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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS
Free Web Seminar – Release of Proposed RESPA Reform Regulation by HUD
Wednesday, March 19 at 12 PM EDT (9:00 AM PDT)
Buckley Kolar attorneys Joseph Kolar and Grant Mitchell will lead a detailed one-hour discussion of the proposed rule and be available to answer questions regarding HUD’s new RESPA reform initiative and its prospect for final adoption. Please note that because the HUD proposed rule has not yet been released to the public, the timing of this webinar is subject to change. In the event the proposed rule is not made public prior to March 19th, the webinar will be rescheduled. To Register for the Webinar, Please Go to https://meetingvisuals.webex.com/meetingvisuals/j.php?ED=103801362&RG=1.
Topics – Covered This Week (Click to View)
FEDERAL ISSUES
OFHEO, New York AG, Fannie and Freddie Agree to New Appraisal Standards. On March 3, the Office of Federal Housing Enterprise Oversight (OFHEO), the New York Attorney General, Fannie Mae, and Freddie Mac entered into cooperation agreements that require Fannie Mae and Freddie Mac to buy loans only from banks that meet new standards designed to ensure independent and reliable appraisals. The agreements establish the “New Home Valuation Protection Code” which (among other things): (i) prohibits mortgage brokers from selecting appraisers; (ii) prohibits lenders from using “in-house” staff appraisers to conduct initial appraisals; and (iii) prohibits lenders from using appraisal management companies that they own or control. In addition, beginning January 1, 2009, Fannie Mae and Freddie Mac, which together purchase approximately 60% of all home loans originated in the United States, will require lenders to represent and warrant that appraisals conform to the Code. The agreements also create an “Independent Valuation Protection Institute” - an independent organization which will implement and monitor the Code, establish a complaint hotline for consumers to call with appraisal fraud concerns, and serve as a contact for appraisers who believe that their independence has been compromised. The new standards follow an investigation of Freddie Mac’s appraisal practices by the New York Attorney General. OFHEO Director John Lockhart expressed concerns regarding the New York Attorney General’s investigation of the federally regulated entity last November (see InfoBytes, Nov. 9, 2007). For more information, please see http://www.oag.state.ny.us/press/2008/mar/mar3a_08.html and http://www.ofheo.gov/newsroom.aspx?ID=417&q1=1&q2=None.
FHA, Fannie, and Freddie Temporarily Increase Maximum Loan Limits. On March 6, the Federal Housing Administration (FHA) issued Mortgagee Letter 2008-06 regarding the temporary increase in the size of mortgages eligible for FHA insurance under the Economic Stimulus Act (see InfoBytes, Feb. 8, 2008). Under the act, for mortgages approved before December 31, 2008, the maximum size of FHA-insurance eligible mortgages is 125% of the area median home price, not to exceed 175% nor be less than 65% of Freddie Mac’s 2008 conforming loan limit. Home Equity Conversion Mortgages (HECMs, FHA-insured reverse mortgages) are not subject to the temporary increases, and are capped by the unaltered limits (discussed in Mortgagee Letter 2008-02). A list of areas where FHA mortgage insurance caps are at the 175% of conforming limit maximum can be found in the mortgagee letter’s Attachment 1. Areas where limits are between the 65% and 175% bounds are listed in the letter’s Attachment 2. Also in connection with the Economic Stimulus Act, on March 6 the Office of Federal Housing Enterprise Oversight (OFHEO) announced it was temporarily raising the conforming loan limit, the maximum size of mortgages eligible for purchase by Fannie Mae and Freddie Mac. Information on the new regional limits, effective through the end of 2008, is available http://www.ofheo.gov/media/hpi/AREA_LIST.pdf. For a copy of Mortgagee Letter 2008-06, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/08-06ml.doc.
GAO Reports that Banks Not Providing Adequate Disclosures for Deposit Accounts. The Government Accountability Office (GAO) recently presented a report to the House Committee on Financial Services urging federal banking regulators to step up their enforcement efforts to ensure that adequate disclosures are made to consumers of checking and savings accounts, especially disclosures concerning fees such as overdraft charges. The GAO’s 84 page report notes that banks are charging increased fees for overdrafts, insufficient funds, stop payments actions and the like, but that monthly account maintenance fees seem to be on the decline. GAO staff members, who visited over 150 depository institutions, found that about one-third of the time, the relevant disclosure language about checking and savings account fees is not made available to consumers. The GAO report finds that, although the federal banking regulators review the policies and procedures of depository institutions and respond to consumer complaints, the information disclosed regarding fees, terms, and conditions is still inadequate to allow borrowers to readily compare their options. The GAO report also suggests that federal banking regulators begin to examine the actual fee amounts being charged for overdrafts and similar events, which have risen by 10% or more since 2000. For the full text of the GAO report, please see http://www.gao.gov/new.items/d08281.pdf.
Banking Agencies Ask Servicers to Use Uniform Modification Reporting. On March 3, the Federal Deposit Insurance Corporation (FDIC), Federal Reserve, Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) asked the financial institutions they regulate to adopt the HOPE NOW Alliance’s loan modification reporting standards. HOPE NOW is a voluntary loan modification program established by the lending industry with the support of the Bush Administration to help fight the foreclosure crisis (most recently reported in InfoBytes, Feb. 22, 2007). According to the FDIC Financial Institution Letter encouraging the uniform standard, “[c]onsistent loan modification reporting will foster transparency in the securitization market and provide standardized data across the mortgage industry.” The Federal Reserve, OCC,and OTS advisory letters issued do not vary significantly from that of the FDIC, which can be found at http://www.fdic.gov/news/news/financial/2008/fil08017.html.
Bernanke Advocates Principal Reductions in Mortgage Workouts. On March 4, during a speech to the Independent Community Bankers Association, Federal Reserve Board Chairman Ben Bernanke said that the industry could “reduce preventable foreclosures if investors acting in their own self interests were to permit servicers to write down the mortgage liabilities of borrowers by accepting a short payoff in appropriate circumstances.” Noting that, according to one estimate, recent subprime foreclosures have recovered less than 50% of principal borrowed, Chairman Bernanke expressed great concern that an already high loss rate on subprime loans “will likely grow even larger.” Therefore, in addition to advocating a more prominent role for FHA, as well as Fannie Mae and Freddie Mac, Mr. Bernanke encouraged action to alleviate the “barriers” to and “disincentives” for steps to avoid “preventable foreclosures.” For a copy of the Chairman’s remarks, please see http://www.federalreserve.gov/newsevents/speech/bernanke20080304a.htm.
Student Lender Settles FTC Claims of Noncompliance with Privacy Rules. On March 4, Goal Financial, LLC, a student loan company, agreed to settle claims brought by the Federal Trade Commission (FTC) for alleged failure to provide “reasonable and appropriate security” for consumers’ personal information in violation of the FTC’s Standards for Safeguarding Customer Information Rule and its Privacy of Customer Financial Information Rule (both of which implement provisions of the Gramm-Leach-Bliley Act). The proposed order requires Goal Financial to establish and maintain an information security program that includes administrative, technical, and physical safeguards, and bars Goal Financial from future data security misrepresentations to consumers. In addition, Goal Financial must undergo audits performed by independent third-party security professionals on a biennial basis for the next 10 years in order to ensure that its security program meets the standards set forth in the agreement. The FTC’s initial complaint was issued in connection with Goal Financial’s employees’ unauthorized transfer of more than 7,000 files with consumer information to third parties, as well as an employee’s sale of public surplus hard drives that contained personal information of approximately 34,000 consumers. As a result of these transfers, the FTC alleged that Goal Financial violated the safeguards rule because it failed to (among other things) (i) restrict access to this information to authorized employees, (ii) implement a comprehensive information security program, (iii) provide adequate employee training, and (iv) in some cases, contractually require third-party service providers to protect the information. In addition, Goal Financial allegedly violated the privacy rule by providing customers with a privacy policy that contained false and misleading statements as to the “reasonable and appropriate” measures Goal Financial had in place to protect consumers’ personal information. The agreement is available for public comment until April 3, after which time the FTC will decide whether to make the agreement final. For a copy of the proposed settlement agreement, please see http://www.ftc.gov/os/caselist/0723013/index.shtm.
