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InfoBytes
CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS
Topics – Covered This Week (Click to View)
FEDERAL ISSUES
FCC Rules That Autodial Collection Calls to Cell Phones Are Permissible. On January 4, the Federal Communications Commission (FCC) released a declaratory ruling specifying that autodial and prerecorded telephone calls to a wireless number by a creditor are permissible under the Telephone Consumer Protection Act (TCPA) if the debtor has granted “prior express consent.” The ruling comes in response to a petition by ACA International – a trade association for third party debt collectors – regarding an ambiguity in the FCC’s exemption from the TCPA’s prohibition on autodial and prerecorded telephone calls for debt collection calls to residences. In 2003, the FCC passed rules prohibiting “any call using an automatic telephone dialing system or an artificial or prerecorded message to any wireless telephone number.” ACA International then sought clarification as to whether the prohibition on autodial and prerecorded calls to wireless telephones applied to debt collection calls. In its declaratory ruling, the FCC stated that it does not apply to such calls, because, by giving a wireless number to a creditor in connection with a debt, a consumer has granted “prior express consent” to be contacted regarding that debt at that number. The ruling emphasizes that “prior express consent is deemed to be granted only if the wireless number was provided by the consumer to the creditor, and that such number was provided during the transaction that resulted in the debt owed.” While the ruling specifies that the exemption for creditors also extends to contracted third party collectors, it notes that in the event of a dispute of the existence of “prior express consent” by a debtor, “the burden will be on the creditor to show it obtained the necessary… consent.” For a copy of this ruling, please see http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-07-232A1.pdf.
FDIC Publishes “Case for Loan Modification,” Forward by Chairman Bair. On January 10, the Federal Deposit Insurance Corporation (FDIC) published an article advocating a more aggressive loan modification program to prevent foreclosures and protect the housing and credit markets. Printed in the winter edition of the FDIC Quarterly, the article includes a forward by FDIC Chairman Sheila Bair who has, during the recent foreclosure crisis, often advocated more sweeping modification policies than other federal regulators. In discussing the recent voluntary private initiative by banks to provide modifications, organized with the encouragement of the White House (reported in InfoBytes Dec. 7, 2007), Chairman Bair noted that “[a]n important component of the industry-led plan is detailed reporting of loan modification activity. Working with the Treasury Department and other bank regulators, the FDIC will monitor loan modification levels and seek adjustments to the protocols if warranted.” The paper discusses the loan modification process, and it identifies “misconceptions” such as (i) restructuring is a bailout of subprime borrowers and/or investors, (ii) restructuring will create a windfall for subprime borrowers, (iii) restructuring will deny investors their expected return, and (iv) restructuring is unnecessary based on past level of credit loss. To view this article, please see http://www.fdic.gov/bank/analytical/quarterly/2007_vol1_3/FeatureArticle_1_V1N3_Full.pdf.
FTC Solicits Comments on Credit Freeze Effectiveness. On January 10, the Federal Trade Commission (FTC) announced a request for comment on the impact of credit report freezes on combating and reducing the costs of identity theft. The request specifies several topics for comment, including, among many others, (i) proposals to create a centralized freeze system alleviating the need for consumers to contact all three credit reporting agencies (CRAs), (ii) an appropriate time limit on the imposition and removal of freezes, and (iii) how to inform consumers of the benefits and means of imposing a credit freeze. A consumers’ right to freeze their credit information is currently authorized under the law of 39 states and the District of Columbia, as well as by each of the CRAs through voluntary programs they have developed. Comments are due by February 25, 2008. For more information on the solicitation, and how to comment, please see http://www.ftc.gov/opa/2008/01/freeze.shtm.
IRS Provides Guidance on Mortgage Insurance Premiums. On January 8, the Internal Revenue Service (IRS) issued a notice providing guidance on how companies must report mortgage insurance premiums (MIPs) and how individuals may allocate deductions for prepaid qualified MIPs for 2007 taxes. The guidance states that any filing entity receiving more than $600 in MIP payments in 2007 must report that fact in their 2007 Form 1098 in the manor prescribed. To view this notice, please see http://www.irs.gov/pub/irs-drop/n-08-15.pdf.
SEC Launches Online Investor Tool on Executive Compensation. On December 21, the Securities and Exchange Commission (SEC) announced that it now offers an online tool called the “Executive Compensation Reader” to enable investors to instantly compare executive compensation for 500 of the largest U.S. corporations. Selected comparisons can be viewed in both table and graphic format using criteria such as industry, public market capitalization or revenue. The information may also be downloaded to Microsoft Excel, thereby permitting users to create their own tables. The tool includes direct links to companies’ proxy statements, footnotes and the companies’ explanation of compensation decisions. The Executive Compensation Reader is available on the SEC’s Web site at http://www.sec.gov/xbrl.
Proposed HOEPA Rules Published. On January 9, the Federal Register published rules proposed under the Home Ownership and Equity Protection Act (HOEPA) by the Federal Reserve Board (FRB) last month (reported in InfoBytes Dec. 21, 2007). Comments on the proposal are due to the FRB by April 8, 2008. For a copy of the rules as published, please see http://edocket.access.gpo.gov/2008/pdf/E7-25058.pdf.
FinCEN Rules Company Cashing Checks It Issued to Customers Not a MSB. The Financial Crimes Enforcement Network (FinCEN) recently released at November 15, 2007 guidance letter stating that a publicly traded company issuing checks to consumers and then cashing them itself does not qualify as a Money Services Business (MSB) with regards to registration and reporting requirements under the Bank Secrecy Act (BSA). The guidance letter came in response to a query by an unnamed company, in the business of consumer lending and tax return preparation, that cashes its own checks issued to loan customers as loan proceeds. In its letter, FinCEN stated that if the company was “only cashing a given loan check for the customer who is obtaining the loan, and not for a third party, then [the company is] in effect disbursing loan proceeds in cash” and does not qualify as a MSB. On a separate point, the letter also specified that the company, which in this case is publicly traded and “registered” with the Securities and Exchange Commission (SEC), did not qualify for the exemption for MSBs "registered with, and regulated or examined by, the [SEC] or the Commodity Futures Trading Commission." FinCEN noted that their guidance explicitly excluded from the exemptions companies whose securities are registered with the SEC but are not themselves registered, because the SEC “neither regulates nor examines the business activities of those companies.” For a copy of this letter, please see http://www.fincen.gov/FIN-2007-R001.html.
STATE ISSUES
Maine Passes “Emergency” Amendment to Predatory Lending Law. On January 8, both the Maine House and Senate passed an emergency bill (LD 2125) amending and clarifying portions of the anti-predatory lending law passed in that state last summer (reported in InfoBytes June 15, 2007). Language in the previous bill (and its attendant rules, reported in InfoBytes Dec. 7, 2007) had caused concerns in the industry over ambiguous standards and penalties. Among the many modifications, the recent amendments incorporate into the statute recent rule making regarding the “ability to repay” standard and modifies the law’s assignee liability provisions. The law, due to its “emergency” status, took effect immediately upon enactment and is applicable retroactively to January 1, 2008. For more information on the LD 2125, please see http://janus.state.me.us/legis/LawMakerWeb/summary.asp?LD=2125.
