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InfoBytes
CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS
Topics – Covered This Week (Click to View)
FEDERAL ISSUES
FTC Settles Charges For Deceptive Disclosures on Gift Cards. On April 3, the Federal Trade Commission (FTC) announced a settlement with Darden Restaurants, Inc. (Darden) resolving charges that the company engaged in deceptive advertising practices for gift cards to its member restaurant chains. The FTC's complaint alleged that Darden failed to adequately disclose at the point of sale a dormancy fee applicable to gift cards eligible to be used at the restaurant chains. The cards included a provision that after a specified number of months of non-use, Darden could deduct a $1.50 fee per month from the value of the card until further use. In many cases, consumers who had lengthy periods of non-use on their card learned of the fee only after they tried to use the card but had little or no money remaining. According to the terms of the settlement, Darden will clearly and prominently disclose any automatic fees and expiration dates in any advertising, at the point of sale and on the card and restore amounts to all cards that were assessed the dormancy fee. In addition, the FTC alleged that certain design elements obscured disclosures. For further information, please see http://www.ftc.gov/opa/2007/04/darden.htm.
Cease and Desist Order Issued Against Federal Credit Union for BSA/AML Compliance. On April 2, Dover N. J. Spanish American Federal Credit Union was issued a cease and desist order by the National Credit Union Administration for Bank Secrecy Act (BSA) anti-money laundering (AML) compliance issues. The credit union has agreed to, among other things, (i) appoint a full time BSA compliance officer, (ii) begin using the Financial Crimes Enforcement Network’s BSA Direct E-Filing System, (iii) ensure staff checks the Credit Union members against the Office of Foreign Asset Control list, and (iv) collect the social security numbers, employer identification numbers, and individual tax identification numbers of all credit union members that have joined since the year 2000. The official press release is available at http://www.ncua.gov/news/press_releases/2007/MR07-0403.htm. Full text of the consent order can be found at http://www.ncua.gov/administrative_orders/Admin/2007/07-0203-II.pdf.
FRB Changes Reserve Requirement Exemption for "Banker's Banks." On April 3, the Federal Reserve Board (FRB) issued its final rule amending Regulation D, regarding bank reserve requirements, as it pertains to the "banker's banks" exemption. The final rule implements without change revisions proposed last August (see the August 18, 2006 issue of InfoBytes). The prior rule allowed banker's banks to conduct limited business with specific listed types of these non-depository institutions. The amended rule now allows the FRB to determine whether additional non-depository institutions, on a case-by-case basis, also qualify. The amendments do not revise the total amount of activity that banker's banks can conduct with non-depository institutions. The official press release is available at http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070404/default.htm. Full text of the final rule, to be published in the Federal Register, can be found at http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070404/attachment.pdf.
Federal Banking Agencies Propose Rules for Relaxed Examination of Certain Banks. On April 3, the federal banking agencies (the FRB, FDIC, OCC, and OTS) proposed for public comment rules to expand relaxed on-site examination schedules to banks with $500 million in assets. The rules, authorized by last year’s Regulatory Relief Act and an amendment earlier this year (see the January 19th issue of InfoBytes), would reduce on-site examinations to every 18 months, in lieu of the standard 12 months, for banks with less than half a billion dollars in assets and a CAMELS rating of one or two. Previously this relaxed schedule was only available to one- and two-rated banks with assets under $250 million. Comments are due within 30 days of the rule’s publication in the Federal Register. For the joint banking agency press release, and a copy of the proposed rule, see http://www.fdic.gov/news/news/press/2007/pr07029.html.
STATE ISSUES
NY Attorney General Announces Settlement with Student Lender, Universities. On April 2, the Attorney General Andrew Cuomo of New York announced a settlement agreement with six universities and Citibank over student lending practices. Under the agreement, the universities will pay a combined $3.27 million as well as adopt the Attorney General’s “College Code of Conduct” prohibiting certain business arrangements and forms of compensation. The restrictions surround practices in which the universities take compensation to promote or endorse the use of a student lender’s loans products. Citibank will also adopt the code of conduct as well as invest $2 million into a national fund run by the Attorney General’s office to educate students and parents about student loans. The settlement is part of a well publicized investigation by Attorney General Cuomo (most recently reported in the March 16th issue of InfoBytes). The press release states that the Attorney General’s investigation into other student lenders and universities is ongoing. Media sources have also recently reported that the Attorney General is investigating senior college officials regarding stock sales in student loan companies and the Federal Department of Education is looking into a matter involving one of its own senior officials regarding similar improprieties. For the official press release regarding the settlement, see http://www.oag.state.ny.us/press/2007/apr/apr02a_07.html.
Montana Credit Freeze Bill Forwarded to Governor. Montana’s legislature recently passed (S.B. 116) permitting state residents to place security freezes on their credit reports. The bill, if signed into law, requires reporting agencies to place a security freeze on a credit report within five business days of receiving a request, and within 24 hours if the request comes from an identity theft victim providing an identity theft report filed with a law enforcement agency. If the consumer requests that the security freeze be temporarily lifted, reporting agencies have three business days to comply (this will change to 15 minutes after January 31, 2009). Consumers must pay $3 to place or temporarily lift a freeze, unless the consumer is a victim of identity theft in which case the service would be free. To view the full text of S.B. 116, please visit http://data.opi.mt.gov/bills/2007/billpdf/SB0116.pdf.
Mississippi Legislature Passes Credit Freeze Bill Designed to Protect ID Theft Victims. The Mississippi legislature recently passed S.B. 3034 requiring that a reporting agency must comply with a request to place a security freeze on a credit report within five business days. Reporting agencies may charge up to $10 for the service. Notably, the bill provides that only identity theft victims may make such a request, rather than all consumers. A security freeze must be removed or temporarily lifted within three business days of a request, and no fee may be charged to do so. To view the full text of S.B. 3034 as sent to the Governor, please visit http://billstatus.ls.state.ms.us/documents/2007/html/SB/3000-3099/SB3034SG.htm.