SEC Proposes Amendments to Regulation S-P to Address Information Security Concerns. On March 4, the U.S. Securities and Exchange Commission (SEC) issued proposed amendments to Regulation S-P, which implements certain provisions of the Gramm-Leach-Bliley Act (GLBA) and the Fair Credit Reporting Act (FCRA) with respect to institutions regulated by the SEC. The proposed amendments are intended to help address security breaches at regulated institutions and would update Regulation S-P’s safeguarding and disposal provisions by extending their application. The proposed amendments would establish more detailed standards for information security programs that are designed to help guard against identity theft and include a new exception that would provide representatives with an orderly mechanism to take limited customer information with them when moving from one SEC-regulated entity to another. As proposed, the disposal provisions would be extended to individuals associated with broker-dealers, investment advisers and transfer agents registered with the SEC. In addition, the safeguarding provisions would be extended to registered transfer agents. For more information, please see http://www.sec.gov/rules/proposed/2008/34-57427.pdf.
STATE ISSUES
Florida AG and AT&T Reach Settlement on Inaccurate Fee Disclosures. On February 29, the Florida Attorney General reached a settlement with AT&T Mobility regarding claims that consumers were charged on their cell phone bills for certain third party services that they did not authorize. The Attorney General alleged that AT&T Mobility internet advertisements described the ringtones or other services as being “free,” but resulted in customers being signed up for costly monthly subscriptions for third party content, including horoscopes, wallpaper, and other cell phone-related content. The settlement agreement requires AT&T Mobility to (i) prohibit certain forms of advertising deemed deceptive, (ii) include disclosure provisions in customer contracts regarding third party services, (iii) notify existing customers of the new contract provisions, (iv) provide quarterly reports to the Attorney General concerning consumer complaints, (v) issue credits and refunds to customers for unauthorized charges, and (vi) pay the Attorney General $2,500,000 for investigation fees and an additional $500,000 to educate consumers about Internet safety. If AT&T Mobility complies with this settlement within 90 days, the Attorney General has agreed to dismiss pending litigation against it. For a full copy of the settlement agreement, please see http://myfloridalegal.com/webfiles.nsf/WF/MRAY-7CAJ86/$file/ATTAVC.pdf.
New York Governor Proposes Subprime Mortgage Legislation. On March 4, New York Governor Eliot Spitzer proposed a new bill designed to offer assistance to New Yorkers who are at risk of losing their homes and to enhance the protections of New York’s “Anti-Predatory Lending” statutes. The bill would require increased due diligence by lenders in assessing a borrower’s ability to repay a mortgage loan. Specifically, lenders would be required to consider a borrower’s ability to afford loan principal, interest, taxes, insurance, assessments, and points and fees in light of the borrower’s income level, employment status and other financial resources. The bill would also require (i) a pre-foreclosure notice to homeowners at least 60 days before initiating legal action, (ii) a settlement conference at the beginning of the foreclosure process, and (iii) registration for mortgage loan servicers. The bill includes measures to protect distressed homeowners from falling prey to rescue scams and sets forth a definition of the crime of “mortgage fraud” under the New York Penal Law to make it easier to prosecute offenders. Additionally, the bill would create a new subset of mortgage loans subject to the state’s high cost home loan provisions: “non-conventional home loans,” defined as a home loan in which the annual percentage rate at consummation exceeds the yield on treasury securities by at least 3% for first lien loans, and by 5% on second lien loans. The bill specifies that the consummation rate on home loans with an introductory rate will be calculated at the first reset of the rate. Finally, this bill prohibits prepayment penalties and yield spread premiums on high cost and non-conventional home loans. For more information, please see http://www.buckleykolar.com/publications/documents/GPB44MEMO.pdf.
COURTS
Federal Court Sets Aside FHA Seller-Funded Downpayment Assistance Rule. A federal district court in California recently held that a rule promulgated by the Department of Housing and Urban Development (HUD) banning downpayment assistance from the seller (or any entity that financially benefits from the transaction) in connection with Federal Housing Administration (FHA) insured mortgages violated the federal Administrative Procedures Act (APA). Nehemiah Corp. of America v. Jackson, No. 07-2056, (E.D. Cal. Feb. 29, 2008). Nehemiah, a non-profit organization, offered “downpayment assistance” (DPA) to FHA borrowers by providing them with the mandatory 3% downpayment and then receiving a reimbursement “donation” from the seller. On October 1, 2007, HUD published a final rule prohibiting such arrangements. Nehemiah sued, arguing that HUD had failed to meet the requirements of the APA because (i) it failed to supply “a reasoned analysis” for departing from its “longstanding support of seller-funded DPA,” (ii) it neglected to provide reasonable explanations for rejecting alternatives to the rule, (iii) it relied on data not provided to the public, and (iv) HUD Secretary Alphonso Jackson exhibited “an unalterably closed mind” regarding the final rule. The court granted Nehemiah summary judgment on its first claim, finding that HUD had failed to acknowledge its previous support for seller-funded DPA, violating the APA regardless of the “substantive analysis” it provided in support of the rule. The court also granted summary judgment on the second claim, because it found HUD “failed to satisfy its duties under the APA” to explore alternative solutions. The court, however, denied summary judgment on the third claim, as it determined that HUD had adequately disclosed data to support its reasoning. Finally, with regard to whether Secretary Jackson had an “unalterably closed mind,” the court disqualified him from further participation in the proceedings. The court set the final seller-funded DPA rule aside, and remanded it to HUD for further action consistent with the order. For a copy of this opinion, please see http://www.buckleykolar.com/publications/documents/NehemiahvJackson.pdf.
Expert Testimony Not Always Required in FCRA “Reasonable Procedures” Case. The U.S. Court of Appeals for the District of Columbia Circuit recently held that the Fair Credit Reporting Act (FCRA) does not always require the use of expert testimony to determine whether a consumer reporting agency’s procedures to assure maximum possible accuracy of reported information were reasonable. Wilson v. CARCO Group, Inc., No. 03cv02313, 2008 WL 540184 (D.C. Cir. Feb. 29, 2008). The plaintiff in the case was subjected to a criminal background check in connection with a job application. CARCO, the background check provider, subcontracted with another entity to conduct the check, which ultimately yielded 13 different “hits,” corresponding to 13 different individuals. Subsequently, the employer withdrew its employment offer, notifying Wilson that he had criminal charges in Oklahoma (which Wilson denied). CARCO eventually concluded that Wilson had no criminal history in Oklahoma, which was confirmed by Wilson’s own investigation. Wilson sued CARCO for negligent violation of FCRA. The district court granted summary judgment in favor of CARCO, holding that a plaintiff alleging the lack of “reasonable procedures” must always present expert testimony. The circuit court reversed based on its holding in Stewart v. Credit Bureau, Inc., 734 F.2d 47 (D.C. Cir. 1984). The court concluded that, “as a practical matter, expert testimony might sometimes be necessary to satisfy Stewart. But it is certainly not required in all [reasonable procedures] cases.” For a copy of the opinion, please see http://pacer.cadc.uscourts.gov/docs/common/opinions/200802/07-7053a.pdf.