COURTS
Baltimore Files “Reverse Redlining” Suit. On January 8, the Mayor and City Council of Baltimore filed a complaint in federal court accusing Wells Fargo of targeting predominantly African-American portions of Baltimore with “deceptive, predatory or otherwise unfair lending practices because of the race or ethnicity of the area’s resident,” a practice the complaint calls “reverse redlining” and claims is a violation of the Fair Housing Act. Among the practices identified as abusive in the complaint were (i) failing to underwrite adjustable rate mortgages to the fully amortizing rate, (ii) encouraging borrowers to refinance into “unaffordable” mortgages, (iii) allowing brokers to charge yield spread premiums, (iv) not underwriting loans based on “traditional underwriting criteria” such as DTI and LTV ratios, FICO scores, documented assets and work history, (v) imposing prepayment penalties on borrowers attempting to refinance into prime loans, and (vi) charging “excessive” points and fees without any “benefits for the borrower.” To support these allegations, the complaint cites among other things (i) higher foreclosure rates in predominantly African-American tracts of the city, (ii) Home Mortgage Disclosure Act data showing a higher rate of placement of “high-cost” mortgages in predominantly African American tracts, (iii) Wells Fargo pricing sheets that allegedly show higher rates for smaller mortgage loans which the complaint argues disproportionately effects African-Americans, (iv) higher rate caps on adjustable rate mortgages made by Wells Fargo in African American neighborhoods, and (v) swifter foreclosures by Wells Fargo in predominately African-American areas. In the complaint, the City of Baltimore seeks “tens of millions of dollars” in compensatory damages for causes including (i) decreased property tax revenue due to lower home value caused by foreclosures, (ii) increased criminal activity due to the growing number of vacant homes, and (iii) increased expenditures for police and fire protection, property rehabilitation, and other city services caused by vacant properties, as well as punitive damages sufficient to “deter similar conduct in the future.” Baltimore Mayor Sheila Dixon stated in a press release that “foreclosures caused by reverse redlining create a very real and very dramatic ripple effect in our neighborhoods.” A copy of the complaint can be found on the plaintiff’s counsel’s website at http://www.relmanlaw.com/City of Baltimore v. Wells Fargo - 08-cv-62 - Complaint.pdf.
Speculated Inability to Produce Funds Does Not Merit Dismissal of Rescission Claims. In a recent action for rescission under the Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA), a federal district court in Alabama held that mere speculation that the plaintiffs in the case lacked the ability to tender the loan proceeds following rescission did not warrant dismissal of their rescission claims. Williams v. Saxon Mortgage Co., No. 06-0799-WS-B, 2008 U.S. Dist. LEXIS 131 (S.D. Ala. Jan. 2, 2008). Homeowners Loan Corporation (HLC), which made the loan at issue in the case, requested the court to order the plaintiffs to produce evidence of their ability to tender the loan proceeds, and to dismiss the rescission claims if the plaintiffs failed to come forward with satisfactory proof of such ability. According to the court, the relief sought by HLC was inappropriate for three reasons: (i) HLC failed to meet its initial burden (on summary judgment) to show that rescission was unavailable because of the plaintiffs’ inability to perform; (ii) the plaintiffs made an adequate showing of their ability to repay the loan proceeds; and (iii) the record reflected that HLC’s alleged violations were not mere technicalities, but consisted of systematic omissions of certain finance charges from required disclosures, and facially unlawful loan features. The court therefore declined to dismiss the plaintiffs’ rescission claims. HLC also requested the court to modify the rescission procedure, but the court determined that this request was premature. For a copy of the opinion, please contact .
Failure to Update Credit Information May Violate Bankruptcy Discharge Injunction. In a recent case, a federal bankruptcy court denied a motion to dismiss, holding that it is reasonable to infer that a deliberate refusal to update erroneous information on a credit report can constitute an act to collect a discharged debt in violation of federal bankruptcy law. In re Russell, 378 B.R. 735 (Bankr. E.D. N.Y. Dec. 6, 2007). In this case, the consumer (the debtor in the bankruptcy proceeding) accrued substantial credit card debt on Chase credit cards, which he did not pay. Chase reported the debt to the credit reporting agencies as past-due and owing and obtained a post-petition judgment on the debt, which it later agreed to vacate. The consumer then received a discharge of all pre-petition unsecured obligations, including the debt to Chase. The plaintiff alleged that despite receiving notice of the discharge order and a notice by the consumer’s lawyer that it was erroneously reporting the debt as past due and owing because the debt was discharged, Chase did not update its information to the credit reporting agencies. In addition, in response to investigation by the credit reporting agencies, Chase responded that the debt was still due and owing. The court agreed with the consumer that reporting a discharged debt could violate the discharge injunction and declined to dismiss the consumer’s allegations that Chase's failure to provide correct credit information, knowing that the plaintiff's ability to obtain new credit would be impaired, constituted an attempt to collect a discharged debt in violation of bankruptcy laws. The court held that Chase could be liable for civil sanctions including punitive damages. For a copy of this decision, please contact .
Fourth Circuit Reduces Emotional Damages in FCRA Credit Information Dispute. The U.S. Court of Appeals for the Fourth Circuit recently upheld a jury verdict awarding $106,000 for economic losses resulting from Fair Credit Reporting Act (FCRA) violations arising from a failure to correct invalid consumer information, but reduced the emotional distress award from $245,000 to $150,000. Sloane v. Equifax, No. 06-2044 (4th Cir. Dec. 27, 2007). In this case, the consumer plaintiff was successful at trial in claims that Equifax had violated FCRA by failing to correct information on a credit report arising from identity theft after repeated requests to do so, and by failing to follow its own identity theft procedures. In its appeal, the defendant argued that the plaintiff’s damages claims were based on speculation and conjecture. The Court of Appeals disagreed, citing evidence presented at trial by the plaintiff indicating multiple attempts to secure lines of credit from a variety of financial institutions, only to be either denied outright or offered credit at much higher cost than if the credit report had been accurate. The defendant further argued that the plaintiff suffered a “single, indivisible” injury, and as such, her economic damages should be reduced to take account of the settlements she had reached with the two other credit reporting agencies and involved financial institutions. The Fourth Circuit disagreed with this argument as well, reasoning that, although the defendant bore no responsibility for the initial identity theft, FCRA places responsibility on the defendant for taking reasonable steps to correct the plaintiff’s credit report once it is brought to the defendant’s attention—each failure to do so results in a separate harm. The Fourth Circuit agreed that the award for emotional distress of $245,000 was, to a degree, excessive, but not to the extent that the defendant argued, reducing that component of damages to $150,000. The Fourth Circuit also reversed and remanded the trial court decision on attorneys’ fees, noting that the district court had determined the attorneys’ fees without allowing the defendant to file briefs. For a copy of this opinion, please see http://pacer.ca4.uscourts.gov/opinion.pdf/062044.P.pdf.
