rating of one or two. Previously this relaxed schedule was only available to one- and two-rated banks with assets under $250 million. The final rule did not alter the proposed rule (reported in the April 6th issue of InfoBytes), and became effective when it was published in the Federal Register on September 25. For a copy of the final rule, please see http://www.fdic.gov/regulations/laws/federal/2007/07AD17final.pdf.

President Signs Student Loan Law. On September 27, President George Bush signed into law the College Cost Reduction and Access Act (H.R.2669), reducing, among other things, student borrower interest rates and student lender compensation (most recently reported in the July 27th issue of InfoBytes). In addition to a graduated decrease in Stafford Loan interest rates charged to borrowers and compensation paid to lenders, the law also (i) increases fees imposed on student lenders for each loan, (ii) caps maximum borrower repayment plans based on income under a repayment program to become available in October 2012, (iii) reduces the portion of loan collections agencies may retain of defaulted Stafford Loans, (iv) increases the availability of economic hardship deferrals, (v) reduces the coverage of lender insurance provided the Stafford Loan program, and (vi) eliminates the “exceptional performers status” designation for certain lenders. When signing the bill, President Bush expressed concern that some of its initiatives were not fully funded. The law is effective October 1, 2007.  For more information, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.02669:.

House Passes Flood Insurance Reform Bill. On September 27, the House of Representatives passed the Flood Insurance Reform and Modernization Act (H.R. 3121) which if enacted would significantly alter the national flood insurance program. Among the many changes, the act would (i) introduce risk-based flood insurance premiums for commercial properties and second homes, (ii) substantially increase the maximum amount of coverage available, (iii) incorporate windstorm coverage into the flood insurance program, (iv) permit coverage of certain ancillary expenses such as business interruption and replacement of lost “contents,” and (v) raise the limitation on annual premium increases from 10% to 15%.  Also, the act would amend the Real Estate Settlement Procedures Act to require that the lender’s good faith estimate include a “conspicuous” notification of the availability of flood insurance outside of designated flood hazard areas, as well as information about the escrowing of flood insurance payments. The bill has been referred to the Senate. For more about H.R. 3121, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.03121:. 

OTS Issues CEO Letter Regarding DoD Rulemaking. On September 24, the Office of Thrift Supervision (OTS) issued CEO Letter 262 notifying federal thrifts of the Department of Defense’s (DOD) recently issued final rule on extensions of credit to service members and their dependents (discussed in the August 31st issue of InfoBytes). In addition to the new maximum annual interest rate of 36%, the letter points to several practices prohibited by the new rule, punishable under civil and criminal penalties, including mandatory arbitration, waiver of legal rights, and prepayment penalties.  The rule is effective October 1, 2007.  To view CEO Letter 262, please see http://www.ots.treas.gov/docs/2/25262.pdf.

OCC Releases New Bank Supervision Process Booklet. On September 26, the Office of the Comptroller of the Currency (OCC) released a revised edition of its Bank Supervision Process booklet explaining the OCC’s methods and philosophy for supervising National Banks. The new Bank Supervision Process booklet incorporates the manifold changes in regulation since the most recent edition of this booklet was released in 1996. To view the new booklet, please see http://www.occ.treas.gov/handbook/banksup.pdf.

House Ways and Means Committee Passes Mortgage Relief Tax Exemption.  On September 26, the House Ways and Means Committee marked up and reported out of committee the Mortgage Forgiveness Debt Relief Act (H.R. 3648) which, if enacted, would prevent the benefits of mortgage debt restructuring from being considered “income” for tax purposes. The bill also grants a tax exemption for mortgage insurance premiums on contracts issues before January 1, 2007.  For more details on this bill, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.03648:.

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State Issues

Vermont Bans Gender Identity Discrimination in Housing and Finance. Vermont recently enacted S.B. 51 making discrimination on the basis of gender identity in housing, certain financing transactions, and insurance a prohibited practice. “Gender identity” means an individual’s actual or perceived gender identity, or gender-related characteristics intrinsically related to his or her gender or gender-identity, regardless of the person’s sex at birth. Unfair housing practices now include gender identity as an unlawful basis of discrimination in the making or purchasing of loans or providing other financial assistance for real estate related transactions or in the selling, brokering, or appraising of residential real property. The law went into effect on July 1, 2007. For text of the bill, please see http://www.leg.state.vt.us/docs/legdoc.cfm?URL=/docs/2008/acts/ACT041.HTM.

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Courts

Ohio Court Holds That Garnishment Fee Statute Permits Banks to Offset Fees and, if it Did Not, Would Be Preempted as to National Banks. On September 18, the United States District Court for the Northern District of Ohio granted motions to dismiss filed by a state bank represented by Buckley Kolar LLP and by several national banks.  The issue in the case was whether banks may charge garnishment fees in Ohio beyond the $1 fee expressly permitted under Ohio law. In Monroe Retail, Inc. v. Charter One Bank, N.A., the court held that the Ohio law did not prohibit banks from charging additional garnishment fees. The court agreed with the defendant banks that garnishing creditors stand in the shoes of the judgment debtor, and held that if the debtor agreed to pay the garnishment fees the bank may offset those fees before providing property to the garnishing creditor. The court further held that even if this was not the rule, the National Bank Act would preempt a state law imposing limitations on garnishment fees with respect to national banks. The court deferred to the Office of the Comptroller of Currency’s (OCC) preemption rules and an OCC opinion letter.  In particular, the court held that 12 C.F.R. § 7.4002(a), which addresses “non-interest charges and fees,” extends to garnishment fees. For a copy of the court’s opinion, see .

Ninth Circuit Holds Credit Agency’s Dispute Resolution Procedures Not “Reasonable”. On September 25, the Court of Appeals for the Ninth Circuit reversed its earlier decision, holding that a credit reporting agency’s dispute investigation did not show “reasonable diligence” as it failed to note court documents in its possession clearly showing the accuracy of plaintiff’s complaint. Dennis v. Beh-1, LLC, 2007 U.S. App. LEXIS 22690 (9th Cir., Sept. 25, 2007). In this case, the plaintiff filed a dispute of credit information used by a credit reporting agency over an erroneous entry in his consumer credit report in connection with a settled lawsuit with a landlord. After conducting an investigation, and employing a third party public records vendor to examine records of prior case, the credit reporting agency found the information was accurate and did not change the report.  The plaintiff then filed suit, alleging that the credit reporting agency violated the Fair Credit Reporting Act (FCRA) by relying on an erroneous entry in the records and failing to consider other entries in the court records correcting the errors. On appeal, the Ninth Circuit initially affirmed in a split decision the district court’s ruling that as a “matter of law” the defendant was reasonable in its investigative methods, its use of a third party investigator, and its reliance on court records (covered in the May 11th issue of InfoBytes). However, upon granting a motion to reconsider, the same panel of judges unanimously reversed their previous opinion.  In its new opinion, the court found that “no rational jury could find that the [defendant] company wasn’t negligent” and granted the plaintiff summary judgment summary that the defendant failed in its duty to “conduct a reasonable reinvestigation in violation of [FCRA].” The court also ruled that the question of willfulness of the violation under FCRA was a question for the jury, and remanded for a determination of damages and attorney’s fees. The court ruled that the plaintiff was “also entitled to attorney’s fees for an entirely successful appeal.” For a copy of this opinion, please see http://www.ca9.uscourts.gov/ca9/newopinions.nsf/.