Court Addresses Definition of “Creditor” for Purposes of TILA as Amended by HOEPA. On February 29, the U.S. Court of Appeals for the Fourth Circuit found that a mortgage broker who acted as a lender in past unrelated “high cost” home loan transactions was not a “creditor” under the Truth in Lending Act (TILA) and its implementing Regulation Z when it brokered a residential mortgage refinance loan for the plaintiffs. Cetto v. LaSalle Bank N.A., No. 06-1720, 2008 WL 542147 (4th Cir. Feb. 29, 2008). The plaintiffs’ argument was based on the last sentence of 15 U.S.C. § 1602(f): “Any person who originates 2 or more [high cost loans] in any 12-month period or any person who originates 1 or more such mortgages through a mortgage broker shall be considered to be a creditor for purposes of this subchapter.” The plaintiffs argued that this is a stand-alone definition of “creditor” under TILA. The court disagreed, noting that if that were the case, a person acting as a broker who made two or more high cost mortgage loans in the past 12 months would be considered a creditor in every transaction in which it engaged even if only acting as a broker. Looking to the structure and text of the statute, legislative history and Regulation Z, the court determined, among other things, that the last sentenced modified the term “regularly” used in the first sentence of the definition – which defines “creditor,” in part, as a person who “regularly” extends consumer credit. As a result, reasonable title search and title binder fees charged by the mortgage broker’s affiliated settlement agent were not “points and fees” under the Home Ownership and Equity Protection Act (HOEPA). Treating such charges as “points and fees” could have possibly transformed the plaintiffs’ loan into a rescindable “high cost” loan that violated HOEPA. For a copy of this opinion, please see http://pacer.ca4.uscourts.gov/opinion.pdf/061720.P.pdf.
Court Finds Negligence and State Law Claims Preempted by FCRA. On February 22, the U.S. District Court for the District of Oregon held that claims against persons who furnish credit information to credit reporting agencies for negligence and for violation of the Oregon Trade Practices Act are preempted by the Fair Credit Reporting Act (FCRA). Weseman v. Wells Fargo Home Mortgage, Inc., No. CV 06-1338-ST, 2008 WL 542961 (D.Or. Feb. 22, 2008). The plaintiff in this case alleged that Wells Fargo erroneously furnished negative credit reporting history about the plaintiff to the major credit bureaus. The plaintiff disputed the debt with the credit bureaus, but Wells Fargo repeatedly verified the debt as delinquent, and it remained on her credit report. In her complaint, the plaintiff alleged claims for willful and negligent violation of FCRA, 15 USC § 1681s-2(b) (Counts I and II), negligence (Count III), and violation of the Oregon Trade Practices Act (OTPA), ORS 646.608 (Count IV). Wells Fargo moved to dismiss Counts III and IV for failure to state a claim, arguing that they were preempted by FCRA. The court granted the motion with leave to amend Count III. The preemption claims involved two sections of FCRA: (i) Section 1681h(e), which limits liability for false reporting of consumer credit information except where such information is furnished with malice or willful intent to injure the consumer; and (ii) Section 1681t(b), which preempts state law claims against furnishers of credit information. Recognizing that the circuit courts have not resolved the tension between these two preemption provisions, and that the district courts have taken different approaches to reconcile these two provisions, the court opted for what it called the “statutory” approach, under which § 1681t(b) preempts state statutory claims, and § 1681h(e) preempts common law negligence claims, but not claims of malice or willful intent. In granting Well Fargo’s motion to dismiss, the court granted the plaintiff leave to amend her complaint as to Count III to claim that Well Fargo furnished false information “with malice or willful intent” to injure her. For a copy of this case, please see http://www.buckleykolar.com/publications/documents/WesemanvWellsFargoHomeMortgage.pdf.
Web Posting of Personal Information Not a Violation of Constitutional Privacy. On February 25, the Sixth Circuit held that the posting of a citizen’s personal information, including a Social Security number, by a state clerk of courts on the internet did not constitute a violation of the 14th Amendment right to privacy. Lambert v. Hartman, No. 07-3154, 2008 WL 482279 (6th Cir. Feb. 25, 2008). The plaintiff in this case alleged that the clerk violated her civil rights under 42 U.S.C. § 1983 and the 14th Amendment by posting personal information taken from a traffic citation, including her Social Security number, drivers license number, birth date, home address, signature, and full name, on the clerk’s website, causing the plaintiff to suffer identity theft. According to the court, the plaintiff’s claim implicated “[a]n individual’s right to control the nature and extent of information released about that individual,” i.e., the right to “informational privacy.” The court, however, explained that it has only extended this right in situations that involve a “fundamental liberty interest.” Specifically, the court noted that it has recognized “an informational-privacy interest of constitutional dimension in only two instances: (i) where the release of personal information could lead to bodily harm ..., and (ii) where the information released was of a sexual, personal, and humiliating nature.” Although the court acknowledged that identity theft constitutes a serious personal invasion, it concluded that the plaintiff’s injuries were more properly described as financial, and the interests implicated were not ”truly liberty interests at all.” The plaintiff also argued that that the clerk’s disclosure of her Social Security number implicated her “fundamental right to property.” The Sixth Circuit, however, rejected this argument, noting that it “has never acknowledged a constitutional right to privacy based on the infringement of a property interest.”. For a copy of the opinion, please see http://www.ca6.uscourts.gov/opinions.pdf/08a0089p-06.pdf.
FACTA Class Certified. A federal court in Illinois certified a class under the Fair and Accurate Transactions Act (FACTA) amendment to the Fair Credit Reporting Act, 15 U.S.C. §§ 1681 et seq., holding that a potentially excessive class damages award should not impact a decision on class certification. Meehan v. Buffalo Wild Wings, Inc., No. 07 C 4562, 2008 WL 548767, (N.D. Ill. Feb. 26, 2008). The consumer plaintiff sued defendants for allegedly providing him with an electronically printed receipt that contained the last four digits of his credit card number and the credit card's expiration date, in violation of FACTA, 15 U.S.C. § 1681c(g). The plaintiff moved for certification of a class of similarly situated consumers. The merchant defendant opposed the motion, arguing that plaintiff failed to satisfy the “superiority” requirement for class certification – that class adjudication is superior to individual adjudication in the case at hand. Specifically, the defendants argued that class adjudication was inferior to individual adjudication because the alleged violation was “technical” and the proposed “damages would be disproportionate to any actual damage caused by the alleged violations.” The court rejected this argument, which was based on decisions from the Ninth, Tenth and Eleventh Circuits, noting that the Seventh Circuit in Murray v. GMAC Mortg. Corp., 434 F.3d 948, 953 (7th Cir.2006), expressly allowed for courts to wait until after a class is certified to consider whether the ultimate award is excessive (see InfoBytes, Jan. 27, 2006). For a copy of the opinion, please see http://www.buckleykolar.com/publications/documents/MeehanvBuffaloWildWings.pdf.
FIRM NEWS
Jeffrey Naimon was quoted in the March 6th issue of the American Banker, in an article discussing the decision of several home equity lenders to take a harder line on requests to refinance first mortgages. Mr. Naimon was quoted in the article, entitled “Second Liens Proving Hurdle on more Refis,” as saying, “You start hearing about these things from major clients [and then] you start hearing from friends and neighbors.” He went on to say, “When the borrower goes to foreclosure, the second [lien holder] in many of these cases will end up with nothing” due to falling real estate prices and high LTV ratios. Mr. Naimon said, “I’m sure that perspective will be shared by the owner of the seconds who refuses to subordinate.”
Matthew Previn was quoted in a March 6th article in the American Banker discussing a law suit filed last week by JPMorgan Chase & Co. accusing a group of Florida law firms of defrauding JPMorgan by bringing frivolous claims on behalf of cardholders. The article entitled, “JPM goes after Lawyers behind Cardholder Suits” cites Mr. Previn as saying, “it’s unusual to file a lawsuit” in this situation “…but it doesn’t surprise me that they would” because debt elimination firms are a growing problem.
