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InfoBytes
CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS
Topics – Covered This Week (Click to View)
FEDERAL ISSUES
House Passes Bill to Cut Student Loan Rate and Lender Compensation. On January 17, the House of Representatives passed the “College Student Relief Act of 2007” (H.R. 5) which would impose a graduated decrease on interest rates for certain student loans paid by borrowers. Under the Act rates would decline incrementally from 6.8% to 3.4% over the next five years, sunsetting at the start of 2012. To offset the reduced borrower payments, the Act would also (i) decrease rates paid by the government to lenders, (ii) reduce the portion of certain student loans insured by the government, (iii) remove a reduced reporting exemption for lenders with “exceptional performance,” (iv) double loan fees for certain loans, and (v) reduce the retention reward for collection agencies. Various sources have put the cost to the student lending industry of these offsets, many of which do not sunset, at $6.05 billion over five years. Details of the bill, now referred to the Senate, can be found at http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.00005:.
Senator Feinstein Reintroduces Data Breach and Social Security Number Legislation. Senator Dianne Feinstein (D – Cal.) recently reintroduced two bills concerning data breach notification and the use of social security numbers. S. 239, a data breach notification bill, reportedly would require businesses and federal agencies to notify individuals when their personal data has been breached. The bill also would require notification to the media and, in some cases, the U.S. Secret Service. S. 239 is reportedly similar to S. 751 introduced in the 109th Congress, which was incorporated into S. 1789, also introduced in the 109th Congress. Senator Feinstein also introduced S. 238, which, if passed, would preclude the government from displaying individuals’ social security numbers on electronic media, including the Internet and other non-web-accessible media. Moreover, the bill reportedly would prohibit displaying or selling an individual’s social security number without his or her consent. Neither bill is yet available on the Library of Congress website (http://thomas.loc.gov/), but should be shortly.
House Votes to Extend HECM Lending Cap Increase. On January 16, the House of Representatives passed H.R. 391, which would extend the temporary increase in FHA-insured Home Equity Conversion Mortgages (HECMs) from last year. The statutory cap on the permissible number of mortgages was temporarily raised to 275,000 last September (see the Continuing Appropriations Resolution, 2007). For information on the bill, see http://thomas.loc.gov/cgi-bin/query/z?c110:h.r.391:.
Amendment to Regulatory Relief Act Becomes Law. On January 11, President Bush signed into law H.R. 6345, which amends the Federal Deposit Insurance Act to increase from $250 million to $500 million the maximum size of a small insured depository institution which the appropriate federal banking agency may subject to a full-scope, on-site examination every 18 months (instead of every 12 months), if the greater amount would be consistent with the principles of institution safety and soundness. For information on H.R. 6345, see http://thomas.loc.gov/cgi-bin/bdquery/z?d109:h.r.6345:.
House Bill Would Revise Do-Not-Call Law. On January 5, Rep. Foxx (R-NC) introduced the “Robo Calls Off Phones Act” (Robo COP)(H.R. 248). The bill would require the Federal Trade Commission (FTC) to revise the Telemarketing Sales Rule to prohibit “politically oriented” pre-recorded messages from being sent to telephone numbers contained on the Do-Not-Call registry. Included in the definition of “politically oriented” are messages that “promote, advertise, campaign or solicit” donations for or against a political cause or candidate or that contain the name of a political candidate. Information about the Act, including the text of the bill, is available at http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.00248:.
COURTS
Supreme Court Hears Oral Arguments in FCRA Willfulness/Adverse Action Case. On January 16, the U.S. Supreme Court heard oral arguments in two consolidated Fair Credit Reporting Act (FCRA) cases before the Supreme Court: Safeco Insurance Co. v. Burr, No. 06-84, and GEICO General Insurance Co. v. Edo, No. 06-100. Both cases involve the interpretation of an insurance company’s obligation under FCRA to provide an applicant with an adverse action notice, as well as the meaning of “willful noncompliance.” (For more details, see the November 17th issue of InfoBytes.) Most observers had expected the Court to focus on whether the U.S. Court of Appeals for the Ninth Circuit was correct in its holding in a related case, Reynolds v. Hartford Financial Services Group, that a company can be found to have “willfully” violated FCRA if its interpretation is found to have been “implausible” or based on “creative lawyering.” FCRA provides for statutory penalties of $100-$1000 for “willful” violations but only actual damages for negligent violations. Although the briefing mostly addressed the willfulness issue, and Safeco did not even seek review on the adverse action question, much of the court’s questioning concerned whether FCRA requires an insurance company to offer a consumer a higher rate than it would otherwise have offered if the information in the consumer’s credit report had been more favorable. The Justices appeared to be very skeptical about this position, questioning whether the premium can be said to be “increased,” as required by the FCRA definition of “adverse action,” in connection with an initial application for insurance. A transcript of the argument is available at http://www.supremecourtus.gov/oral_arguments/argument_transcripts/06-84.pdf.
Plaintiffs Appeal Decisions Providing Civil Immunity for Entities Not Publishing Content Under The CDA. Plaintiffs filed a notice of appeal in Johnny Doe v. Mark Bates and Yahoo! Inc., No. 5:05-CV-91-DF-CMC (E.D. Tex.), a case in which Yahoo! was granted immunity from civil liability under the Communications Decency Act (CDA). In Johnny Doe, plaintiffs, on behalf of their minor son, sued defendants on the basis of federal child pornography protection laws and common law theories, alleging that Yahoo! knowingly hosted child pornography on an e-group. Yahoo! moved to dismiss, arguing that it was immune from plaintiffs’ claims under the CDA. The Court granted the motion, adopting the report and recommendations of a magistrate judge holding that Yahoo! – an “interactive computer service” (ICS) as defined by the CDA – was immune from all private civil liability. According to the Court, the photographs at issue were “information provided by another information content provider,” and plaintiffs’ claims treated Yahoo! as the “publisher or speaker” of that content. In such cases, the CDA – in both its language and intent – provides ICSs with blanket immunity from civil liability in an effort to “avoid disincentives to innovation and to encourage self-regulation.” Providers of content, on the other hand, are not immune from suit under the CDA. The Court’s opinion was issued on December 27, 2006, and the plaintiffs filed their notice of appeal on January 8, 2007.
Similarly, on January 11, the plaintiff in Chicago Lawyer’s Committee for Civil Rights Under Law, Inc. v. craigslist, Inc. (first reported in the July 7th issue of InfoBytes) filed a notice that it is appealing the lower court’s decision to the Seventh Circuit. That decision held that the CDA immunized craigslist – the operator of “a website that allows third parties to post and read notices for, among other things, housing sale or rental opportunities” – from federal Fair Housing Act claims alleging that craigslist hosted discriminatory real estate listings posted by others. While holding that the CDA does not bar all causes of action, the Court held that the CDA bars “those causes of action that would require treating an ICS as a publisher of third-party content.” For copies of decisions in either case, please contact .
TILA Rescission Class Certified. A federal court in Wisconsin recently granted plaintiffs summary judgment and certified a rescission class in a Truth in Lending Act (TILA) disclosure lawsuit. Andrews v. Chevy Chase Bank, FSB, Case No. 05-C-0454 (E.D. Wisc., opinion issued January 16, 2007). Plaintiffs had obtained a five-year fixed payment loan with a first month discounted rate feature that increased monthly, but alleged that the TILA disclosure confusingly suggested that their loan also included a five-year fixed interest rate feature. Granting summary judgment for plaintiffs, the Court held that while these violations did not entitle plaintiffs to statutory damages, plaintiffs were entitled to take advantage of TILA’s rescission remedy. The Court then certified a declaratory relief rescission class of borrowers who received identical TILA disclosures, finding significant that plaintiffs were not seeking actual rescission, but rather a declaration that loans with identical disclosure violations were rescindable. For a copy of this opinion, please contact .
Court Upholds Mortgage “Firm Offer” under FCRA. The U.S. District Court for the Northern District of Illinois held that solicitation letters for a home mortgage met the Fair Credit Reporting Act’s (FCRA) requirements for a valid “firm offer” even though they did not “provide the precise interest rate that will apply to each individual borrower, and they also do not disclose every term and condition of the loan, such as the maximum negative amortization provisions and whether prepayment penalties or other fees will apply.” While the court interpreted the previous Seventh Circuit Court of Appeals decisions in Cole v. U.S. Capital and Perry v. First National Bank to require that “the material terms of the offer [be] adequately disclosed,” it held that a mortgage solicitation need not disclose the exact terms because that would be a practical impossibility given that many of the terms cannot be determined from the consumer’s credit report alone. The court also rejected the consumer’s claim that the loan, an interest-only adjustable-rate mortgage, lacked “value” under the Cole test because of the risks of that type of loan, stating that “the FCRA is designed to protect the privacy of consumers’ credit histories, not to prevent them from making unwise financial choices.” See Cavin v. Home Loan Center Inc., No. 05 C 4987, – F. Supp. 2d –, 2007 WL 92509 (Jan. 10, 2007). For a copy of this opinion, please contact .