Seventh Circuit Reverses Credit Dispute FCRA Suit. The U.S. Circuit Court of Appeals for the Seventh Circuit has reversed a district court’s dismissal of a case alleging violations of the Fair Credit Reporting Act (FCRA) by two banks for failing to adequately investigate a dispute of credit information. Lang v. TCF National Bank, No. 07-1415, 2007 U.S. App. Lexis 22588 (7th Cir. Sept. 21, 2007). In this case, the plaintiff learned from a consumer reporting agency (CRA) that it had “no information” about whether the plaintiff currently had a debt with two banks. The plaintiff alleged that the CRA instead should have had information that the plaintiff had no current debts with the banks. The CRA told one of the banks about the claim, but the banks did not correct the credit report, even after the plaintiff sent a letter informing each of the alleged inaccuracy. The plaintiff sued under FCRA, claiming failure to investigate purported errors. The district court dismissed the case on the grounds that the plaintiff did not allege that the CRA had notified both of the banks of his dispute, thereby triggering the requirement to investigate. The appeals court reversed in an unpublished decision, finding that it is “plausible” that the plaintiff could recover under FCRA, and that the complaint appears to have provided “fair notice” of the plaintiff’s claim. For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=07-1415_018.pdf.

Liability Insurer Required to Pay Settlements in FCRA Lawsuits. On September 10, a federal district court in Illinois held that a liability insurer was required to pay settlements in two FCRA lawsuits which the insurer declined to defend. Pietras v. Sentry Ins. Co., Nos. 06-C-4769, 06-C-3576, 2007 WL 2736545 (N.D. Ill. Sept. 10, 2007). The underlying FCRA lawsuits involved the same type of violation: the plaintiffs alleged that the defendant auto dealerships accessed their respective credit information without a permissible purpose. Both dealerships had liability insurance policies with Sentry Insurance Company, but Sentry refused to defend the dealerships against the lawsuits. After both cases settled, the plaintiffs sued Sentry, alleging that Sentry was obliged to pay the settlement amounts and attorney’s fees pursuant to the liability policies. Among other things, Sentry argued that because the dealerships did not oppose class certification and did not attempt to litigate the merits of the FCRA cases, their quickly-reached settlements were unreasonable. The court, however, noted that classes have been certified in virtually every other comparable FCRA case, as class actions were ideal in such cases, “’in which the potential recovery is too slight to support individual suits, but injury is substantial in aggregate.’” In response to Sentry’s argument that the amounts of the settlements were unreasonable, the court stated that Sentry was not entitled to the most favorable settlement possible. The court concluded that both settlements were reasonable, and granted the plaintiffs’ motions for summary judgment. For a copy of the opinion, please contact .

Court Holds FACTA Eliminates FCRA  Private Rights of Action, But Not Retroactively. On September 21, a U.S. District Court in the Eastern District of Pennsylvania held that the Fair and Accurate Credit Transactions Act (FACTA) eliminates private rights of action asserting violations of § 1681m of FCRA, but not for claims accruing before FACTA took effect. Meyers v. Freedom Credit Union v. Creditor Resources, Inc., 2007 U.S. Dist. Lexis 70032 (Sept. 21, 2007). FACTA amended FCRA by adding a subsection, § 1681m(h), which requires prospective creditors to notify consumers when they offer credit on less favorable terms because of the consumer’s credit history—known as “risk-based pricing.” Prior to FACTA, § 1681m required notice to be given to consumers only when prospective creditors denied them credit altogether.  In making this addition, however, FACTA also added § 1681m(h)(8), which eliminates private rights of action for “this section.”    In this case, the plaintiff argued that, based on FACTA eliminates private rights of action only in the context of “risk-based pricing,” not in the context of denial of credit altogether. The court disagreed, citing the most natural reading of the text and general statutory interpretation.  The court also addressed the issue of whether FACTA was to be applied retroactively— and held that where a new statute would impair the rights of a party that the party held when he began the action, the new statute should not be applied retroactively in the absence of a clear expression of intent by Congress to the contrary.  Consequently, the court denied the defendants’ motions to dismiss, holding that FACTA does not apply retroactively to bar private rights of action for claims accruing before FACTA took effect.  For a copy of this decision please contact .

Ninth Circuit Holds Collection of “Involuntary” Debt Not a Permissible FCRA Purpose. The Court of Appeals for the Ninth Circuit recently ruled that collecting a debt that was not incurred voluntarily is not a “credit transaction” under the Fair Credit Reporting Act (FCRA), and thus not a permissible purpose to access a consumer credit report. Pintos v. Pacific Creditors Ass’n, No. 04-17485 2007 WL 2743502 (9th Cir., September 21, 2007). In this case, the plaintiff incurred a debt in connection with the towing of her car at the direction of the police. The plaintiff was not willing to pay for the towing and the resale of the vehicle did not cover the towing company’s fees.  The towing company then contracted a debt collection agency, which in turn purchased a consumer credit report on the plaintiff from a credit reporting agency claiming the right to view the report under FCRA as it was “in connection a credit transaction.” In overturning a district court’s summary judgment in favor of the defendants, the Ninth Circuit noted that, FCRA does not define “credit transaction,” the Fair and Accurate Credit Transactions Act (FACTA) amendments to FCRA defined “credit” as “the right granted by a creditor to a debtor to defer payment of debt or to incur debts and defer its payment or to purchase property or services and defer payment thereof.” Therefore, the court reasoned, “credit” for purposes of FCRA could only be sought voluntarily “by a creditor” and that an involuntary debt, as incurred by the plaintiff, could not be a “credit transaction.” After ruling the debt collector had sought the credit report unlawfully, the court then considered the credit reporting agency’s liability.  The agency argued that it had a “blanket certification” from the debt collector that it would only seek reports for permissible purposes, and thus should be free from liability. The Ninth Circuit disagreed, overturning summary judgment in favor of the credit reporting agency, and ruling that FCRA requires more than “merely obtaining a subscriber’s general promise to obey the law.”  The case has been remanded to district court.  For a copy of this opinion, please see http://www.ca9.uscourts.gov/ca9/newopinions.nsf/.

Unconscionable Class Action Waiver Does Not Merit Nationwide Class. The Court of Appeals for the Ninth Circuit recently affirmed a lower court’s decision limiting a putative nationwide class action to California residents, reasoning that the question of whether a class action waiver was unconscionable would require analysis of the laws of each state.  Lozano v. AT&T Wireless Services, Inc., Appeal Nos. 05-56466, 05-56511 (9th Cir., opinion filed Sept. 20, 2007). Lozano’s class action suit challenged disclosures related to defendant’s cellular phone billing practices. Defendant moved to compel arbitration based on an arbitration agreement that included a class action waiver ostensibly preventing both parties from pursuing class claims. The district court denied the motion, relying on Ting v. AT&T, 319 F.3d 1126 (9th Cir. 2003) (adhesion contract rendered class action waiver procedurally unconscionable), and Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003) (“essentially unilateral” class action waiver substantively unconscionable) and holding the waiver to be procedurally and substantively unconscionable under California law. The district court then certified a class of California residents, but refused to certify a nationwide class because the individual issue of whether the class action waiver was unconscionable under the laws of the other 49 states predominated. The Ninth Circuit affirmed this decision as reasonable. According to the court, “the law on predominance requires the district court to consider variations in state law when a class action involves multiple jurisdictions.” The Ninth Circuit expressly “reject[ed] the notion that the district court was obligated to conduct a comprehensive survey of every state’s law on this issue.” For a copy of this opinion, please see http://www.ca9.uscourts.gov/ca9/newopinions.nsf/.