COURTS
Federal Court Rejects HOLA Preemption Removal Request By Federal Thrift. In King v. HomeSide Lending, Inc., et al., 2007 U.S. Dist. LEXIS 24576, No. 2:03-2134 (S.D. W.Va. Mar. 30, 2007), a federal district court denied a request by Washington Mutual to remove a case brought in state court to federal court based on federal preemption of lending regulations as they apply to federal savings associations. Washington Mutual was the successor in interest to the defendant loan servicer, and sought to remove the case to federal court based on the argument that the Home Owners Loan Act (HOLA) preempts state lending regulations as they apply to federal savings associations. The court then rejected Washington Mutual's arguments to remove the case pursuant to the federal original jurisdiction statute 28 USC Sec. 1331, based on (i) the complete preemption doctrine and (ii) the substantial question of federal law doctrine. First, the court stated that when passing the HOLA, Congress did not express the necessary intent to have HOLA be the exclusive remedy for alleged lending violations by savings associations. Rather, HOLA can be a basis for ordinary or conflict preemption, but a defense based on either of those arguments is insufficient to require removal to federal court. Second, the court found that none of the plaintiff's claims were based on questions of federal law, and the mere presence of a federal law-based defense (here, preemption based on HOLA) is insufficient for creating a "substantial question of federal law" necessitating removal to federal court. Finally, the court rejected the argument that refusing to remove to federal court would "undermine" the uniform scheme for lending by federal savings associations enacted by Congress, primarily because there was no issue of federal law as an essential element of any of the plaintiff's claims. For a copy of this decision, please contact .
Court Holds for Lender in RESPA Case Involving Alleged Unearned Fees. On March 30, a federal district court in California held that section 8(b) of RESPA prohibiting fee splitting applies only where a fee is charged without the performance of any services, and does not extend to mere overcharges. Martinez v. Wells Fargo Bank, N.A., No. C-06-03327, 2007 WL 963965 (N.D. Cal. March 30, 2007). The plaintiffs in the case sued Wells Fargo Bank and affiliated companies, alleging, among other things, that Wells Fargo violated section 8(b) of RESPA by charging them excessive underwriting and tax service fees for services performed by Wells Fargo in connection with the refinancing of their residential mortgage loan. Although the Ninth Circuit has not addressed the issue of whether section 8(b) applies to unilaterally imposed overcharges, other circuits (including the Second, Third, Fourth, Seventh, and Eighth Circuits) have held that section 8(b) does not prohibit such overcharges. The court found these decisions persuasive, holding that “section 8(b) is not a price control statute and does not extend to overcharges.” Furthermore, because the court found the text of section 8(b) to be unambiguous, it did not need to consider a HUD policy statement relied upon by the plaintiffs, which interprets section 8(b) as barring unilateral overcharges. The court also ruled that certain state law claims brought by the plaintiffs were preempted under the National Bank Act. For a copy of the opinion, please contact .
Federal Court Upholds Online Contract Presented in Scroll Box. The Federal District Court for the Eastern District of Pennsylvania recently upheld an online contract that was presented in a scroll box that did not require all the contract’s text be viewed before assent. Feldman v. Google, Inc., No. 06-2540 (E.D. Pa. Mar. 28, 2007). In Feldman, the plaintiff attempted to sue Google in Pennsylvania in connection with a dispute regarding one of Google’s advertising services. Google attempted to move to dismiss or transfer the dispute to Federal court in California, citing the forum selection clause in the service’s online contract. The plaintiff alleged, among other things, that he had not validly assented to the forum selection clause because it was not adequately presented to him. The court, however, disagreed, noting that Google had presented the forum selection clause in an online agreement. The online agreement was presented in a scroll box and began with a boldfaced admonition to “Carefully read the following terms and conditions.” In addition, Google offered a “printer friendly” version of the agreement and required the customer to click on a checkbox and press a button labeled “Yes, I agree to the above terms and conditions” in order to agree to the contract terms. The court determined, among other things, that the plaintiff had in fact agreed to Google’s online contract, rendering the forum selection clause enforceable. Moreover, the court was not swayed by the plaintiff’s allegations that it should not be bound by the forum selection clause because he had not actually read the contract, noting that “[p]laintiff’s failure to read the Agreement, if that were the case, does not excuse him from being bound by his express agreement.” Please contact for a copy of the court’s decision.
NY High Court Applies Common Law Conversion Tort to Electronic Documents and Data. The New York Court of Appeals held on March 22 that the common law tort of conversion applies to deletions and misappropriations of documents and data stored on electronic media. Thyroff v. Nationwide Mut. Ins. Co., No. 41 (N.Y. Ct. App., March 22, 2007). Nationwide Mutual Insurance Co. had leased to Thyroff, one of its individual insurance agents, on a personal basis, computer hardware and software to be used for company business. Thyroff also used the computer equipment for personal e-mail, correspondence, and other data storage. When Nationwide terminated the plaintiff, it repossessed his computer equipment and denied the plaintiff any further access to it, thereby prohibiting Thyroff from retrieving information about his customers or any other personal information stored on the computer. After filing suit on a claim for conversion of his business and personal information, the district court dismissed the conversion claim. On appeal, the Second Circuit certified the following question to the New York Court of Appeals: is a claim for the conversion of electronic data cognizable under New York law? The general rule is that an action for conversion is not available in cases involving intangible property because there is no physical item that can be misappropriated. However, the court noted, recent cases have relaxed that rule, creating a "merger" doctrine that permits claims for conversion in cases in which the medium representing an intangible right – a stock certificate, a master sound recording – merges with the underlying intangible right such that conversion of the medium was treated as conversion of the intangible right. Noting that computers and digital information are ubiquitous in business and personal life, the court said, "We cannot conceive of any reason in law or logic why [the] process of virtual creation should be treated any differently from production by pen on paper or quill on parchment. A document stored on a computer hard drive has the same value as a paper document kept in a file cabinet." The court concluded that the data Nationwide took possession of – “electronic records that were stored on a computer and were indistinguishable from printed documents" – are subject to a claim of conversion under New York law. For a copy of the opinion, please contact .