Class Action Prohibition, Assented to by Web Site Visit, Not Unconscionable. A federal court in Illinois recently enforced an arbitration clause which included a class action waiver dismissing a Fair and Accurate Credit Transactions Act (FACTA) credit card truncation class action. Deaton v. Overstock.com, Inc., No. 07-cv-643-JPG (S.D. Ill., Dec. 27, 2007). In her complaint, the consumer alleged that an online merchant improperly included the expiration date of her credit card on an electronic receipt for her purchase in violation of the FACTA amendments to the Fair Credit Reporting Act. The defendant merchant moved to dismiss the consumer’s claims, arguing that, by accessing its website, the consumer agreed to arbitrate her claims in Utah and waived her ability to bring her claims as a class action. The consumer countered that the prohibitive costs associated with a Utah arbitration rendered the arbitration clause unenforceable, and that these same costs rendered the class action waiver unconscionable because the only effective method of protecting a consumer’s FACTA rights was through collective action. The court rejected the consumer’s arguments, finding that consumer had not met her burden of showing that arbitration would be any more expensive than litigation, and noting that the arbitration rules contemplated cost-reducing alternatives and that the defendant had agreed to pay the consumer’s portion of the arbitration costs. Reminding that – in the Seventh Circuit – class actions bars in arbitration agreements are not per se unconscionable, the court found that the class action bar in this case was not unconscionable because of the cost-reducing alternatives contained in the arbitration rules. For a copy of this opinion, please contact .
Court Finds Foreclosure to Be an “Increase in Hazard” Requiring Notice to Insurer. The Tennessee Court of Appeals has ruled that an insurer does not have to pay a claim to a mortgage servicer because the servicer failed to notify the insurer of the initiation of foreclosure proceedings, which the court found to be an “increase in hazard.” U.S. Bank N.A. v. Tennessee Farmers Mut. Ins. Co., No. W2006-02536-COA-R3-CV, 2007 Tenn. App. Lexis 788 (Tenn. Ct. App., Dec. 21, 2007). In this case, the borrower defaulted on her mortgage, and the servicer initiated foreclosure. At that time the servicer did not notify borrower’s insurer of the foreclosure proceeding. The borrower subsequently filed for bankruptcy protection. During the bankruptcy proceedings, the home was destroyed by fire. The borrower’s fire insurance policy contained a “standard mortgage clause,” which required the servicer to notify the insurer of “any increase of hazard.” Tennessee state law also requires that mortgagees notify insurers of any “increase in hazard.” Claiming that the initiation of foreclosure proceedings was an “increase of hazard,” the insurer denied the claim. The trial court had initially found in favor of the servicer, but Court of Appeals reversed. The Court of Appeals noted that case law is split on the issue of whether foreclosure constitutes an “increase in hazard.” Still, the court emphasized that “an insured faced with imminent foreclosure has an incentive to destroy the house intentionally to receive the proceeds of the insurance policy.” For copy of the opinion, please contact .
Court Finds Accuracy of TILA Disclosures Dependent on Who Received Funds First. In Jackson v. The CIT Group/Consumer Finance, Inc., 2007 U.S. Dist. LEXIS 93306 (WDPA Dec. 19, 2007), the U.S. District Court for the Western District of Pennsylvania granted CIT Group/Consumer Finance, Inc.’s motion for summary judgment finding that a borrower’s subsequent disbursement of funds to a third party did not make the Truth in Lending Act (TILA) disclosure specifying the borrower as the recipient materially inaccurate. The court found that “[a]s a matter of form, the money ultimately directed to ... [the contractor] was first disbursed by check to the Plaintiff ... at the closing, and [Plaintiffs] then endorsed the check and returned it to the closing agent to be paid to ... [the contractor].” As a result, the court held that the disclosures were accurate in terms of the amount advanced by the defendant mortgage lender, even though the funds were subsequently redirected to a contractor at closing, because the full amount was initially issued to the borrower. For a copy of this opinion, please contact .
Ninth Circuit Rules on Cases Remanded by the Supreme Court in Safeco v. Burr. On January 9, the Ninth Circuit Court of Appeals handed down rulings on three Fair Credit Reporting Act (FCRA) cases remanded by a consolidated ruling by the Supreme Court this summer (Safeco Insurance Co. v. Burr, No. 06-84 – reported in the June 4, 2007 InfoBytes Special Alert). Edo v. GEICO Casualty Co., 2008 WL 80635 (9th Cir. Jan. 9, 2008), Willes v. State Farm Fire & Casualty Co., 2008 WL 80631 (9th Cir. Jan. 9, 2008), Spano v. Safeco Corp., 2008 WL 80628 (9th Cir. Jan. 9, 2008). The court granted judgment to the insurers in all of the cases, either on substantive grounds because the Supreme Court held that adverse action did not occur, or because Safeco indicated that the consumers could not recover statutory damages under FCRA because the insurer’s misinterpretation of FCRA’s adverse action requirement was not “objectively unreasonable.” The opinions can be found at http://www.ca9.uscourts.gov/ca9/newopinions.nsf/.
FIRM NEWS
Jeff Naimon moderated the Truth in Lending Subcommittee at the American Bar Association Consumer Financial Services Committee winter meeting in Park City Utah held January 5th through 8th. Mr. Naimon’s panel focused on two currently litigated controversies in TILA: (i) the availability on a class basis of a declaration that the consumer's loan is rescindable and (ii) the ability to rescind loans after payoff. For more on this meeting, please see http://www.abanet.org/buslaw/committees/CL230000pub/meetings.shtml.
