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InfoBytes

CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

February 24 , 2006

FEDERAL ISSUES

Credit-Card Processor Settles FTC Data-Security Charges. On February 23, 2006, the Federal Trade Commission (“FTC”) issued a proposed settlement in its data security case against Card Systems Solutions, Inc. (“Card Systems”). The FTC’s complaint alleged that Card Systems, a credit-card processor, violated the FTC Act by failing to “employ reasonable and appropriate security measures,” allowing a computer hacker to obtain credit-card authorization data from the company. The complaint alleges that Card Systems increased its exposure to hackers by leaving authorization data on its server “in a vulnerable format for up to 30 days” and “did not implement simple, low-cost, and readily available defenses to [hacker] attacks.” According to the complaint, the hackers then used this information to create counterfeit credit and debit cards that “contained complete and accurate magnetic stripe data” which were used to authorize millions of dollars in fraudulent charges. As in the BJ’s Wholesale Club and DSW matters announced in 2005, but in contrast to earlier FTC data-security and privacy cases, the FTC based its allegations of law violations on a broad unfairness theory, in which the claim is that “failure to employ reasonable and appropriate security measures” is an unfair practice in violation of Section 5 of the FTC Act. Earlier cases had relied on a narrower theory that the company engaged in a deceptive practice by failing to honor its disclosed privacy policy. The consent order does not order the company to pay restitution, although both the press release and the analysis of the order to be published in the Federal Register note that the company “faces potential liability in the millions of dollars under bank procedures and in private litigation for losses related to the breach.” Comments on the proposed consent order, which will be published in the Federal Register, are due by March 27, 2006. (FTC administrative consent orders are subject to public comment before being issued in final form.) See Card Systems Solutions, Inc., 052-3148 (proposed settlement posted for public comment Feb. 23, 2006), available at http://www.ftc.gov/os/caselist/0523148/0523148.htm. FTC Chairman Deborah Platt Majoras announced the settlement in a speech at an identity-theft “summit” sponsored by the California Department of Consumer Affairs; her speech includes citations to the FTC’s previous data-security settlements. See http://www.ftc.gov/speeches/majoras/060223californiaidtheft.pdf.

New SAR Form Proposed for Depository Institutions. On February 17, the Treasury Department's Financial Crimes Enforcement Network, together with the federal banking agencies, proposed revisions to the form used for reporting suspicious activities pursuant to the Bank Secrecy Act and to the instructions for completing the form. The revisions are intended to enhance the clarity of the instructions, allow for joint filing of suspicious activity reports (“SARs”) by multiple financial institutions, and improve the usefulness of the SAR form to law enforcement. Comments can be submitted through April 18. The proposed revisions are available at http://www.fincen.gov/71_fr_86401.pdf.

FDIC Issues Final Rule on Assumption of Insured Deposits. On February 21, 2006, the Federal Deposit Insurance Corporation (“FDIC”) adopted a final rule simplifying the procedures to be used when all of the deposit liabilities of an insured depository institution are assumed by another insured depository institution. The final rule modifies existing requirements by: (i) clarifying that an insured institution must file a “certification” only when all of its deposits are assumed; (ii) requiring that the transferring institution, or its legal successor, file the certification; (iii) clarifying that the transferring institution’s status as an insured institution automatically terminates upon the FDIC’s receipt of an accurate certification; and (iv) providing more specificity regarding how notice is to be given to depositors when an insured depository institution voluntarily terminates its insured status. The final rule takes effect on March 23, 2006. For a copy of the rule, see http://www.fdic.gov/regulations/laws/federal/2006/06final221.pdf.

OTS Issues Updated FCRA, CAN-SPAM and TCPA Guidance. On February 23, 2006, the Office of Thrift Supervision (“OTS”) issued Regulatory Bulletin 37-13 (“RB 37-13”). RB 37-13 replaces Section 1300 of the OTS Examination Handbook. The bulletin updates the Examination Handbook’s discussion of Fair Credit Reporting Act requirements, including the FACT Act. In addition, it adds sections on compliance with the CAN-SPAM Act and Telephone Consumer Protection Act (“TCPA”). RB 37-13 is available at http://www.ots.gov/docs/7/74824.pdf.