Court Finds Solicitation Based on Non-“Consumer Report” Lead Is Not Subject to FCRA. The U.S. District Court for the Eastern District of Wisconsin granted summary judgment to a lender that sent a solicitation for a mortgage that included the required FCRA prescreening notices, even though the consumer’s name was obtained from a “lead generator” that claimed not to be a consumer reporting agency (CRA) subject to FCRA. The court held that the lead generator was not a CRA because the information in the lead generator’s database was collected “with the expectation that it will be used for direct marketing purposes, and not for determining a consumer's eligibility for credit,” and, therefore, the lead generator did not meet the definition of a CRA. See Forrest v. Secured Funding Corp., No. 05-C-1324, 2007 WL 81878 (E.D. Wis. Jan. 8, 2007). For a copy of this opinion, please contact .
Tower City Title Agency Agrees to Settle RESPA Suit for $900K. An Ohio title agency has agreed to settle a class action lawsuit over marketing agreements that were alleged to violate Real Estate Settlement Procedures Act (RESPA) and the Ohio Consumer Sales Practices Act. Shahan v. Tower City Title Agency, Inc., No. 1:05 cv 1983 (N.D. Ohio Jan. 11, 2007). The plaintiffs claimed that Tower City Title Agency had entered into marketing agreements with and made payments to multiple mortgage brokers in exchange for referrals. The plaintiffs alleged that, as a result of these arrangements, borrowers were overcharged for title and closing services and that the fee paid to Tower City were illegal referral fees. The settlement, totaling $900,000, will provide refunds to Ohio borrowers who paid fees in a mortgage loan transaction in which Tower City’s services were used, and where the HUD-1 included a payment to a mortgage broker who had entered into a marketing agreement with Tower City. Tower City also agreed to end its practice of entering into marketing agreements with brokers. For a copy of the settlement, please contact .
Prohibition On Class Claims Renders Arbitration Agreement Unconscionable And Unenforceable. In a recent case, a federal court refused to compel arbitration, finding the class action bar and injunctive relief limitation contained in the arbitration clause to be substantively unconscionable. Riensche v. Cingular Wireless LLC et al., No. C06-1325Z (W.D. Wash., Order Issued Dec. 27, 2006). The class action complaint asserted that defendant Cingular Wireless violated the Washington Consumer Protection Act (CPA) and breached the service contract when it allegedly failed to disclose, and subsequently charged and collected, a “Business and Occupation Tax Surcharge.” Defendant moved to compel arbitration on the basis of an arbitration provision contained in the “Terms of Service” provided to plaintiff online and again in a “Welcome Kit” subsequently mailed to plaintiff. The Court denied the motion, however, holding that the class action prohibition contained in the arbitration provision rendered the provision procedurally unconscionable for several reasons, including that it was (i) “unilateral and excessively favor[ed] Cingular,” (ii) that the prohibition “deprive[d] consumers of an important means for enforcing their rights under the CPA”, and (iii) contravened Washington’s public policy favoring class actions as a method of enforcing violations of the CPA. The Court also found that the arbitration agreement was substantively unconscionable because it limited the availability of injunctive relief in contradiction to the relief envisioned in the CPA. Accordingly, the court severed the arbitration clause from the Terms of Service, and ordered the case to proceed. For a copy of this decision, please contact .
State Farm Loses Katrina Suit. Following on a ruling by a U.S. District Court judge in Mississippi that State Farm Fire & Casualty Co. must pay the full value of a policy to a couple whose home was destroyed by Hurricane Katrina, the jury in the case awarded $2.5 million in punitive damages to the couple. The result is significant for the insurance industry, which is facing thousands of suits and other disputed policyholder claims related to the hurricane in Mississippi and other states. State Farm itself is in the process of negotiating a group settlement with policyholders with respect to the majority of cases filed against it in Mississippi, as well as with the Mississippi Attorney General. State Farm has indicated that it is likely to appeal the decision. For a copy of the opinion in Broussard v. State Farm, see http://www.mssd.uscourts.gov/Insurance%20Opinions/ch06cv6order0111.pdf. For a copy of State Farm's related press release, see http://www.statefarm.com/about/media/media_releases/broussard.asp.
Seventh Circuit Upholds Click-Through Contract. On January 7, the Seventh Circuit upheld United Parcel Service’s click through contracting process. Treiber & Straub, Inc. v. United Parcel Svc., Inc., Nos. 05-3743 and 05-3896 (7th Cir. Jan. 7, 2007). In this case, the plaintiff attempted to ship a package worth $105,000 via UPS and purchased excess value insurance of $50,000 to cover the package. UPS lost the package. When T&S attempted to collect on the insurance policy, UPS denied the claim because its terms and conditions and insurance documents explicitly excluded insurance on items with a real value greater than $50,000. Plaintiff argued that it did not have adequate notice of the exclusion because it was not clearly and conspicuously placed in UPS’ lengthy Terms and Conditions. The court determined that the common law of contract did not require that the exclusion be “clear and conspicuous,” and in any event determined that plaintiff was bound by UPS’s Terms and Conditions, which plaintiff acknowledged via a click-through process. Please contact for a copy of the decision.
Judge Kaplan Defends Ancillary Jurisdiction to the 2nd Circuit. U.S. District Court Judge Lewis Kaplan recently presented a brief defending his procedural resolution of a conflict arising from his June 27th, 2006 opinion in USA v. Stein. As noted in the the June 30th issue of InfoBytes, Judge Kaplan ruled unconstitutional the “Thompson Memo,” a U.S. Department of Justice policy that gave favorable treatment to companies under federal investigation that limit the advance of legal fees to employees under federal investigation. In that decision, Judge Kaplan ruled that federal prosecutors violated the Constitutional rights of sixteen former KPMG partners indicted for tax fraud by pressuring the firm to cut off their legal fees. Judge Kaplan’s authority to exercise what he called “ancillary jurisdiction” – creating a separate civil proceeding to determine the issue of whether KPMG should pay the legal fees – was appealed to the Second Circuit and the KPMG case put on hold. Judge Kaplan defended his decision, based on the U.S. Constitution and Supreme Court and Second Circuit authority. The Second Circuit may issue a writ of mandamus and halt the proceeding, or allow the proceeding to go forward leaving KPMG the option to appeal again at the end. Importantly, the Justice Department recently replaced the “Thompson Memo” guidelines that Judge Kaplan objected to in his June decision (for more information see the December 22nd issue of InfoBytes). To view Judge Kaplan’s brief to the 2nd Circuit, see http://taxprof.typepad.com/taxprof_blog/files/kaplan_brief.pdf.
Financial Harm From Identity Theft No Basis For Constitutional Privacy Rights Claim. On December 29, the U.S. District Court for the Southern District of Ohio held that individuals do not have a Constitutionally protected privacy interest in their Social Security number. The plaintiff had been issued a speeding ticket, on which the police officer recorded her name, address, birth date, driver's license number, and Social Security number. The ticket was later filed with the local court clerk who posted the ticket on the clerk's web site. Subsequently, an individual using a driver's license with the plaintiff's personal identification purchased thousands of dollars of electronics from Sam's Club and put an additional $12,000 on a credit card opened in her name. The court held that the plaintiff's alleged privacy interest in her name, signature, home address, birth date, driver's license number, and social security number do not implicate either a "fundamental right or one implicit in the concept of ordered liberty," the required standard to find a Constitutional right to privacy protection of one's interests. The court contrasted the plaintiff's financial harm to "potential and actual harm" suffered by plaintiffs in previous cases where personal security and bodily integrity were at stake and, since the standard was not met, dismissed the Constitutional claim filed under 42 U.S.C. § 1983. See Lambert v. Hartmann, Case No. 1:04cv837, (S.D. Ohio, 12/29/06). For a copy of the court's opinion, please contact .
