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InfoBytes
CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS
Topics – Covered This Week (Click to View)
FEDERAL ISSUES
FRB Proposes Amendments to Regs for Electronic Consumer Disclosures. Today, the Federal Reserve Board (FRB) requested public comment on proposed amendments to five consumer financial services and fair lending regulations (Regulations B, E, M, Z, and DD) to clarify the requirements for providing consumer disclosures in electronic form. In 2001, the FRB published interim final rules to establish uniform standards for the electronic delivery of disclosures. However, the mandatory compliance date for these rules was later lifted and institutions have not been required to comply with the interim final rules. The proposal would amend the FRB's rules by (i) withdrawing certain portions of the 2001 interim final rules that restate or cross-reference provisions of the Electronic Signatures in Global and National Commerce Act (ESIGN), (ii) withdrawing provisions of the interim final rules that may impose undue burdens on electronic banking and commerce and may be unnecessary for consumer protection, and (iii) retaining certain provisions of the interim final rules that provide guidance on the use of electronic disclosures. The proposal would also implement certain provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which mandates certain disclosures for online credit card solicitations. The proposal provides for a 60-day comment period after publication in the Federal Register. For the press release, and copies of the proposed amendments, see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070420/default.htm.
House Passes Bill Giving Shareholders Vote on Executive Pay. Today, the U.S. House of Representatives passed H.R. 1257 which would give shareholders a non-binding vote on executive pay and “golden parachute” compensation (previously reported in the March 2nd issue of InfoBytes). The bill was passed by a vote of 269 to 134, and will now be referred to the Senate. For the House Financial Services Committee press release, see http://www.house.gov/apps/list/press/financialsvcs_dem/press042007.shtml.
SEC Announces First SAR Enforcement Action Against a Broker-Dealer. On April 11, the Securities and Exchange Commission (SEC) filed an order instituting administrative and cease-and-desist proceedings against Park Financial Group, Inc. for anti-money laundering non-compliance. The SEC's filing alleges, among other items, that Park failed to file Suspicious Activity Reports (SARs) required by the Bank Secrecy Act as amended by the 2002 USA PATRIOT Act. This is the SEC's first case against a securities broker-dealer involving SARs. The SEC press release is available at http://www.sec.gov/litigation/admin/2007/34-55614.pdf. The order can be viewed at http://www.sec.gov/litigation/admin/2007/34-55614-o.pdf. The SEC also recently announced its new “AML Source Tool,” which is designed to serve as an anti-money laundering compliance database and guide for broker-dealers. For more information, please see http://www.sec.gov/news/press/2007/2007-67.htm.
Federal Regulators Encourage Lenders to Work with Struggling Borrowers. On April 17, the federal banking agencies (the FRB, FDIC, NCUA, OCC, and OTS) issued a joint statement encouraging lending institutions to work with borrowers who cannot make their mortgage loan payments to find solutions other than immediate foreclosure. The banking agencies point out that lending institutions will not face regulatory penalties if they pursue “prudent workout arrangements” with borrowers. Additionally, bank and thrift programs that transition moderate-to-low-income homeowners into less costly loans may receive favorable treatment under the Community Reinvestment Act (CRA). For the press release, and a link to the official announcement, please see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070417/default.htm.
HUD Mortgagee Letter Clarifies Definition of “Existing Property” for HECMs. On April 12, the Department of Housing and Urban Development (HUD) issued a letter to all FHA-approved mortgagees clarifying its definition of “existing properties” with regard to its use as collateral for Home Equity Conversion Mortgages (HECMs). According to the letter, lenders must guarantee that: (i) real property used to secure a HECM serves as the borrower’s principal residence; (ii) construction of the property is complete and the property is habitable; (iii) loan proceeds are not used to purchase the property; and (iv) any loan that financed the construction and/or purchase of the home is satisfied and the HECM is secured by a first lien. For further details, the FHA mortgagee letter is available at http://www.hudclips.org/sub_nonhud/cgi/pdfforms/07-6ML.doc.
