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InfoBytes
CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS
Topics – Covered This Week (Click to View)
FEDERAL ISSUES
OFHEO Releases New Mortgage Fraud Program Guidance. On January 10, the Office of Federal Housing Enterprise Oversight (OFHEO) issued new examination guidance for evaluating Fannie Mae and Freddie Mac’s mortgage fraud detection programs. The publication, Policy Guidance PG-08-001, replaces guidance from 2005 and modifies several aspects of the previous guidelines for the Government Sponsored Enterprises (GSEs), including (i) permitting the GSEs to identify patterns “of related conduct or behavior that is interpreted as mortgage fraud” in their reporting, (ii) requires immediate notification to OFHEO in the event of “insider” fraud, (iii) alters reporting requirements to FinCEN by the GSEs, and (iv) “clarifies” the definition of mortgage fraud to include the use of false statements of identification, documentation employment and earnings, and appraisals. For a full copy of the guidance, please see http://www.ofheo.gov/media/guidance/MFGuidance08-001.pdf.
FDIC Chairman Holds Out Possibility of Government Intervention in Mortgage Crisis. On January 17, while addressing a conference on mortgage securitizing, Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair suggested, during a wide-ranging speech on the market, that if the foreclosure crisis worsens, the government may intervene. Noting that Congress was already considering several proposals, Chairman Bair said “I very much believe in the market. But if market solutions fail to solve the problem, government will step in.” The speech also covered topics on the risks and future of structured investment vehicles, the restructuring initiative, and the risks of a slowing economy. For a copy of her remarks, please see http://www.fdic.gov/news/news/speeches/chairman/spjan1708.html.
STATE ISSUES
Arizona Governor Announces Mortgage Regulation Initiative. On January 14, Arizona Governor Janet Napolitano in her state of the state address announced a three pronged plan to address the “subprime-lending debacle” including (i) an educational “Homebuyer’s Bill of Rights,” (ii) legislation to license “equity purchasers” or foreclosure lenders, and (iii) legislation to license loan officers. She explicitly called on legislators to pass the Arizona Home Equity Theft Protection Act in order to “put the bad guys out of work.” For a copy of the governor’s speech, please see http://azgovernor.gov/documents/2008%20SOS%20Address.pdf.
Michigan Governor Pursues Freeze Arrangement with Servicers. On January 11, Michigan Governor Jennifer Granholm announced that she had met with four major mortgage servicers and had received “assurances” regarding freezing the adjustable rates of mortgages for certain high risk borrowers. The announcement follows similar action by the Governor of California and the HOPE NOW initiative brokered by the White House (reported in InfoBytes for Nov. 30, 2007 and Dec. 7, 2007 respectively). In her announcement, Gov. Granholm said that the protocols discussed with servicers included plans to “proactively reach out to borrowers in advance of their mortgage rates being reset” to workout alternatives and consider rate freezes. The Governor also called for the legislature to expand the number of state regulators to strengthen oversight. For a copy of the official press release, please see http://www.michigan.gov/gov/0,1607,7-168-23442_21974-183346--,00.html.
COURTS
Cleveland Sues 21 Wall Street Banks over Foreclosures. On January 14, the City of Cleveland filed a complaint in state court against most of the prominent securitizers in the mortgage industry alleging that the growth of subprime mortgages “and the corresponding foreclosures” constituted a “public nuisance” under common law. City of Cleveland v. Deutsche Bank Trust Company et al, No. CV-08-646970, (OH CP. Ct., Jan 14, 2008). The complaint seeks direct and proximate damages for (i) monitoring, maintenance, and demolition costs incurred in connection with foreclosed properties and (ii) reduced city property tax revenue due to property devaluation from foreclosures. Among the many novel arguments put forward in the complaint, Cleveland argues that the securitizing banks “should have eliminated Cleveland as a market for sub-prime lending” based on the economic hardship and decline the city was facing, a position with interesting ramifications for purposes of fair lending and red-lining. Cleveland Mayor Frank Jackson issued a press release stating that, by filing this suit, he was “confront[ing] the foreclosure crisis at its very core.” For a copy of the complaint, please contact .
Class Certification Granted in RESPA § 8(b) Case. The Eleventh Circuit reversed a district court’s denial of class certification in a case alleging violations of § 8(b) of the Real Estate Settlement Procedures Act (RESPA). Busby v. JRHBW Realty, Inc., No. 06-15308, 2008 U.S. App. Lexis 996 (11th Cir., Jan. 17, 2008). The plaintiff Busby purchased a home and, in addition to paying a real estate brokerage commission, was charged an Administrative Brokerage Commission Fee (“ABC Fee”) of $149 at closing. Busby filed suit on behalf of herself and all others who were charged an ABC Fee, alleging that the fee violated RESPA as a fee charged for unperformed services. The district court denied her motion for class certification, finding that individual factual issues predominated the class. Relying upon Heimmermann v. First Union Mort. Corp., 305 F.3d 1257, 1264 (11th Cir. 2002) (addressing claims that yield spread premiums were unreasonably excessive) to deny class certification under RESPA § 8(a), the district court determined that the excessiveness of a fee must be gleaned on a case-by-case basis. The Eleventh Circuit reversed, finding that the district court applied the wrong legal standard. The Eleventh Circuit emphasized that Busby and the purported class claimed that no work had been done in exchange for the ABC Fee, not that the fee was excessive. Thus, the court noted, class treatment is appropriate because “a simple binary determination of ‘any services’ or ‘no services’ is all that need be done.” A copy of the opinion is available at http://www.ca11.uscourts.gov/opinions/ops/200615308.pdf.