OTS Issues Revised Examination Handbook Section 380 - Transactions with Affiliates and Insiders. On February 23, 2006, the OTS also released Regulatory Bulletin 37-12 (“RB 37-12”) which provides a new Examination Handbook Section 380 - Transactions with Affiliates and Insiders - to replace the old Thrift Activities Handbook Section 380. OTS issued new Section 380 to incorporate changes pursuant to the Board of Governors of the Federal Reserve System’s (“FRB”) final Transactions with Affiliates Rule. The revised Section 380 incorporates applicable provisions of the FRB’s Regulation W, explains that certain aspects of this regulation do not apply to savings associations (such as the concept of subsidiaries), and revises several OTS interpretations under section 11(a)(1) of the Home Owners’ Loan Act (which prohibits savings associations from making loans to an affiliate that is engaged in non-bank holding company activities.) To view RB 37-12, including detailed information regarding the Section 380 changes, please go to http://www.ots.treas.gov/docs/7/74823.pdf.

STATE ISSUES

California Department of Real Estate Targets Real Estate Brokerage for “Illegal Rebates.” On February 2, 2006, the California Department of Real Estate (“DRE”) issued an accusation against a corporate real estate broker, R.J. Young Co. (“RJYC”) of Westlake Village, and its broker of record, Joan Ruth Young, for: (i) receiving “illegal rebates” in exchange for steering home sellers to particular title insurance companies; and (ii) failing to disclose its reinsurance arrangement and compensation to sellers. In 2004, RJYC allegedly received $15,996 as a result of a reinsurance participation agreement it forged with title companies owned by Fidelity National Financial (“FNF”). In addition, DRE asserts that RJYC and its brokers engaged in “fraud or dishonest dealings” when they failed to disclose to home sellers the nature of their reinsurance agreement and the fact that they would receive compensation for sending the seller to a specific title insurance company. For a complete copy of the DRE complaint, please contact Buckley Kolar.

Interpretations Regarding Texas Home Equity Lending Proposed. On February 17, 2006, the Finance Commission of Texas and the Texas Credit Union Commission jointly proposed new interpretations to replace current interpretations regarding home equity lending under the Texas Constitution, Article XVI, § 50(a)(6). The proposed interpretations involve: (i) the one day waiting period between the disclosure of fees and the closing of the equity loan, (ii) the debt consolidation provision that allows a borrower to pay off preexisting debt with the lender, making the home equity loan from the proceeds from the new loan, (iii) signing "instruments" with blanks left to be filled in and (iv) expanding the copies of documents required to be provided to the borrower at closing to include certain documents signed by the borrower prior to closing. Comments on the proposed interpretations must be received by the Credit Union Department or Office of Consumer Credit Commissioner on or before the 40th day after the publication of the proposals in the Texas Register. The Finance Commission has indicated that the proposals will be published in the March 3, 2006, issue of the Texas Register. For more information on the proposals, please contact Buckley Kolar.

COURTS

Seventh Circuit Rejects Rehearing in FCRA Prescreening Case. As reported in InfoBytes for January 20, 2006 (see http://www.buckleykolar.com/publications/InfoBytes012006.html), the United States Court of Appeals for the Seventh Circuit had reversed a district court’s denial of a consumer’s petition for class certification in a FCRA “firm offer” prescreening case. See Murray v. GMAC Mortgage Corp., 434 F.3d 948 (7th Cir. Jan. 17, 2006). On February 21, 2006, the court denied GMAC Mortgage’s petition for rehearing and petition for rehearing en banc of the appellate decision. As reported in InfoBytes for January 27, 2006 (see http://www.buckleykolar.com/publications/InfoBytes012706.html), one federal district court in the Northern District of Illinois implied that the Seventh Circuit’s reference to interpreting the “four corners” of the offer means that the initial solicitation letter must contain the entire “firm offer.” See Kudlicki v. Farragut Financial Corp., No. 05-C-2459 (N.D. Ill. Jan. 20, 2006). Please contact Buckley Kolar for a copy of the decision.