STATE ISSUES
New York Attorney General Announces Suit Against Drexel University, Settlement with Sallie Mae. On April 19, New York Attorney General Andrew Cuomo announced his intent to sue Drexel University over its student loan revenue sharing agreement with Education Finance Partners. This marks the first legal action in the Attorney General’s widely publicized investigation into relationships between lenders to students and universities (most recently reported in the April 6 issue of InfoBytes). Education Finance Partners, which is alleged to have agreed to pay Drexel a percentage of the net value of referred loans, reached a settlement with the Attorney General’s Office earlier this week in which it agreed to adopt the Attorney General’s Student Loan Code of Conduct and pay $2.5 million to a fund to educate student borrowers. (For more details, see the official press release at http://www.oag.state.ny.us/press/2007/apr/apr16b_07.html.) This follows an announcement of a settlement last week by the Attorney General with Sallie Mae, which also agreed to adopt the Code of Conduct and pay $2 million into the borrower education fund. In the press release regarding Drexel, Attorney General Cuomo is quoted as saying “We have proceeded against lenders and now we are proceeding against schools. . . . This office has been clear to schools: settle or we will commence litigation.” The announcement also mentions three New York universities, and one located in Rhode Island, that have agreed to adopt the code of conduct and repay money from Education Finance Partners paid under referral incentive agreements. The press release also asserts that Drexel University, which is located in Pennsylvania, “solicits and corresponds with students from New York” who “rely on Drexel’s representations about preferred lenders,” and therefore falls under the New York Attorney General’s jurisdiction in this matter. To view the official press release, please see http://www.oag.state.ny.us/press/2007/apr/apr19b_07.html.
Lender Settles with Connecticut Banking Department Over Non-Compliance Allegations. On April 11, Connecticut Governor M. Jodi Rell and Banking Commissioner Howard Pitkin jointly announced a settlement agreement with a mortgage lender over allegations that the lender had failed to comply with state law. The settlement centered on allegations that (i) 473 first mortgage loans in which the state regulator claimed that finance charges exceeded the lesser of $2000 or 5% of the loan amount, which is prohibited by Conn. Gen. Stat. § 36a-498a and (ii) 147 originators loan had originated loans without individual licensure. The lender has voluntarily repaid borrowers the allegedly overcharged loan fees, and implemented several policies to strengthen compliance including a system to document unregistered originators on a monthly basis. Under the settlement, the lender will pay a $401,750 civil money penalty to the Connecticut Department of Banking, as well as $100,000 to Neighborhood Reinvestment Corporation to provide homeownership assistance in Connecticut. For the official press release, and a link to the settlement agreement, please see http://www.ct.gov/dob/cwp/view.asp?a=2245&q=378338.
Montana Credit Freeze Bill Signed Into Law. A Montana bill (S.B. 116) permitting residents to place security freezes on their credit reports has been signed into law by Governor Brian Schweitzer. The law (whose passage was reported in the April 6th, 2007 edition of InfoBytes), which becomes effective July 1st, 2007, provides that credit reporting firms have five business days to implement a freeze after receiving a request. If a request comes from an identity theft victim specifically, then a credit reporting firm must implement the freeze within 24 hours. The service is free for identity theft victims whereas all others must pay a $3 fee. To view the full text of S.B. 116, as signed into law by the governor, please visit http://data.opi.mt.gov/bills/2007/billpdf/SB0116.pdf.
COURTS
Supreme Court Issues Widely Anticipated OCC Preemption Opinion. On April 17, the U.S. Supreme Court affirmed, in a 5-3 decision, a Sixth Circuit ruling that an operating subsidiary of a national bank was not subject to state mortgage lending laws or licensure (most recently reported in the December 1st, 2006 issue of InfoBytes). Watters v. Wachovia Bank, N.A., No. 05-1342, (U.S. April 17, 2007). For more details of this decision, please see InfoBytes’ recent Special Alert at http://www.buckleykolar.com/publications/InfoBytesSpecialAlert041707.htm. For a copy of this opinion, please see http://www.supremecourtus.gov/opinions/06pdf/05-1342.pdf.