Oversecured Bankruptcy Creditor May Collect Prepayment Penalties As Unsecured Debt. Recently, the First Circuit Court of Appeals reversed a lower court’s ruling, finding that an oversecured creditor is entitled to collect a bargained-for prepayment penalty as the functional equivalent of unsecured debt, regardless of whether the penalty is reasonable under applicable state law. UPS Capital Bus. Credit v. Gencarelli (In re Gencarelli), No. 06-2700 (1st Cir. Aug. 30, 2007). In arriving at this conclusion, the court analyzed the interrelationship between Sections 502 and 506(b) of the Bankruptcy Code. Section 502 instructs the bankruptcy court to allow claims made against the debtor, but it has nine exceptions, including Section 502(b)(1), which disallows claims that are unenforceable under applicable law. On the other hand, Section 506(b) allows claims for “reasonable fees” so long as the claim is “secured by property the value of which … is greater than the amount of such claim …” . Here, after the auction of the debtor’s bankruptcy estate resulted in a multimillion-dollar surplus, the creditor submitted claims for, among other things, prepayment penalties included in the loan agreements. The bankruptcy court disallowed the creditor’s prepayment penalty claims, not because they were unenforceable under applicable law and therefore disallowed by Section 502, but because it deemed Section 506(b) controlling. Reversing the bankruptcy court’s decision, the First Circuit found that Section 506(b) spoke to whether an oversecured creditor may enjoy special priority over other creditors with respect to ancillary claims for various kinds of fees, costs, and other charges. In this case, where there was a solvent debtor, it was irrelevant whether prepayment penalties were unreasonable (and, thus, not entitled to priority as secured claims) because such claims were allowable as unsecured claims under Section 502. Where the debtor has sufficient funds to pay all claims – secured and unsecured – in full, “no useful purpose would be served by inquiring into whether the prepayment penalties are reasonable (and, thus, deserving of priority) within the contemplation of section 506(b).”   This decision can be found at http://www.ca1.uscourts.gov/pdf.opinions/06-2700-01A.pdf.

Addendum Permitting REO Seller to Select Title and Closing Agent Did Not Violate RESPA. The U.S. District Court for the District of South Carolina in Hopkins v. Horizon Management Services, Inc., No. 06-2935 2007 U.S. Dist. Lexis 69958 (Sept. 21, 2007), among other things, held that an addendum permitting the seller to select the title and closing agent did not violate RESPA section 2603, which prohibits sellers from requiring a buyer to use a particular title insurance company. The seller, a mortgage loan servicer selling foreclosed property, chose a closing agent that was a title agent only for the title insurance company, Fidelity Title. As a result, the plaintiff alleged that the seller required a buyer to use a particular title company in violation of RESPA. The court noted that the real estate listing agreement contained the addendum permitting the seller to choose the closing agent and although the addendum did not state the buyer was free to purchase a lender’s title insurance policy from any title insurance company it did not specifically require the buyer to purchase the lender’s title policy from a particular title insurance company. Moreover, the buyer signed a South Carolina Insurance Department Financial Disclosure Form providing notice that the buyer has the right to choose the title insurer. The plaintiff also received a HUD booklet prior to closing disclosing that the buyer may choose a title company. The court further determined that economic incentives provided for the purchase of additional products or services from a particular title insurance company does not constitute “required use” under RESPA. For a copy of this opinion, please contact .

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Firm News

Robert Serino was quoted the Wednesday, September 26 edition of the American Banker, in an article entitled “AML Fines Mount: Root Causes and Next Steps.”  Mr. Serino was quoted discussing the difficulties of AML/BSA compliance in large institutions, and how in the face of inevitable lapses, banks should have systems in face to prioritize the biggest risks.

Jeremiah Buckley will be speaking at the 11th Annual CRA & Fair Lending Colloquium in San Diego on October 3rd. Mr. Buckley will be speaking on a panel entitled “Best Practices in Identifying & Preventing Mortgage Fraud,” and will discuss several issues central to avoiding fraudulent mortgages, including identifying such practices as (i) mortgage flipping, (ii) inflated appraisals, (iii) equity skimming, and (iv) foreclosure schemes. For more information, or to register, please see http://www.cracolloquium.com/.

Margo Tank, Lane Macalester and Judy VanDusen will be speaking at the ARMA International Annual Conference being held from October 7 - 10 in Baltimore. They will appear on a panel entitled “Emerging Electronic Record Standards in Financial Services.” The panel will review legal considerations and strategies for implementing effective electronic record management policies and procedures.  For more information, or to register, please see http://www.arma.org/conference/2007/expo/exposchedule.cfm.

Jeffrey Naimon will be speaking at the ACI’s conference on Responsible Mortgage Lending in Las Vegas, November 14-16. Mr. Naimon will be presenting a workshop entitled “Mortgage Regulation Primer: Rules, Restrictions and Requirements for State Regulated and Federally Chartered Mortgage Lenders.” For more information about the conference, or to register, please see https://webserv.c5groupinc.com/www_secure/conf_details.php?conf=4850&view=ovrv.

Joseph Lynyak spoke at the Mortgage Banker’s Association’s Regulatory Compliance Conference in Washington, DC on September 23rd.  Mr. Lynyak spoke on fair lending and HMDA compliance issues.  To learn more, please go to http://events.mortgagebankers.org/regcomp2007/register.

Joseph Lynyak also spoke at the ACI’s Subprime Lending Litigation & Regulatory Enforcement Conference in Washington, DC on September 27th.  Mr. Lynyak spoke on a panel entitled “Redlining and Reverse Redlining: Proactive Defenses and Preventive Measures.”  To learn more, please see https://www.americanconference.com/Finance/subprimelit.htm. Copies of the materials for both of Mr. Lynyak’s presentations will be posted to the Buckley Kolar website shortly.

Robert Serino spoke at the American Bar Association’s National Institute on Banking Law II in Chicago on September 27th and 28th.  Mr. Serino lectured on Anti-Money Laundering and Bank Secrecy.  For more information, please see http://www.abanet.org/cle/programs/n07bla1.html.

Lee Negroni, together with Summer Associate Joya Raha, has authored an article on the law of mortgage broker fiduciary duty to consumer clients to be published in the October issue of Mortgage Banking Magazine.

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Miscellany

ESRA to Hold Conference on E-Signatures. The Electronic Signatures & Records Association (ESRA) will hold a conference entitled “Getting E-Signatures Right: Key Business, Technology, and Legal Developments” on November 13-14, 2007 in Washington, DC. Some of the conference topics include (i) success of the ESIGN Act, (ii) long term retention of electronically signed records, (iii) various industry sector case studies and (iv) key trends. Congressman Jay Inslee (D – WA) will be among the speakers, as well as Jeremiah Buckley and Margo Tank of Buckley Kolar, LLP. To learn more about the conference go to http://www.esignrecords.org/events/ESRA-announcement081507.pdf.

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Mortgages

Addendum Permitting REO Seller to Select Title and Closing Agent Did Not Violate RESPA. The U.S. District Court for the District of South Carolina in Hopkins v. Horizon Management Services, Inc., No. 06-2935 2007 U.S. Dist. Lexis 69958 (Sept. 21, 2007), among other things, held that an addendum permitting the seller to select the title and closing agent did not violate RESPA section 2603, which prohibits sellers from requiring a buyer to use a particular title insurance company. The seller, a mortgage loan servicer selling foreclosed property, chose a closing agent that was a title agent only for the title insurance company, Fidelity Title. As a result, the plaintiff alleged that the seller required a buyer to use a particular title company in violation of RESPA. The court noted that the real estate listing agreement contained the addendum permitting the seller to choose the closing agent and although the addendum did not state the buyer was free to purchase a lender’s title insurance policy from any title insurance company it did not specifically require the buyer to purchase the lender’s title policy from a particular title insurance company. Moreover, the buyer signed a South Carolina Insurance Department Financial Disclosure Form providing notice that the buyer has the right to choose the title insurer. The plaintiff also received a HUD booklet prior to closing disclosing that the buyer may choose a title company. The court further determined that economic incentives provided for the purchase of additional products or services from a particular title insurance company does not constitute “required use” under RESPA. For a copy of this opinion, please contact .