OFHEO, New York AG, Fannie and Freddie Agree to New Appraisal Standards. On March 3, the Office of Federal Housing Enterprise Oversight (OFHEO), the New York Attorney General, Fannie Mae, and Freddie Mac entered into cooperation agreements that require Fannie Mae and Freddie Mac to buy loans only from banks that meet new standards designed to ensure independent and reliable appraisals. The agreements establish the “New Home Valuation Protection Code” which (among other things): (i) prohibits mortgage brokers from selecting appraisers; (ii) prohibits lenders from using “in-house” staff appraisers to conduct initial appraisals; and (iii) prohibits lenders from using appraisal management companies that they own or control. In addition, beginning January 1, 2009, Fannie Mae and Freddie Mac, which together purchase approximately 60% of all home loans originated in the United States, will require lenders to represent and warrant that appraisals conform to the Code. The agreements also create an “Independent Valuation Protection Institute” - an independent organization which will implement and monitor the Code, establish a complaint hotline for consumers to call with appraisal fraud concerns, and serve as a contact for appraisers who believe that their independence has been compromised. The new standards follow an investigation of Freddie Mac’s appraisal practices by the New York Attorney General. OFHEO Director John Lockhart expressed concerns regarding the New York Attorney General’s investigation of the federally regulated entity last November (see InfoBytes, Nov. 9, 2007). For more information, please see http://www.oag.state.ny.us/press/2008/mar/mar3a_08.html and http://www.ofheo.gov/newsroom.aspx?ID=417&q1=1&q2=None.
FHA, Fannie, and Freddie Temporarily Increase Maximum Loan Limits. On March 6, the Federal Housing Administration (FHA) issued Mortgagee Letter 2008-06 regarding the temporary increase in the size of mortgages eligible for FHA insurance under the Economic Stimulus Act (see InfoBytes, Feb. 8, 2008). Under the act, for mortgages approved before December 31, 2008, the maximum size of FHA-insurance eligible mortgages is 125% of the area median home price, not to exceed 175% nor be less than 65% of Freddie Mac’s 2008 conforming loan limit. Home Equity Conversion Mortgages (HECMs, FHA-insured reverse mortgages) are not subject to the temporary increases, and are capped by the unaltered limits (discussed in Mortgagee Letter 2008-02). A list of areas where FHA mortgage insurance caps are at the 175% of conforming limit maximum can be found in the mortgagee letter’s Attachment 1. Areas where limits are between the 65% and 175% bounds are listed in the letter’s Attachment 2. Also in connection with the Economic Stimulus Act, on March 6 the Office of Federal Housing Enterprise Oversight (OFHEO) announced it was temporarily raising the conforming loan limit, the maximum size of mortgages eligible for purchase by Fannie Mae and Freddie Mac. Information on the new regional limits, effective through the end of 2008, is available http://www.ofheo.gov/media/hpi/AREA_LIST.pdf. For a copy of Mortgagee Letter 2008-06, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/08-06ml.doc.
Federal Court Sets Aside FHA Seller-Funded Downpayment Assistance Rule. A federal district court in California recently held that a rule promulgated by the Department of Housing and Urban Development (HUD) banning downpayment assistance from the seller (or any entity that financially benefits from the transaction) in connection with Federal Housing Administration (FHA) insured mortgages violated the federal Administrative Procedures Act (APA). Nehemiah Corp. of America v. Jackson, No. 07-2056, (E.D. Cal. Feb. 29, 2008). Nehemiah, a non-profit organization, offered “downpayment assistance” (DPA) to FHA borrowers by providing them with the mandatory 3% downpayment and then receiving a reimbursement “donation” from the seller. On October 1, 2007, HUD published a final rule prohibiting such arrangements. Nehemiah sued, arguing that HUD had failed to meet the requirements of the APA because (i) it failed to supply “a reasoned analysis” for departing from its “longstanding support of seller-funded DPA,” (ii) it neglected to provide reasonable explanations for rejecting alternatives to the rule, (iii) it relied on data not provided to the public, and (iv) HUD Secretary Alphonso Jackson exhibited “an unalterably closed mind” regarding the final rule. The court granted Nehemiah summary judgment on its first claim, finding that HUD had failed to acknowledge its previous support for seller-funded DPA, violating the APA regardless of the “substantive analysis” it provided in support of the rule. The court also granted summary judgment on the second claim, because it found HUD “failed to satisfy its duties under the APA” to explore alternative solutions. The court, however, denied summary judgment on the third claim, as it determined that HUD had adequately disclosed data to support its reasoning. Finally, with regard to whether Secretary Jackson had an “unalterably closed mind,” the court disqualified him from further participation in the proceedings. The court set the final seller-funded DPA rule aside, and remanded it to HUD for further action consistent with the order. For a copy of this opinion, please see http://www.buckleykolar.com/publications/documents/NehemiahvJackson.pdf.
Court Addresses Definition of “Creditor” for Purposes of TILA as Amended by HOEPA. On February 29, the U.S. Court of Appeals for the Fourth Circuit found that a mortgage broker who acted as a lender in past unrelated “high cost” home loan transactions was not a “creditor” under the Truth in Lending Act (TILA) and its implementing Regulation Z when it brokered a residential mortgage refinance loan for the plaintiffs. Cetto v. LaSalle Bank N.A., No. 06-1720, 2008 WL 542147 (4th Cir. Feb. 29, 2008). The plaintiffs’ argument was based on the last sentence of 15 U.S.C. § 1602(f): “Any person who originates 2 or more [high cost loans] in any 12-month period or any person who originates 1 or more such mortgages through a mortgage broker shall be considered to be a creditor for purposes of this subchapter.” The plaintiffs argued that this is a stand-alone definition of “creditor” under TILA. The court disagreed, noting that if that were the case, a person acting as a broker who made two or more high cost mortgage loans in the past 12 months would be considered a creditor in every transaction in which it engaged even if only acting as a broker. Looking to the structure and text of the statute, legislative history and Regulation Z, the court determined, among other things, that the last sentenced modified the term “regularly” used in the first sentence of the definition – which defines “creditor,” in part, as a person who “regularly” extends consumer credit. As a result, reasonable title search and title binder fees charged by the mortgage broker’s affiliated settlement agent were not “points and fees” under the Home Ownership and Equity Protection Act (HOEPA). Treating such charges as “points and fees” could have possibly transformed the plaintiffs’ loan into a rescindable “high cost” loan that violated HOEPA. For a copy of this opinion, please see http://pacer.ca4.uscourts.gov/opinion.pdf/061720.P.pdf.
Banking Agencies Ask Servicers to Use Uniform Modification Reporting. On March 3, the Federal Deposit Insurance Corporation (FDIC), Federal Reserve, Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) asked the financial institutions they regulate to adopt the HOPE NOW Alliance’s loan modification reporting standards. HOPE NOW is a voluntary loan modification program established by the lending industry with the support of the Bush Administration to help fight the foreclosure crisis (most recently reported in InfoBytes, Feb. 22, 2007). According to the FDIC Financial Institution Letter encouraging the uniform standard, “[c]onsistent loan modification reporting will foster transparency in the securitization market and provide standardized data across the mortgage industry.” The Federal Reserve, OCC,and OTS advisory letters issued do not vary significantly from that of the FDIC, which can be found at http://www.fdic.gov/news/news/financial/2008/fil08017.html.