Federal District Court Holds That Mailer with “No Terms That Could Be Honored” Is Not Valid FCRA Firm Offer. The U.S. District Court for the Northern District of Illinois agreed with a consumer that a mortgage lender had not made a valid "firm offer" under the Fair Credit Reporting Act (FCRA) and granted summary judgment to the consumer. Murray v. GMAC Mortgage Corp., – F. Supp. 2d –, 2007 WL 1100608 (N.D. Ill. Apr. 10, 2007). This is the same case in which, in earlier proceedings, the U.S. Court of Appeals for the Seventh Circuit stated that the legality of a prescreened offer may be decided by “determin[ing] whether the four corners of the offer satisfy the statutory definition” of “firm offer.” See InfoBytes, February 24, 2006. Implicitly assuming that the Seventh Circuit’s “four corners” language applies to the mailer itself and not to the entire offer established in advance of the prescreening by the lender, the district court in the current decision found the mailing to contain "highly conditional terms" that amounted to no terms at all, providing the recipient with "no substantive information from which [to begin] to guess the worth of the offer to them as an individual." The court also noted that the mailing is "so unlike a firm offer that there are essentially no terms that could be honored." It rejected the lender’s argument that it would have been impractical to specify the terms in the mailer “because of the nature of mortgage lending,” stating that if that were the case, the lender had the option of not sending the mailing at all. Stating that it was following the rationale of Cole v. U.S. Capital, Inc. (see InfoBytes, December 3, 2004), the court said that did not "find value to justify the invasion of privacy that credit report disclosure represents" and, therefore, the mailing amounted to a sales pitch rather than a true offer of credit. The court stated that, because it had found that the firm offer was invalid, it did not need to address whether the disclosures in the mailing were laid out in a "clear and conspicuous" manner or whether the private right of action under FCRA for failure to provide proper disclosures was repealed by the Fair and Accurate Credit Transactions Act of 2003. The court also concluded that the issue of whether or not the lender’s conduct was "willful" could not be determined on a motion for summary judgment. For a copy of this decision, please contact .
Michigan Appeals Court Holds that Neither DIDMCA Nor AMTPA Preempts State Usury Limit for Loan Extensions. Recently, the Michigan Court of Appeals held that the preemption provisions of Section 501 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) and the Alternative Mortgage Transaction parity Act (AMTPA) did not apply to a Michigan state usury statute limiting the interest rate of an extension of an existing loan. Patrick v. Pines Investment Corp. et al., No. 272692 (Mich. Ct. App. Apr. 10, 2007). In this case, the original loan was a balloon loan that provided the borrowers a right to refinance at an interest rate based on the then prevailing market rate. At maturity, the borrowers agreed to extend the loan at higher, and increasing, interest rates, but eventually stopped payment and brought suit alleging a violation of the state usury statute, among other claims. The Court of Appeals held that providing for a different interest rate for a right to refinance, even if the rates end up higher than the original loan interest rate, is perfectly legal, so long as the interest rate for the extension is tied to an objective standard beyond the control of either party. Here, the rate was extended at a higher rate explicitly set by the defendant, and therefore the usury provisions applied. The Court then stated that DIDMCA applies to situations where state statutes expressly limit the rate of interest or otherwise restrict the interest rates to below market rates. Because the Michigan statute at question does not expressly limit the rate, and especially not a future interest rate, so long as it is tied to an objective market rate, the statute is not preempted. The defendants argued that the Michigan usury statute should not apply because the AMTPA preempted state laws limiting this type of mortgage transaction. The court disagreed, finding that the AMTPA applies to loan originations, not loan extensions. For a copy of the decision, please contact .
Challenge to Private Right of Action for FCRA Five Digit Provision Rejected. A California federal court rejected a defendant’s contention that there is no private cause of action under the Fair Credit Reporting Act’s (FCRA) prohibition against printing more than five digits and/or the expiration date of a credit card account on receipts. Loewardy v. Oakley, Inc., Case No. SACV 07-53 (C.D. Cal., “in chambers” order issued April 10, 2007). Plaintiff sued the defendant, on behalf of herself and a putative class, alleging that the defendant violated the FCRA by including more than the last five digits and/or expiration date of her credit card on receipts. The defendant moved to dismiss, arguing that there is no private right of action under the FCRA provision at issue because it protects “cardholders” – who may be individuals or entities – as opposed to “consumers” (who are provided a private cause of action under FCRA). The District Court rejected this argument, noting that FCRA generally provides consumers with a private cause of action for willful or negligent violations of all of FCRA’s requirements, and holding that such private rights of action are not eliminated simply because the provision at issue more broadly refers to “cardholders.” The Court also noted that the plaintiff expressly limited her putative class to individual consumers. For a copy of this decision please contact .