Supreme Court Narrows Scope of Recovery under Securities Antifraud Provisions. The Supreme Court ruled, in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. No. 06-43 (U.S., Jan. 15, 2008), that defrauded investors in a publicly-traded company did not adequately plead reliance, and could not recover damages, under the antifraud provisions of Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5. The investors had brought suit against one of the company’s customers/suppliers, or “vendors,” alleging it had agreed to back-dating and other irregular arrangements. The investors further alleged that the backdating and other arrangements had enabled the company to mislead its auditors and to issue materially misleading financial statements to public investors. The Court focused on whether the investors relied on any deceptive acts of the vendor in question in purchasing securities of the company and found that nothing the vendor did made it necessary or inevitable for the company to falsely record the transactions as it did. With this holding, the Supreme Court reaffirmed that a private right of action under Section 10(b) and Rule 10b-5 does not extend to aiders and abettors. Therefore, for conduct by a secondary actor to be actionable each of the elements of Rule 10b-5 liability must be satisfied, which includes the requirement that a plaintiff must prove reliance upon either a defendant’s material misrepresentation or upon a material omission if there is a duty to disclose. The Court determined that, based on the facts presented, the vendor had no affirmative duty to disclose the true nature of the arrangements, nor were the arrangements it entered into falsely communicated by it to the investing public during the relevant period. As a result, the investors were unable to show reliance on the vendor’s actions, except in an indirect chain too remote for liability. For a copy of the Court’s opinion, please see http://www.supremecourtus.gov/opinions/07pdf/06-43.pdf.
TILA Claim Against MERS Survives Motion to Dismiss. A federal district court recently denied a motion to dismiss a Truth in Lending Act (TILA) claim against the Mortgage Electronic Registration System (MERS), rejecting MERS’s argument that it was neither the creditor or assignee of the loan in question. Newman v. Apex Financial Group, Inc. No. 07-c-4475 2008 U.S. Dist. LEXIS 2249 (N.D. Ill. Jan. 11, 2008). The borrower brought suit against the broker, the alleged mortgage broker firm, several successor lenders and banks, and MERS alleging he was defrauded by a mortgage broker who allocated more of a fifth of the proceeds of the loan to himself. Among the many statutes under which claims were brought, the borrower alleged MERS was liable for violations of TILA. MERS moved to dismiss arguing that “a TILA claim can only be brought against a creditor of the plaintiff or an assignee of the creditor.” The court denied the motion noting that, (i) as holder of the title, MERS has certain powers such as the ability to foreclose which, if exercised, would interfere with the proceedings of the case and (ii) the borrower can “acquire complete relief only with the inclusion of MERS.” For a copy of this opinion, please contact .
Applicant’s Same Day Receipt of Adverse Action and Rights Notices May Violate FCRA. A federal district court recently denied Wal-Mart summary judgment on Fair Credit Reporting Act (FCRA) claims brought by a job applicant alleging adverse action was taken before the applicant had an opportunity to correct inaccuracies in his criminal background report. Beverly v. Wal-Mart Stores, Inc., No. 07-469, 2008 U.S. Dist. LEXIS 2266 (E.D. Va. Jan. 11, 2008). The plaintiff applied for a job at Wal-Mart, and as part of the application process signed an authorization allowing the defendant to conduct a criminal background check. Wal-Mart delegated to a separate company the task of running the background check and providing the applicant with the proper notices under FCRA. When the background check showed prior infractions, the company notified the applicant by letter that the check included public record information that would likely have an adverse effect on the applicant's ability to secure employment, and five days later, sent a second letter notifying the applicant that Wal-Mart would not make an offer of employment based in whole or in part on the information in the background report. The applicant sued Wal-Mart, contending that Wal-Mart failed to comply with FCRA notice procedures because it took an adverse action against him without providing him reasonable opportunity to correct the inaccuracies on the report. Wal-Mart moved for summary judgment, stating that (i) because it eventually hired the applicant, it did not take an "adverse action"; and (ii) that the applicant was mailed the notification letter prior to receiving the adverse action letter. The court stated that the action was clearly an adverse action, and that because the applicant received both letters on the same day, a reasonable jury could determine that the adverse action was taken before the applicant had an opportunity to correct inaccurate information in his report. Consequently, the court denied the motion for summary judgment. For a copy of the case, please contact .
Court Finds Check Verification Codes Can Be Consumer Reports. On January 10, in ruling on the parties’ summary judgment motions, the U.S. District Court for the Middle District of Tennessee found, among other things, that (i) simple numeric codes recommending whether to accept a check are “consumer reports” for Fair Credit Reporting Act (FCRA) purposes when issued by a consumer reporting agency, and (ii) the U.S. Supreme Court’s recent Safeco holding does not eliminate the relevance of pattern and practice proof to showing whether a violation was willful. Holmes v. Telecheck Int’l, Inc., No. 3:05-0633, 2008 WL 118064 (M.D. Tenn. Jan. 10, 2008). The consumer plaintiff presented as payments to four merchants six checks. On the recommendation of TeleCheck, a provider of check verification services largely based on a database it maintains of consumer check writing histories, five of the six checks were declined at the point of sale. The merchant ultimately accepted the other check, but TeleCheck initially issued a code requiring the merchant to whom the plaintiff had presented the check to contact TeleCheck to provide additional information regarding the transaction. The plaintiff alleged that TeleCheck violated the Fair Credit Reporting Act (FCRA) in a number of ways. The court found that TeleCheck was a consumer reporting agency under the FCRA, and that the numeric codes issued to merchants by TeleCheck constitute consumer reports under FCRA. On the issue of damages, the court noted that the U.S. Supreme Court held in Safeco Ins. Co. of Am. v. Burr, 127 S.Ct. 2201 (2007) (reported in the InfoBytes Special Alert June 4, 2007), that punitive and statutory damages may be recovered under the FCRA only if a plaintiff demonstrates (i) the defendant knowingly violated her FCRA rights or (ii) the defendant acted with reckless disregard for those rights. The court determined, however, that the Safeco ruling did not eliminate the relevance of pattern and practice proof to establishing willfulness. Please contact for a copy of this decision.