CDA Immunizes Internet Service Providers from State IP Laws. The Ninth Circuit recently held that, while Communications Decency Act (CDA) immunity does not immunize internet service providers from federal intellectual property claims, it does immunize them from state intellectual property claims. In Perfect 10, Inc. v. CCBill LLC et al., Nos. 04-57143, 04-57207 (9th Cir., opinion issued March 29, 2007), plaintiff – an internet publisher of adult photos – sued defendants – providers of internet connectivity and payment services. Plaintiff alleged that, by providing these services to websites that posted images stolen from plaintiff’s website, defendants violated not only copyright and trademark laws but also state unfair competition, false advertising and right of publicity laws. The trial court dismissed the state unfair competition and false advertising claims, finding that defendants were immune from such claims because of the CDA. However, the trial court allowed plaintiff’s right of publicity claims, noting that CDA immunity to state law does not extend to “intellectual property” claims. On appeal, the Ninth Circuit agreed that the unfair competition and false advertising claims were properly dismissed, but disagreed with the trial court’s refusal to dismiss the right of publicity claims. The Ninth Circuit panel noted that while the CDA explicitly does not extend immunity to causes of action “pertaining to intellectual property,” the statute does not define what laws pertain to intellectual property. The Court worried that, while the scope of federal intellectual property law is relatively clear, “it is not always easy to determine which state laws protect ‘intellectual property.’” Finding support in the CDA’s “expressed goal of insulating the development of the Internet from the various state-law regimes,” the Court defined “intellectual property” laws to mean “federal intellectual property” laws – resolving the dilemma. Accordingly, defendants were immune from plaintiff’s right of publicity claim. For a copy of this opinion, see the court’s website at http://www.ca9.uscourts.gov/ca9/newopinions.nsf/.
District Court Holds that Identification of Creditor By Acronym Alone May Violate FDCPA. On March 27, a Federal District Court in Wisconsin found that a debt collection letter that identified the creditor by acronym alone may be in violation of the Fair Debt Collection Practices Act (FDCPA). Blarek v. Encore Receivable Management, Inc., No. 06-C-0420, 2007 U.S. Dist. LEXIS 22549 (E.D. Wis. March 27, 2007). The plaintiff received a debt collection letter from defendant that identified the creditor by acronym alone as “HSB,” a registered trademark of Hurley State Bank. In 2001, Hurley State Bank merged with Citibank USA, N.A., and changed its name to Citibank USA, N.A, although it still maintained the registered trademark with the United States Patent and Trademark office. The plaintiff contends that the defendant violated 15 USC § 1692g(a) by failing to properly state the name of the creditor. Because § 1692g(a) does not provide detail as to what properly constitutes disclosure of “the name of the creditor,” the District Court concedes that the use of a commonly used acronym could be sufficient to identify the creditor. The District Court applied the “unsophisticated consumer” test from Avila v. Rubin in concluding that there is a violation of the FDCPA if an “unsophisticated consumer” would be confused of misled as to the identity of the creditor. Avila v. Rubin, 84 F. 3d 222 (7th Cir. 1996). Ultimately, the court declined to grant summary judgment holding that a genuine issue of material fact still endured as to whether an “unsophisticated consumer” would conclude that “HSB” is in fact a “commonly used acronym.” For a copy of these decisions, please contact .
Court Rules for Lender in TILA Rescission Case. A federal district court has ruled in favor of a lender in a TILA rescission case, finding that any errors or omissions were attributable to third parties and occurred after closing. Rivers v. Credit Suisse Boston Financial Corp., No. 05-6011, 2007 U.S. Dist. LEXIS 23621 (D.N.J. Mar. 30, 2007). In this case, the plaintiffs received a loan from the defendant through Allied Home Mortgage Capital Corporation, a mortgage broker. The plaintiffs agreed to pay two points valued at $4,860, along with a yield spread premium of $2,278. The TILA disclosure statement did not include the yield spread premium, but it did include the points as part of the finance charge. The closing attorney erred and did not collect the payments due to the lenders. Allied inquired about payment following closing, and, nearly a year after closing, the plaintiffs informed the defendant that they wished to rescind the loan due to TILA disclosure violations. The defendant refused to rescind the loan, and the plaintiffs filed suit, claiming that the defendant demanded undisclosed finance charges and failed to provide material disclosures. The court ruled in favor of the defendant, finding that (i) the points were properly disclosed as part of the finance charge, (ii) the yield spread premium was properly not included as part of the finance charge, and (iii) the points and yield spread premium are not “material disclosures” for the purpose of rescission under TILA. The court remanded to state court the plaintiffs’ claims under the New Jersey Consumer Fraud Act. For a copy of the opinion, please contact .
MISCELLANY
Agencies Issue GLB Correction. The federal banking agencies and other regulators issued a corrected version of one page of their proposed model Gramm-Leach-Bliley privacy disclosure forms. 72 Fed. Reg. 16875 (Apr. 5, 2007), is available at http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/pdf/C7-1476.pdf.
Do Not Call Registry Report Submitted to Congress. The Federal Trade Commission's (FTC) Do Not Call Registry report for fiscal year 2006 has been submitted to the House Committee on Energy and Commerce and the Senate Committee on Commerce, Science and Transportation. The report includes, among other things, the number of consumers who have placed their telephone numbers on the registry and the number of entities who pay fees to access the registry including the fee amounts. The official press release is available at http://www.ftc.gov/opa/2007/04/fyi07232.htm. For full text of the report see http://www.ftc.gov/os/2007/04/P034305FY2006RptOnDNC.pdf.
HUD Report Shows Discrimination Complaints At Record Levels. The Department of Housing and Urban Development (HUD) recently released its Fiscal Year 2006 Annual Report on Fair Housing, which documented the highest number of Fair Housing Act complaints in the agency’s history. The record showed that complaints most often involve refusal to rent, or alleged discrimination in sale or rental terms and conditions, on the basis of disability or race. The report also examines the use of grants and education activities to promote fair housing enforcement, as well as efforts to make housing more accessible to the disabled. The official press release is available at http://www.hud.gov/news/release.cfm?content=pr07-032.cfm. Full text of the report can be found at http://www.hud.gov/offices/fheo/fy2006rpt.pdf.
FIRM NEWS
Jerry Buckley and John Kromer will be participating in a webcast seminar entitled “Legal Issues Associated with Managing Subprime Mortgage Portfolios” offered on April 27th through West Legalworks. The seminar will address several topics on legal compliance with a focus on “legislative and regulatory proposals to impose stricter underwriting standards or ban certain loan products.” To read more or register, visit http://westlegaledcenter.com/program_guide/course_detail.jsf? courseId=5220934&sc_cid=LWEmail_13.