Oversecured Bankruptcy Creditor May Collect Prepayment Penalties As Unsecured Debt. Recently, the First Circuit Court of Appeals reversed a lower court’s ruling, finding that an oversecured creditor is entitled to collect a bargained-for prepayment penalty as the functional equivalent of unsecured debt, regardless of whether the penalty is reasonable under applicable state law. UPS Capital Bus. Credit v. Gencarelli (In re Gencarelli), No. 06-2700 (1st Cir. Aug. 30, 2007). In arriving at this conclusion, the court analyzed the interrelationship between Sections 502 and 506(b) of the Bankruptcy Code. Section 502 instructs the bankruptcy court to allow claims made against the debtor, but it has nine exceptions, including Section 502(b)(1), which disallows claims that are unenforceable under applicable law. On the other hand, Section 506(b) allows claims for “reasonable fees” so long as the claim is “secured by property the value of which … is greater than the amount of such claim …” . Here, after the auction of the debtor’s bankruptcy estate resulted in a multimillion-dollar surplus, the creditor submitted claims for, among other things, prepayment penalties included in the loan agreements. The bankruptcy court disallowed the creditor’s prepayment penalty claims, not because they were unenforceable under applicable law and therefore disallowed by Section 502, but because it deemed Section 506(b) controlling. Reversing the bankruptcy court’s decision, the First Circuit found that Section 506(b) spoke to whether an oversecured creditor may enjoy special priority over other creditors with respect to ancillary claims for various kinds of fees, costs, and other charges. In this case, where there was a solvent debtor, it was irrelevant whether prepayment penalties were unreasonable (and, thus, not entitled to priority as secured claims) because such claims were allowable as unsecured claims under Section 502. Where the debtor has sufficient funds to pay all claims – secured and unsecured – in full, “no useful purpose would be served by inquiring into whether the prepayment penalties are reasonable (and, thus, deserving of priority) within the contemplation of section 506(b).”   This decision can be found at http://www.ca1.uscourts.gov/pdf.opinions/06-2700-01A.pdf.

House Passes Flood Insurance Reform Bill. On September 27, the House of Representatives passed the Flood Insurance Reform and Modernization Act (H.R. 3121) which if enacted would significantly alter the national flood insurance program. Among the many changes, the act would (i) introduce risk-based flood insurance premiums for commercial properties and second homes, (ii) substantially increase the maximum amount of coverage available, (iii) incorporate windstorm coverage into the flood insurance program, (iv) permit coverage of certain ancillary expenses such as business interruption and replacement of lost “contents,” and (v) raise the limitation on annual premium increases from 10% to 15%.  Also, the act would amend the Real Estate Settlement Procedures Act to require that the lender’s good faith estimate include a “conspicuous” notification of the availability of flood insurance outside of designated flood hazard areas, as well as information about the escrowing of flood insurance payments. The bill has been referred to the Senate. For more about H.R. 3121, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.03121:. 

House Ways and Means Committee Passes Mortgage Relief Tax Exemption.  On September 26, the House Ways and Means Committee marked up and reported out of committee the Mortgage Forgiveness Debt Relief Act (H.R. 3648) which, if enacted, would prevent the benefits of mortgage debt restructuring from being considered “income” for tax purposes. The bill also grants a tax exemption for mortgage insurance premiums on contracts issues before January 1, 2007.  For more details on this bill, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.03648:.

Vermont Bans Gender Identity Discrimination in Housing and Finance. Vermont recently enacted S.B. 51 making discrimination on the basis of gender identity in housing, certain financing transactions, and insurance a prohibited practice. “Gender identity” means an individual’s actual or perceived gender identity, or gender-related characteristics intrinsically related to his or her gender or gender-identity, regardless of the person’s sex at birth. Unfair housing practices now include gender identity as an unlawful basis of discrimination in the making or purchasing of loans or providing other financial assistance for real estate related transactions or in the selling, brokering, or appraising of residential real property. The law went into effect on July 1, 2007. For text of the bill, please see http://www.leg.state.vt.us/docs/legdoc.cfm?URL=/docs/2008/acts/ACT041.HTM.

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Banking

Ohio Court Holds That Garnishment Fee Statute Permits Banks to Offset Fees and, if it Did Not, Would Be Preempted as to National Banks. On September 18, the United States District Court for the Northern District of Ohio granted motions to dismiss filed by a state bank represented by Buckley Kolar LLP and by several national banks.  The issue in the case was whether banks may charge garnishment fees in Ohio beyond the $1 fee expressly permitted under Ohio law. In Monroe Retail, Inc. v. Charter One Bank, N.A., the court held that the Ohio law did not prohibit banks from charging additional garnishment fees. The court agreed with the defendant banks that garnishing creditors stand in the shoes of the judgment debtor, and held that if the debtor agreed to pay the garnishment fees the bank may offset those fees before providing property to the garnishing creditor. The court further held that even if this was not the rule, the National Bank Act would preempt a state law imposing limitations on garnishment fees with respect to national banks. The court deferred to the Office of the Comptroller of Currency’s (OCC) preemption rules and an OCC opinion letter.  In particular, the court held that 12 C.F.R. § 7.4002(a), which addresses “non-interest charges and fees,” extends to garnishment fees. For a copy of the court’s opinion, see .

Seventh Circuit Reverses Credit Dispute FCRA Suit. The U.S. Circuit Court of Appeals for the Seventh Circuit has reversed a district court’s dismissal of a case alleging violations of the Fair Credit Reporting Act (FCRA) by two banks for failing to adequately investigate a dispute of credit information. Lang v. TCF National Bank, No. 07-1415, 2007 U.S. App. Lexis 22588 (7th Cir. Sept. 21, 2007). In this case, the plaintiff learned from a consumer reporting agency (CRA) that it had “no information” about whether the plaintiff currently had a debt with two banks. The plaintiff alleged that the CRA instead should have had information that the plaintiff had no current debts with the banks. The CRA told one of the banks about the claim, but the banks did not correct the credit report, even after the plaintiff sent a letter informing each of the alleged inaccuracy. The plaintiff sued under FCRA, claiming failure to investigate purported errors. The district court dismissed the case on the grounds that the plaintiff did not allege that the CRA had notified both of the banks of his dispute, thereby triggering the requirement to investigate. The appeals court reversed in an unpublished decision, finding that it is “plausible” that the plaintiff could recover under FCRA, and that the complaint appears to have provided “fair notice” of the plaintiff’s claim. For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=07-1415_018.pdf.

Federal Bank Regulators Issue Final Relaxed Examination Rule.  On September 21, the federal banking agencies (the Federal Reserve, FDIC, OCC, and OTS) announced final rulemaking to implement the Financial Services Regulatory Relief Act’s reduced examination frequency for certain small, highly rated banks. The final would reduce on-site examinations to every 18 months, in lieu of the standard 12 months, for banks with less than half a billion dollars in assets and a CAMELS rating of one or two. Previously this relaxed schedule was only available to one- and two-rated banks with assets under $250 million. The final rule did not alter the proposed rule (reported in the April 6th issue of InfoBytes), and became effective when it was published in the Federal Register on September 25. For a copy of the final rule, please see http://www.fdic.gov/regulations/laws/federal/2007/07AD17final.pdf.