Web Sale Terms Binding Despite Specifying Different Product. A federal district court recently ruled that terms and conditions for a website television purchase were valid, despite the fact the click wrap agreement explicitly mentioned “computers” rather than “televisions,” in part because the consumer “could not have purchased a computer without actively choosing to click the computer indicating their agreement” to the terms. Davis v. Dell, Inc. No. 07-630 (D.N.J. Dec. 28, 2007). The consumer purchased a television through Dell’s website. The transaction included terms and conditions including an arbitration agreement, a forum selection clause, and a bar on class actions. The agreement specified that it applied to the “purchase of computer systems and/or related products and/or services and support.” Among other things, the consumer argued that the agreement did not apply because a television did not fall into any of those three categories. Despite agreeing that the terms were “not ambiguous, and that a television is not a ‘computer system’ or ‘related product’” the court ruled that because the consumer “clicked the computer” statement “I AGREE to Dell’s Terms and Conditions of Sale” they applied to the transaction. The court also briefly noted that printed materials were shipped with the television informing the purchaser that all sales are subject to Dell’s “Terms and Conditions of Sale.” For a copy of this decision, please contact .
Merchant’s Argument That Telephone Sale Not under FACTA Fails. A federal district court recently rejected an audio equipment merchant’s argument that a “point of sale” under the Fair and Accurate Credit Transactions Act (FACTA) amendments to FCRA is a “precise location within a store” and therefore did not apply to a receipt produced through a telephone transaction. Ehrheart v. Bose Corp., No. 07-350 2008 WL 64491 (W.D. Pa. Jan. 4, 2008). The consumer made a purchase from a Bose store via telephone, and her credit card information was recorded by a clerk hand-on-paper. The clerk then printed a receipt using the store’s register, which the court noted was not shown (i) to be separate from the register used by walk-in customers or (ii) to differ in any way from a receipt she would have received had she purchased the item in person. The clerk then shipped the purchase and the receipt, which allegedly included the credit card’s expiration date in violation of FACTA, to the consumer. In response to the class action suit brought by the consumer, Bose argued that a receipt printed 70 miles away from the consumer did not qualify as being at the “point of sale” under FACTA, which it argued “is to protect a consumer’s private information from being displayed in the busy, high traffic areas of public stores.” While agreeing the defendant’s argument “may be true in part” the court, citing Vasquez-Torres v. Stubhub, Inc. (reported in InfoBytes Sept. 7, 2007) reasoned that in passing FACTA the “Congress likely intended to prevent identity theft in all its forms, including common online identity theft.” Therefore the court rejected Bose’s argument, and denied its motion for summary judgment. For a copy of this opinion, please contact .
FIRM NEWS
Matthew Previn will be speaking at the American Conference Institute’s conference on Consumer Finance Class Actions and Litigation held January 29-30 in New York City. Mr. Previn will be participating in a panel entitled “Responding to Government Investigations and Enforcement – While Minimizing Potential for Follow-On Litigation,” which will discuss topics including (i) recent federal enforcement activity, (ii) issues currently subject to regulatory investigations, (iii) requirements to disclose investigations by regulators, (iv) structuring settlements to prevent follow-on litigations, and (v) techniques to prevent enforcement actions from spawning civil litigation. In addition, Mr. Previn will co-lead with Pat Cipollone of Kirkland & Ellis a post-conference workshop entitled “Managing Government Investigations - Boot Camp for Consumer Finance Counsel.” For more information, or to register, please see http://www.americanconference.com/finance/consfinlit.htm.
Margo Tank will be speaking in a webinar entitled “Evidence Requirements for Electronic Signatures & Records” on January 30, from 2:00 PM – 3:00 PM ET. The seminar will focus on (i) the legal holdings on the validity of electronic signatures and records, (ii) comparing the reliability of electronic records and signatures to their paper counterparts, (iii) methods to ensure the enforceability of online transactions, and (iv) assessing the most reliable types of e-signatures. For more information, or to register, please see http://www.silanis.com/resource-center/webcasts/01302008_Buckley/2008/evidence-requirements-for-electronic-signatures.html.
Jon Jerison and Kirk Jensen will present an audio conference entitled “For All Mortgage Lenders: Dealing with the Fallout from the Current Lending Crisis” on February 6, 2008, from 1:00 PM – 2:30 PM ET. The topics discussed will include the Federal Reserve Board’s pending HOEPA consumer protection rules and Senate Banking Committee Chairman Christopher Dodd’s recently introduced “Home Ownership Preservation and Protection Act” (reported in InfoBytes Dec. 21, 2007 and InfoBytes Dec. 14, 2007 respectively). The conference will be followed by a thirty minute interactive Q&A session with Mr. Jerison and Mr. Jensen. For more information, or to register, please see http://www.aspratt.com/store/77B.php.
Cleveland Sues 21 Wall Street Banks over Foreclosures. On January 14, the City of Cleveland filed a complaint in state court against most of the prominent securitizers in the mortgage industry alleging that the growth of subprime mortgages “and the corresponding foreclosures” constituted a “public nuisance” under common law. City of Cleveland v. Deutsche Bank Trust Company et al, No. CV-08-646970, (OH CP. Ct., Jan 14, 2008). The complaint seeks direct and proximate damages for (i) monitoring, maintenance, and demolition costs incurred in connection with foreclosed properties and (ii) reduced city property tax revenue due to property devaluation from foreclosures. Among the many novel arguments put forward in the complaint, Cleveland argues that the securitizing banks “should have eliminated Cleveland as a market for sub-prime lending” based on the economic hardship and decline the city was facing, a position with interesting ramifications for purposes of fair lending and red-lining. Cleveland Mayor Frank Jackson issued a press release stating that, by filing this suit, he was “confront[ing] the foreclosure crisis at its very core.” For a copy of the complaint, please contact .