Margo Tank will be speaking in a Web seminar entitled “The Impact of Going Paperless: A 90-minute Roadmap to Developing a Paperless Process” on April 12. The seminar will address the legal and technical challenges and benefits of electronic transactions. To learn more or register, go to http://webinars.elfaonline.org/session.php?id=567.
Jeff Naimon will be speaking on the RESPA panel at the American Conference Institute's upcoming seminar "Preventing, Defending and Resolving Consumer Credit Litigation" taking place on June 5-6, 2007 in New York. For more information, or to register, go to http://www.americanconference.com/Litigation/creditlit.htm.
On Thursday, April 19, John Kromer and Clinton Rockwell will be speaking on a Pratt Audio Conference Series regarding non-traditional mortgage loans and federal and state agency guidance. For more information, or to register, see http://www.aspratt.com/store/V03.php.
Federal Court Rejects HOLA Preemption Removal Request By Federal Thrift. In King v. HomeSide Lending, Inc., et al., 2007 U.S. Dist. LEXIS 24576, No. 2:03-2134 (S.D. W.Va. Mar. 30, 2007), a federal district court denied a request by Washington Mutual to remove a case brought in state court to federal court based on federal preemption of lending regulations as they apply to federal savings associations. Washington Mutual was the successor in interest to the defendant loan servicer, and sought to remove the case to federal court based on the argument that the Home Owners Loan Act (HOLA) preempts state lending regulations as they apply to federal savings associations. The court then rejected Washington Mutual's arguments to remove the case pursuant to the federal original jurisdiction statute 28 USC Sec. 1331, based on (i) the complete preemption doctrine and (ii) the substantial question of federal law doctrine. First, the court stated that when passing the HOLA, Congress did not express the necessary intent to have HOLA be the exclusive remedy for alleged lending violations by savings associations. Rather, HOLA can be a basis for ordinary or conflict preemption, but a defense based on either of those arguments is insufficient to require removal to federal court. Second, the court found that none of the plaintiff's claims were based on questions of federal law, and the mere presence of a federal law-based defense (here, preemption based on HOLA) is insufficient for creating a "substantial question of federal law" necessitating removal to federal court. Finally, the court rejected the argument that refusing to remove to federal court would "undermine" the uniform scheme for lending by federal savings associations enacted by Congress, primarily because there was no issue of federal law as an essential element of any of the plaintiff's claims. For a copy of this decision, please contact .
Court Holds for Lender in RESPA Case Involving Alleged Unearned Fees. On March 30, a federal district court in California held that section 8(b) of RESPA prohibiting fee splitting applies only where a fee is charged without the performance of any services, and does not extend to mere overcharges. Martinez v. Wells Fargo Bank, N.A., No. C-06-03327, 2007 WL 963965 (N.D. Cal. March 30, 2007). The plaintiffs in the case sued Wells Fargo Bank and affiliated companies, alleging, among other things, that Wells Fargo violated section 8(b) of RESPA by charging them excessive underwriting and tax service fees for services performed by Wells Fargo in connection with the refinancing of their residential mortgage loan. Although the Ninth Circuit has not addressed the issue of whether section 8(b) applies to unilaterally imposed overcharges, other circuits (including the Second, Third, Fourth, Seventh, and Eighth Circuits) have held that section 8(b) does not prohibit such overcharges. The court found these decisions persuasive, holding that “section 8(b) is not a price control statute and does not extend to overcharges.” Furthermore, because the court found the text of section 8(b) to be unambiguous, it did not need to consider a HUD policy statement relied upon by the plaintiffs, which interprets section 8(b) as barring unilateral overcharges. The court also ruled that certain state law claims brought by the plaintiffs were preempted under the National Bank Act. For a copy of the opinion, please contact .
Court Rules for Lender in TILA Rescission Case. A federal district court has ruled in favor of a lender in a TILA rescission case, finding that any errors or omissions were attributable to third parties and occurred after closing. Rivers v. Credit Suisse Boston Financial Corp., No. 05-6011, 2007 U.S. Dist. LEXIS 23621 (D.N.J. Mar. 30, 2007). In this case, the plaintiffs received a loan from the defendant through Allied Home Mortgage Capital Corporation, a mortgage broker. The plaintiffs agreed to pay two points valued at $4,860, along with a yield spread premium of $2,278. The TILA disclosure statement did not include the yield spread premium, but it did include the points as part of the finance charge. The closing attorney erred and did not collect the payments due to the lenders. Allied inquired about payment following closing, and, nearly a year after closing, the plaintiffs informed the defendant that they wished to rescind the loan due to TILA disclosure violations. The defendant refused to rescind the loan, and the plaintiffs filed suit, claiming that the defendant demanded undisclosed finance charges and failed to provide material disclosures. The court ruled in favor of the defendant, finding that (i) the points were properly disclosed as part of the finance charge, (ii) the yield spread premium was properly not included as part of the finance charge, and (iii) the points and yield spread premium are not “material disclosures” for the purpose of rescission under TILA. The court remanded to state court the plaintiffs’ claims under the New Jersey Consumer Fraud Act. For a copy of the opinion, please contact .
HUD Report Shows Discrimination Complaints At Record Levels. The Department of Housing and Urban Development (HUD) recently released its Fiscal Year 2006 Annual Report on Fair Housing, which documented the highest number of Fair Housing Act complaints in the agency’s history. The record showed that complaints most often involve refusal to rent, or alleged discrimination in sale or rental terms and conditions, on the basis of disability or race. The report also examines the use of grants and education activities to promote fair housing enforcement, as well as efforts to make housing more accessible to the disabled. The official press release is available at http://www.hud.gov/news/release.cfm?content=pr07-032.cfm. Full text of the report can be found here.