Vermont Bans Gender Identity Discrimination in Housing and Finance. Vermont recently enacted S.B. 51 making discrimination on the basis of gender identity in housing, certain financing transactions, and insurance a prohibited practice. “Gender identity” means an individual’s actual or perceived gender identity, or gender-related characteristics intrinsically related to his or her gender or gender-identity, regardless of the person’s sex at birth. Unfair housing practices now include gender identity as an unlawful basis of discrimination in the making or purchasing of loans or providing other financial assistance for real estate related transactions or in the selling, brokering, or appraising of residential real property. The law went into effect on July 1, 2007. For text of the bill, please see http://www.leg.state.vt.us/docs/legdoc.cfm?URL=/docs/2008/acts/ACT041.HTM.

OTS Issues CEO Letter Regarding DoD Rulemaking. On September 24, the Office of Thrift Supervision (OTS) issued CEO Letter 262 notifying federal thrifts of the Department of Defense’s (DOD) recently issued final rule on extensions of credit to service members and their dependents (discussed in the August 31st issue of InfoBytes). In addition to the new maximum annual interest rate of 36%, the letter points to several practices prohibited by the new rule, punishable under civil and criminal penalties, including mandatory arbitration, waiver of legal rights, and prepayment penalties.  The rule is effective October 1, 2007.  To view CEO Letter 262, please see http://www.ots.treas.gov/docs/2/25262.pdf.

OCC Releases New Bank Supervision Process Booklet. On September 26, the Office of the Comptroller of the Currency (OCC) released a revised edition of its Bank Supervision Process booklet explaining the OCC’s methods and philosophy for supervising National Banks. The new Bank Supervision Process booklet incorporates the manifold changes in regulation since the most recent edition of this booklet was released in 1996. To view the new booklet, please see http://www.occ.treas.gov/handbook/banksup.pdf.

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Consumer Finance

President Signs Student Loan Law. On September 27, President George Bush signed into law the College Cost Reduction and Access Act (H.R.2669), reducing, among other things, student borrower interest rates and student lender compensation (most recently reported in the July 27th issue of InfoBytes). In addition to a graduated decrease in Stafford Loan interest rates charged to borrowers and compensation paid to lenders, the law also (i) increases fees imposed on student lenders for each loan, (ii) caps maximum borrower repayment plans based on income under a repayment program to become available in October 2012, (iii) reduces the portion of loan collections agencies may retain of defaulted Stafford Loans, (iv) increases the availability of economic hardship deferrals, (v) reduces the coverage of lender insurance provided the Stafford Loan program, and (vi) eliminates the “exceptional performers status” designation for certain lenders. When signing the bill, President Bush expressed concern that some of its initiatives were not fully funded. The law is effective October 1, 2007.  For more information, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.02669:.

FTC Requires Medical Data Firms to Comply with FCRA. On September 17, the Federal Trade Commission (FTC) announced it was issuing complaints against two consumer medical data providers, accusing them of failing to comply with the Fair Credit Reporting Act (FCRA). The two firms, Milliman Inc. and Ingenix Inc., provide individual medical profiles to health insurers on consumers. These profiles, which are sought with the permission of the consumer being reported on, are then used by health insurance companies in their underwriting processes. As these reports bear on a consumer’s personal characteristics, and are obtained in connection with considering a consumer’s eligibility for insurance, the FTC believes that the two companies were consumer reporting agencies as defined by FCRA, and therefore must comply with the act. Therefore, the FTC issued complaints against both companies alleging FCRA violations due to the companies’ failure to provide the notices or implement the procedures required by statute. In the proposed settlement agreements, the two companies, without admission of wrongdoing, agree to (i) provide users with the required notice, (ii) maintain reasonable procedures to determine if reports are sought for a permissible purpose, and (iii) maintain reasonable policies for investigating and resolving cases of disputed consumer information accuracy.  For the official FTC press release, and links to the complaints and settlements, please see http://www.ftc.gov/opa/2007/09/ingenixmilliman.shtm.

Ninth Circuit Holds Credit Agency’s Dispute Resolution Procedures Not “Reasonable”. On September 25, the Court of Appeals for the Ninth Circuit reversed its earlier decision, holding that a credit reporting agency’s dispute investigation did not show “reasonable diligence” as it failed to note court documents in its possession clearly showing the accuracy of plaintiff’s complaint. Dennis v. Beh-1, LLC, 2007 U.S. App. LEXIS 22690 (9th Cir., Sept. 25, 2007). In this case, the plaintiff filed a dispute of credit information used by a credit reporting agency over an erroneous entry in his consumer credit report in connection with a settled lawsuit with a landlord. After conducting an investigation, and employing a third party public records vendor to examine records of prior case, the credit reporting agency found the information was accurate and did not change the report.  The plaintiff then filed suit, alleging that the credit reporting agency violated the Fair Credit Reporting Act (FCRA) by relying on an erroneous entry in the records and failing to consider other entries in the court records correcting the errors. On appeal, the Ninth Circuit initially affirmed in a split decision the district court’s ruling that as a “matter of law” the defendant was reasonable in its investigative methods, its use of a third party investigator, and its reliance on court records (covered in the May 11th issue of InfoBytes). However, upon granting a motion to reconsider, the same panel of judges unanimously reversed their previous opinion.  In its new opinion, the court found that “no rational jury could find that the [defendant] company wasn’t negligent” and granted the plaintiff summary judgment summary that the defendant failed in its duty to “conduct a reasonable reinvestigation in violation of [FCRA].” The court also ruled that the question of willfulness of the violation under FCRA was a question for the jury, and remanded for a determination of damages and attorney’s fees. The court ruled that the plaintiff was “also entitled to attorney’s fees for an entirely successful appeal.” For a copy of this opinion, please see http://www.ca9.uscourts.gov/ca9/newopinions.nsf/.

Ninth Circuit Holds Collection of “Involuntary” Debt Not a Permissible FCRA Purpose. The Court of Appeals for the Ninth Circuit recently ruled that collecting a debt that was not incurred voluntarily is not a “credit transaction” under the Fair Credit Reporting Act (FCRA), and thus not a permissible purpose to access a consumer credit report. Pintos v. Pacific Creditors Ass’n, No. 04-17485 2007 WL 2743502 (9th Cir., September 21, 2007). In this case, the plaintiff incurred a debt in connection with the towing of her car at the direction of the police. The plaintiff was not willing to pay for the towing and the resale of the vehicle did not cover the towing company’s fees.  The towing company then contracted a debt collection agency, which in turn purchased a consumer credit report on the plaintiff from a credit reporting agency claiming the right to view the report under FCRA as it was “in connection a credit transaction.” In overturning a district court’s summary judgment in favor of the defendants, the Ninth Circuit noted that, FCRA does not define “credit transaction,” the Fair and Accurate Credit Transactions Act (FACTA) amendments to FCRA defined “credit” as “the right granted by a creditor to a debtor to defer payment of debt or to incur debts and defer its payment or to purchase property or services and defer payment thereof.” Therefore, the court reasoned, “credit” for purposes of FCRA could only be sought voluntarily “by a creditor” and that an involuntary debt, as incurred by the plaintiff, could not be a “credit transaction.” After ruling the debt collector had sought the credit report unlawfully, the court then considered the credit reporting agency’s liability.  The agency argued that it had a “blanket certification” from the debt collector that it would only seek reports for permissible purposes, and thus should be free from liability. The Ninth Circuit disagreed, overturning summary judgment in favor of the credit reporting agency, and ruling that FCRA requires more than “merely obtaining a subscriber’s general promise to obey the law.”  The case has been remanded to district court.  For a copy of this opinion, please see http://www.ca9.uscourts.gov/ca9/newopinions.nsf/.