Class Certification Granted in RESPA § 8(b) Case. The Eleventh Circuit reversed a district court’s denial of class certification in a case alleging violations of § 8(b) of the Real Estate Settlement Procedures Act (RESPA). Busby v. JRHBW Realty, Inc., No. 06-15308, 2008 U.S. App. Lexis 996 (11th Cir., Jan. 17, 2008). The plaintiff Busby purchased a home and, in addition to paying a real estate brokerage commission, was charged an Administrative Brokerage Commission Fee (“ABC Fee”) of $149 at closing. Busby filed suit on behalf of herself and all others who were charged an ABC Fee, alleging that the fee violated RESPA as a fee charged for unperformed services. The district court denied her motion for class certification, finding that individual factual issues predominated the class. Relying upon Heimmermann v. First Union Mort. Corp., 305 F.3d 1257, 1264 (11th Cir. 2002) (addressing claims that yield spread premiums were unreasonably excessive) to deny class certification under RESPA § 8(a), the district court determined that the excessiveness of a fee must be gleaned on a case-by-case basis. The Eleventh Circuit reversed, finding that the district court applied the wrong legal standard. The Eleventh Circuit emphasized that Busby and the purported class claimed that no work had been done in exchange for the ABC Fee, not that the fee was excessive. Thus, the court noted, class treatment is appropriate because “a simple binary determination of ‘any services’ or ‘no services’ is all that need be done.” A copy of the opinion is available at http://www.ca11.uscourts.gov/opinions/ops/200615308.pdf.
TILA Claim Against MERS Survives Motion to Dismiss. A federal district court recently denied a motion to dismiss a Truth in Lending Act (TILA) claim against the Mortgage Electronic Registration System (MERS), rejecting MERS’s argument that it was neither the creditor or assignee of the loan in question. Newman v. Apex Financial Group, Inc. No. 07-c-4475 2008 U.S. Dist. LEXIS 2249 (N.D. Ill. Jan. 11, 2008). The borrower brought suit against the broker, the alleged mortgage broker firm, several successor lenders and banks, and MERS alleging he was defrauded by a mortgage broker who allocated more of a fifth of the proceeds of the loan to himself. Among the many statutes under which claims were brought, the borrower alleged MERS was liable for violations of TILA. MERS moved to dismiss arguing that “a TILA claim can only be brought against a creditor of the plaintiff or an assignee of the creditor.” The court denied the motion noting that, (i) as holder of the title, MERS has certain powers such as the ability to foreclose which, if exercised, would interfere with the proceedings of the case and (ii) the borrower can “acquire complete relief only with the inclusion of MERS.” For a copy of this opinion, please contact .
OFHEO Releases New Mortgage Fraud Program Guidance. On January 10, the Office of Federal Housing Enterprise Oversight (OFHEO) issued new examination guidance for evaluating Fannie Mae and Freddie Mac’s mortgage fraud detection programs. The publication, Policy Guidance PG-08-001, replaces guidance from 2005 and modifies several aspects of the previous guidelines for the Government Sponsored Enterprises (GSEs), including (i) permitting the GSEs to identify patterns “of related conduct or behavior that is interpreted as mortgage fraud” in their reporting, (ii) requires immediate notification to OFHEO in the event of “insider” fraud, (iii) alters reporting requirements to FinCEN by the GSEs, and (iv) “clarifies” the definition of mortgage fraud to include the use of false statements of identification, documentation employment and earnings, and appraisals. For a full copy of the guidance, please see http://www.ofheo.gov/media/guidance/MFGuidance08-001.pdf.
Arizona Governor Announces Mortgage Regulation Initiative. On January 14, Arizona Governor Janet Napolitano in her state of the state address announced a three pronged plan to address the “subprime-lending debacle” including (i) an educational “Homebuyer’s Bill of Rights,” (ii) legislation to license “equity purchasers” or foreclosure lenders, and (iii) legislation to license loan officers. She explicitly called on legislators to pass the Arizona Home Equity Theft Protection Act in order to “put the bad guys out of work.” For a copy of the governor’s speech, please see http://azgovernor.gov/documents/2008%20SOS%20Address.pdf.
Michigan Governor Pursues Freeze Arrangement with Servicers. On January 11, Michigan Governor Jennifer Granholm announced that she had met with four major mortgage servicers and had received “assurances” regarding freezing the adjustable rates of mortgages for certain high risk borrowers. The announcement follows similar action by the Governor of California and the HOPE NOW initiative brokered by the White House (reported in InfoBytes for Nov. 30, 2007 and Dec. 7, 2007 respectively). In her announcement, Gov. Granholm said that the protocols discussed with servicers included plans to “proactively reach out to borrowers in advance of their mortgage rates being reset” to workout alternatives and consider rate freezes. The Governor also called for the legislature to expand the number of state regulators to strengthen oversight. For a copy of the official press release, please see http://www.michigan.gov/gov/0,1607,7-168-23442_21974-183346--,00.html.