New York Governor Proposes Subprime Mortgage Legislation. On March 4, New York Governor Eliot Spitzer proposed a new bill designed to offer assistance to New Yorkers who are at risk of losing their homes and to enhance the protections of New York’s “Anti-Predatory Lending” statutes. The bill would require increased due diligence by lenders in assessing a borrower’s ability to repay a mortgage loan. Specifically, lenders would be required to consider a borrower’s ability to afford loan principal, interest, taxes, insurance, assessments, and points and fees in light of the borrower’s income level, employment status and other financial resources. The bill would also require (i) a pre-foreclosure notice to homeowners at least 60 days before initiating legal action, (ii) a settlement conference at the beginning of the foreclosure process, and (iii) registration for mortgage loan servicers. The bill includes measures to protect distressed homeowners from falling prey to rescue scams and sets forth a definition of the crime of “mortgage fraud” under the New York Penal Law to make it easier to prosecute offenders. Additionally, the bill would create a new subset of mortgage loans subject to the state’s high cost home loan provisions: “non-conventional home loans,” defined as a home loan in which the annual percentage rate at consummation exceeds the yield on treasury securities by at least 3% for first lien loans, and by 5% on second lien loans. The bill specifies that the consummation rate on home loans with an introductory rate will be calculated at the first reset of the rate. Finally, this bill prohibits prepayment penalties and yield spread premiums on high cost and non-conventional home loans. For more information, please see http://www.buckleykolar.com/publications/documents/GPB44MEMO.pdf.
Bernanke Advocates Principal Reductions in Mortgage Workouts. On March 4, during a speech to the Independent Community Bankers Association, Federal Reserve Board Chairman Ben Bernanke said that the industry could “reduce preventable foreclosures if investors acting in their own self interests were to permit servicers to write down the mortgage liabilities of borrowers by accepting a short payoff in appropriate circumstances.” Noting that, according to one estimate, recent subprime foreclosures have recovered less than 50% of principal borrowed, Chairman Bernanke expressed great concern that an already high loss rate on subprime loans “will likely grow even larger.” Therefore, in addition to advocating a more prominent role for FHA, as well as Fannie Mae and Freddie Mac, Mr. Bernanke encouraged action to alleviate the “barriers” to and “disincentives” for steps to avoid “preventable foreclosures.” For a copy of the Chairman’s remarks, please see http://www.federalreserve.gov/newsevents/speech/bernanke20080304a.htm.
GAO Reports that Banks Not Providing Adequate Disclosures for Deposit Accounts. The Government Accountability Office (GAO) recently presented a report to the House Committee on Financial Services urging federal banking regulators to step up their enforcement efforts to ensure that adequate disclosures are made to consumers of checking and savings accounts, especially disclosures concerning fees such as overdraft charges. The GAO’s 84 page report notes that banks are charging increased fees for overdrafts, insufficient funds, stop payments actions and the like, but that monthly account maintenance fees seem to be on the decline. GAO staff members, who visited over 150 depository institutions, found that about one-third of the time, the relevant disclosure language about checking and savings account fees is not made available to consumers. The GAO report finds that, although the federal banking regulators review the policies and procedures of depository institutions and respond to consumer complaints, the information disclosed regarding fees, terms, and conditions is still inadequate to allow borrowers to readily compare their options. The GAO report also suggests that federal banking regulators begin to examine the actual fee amounts being charged for overdrafts and similar events, which have risen by 10% or more since 2000. For the full text of the GAO report, please see http://www.gao.gov/new.items/d08281.pdf.
Banking Agencies Ask Servicers to Use Uniform Modification Reporting. On March 3, the Federal Deposit Insurance Corporation (FDIC), Federal Reserve, Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) asked the financial institutions they regulate to adopt the HOPE NOW Alliance’s loan modification reporting standards. HOPE NOW is a voluntary loan modification program established by the lending industry with the support of the Bush Administration to help fight the foreclosure crisis (most recently reported in InfoBytes, Feb. 22, 2007). According to the FDIC Financial Institution Letter encouraging the uniform standard, “[c]onsistent loan modification reporting will foster transparency in the securitization market and provide standardized data across the mortgage industry.” The Federal Reserve, OCC,and OTS advisory letters issued do not vary significantly from that of the FDIC, which can be found at http://www.fdic.gov/news/news/financial/2008/fil08017.html.
Bernanke Advocates Principal Reductions in Mortgage Workouts. On March 4, during a speech to the Independent Community Bankers Association, Federal Reserve Board Chairman Ben Bernanke said that the industry could “reduce preventable foreclosures if investors acting in their own self interests were to permit servicers to write down the mortgage liabilities of borrowers by accepting a short payoff in appropriate circumstances.” Noting that, according to one estimate, recent subprime foreclosures have recovered less than 50% of principal borrowed, Chairman Bernanke expressed great concern that an already high loss rate on subprime loans “will likely grow even larger.” Therefore, in addition to advocating a more prominent role for FHA, as well as Fannie Mae and Freddie Mac, Mr. Bernanke encouraged action to alleviate the “barriers” to and “disincentives” for steps to avoid “preventable foreclosures.” For a copy of the Chairman’s remarks, please see http://www.federalreserve.gov/newsevents/speech/bernanke20080304a.htm.
Student Lender Settles FTC Claims of Noncompliance with Privacy Rules. On March 4, Goal Financial, LLC, a student loan company, agreed to settle claims brought by the Federal Trade Commission (FTC) for alleged failure to provide “reasonable and appropriate security” for consumers’ personal information in violation of the FTC’s Standards for Safeguarding Customer Information Rule and its Privacy of Customer Financial Information Rule (both of which implement provisions of the Gramm-Leach-Bliley Act). The proposed order requires Goal Financial to establish and maintain an information security program that includes administrative, technical, and physical safeguards, and bars Goal Financial from future data security misrepresentations to consumers. In addition, Goal Financial must undergo audits performed by independent third-party security professionals on a biennial basis for the next 10 years in order to ensure that its security program meets the standards set forth in the agreement. The FTC’s initial complaint was issued in connection with Goal Financial’s employees’ unauthorized transfer of more than 7,000 files with consumer information to third parties, as well as an employee’s sale of public surplus hard drives that contained personal information of approximately 34,000 consumers. As a result of these transfers, the FTC alleged that Goal Financial violated the safeguards rule because it failed to (among other things) (i) restrict access to this information to authorized employees, (ii) implement a comprehensive information security program, (iii) provide adequate employee training, and (iv) in some cases, contractually require third-party service providers to protect the information. In addition, Goal Financial allegedly violated the privacy rule by providing customers with a privacy policy that contained false and misleading statements as to the “reasonable and appropriate” measures Goal Financial had in place to protect consumers’ personal information. The agreement is available for public comment until April 3, after which time the FTC will decide whether to make the agreement final. For a copy of the proposed settlement agreement, please see http://www.ftc.gov/os/caselist/0723013/index.shtm.
FACTA Class Certified. A federal court in Illinois certified a class under the Fair and Accurate Transactions Act (FACTA) amendment to the Fair Credit Reporting Act, 15 U.S.C. §§ 1681 et seq., holding that a potentially excessive class damages award should not impact a decision on class certification. Meehan v. Buffalo Wild Wings, Inc., No. 07 C 4562, 2008 WL 548767, (N.D. Ill. Feb. 26, 2008). The consumer plaintiff sued defendants for allegedly providing him with an electronically printed receipt that contained the last four digits of his credit card number and the credit card's expiration date, in violation of FACTA, 15 U.S.C. § 1681c(g). The plaintiff moved for certification of a class of similarly situated consumers. The merchant defendant opposed the motion, arguing that plaintiff failed to satisfy the “superiority” requirement for class certification – that class adjudication is superior to individual adjudication in the case at hand. Specifically, the defendants argued that class adjudication was inferior to individual adjudication because the alleged violation was “technical” and the proposed “damages would be disproportionate to any actual damage caused by the alleged violations.” The court rejected this argument, which was based on decisions from the Ninth, Tenth and Eleventh Circuits, noting that the Seventh Circuit in Murray v. GMAC Mortg. Corp., 434 F.3d 948, 953 (7th Cir.2006), expressly allowed for courts to wait until after a class is certified to consider whether the ultimate award is excessive (see InfoBytes, Jan. 27, 2006). For a copy of the opinion, please see http://www.buckleykolar.com/publications/documents/MeehanvBuffaloWildWings.pdf.