Baltimore Files “Reverse Redlining” Suit. On January 8, the Mayor and City Council of Baltimore filed a complaint in federal court accusing Wells Fargo of targeting predominantly African-American portions of Baltimore with “deceptive, predatory or otherwise unfair lending practices because of the race or ethnicity of the area’s resident,” a practice the complaint calls “reverse redlining” and claims is a violation of the Fair Housing Act. Among the practices identified as abusive in the complaint were (i) failing to underwrite adjustable rate mortgages to the fully amortizing rate, (ii) encouraging borrowers to refinance into “unaffordable” mortgages, (iii) allowing brokers to charge yield spread premiums, (iv) not underwriting loans based on “traditional underwriting criteria” such as DTI and LTV ratios, FICO scores, documented assets and work history, (v) imposing prepayment penalties on borrowers attempting to refinance into prime loans, and (vi) charging “excessive” points and fees without any “benefits for the borrower.” To support these allegations, the complaint cites among other things (i) higher foreclosure rates in predominantly African-American tracts of the city, (ii) Home Mortgage Disclosure Act data showing a higher rate of placement of “high-cost” mortgages in predominantly African American tracts, (iii) Wells Fargo pricing sheets that allegedly show higher rates for smaller mortgage loans which the complaint argues disproportionately effects African-Americans, (iv) higher rate caps on adjustable rate mortgages made by Wells Fargo in African American neighborhoods, and (v) swifter foreclosures by Wells Fargo in predominately African-American areas. In the complaint, the City of Baltimore seeks “tens of millions of dollars” in compensatory damages for causes including (i) decreased property tax revenue due to lower home value caused by foreclosures, (ii) increased criminal activity due to the growing number of vacant homes, and (iii) increased expenditures for police and fire protection, property rehabilitation, and other city services caused by vacant properties, as well as punitive damages sufficient to “deter similar conduct in the future.” Baltimore Mayor Sheila Dixon stated in a press release that “foreclosures caused by reverse redlining create a very real and very dramatic ripple effect in our neighborhoods.” A copy of the complaint can be found on the plaintiff’s counsel’s website at http://www.relmanlaw.com/City of Baltimore v. Wells Fargo - 08-cv-62 - Complaint.pdf.
Maine Passes “Emergency” Amendment to Predatory Lending Law. On January 8, both the Maine House and Senate passed an emergency bill (LD 2125) amending and clarifying portions of the anti-predatory lending law passed in that state last summer (reported in InfoBytes June 15, 2007). Language in the previous bill (and its attendant rules, reported in InfoBytes Dec. 7, 2007) had caused concerns in the industry over ambiguous standards and penalties. Among the many modifications, the recent amendments incorporate into the statute recent rule making regarding the “ability to repay” standard and modifies the law’s assignee liability provisions. The law, due to its “emergency” status, took effect immediately upon enactment and is applicable retroactively to January 1, 2008. For more information on the LD 2125, please see http://janus.state.me.us/legis/LawMakerWeb/summary.asp?LD=2125.
Speculated Inability to Produce Funds Does Not Merit Dismissal of Rescission Claims. In a recent action for rescission under the Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA), a federal district court in Alabama held that mere speculation that the plaintiffs in the case lacked the ability to tender the loan proceeds following rescission did not warrant dismissal of their rescission claims. Williams v. Saxon Mortgage Co., No. 06-0799-WS-B, 2008 U.S. Dist. LEXIS 131 (S.D. Ala. Jan. 2, 2008). Homeowners Loan Corporation (HLC), which made the loan at issue in the case, requested the court to order the plaintiffs to produce evidence of their ability to tender the loan proceeds, and to dismiss the rescission claims if the plaintiffs failed to come forward with satisfactory proof of such ability. According to the court, the relief sought by HLC was inappropriate for three reasons: (i) HLC failed to meet its initial burden (on summary judgment) to show that rescission was unavailable because of the plaintiffs’ inability to perform; (ii) the plaintiffs made an adequate showing of their ability to repay the loan proceeds; and (iii) the record reflected that HLC’s alleged violations were not mere technicalities, but consisted of systematic omissions of certain finance charges from required disclosures, and facially unlawful loan features. The court therefore declined to dismiss the plaintiffs’ rescission claims. HLC also requested the court to modify the rescission procedure, but the court determined that this request was premature. For a copy of the opinion, please contact .
Court Finds Foreclosure to Be an “Increase in Hazard” Requiring Notice to Insurer. The Tennessee Court of Appeals has ruled that an insurer does not have to pay a claim to a mortgage servicer because the servicer failed to notify the insurer of the initiation of foreclosure proceedings, which the court found to be an “increase in hazard.” U.S. Bank N.A. v. Tennessee Farmers Mut. Ins. Co., No. W2006-02536-COA-R3-CV, 2007 Tenn. App. Lexis 788 (Tenn. Ct. App., Dec. 21, 2007). In this case, the borrower defaulted on her mortgage, and the servicer initiated foreclosure. At that time the servicer did not notify borrower’s insurer of the foreclosure proceeding. The borrower subsequently filed for bankruptcy protection. During the bankruptcy proceedings, the home was destroyed by fire. The borrower’s fire insurance policy contained a “standard mortgage clause,” which required the servicer to notify the insurer of “any increase of hazard.” Tennessee state law also requires that mortgagees notify insurers of any “increase in hazard.” Claiming that the initiation of foreclosure proceedings was an “increase of hazard,” the insurer denied the claim. The trial court had initially found in favor of the servicer, but Court of Appeals reversed. The Court of Appeals noted that case law is split on the issue of whether foreclosure constitutes an “increase in hazard.” Still, the court emphasized that “an insured faced with imminent foreclosure has an incentive to destroy the house intentionally to receive the proceeds of the insurance policy.” For copy of the opinion, please contact .
FDIC Publishes “Case for Loan Modification,” Forward by Chairman Bair. On January 10, the Federal Deposit Insurance Corporation (FDIC) published an article advocating a more aggressive loan modification program to prevent foreclosures and protect the housing and credit markets. Printed in the winter edition of the FDIC Quarterly, the article includes a forward by FDIC Chairman Sheila Bair who has, during the recent foreclosure crisis, often advocated more sweeping modification policies than other federal regulators. In discussing the recent voluntary private initiative by banks to provide modifications, organized with the encouragement of the White House (reported in InfoBytes Dec. 7, 2007), Chairman Bair noted that “[a]n important component of the industry-led plan is detailed reporting of loan modification activity. Working with the Treasury Department and other bank regulators, the FDIC will monitor loan modification levels and seek adjustments to the protocols if warranted.” The paper discusses the loan modification process, and it identifies “misconceptions” such as (i) restructuring is a bailout of subprime borrowers and/or investors, (ii) restructuring will create a windfall for subprime borrowers, (iii) restructuring will deny investors their expected return, and (iv) restructuring is unnecessary based on past level of credit loss. To view this article, please see http://www.fdic.gov/bank/analytical/quarterly/2007_vol1_3/FeatureArticle_1_V1N3_Full.pdf.
Court Finds Accuracy of TILA Disclosures Dependent on Who Received Funds First. In Jackson v. The CIT Group/Consumer Finance, Inc., 2007 U.S. Dist. LEXIS 93306 (WDPA Dec. 19, 2007), the U.S. District Court for the Western District of Pennsylvania granted CIT Group/Consumer Finance, Inc.’s motion for summary judgment finding that a borrower’s subsequent disbursement of funds to a third party did not make the Truth in Lending Act (TILA) disclosure specifying the borrower as the recipient materially inaccurate. The court found that “[a]s a matter of form, the money ultimately directed to ... [the contractor] was first disbursed by check to the Plaintiff ... at the closing, and [Plaintiffs] then endorsed the check and returned it to the closing agent to be paid to ... [the contractor].” As a result, the court held that the disclosures were accurate in terms of the amount advanced by the defendant mortgage lender, even though the funds were subsequently redirected to a contractor at closing, because the full amount was initially issued to the borrower. For a copy of this opinion, please contact .