STATE ISSUES
Pennsylvania Issues Guidance on Fraudulent Mortgage Business Practices. The Pennsylvania Department of Banking has issued a policy statement regarding certain prohibited conduct and practices under Pennsylvania’s Mortgage Bankers and Brokers and Consumer Equity Protection Act. Although the policy statement does not carry the force of law, it provides guidance to licensees as to which practices constitute “dishonest, fraudulent or illegal practices or conduct in any business, unfair or unethical practices or conduct in connection with the first mortgage loan business and negligence or incompetence in performing any act for which a licensee is required to hold a license” under the Act. According to the Department, the policy statement is the first of two administrative responses to a 2005 statewide foreclosure study, as the Department is also in the process of drafting new mortgage lender and broker regulations. The policy became effective on December 16, 2006. For more information, see http://www.banking.state.pa.us/banking/lib/banking/news_and_events/press_releases/2007/01-12-07-banking_statement_of_policy_release.pdf and http://www.banking.state.pa.us/banking/lib/banking/laws_and_regulations/ secretarys_letter_to_accompany_mbbecpa_sop.pdf. A copy of the Department’s policy statement can be found at http://www.banking.state.pa.us/banking/lib/banking/laws_and_regulations/mortgage_sop.pdf.
Texas Agencies Identify Preempted Laws. The Texas Finance Commission and Texas Credit Union Commission recently presented to the state legislature a “legislative report” of state financial laws preempted by federal authority. The study, ordered by the previous legislature, identifies several portions of the Texas Code pertaining to financial institutions, mortgage lending, credit reporting, and other spheres of the financial services, effectively nullified by federal law. The report can be read in full at http://www.fc.state.tx.us/Studies/preemption.pdf.
Colorado AG Proposes Law to Fight Appraisal Fraud and Deceptive Broker Practices. Colorado Attorney General John Suthers recently proposed legislation to help prevent mortgage fraud. Under the proposed bill, the Colorado Division of Real Estate would be given discretion to deny or revoke the registration of a mortgage broker who has been prohibited by any court from engaging in deceptive conduct relating to brokering a mortgage loan. The proposed bill would also prohibit individuals (including mortgage brokers, real estate agents, lenders, and even consumers) from compensating, coercing, or intimidating an appraiser in order to obtain an artificially inflated appraisal, as well as prohibit the submission of a knowingly false appraisal by an appraiser. Under the proposed law, violators of either of these provisions would be subject to civil liability as well as criminal prosecution. To view the Colorado Attorney General’s press release, please visit http://www.ago.state.co.us/press_detail.cfm?pressID=833.
MISCELLANY
Study Suggests Basel II Will Encourage Mortgage Company Mergers. A recent study by a University of Florida professor suggests that banks adopting the new Basel II capital requirements could have a dramatically different role in the mortgage market. The study concludes that in a bifurcated regulatory scheme the capital retention required of Basel II-adopters for high-quality residential mortgages will be far below that of institutions opting out of the regulatory scheme. This could greatly encourage Basel II compliant banks to acquire mortgages and mortgage companies. To read the Mortgage Banker Association’s press release, and view the study, see http://www.mortgagebankers.org/NewsandMedia/PressCenter/47344.htm.
Economic Letter Addresses Concentrations in CRE Lending. An Economic Letter issued by the Federal Reserve Bank of San Francisco on January 5 discusses the increase in Commercial Real Estate (CRE) loan concentrations at commercial banks and the performance of such loans since the 1990s. The findings suggest that a high concentration of CRE loans has little or no effect on the performance of a bank’s loan portfolio and that banks with a high concentration of CRE loans are able to manage lending risk as well as other banks. The results of recent analysis indicate that nonperforming loan growth has been relatively low for most banks with CRE concentrations within five years of the concentration being identified. For information on recent federal agency guidance on CRE concentration risk, see the December 8th issue of InfoBytes. The Letter is available on the Federal Reserve Bank of San Francisco’s website at http://www.frbsf.org/publications/economics/letter/2007/el2007-01.html.
FIRM NEWS
Andrea “Lee” Negroni and Joe Lynyak will be speaking at two Thomson/West users’ conferences in Los Angeles and Santa Ana, California on February 6-7, 2007. Lee is a West Key Author and author of Residential Mortgage Lending: State Regulation Manual, and Residential Mortgage Lending: Brokers, both published by Thomson/West and available on Westlaw. Joe is a partner at Buckley Kolar and California bar member. They will discuss residential and commercial mortgage lending, data security and consumer financial privacy laws, fair lending, firm offers of credit and FCRA, and RESPA enforcement, before an audience of mortgage company compliance and legal personnel, real estate brokers, homebuilders, and title company representatives.
In February, Andrea “Lee” Negroni will attend the Third Annual International Conference of the Information Technology Law Association in Bangalore, India. She and Buckley Kolar partner John Kromer have been assisting clients with legal issues in the area of business process outsourcing (BPO) for U.S. and India-based financial institution clients. During her trip, Lee will be available to lead discussion groups and present seminars on regulatory issues implicated by BPO in the fields of consumer loan application processing, loan servicing, consumer data privacy and similar subjects, in the cities of Bangalore, Mumbai (Bombay) and Delhi between February 13 and 25, 2007. Interested persons may contact Lee at or by phone at 202-349-8032. During her trip, Lee will post a periodic "Blog from Bangalore" on the Buckley Kolar website.
Manley Williams gave a briefing to Congressional staff at the Financial Services Roundtable's Financial Services University regarding credit card lending issues on January 18.
Supreme Court Hears Oral Arguments in FCRA Willfulness/Adverse Action Case. On January 16, the U.S. Supreme Court heard oral arguments in two consolidated Fair Credit Reporting Act (FCRA) cases before the Supreme Court: Safeco Insurance Co. v. Burr, No. 06-84, and GEICO General Insurance Co. v. Edo, No. 06-100. Both cases involve the interpretation of an insurance company’s obligation under FCRA to provide an applicant with an adverse action notice, as well as the meaning of “willful noncompliance.” (For more details, see the November 17th issue of InfoBytes.) Most observers had expected the Court to focus on whether the U.S. Court of Appeals for the Ninth Circuit was correct in its holding in a related case, Reynolds v. Hartford Financial Services Group, that a company can be found to have “willfully” violated FCRA if its interpretation is found to have been “implausible” or based on “creative lawyering.” FCRA provides for statutory penalties of $100-$1000 for “willful” violations but only actual damages for negligent violations. Although the briefing mostly addressed the willfulness issue, and Safeco did not even seek review on the adverse action question, much of the court’s questioning concerned whether FCRA requires an insurance company to offer a consumer a higher rate than it would otherwise have offered if the information in the consumer’s credit report had been more favorable. The Justices appeared to be very skeptical about this position, questioning whether the premium can be said to be “increased,” as required by the FCRA definition of “adverse action,” in connection with an initial application for insurance. A transcript of the argument is available at http://www.supremecourtus.gov/oral_arguments/argument_transcripts/06-84.pdf.
TILA Rescission Class Certified. A federal court in Wisconsin recently granted plaintiffs summary judgment and certified a rescission class in a Truth in Lending Act (TILA) disclosure lawsuit. Andrews v. Chevy Chase Bank, FSB, Case No. 05-C-0454 (E.D. Wisc., opinion issued January 16, 2007). Plaintiffs had obtained a five-year fixed payment loan with a first month discounted rate feature that increased monthly, but alleged that the TILA disclosure confusingly suggested that their loan also included a five-year fixed interest rate feature. Granting summary judgment for plaintiffs, the Court held that while these violations did not entitle plaintiffs to statutory damages, plaintiffs were entitled to take advantage of TILA’s rescission remedy. The Court then certified a declaratory relief rescission class of borrowers who received identical TILA disclosures, finding significant that plaintiffs were not seeking actual rescission, but rather a declaration that loans with identical disclosure violations were rescindable. For a copy of this opinion, please contact .