SEC Proposes Amendments to Regulation S-P to Address Information Security Concerns. On March 4, the U.S. Securities and Exchange Commission (SEC) issued proposed amendments to Regulation S-P, which implements certain provisions of the Gramm-Leach-Bliley Act (GLBA) and the Fair Credit Reporting Act (FCRA) with respect to institutions regulated by the SEC. The proposed amendments are intended to help address security breaches at regulated institutions and would update Regulation S-P’s safeguarding and disposal provisions by extending their application. The proposed amendments would establish more detailed standards for information security programs that are designed to help guard against identity theft and include a new exception that would provide representatives with an orderly mechanism to take limited customer information with them when moving from one SEC-regulated entity to another. As proposed, the disposal provisions would be extended to individuals associated with broker-dealers, investment advisers and transfer agents registered with the SEC. In addition, the safeguarding provisions would be extended to registered transfer agents. For more information, please see http://www.sec.gov/rules/proposed/2008/34-57427.pdf.
Federal Court Sets Aside FHA Seller-Funded Downpayment Assistance Rule. A federal district court in California recently held that a rule promulgated by the Department of Housing and Urban Development (HUD) banning downpayment assistance from the seller (or any entity that financially benefits from the transaction) in connection with Federal Housing Administration (FHA) insured mortgages violated the federal Administrative Procedures Act (APA). Nehemiah Corp. of America v. Jackson, No. 07-2056, (E.D. Cal. Feb. 29, 2008). Nehemiah, a non-profit organization, offered “downpayment assistance” (DPA) to FHA borrowers by providing them with the mandatory 3% downpayment and then receiving a reimbursement “donation” from the seller. On October 1, 2007, HUD published a final rule prohibiting such arrangements. Nehemiah sued, arguing that HUD had failed to meet the requirements of the APA because (i) it failed to supply “a reasoned analysis” for departing from its “longstanding support of seller-funded DPA,” (ii) it neglected to provide reasonable explanations for rejecting alternatives to the rule, (iii) it relied on data not provided to the public, and (iv) HUD Secretary Alphonso Jackson exhibited “an unalterably closed mind” regarding the final rule. The court granted Nehemiah summary judgment on its first claim, finding that HUD had failed to acknowledge its previous support for seller-funded DPA, violating the APA regardless of the “substantive analysis” it provided in support of the rule. The court also granted summary judgment on the second claim, because it found HUD “failed to satisfy its duties under the APA” to explore alternative solutions. The court, however, denied summary judgment on the third claim, as it determined that HUD had adequately disclosed data to support its reasoning. Finally, with regard to whether Secretary Jackson had an “unalterably closed mind,” the court disqualified him from further participation in the proceedings. The court set the final seller-funded DPA rule aside, and remanded it to HUD for further action consistent with the order. For a copy of this opinion, please see http://www.buckleykolar.com/publications/documents/NehemiahvJackson.pdf.
Expert Testimony Not Always Required in FCRA “Reasonable Procedures” Case. The U.S. Court of Appeals for the District of Columbia Circuit recently held that the Fair Credit Reporting Act (FCRA) does not always require the use of expert testimony to determine whether a consumer reporting agency’s procedures to assure maximum possible accuracy of reported information were reasonable. Wilson v. CARCO Group, Inc., No. 03cv02313, 2008 WL 540184 (D.C. Cir. Feb. 29, 2008). The plaintiff in the case was subjected to a criminal background check in connection with a job application. CARCO, the background check provider, subcontracted with another entity to conduct the check, which ultimately yielded 13 different “hits,” corresponding to 13 different individuals. Subsequently, the employer withdrew its employment offer, notifying Wilson that he had criminal charges in Oklahoma (which Wilson denied). CARCO eventually concluded that Wilson had no criminal history in Oklahoma, which was confirmed by Wilson’s own investigation. Wilson sued CARCO for negligent violation of FCRA. The district court granted summary judgment in favor of CARCO, holding that a plaintiff alleging the lack of “reasonable procedures” must always present expert testimony. The circuit court reversed based on its holding in Stewart v. Credit Bureau, Inc., 734 F.2d 47 (D.C. Cir. 1984). The court concluded that, “as a practical matter, expert testimony might sometimes be necessary to satisfy Stewart. But it is certainly not required in all [reasonable procedures] cases.” For a copy of the opinion, please see http://pacer.cadc.uscourts.gov/docs/common/opinions/200802/07-7053a.pdf.
Court Addresses Definition of “Creditor” for Purposes of TILA as Amended by HOEPA. On February 29, the U.S. Court of Appeals for the Fourth Circuit found that a mortgage broker who acted as a lender in past unrelated “high cost” home loan transactions was not a “creditor” under the Truth in Lending Act (TILA) and its implementing Regulation Z when it brokered a residential mortgage refinance loan for the plaintiffs. Cetto v. LaSalle Bank N.A., No. 06-1720, 2008 WL 542147 (4th Cir. Feb. 29, 2008). The plaintiffs’ argument was based on the last sentence of 15 U.S.C. § 1602(f): “Any person who originates 2 or more [high cost loans] in any 12-month period or any person who originates 1 or more such mortgages through a mortgage broker shall be considered to be a creditor for purposes of this subchapter.” The plaintiffs argued that this is a stand-alone definition of “creditor” under TILA. The court disagreed, noting that if that were the case, a person acting as a broker who made two or more high cost mortgage loans in the past 12 months would be considered a creditor in every transaction in which it engaged even if only acting as a broker. Looking to the structure and text of the statute, legislative history and Regulation Z, the court determined, among other things, that the last sentenced modified the term “regularly” used in the first sentence of the definition – which defines “creditor,” in part, as a person who “regularly” extends consumer credit. As a result, reasonable title search and title binder fees charged by the mortgage broker’s affiliated settlement agent were not “points and fees” under the Home Ownership and Equity Protection Act (HOEPA). Treating such charges as “points and fees” could have possibly transformed the plaintiffs’ loan into a rescindable “high cost” loan that violated HOEPA. For a copy of this opinion, please see http://pacer.ca4.uscourts.gov/opinion.pdf/061720.P.pdf.
Court Finds Negligence and State Law Claims Preempted by FCRA. On February 22, the U.S. District Court for the District of Oregon held that claims against persons who furnish credit information to credit reporting agencies for negligence and for violation of the Oregon Trade Practices Act are preempted by the Fair Credit Reporting Act (FCRA). Weseman v. Wells Fargo Home Mortgage, Inc., No. CV 06-1338-ST, 2008 WL 542961 (D.Or. Feb. 22, 2008). The plaintiff in this case alleged that Wells Fargo erroneously furnished negative credit reporting history about the plaintiff to the major credit bureaus. The plaintiff disputed the debt with the credit bureaus, but Wells Fargo repeatedly verified the debt as delinquent, and it remained on her credit report. In her complaint, the plaintiff alleged claims for willful and negligent violation of FCRA, 15 USC § 1681s-2(b) (Counts I and II), negligence (Count III), and violation of the Oregon Trade Practices Act (OTPA), ORS 646.608 (Count IV). Wells Fargo moved to dismiss Counts III and IV for failure to state a claim, arguing that they were preempted by FCRA. The court granted the motion with leave to amend Count III. The preemption claims involved two sections of FCRA: (i) Section 1681h(e), which limits liability for false reporting of consumer credit information except where such information is furnished with malice or willful intent to injure the consumer; and (ii) Section 1681t(b), which preempts state law claims against furnishers of credit information. Recognizing that the circuit courts have not resolved the tension between these two preemption provisions, and that the district courts have taken different approaches to reconcile these two provisions, the court opted for what it called the “statutory” approach, under which § 1681t(b) preempts state statutory claims, and § 1681h(e) preempts common law negligence claims, but not claims of malice or willful intent. In granting Well Fargo’s motion to dismiss, the court granted the plaintiff leave to amend her complaint as to Count III to claim that Well Fargo furnished false information “with malice or willful intent” to injure her. For a copy of this case, please see http://www.buckleykolar.com/publications/documents/WesemanvWellsFargoHomeMortgage.pdf.