IRS Provides Guidance on Mortgage Insurance Premiums. On January 8, the Internal Revenue Service (IRS) issued a notice providing guidance on how companies must report mortgage insurance premiums (MIPs) and how individuals may allocate deductions for prepaid qualified MIPs for 2007 taxes. The guidance states that any filing entity receiving more than $600 in MIP payments in 2007 must report that fact in their 2007 Form 1098 in the manor prescribed. To view this notice, please see http://www.irs.gov/pub/irs-drop/n-08-15.pdf.
Proposed HOEPA Rules Published. On January 9, the Federal Register published rules proposed under the Home Ownership and Equity Protection Act (HOEPA) by the Federal Reserve Board (FRB) last month (reported in InfoBytes Dec. 21, 2007). Comments on the proposal are due to the FRB by April 8, 2008. For a copy of the rules as published, please see http://edocket.access.gpo.gov/2008/pdf/E7-25058.pdf.
FDIC Publishes “Case for Loan Modification,” Forward by Chairman Bair. On January 10, the Federal Deposit Insurance Corporation (FDIC) published an article advocating a more aggressive loan modification program to prevent foreclosures and protect the housing and credit markets. Printed in the winter edition of the FDIC Quarterly, the article includes a forward by FDIC Chairman Sheila Bair who has, during the recent foreclosure crisis, often advocated more sweeping modification policies than other federal regulators. In discussing the recent voluntary private initiative by banks to provide modifications, organized with the encouragement of the White House (reported in InfoBytes Dec. 7, 2007), Chairman Bair noted that “[a]n important component of the industry-led plan is detailed reporting of loan modification activity. Working with the Treasury Department and other bank regulators, the FDIC will monitor loan modification levels and seek adjustments to the protocols if warranted.” The paper discusses the loan modification process, and it identifies “misconceptions” such as (i) restructuring is a bailout of subprime borrowers and/or investors, (ii) restructuring will create a windfall for subprime borrowers, (iii) restructuring will deny investors their expected return, and (iv) restructuring is unnecessary based on past level of credit loss. To view this article, please see http://www.fdic.gov/bank/analytical/quarterly/2007_vol1_3/FeatureArticle_1_V1N3_Full.pdf.
FCC Rules That Autodial Collection Calls to Cell Phones Are Permissible. On January 4, the Federal Communications Commission (FCC) released a declaratory ruling specifying that autodial and prerecorded telephone calls to a wireless number by a creditor are permissible under the Telephone Consumer Protection Act (TCPA) if the debtor has granted “prior express consent.” The ruling comes in response to a petition by ACA International – a trade association for third party debt collectors – regarding an ambiguity in the FCC’s exemption from the TCPA’s prohibition on autodial and prerecorded telephone calls for debt collection calls to residences. In 2003, the FCC passed rules prohibiting “any call using an automatic telephone dialing system or an artificial or prerecorded message to any wireless telephone number.” ACA International then sought clarification as to whether the prohibition on autodial and prerecorded calls to wireless telephones applied to debt collection calls. In its declaratory ruling, the FCC stated that it does not apply to such calls, because, by giving a wireless number to a creditor in connection with a debt, a consumer has granted “prior express consent” to be contacted regarding that debt at that number. The ruling emphasizes that “prior express consent is deemed to be granted only if the wireless number was provided by the consumer to the creditor, and that such number was provided during the transaction that resulted in the debt owed.” While the ruling specifies that the exemption for creditors also extends to contracted third party collectors, it notes that in the event of a dispute of the existence of “prior express consent” by a debtor, “the burden will be on the creditor to show it obtained the necessary… consent.” For a copy of this ruling, please see http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-07-232A1.pdf.
FinCEN Rules Company Cashing Checks It Issued to Customers Not a MSB. The Financial Crimes Enforcement Network (FinCEN) recently released at November 15, 2007 guidance letter stating that a publicly traded company issuing checks to consumers and then cashing them itself does not qualify as a Money Services Business (MSB) with regards to registration and reporting requirements under the Bank Secrecy Act (BSA). The guidance letter came in response to a query by an unnamed company, in the business of consumer lending and tax return preparation, that cashes its own checks issued to loan customers as loan proceeds. In its letter, FinCEN stated that if the company was “only cashing a given loan check for the customer who is obtaining the loan, and not for a third party, then [the company is] in effect disbursing loan proceeds in cash” and does not qualify as a MSB. On a separate point, the letter also specified that the company, which in this case is publicly traded and “registered” with the Securities and Exchange Commission (SEC), did not qualify for the exemption for MSBs "registered with, and regulated or examined by, the [SEC] or the Commodity Futures Trading Commission." FinCEN noted that their guidance explicitly excluded from the exemptions companies whose securities are registered with the SEC but are not themselves registered, because the SEC “neither regulates nor examines the business activities of those companies.” For a copy of this letter, please see http://www.fincen.gov/FIN-2007-R001.html.
SEC Launches Online Investor Tool on Executive Compensation. On December 21, the Securities and Exchange Commission (SEC) announced that it now offers an online tool called the “Executive Compensation Reader” to enable investors to instantly compare executive compensation for 500 of the largest U.S. corporations. Selected comparisons can be viewed in both table and graphic format using criteria such as industry, public market capitalization or revenue. The information may also be downloaded to Microsoft Excel, thereby permitting users to create their own tables. The tool includes direct links to companies’ proxy statements, footnotes and the companies’ explanation of compensation decisions. The Executive Compensation Reader is available on the SEC’s Web site at http://www.sec.gov/xbrl.