Seventh Circuit Reverses Credit Dispute FCRA Suit. The U.S. Circuit Court of Appeals for the Seventh Circuit has reversed a district court’s dismissal of a case alleging violations of the Fair Credit Reporting Act (FCRA) by two banks for failing to adequately investigate a dispute of credit information. Lang v. TCF National Bank, No. 07-1415, 2007 U.S. App. Lexis 22588 (7th Cir. Sept. 21, 2007). In this case, the plaintiff learned from a consumer reporting agency (CRA) that it had “no information” about whether the plaintiff currently had a debt with two banks. The plaintiff alleged that the CRA instead should have had information that the plaintiff had no current debts with the banks. The CRA told one of the banks about the claim, but the banks did not correct the credit report, even after the plaintiff sent a letter informing each of the alleged inaccuracy. The plaintiff sued under FCRA, claiming failure to investigate purported errors. The district court dismissed the case on the grounds that the plaintiff did not allege that the CRA had notified both of the banks of his dispute, thereby triggering the requirement to investigate. The appeals court reversed in an unpublished decision, finding that it is “plausible” that the plaintiff could recover under FCRA, and that the complaint appears to have provided “fair notice” of the plaintiff’s claim. For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=07-1415_018.pdf.

Liability Insurer Required to Pay Settlements in FCRA Lawsuits. On September 10, a federal district court in Illinois held that a liability insurer was required to pay settlements in two FCRA lawsuits which the insurer declined to defend. Pietras v. Sentry Ins. Co., Nos. 06-C-4769, 06-C-3576, 2007 WL 2736545 (N.D. Ill. Sept. 10, 2007). The underlying FCRA lawsuits involved the same type of violation: the plaintiffs alleged that the defendant auto dealerships accessed their respective credit information without a permissible purpose. Both dealerships had liability insurance policies with Sentry Insurance Company, but Sentry refused to defend the dealerships against the lawsuits. After both cases settled, the plaintiffs sued Sentry, alleging that Sentry was obliged to pay the settlement amounts and attorney’s fees pursuant to the liability policies. Among other things, Sentry argued that because the dealerships did not oppose class certification and did not attempt to litigate the merits of the FCRA cases, their quickly-reached settlements were unreasonable. The court, however, noted that classes have been certified in virtually every other comparable FCRA case, as class actions were ideal in such cases, “’in which the potential recovery is too slight to support individual suits, but injury is substantial in aggregate.’” In response to Sentry’s argument that the amounts of the settlements were unreasonable, the court stated that Sentry was not entitled to the most favorable settlement possible. The court concluded that both settlements were reasonable, and granted the plaintiffs’ motions for summary judgment. For a copy of the opinion, please contact .

Court Holds FACTA Eliminates FCRA  Private Rights of Action, But Not Retroactively. On September 21, a U.S. District Court in the Eastern District of Pennsylvania held that the Fair and Accurate Credit Transactions Act (FACTA) eliminates private rights of action asserting violations of § 1681m of FCRA, but not for claims accruing before FACTA took effect. Meyers v. Freedom Credit Union, 2007 U.S. Dist. Lexis 70032 (Sept. 21, 2007). FACTA amended FCRA by adding a subsection, § 1681m(h), which requires prospective creditors to notify consumers when they offer credit on less favorable terms because of the consumer’s credit history—known as “risk-based pricing.” Prior to FACTA, § 1681m required notice to be given to consumers only when prospective creditors denied them credit altogether.  In making this addition, however, FACTA also added § 1681m(h)(8), which eliminates private rights of action for “this section.”    In this case, the plaintiff argued that, based on FACTA eliminates private rights of action only in the context of “risk-based pricing,” not in the context of denial of credit altogether. The court disagreed, citing the most natural reading of the text and general statutory interpretation.  The court also addressed the issue of whether FACTA was to be applied retroactively— and held that where a new statute would impair the rights of a party that the party held when he began the action, the new statute should not be applied retroactively in the absence of a clear expression of intent by Congress to the contrary.  Consequently, the court denied the defendants’ motions to dismiss, holding that FACTA does not apply retroactively to bar private rights of action for claims accruing before FACTA took effect.  For a copy of this decision please contact .

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Insurance

Liability Insurer Required to Pay Settlements in FCRA Lawsuits. On September 10, a federal district court in Illinois held that a liability insurer was required to pay settlements in two FCRA lawsuits which the insurer declined to defend. Pietras v. Sentry Ins. Co., Nos. 06-C-4769, 06-C-3576, 2007 WL 2736545 (N.D. Ill. Sept. 10, 2007). The underlying FCRA lawsuits involved the same type of violation: the plaintiffs alleged that the defendant auto dealerships accessed their respective credit information without a permissible purpose. Both dealerships had liability insurance policies with Sentry Insurance Company, but Sentry refused to defend the dealerships against the lawsuits. After both cases settled, the plaintiffs sued Sentry, alleging that Sentry was obliged to pay the settlement amounts and attorney’s fees pursuant to the liability policies. Among other things, Sentry argued that because the dealerships did not oppose class certification and did not attempt to litigate the merits of the FCRA cases, their quickly-reached settlements were unreasonable. The court, however, noted that classes have been certified in virtually every other comparable FCRA case, as class actions were ideal in such cases, “’in which the potential recovery is too slight to support individual suits, but injury is substantial in aggregate.’” In response to Sentry’s argument that the amounts of the settlements were unreasonable, the court stated that Sentry was not entitled to the most favorable settlement possible. The court concluded that both settlements were reasonable, and granted the plaintiffs’ motions for summary judgment. For a copy of the opinion, please contact .

FTC Requires Medical Data Firms to Comply with FCRA. On September 17, the Federal Trade Commission (FTC) announced it was issuing complaints against two consumer medical data providers, accusing them of failing to comply with the Fair Credit Reporting Act (FCRA). The two firms, Milliman Inc. and Ingenix Inc., provide individual medical profiles to health insurers on consumers. These profiles, which are sought with the permission of the consumer being reported on, are then used by health insurance companies in their underwriting processes. As these reports bear on a consumer’s personal characteristics, and are obtained in connection with considering a consumer’s eligibility for insurance, the FTC believes that the two companies were consumer reporting agencies as defined by FCRA, and therefore must comply with the act. Therefore, the FTC issued complaints against both companies alleging FCRA violations due to the companies’ failure to provide the notices or implement the procedures required by statute. In the proposed settlement agreements, the two companies, without admission of wrongdoing, agree to (i) provide users with the required notice, (ii) maintain reasonable procedures to determine if reports are sought for a permissible purpose, and (iii) maintain reasonable policies for investigating and resolving cases of disputed consumer information accuracy.  For the official FTC press release, and links to the complaints and settlements, please see http://www.ftc.gov/opa/2007/09/ingenixmilliman.shtm.

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Litigation

Ohio Court Holds That Garnishment Fee Statute Permits Banks to Offset Fees and, if it Did Not, Would Be Preempted as to National Banks. On September 18, the United States District Court for the Northern District of Ohio granted motions to dismiss filed by a state bank represented by Buckley Kolar LLP and by several national banks.  The issue in the case was whether banks may charge garnishment fees in Ohio beyond the $1 fee expressly permitted under Ohio law. In Monroe Retail, Inc. v. Charter One Bank, N.A., the court held that the Ohio law did not prohibit banks from charging additional garnishment fees. The court agreed with the defendant banks that garnishing creditors stand in the shoes of the judgment debtor, and held that if the debtor agreed to pay the garnishment fees the bank may offset those fees before providing property to the garnishing creditor. The court further held that even if this was not the rule, the National Bank Act would preempt a state law imposing limitations on garnishment fees with respect to national banks. The court deferred to the Office of the Comptroller of Currency’s (OCC) preemption rules and an OCC opinion letter.  In particular, the court held that 12 C.F.R. § 7.4002(a), which addresses “non-interest charges and fees,” extends to garnishment fees. For a copy of the court’s opinion, see .