Court Upholds Mortgage “Firm Offer” under FCRA. The U.S. District Court for the Northern District of Illinois held that solicitation letters for a home mortgage met the Fair Credit Reporting Act’s (FCRA) requirements for a valid “firm offer” even though they did not “provide the precise interest rate that will apply to each individual borrower, and they also do not disclose every term and condition of the loan, such as the maximum negative amortization provisions and whether prepayment penalties or other fees will apply.” While the court interpreted the previous Seventh Circuit Court of Appeals decisions in Cole v. U.S. Capital and Perry v. First National Bank to require that “the material terms of the offer [be] adequately disclosed,” it held that a mortgage solicitation need not disclose the exact terms because that would be a practical impossibility given that many of the terms cannot be determined from the consumer’s credit report alone. The court also rejected the consumer’s claim that the loan, an interest-only adjustable-rate mortgage, lacked “value” under the Cole test because of the risks of that type of loan, stating that “the FCRA is designed to protect the privacy of consumers’ credit histories, not to prevent them from making unwise financial choices.” See Cavin v. Home Loan Center Inc., No. 05 C 4987, – F. Supp. 2d –, 2007 WL 92509 (Jan. 10, 2007). For a copy of this opinion, please contact .
Court Finds Solicitation Based on Non-“Consumer Report” Lead Is Not Subject to FCRA. The U.S. District Court for the Eastern District of Wisconsin granted summary judgment to a lender that sent a solicitation for a mortgage that included the required FCRA prescreening notices, even though the consumer’s name was obtained from a “lead generator” that claimed not to be a consumer reporting agency (CRA) subject to FCRA. The court held that the lead generator was not a CRA because the information in the lead generator’s database was collected “with the expectation that it will be used for direct marketing purposes, and not for determining a consumer's eligibility for credit,” and, therefore, the lead generator did not meet the definition of a CRA. See Forrest v. Secured Funding Corp., No. 05-C-1324, 2007 WL 81878 (E.D. Wis. Jan. 8, 2007). For a copy of this opinion, please contact .
State Farm Loses Katrina Suit. Following on a ruling by a U.S. District Court judge in Mississippi that State Farm Fire & Casualty Co. must pay the full value of a policy to a couple whose home was destroyed by Hurricane Katrina, the jury in the case awarded $2.5 million in punitive damages to the couple. The result is significant for the insurance industry, which is facing thousands of suits and other disputed policyholder claims related to the hurricane in Mississippi and other states. State Farm itself is in the process of negotiating a group settlement with policyholders with respect to the majority of cases filed against it in Mississippi, as well as with the Mississippi Attorney General. State Farm has indicated that it is likely to appeal the decision. For a copy of the opinion in Broussard v. State Farm, see http://www.mssd.uscourts.gov/Insurance%20Opinions/ch06cv6order0111.pdf. For a copy of State Farm's related press release, see http://www.statefarm.com/about/media/media_releases/broussard.asp.
Tower City Title Agency Agrees to Settle RESPA Suit for $900K. An Ohio title agency has agreed to settle a class action lawsuit over marketing agreements that were alleged to violate Real Estate Settlement Procedures Act (RESPA) and the Ohio Consumer Sales Practices Act. Shahan v. Tower City Title Agency, Inc., No. 1:05 cv 1983 (N.D. Ohio Jan. 11, 2007). The plaintiffs claimed that Tower City Title Agency had entered into marketing agreements with and made payments to multiple mortgage brokers in exchange for referrals. The plaintiffs alleged that, as a result of these arrangements, borrowers were overcharged for title and closing services and that the fee paid to Tower City were illegal referral fees. The settlement, totaling $900,000, will provide refunds to Ohio borrowers who paid fees in a mortgage loan transaction in which Tower City’s services were used, and where the HUD-1 included a payment to a mortgage broker who had entered into a marketing agreement with Tower City. Tower City also agreed to end its practice of entering into marketing agreements with brokers. For a copy of the settlement, please contact .
Pennsylvania Issues Guidance on Fraudulent Mortgage Business Practices. The Pennsylvania Department of Banking has issued a policy statement regarding certain prohibited conduct and practices under Pennsylvania’s Mortgage Bankers and Brokers and Consumer Equity Protection Act. Although the policy statement does not carry the force of law, it provides guidance to licensees as to which practices constitute “dishonest, fraudulent or illegal practices or conduct in any business, unfair or unethical practices or conduct in connection with the first mortgage loan business and negligence or incompetence in performing any act for which a licensee is required to hold a license” under the Act. According to the Department, the policy statement is the first of two administrative responses to a 2005 statewide foreclosure study, as the Department is also in the process of drafting new mortgage lender and broker regulations. The policy became effective on December 16, 2006. For more information, see http://www.banking.state.pa.us/banking/lib/banking/news_and_events/press_releases/2007/01-12-07-banking_statement_of_policy_release.pdf and http://www.banking.state.pa.us/banking/lib/banking/laws_and_regulations/ secretarys_letter_to_accompany_mbbecpa_sop.pdf. A copy of the Department’s policy statement can be found at http://www.banking.state.pa.us/banking/lib/banking/laws_and_regulations/mortgage_sop.pdf.
Texas Agencies Identify Preempted Laws. The Texas Finance Commission and Texas Credit Union Commission recently presented to the state legislature a “legislative report” of state financial laws preempted by federal authority. The study, ordered by the previous legislature, identifies several portions of the Texas Code pertaining to financial institutions, mortgage lending, credit reporting, and other spheres of the financial services, effectively nullified by federal law. The report can be read in full at http://www.fc.state.tx.us/Studies/preemption.pdf.
Colorado AG Proposes Law to Fight Appraisal Fraud and Deceptive Broker Practices. Colorado Attorney General John Suthers recently proposed legislation to help prevent mortgage fraud. Under the proposed bill, the Colorado Division of Real Estate would be given discretion to deny or revoke the registration of a mortgage broker who has been prohibited by any court from engaging in deceptive conduct relating to brokering a mortgage loan. The proposed bill would also prohibit individuals (including mortgage brokers, real estate agents, lenders, and even consumers) from compensating, coercing, or intimidating an appraiser in order to obtain an artificially inflated appraisal, as well as prohibit the submission of a knowingly false appraisal by an appraiser. Under the proposed law, violators of either of these provisions would be subject to civil liability as well as criminal prosecution. To view the Colorado Attorney General’s press release, please visit http://www.ago.state.co.us/press_detail.cfm?pressID=833.
House Votes to Extend HECM Lending Cap Increase. On January 16, the House of Representatives passed H.R. 391, which would extend the temporary increase in FHA-insured Home Equity Conversion Mortgages (HECMs) from last year. The statutory cap on the permissible number of mortgages was temporarily raised to 275,000 last September (see the Continuing Appropriations Resolution, 2007). For information on the bill, see http://thomas.loc.gov/cgi-bin/query/z?c110:h.r.391:.
Study Suggests Basel II Will Encourage Mortgage Company Mergers. A recent study by a University of Florida professor suggests that banks adopting the new Basel II capital requirements could have a dramatically different role in the mortgage market. The study concludes that in a bifurcated regulatory scheme the capital retention required of Basel II-adopters for high-quality residential mortgages will be far below that of institutions opting out of the regulatory scheme. This could greatly encourage Basel II compliant banks to acquire mortgages and mortgage companies. To read the Mortgage Banker Association’s press release, and view the study, see http://www.mortgagebankers.org/NewsandMedia/PressCenter/47344.htm.
Plaintiffs Appeal Decisions Providing Civil Immunity for Entities Not Publishing Content Under The CDA. Plaintiffs filed a notice of appeal in Johnny Doe v. Mark Bates and Yahoo! Inc., No. 5:05-CV-91-DF-CMC (E.D. Tex.), a case in which Yahoo! was granted immunity from civil liability under the Communications Decency Act (CDA). In Johnny Doe, plaintiffs, on behalf of their minor son, sued defendants on the basis of federal child pornography protection laws and common law theories, alleging that Yahoo! knowingly hosted child pornography on an e-group. Yahoo! moved to dismiss, arguing that it was immune from plaintiffs’ claims under the CDA. The Court granted the motion, adopting the report and recommendations of a magistrate judge holding that Yahoo! – an “interactive computer service” (ICS) as defined by the CDA – was immune from all private civil liability. According to the Court, the photographs at issue were “information provided by another information content provider,” and plaintiffs’ claims treated Yahoo! as the “publisher or speaker” of that content. In such cases, the CDA – in both its language and intent – provides ICSs with blanket immunity from civil liability in an effort to “avoid disincentives to innovation and to encourage self-regulation.” Providers of content, on the other hand, are not immune from suit under the CDA. The Court’s opinion was issued on December 27, 2006, and the plaintiffs filed their notice of appeal on January 8, 2007.