FDIC Chairman Holds Out Possibility of Government Intervention in Mortgage Crisis. On January 17, while addressing a conference on mortgage securitizing, Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair suggested, during a wide-ranging speech on the market, that if the foreclosure crisis worsens, the government may intervene. Noting that Congress was already considering several proposals, Chairman Bair said “I very much believe in the market. But if market solutions fail to solve the problem, government will step in.” The speech also covered topics on the risks and future of structured investment vehicles, the restructuring initiative, and the risks of a slowing economy. For a copy of her remarks, please see http://www.fdic.gov/news/news/speeches/chairman/spjan1708.html.
Cleveland Sues 21 Wall Street Banks over Foreclosures. On January 14, the City of Cleveland filed a complaint in state court against most of the prominent securitizers in the mortgage industry alleging that the growth of subprime mortgages “and the corresponding foreclosures” constituted a “public nuisance” under common law. City of Cleveland v. Deutsche Bank Trust Company et al, No. CV-08-646970, (OH CP. Ct., Jan 14, 2008). The complaint seeks direct and proximate damages for (i) monitoring, maintenance, and demolition costs incurred in connection with foreclosed properties and (ii) reduced city property tax revenue due to property devaluation from foreclosures. Among the many novel arguments put forward in the complaint, Cleveland argues that the securitizing banks “should have eliminated Cleveland as a market for sub-prime lending” based on the economic hardship and decline the city was facing, a position with interesting ramifications for purposes of fair lending and red-lining. Cleveland Mayor Frank Jackson issued a press release stating that, by filing this suit, he was “confront[ing] the foreclosure crisis at its very core.” For a copy of the complaint, please contact .
Michigan Governor Pursues Freeze Arrangement with Servicers. On January 11, Michigan Governor Jennifer Granholm announced that she had met with four major mortgage servicers and had received “assurances” regarding freezing the adjustable rates of mortgages for certain high risk borrowers. The announcement follows similar action by the Governor of California and the HOPE NOW initiative brokered by the White House (reported in InfoBytes for Nov. 30, 2007 and Dec. 7, 2007 respectively). In her announcement, Gov. Granholm said that the protocols discussed with servicers included plans to “proactively reach out to borrowers in advance of their mortgage rates being reset” to workout alternatives and consider rate freezes. The Governor also called for the legislature to expand the number of state regulators to strengthen oversight. For a copy of the official press release, please see http://www.michigan.gov/gov/0,1607,7-168-23442_21974-183346--,00.html.
FDIC Chairman Holds Out Possibility of Government Intervention in Mortgage Crisis. On January 17, while addressing a conference on mortgage securitizing, Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair suggested, during a wide-ranging speech on the market, that if the foreclosure crisis worsens, the government may intervene. Noting that Congress was already considering several proposals, Chairman Bair said “I very much believe in the market. But if market solutions fail to solve the problem, government will step in.” The speech also covered topics on the risks and future of structured investment vehicles, the restructuring initiative, and the risks of a slowing economy. For a copy of her remarks, please see http://www.fdic.gov/news/news/speeches/chairman/spjan1708.html.
Supreme Court Narrows Scope of Recovery under Securities Antifraud Provisions. The Supreme Court ruled, in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. No. 06-43 (U.S., Jan. 15, 2008), that defrauded investors in a publicly-traded company did not adequately plead reliance, and could not recover damages, under the antifraud provisions of Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5. The investors had brought suit against one of the company’s customers/suppliers, or “vendors,” alleging it had agreed to back-dating and other irregular arrangements. The investors further alleged that the backdating and other arrangements had enabled the company to mislead its auditors and to issue materially misleading financial statements to public investors. The Court focused on whether the investors relied on any deceptive acts of the vendor in question in purchasing securities of the company and found that nothing the vendor did made it necessary or inevitable for the company to falsely record the transactions as it did. With this holding, the Supreme Court reaffirmed that a private right of action under Section 10(b) and Rule 10b-5 does not extend to aiders and abettors. Therefore, for conduct by a secondary actor to be actionable each of the elements of Rule 10b-5 liability must be satisfied, which includes the requirement that a plaintiff must prove reliance upon either a defendant’s material misrepresentation or upon a material omission if there is a duty to disclose. The Court determined that, based on the facts presented, the vendor had no affirmative duty to disclose the true nature of the arrangements, nor were the arrangements it entered into falsely communicated by it to the investing public during the relevant period. As a result, the investors were unable to show reliance on the vendor’s actions, except in an indirect chain too remote for liability. For a copy of the Court’s opinion, please see http://www.supremecourtus.gov/opinions/07pdf/06-43.pdf.
Cleveland Sues 21 Wall Street Banks over Foreclosures. On January 14, the City of Cleveland filed a complaint in state court against most of the prominent securitizers in the mortgage industry alleging that the growth of subprime mortgages “and the corresponding foreclosures” constituted a “public nuisance” under common law. City of Cleveland v. Deutsche Bank Trust Company et al, No. CV-08-646970, (OH CP. Ct., Jan 14, 2008). The complaint seeks direct and proximate damages for (i) monitoring, maintenance, and demolition costs incurred in connection with foreclosed properties and (ii) reduced city property tax revenue due to property devaluation from foreclosures. Among the many novel arguments put forward in the complaint, Cleveland argues that the securitizing banks “should have eliminated Cleveland as a market for sub-prime lending” based on the economic hardship and decline the city was facing, a position with interesting ramifications for purposes of fair lending and red-lining. Cleveland Mayor Frank Jackson issued a press release stating that, by filing this suit, he was “confront[ing] the foreclosure crisis at its very core.” For a copy of the complaint, please contact .