U.S. Supreme Court Holds That Contract Legality to be Determined by Arbitrator, Not Court. On February 21, 2006, the United States Supreme Court upheld the enforceability of an arbitration agreement, notwithstanding claims that the contract containing the arbitration agreement was illegal and unenforceable. The putative class of plaintiffs argued that the defendant lender had made usurious loans disguised as check cashing transactions in violation of state law. The Florida Supreme Court held that claims that the underlying contract was illegal and void ab initio had to be resolved by the trial court before arbitration of other disputes could be compelled. In a 7-1 decision (with Justice Alito abstaining), the U.S. Supreme Court reversed, holding that claims that a purportedly usurious contract containing an arbitration agreement was void for illegality are to be determined by the arbitrator, not by the court. For a copy of the opinion, see Buckeye Check Cashing, Inc. v. Cardegna, No. 04-1264 (Feb. 21, 2006), available at http://www.supremecourtus.gov/opinions/05pdf/04-1264.pdf.

U.S. District Court Rules that Loan Company’s Storage of Unencrypted Personal Financial Data on an Employee Laptop Computer is Not a Violation of Gramm-Leach Bliley. On February 7, the U.S. District Court for the District of Minnesota in Guin v. Brazos Higher Educ. Svc., Civ. No. 05-668 (RHK-JSH) (Feb. 7, 2006), held that a student loan service company did not breach its duty of care to its customers by allowing unencrypted personal financial data to be stored on a laptop computer which was stolen from an employee’s home. The plaintiff, a customer who was notified by the loan company that his data may have been compromised but did not experience any fraud or identity theft as a result of the security breach, argued that the company violated the standard of care established by the Gramm-Leach Bliley Act, 15 US.C. §6801 (“GLB Act”). The Court held that the GLB Act does not require data encryption and that it is not a breach of the GLB Act’s standard of care for employees who are authorized to access customers’ financial data to bring such information home on laptop computers. The Court also noted that, while the FTC cautions businesses to provide secure data transmission through the use of encryption, there is no such standard in the GLB Act, nor in the FTC regulations. To view the Court opinion, please go to http://www.nysd.uscourts.gov/courtweb/pdf/D08MNXC/06-00529.PDF.

Providing Credit Report on Closed Account May Create FCRA Claim Against Consumer Reporting Agency. The U.S. Court of Appeals for the Eleventh Circuit recently held that a plaintiff sufficiently stated a claim under the Fair Credit Reporting Act (“FCRA”) against a consumer reporting agency (“CRA”) when he alleged that the CRA provided a consumer report to a third party, even though the CRA had “reasonable grounds for believing that the consumer report [would] not be used for a [permissible] purpose.” In Levine v. World Financial Network National Bank, — F.3d —, No. 04-16428, 2006 WL 200920, 2006 U.S. App. LEXIS 2023 (11th Cir. Jan. 27, 2006), the plaintiff alleged that the CRA furnished two credit reports on the consumer within a few months to a private-label credit-card issuer owned by a retailer, based on card issuer’s statement that the purpose of obtaining the report was “account review.” The consumer’s complaint alleged that his account with the card issuer had been closed for several years and that there was no dispute or other reason that would give the card issuer a permissible purpose to obtain the report. The court reserved judgment on whether FCRA absolutely prohibits providing a credit report under the “review” purpose when the account is closed. To obtain the decision, please go to http://caselaw.lp.findlaw.com/data2/circs/11th/0416428p.pdf.