Baltimore Files “Reverse Redlining” Suit. On January 8, the Mayor and City Council of Baltimore filed a complaint in federal court accusing Wells Fargo of targeting predominantly African-American portions of Baltimore with “deceptive, predatory or otherwise unfair lending practices because of the race or ethnicity of the area’s resident,” a practice the complaint calls “reverse redlining” and claims is a violation of the Fair Housing Act. Among the practices identified as abusive in the complaint were (i) failing to underwrite adjustable rate mortgages to the fully amortizing rate, (ii) encouraging borrowers to refinance into “unaffordable” mortgages, (iii) allowing brokers to charge yield spread premiums, (iv) not underwriting loans based on “traditional underwriting criteria” such as DTI and LTV ratios, FICO scores, documented assets and work history, (v) imposing prepayment penalties on borrowers attempting to refinance into prime loans, and (vi) charging “excessive” points and fees without any “benefits for the borrower.” To support these allegations, the complaint cites among other things (i) higher foreclosure rates in predominantly African-American tracts of the city, (ii) Home Mortgage Disclosure Act data showing a higher rate of placement of “high-cost” mortgages in predominantly African American tracts, (iii) Wells Fargo pricing sheets that allegedly show higher rates for smaller mortgage loans which the complaint argues disproportionately effects African-Americans, (iv) higher rate caps on adjustable rate mortgages made by Wells Fargo in African American neighborhoods, and (v) swifter foreclosures by Wells Fargo in predominately African-American areas. In the complaint, the City of Baltimore seeks “tens of millions of dollars” in compensatory damages for causes including (i) decreased property tax revenue due to lower home value caused by foreclosures, (ii) increased criminal activity due to the growing number of vacant homes, and (iii) increased expenditures for police and fire protection, property rehabilitation, and other city services caused by vacant properties, as well as punitive damages sufficient to “deter similar conduct in the future.” Baltimore Mayor Sheila Dixon stated in a press release that “foreclosures caused by reverse redlining create a very real and very dramatic ripple effect in our neighborhoods.” A copy of the complaint can be found on the plaintiff’s counsel’s website at http://www.relmanlaw.com/City of Baltimore v. Wells Fargo - 08-cv-62 - Complaint.pdf.
Speculated Inability to Produce Funds Does Not Merit Dismissal of Rescission Claims. In a recent action for rescission under the Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA), a federal district court in Alabama held that mere speculation that the plaintiffs in the case lacked the ability to tender the loan proceeds following rescission did not warrant dismissal of their rescission claims. Williams v. Saxon Mortgage Co., No. 06-0799-WS-B, 2008 U.S. Dist. LEXIS 131 (S.D. Ala. Jan. 2, 2008). Homeowners Loan Corporation (HLC), which made the loan at issue in the case, requested the court to order the plaintiffs to produce evidence of their ability to tender the loan proceeds, and to dismiss the rescission claims if the plaintiffs failed to come forward with satisfactory proof of such ability. According to the court, the relief sought by HLC was inappropriate for three reasons: (i) HLC failed to meet its initial burden (on summary judgment) to show that rescission was unavailable because of the plaintiffs’ inability to perform; (ii) the plaintiffs made an adequate showing of their ability to repay the loan proceeds; and (iii) the record reflected that HLC’s alleged violations were not mere technicalities, but consisted of systematic omissions of certain finance charges from required disclosures, and facially unlawful loan features. The court therefore declined to dismiss the plaintiffs’ rescission claims. HLC also requested the court to modify the rescission procedure, but the court determined that this request was premature. For a copy of the opinion, please contact .
Failure to Update Credit Information May Violate Bankruptcy Discharge Injunction. In a recent case, a federal bankruptcy court denied a motion to dismiss, holding that it is reasonable to infer that a deliberate refusal to update erroneous information on a credit report can constitute an act to collect a discharged debt in violation of federal bankruptcy law. In re Russell, 378 B.R. 735 (Bankr. E.D. N.Y. Dec. 6, 2007). In this case, the consumer (the debtor in the bankruptcy proceeding) accrued substantial credit card debt on Chase credit cards, which he did not pay. Chase reported the debt to the credit reporting agencies as past-due and owing and obtained a post-petition judgment on the debt, which it later agreed to vacate. The consumer then received a discharge of all pre-petition unsecured obligations, including the debt to Chase. The plaintiff alleged that despite receiving notice of the discharge order and a notice by the consumer’s lawyer that it was erroneously reporting the debt as past due and owing because the debt was discharged, Chase did not update its information to the credit reporting agencies. In addition, in response to investigation by the credit reporting agencies, Chase responded that the debt was still due and owing. The court agreed with the consumer that reporting a discharged debt could violate the discharge injunction and declined to dismiss the consumer’s allegations that Chase's failure to provide correct credit information, knowing that the plaintiff's ability to obtain new credit would be impaired, constituted an attempt to collect a discharged debt in violation of bankruptcy laws. The court held that Chase could be liable for civil sanctions including punitive damages. For a copy of this decision, please contact .
Fourth Circuit Reduces Emotional Damages in FCRA Credit Information Dispute. The U.S. Court of Appeals for the Fourth Circuit recently upheld a jury verdict awarding $106,000 for economic losses resulting from Fair Credit Reporting Act (FCRA) violations arising from a failure to correct invalid consumer information, but reduced the emotional distress award from $245,000 to $150,000. Sloane v. Equifax, No. 06-2044 (4th Cir. Dec. 27, 2007). In this case, the consumer plaintiff was successful at trial in claims that Equifax had violated FCRA by failing to correct information on a credit report arising from identity theft after repeated requests to do so, and by failing to follow its own identity theft procedures. In its appeal, the defendant argued that the plaintiff’s damages claims were based on speculation and conjecture. The Court of Appeals disagreed, citing evidence presented at trial by the plaintiff indicating multiple attempts to secure lines of credit from a variety of financial institutions, only to be either denied outright or offered credit at much higher cost than if the credit report had been accurate. The defendant further argued that the plaintiff suffered a “single, indivisible” injury, and as such, her economic damages should be reduced to take account of the settlements she had reached with the two other credit reporting agencies and involved financial institutions. The Fourth Circuit disagreed with this argument as well, reasoning that, although the defendant bore no responsibility for the initial identity theft, FCRA places responsibility on the defendant for taking reasonable steps to correct the plaintiff’s credit report once it is brought to the defendant’s attention—each failure to do so results in a separate harm. The Fourth Circuit agreed that the award for emotional distress of $245,000 was, to a degree, excessive, but not to the extent that the defendant argued, reducing that component of damages to $150,000. The Fourth Circuit also reversed and remanded the trial court decision on attorneys’ fees, noting that the district court had determined the attorneys’ fees without allowing the defendant to file briefs. For a copy of this opinion, please see http://pacer.ca4.uscourts.gov/opinion.pdf/062044.P.pdf.
Class Action Prohibition, Assented to by Web Site Visit, Not Unconscionable. A federal court in Illinois recently enforced an arbitration clause which included a class action waiver dismissing a Fair and Accurate Credit Transactions Act (FACTA) credit card truncation class action. Deaton v. Overstock.com, Inc., No. 07-cv-643-JPG (S.D. Ill., Dec. 27, 2007). In her complaint, the consumer alleged that an online merchant improperly included the expiration date of her credit card on an electronic receipt for her purchase in violation of the FACTA amendments to the Fair Credit Reporting Act. The defendant merchant moved to dismiss the consumer’s claims, arguing that, by accessing its website, the consumer agreed to arbitrate her claims in Utah and waived her ability to bring her claims as a class action. The consumer countered that the prohibitive costs associated with a Utah arbitration rendered the arbitration clause unenforceable, and that these same costs rendered the class action waiver unconscionable because the only effective method of protecting a consumer’s FACTA rights was through collective action. The court rejected the consumer’s arguments, finding that consumer had not met her burden of showing that arbitration would be any more expensive than litigation, and noting that the arbitration rules contemplated cost-reducing alternatives and that the defendant had agreed to pay the consumer’s portion of the arbitration costs. Reminding that – in the Seventh Circuit – class actions bars in arbitration agreements are not per se unconscionable, the court found that the class action bar in this case was not unconscionable because of the cost-reducing alternatives contained in the arbitration rules. For a copy of this opinion, please contact .