Cleveland Sues 21 Wall Street Banks over Foreclosures. On January 14, the City of Cleveland filed a complaint in state court against most of the prominent securitizers in the mortgage industry alleging that the growth of subprime mortgages “and the corresponding foreclosures” constituted a “public nuisance” under common law. City of Cleveland v. Deutsche Bank Trust Company et al, No. CV-08-646970, (OH CP. Ct., Jan 14, 2008). The complaint seeks direct and proximate damages for (i) monitoring, maintenance, and demolition costs incurred in connection with foreclosed properties and (ii) reduced city property tax revenue due to property devaluation from foreclosures. Among the many novel arguments put forward in the complaint, Cleveland argues that the securitizing banks “should have eliminated Cleveland as a market for sub-prime lending” based on the economic hardship and decline the city was facing, a position with interesting ramifications for purposes of fair lending and red-lining. Cleveland Mayor Frank Jackson issued a press release stating that, by filing this suit, he was “confront[ing] the foreclosure crisis at its very core.” For a copy of the complaint, please contact .
Class Certification Granted in RESPA § 8(b) Case. The Eleventh Circuit reversed a district court’s denial of class certification in a case alleging violations of § 8(b) of the Real Estate Settlement Procedures Act (RESPA). Busby v. JRHBW Realty, Inc., No. 06-15308, 2008 U.S. App. Lexis 996 (11th Cir., Jan. 17, 2008). The plaintiff Busby purchased a home and, in addition to paying a real estate brokerage commission, was charged an Administrative Brokerage Commission Fee (“ABC Fee”) of $149 at closing. Busby filed suit on behalf of herself and all others who were charged an ABC Fee, alleging that the fee violated RESPA as a fee charged for unperformed services. The district court denied her motion for class certification, finding that individual factual issues predominated the class. Relying upon Heimmermann v. First Union Mort. Corp., 305 F.3d 1257, 1264 (11th Cir. 2002) (addressing claims that yield spread premiums were unreasonably excessive) to deny class certification under RESPA § 8(a), the district court determined that the excessiveness of a fee must be gleaned on a case-by-case basis. The Eleventh Circuit reversed, finding that the district court applied the wrong legal standard. The Eleventh Circuit emphasized that Busby and the purported class claimed that no work had been done in exchange for the ABC Fee, not that the fee was excessive. Thus, the court noted, class treatment is appropriate because “a simple binary determination of ‘any services’ or ‘no services’ is all that need be done.” A copy of the opinion is available at http://www.ca11.uscourts.gov/opinions/ops/200615308.pdf.
Supreme Court Narrows Scope of Recovery under Securities Antifraud Provisions. The Supreme Court ruled, in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. No. 06-43 (U.S., Jan. 15, 2008), that defrauded investors in a publicly-traded company did not adequately plead reliance, and could not recover damages, under the antifraud provisions of Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5. The investors had brought suit against one of the company’s customers/suppliers, or “vendors,” alleging it had agreed to back-dating and other irregular arrangements. The investors further alleged that the backdating and other arrangements had enabled the company to mislead its auditors and to issue materially misleading financial statements to public investors. The Court focused on whether the investors relied on any deceptive acts of the vendor in question in purchasing securities of the company and found that nothing the vendor did made it necessary or inevitable for the company to falsely record the transactions as it did. With this holding, the Supreme Court reaffirmed that a private right of action under Section 10(b) and Rule 10b-5 does not extend to aiders and abettors. Therefore, for conduct by a secondary actor to be actionable each of the elements of Rule 10b-5 liability must be satisfied, which includes the requirement that a plaintiff must prove reliance upon either a defendant’s material misrepresentation or upon a material omission if there is a duty to disclose. The Court determined that, based on the facts presented, the vendor had no affirmative duty to disclose the true nature of the arrangements, nor were the arrangements it entered into falsely communicated by it to the investing public during the relevant period. As a result, the investors were unable to show reliance on the vendor’s actions, except in an indirect chain too remote for liability. For a copy of the Court’s opinion, please see http://www.supremecourtus.gov/opinions/07pdf/06-43.pdf.
TILA Claim Against MERS Survives Motion to Dismiss. A federal district court recently denied a motion to dismiss a Truth in Lending Act (TILA) claim against the Mortgage Electronic Registration System (MERS), rejecting MERS’s argument that it was neither the creditor or assignee of the loan in question. Newman v. Apex Financial Group, Inc. No. 07-c-4475 2008 U.S. Dist. LEXIS 2249 (N.D. Ill. Jan. 11, 2008). The borrower brought suit against the broker, the alleged mortgage broker firm, several successor lenders and banks, and MERS alleging he was defrauded by a mortgage broker who allocated more of a fifth of the proceeds of the loan to himself. Among the many statutes under which claims were brought, the borrower alleged MERS was liable for violations of TILA. MERS moved to dismiss arguing that “a TILA claim can only be brought against a creditor of the plaintiff or an assignee of the creditor.” The court denied the motion noting that, (i) as holder of the title, MERS has certain powers such as the ability to foreclose which, if exercised, would interfere with the proceedings of the case and (ii) the borrower can “acquire complete relief only with the inclusion of MERS.” For a copy of this opinion, please contact .
Applicant’s Same Day Receipt of Adverse Action and Rights Notices May Violate FCRA. A federal district court recently denied Wal-Mart summary judgment on Fair Credit Reporting Act (FCRA) claims brought by a job applicant alleging adverse action was taken before the applicant had an opportunity to correct inaccuracies in his criminal background report. Beverly v. Wal-Mart Stores, Inc., No. 07-469, 2008 U.S. Dist. LEXIS 2266 (E.D. Va. Jan. 11, 2008). The plaintiff applied for a job at Wal-Mart, and as part of the application process signed an authorization allowing the defendant to conduct a criminal background check. Wal-Mart delegated to a separate company the task of running the background check and providing the applicant with the proper notices under FCRA. When the background check showed prior infractions, the company notified the applicant by letter that the check included public record information that would likely have an adverse effect on the applicant's ability to secure employment, and five days later, sent a second letter notifying the applicant that Wal-Mart would not make an offer of employment based in whole or in part on the information in the background report. The applicant sued Wal-Mart, contending that Wal-Mart failed to comply with FCRA notice procedures because it took an adverse action against him without providing him reasonable opportunity to correct the inaccuracies on the report. Wal-Mart moved for summary judgment, stating that (i) because it eventually hired the applicant, it did not take an "adverse action"; and (ii) that the applicant was mailed the notification letter prior to receiving the adverse action letter. The court stated that the action was clearly an adverse action, and that because the applicant received both letters on the same day, a reasonable jury could determine that the adverse action was taken before the applicant had an opportunity to correct inaccurate information in his report. Consequently, the court denied the motion for summary judgment. For a copy of the case, please contact .