Web Posting of Personal Information Not a Violation of Constitutional Privacy. On February 25, the Sixth Circuit held that the posting of a citizen’s personal information, including a Social Security number, by a state clerk of courts on the internet did not constitute a violation of the 14th Amendment right to privacy. Lambert v. Hartman, No. 07-3154, 2008 WL 482279 (6th Cir. Feb. 25, 2008). The plaintiff in this case alleged that the clerk violated her civil rights under 42 U.S.C. § 1983 and the 14th Amendment by posting personal information taken from a traffic citation, including her Social Security number, drivers license number, birth date, home address, signature, and full name, on the clerk’s website, causing the plaintiff to suffer identity theft. According to the court, the plaintiff’s claim implicated “[a]n individual’s right to control the nature and extent of information released about that individual,” i.e., the right to “informational privacy.” The court, however, explained that it has only extended this right in situations that involve a “fundamental liberty interest.” Specifically, the court noted that it has recognized “an informational-privacy interest of constitutional dimension in only two instances: (i) where the release of personal information could lead to bodily harm ..., and (ii) where the information released was of a sexual, personal, and humiliating nature.” Although the court acknowledged that identity theft constitutes a serious personal invasion, it concluded that the plaintiff’s injuries were more properly described as financial, and the interests implicated were not ”truly liberty interests at all.” The plaintiff also argued that that the clerk’s disclosure of her Social Security number implicated her “fundamental right to property.” The Sixth Circuit, however, rejected this argument, noting that it “has never acknowledged a constitutional right to privacy based on the infringement of a property interest.”. For a copy of the opinion, please see http://www.ca6.uscourts.gov/opinions.pdf/08a0089p-06.pdf.
FACTA Class Certified. A federal court in Illinois certified a class under the Fair and Accurate Transactions Act (FACTA) amendment to the Fair Credit Reporting Act, 15 U.S.C. §§ 1681 et seq., holding that a potentially excessive class damages award should not impact a decision on class certification. Meehan v. Buffalo Wild Wings, Inc., No. 07 C 4562, 2008 WL 548767, (N.D. Ill. Feb. 26, 2008). The consumer plaintiff sued defendants for allegedly providing him with an electronically printed receipt that contained the last four digits of his credit card number and the credit card's expiration date, in violation of FACTA, 15 U.S.C. § 1681c(g). The plaintiff moved for certification of a class of similarly situated consumers. The merchant defendant opposed the motion, arguing that plaintiff failed to satisfy the “superiority” requirement for class certification – that class adjudication is superior to individual adjudication in the case at hand. Specifically, the defendants argued that class adjudication was inferior to individual adjudication because the alleged violation was “technical” and the proposed “damages would be disproportionate to any actual damage caused by the alleged violations.” The court rejected this argument, which was based on decisions from the Ninth, Tenth and Eleventh Circuits, noting that the Seventh Circuit in Murray v. GMAC Mortg. Corp., 434 F.3d 948, 953 (7th Cir.2006), expressly allowed for courts to wait until after a class is certified to consider whether the ultimate award is excessive (see InfoBytes, Jan. 27, 2006). For a copy of the opinion, please see http://www.buckleykolar.com/publications/documents/MeehanvBuffaloWildWings.pdf.
Web Posting of Personal Information Not a Violation of Constitutional Privacy. On February 25, the Sixth Circuit held that the posting of a citizen’s personal information, including a Social Security number, by a state clerk of courts on the internet did not constitute a violation of the 14th Amendment right to privacy. Lambert v. Hartman, No. 07-3154, 2008 WL 482279 (6th Cir. Feb. 25, 2008). The plaintiff in this case alleged that the clerk violated her civil rights under 42 U.S.C. § 1983 and the 14th Amendment by posting personal information taken from a traffic citation, including her Social Security number, drivers license number, birth date, home address, signature, and full name, on the clerk’s website, causing the plaintiff to suffer identity theft. According to the court, the plaintiff’s claim implicated “[a]n individual’s right to control the nature and extent of information released about that individual,” i.e., the right to “informational privacy.” The court, however, explained that it has only extended this right in situations that involve a “fundamental liberty interest.” Specifically, the court noted that it has recognized “an informational-privacy interest of constitutional dimension in only two instances: (i) where the release of personal information could lead to bodily harm ..., and (ii) where the information released was of a sexual, personal, and humiliating nature.” Although the court acknowledged that identity theft constitutes a serious personal invasion, it concluded that the plaintiff’s injuries were more properly described as financial, and the interests implicated were not ”truly liberty interests at all.” The plaintiff also argued that that the clerk’s disclosure of her Social Security number implicated her “fundamental right to property.” The Sixth Circuit, however, rejected this argument, noting that it “has never acknowledged a constitutional right to privacy based on the infringement of a property interest.”. For a copy of the opinion, please see http://www.ca6.uscourts.gov/opinions.pdf/08a0089p-06.pdf.
Florida AG and AT&T Reach Settlement on Inaccurate Fee Disclosures. On February 29, the Florida Attorney General reached a settlement with AT&T Mobility regarding claims that consumers were charged on their cell phone bills for certain third party services that they did not authorize. The Attorney General alleged that AT&T Mobility internet advertisements described the ringtones or other services as being “free,” but resulted in customers being signed up for costly monthly subscriptions for third party content, including horoscopes, wallpaper, and other cell phone-related content. The settlement agreement requires AT&T Mobility to (i) prohibit certain forms of advertising deemed deceptive, (ii) include disclosure provisions in customer contracts regarding third party services, (iii) notify existing customers of the new contract provisions, (iv) provide quarterly reports to the Attorney General concerning consumer complaints, (v) issue credits and refunds to customers for unauthorized charges, and (vi) pay the Attorney General $2,500,000 for investigation fees and an additional $500,000 to educate consumers about Internet safety. If AT&T Mobility complies with this settlement within 90 days, the Attorney General has agreed to dismiss pending litigation against it. For a full copy of the settlement agreement, please see http://myfloridalegal.com/webfiles.nsf/WF/MRAY-7CAJ86/$file/ATTAVC.pdf.