Federal Court Rejects HOLA Preemption Removal Request By Federal Thrift. In King v. HomeSide Lending, Inc., et al., 2007 U.S. Dist. LEXIS 24576, No. 2:03-2134 (S.D. W.Va. Mar. 30, 2007), a federal district court denied a request by Washington Mutual to remove a case brought in state court to federal court based on federal preemption of lending regulations as they apply to federal savings associations. Washington Mutual was the successor in interest to the defendant loan servicer, and sought to remove the case to federal court based on the argument that the Home Owners Loan Act (HOLA) preempts state lending regulations as they apply to federal savings associations. The court then rejected Washington Mutual's arguments to remove the case pursuant to the federal original jurisdiction statute 28 USC Sec. 1331, based on (i) the complete preemption doctrine and (ii) the substantial question of federal law doctrine. First, the court stated that when passing the HOLA, Congress did not express the necessary intent to have HOLA be the exclusive remedy for alleged lending violations by savings associations. Rather, HOLA can be a basis for ordinary or conflict preemption, but a defense based on either of those arguments is insufficient to require removal to federal court. Second, the court found that none of the plaintiff's claims were based on questions of federal law, and the mere presence of a federal law-based defense (here, preemption based on HOLA) is insufficient for creating a "substantial question of federal law" necessitating removal to federal court. Finally, the court rejected the argument that refusing to remove to federal court would "undermine" the uniform scheme for lending by federal savings associations enacted by Congress, primarily because there was no issue of federal law as an essential element of any of the plaintiff's claims. For a copy of this decision, please contact .
Cease and Desist Order Issued Against Federal Credit Union for BSA/AML Compliance. On April 2, Dover N. J. Spanish American Federal Credit Union was issued a cease and desist order by the National Credit Union Administration for Bank Secrecy Act (BSA) anti-money laundering (AML) compliance issues. The credit union has agreed to, among other things, (i) appoint a full time BSA compliance officer, (ii) begin using the Financial Crimes Enforcement Network’s BSA Direct E-Filing System, (iii) ensure staff checks the Credit Union members against the Office of Foreign Asset Control list, and (iv) collect the social security numbers, employer identification numbers, and individual tax identification numbers of all credit union members that have joined since the year 2000. The official press release is available at http://www.ncua.gov/news/press_releases/2007/MR07-0403.htm. Full text of the consent order can be found here.
FRB Changes Reserve Requirement Exemption for "Banker's Banks." On April 3, the Federal Reserve Board (FRB) issued its final rule amending Regulation D, regarding bank reserve requirements, as it pertains to the "banker's banks" exemption. The final rule implements without change revisions proposed last August (see the August 18, 2006 issue of InfoBytes). The prior rule allowed banker's banks to conduct limited business with specific listed types of these non-depository institutions. The amended rule now allows the FRB to determine whether additional non-depository institutions, on a case-by-case basis, also qualify. The amendments do not revise the total amount of activity that banker's banks can conduct with non-depository institutions. The official press release is available at http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070404/default.htm. Full text of the final rule, to be published in the Federal Register, can be found at http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070404/attachment.pdf.
Federal Banking Agencies Propose Rules for Relaxed Examination of Certain Banks. On April 3, the federal banking agencies (the FRB, FDIC, OCC, and OTS) proposed for public comment rules to expand relaxed on-site examination schedules to banks with $500 million in assets. The rules, authorized by last year’s Regulatory Relief Act and an amendment earlier this year (see the January 19th issue of InfoBytes), would reduce on-site examinations to every 18 months, in lieu of the standard 12 months, for banks with less than half a billion dollars in assets and a CAMELS rating of one or two. Previously this relaxed schedule was only available to one- and two-rated banks with assets under $250 million. Comments are due within 30 days of the rule’s publication in the Federal Register. For the joint banking agency press release, and a copy of the proposed rule, see http://www.fdic.gov/news/news/press/2007/pr07029.html.
Court Holds for Lender in RESPA Case Involving Alleged Unearned Fees. On March 30, a federal district court in California held that section 8(b) of RESPA prohibiting fee splitting applies only where a fee is charged without the performance of any services, and does not extend to mere overcharges. Martinez v. Wells Fargo Bank, N.A., No. C-06-03327, 2007 WL 963965 (N.D. Cal. March 30, 2007). The plaintiffs in the case sued Wells Fargo Bank and affiliated companies, alleging, among other things, that Wells Fargo violated section 8(b) of RESPA by charging them excessive underwriting and tax service fees for services performed by Wells Fargo in connection with the refinancing of their residential mortgage loan. Although the Ninth Circuit has not addressed the issue of whether section 8(b) applies to unilaterally imposed overcharges, other circuits (including the Second, Third, Fourth, Seventh, and Eighth Circuits) have held that section 8(b) does not prohibit such overcharges. The court found these decisions persuasive, holding that “section 8(b) is not a price control statute and does not extend to overcharges.” Furthermore, because the court found the text of section 8(b) to be unambiguous, it did not need to consider a HUD policy statement relied upon by the plaintiffs, which interprets section 8(b) as barring unilateral overcharges. The court also ruled that certain state law claims brought by the plaintiffs were preempted under the National Bank Act. For a copy of the opinion, please contact .
FTC Settles Charges For Deceptive Disclosures on Gift Cards. On April 3, the Federal Trade Commission (FTC) announced a settlement with Darden Restaurants, Inc. (Darden) resolving charges that the company engaged in deceptive advertising practices for gift cards to its member restaurant chains. The FTC's complaint alleged that Darden failed to adequately disclose at the point of sale a dormancy fee applicable to gift cards eligible to be used at the restaurant chains. The cards included a provision that after a specified number of months of non-use, Darden could deduct a $1.50 fee per month from the value of the card until further use. In many cases, consumers who had lengthy periods of non-use on their card learned of the fee only after they tried to use the card but had little or no money remaining. According to the terms of the settlement, Darden will clearly and prominently disclose any automatic fees and expiration dates in any advertising, at the point of sale and on the card and restore amounts to all cards that were assessed the dormancy fee. In addition, the FTC alleged that certain design elements obscured disclosures. For further information, please see http://www.ftc.gov/opa/2007/04/darden.htm.