Unconscionable Class Action Waiver Does Not Merit Nationwide Class. The Court of Appeals for the Ninth Circuit recently affirmed a lower court’s decision limiting a putative nationwide class action to California residents, reasoning that the question of whether a class action waiver was unconscionable would require analysis of the laws of each state.  Lozano v. AT&T Wireless Services, Inc., Appeal Nos. 05-56466, 05-56511 (9th Cir., opinion filed Sept. 20, 2007). Lozano’s class action suit challenged disclosures related to defendant’s cellular phone billing practices. Defendant moved to compel arbitration based on an arbitration agreement that included a class action waiver ostensibly preventing both parties from pursuing class claims. The district court denied the motion, relying on Ting v. AT&T, 319 F.3d 1126 (9th Cir. 2003) (adhesion contract rendered class action waiver procedurally unconscionable), and Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003) (“essentially unilateral” class action waiver substantively unconscionable) and holding the waiver to be procedurally and substantively unconscionable under California law. The district court then certified a class of California residents, but refused to certify a nationwide class because the individual issue of whether the class action waiver was unconscionable under the laws of the other 49 states predominated. The Ninth Circuit affirmed this decision as reasonable. According to the court, “the law on predominance requires the district court to consider variations in state law when a class action involves multiple jurisdictions.” The Ninth Circuit expressly “reject[ed] the notion that the district court was obligated to conduct a comprehensive survey of every state’s law on this issue.” For a copy of this opinion, please see http://www.ca9.uscourts.gov/ca9/newopinions.nsf/.

Ninth Circuit Holds Credit Agency’s Dispute Resolution Procedures Not “Reasonable”. On September 25, the Court of Appeals for the Ninth Circuit reversed its earlier decision, holding that a credit reporting agency’s dispute investigation did not show “reasonable diligence” as it failed to note court documents in its possession clearly showing the accuracy of plaintiff’s complaint. Dennis v. Beh-1, LLC, 2007 U.S. App. LEXIS 22690 (9th Cir., Sept. 25, 2007). In this case, the plaintiff filed a dispute of credit information used by a credit reporting agency over an erroneous entry in his consumer credit report in connection with a settled lawsuit with a landlord. After conducting an investigation, and employing a third party public records vendor to examine records of prior case, the credit reporting agency found the information was accurate and did not change the report.  The plaintiff then filed suit, alleging that the credit reporting agency violated the Fair Credit Reporting Act (FCRA) by relying on an erroneous entry in the records and failing to consider other entries in the court records correcting the errors. On appeal, the Ninth Circuit initially affirmed in a split decision the district court’s ruling that as a “matter of law” the defendant was reasonable in its investigative methods, its use of a third party investigator, and its reliance on court records (covered in the May 11th issue of InfoBytes). However, upon granting a motion to reconsider, the same panel of judges unanimously reversed their previous opinion.  In its new opinion, the court found that “no rational jury could find that the [defendant] company wasn’t negligent” and granted the plaintiff summary judgment summary that the defendant failed in its duty to “conduct a reasonable reinvestigation in violation of [FCRA].” The court also ruled that the question of willfulness of the violation under FCRA was a question for the jury, and remanded for a determination of damages and attorney’s fees. The court ruled that the plaintiff was “also entitled to attorney’s fees for an entirely successful appeal.” For a copy of this opinion, please see http://www.ca9.uscourts.gov/ca9/newopinions.nsf/.

Ninth Circuit Holds Collection of “Involuntary” Debt Not a Permissible FCRA Purpose. The Court of Appeals for the Ninth Circuit recently ruled that collecting a debt that was not incurred voluntarily is not a “credit transaction” under the Fair Credit Reporting Act (FCRA), and thus not a permissible purpose to access a consumer credit report. Pintos v. Pacific Creditors Ass’n, No. 04-17485 2007 WL 2743502 (9th Cir., September 21, 2007). In this case, the plaintiff incurred a debt in connection with the towing of her car at the direction of the police. The plaintiff was not willing to pay for the towing and the resale of the vehicle did not cover the towing company’s fees.  The towing company then contracted a debt collection agency, which in turn purchased a consumer credit report on the plaintiff from a credit reporting agency claiming the right to view the report under FCRA as it was “in connection a credit transaction.” In overturning a district court’s summary judgment in favor of the defendants, the Ninth Circuit noted that, FCRA does not define “credit transaction,” the Fair and Accurate Credit Transactions Act (FACTA) amendments to FCRA defined “credit” as “the right granted by a creditor to a debtor to defer payment of debt or to incur debts and defer its payment or to purchase property or services and defer payment thereof.” Therefore, the court reasoned, “credit” for purposes of FCRA could only be sought voluntarily “by a creditor” and that an involuntary debt, as incurred by the plaintiff, could not be a “credit transaction.” After ruling the debt collector had sought the credit report unlawfully, the court then considered the credit reporting agency’s liability.  The agency argued that it had a “blanket certification” from the debt collector that it would only seek reports for permissible purposes, and thus should be free from liability. The Ninth Circuit disagreed, overturning summary judgment in favor of the credit reporting agency, and ruling that FCRA requires more than “merely obtaining a subscriber’s general promise to obey the law.”  The case has been remanded to district court.  For a copy of this opinion, please see http://www.ca9.uscourts.gov/ca9/newopinions.nsf/.

Seventh Circuit Reverses Credit Dispute FCRA Suit. The U.S. Circuit Court of Appeals for the Seventh Circuit has reversed a district court’s dismissal of a case alleging violations of the Fair Credit Reporting Act (FCRA) by two banks for failing to adequately investigate a dispute of credit information. Lang v. TCF National Bank, No. 07-1415, 2007 U.S. App. Lexis 22588 (7th Cir. Sept. 21, 2007). In this case, the plaintiff learned from a consumer reporting agency (CRA) that it had “no information” about whether the plaintiff currently had a debt with two banks. The plaintiff alleged that the CRA instead should have had information that the plaintiff had no current debts with the banks. The CRA told one of the banks about the claim, but the banks did not correct the credit report, even after the plaintiff sent a letter informing each of the alleged inaccuracy. The plaintiff sued under FCRA, claiming failure to investigate purported errors. The district court dismissed the case on the grounds that the plaintiff did not allege that the CRA had notified both of the banks of his dispute, thereby triggering the requirement to investigate. The appeals court reversed in an unpublished decision, finding that it is “plausible” that the plaintiff could recover under FCRA, and that the complaint appears to have provided “fair notice” of the plaintiff’s claim. For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=07-1415_018.pdf.

Liability Insurer Required to Pay Settlements in FCRA Lawsuits. On September 10, a federal district court in Illinois held that a liability insurer was required to pay settlements in two FCRA lawsuits which the insurer declined to defend. Pietras v. Sentry Ins. Co., Nos. 06-C-4769, 06-C-3576, 2007 WL 2736545 (N.D. Ill. Sept. 10, 2007). The underlying FCRA lawsuits involved the same type of violation: the plaintiffs alleged that the defendant auto dealerships accessed their respective credit information without a permissible purpose. Both dealerships had liability insurance policies with Sentry Insurance Company, but Sentry refused to defend the dealerships against the lawsuits. After both cases settled, the plaintiffs sued Sentry, alleging that Sentry was obliged to pay the settlement amounts and attorney’s fees pursuant to the liability policies. Among other things, Sentry argued that because the dealerships did not oppose class certification and did not attempt to litigate the merits of the FCRA cases, their quickly-reached settlements were unreasonable. The court, however, noted that classes have been certified in virtually every other comparable FCRA case, as class actions were ideal in such cases, “’in which the potential recovery is too slight to support individual suits, but injury is substantial in aggregate.’” In response to Sentry’s argument that the amounts of the settlements were unreasonable, the court stated that Sentry was not entitled to the most favorable settlement possible. The court concluded that both settlements were reasonable, and granted the plaintiffs’ motions for summary judgment. For a copy of the opinion, please contact .