Expert Testimony Not Always Required in FCRA “Reasonable Procedures” Case. The U.S. Court of Appeals for the District of Columbia Circuit recently held that the Fair Credit Reporting Act (FCRA) does not always require the use of expert testimony to determine whether a consumer reporting agency’s procedures to assure maximum possible accuracy of reported information were reasonable. Wilson v. CARCO Group, Inc., No. 03cv02313, 2008 WL 540184 (D.C. Cir. Feb. 29, 2008). The plaintiff in the case was subjected to a criminal background check in connection with a job application. CARCO, the background check provider, subcontracted with another entity to conduct the check, which ultimately yielded 13 different “hits,” corresponding to 13 different individuals. Subsequently, the employer withdrew its employment offer, notifying Wilson that he had criminal charges in Oklahoma (which Wilson denied). CARCO eventually concluded that Wilson had no criminal history in Oklahoma, which was confirmed by Wilson’s own investigation. Wilson sued CARCO for negligent violation of FCRA. The district court granted summary judgment in favor of CARCO, holding that a plaintiff alleging the lack of “reasonable procedures” must always present expert testimony. The circuit court reversed based on its holding in Stewart v. Credit Bureau, Inc., 734 F.2d 47 (D.C. Cir. 1984). The court concluded that, “as a practical matter, expert testimony might sometimes be necessary to satisfy Stewart. But it is certainly not required in all [reasonable procedures] cases.” For a copy of the opinion, please see http://pacer.cadc.uscourts.gov/docs/common/opinions/200802/07-7053a.pdf.
Web Posting of Personal Information Not a Violation of Constitutional Privacy. On February 25, the Sixth Circuit held that the posting of a citizen’s personal information, including a Social Security number, by a state clerk of courts on the internet did not constitute a violation of the 14th Amendment right to privacy. Lambert v. Hartman, No. 07-3154, 2008 WL 482279 (6th Cir. Feb. 25, 2008). The plaintiff in this case alleged that the clerk violated her civil rights under 42 U.S.C. § 1983 and the 14th Amendment by posting personal information taken from a traffic citation, including her Social Security number, drivers license number, birth date, home address, signature, and full name, on the clerk’s website, causing the plaintiff to suffer identity theft. According to the court, the plaintiff’s claim implicated “[a]n individual’s right to control the nature and extent of information released about that individual,” i.e., the right to “informational privacy.” The court, however, explained that it has only extended this right in situations that involve a “fundamental liberty interest.” Specifically, the court noted that it has recognized “an informational-privacy interest of constitutional dimension in only two instances: (i) where the release of personal information could lead to bodily harm ..., and (ii) where the information released was of a sexual, personal, and humiliating nature.” Although the court acknowledged that identity theft constitutes a serious personal invasion, it concluded that the plaintiff’s injuries were more properly described as financial, and the interests implicated were not ”truly liberty interests at all.” The plaintiff also argued that that the clerk’s disclosure of her Social Security number implicated her “fundamental right to property.” The Sixth Circuit, however, rejected this argument, noting that it “has never acknowledged a constitutional right to privacy based on the infringement of a property interest.”. For a copy of the opinion, please see http://www.ca6.uscourts.gov/opinions.pdf/08a0089p-06.pdf.
Student Lender Settles FTC Claims of Noncompliance with Privacy Rules. On March 4, Goal Financial, LLC, a student loan company, agreed to settle claims brought by the Federal Trade Commission (FTC) for alleged failure to provide “reasonable and appropriate security” for consumers’ personal information in violation of the FTC’s Standards for Safeguarding Customer Information Rule and its Privacy of Customer Financial Information Rule (both of which implement provisions of the Gramm-Leach-Bliley Act). The proposed order requires Goal Financial to establish and maintain an information security program that includes administrative, technical, and physical safeguards, and bars Goal Financial from future data security misrepresentations to consumers. In addition, Goal Financial must undergo audits performed by independent third-party security professionals on a biennial basis for the next 10 years in order to ensure that its security program meets the standards set forth in the agreement. The FTC’s initial complaint was issued in connection with Goal Financial’s employees’ unauthorized transfer of more than 7,000 files with consumer information to third parties, as well as an employee’s sale of public surplus hard drives that contained personal information of approximately 34,000 consumers. As a result of these transfers, the FTC alleged that Goal Financial violated the safeguards rule because it failed to (among other things) (i) restrict access to this information to authorized employees, (ii) implement a comprehensive information security program, (iii) provide adequate employee training, and (iv) in some cases, contractually require third-party service providers to protect the information. In addition, Goal Financial allegedly violated the privacy rule by providing customers with a privacy policy that contained false and misleading statements as to the “reasonable and appropriate” measures Goal Financial had in place to protect consumers’ personal information. The agreement is available for public comment until April 3, after which time the FTC will decide whether to make the agreement final. For a copy of the proposed settlement agreement, please see http://www.ftc.gov/os/caselist/0723013/index.shtm.
Court Finds Negligence and State Law Claims Preempted by FCRA. On February 22, the U.S. District Court for the District of Oregon held that claims against persons who furnish credit information to credit reporting agencies for negligence and for violation of the Oregon Trade Practices Act are preempted by the Fair Credit Reporting Act (FCRA). Weseman v. Wells Fargo Home Mortgage, Inc., No. CV 06-1338-ST, 2008 WL 542961 (D.Or. Feb. 22, 2008). The plaintiff in this case alleged that Wells Fargo erroneously furnished negative credit reporting history about the plaintiff to the major credit bureaus. The plaintiff disputed the debt with the credit bureaus, but Wells Fargo repeatedly verified the debt as delinquent, and it remained on her credit report. In her complaint, the plaintiff alleged claims for willful and negligent violation of FCRA, 15 USC § 1681s-2(b) (Counts I and II), negligence (Count III), and violation of the Oregon Trade Practices Act (OTPA), ORS 646.608 (Count IV). Wells Fargo moved to dismiss Counts III and IV for failure to state a claim, arguing that they were preempted by FCRA. The court granted the motion with leave to amend Count III. The preemption claims involved two sections of FCRA: (i) Section 1681h(e), which limits liability for false reporting of consumer credit information except where such information is furnished with malice or willful intent to injure the consumer; and (ii) Section 1681t(b), which preempts state law claims against furnishers of credit information. Recognizing that the circuit courts have not resolved the tension between these two preemption provisions, and that the district courts have taken different approaches to reconcile these two provisions, the court opted for what it called the “statutory” approach, under which § 1681t(b) preempts state statutory claims, and § 1681h(e) preempts common law negligence claims, but not claims of malice or willful intent. In granting Well Fargo’s motion to dismiss, the court granted the plaintiff leave to amend her complaint as to Count III to claim that Well Fargo furnished false information “with malice or willful intent” to injure her. For a copy of this case, please see http://www.buckleykolar.com/publications/documents/WesemanvWellsFargoHomeMortgage.pdf.
FACTA Class Certified. A federal court in Illinois certified a class under the Fair and Accurate Transactions Act (FACTA) amendment to the Fair Credit Reporting Act, 15 U.S.C. §§ 1681 et seq., holding that a potentially excessive class damages award should not impact a decision on class certification. Meehan v. Buffalo Wild Wings, Inc., No. 07 C 4562, 2008 WL 548767, (N.D. Ill. Feb. 26, 2008). The consumer plaintiff sued defendants for allegedly providing him with an electronically printed receipt that contained the last four digits of his credit card number and the credit card's expiration date, in violation of FACTA, 15 U.S.C. § 1681c(g). The plaintiff moved for certification of a class of similarly situated consumers. The merchant defendant opposed the motion, arguing that plaintiff failed to satisfy the “superiority” requirement for class certification – that class adjudication is superior to individual adjudication in the case at hand. Specifically, the defendants argued that class adjudication was inferior to individual adjudication because the alleged violation was “technical” and the proposed “damages would be disproportionate to any actual damage caused by the alleged violations.” The court rejected this argument, which was based on decisions from the Ninth, Tenth and Eleventh Circuits, noting that the Seventh Circuit in Murray v. GMAC Mortg. Corp., 434 F.3d 948, 953 (7th Cir.2006), expressly allowed for courts to wait until after a class is certified to consider whether the ultimate award is excessive (see InfoBytes, Jan. 27, 2006). For a copy of the opinion, please see http://www.buckleykolar.com/publications/documents/MeehanvBuffaloWildWings.pdf.
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