Court Finds Check Verification Codes Can Be Consumer Reports. On January 10, in ruling on the parties’ summary judgment motions, the U.S. District Court for the Middle District of Tennessee found, among other things, that (i) simple numeric codes recommending whether to accept a check are “consumer reports” for Fair Credit Reporting Act (FCRA) purposes when issued by a consumer reporting agency, and (ii) the U.S. Supreme Court’s recent Safeco holding does not eliminate the relevance of pattern and practice proof to showing whether a violation was willful. Holmes v. Telecheck Int’l, Inc., No. 3:05-0633, 2008 WL 118064 (M.D. Tenn. Jan. 10, 2008). The consumer plaintiff presented as payments to four merchants six checks. On the recommendation of TeleCheck, a provider of check verification services largely based on a database it maintains of consumer check writing histories, five of the six checks were declined at the point of sale. The merchant ultimately accepted the other check, but TeleCheck initially issued a code requiring the merchant to whom the plaintiff had presented the check to contact TeleCheck to provide additional information regarding the transaction. The plaintiff alleged that TeleCheck violated the Fair Credit Reporting Act (FCRA) in a number of ways. The court found that TeleCheck was a consumer reporting agency under the FCRA, and that the numeric codes issued to merchants by TeleCheck constitute consumer reports under FCRA. On the issue of damages, the court noted that the U.S. Supreme Court held in Safeco Ins. Co. of Am. v. Burr, 127 S.Ct. 2201 (2007) (reported in the InfoBytes Special Alert June 4, 2007), that punitive and statutory damages may be recovered under the FCRA only if a plaintiff demonstrates (i) the defendant knowingly violated her FCRA rights or (ii) the defendant acted with reckless disregard for those rights. The court determined, however, that the Safeco ruling did not eliminate the relevance of pattern and practice proof to establishing willfulness. Please contact for a copy of this decision.
Web Sale Terms Binding Despite Specifying Different Product. A federal district court recently ruled that terms and conditions for a website television purchase were valid, despite the fact the click wrap agreement explicitly mentioned “computers” rather than “televisions,” in part because the consumer “could not have purchased a computer without actively choosing to click the computer indicating their agreement” to the terms. Davis v. Dell, Inc. No. 07-630 (D.N.J. Dec. 28, 2007). The consumer purchased a television through Dell’s website. The transaction included terms and conditions including an arbitration agreement, a forum selection clause, and a bar on class actions. The agreement specified that it applied to the “purchase of computer systems and/or related products and/or services and support.” Among other things, the consumer argued that the agreement did not apply because a television did not fall into any of those three categories. Despite agreeing that the terms were “not ambiguous, and that a television is not a ‘computer system’ or ‘related product’” the court ruled that because the consumer “clicked the computer” statement “I AGREE to Dell’s Terms and Conditions of Sale” they applied to the transaction. The court also briefly noted that printed materials were shipped with the television informing the purchaser that all sales are subject to Dell’s “Terms and Conditions of Sale.” For a copy of this decision, please contact .
Merchant’s Argument That Telephone Sale Not under FACTA Fails. A federal district court recently rejected an audio equipment merchant’s argument that a “point of sale” under the Fair and Accurate Credit Transactions Act (FACTA) amendments to FCRA is a “precise location within a store” and therefore did not apply to a receipt produced through a telephone transaction. Ehrheart v. Bose Corp., No. 07-350 2008 WL 64491 (W.D. Pa. Jan. 4, 2008). The consumer made a purchase from a Bose store via telephone, and her credit card information was recorded by a clerk hand-on-paper. The clerk then printed a receipt using the store’s register, which the court noted was not shown (i) to be separate from the register used by walk-in customers or (ii) to differ in any way from a receipt she would have received had she purchased the item in person. The clerk then shipped the purchase and the receipt, which allegedly included the credit card’s expiration date in violation of FACTA, to the consumer. In response to the class action suit brought by the consumer, Bose argued that a receipt printed 70 miles away from the consumer did not qualify as being at the “point of sale” under FACTA, which it argued “is to protect a consumer’s private information from being displayed in the busy, high traffic areas of public stores.” While agreeing the defendant’s argument “may be true in part” the court, citing Vasquez-Torres v. Stubhub, Inc. (reported in InfoBytes Sept. 7, 2007) reasoned that in passing FACTA the “Congress likely intended to prevent identity theft in all its forms, including common online identity theft.” Therefore the court rejected Bose’s argument, and denied its motion for summary judgment. For a copy of this opinion, please contact .