NY Attorney General Announces Settlement with Student Lender, Universities. On April 2, the Attorney General Andrew Cuomo of New York announced a settlement agreement with six universities and Citibank over student lending practices. Under the agreement, the universities will pay a combined $3.27 million as well as adopt the Attorney General’s “College Code of Conduct” prohibiting certain business arrangements and forms of compensation. The restrictions surround practices in which the universities take compensation to promote or endorse the use of a student lender’s loans products. Citibank will also adopt the code of conduct as well as invest $2 million into a national fund run by the Attorney General’s office to educate students and parents about student loans. The settlement is part of a well publicized investigation by Attorney General Cuomo (most recently reported in the March 16th issue of InfoBytes). The press release states that the Attorney General’s investigation into other student lenders and universities is ongoing. Media sources have also recently reported that the Attorney General is investigating senior college officials regarding stock sales in student loan companies and the Federal Department of Education is looking into a matter involving one of its own senior officials regarding similar improprieties. For the official press release regarding the settlement, see http://www.oag.state.ny.us/press/2007/apr/apr02a_07.html.
District Court Holds that Identification of Creditor By Acronym Alone May Violate FDCPA. On March 27, a Federal District Court in Wisconsin found that a debt collection letter that identified the creditor by acronym alone may be in violation of the Fair Debt Collection Practices Act (FDCPA). Blarek v. Encore Receivable Management, Inc., No. 06-C-0420, 2007 U.S. Dist. LEXIS 22549 (E.D. Wis. March 27, 2007). The plaintiff received a debt collection letter from defendant that identified the creditor by acronym alone as “HSB,” a registered trademark of Hurley State Bank. In 2001, Hurley State Bank merged with Citibank USA, N.A., and changed its name to Citibank USA, N.A, although it still maintained the registered trademark with the United States Patent and Trademark office. The plaintiff contends that the defendant violated 15 USC § 1692g(a) by failing to properly state the name of the creditor. Because § 1692g(a) does not provide detail as to what properly constitutes disclosure of “the name of the creditor,” the District Court concedes that the use of a commonly used acronym could be sufficient to identify the creditor. The District Court applied the “unsophisticated consumer” test from Avila v. Rubin in concluding that there is a violation of the FDCPA if an “unsophisticated consumer” would be confused of misled as to the identity of the creditor. Avila v. Rubin, 84 F. 3d 222 (7th Cir. 1996). Ultimately, the court declined to grant summary judgment holding that a genuine issue of material fact still endured as to whether an “unsophisticated consumer” would conclude that “HSB” is in fact a “commonly used acronym.” For a copy of these decisions, please contact .
Federal Court Rejects HOLA Preemption Removal Request By Federal Thrift. In King v. HomeSide Lending, Inc., et al., 2007 U.S. Dist. LEXIS 24576, No. 2:03-2134 (S.D. W.Va. Mar. 30, 2007), a federal district court denied a request by Washington Mutual to remove a case brought in state court to federal court based on federal preemption of lending regulations as they apply to federal savings associations. Washington Mutual was the successor in interest to the defendant loan servicer, and sought to remove the case to federal court based on the argument that the Home Owners Loan Act (HOLA) preempts state lending regulations as they apply to federal savings associations. The court then rejected Washington Mutual's arguments to remove the case pursuant to the federal original jurisdiction statute 28 USC Sec. 1331, based on (i) the complete preemption doctrine and (ii) the substantial question of federal law doctrine. First, the court stated that when passing the HOLA, Congress did not express the necessary intent to have HOLA be the exclusive remedy for alleged lending violations by savings associations. Rather, HOLA can be a basis for ordinary or conflict preemption, but a defense based on either of those arguments is insufficient to require removal to federal court. Second, the court found that none of the plaintiff's claims were based on questions of federal law, and the mere presence of a federal law-based defense (here, preemption based on HOLA) is insufficient for creating a "substantial question of federal law" necessitating removal to federal court. Finally, the court rejected the argument that refusing to remove to federal court would "undermine" the uniform scheme for lending by federal savings associations enacted by Congress, primarily because there was no issue of federal law as an essential element of any of the plaintiff's claims. For a copy of this decision, please contact .
Court Holds for Lender in RESPA Case Involving Alleged Unearned Fees. On March 30, a federal district court in California held that section 8(b) of RESPA prohibiting fee splitting applies only where a fee is charged without the performance of any services, and does not extend to mere overcharges. Martinez v. Wells Fargo Bank, N.A., No. C-06-03327, 2007 WL 963965 (N.D. Cal. March 30, 2007). The plaintiffs in the case sued Wells Fargo Bank and affiliated companies, alleging, among other things, that Wells Fargo violated section 8(b) of RESPA by charging them excessive underwriting and tax service fees for services performed by Wells Fargo in connection with the refinancing of their residential mortgage loan. Although the Ninth Circuit has not addressed the issue of whether section 8(b) applies to unilaterally imposed overcharges, other circuits (including the Second, Third, Fourth, Seventh, and Eighth Circuits) have held that section 8(b) does not prohibit such overcharges. The court found these decisions persuasive, holding that “section 8(b) is not a price control statute and does not extend to overcharges.” Furthermore, because the court found the text of section 8(b) to be unambiguous, it did not need to consider a HUD policy statement relied upon by the plaintiffs, which interprets section 8(b) as barring unilateral overcharges. The court also ruled that certain state law claims brought by the plaintiffs were preempted under the National Bank Act. For a copy of the opinion, please contact .
Federal Court Upholds Online Contract Presented in Scroll Box. The Federal District Court for the Eastern District of Pennsylvania recently upheld an online contract that was presented in a scroll box that did not require all the contract’s text be viewed before assent. Feldman v. Google, Inc., No. 06-2540 (E.D. Pa. Mar. 28, 2007). In Feldman, the plaintiff attempted to sue Google in Pennsylvania in connection with a dispute regarding one of Google’s advertising services. Google attempted to move to dismiss or transfer the dispute to Federal court in California, citing the forum selection clause in the service’s online contract. The plaintiff alleged, among other things, that he had not validly assented to the forum selection clause because it was not adequately presented to him. The court, however, disagreed, noting that Google had presented the forum selection clause in an online agreement. The online agreement was presented in a scroll box and began with a boldfaced admonition to “Carefully read the following terms and conditions.” In addition, Google offered a “printer friendly” version of the agreement and required the customer to click on a checkbox and press a button labeled “Yes, I agree to the above terms and conditions” in order to agree to the contract terms. The court determined, among other things, that the plaintiff had in fact agreed to Google’s online contract, rendering the forum selection clause enforceable. Moreover, the court was not swayed by the plaintiff’s allegations that it should not be bound by the forum selection clause because he had not actually read the contract, noting that “[p]laintiff’s failure to read the Agreement, if that were the case, does not excuse him from being bound by his express agreement.” Please contact for a copy of the court’s decision.