Similarly, on January 11, the plaintiff in Chicago Lawyer’s Committee for Civil Rights Under Law, Inc. v. craigslist, Inc. (first reported in the July 7th issue of InfoBytes) filed a notice that it is appealing the lower court’s decision to the Seventh Circuit. That decision held that the CDA immunized craigslist – the operator of “a website that allows third parties to post and read notices for, among other things, housing sale or rental opportunities” – from federal Fair Housing Act claims alleging that craigslist hosted discriminatory real estate listings posted by others. While holding that the CDA does not bar all causes of action, the Court held that the CDA bars “those causes of action that would require treating an ICS as a publisher of third-party content.” For copies of decisions in either case, please contact .
Supreme Court Hears Oral Arguments in FCRA Willfulness/Adverse Action Case. On January 16, the U.S. Supreme Court heard oral arguments in two consolidated Fair Credit Reporting Act (FCRA) cases before the Supreme Court: Safeco Insurance Co. v. Burr, No. 06-84, and GEICO General Insurance Co. v. Edo, No. 06-100. Both cases involve the interpretation of an insurance company’s obligation under FCRA to provide an applicant with an adverse action notice, as well as the meaning of “willful noncompliance.” (For more details, see the November 17th issue of InfoBytes.) Most observers had expected the Court to focus on whether the U.S. Court of Appeals for the Ninth Circuit was correct in its holding in a related case, Reynolds v. Hartford Financial Services Group, that a company can be found to have “willfully” violated FCRA if its interpretation is found to have been “implausible” or based on “creative lawyering.” FCRA provides for statutory penalties of $100-$1000 for “willful” violations but only actual damages for negligent violations. Although the briefing mostly addressed the willfulness issue, and Safeco did not even seek review on the adverse action question, much of the court’s questioning concerned whether FCRA requires an insurance company to offer a consumer a higher rate than it would otherwise have offered if the information in the consumer’s credit report had been more favorable. The Justices appeared to be very skeptical about this position, questioning whether the premium can be said to be “increased,” as required by the FCRA definition of “adverse action,” in connection with an initial application for insurance. A transcript of the argument is available at http://www.supremecourtus.gov/oral_arguments/argument_transcripts/06-84.pdf.
House Passes Bill to Cut Student Loan Rate and Lender Compensation. On January 17, the House of Representatives passed the “College Student Relief Act of 2007” (H.R. 5) which would impose a graduated decrease on interest rates for certain student loans paid by borrowers. Under the Act rates would decline incrementally from 6.8% to 3.4% over the next five years, sunsetting at the start of 2012. To offset the reduced borrower payments, the Act would also (i) decrease rates paid by the government to lenders, (ii) reduce the portion of certain student loans insured by the government, (iii) remove a reduced reporting exemption for lenders with “exceptional performance,” (iv) double loan fees for certain loans, and (v) reduce the retention reward for collection agencies. Various sources have put the cost to the student lending industry of these offsets, many of which do not sunset, at $6.05 billion over five years. Details of the bill, now referred to the Senate, can be found at http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.00005:.
TILA Rescission Class Certified. A federal court in Wisconsin recently granted plaintiffs summary judgment and certified a rescission class in a Truth in Lending Act (TILA) disclosure lawsuit. Andrews v. Chevy Chase Bank, FSB, Case No. 05-C-0454 (E.D. Wisc., opinion issued January 16, 2007). Plaintiffs had obtained a five-year fixed payment loan with a first month discounted rate feature that increased monthly, but alleged that the TILA disclosure confusingly suggested that their loan also included a five-year fixed interest rate feature. Granting summary judgment for plaintiffs, the Court held that while these violations did not entitle plaintiffs to statutory damages, plaintiffs were entitled to take advantage of TILA’s rescission remedy. The Court then certified a declaratory relief rescission class of borrowers who received identical TILA disclosures, finding significant that plaintiffs were not seeking actual rescission, but rather a declaration that loans with identical disclosure violations were rescindable. For a copy of this opinion, please contact .
Court Upholds Mortgage “Firm Offer” under FCRA. The U.S. District Court for the Northern District of Illinois held that solicitation letters for a home mortgage met the Fair Credit Reporting Act’s (FCRA) requirements for a valid “firm offer” even though they did not “provide the precise interest rate that will apply to each individual borrower, and they also do not disclose every term and condition of the loan, such as the maximum negative amortization provisions and whether prepayment penalties or other fees will apply.” While the court interpreted the previous Seventh Circuit Court of Appeals decisions in Cole v. U.S. Capital and Perry v. First National Bank to require that “the material terms of the offer [be] adequately disclosed,” it held that a mortgage solicitation need not disclose the exact terms because that would be a practical impossibility given that many of the terms cannot be determined from the consumer’s credit report alone. The court also rejected the consumer’s claim that the loan, an interest-only adjustable-rate mortgage, lacked “value” under the Cole test because of the risks of that type of loan, stating that “the FCRA is designed to protect the privacy of consumers’ credit histories, not to prevent them from making unwise financial choices.” See Cavin v. Home Loan Center Inc., No. 05 C 4987, – F. Supp. 2d –, 2007 WL 92509 (Jan. 10, 2007). For a copy of this opinion, please contact .
Court Finds Solicitation Based on Non-“Consumer Report” Lead Is Not Subject to FCRA. The U.S. District Court for the Eastern District of Wisconsin granted summary judgment to a lender that sent a solicitation for a mortgage that included the required FCRA prescreening notices, even though the consumer’s name was obtained from a “lead generator” that claimed not to be a consumer reporting agency (CRA) subject to FCRA. The court held that the lead generator was not a CRA because the information in the lead generator’s database was collected “with the expectation that it will be used for direct marketing purposes, and not for determining a consumer's eligibility for credit,” and, therefore, the lead generator did not meet the definition of a CRA. See Forrest v. Secured Funding Corp., No. 05-C-1324, 2007 WL 81878 (E.D. Wis. Jan. 8, 2007). For a copy of this opinion, please contact .
Study Suggests Basel II Will Encourage Mortgage Company Mergers. A recent study by a University of Florida professor suggests that banks adopting the new Basel II capital requirements could have a dramatically different role in the mortgage market. The study concludes that in a bifurcated regulatory scheme the capital retention required of Basel II-adopters for high-quality residential mortgages will be far below that of institutions opting out of the regulatory scheme. This could greatly encourage Basel II compliant banks to acquire mortgages and mortgage companies. To read the Mortgage Banker Association’s press release, and view the study, see http://www.mortgagebankers.org/NewsandMedia/PressCenter/47344.htm.
Economic Letter Addresses Concentrations in CRE Lending. An Economic Letter issued by the Federal Reserve Bank of San Francisco on January 5 discusses the increase in Commercial Real Estate (CRE) loan concentrations at commercial banks and the performance of such loans since the 1990s. The findings suggest that a high concentration of CRE loans has little or no effect on the performance of a bank’s loan portfolio and that banks with a high concentration of CRE loans are able to manage lending risk as well as other banks. The results of recent analysis indicate that nonperforming loan growth has been relatively low for most banks with CRE concentrations within five years of the concentration being identified. For information on recent federal agency guidance on CRE concentration risk, see the December 8th issue of InfoBytes. The Letter is available on the Federal Reserve Bank of San Francisco’s website at http://www.frbsf.org/publications/economics/letter/2007/el2007-01.html.
Texas Agencies Identify Preempted Laws. The Texas Finance Commission and Texas Credit Union Commission recently presented to the state legislature a “legislative report” of state financial laws preempted by federal authority. The study, ordered by the previous legislature, identifies several portions of the Texas Code pertaining to financial institutions, mortgage lending, credit reporting, and other spheres of the financial services, effectively nullified by federal law. The report can be read in full at http://www.fc.state.tx.us/Studies/preemption.pdf.
Amendment to Regulatory Relief Act Becomes Law. On January 11, President Bush signed into law H.R. 6345, which amends the Federal Deposit Insurance Act to increase from $250 million to $500 million the maximum size of a small insured depository institution which the appropriate federal banking agency may subject to a full-scope, on-site examination every 18 months (instead of every 12 months), if the greater amount would be consistent with the principles of institution safety and soundness. For information on H.R. 6345, see http://thomas.loc.gov/cgi-bin/bdquery/z?d109:h.r.6345:.