Merchant’s Argument That Telephone Sale Not under FACTA Fails. A federal district court recently rejected an audio equipment merchant’s argument that a “point of sale” under the Fair and Accurate Credit Transactions Act (FACTA) amendments to FCRA is a “precise location within a store” and therefore did not apply to a receipt produced through a telephone transaction. Ehrheart v. Bose Corp., No. 07-350 2008 WL 64491 (W.D. Pa. Jan. 4, 2008). The consumer made a purchase from a Bose store via telephone, and her credit card information was recorded by a clerk hand-on-paper. The clerk then printed a receipt using the store’s register, which the court noted was not shown (i) to be separate from the register used by walk-in customers or (ii) to differ in any way from a receipt she would have received had she purchased the item in person. The clerk then shipped the purchase and the receipt, which allegedly included the credit card’s expiration date in violation of FACTA, to the consumer. In response to the class action suit brought by the consumer, Bose argued that a receipt printed 70 miles away from the consumer did not qualify as being at the “point of sale” under FACTA, which it argued “is to protect a consumer’s private information from being displayed in the busy, high traffic areas of public stores.” While agreeing the defendant’s argument “may be true in part” the court, citing Vasquez-Torres v. Stubhub, Inc. (reported in InfoBytes Sept. 7, 2007) reasoned that in passing FACTA the “Congress likely intended to prevent identity theft in all its forms, including common online identity theft.” Therefore the court rejected Bose’s argument, and denied its motion for summary judgment. For a copy of this opinion, please contact .
Web Sale Terms Binding Despite Specifying Different Product. A federal district court recently ruled that terms and conditions for a website television purchase were valid, despite the fact the click wrap agreement explicitly mentioned “computers” rather than “televisions,” in part because the consumer “could not have purchased a computer without actively choosing to click the computer indicating their agreement” to the terms. Davis v. Dell, Inc. No. 07-630 (D.N.J. Dec. 28, 2007). The consumer purchased a television through Dell’s website. The transaction included terms and conditions including an arbitration agreement, a forum selection clause, and a bar on class actions. The agreement specified that it applied to the “purchase of computer systems and/or related products and/or services and support.” Among other things, the consumer argued that the agreement did not apply because a television did not fall into any of those three categories. Despite agreeing that the terms were “not ambiguous, and that a television is not a ‘computer system’ or ‘related product’” the court ruled that because the consumer “clicked the computer” statement “I AGREE to Dell’s Terms and Conditions of Sale” they applied to the transaction. The court also briefly noted that printed materials were shipped with the television informing the purchaser that all sales are subject to Dell’s “Terms and Conditions of Sale.” For a copy of this decision, please contact .
Applicant’s Same Day Receipt of Adverse Action and Rights Notices May Violate FCRA. A federal district court recently denied Wal-Mart summary judgment on Fair Credit Reporting Act (FCRA) claims brought by a job applicant alleging adverse action was taken before the applicant had an opportunity to correct inaccuracies in his criminal background report. Beverly v. Wal-Mart Stores, Inc., No. 07-469, 2008 U.S. Dist. LEXIS 2266 (E.D. Va. Jan. 11, 2008). The plaintiff applied for a job at Wal-Mart, and as part of the application process signed an authorization allowing the defendant to conduct a criminal background check. Wal-Mart delegated to a separate company the task of running the background check and providing the applicant with the proper notices under FCRA. When the background check showed prior infractions, the company notified the applicant by letter that the check included public record information that would likely have an adverse effect on the applicant's ability to secure employment, and five days later, sent a second letter notifying the applicant that Wal-Mart would not make an offer of employment based in whole or in part on the information in the background report. The applicant sued Wal-Mart, contending that Wal-Mart failed to comply with FCRA notice procedures because it took an adverse action against him without providing him reasonable opportunity to correct the inaccuracies on the report. Wal-Mart moved for summary judgment, stating that (i) because it eventually hired the applicant, it did not take an "adverse action"; and (ii) that the applicant was mailed the notification letter prior to receiving the adverse action letter. The court stated that the action was clearly an adverse action, and that because the applicant received both letters on the same day, a reasonable jury could determine that the adverse action was taken before the applicant had an opportunity to correct inaccurate information in his report. Consequently, the court denied the motion for summary judgment. For a copy of the case, please contact .
Court Finds Check Verification Codes Can Be Consumer Reports. On January 10, in ruling on the parties’ summary judgment motions, the U.S. District Court for the Middle District of Tennessee found, among other things, that (i) simple numeric codes recommending whether to accept a check are “consumer reports” for Fair Credit Reporting Act (FCRA) purposes when issued by a consumer reporting agency, and (ii) the U.S. Supreme Court’s recent Safeco holding does not eliminate the relevance of pattern and practice proof to showing whether a violation was willful. Holmes v. Telecheck Int’l, Inc., No. 3:05-0633, 2008 WL 118064 (M.D. Tenn. Jan. 10, 2008). The consumer plaintiff presented as payments to four merchants six checks. On the recommendation of TeleCheck, a provider of check verification services largely based on a database it maintains of consumer check writing histories, five of the six checks were declined at the point of sale. The merchant ultimately accepted the other check, but TeleCheck initially issued a code requiring the merchant to whom the plaintiff had presented the check to contact TeleCheck to provide additional information regarding the transaction. The plaintiff alleged that TeleCheck violated the Fair Credit Reporting Act (FCRA) in a number of ways. The court found that TeleCheck was a consumer reporting agency under the FCRA, and that the numeric codes issued to merchants by TeleCheck constitute consumer reports under FCRA. On the issue of damages, the court noted that the U.S. Supreme Court held in Safeco Ins. Co. of Am. v. Burr, 127 S.Ct. 2201 (2007) (reported in the InfoBytes Special Alert June 4, 2007), that punitive and statutory damages may be recovered under the FCRA only if a plaintiff demonstrates (i) the defendant knowingly violated her FCRA rights or (ii) the defendant acted with reckless disregard for those rights. The court determined, however, that the Safeco ruling did not eliminate the relevance of pattern and practice proof to establishing willfulness. Please contact for a copy of this decision.
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