Court Finds Foreclosure to Be an “Increase in Hazard” Requiring Notice to Insurer. The Tennessee Court of Appeals has ruled that an insurer does not have to pay a claim to a mortgage servicer because the servicer failed to notify the insurer of the initiation of foreclosure proceedings, which the court found to be an “increase in hazard.” U.S. Bank N.A. v. Tennessee Farmers Mut. Ins. Co., No. W2006-02536-COA-R3-CV, 2007 Tenn. App. Lexis 788 (Tenn. Ct. App., Dec. 21, 2007). In this case, the borrower defaulted on her mortgage, and the servicer initiated foreclosure. At that time the servicer did not notify borrower’s insurer of the foreclosure proceeding. The borrower subsequently filed for bankruptcy protection. During the bankruptcy proceedings, the home was destroyed by fire. The borrower’s fire insurance policy contained a “standard mortgage clause,” which required the servicer to notify the insurer of “any increase of hazard.” Tennessee state law also requires that mortgagees notify insurers of any “increase in hazard.” Claiming that the initiation of foreclosure proceedings was an “increase of hazard,” the insurer denied the claim. The trial court had initially found in favor of the servicer, but Court of Appeals reversed. The Court of Appeals noted that case law is split on the issue of whether foreclosure constitutes an “increase in hazard.” Still, the court emphasized that “an insured faced with imminent foreclosure has an incentive to destroy the house intentionally to receive the proceeds of the insurance policy.” For copy of the opinion, please contact .
Court Finds Accuracy of TILA Disclosures Dependent on Who Received Funds First. In Jackson v. The CIT Group/Consumer Finance, Inc., 2007 U.S. Dist. LEXIS 93306 (WDPA Dec. 19, 2007), the U.S. District Court for the Western District of Pennsylvania granted CIT Group/Consumer Finance, Inc.’s motion for summary judgment finding that a borrower’s subsequent disbursement of funds to a third party did not make the Truth in Lending Act (TILA) disclosure specifying the borrower as the recipient materially inaccurate. The court found that “[a]s a matter of form, the money ultimately directed to ... [the contractor] was first disbursed by check to the Plaintiff ... at the closing, and [Plaintiffs] then endorsed the check and returned it to the closing agent to be paid to ... [the contractor].” As a result, the court held that the disclosures were accurate in terms of the amount advanced by the defendant mortgage lender, even though the funds were subsequently redirected to a contractor at closing, because the full amount was initially issued to the borrower. For a copy of this opinion, please contact .
Ninth Circuit Rules on Cases Remanded by the Supreme Court in Safeco v. Burr. On January 9, the Ninth Circuit Court of Appeals handed down rulings on three Fair Credit Reporting Act (FCRA) cases remanded by a consolidated ruling by the Supreme Court this summer (Safeco Insurance Co. v. Burr, No. 06-84 – reported in the June 4, 2007 InfoBytes Special Alert). Edo v. GEICO Casualty Co., 2008 WL 80635 (9th Cir. Jan. 9, 2008), Willes v. State Farm Fire & Casualty Co., 2008 WL 80631 (9th Cir. Jan. 9, 2008), Spano v. Safeco Corp., 2008 WL 80628 (9th Cir. Jan. 9, 2008). The court granted judgment to the insurers in all of the cases, either on substantive grounds because the Supreme Court held that adverse action did not occur, or because Safeco indicated that the consumers could not recover statutory damages under FCRA because the insurer’s misinterpretation of FCRA’s adverse action requirement was not “objectively unreasonable.” The opinions can be found at http://www.ca9.uscourts.gov/ca9/newopinions.nsf/.
Court Finds Foreclosure to Be an “Increase in Hazard” Requiring Notice to Insurer. The Tennessee Court of Appeals has ruled that an insurer does not have to pay a claim to a mortgage servicer because the servicer failed to notify the insurer of the initiation of foreclosure proceedings, which the court found to be an “increase in hazard.” U.S. Bank N.A. v. Tennessee Farmers Mut. Ins. Co., No. W2006-02536-COA-R3-CV, 2007 Tenn. App. Lexis 788 (Tenn. Ct. App., Dec. 21, 2007). In this case, the borrower defaulted on her mortgage, and the servicer initiated foreclosure. At that time the servicer did not notify borrower’s insurer of the foreclosure proceeding. The borrower subsequently filed for bankruptcy protection. During the bankruptcy proceedings, the home was destroyed by fire. The borrower’s fire insurance policy contained a “standard mortgage clause,” which required the servicer to notify the insurer of “any increase of hazard.” Tennessee state law also requires that mortgagees notify insurers of any “increase in hazard.” Claiming that the initiation of foreclosure proceedings was an “increase of hazard,” the insurer denied the claim. The trial court had initially found in favor of the servicer, but Court of Appeals reversed. The Court of Appeals noted that case law is split on the issue of whether foreclosure constitutes an “increase in hazard.” Still, the court emphasized that “an insured faced with imminent foreclosure has an incentive to destroy the house intentionally to receive the proceeds of the insurance policy.” For copy of the opinion, please contact .
Ninth Circuit Rules on Cases Remanded by the Supreme Court in Safeco v. Burr. On January 9, the Ninth Circuit Court of Appeals handed down rulings on three Fair Credit Reporting Act (FCRA) cases remanded by a consolidated ruling by the Supreme Court this summer (Safeco Insurance Co. v. Burr, No. 06-84 – reported in the June 4, 2007 InfoBytes Special Alert). Edo v. GEICO Casualty Co., 2008 WL 80635 (9th Cir. Jan. 9, 2008), Willes v. State Farm Fire & Casualty Co., 2008 WL 80631 (9th Cir. Jan. 9, 2008), Spano v. Safeco Corp., 2008 WL 80628 (9th Cir. Jan. 9, 2008). The court granted judgment to the insurers in all of the cases, either on substantive grounds because the Supreme Court held that adverse action did not occur, or because Safeco indicated that the consumers could not recover statutory damages under FCRA because the insurer’s misinterpretation of FCRA’s adverse action requirement was not “objectively unreasonable.” The opinions can be found at http://www.ca9.uscourts.gov/ca9/newopinions.nsf/.