Supreme Court Hears Oral Arguments in FCRA Willfulness/Adverse Action Case. On January 16, the U.S. Supreme Court heard oral arguments in two consolidated Fair Credit Reporting Act (FCRA) cases before the Supreme Court: Safeco Insurance Co. v. Burr, No. 06-84, and GEICO General Insurance Co. v. Edo, No. 06-100. Both cases involve the interpretation of an insurance company’s obligation under FCRA to provide an applicant with an adverse action notice, as well as the meaning of “willful noncompliance.” (For more details, see the November 17th issue of InfoBytes.) Most observers had expected the Court to focus on whether the U.S. Court of Appeals for the Ninth Circuit was correct in its holding in a related case, Reynolds v. Hartford Financial Services Group, that a company can be found to have “willfully” violated FCRA if its interpretation is found to have been “implausible” or based on “creative lawyering.” FCRA provides for statutory penalties of $100-$1000 for “willful” violations but only actual damages for negligent violations. Although the briefing mostly addressed the willfulness issue, and Safeco did not even seek review on the adverse action question, much of the court’s questioning concerned whether FCRA requires an insurance company to offer a consumer a higher rate than it would otherwise have offered if the information in the consumer’s credit report had been more favorable. The Justices appeared to be very skeptical about this position, questioning whether the premium can be said to be “increased,” as required by the FCRA definition of “adverse action,” in connection with an initial application for insurance. A transcript of the argument is available at http://www.supremecourtus.gov/oral_arguments/argument_transcripts/06-84.pdf.
House Passes Bill to Cut Student Loan Rate and Lender Compensation. On January 17, the House of Representatives passed the “College Student Relief Act of 2007” (H.R. 5) which would impose a graduated decrease on interest rates for certain student loans paid by borrowers. Under the Act rates would decline incrementally from 6.8% to 3.4% over the next five years, sunsetting at the start of 2012. To offset the reduced borrower payments, the Act would also (i) decrease rates paid by the government to lenders, (ii) reduce the portion of certain student loans insured by the government, (iii) remove a reduced reporting exemption for lenders with “exceptional performance,” (iv) double loan fees for certain loans, and (v) reduce the retention reward for collection agencies. Various sources have put the cost to the student lending industry of these offsets, many of which do not sunset, at $6.05 billion over five years. Details of the bill, now referred to the Senate, can be found at http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.00005:.
Court Upholds Mortgage “Firm Offer” under FCRA. The U.S. District Court for the Northern District of Illinois held that solicitation letters for a home mortgage met the Fair Credit Reporting Act’s (FCRA) requirements for a valid “firm offer” even though they did not “provide the precise interest rate that will apply to each individual borrower, and they also do not disclose every term and condition of the loan, such as the maximum negative amortization provisions and whether prepayment penalties or other fees will apply.” While the court interpreted the previous Seventh Circuit Court of Appeals decisions in Cole v. U.S. Capital and Perry v. First National Bank to require that “the material terms of the offer [be] adequately disclosed,” it held that a mortgage solicitation need not disclose the exact terms because that would be a practical impossibility given that many of the terms cannot be determined from the consumer’s credit report alone. The court also rejected the consumer’s claim that the loan, an interest-only adjustable-rate mortgage, lacked “value” under the Cole test because of the risks of that type of loan, stating that “the FCRA is designed to protect the privacy of consumers’ credit histories, not to prevent them from making unwise financial choices.” See Cavin v. Home Loan Center Inc., No. 05 C 4987, – F. Supp. 2d –, 2007 WL 92509 (Jan. 10, 2007). For a copy of this opinion, please contact .
Court Finds Solicitation Based on Non-“Consumer Report” Lead Is Not Subject to FCRA. The U.S. District Court for the Eastern District of Wisconsin granted summary judgment to a lender that sent a solicitation for a mortgage that included the required FCRA prescreening notices, even though the consumer’s name was obtained from a “lead generator” that claimed not to be a consumer reporting agency (CRA) subject to FCRA. The court held that the lead generator was not a CRA because the information in the lead generator’s database was collected “with the expectation that it will be used for direct marketing purposes, and not for determining a consumer's eligibility for credit,” and, therefore, the lead generator did not meet the definition of a CRA. See Forrest v. Secured Funding Corp., No. 05-C-1324, 2007 WL 81878 (E.D. Wis. Jan. 8, 2007). For a copy of this opinion, please contact .
House Bill Would Revise Do-Not-Call Law. On January 5, Rep. Foxx (R-NC) introduced the “Robo Calls Off Phones Act” (Robo COP)(H.R. 248). The bill would require the Federal Trade Commission (FTC) to revise the Telemarketing Sales Rule to prohibit “politically oriented” pre-recorded messages from being sent to telephone numbers contained on the Do-Not-Call registry. Included in the definition of “politically oriented” are messages that “promote, advertise, campaign or solicit” donations for or against a political cause or candidate or that contain the name of a political candidate. Information about the Act, including the text of the bill, is available at http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.00248:.
Texas Agencies Identify Preempted Laws. The Texas Finance Commission and Texas Credit Union Commission recently presented to the state legislature a “legislative report” of state financial laws preempted by federal authority. The study, ordered by the previous legislature, identifies several portions of the Texas Code pertaining to financial institutions, mortgage lending, credit reporting, and other spheres of the financial services, effectively nullified by federal law. The report can be read in full at http://www.fc.state.tx.us/Studies/preemption.pdf.
Prohibition On Class Claims Renders Arbitration Agreement Unconscionable And Unenforceable. In a recent case, a federal court refused to compel arbitration, finding the class action bar and injunctive relief limitation contained in the arbitration clause to be substantively unconscionable. Riensche v. Cingular Wireless LLC et al., No. C06-1325Z (W.D. Wash., Order Issued Dec. 27, 2006). The class action complaint asserted that defendant Cingular Wireless violated the Washington Consumer Protection Act (CPA) and breached the service contract when it allegedly failed to disclose, and subsequently charged and collected, a “Business and Occupation Tax Surcharge.” Defendant moved to compel arbitration on the basis of an arbitration provision contained in the “Terms of Service” provided to plaintiff online and again in a “Welcome Kit” subsequently mailed to plaintiff. The Court denied the motion, however, holding that the class action prohibition contained in the arbitration provision rendered the provision procedurally unconscionable for several reasons, including that it was (i) “unilateral and excessively favor[ed] Cingular,” (ii) that the prohibition “deprive[d] consumers of an important means for enforcing their rights under the CPA”, and (iii) contravened Washington’s public policy favoring class actions as a method of enforcing violations of the CPA. The Court also found that the arbitration agreement was substantively unconscionable because it limited the availability of injunctive relief in contradiction to the relief envisioned in the CPA. Accordingly, the court severed the arbitration clause from the Terms of Service, and ordered the case to proceed. For a copy of this decision, please contact .
Judge Kaplan Defends Ancillary Jurisdiction to the 2nd Circuit. U.S. District Court Judge Lewis Kaplan recently presented a brief defending his procedural resolution of a conflict arising from his June 27th, 2006 opinion in USA v. Stein. As noted in the the June 30th issue of InfoBytes, Judge Kaplan ruled unconstitutional the “Thompson Memo,” a U.S. Department of Justice policy that gave favorable treatment to companies under federal investigation that limit the advance of legal fees to employees under federal investigation. In that decision, Judge Kaplan ruled that federal prosecutors violated the Constitutional rights of sixteen former KPMG partners indicted for tax fraud by pressuring the firm to cut off their legal fees. Judge Kaplan’s authority to exercise what he called “ancillary jurisdiction” – creating a separate civil proceeding to determine the issue of whether KPMG should pay the legal fees – was appealed to the Second Circuit and the KPMG case put on hold. Judge Kaplan defended his decision, based on the U.S. Constitution and Supreme Court and Second Circuit authority. The Second Circuit may issue a writ of mandamus and halt the proceeding, or allow the proceeding to go forward leaving KPMG the option to appeal again at the end. Importantly, the Justice Department recently replaced the “Thompson Memo” guidelines that Judge Kaplan objected to in his June decision (for more information see the December 22nd issue of InfoBytes). To view Judge Kaplan’s brief to the 2nd Circuit, see http://taxprof.typepad.com/taxprof_blog/files/kaplan_brief.pdf.