Court Holds FACTA Eliminates FCRA  Private Rights of Action, But Not Retroactively. On September 21, a U.S. District Court in the Eastern District of Pennsylvania held that the Fair and Accurate Credit Transactions Act (FACTA) eliminates private rights of action asserting violations of § 1681m of FCRA, but not for claims accruing before FACTA took effect. Meyers v. Freedom Credit Union v. Creditor Resources, Inc., 2007 U.S. Dist. Lexis 70032 (Sept. 21, 2007). FACTA amended FCRA by adding a subsection, § 1681m(h), which requires prospective creditors to notify consumers when they offer credit on less favorable terms because of the consumer’s credit history—known as “risk-based pricing.” Prior to FACTA, § 1681m required notice to be given to consumers only when prospective creditors denied them credit altogether.  In making this addition, however, FACTA also added § 1681m(h)(8), which eliminates private rights of action for “this section.”    In this case, the plaintiff argued that, based on FACTA eliminates private rights of action only in the context of “risk-based pricing,” not in the context of denial of credit altogether. The court disagreed, citing the most natural reading of the text and general statutory interpretation.  The court also addressed the issue of whether FACTA was to be applied retroactively— and held that where a new statute would impair the rights of a party that the party held when he began the action, the new statute should not be applied retroactively in the absence of a clear expression of intent by Congress to the contrary.  Consequently, the court denied the defendants’ motions to dismiss, holding that FACTA does not apply retroactively to bar private rights of action for claims accruing before FACTA took effect.  For a copy of this decision please contact .

Oversecured Bankruptcy Creditor May Collect Prepayment Penalties As Unsecured Debt. Recently, the First Circuit Court of Appeals reversed a lower court’s ruling, finding that an oversecured creditor is entitled to collect a bargained-for prepayment penalty as the functional equivalent of unsecured debt, regardless of whether the penalty is reasonable under applicable state law. UPS Capital Bus. Credit v. Gencarelli (In re Gencarelli), No. 06-2700 (1st Cir. Aug. 30, 2007). In arriving at this conclusion, the court analyzed the interrelationship between Sections 502 and 506(b) of the Bankruptcy Code. Section 502 instructs the bankruptcy court to allow claims made against the debtor, but it has nine exceptions, including Section 502(b)(1), which disallows claims that are unenforceable under applicable law. On the other hand, Section 506(b) allows claims for “reasonable fees” so long as the claim is “secured by property the value of which … is greater than the amount of such claim …” . Here, after the auction of the debtor’s bankruptcy estate resulted in a multimillion-dollar surplus, the creditor submitted claims for, among other things, prepayment penalties included in the loan agreements. The bankruptcy court disallowed the creditor’s prepayment penalty claims, not because they were unenforceable under applicable law and therefore disallowed by Section 502, but because it deemed Section 506(b) controlling. Reversing the bankruptcy court’s decision, the First Circuit found that Section 506(b) spoke to whether an oversecured creditor may enjoy special priority over other creditors with respect to ancillary claims for various kinds of fees, costs, and other charges. In this case, where there was a solvent debtor, it was irrelevant whether prepayment penalties were unreasonable (and, thus, not entitled to priority as secured claims) because such claims were allowable as unsecured claims under Section 502. Where the debtor has sufficient funds to pay all claims – secured and unsecured – in full, “no useful purpose would be served by inquiring into whether the prepayment penalties are reasonable (and, thus, deserving of priority) within the contemplation of section 506(b).”   This decision can be found at http://www.ca1.uscourts.gov/pdf.opinions/06-2700-01A.pdf.

Addendum Permitting REO Seller to Select Title and Closing Agent Did Not Violate RESPA. The U.S. District Court for the District of South Carolina in Hopkins v. Horizon Management Services, Inc., No. 06-2935 2007 U.S. Dist. Lexis 69958 (Sept. 21, 2007), among other things, held that an addendum permitting the seller to select the title and closing agent did not violate RESPA section 2603, which prohibits sellers from requiring a buyer to use a particular title insurance company. The seller, a mortgage loan servicer selling foreclosed property, chose a closing agent that was a title agent only for the title insurance company, Fidelity Title. As a result, the plaintiff alleged that the seller required a buyer to use a particular title company in violation of RESPA. The court noted that the real estate listing agreement contained the addendum permitting the seller to choose the closing agent and although the addendum did not state the buyer was free to purchase a lender’s title insurance policy from any title insurance company it did not specifically require the buyer to purchase the lender’s title policy from a particular title insurance company. Moreover, the buyer signed a South Carolina Insurance Department Financial Disclosure Form providing notice that the buyer has the right to choose the title insurer. The plaintiff also received a HUD booklet prior to closing disclosing that the buyer may choose a title company. The court further determined that economic incentives provided for the purchase of additional products or services from a particular title insurance company does not constitute “required use” under RESPA. For a copy of this opinion, please contact .

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E-Financial Services

ESRA to Hold Conference on E-Signatures. The Electronic Signatures & Records Association (ESRA) will hold a conference entitled “Getting E-Signatures Right: Key Business, Technology, and Legal Developments” on November 13-14, 2007 in Washington, DC. Some of the conference topics include (i) success of the ESIGN Act, (ii) long term retention of electronically signed records, (iii) various industry sector case studies and (iv) key trends. Congressman Jay Inslee (D – WA) will be among the speakers, as well as Jeremiah Buckley and Margo Tank of Buckley Kolar, LLP. To learn more about the conference go to http://www.esignrecords.org/events/ESRA-announcement081507.pdf.

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Privacy/Data Security

FTC Requires Medical Data Firms to Comply with FCRA. On September 17, the Federal Trade Commission (FTC) announced it was issuing complaints against two consumer medical data providers, accusing them of failing to comply with the Fair Credit Reporting Act (FCRA). The two firms, Milliman Inc. and Ingenix Inc., provide individual medical profiles to health insurers on consumers. These profiles, which are sought with the permission of the consumer being reported on, are then used by health insurance companies in their underwriting processes. As these reports bear on a consumer’s personal characteristics, and are obtained in connection with considering a consumer’s eligibility for insurance, the FTC believes that the two companies were consumer reporting agencies as defined by FCRA, and therefore must comply with the act. Therefore, the FTC issued complaints against both companies alleging FCRA violations due to the companies’ failure to provide the notices or implement the procedures required by statute. In the proposed settlement agreements, the two companies, without admission of wrongdoing, agree to (i) provide users with the required notice, (ii) maintain reasonable procedures to determine if reports are sought for a permissible purpose, and (iii) maintain reasonable policies for investigating and resolving cases of disputed consumer information accuracy.  For the official FTC press release, and links to the complaints and settlements, please see http://www.ftc.gov/opa/2007/09/ingenixmilliman.shtm.

ESRA to Hold Conference on E-Signatures. The Electronic Signatures & Records Association (ESRA) will hold a conference entitled “Getting E-Signatures Right: Key Business, Technology, and Legal Developments” on November 13-14, 2007 in Washington, DC. Some of the conference topics include (i) success of the ESIGN Act, (ii) long term retention of electronically signed records, (iii) various industry sector case studies and (iv) key trends. Congressman Jay Inslee (D – WA) will be among the speakers, as well as Jeremiah Buckley and Margo Tank of Buckley Kolar, LLP. To learn more about the conference go to http://www.esignrecords.org/events/ESRA-announcement081507.pdf.

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