Class Action Prohibition, Assented to by Web Site Visit, Not Unconscionable. A federal court in Illinois recently enforced an arbitration clause which included a class action waiver dismissing a Fair and Accurate Credit Transactions Act (FACTA) credit card truncation class action. Deaton v. Overstock.com, Inc., No. 07-cv-643-JPG (S.D. Ill., Dec. 27, 2007). In her complaint, the consumer alleged that an online merchant improperly included the expiration date of her credit card on an electronic receipt for her purchase in violation of the FACTA amendments to the Fair Credit Reporting Act. The defendant merchant moved to dismiss the consumer’s claims, arguing that, by accessing its website, the consumer agreed to arbitrate her claims in Utah and waived her ability to bring her claims as a class action. The consumer countered that the prohibitive costs associated with a Utah arbitration rendered the arbitration clause unenforceable, and that these same costs rendered the class action waiver unconscionable because the only effective method of protecting a consumer’s FACTA rights was through collective action. The court rejected the consumer’s arguments, finding that consumer had not met her burden of showing that arbitration would be any more expensive than litigation, and noting that the arbitration rules contemplated cost-reducing alternatives and that the defendant had agreed to pay the consumer’s portion of the arbitration costs. Reminding that – in the Seventh Circuit – class actions bars in arbitration agreements are not per se unconscionable, the court found that the class action bar in this case was not unconscionable because of the cost-reducing alternatives contained in the arbitration rules. For a copy of this opinion, please contact .
FCC Rules That Autodial Collection Calls to Cell Phones Are Permissible. On January 4, the Federal Communications Commission (FCC) released a declaratory ruling specifying that autodial and prerecorded telephone calls to a wireless number by a creditor are permissible under the Telephone Consumer Protection Act (TCPA) if the debtor has granted “prior express consent.” The ruling comes in response to a petition by ACA International – a trade association for third party debt collectors – regarding an ambiguity in the FCC’s exemption from the TCPA’s prohibition on autodial and prerecorded telephone calls for debt collection calls to residences. In 2003, the FCC passed rules prohibiting “any call using an automatic telephone dialing system or an artificial or prerecorded message to any wireless telephone number.” ACA International then sought clarification as to whether the prohibition on autodial and prerecorded calls to wireless telephones applied to debt collection calls. In its declaratory ruling, the FCC stated that it does not apply to such calls, because, by giving a wireless number to a creditor in connection with a debt, a consumer has granted “prior express consent” to be contacted regarding that debt at that number. The ruling emphasizes that “prior express consent is deemed to be granted only if the wireless number was provided by the consumer to the creditor, and that such number was provided during the transaction that resulted in the debt owed.” While the ruling specifies that the exemption for creditors also extends to contracted third party collectors, it notes that in the event of a dispute of the existence of “prior express consent” by a debtor, “the burden will be on the creditor to show it obtained the necessary… consent.” For a copy of this ruling, please see http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-07-232A1.pdf.
Fourth Circuit Reduces Emotional Damages in FCRA Credit Information Dispute. The U.S. Court of Appeals for the Fourth Circuit recently upheld a jury verdict awarding $106,000 for economic losses resulting from Fair Credit Reporting Act (FCRA) violations arising from a failure to correct invalid consumer information, but reduced the emotional distress award from $245,000 to $150,000. Sloane v. Equifax, No. 06-2044 (4th Cir. Dec. 27, 2007). In this case, the consumer plaintiff was successful at trial in claims that Equifax had violated FCRA by failing to correct information on a credit report arising from identity theft after repeated requests to do so, and by failing to follow its own identity theft procedures. In its appeal, the defendant argued that the plaintiff’s damages claims were based on speculation and conjecture. The Court of Appeals disagreed, citing evidence presented at trial by the plaintiff indicating multiple attempts to secure lines of credit from a variety of financial institutions, only to be either denied outright or offered credit at much higher cost than if the credit report had been accurate. The defendant further argued that the plaintiff suffered a “single, indivisible” injury, and as such, her economic damages should be reduced to take account of the settlements she had reached with the two other credit reporting agencies and involved financial institutions. The Fourth Circuit disagreed with this argument as well, reasoning that, although the defendant bore no responsibility for the initial identity theft, FCRA places responsibility on the defendant for taking reasonable steps to correct the plaintiff’s credit report once it is brought to the defendant’s attention—each failure to do so results in a separate harm. The Fourth Circuit agreed that the award for emotional distress of $245,000 was, to a degree, excessive, but not to the extent that the defendant argued, reducing that component of damages to $150,000. The Fourth Circuit also reversed and remanded the trial court decision on attorneys’ fees, noting that the district court had determined the attorneys’ fees without allowing the defendant to file briefs. For a copy of this opinion, please see http://pacer.ca4.uscourts.gov/opinion.pdf/062044.P.pdf.
FTC Solicits Comments on Credit Freeze Effectiveness. On January 10, the Federal Trade Commission (FTC) announced a request for comment on the impact of credit report freezes on combating and reducing the costs of identity theft. The request specifies several topics for comment, including, among many others, (i) proposals to create a centralized freeze system alleviating the need for consumers to contact all three credit reporting agencies (CRAs), (ii) an appropriate time limit on the imposition and removal of freezes, and (iii) how to inform consumers of the benefits and means of imposing a credit freeze. A consumers’ right to freeze their credit information is currently authorized under the law of 39 states and the District of Columbia, as well as by each of the CRAs through voluntary programs they have developed. Comments are due by February 25, 2008. For more information on the solicitation, and how to comment, please see http://www.ftc.gov/opa/2008/01/freeze.shtm.
Failure to Update Credit Information May Violate Bankruptcy Discharge Injunction. In a recent case, a federal bankruptcy court denied a motion to dismiss, holding that it is reasonable to infer that a deliberate refusal to update erroneous information on a credit report can constitute an act to collect a discharged debt in violation of federal bankruptcy law. In re Russell, 378 B.R. 735 (Bankr. E.D. N.Y. Dec. 6, 2007). In this case, the consumer (the debtor in the bankruptcy proceeding) accrued substantial credit card debt on Chase credit cards, which he did not pay. Chase reported the debt to the credit reporting agencies as past-due and owing and obtained a post-petition judgment on the debt, which it later agreed to vacate. The consumer then received a discharge of all pre-petition unsecured obligations, including the debt to Chase. The plaintiff alleged that despite receiving notice of the discharge order and a notice by the consumer’s lawyer that it was erroneously reporting the debt as past due and owing because the debt was discharged, Chase did not update its information to the credit reporting agencies. In addition, in response to investigation by the credit reporting agencies, Chase responded that the debt was still due and owing. The court agreed with the consumer that reporting a discharged debt could violate the discharge injunction and declined to dismiss the consumer’s allegations that Chase's failure to provide correct credit information, knowing that the plaintiff's ability to obtain new credit would be impaired, constituted an attempt to collect a discharged debt in violation of bankruptcy laws. The court held that Chase could be liable for civil sanctions including punitive damages. For a copy of this decision, please contact .
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