Supreme Court Hears Oral Arguments in FCRA Willfulness/Adverse Action Case. On January 16, the U.S. Supreme Court heard oral arguments in two consolidated Fair Credit Reporting Act (FCRA) cases before the Supreme Court: Safeco Insurance Co. v. Burr, No. 06-84, and GEICO General Insurance Co. v. Edo, No. 06-100. Both cases involve the interpretation of an insurance company’s obligation under FCRA to provide an applicant with an adverse action notice, as well as the meaning of “willful noncompliance.” (For more details, see the November 17th issue of InfoBytes.) Most observers had expected the Court to focus on whether the U.S. Court of Appeals for the Ninth Circuit was correct in its holding in a related case, Reynolds v. Hartford Financial Services Group, that a company can be found to have “willfully” violated FCRA if its interpretation is found to have been “implausible” or based on “creative lawyering.” FCRA provides for statutory penalties of $100-$1000 for “willful” violations but only actual damages for negligent violations. Although the briefing mostly addressed the willfulness issue, and Safeco did not even seek review on the adverse action question, much of the court’s questioning concerned whether FCRA requires an insurance company to offer a consumer a higher rate than it would otherwise have offered if the information in the consumer’s credit report had been more favorable. The Justices appeared to be very skeptical about this position, questioning whether the premium can be said to be “increased,” as required by the FCRA definition of “adverse action,” in connection with an initial application for insurance. A transcript of the argument is available at http://www.supremecourtus.gov/oral_arguments/argument_transcripts/06-84.pdf.
Plaintiffs Appeal Decisions Providing Civil Immunity for Entities Not Publishing Content Under The CDA. Plaintiffs filed a notice of appeal in Johnny Doe v. Mark Bates and Yahoo! Inc., No. 5:05-CV-91-DF-CMC (E.D. Tex.), a case in which Yahoo! was granted immunity from civil liability under the Communications Decency Act (CDA). In Johnny Doe, plaintiffs, on behalf of their minor son, sued defendants on the basis of federal child pornography protection laws and common law theories, alleging that Yahoo! knowingly hosted child pornography on an e-group. Yahoo! moved to dismiss, arguing that it was immune from plaintiffs’ claims under the CDA. The Court granted the motion, adopting the report and recommendations of a magistrate judge holding that Yahoo! – an “interactive computer service” (ICS) as defined by the CDA – was immune from all private civil liability. According to the Court, the photographs at issue were “information provided by another information content provider,” and plaintiffs’ claims treated Yahoo! as the “publisher or speaker” of that content. In such cases, the CDA – in both its language and intent – provides ICSs with blanket immunity from civil liability in an effort to “avoid disincentives to innovation and to encourage self-regulation.” Providers of content, on the other hand, are not immune from suit under the CDA. The Court’s opinion was issued on December 27, 2006, and the plaintiffs filed their notice of appeal on January 8, 2007.
Similarly, on January 11, the plaintiff in Chicago Lawyer’s Committee for Civil Rights Under Law, Inc. v. craigslist, Inc. (first reported in the July 7th issue of InfoBytes) filed a notice that it is appealing the lower court’s decision to the Seventh Circuit. That decision held that the CDA immunized craigslist – the operator of “a website that allows third parties to post and read notices for, among other things, housing sale or rental opportunities” – from federal Fair Housing Act claims alleging that craigslist hosted discriminatory real estate listings posted by others. While holding that the CDA does not bar all causes of action, the Court held that the CDA bars “those causes of action that would require treating an ICS as a publisher of third-party content.” For copies of decisions in either case, please contact .
TILA Rescission Class Certified. A federal court in Wisconsin recently granted plaintiffs summary judgment and certified a rescission class in a Truth in Lending Act (TILA) disclosure lawsuit. Andrews v. Chevy Chase Bank, FSB, Case No. 05-C-0454 (E.D. Wisc., opinion issued January 16, 2007). Plaintiffs had obtained a five-year fixed payment loan with a first month discounted rate feature that increased monthly, but alleged that the TILA disclosure confusingly suggested that their loan also included a five-year fixed interest rate feature. Granting summary judgment for plaintiffs, the Court held that while these violations did not entitle plaintiffs to statutory damages, plaintiffs were entitled to take advantage of TILA’s rescission remedy. The Court then certified a declaratory relief rescission class of borrowers who received identical TILA disclosures, finding significant that plaintiffs were not seeking actual rescission, but rather a declaration that loans with identical disclosure violations were rescindable. For a copy of this opinion, please contact .
Court Upholds Mortgage “Firm Offer” under FCRA. The U.S. District Court for the Northern District of Illinois held that solicitation letters for a home mortgage met the Fair Credit Reporting Act’s (FCRA) requirements for a valid “firm offer” even though they did not “provide the precise interest rate that will apply to each individual borrower, and they also do not disclose every term and condition of the loan, such as the maximum negative amortization provisions and whether prepayment penalties or other fees will apply.” While the court interpreted the previous Seventh Circuit Court of Appeals decisions in Cole v. U.S. Capital and Perry v. First National Bank to require that “the material terms of the offer [be] adequately disclosed,” it held that a mortgage solicitation need not disclose the exact terms because that would be a practical impossibility given that many of the terms cannot be determined from the consumer’s credit report alone. The court also rejected the consumer’s claim that the loan, an interest-only adjustable-rate mortgage, lacked “value” under the Cole test because of the risks of that type of loan, stating that “the FCRA is designed to protect the privacy of consumers’ credit histories, not to prevent them from making unwise financial choices.” See Cavin v. Home Loan Center Inc., No. 05 C 4987, – F. Supp. 2d –, 2007 WL 92509 (Jan. 10, 2007). For a copy of this opinion, please contact .
Court Finds Solicitation Based on Non-“Consumer Report” Lead Is Not Subject to FCRA. The U.S. District Court for the Eastern District of Wisconsin granted summary judgment to a lender that sent a solicitation for a mortgage that included the required FCRA prescreening notices, even though the consumer’s name was obtained from a “lead generator” that claimed not to be a consumer reporting agency (CRA) subject to FCRA. The court held that the lead generator was not a CRA because the information in the lead generator’s database was collected “with the expectation that it will be used for direct marketing purposes, and not for determining a consumer's eligibility for credit,” and, therefore, the lead generator did not meet the definition of a CRA. See Forrest v. Secured Funding Corp., No. 05-C-1324, 2007 WL 81878 (E.D. Wis. Jan. 8, 2007). For a copy of this opinion, please contact .
Tower City Title Agency Agrees to Settle RESPA Suit for $900K. An Ohio title agency has agreed to settle a class action lawsuit over marketing agreements that were alleged to violate Real Estate Settlement Procedures Act (RESPA) and the Ohio Consumer Sales Practices Act. Shahan v. Tower City Title Agency, Inc., No. 1:05 cv 1983 (N.D. Ohio Jan. 11, 2007). The plaintiffs claimed that Tower City Title Agency had entered into marketing agreements with and made payments to multiple mortgage brokers in exchange for referrals. The plaintiffs alleged that, as a result of these arrangements, borrowers were overcharged for title and closing services and that the fee paid to Tower City were illegal referral fees. The settlement, totaling $900,000, will provide refunds to Ohio borrowers who paid fees in a mortgage loan transaction in which Tower City’s services were used, and where the HUD-1 included a payment to a mortgage broker who had entered into a marketing agreement with Tower City. Tower City also agreed to end its practice of entering into marketing agreements with brokers. For a copy of the settlement, please contact .
State Farm Loses Katrina Suit. Following on a ruling by a U.S. District Court judge in Mississippi that State Farm Fire & Casualty Co. must pay the full value of a policy to a couple whose home was destroyed by Hurricane Katrina, the jury in the case awarded $2.5 million in punitive damages to the couple. The result is significant for the insurance industry, which is facing thousands of suits and other disputed policyholder claims related to the hurricane in Mississippi and other states. State Farm itself is in the process of negotiating a group settlement with policyholders with respect to the majority of cases filed against it in Mississippi, as well as with the Mississippi Attorney General. State Farm has indicated that it is likely to appeal the decision. For a copy of the opinion in Broussard v. State Farm, see http://www.mssd.uscourts.gov/Insurance%20Opinions/ch06cv6order0111.pdf. For a copy of State Farm's related press release, see http://www.statefarm.com/about/media/media_releases/broussard.asp.
Seventh Circuit Upholds Click-Through Contract. On January 7, the Seventh Circuit upheld United Parcel Service’s click through contracting process. Treiber & Straub, Inc. v. United Parcel Svc., Inc., Nos. 05-3743 and 05-3896 (7th Cir. Jan. 7, 2007). In this case, the plaintiff attempted to ship a package worth $105,000 via UPS and purchased excess value insurance of $50,000 to cover the package. UPS lost the package. When T&S attempted to collect on the insurance policy, UPS denied the claim because its terms and conditions and insurance documents explicitly excluded insurance on items with a real value greater than $50,000. Plaintiff argued that it did not have adequate notice of the exclusion because it was not clearly and conspicuously placed in UPS’ lengthy Terms and Conditions. The court determined that the common law of contract did not require that the exclusion be “clear and conspicuous,” and in any event determined that plaintiff was bound by UPS’s Terms and Conditions, which plaintiff acknowledged via a click-through process. Please contact for a copy of the decision.