NY High Court Applies Common Law Conversion Tort to Electronic Documents and Data. The New York Court of Appeals held on March 22 that the common law tort of conversion applies to deletions and misappropriations of documents and data stored on electronic media. Thyroff v. Nationwide Mut. Ins. Co., No. 41 (N.Y. Ct. App., March 22, 2007). Nationwide Mutual Insurance Co. had leased to Thyroff, one of its individual insurance agents, on a personal basis, computer hardware and software to be used for company business. Thyroff also used the computer equipment for personal e-mail, correspondence, and other data storage. When Nationwide terminated the plaintiff, it repossessed his computer equipment and denied the plaintiff any further access to it, thereby prohibiting Thyroff from retrieving information about his customers or any other personal information stored on the computer. After filing suit on a claim for conversion of his business and personal information, the district court dismissed the conversion claim. On appeal, the Second Circuit certified the following question to the New York Court of Appeals: is a claim for the conversion of electronic data cognizable under New York law? The general rule is that an action for conversion is not available in cases involving intangible property because there is no physical item that can be misappropriated. However, the court noted, recent cases have relaxed that rule, creating a "merger" doctrine that permits claims for conversion in cases in which the medium representing an intangible right – a stock certificate, a master sound recording – merges with the underlying intangible right such that conversion of the medium was treated as conversion of the intangible right. Noting that computers and digital information are ubiquitous in business and personal life, the court said, "We cannot conceive of any reason in law or logic why [the] process of virtual creation should be treated any differently from production by pen on paper or quill on parchment. A document stored on a computer hard drive has the same value as a paper document kept in a file cabinet." The court concluded that the data Nationwide took possession of – “electronic records that were stored on a computer and were indistinguishable from printed documents" – are subject to a claim of conversion under New York law. For a copy of the opinion, please contact .
CDA Immunizes Internet Service Providers from State IP Laws. The Ninth Circuit recently held that, while Communications Decency Act (CDA) immunity does not immunize internet service providers from federal intellectual property claims, it does immunize them from state intellectual property claims. In Perfect 10, Inc. v. CCBill LLC et al., Nos. 04-57143, 04-57207 (9th Cir., opinion issued March 29, 2007), plaintiff – an internet publisher of adult photos – sued defendants – providers of internet connectivity and payment services. Plaintiff alleged that, by providing these services to websites that posted images stolen from plaintiff’s website, defendants violated not only copyright and trademark laws but also state unfair competition, false advertising and right of publicity laws. The trial court dismissed the state unfair competition and false advertising claims, finding that defendants were immune from such claims because of the CDA. However, the trial court allowed plaintiff’s right of publicity claims, noting that CDA immunity to state law does not extend to “intellectual property” claims. On appeal, the Ninth Circuit agreed that the unfair competition and false advertising claims were properly dismissed, but disagreed with the trial court’s refusal to dismiss the right of publicity claims. The Ninth Circuit panel noted that while the CDA explicitly does not extend immunity to causes of action “pertaining to intellectual property,” the statute does not define what laws pertain to intellectual property. The Court worried that, while the scope of federal intellectual property law is relatively clear, “it is not always easy to determine which state laws protect ‘intellectual property.’” Finding support in the CDA’s “expressed goal of insulating the development of the Internet from the various state-law regimes,” the Court defined “intellectual property” laws to mean “federal intellectual property” laws – resolving the dilemma. Accordingly, defendants were immune from plaintiff’s right of publicity claim. For a copy of this opinion, see the court’s website at http://www.ca9.uscourts.gov/ca9/newopinions.nsf/.
District Court Holds that Identification of Creditor By Acronym Alone May Violate FDCPA. On March 27, a Federal District Court in Wisconsin found that a debt collection letter that identified the creditor by acronym alone may be in violation of the Fair Debt Collection Practices Act (FDCPA). Blarek v. Encore Receivable Management, Inc., No. 06-C-0420, 2007 U.S. Dist. LEXIS 22549 (E.D. Wis. March 27, 2007). The plaintiff received a debt collection letter from defendant that identified the creditor by acronym alone as “HSB,” a registered trademark of Hurley State Bank. In 2001, Hurley State Bank merged with Citibank USA, N.A., and changed its name to Citibank USA, N.A, although it still maintained the registered trademark with the United States Patent and Trademark office. The plaintiff contends that the defendant violated 15 USC § 1692g(a) by failing to properly state the name of the creditor. Because § 1692g(a) does not provide detail as to what properly constitutes disclosure of “the name of the creditor,” the District Court concedes that the use of a commonly used acronym could be sufficient to identify the creditor. The District Court applied the “unsophisticated consumer” test from Avila v. Rubin in concluding that there is a violation of the FDCPA if an “unsophisticated consumer” would be confused of misled as to the identity of the creditor. Avila v. Rubin, 84 F. 3d 222 (7th Cir. 1996). Ultimately, the court declined to grant summary judgment holding that a genuine issue of material fact still endured as to whether an “unsophisticated consumer” would conclude that “HSB” is in fact a “commonly used acronym.” For a copy of these decisions, please contact .