California Court Rules "Unauthorized" Indorsement Includes Missing Indorsements. A California Appellate Court upheld a decision that rejected appellant-homeowners’ claims that a bank was liable for misrepresentation, negligence and conversion for accepting a check without a required indorsement. In this case, a construction company obtained an insurance check indorsed by the homeowner with promises of presenting the check to the mortgagee for their required indorsement, but instead deposited into their bank account without the mortgagee's indorsement. The defendant-appellee payee bank eventually reimbursed the mortgagee for the amount of the check, but the homeowners alleged consequential and special damages based on common law negligence and fraud. The trial court rejected the claims, ruling that the California Uniform Commercial Code (“CUCC”) subsumed the claims in a statutory conversion action. The appellate court agreed, citing several reasons. First, the homeowners claimed that the CUCC did not cover the situation because the CUCC specifically addresses unauthorized indorsements rather than missing indorsements, allowing a claim to be brought under a common law negligence theory. The court disagreed, citing precedent and statutory authority supporting the view that the CUCC specifically includes missing indorsements within the unauthorized indorsements covered by the CUCC. The Court also rejected the homeowners’ fraud claims, ruling that the homeowners were unable to prove that the bank made a misrepresentation to the homeowners. Finally, the court ruled that the proper cause of action was conversion, which provides recovery in the amount of the plaintiff's interest in the instrument. Because the bank reimbursed the full amount of the check to the mortgagee, the homeowners cannot recover twice. Gil v. Bank of America, N.A., No. B181249, 2006 Cal. App. LEXIS 169 (Cal. Ct. App., Feb. 9, 2006). To obtain the decision, please go to http://www.courtinfo.ca.gov/opinions/documents/B181249.PDF.

MISCELLANY

FED Vice Chairman Ferguson Resigns. On February 22, 2006, Roger W. Ferguson, Jr. submitted his resignation as Vice Chairman and member of the Board of Governors of the Federal Reserve System, effective April 28, 2006. Ferguson, who was appointed by both President Clinton and President Bush, has served on the Board for over eight years. As Vice Chairman, Ferguson represented the Federal Reserve in international policy groups, served as Chairman of several forums and committees, and led in negotiating the Basel II capital accord. To read Ferguson's resignation letter, go to http://www.federalreserve.gov/BoardDocs/Press/other/2006/20060222/attachment.pdf. To View the press release, go to http://www.federalreserve.gov/BoardDocs/Press/other/2006/20060222/default.htm.

Kevin Warsh Sworn in to Board of Governors of the Federal Reserve. Today, the Federal Reserve announced that Kevin Warsh was sworn in as a member of the Board of Governors of the Federal Reserve System. Mr. Warsh’s term expires January 31, 2018. For more information, please go to http://www.federalreserve.gov/BoardDocs/Press/other/2006/20060224/default.htm.

FIRM NEWS

On March 9-10, 2006, Andrea Lee Negroni will be speaking at the Texas Bar Association's meeting at the Adolphus Hotel in Dallas, Texas, on the subject of "Advanced Real Estate Drafting: Residential Disclosures."

On March 10, 2006, from 12:00-1:30pm EST, Buckley Kolar LLP and the Electronic Financial Services Council will be hosting a teleseminar on Freddie Mac's recently released eMortgage Handbook. Ann Epstein, Offerings Director, and Michael Gordon, Assistant General Counsel of Freddie Mac will be presenting. If you would like to attend, please RSVP via email to Nick Ennis at Buckley Kolar (). A call-in number and materials will be provided in advance.

On March 15, 2006, Bob Serino will be speaking at the Money Laundering Alert 11th Annual International Money Laundering Conference in Hollywood, FL, the largest conference of its kind in the United States. For the benefit of InfoBytes subscribers who want to attend, Buckley Kolar has $200 Savings Vouchers available towards a discounted registration fee. If you are interested in attending and would like a Savings Voucher, please contact Sue Kilgore at (202) 349-8054. For a copy of the program brochure, which includes detailed registration information, see http://www.nxtbook.com/nxtbooks/alertglobalmedia/2006brochure/.

On March 16, 2006, Joe Kolar will be speaking on “Joint Ventures and Affiliated Business Arrangements Under RESPA” at the Old Republic National Title Insurance Company’s 2006 Annual Seminar in Columbus, OH.

On March 20-21, 2006, Joe Kolar will be speaking at the PLI’s 11th Annual Institute on Consumer Financial Services Litigation in New York City.

© Buckley Kolar, LLP 2006. INFOBYTES is not intended as legal advice to any person or firm. It is provided as a client service and information contained herein is drawn from various public sources, including other publications.

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