Financial Harm From Identity Theft No Basis For Constitutional Privacy Rights Claim. On December 29, the U.S. District Court for the Southern District of Ohio held that individuals do not have a Constitutionally protected privacy interest in their Social Security number. The plaintiff had been issued a speeding ticket, on which the police officer recorded her name, address, birth date, driver's license number, and Social Security number. The ticket was later filed with the local court clerk who posted the ticket on the clerk's web site. Subsequently, an individual using a driver's license with the plaintiff's personal identification purchased thousands of dollars of electronics from Sam's Club and put an additional $12,000 on a credit card opened in her name. The court held that the plaintiff's alleged privacy interest in her name, signature, home address, birth date, driver's license number, and social security number do not implicate either a "fundamental right or one implicit in the concept of ordered liberty," the required standard to find a Constitutional right to privacy protection of one's interests. The court contrasted the plaintiff's financial harm to "potential and actual harm" suffered by plaintiffs in previous cases where personal security and bodily integrity were at stake and, since the standard was not met, dismissed the Constitutional claim filed under 42 U.S.C. § 1983. See Lambert v. Hartmann, Case No. 1:04cv837, (S.D. Ohio, 12/29/06). For a copy of the court's opinion, please contact .
State Farm Loses Katrina Suit. Following on a ruling by a U.S. District Court judge in Mississippi that State Farm Fire & Casualty Co. must pay the full value of a policy to a couple whose home was destroyed by Hurricane Katrina, the jury in the case awarded $2.5 million in punitive damages to the couple. The result is significant for the insurance industry, which is facing thousands of suits and other disputed policyholder claims related to the hurricane in Mississippi and other states. State Farm itself is in the process of negotiating a group settlement with policyholders with respect to the majority of cases filed against it in Mississippi, as well as with the Mississippi Attorney General. State Farm has indicated that it is likely to appeal the decision. For a copy of the opinion in Broussard v. State Farm, see http://www.mssd.uscourts.gov/Insurance%20Opinions/ch06cv6order0111.pdf. For a copy of State Farm's related press release, see http://www.statefarm.com/about/media/media_releases/broussard.asp.
Plaintiffs Appeal Decisions Providing Civil Immunity for Entities Not Publishing Content Under The CDA. Plaintiffs filed a notice of appeal in Johnny Doe v. Mark Bates and Yahoo! Inc., No. 5:05-CV-91-DF-CMC (E.D. Tex.), a case in which Yahoo! was granted immunity from civil liability under the Communications Decency Act (CDA). In Johnny Doe, plaintiffs, on behalf of their minor son, sued defendants on the basis of federal child pornography protection laws and common law theories, alleging that Yahoo! knowingly hosted child pornography on an e-group. Yahoo! moved to dismiss, arguing that it was immune from plaintiffs’ claims under the CDA. The Court granted the motion, adopting the report and recommendations of a magistrate judge holding that Yahoo! – an “interactive computer service” (ICS) as defined by the CDA – was immune from all private civil liability. According to the Court, the photographs at issue were “information provided by another information content provider,” and plaintiffs’ claims treated Yahoo! as the “publisher or speaker” of that content. In such cases, the CDA – in both its language and intent – provides ICSs with blanket immunity from civil liability in an effort to “avoid disincentives to innovation and to encourage self-regulation.” Providers of content, on the other hand, are not immune from suit under the CDA. The Court’s opinion was issued on December 27, 2006, and the plaintiffs filed their notice of appeal on January 8, 2007.
Similarly, on January 11, the plaintiff in Chicago Lawyer’s Committee for Civil Rights Under Law, Inc. v. craigslist, Inc. (first reported in the July 7th issue of InfoBytes) filed a notice that it is appealing the lower court’s decision to the Seventh Circuit. That decision held that the CDA immunized craigslist – the operator of “a website that allows third parties to post and read notices for, among other things, housing sale or rental opportunities” – from federal Fair Housing Act claims alleging that craigslist hosted discriminatory real estate listings posted by others. While holding that the CDA does not bar all causes of action, the Court held that the CDA bars “those causes of action that would require treating an ICS as a publisher of third-party content.” For copies of decisions in either case, please contact .
Seventh Circuit Upholds Click-Through Contract. On January 7, the Seventh Circuit upheld United Parcel Service’s click through contracting process. Treiber & Straub, Inc. v. United Parcel Svc., Inc., Nos. 05-3743 and 05-3896 (7th Cir. Jan. 7, 2007). In this case, the plaintiff attempted to ship a package worth $105,000 via UPS and purchased excess value insurance of $50,000 to cover the package. UPS lost the package. When T&S attempted to collect on the insurance policy, UPS denied the claim because its terms and conditions and insurance documents explicitly excluded insurance on items with a real value greater than $50,000. Plaintiff argued that it did not have adequate notice of the exclusion because it was not clearly and conspicuously placed in UPS’ lengthy Terms and Conditions. The court determined that the common law of contract did not require that the exclusion be “clear and conspicuous,” and in any event determined that plaintiff was bound by UPS’s Terms and Conditions, which plaintiff acknowledged via a click-through process. Please contact for a copy of the decision.
Senator Feinstein Reintroduces Data Breach and Social Security Number Legislation. Senator Dianne Feinstein (D – Cal.) recently reintroduced two bills concerning data breach notification and the use of social security numbers. S. 239, a data breach notification bill, reportedly would require businesses and federal agencies to notify individuals when their personal data has been breached. The bill also would require notification to the media and, in some cases, the U.S. Secret Service. S. 239 is reportedly similar to S. 751 introduced in the 109th Congress, which was incorporated into S. 1789, also introduced in the 109th Congress. Senator Feinstein also introduced S. 238, which, if passed, would preclude the government from displaying individuals’ social security numbers on electronic media, including the Internet and other non-web-accessible media. Moreover, the bill reportedly would prohibit displaying or selling an individual’s social security number without his or her consent. Neither bill is yet available on the Library of Congress website (http://thomas.loc.gov/), but should be shortly.
Senator Feinstein Reintroduces Data Breach and Social Security Number Legislation. Senator Dianne Feinstein (D – Cal.) recently reintroduced two bills concerning data breach notification and the use of social security numbers. S. 239, a data breach notification bill, reportedly would require businesses and federal agencies to notify individuals when their personal data has been breached. The bill also would require notification to the media and, in some cases, the U.S. Secret Service. S. 239 is reportedly similar to S. 751 introduced in the 109th Congress, which was incorporated into S. 1789, also introduced in the 109th Congress. Senator Feinstein also introduced S. 238, which, if passed, would preclude the government from displaying individuals’ social security numbers on electronic media, including the Internet and other non-web-accessible media. Moreover, the bill reportedly would prohibit displaying or selling an individual’s social security number without his or her consent. Neither bill is yet available on the Library of Congress website (http://thomas.loc.gov/), but should be shortly.
Financial Harm From Identity Theft No Basis For Constitutional Privacy Rights Claim. On December 29, the U.S. District Court for the Southern District of Ohio held that individuals do not have a Constitutionally protected privacy interest in their Social Security number. The plaintiff had been issued a speeding ticket, on which the police officer recorded her name, address, birth date, driver's license number, and Social Security number. The ticket was later filed with the local court clerk who posted the ticket on the clerk's web site. Subsequently, an individual using a driver's license with the plaintiff's personal identification purchased thousands of dollars of electronics from Sam's Club and put an additional $12,000 on a credit card opened in her name. The court held that the plaintiff's alleged privacy interest in her name, signature, home address, birth date, driver's license number, and social security number do not implicate either a "fundamental right or one implicit in the concept of ordered liberty," the required standard to find a Constitutional right to privacy protection of one's interests. The court contrasted the plaintiff's financial harm to "potential and actual harm" suffered by plaintiffs in previous cases where personal security and bodily integrity were at stake and, since the standard was not met, dismissed the Constitutional claim filed under 42 U.S.C. § 1983. See Lambert v. Hartmann, Case No. 1:04cv837, (S.D. Ohio, 12/29/06). For a copy of the court's opinion, please contact .
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