Court Rules for Lender in TILA Rescission Case. A federal district court has ruled in favor of a lender in a TILA rescission case, finding that any errors or omissions were attributable to third parties and occurred after closing. Rivers v. Credit Suisse Boston Financial Corp., No. 05-6011, 2007 U.S. Dist. LEXIS 23621 (D.N.J. Mar. 30, 2007). In this case, the plaintiffs received a loan from the defendant through Allied Home Mortgage Capital Corporation, a mortgage broker. The plaintiffs agreed to pay two points valued at $4,860, along with a yield spread premium of $2,278. The TILA disclosure statement did not include the yield spread premium, but it did include the points as part of the finance charge. The closing attorney erred and did not collect the payments due to the lenders. Allied inquired about payment following closing, and, nearly a year after closing, the plaintiffs informed the defendant that they wished to rescind the loan due to TILA disclosure violations. The defendant refused to rescind the loan, and the plaintiffs filed suit, claiming that the defendant demanded undisclosed finance charges and failed to provide material disclosures. The court ruled in favor of the defendant, finding that (i) the points were properly disclosed as part of the finance charge, (ii) the yield spread premium was properly not included as part of the finance charge, and (iii) the points and yield spread premium are not “material disclosures” for the purpose of rescission under TILA. The court remanded to state court the plaintiffs’ claims under the New Jersey Consumer Fraud Act. For a copy of the opinion, please contact .
Federal Court Upholds Online Contract Presented in Scroll Box. The Federal District Court for the Eastern District of Pennsylvania recently upheld an online contract that was presented in a scroll box that did not require all the contract’s text be viewed before assent. Feldman v. Google, Inc., No. 06-2540 (E.D. Pa. Mar. 28, 2007). In Feldman, the plaintiff attempted to sue Google in Pennsylvania in connection with a dispute regarding one of Google’s advertising services. Google attempted to move to dismiss or transfer the dispute to Federal court in California, citing the forum selection clause in the service’s online contract. The plaintiff alleged, among other things, that he had not validly assented to the forum selection clause because it was not adequately presented to him. The court, however, disagreed, noting that Google had presented the forum selection clause in an online agreement. The online agreement was presented in a scroll box and began with a boldfaced admonition to “Carefully read the following terms and conditions.” In addition, Google offered a “printer friendly” version of the agreement and required the customer to click on a checkbox and press a button labeled “Yes, I agree to the above terms and conditions” in order to agree to the contract terms. The court determined, among other things, that the plaintiff had in fact agreed to Google’s online contract, rendering the forum selection clause enforceable. Moreover, the court was not swayed by the plaintiff’s allegations that it should not be bound by the forum selection clause because he had not actually read the contract, noting that “[p]laintiff’s failure to read the Agreement, if that were the case, does not excuse him from being bound by his express agreement.” Please contact for a copy of the court’s decision.
NY High Court Applies Common Law Conversion Tort to Electronic Documents and Data. The New York Court of Appeals held on March 22 that the common law tort of conversion applies to deletions and misappropriations of documents and data stored on electronic media. Thyroff v. Nationwide Mut. Ins. Co., No. 41 (N.Y. Ct. App., March 22, 2007). Nationwide Mutual Insurance Co. had leased to Thyroff, one of its individual insurance agents, on a personal basis, computer hardware and software to be used for company business. Thyroff also used the computer equipment for personal e-mail, correspondence, and other data storage. When Nationwide terminated the plaintiff, it repossessed his computer equipment and denied the plaintiff any further access to it, thereby prohibiting Thyroff from retrieving information about his customers or any other personal information stored on the computer. After filing suit on a claim for conversion of his business and personal information, the district court dismissed the conversion claim. On appeal, the Second Circuit certified the following question to the New York Court of Appeals: is a claim for the conversion of electronic data cognizable under New York law? The general rule is that an action for conversion is not available in cases involving intangible property because there is no physical item that can be misappropriated. However, the court noted, recent cases have relaxed that rule, creating a "merger" doctrine that permits claims for conversion in cases in which the medium representing an intangible right – a stock certificate, a master sound recording – merges with the underlying intangible right such that conversion of the medium was treated as conversion of the intangible right. Noting that computers and digital information are ubiquitous in business and personal life, the court said, "We cannot conceive of any reason in law or logic why [the] process of virtual creation should be treated any differently from production by pen on paper or quill on parchment. A document stored on a computer hard drive has the same value as a paper document kept in a file cabinet." The court concluded that the data Nationwide took possession of – “electronic records that were stored on a computer and were indistinguishable from printed documents" – are subject to a claim of conversion under New York law. For a copy of the opinion, please contact .
Montana Credit Freeze Bill Forwarded to Governor. Montana’s legislature recently passed (S.B. 116) permitting state residents to place security freezes on their credit reports. The bill, if signed into law, requires reporting agencies to place a security freeze on a credit report within five business days of receiving a request, and within 24 hours if the request comes from an identity theft victim providing an identity theft report filed with a law enforcement agency. If the consumer requests that the security freeze be temporarily lifted, reporting agencies have three business days to comply (this will change to 15 minutes after January 31, 2009). Consumers must pay $3 to place or temporarily lift a freeze, unless the consumer is a victim of identity theft in which case the service would be free. To view the full text of S.B. 116, please visit http://data.opi.mt.gov/bills/2007/billpdf/SB0116.pdf.
Mississippi Legislature Passes Credit Freeze Bill Designed to Protect ID Theft Victims. The Mississippi legislature recently passed S.B. 3034 requiring that a reporting agency must comply with a request to place a security freeze on a credit report within five business days. Reporting agencies may charge up to $10 for the service. Notably, the bill provides that only identity theft victims may make such a request, rather than all consumers. A security freeze must be removed or temporarily lifted within three business days of a request, and no fee may be charged to do so. To view the full text of S.B. 3034 as sent to the Governor, please visit http://billstatus.ls.state.ms.us/documents/2007/html/SB/3000-3099/SB3034SG.htm.
Agencies Issue GLB Correction. The federal banking agencies and other regulators issued a corrected version of one page of their proposed model Gramm-Leach-Bliley privacy disclosure forms. 72 Fed. Reg. 16875 (Apr. 5, 2007), is available at http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/pdf/C7-1476.pdf.
Do Not Call Registry Report Submitted to Congress. The Federal Trade Commission's (FTC) Do Not Call Registry report for fiscal year 2006 has been submitted to the House Committee on Energy and Commerce and the Senate Committee on Commerce, Science and Transportation. The report includes, among other things, the number of consumers who have placed their telephone numbers on the registry and the number of entities who pay fees to access the registry including the fee amounts. The official press release is available at http://www.ftc.gov/opa/2007/04/fyi07232.htm. For full text of the report see http://www.ftc.gov/os/2007/04/P034305FY2006RptOnDNC.pdf.
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