First Circuit Upholds Dismissal of TILA Rescission Suit Based on Alleged Improper Notice. The U.S. Court of Appeals for the First Circuit has upheld the dismissal of a lawsuit seeking rescission of home loans and damages for alleged violations of the Truth in Lending Act (TILA). Santos-Rodriguez v. Doral Mortgage Corp., No. 06-1769 (1st Cir. Apr. 19, 2007). In this case, the plaintiffs alleged that Doral failed to provide sufficient notice of their rescission rights. The plaintiffs entered into same-lender refinancing transactions with Doral. Doral provided, and the borrowers signed, a rescission notice patterned after Regulation Z’s Model Form H-8. That form is designed for general transactions, while Model Form H-9 is designed for same-lender refinancings. The court stated that the plaintiffs’ argument that providing the different form violated TILA was “a non-starter.” The plaintiffs also argued that the rescission notice form Doral used was misleading because it did not adequately explain the effects of rescinding a same-lender refinance, as opposed to an original loan. The plaintiffs noted that the forms they signed did not disclose that rescinding a same-lender refinancing loan would not cancel the original loan. The court, in rejecting a “hyper-technical” compliance requirement, held that TILA’s disclosure requirements mandate only that the rescission notice inform the borrowers of their rights with regard to the security interest being created, not with regard to any prior transaction. A copy of the opinion is available at http://www.ca1.uscourts.gov/pdf.opinions/06-1769-01A.pdf.
Maryland Court of Appeals Enforces Credit Card Choice of Law Provision. Notwithstanding a credit card holder’s argument that Maryland law had been violated by the card issuer’s failure to obtain her signature before opening her credit card account, the Maryland Court of Appeals applied the law of South Dakota, which authorizes the issuance of credit cards without such signatures. Jackson v. Pasadena Receivables, Inc., Appeal No. 106 (Md., opinion issued April 11, 2007). After using her credit card for about nine years, and without denying that she had charged the amounts at issue, the cardholder defended a collection effort by alleging that she had never signed the credit card application in violation of the Maryland Retail Credit Accounts Law (MRCAL). The MRCAL requires that retail credit account agreements be signed or else the holder forfeits accrued finance charges. The district court rejected this argument, applying the law of South Dakota, which allows for a card to be issued without a cardholder signature, as provided for in the credit card agreement’s choice of law provision. Both the Maryland Circuit Court and the Maryland Court of Appeals affirmed the lower court. According to the Court of Appeals, the credit card agreement clearly incorporated the law of South Dakota – the home state of the credit card issuer – and application of South Dakota law was not contrary to fundamental Maryland policy. Indeed, Maryland laws enacted more recently than the MRCAL, as well as an opinion issued by the Maryland Commissioner of Consumer Credit, specifically authorize the opening of credit card accounts without obtaining the signature of the cardholder. For a copy of this decision, please contact .
New York Court Holds That Promissory Notes Are Securities Under UCC. The New York Court of Appeals has held that promissory notes are securities within the meaning of the Uniform Commercial Code (UCC). Highland Capital Management LP v. Schneider, No. 38 (N.Y. App. Apr. 3, 2007). This case, a certified question from the U.S. Court of Appeals for the Second Circuit, arose out of the acquisition of two women’s clothing companies by McNaughton, an apparel company, from members of the Schneider family (the defendants in the case), in which McNaughton signed eight promissory notes with an aggregate face value of $69 million. Each note bore a restrictive legend stating that the note had not been registered under the 1933 Securities Act and thus could not be transferred without registration or an attorney’s opinion that registration was not required. McNaughton was subsequently acquired by another apparel company, which redeemed the notes at par value plus interest. Highland Capital, an investment management firm and hedge fund, then sued the Schneiders, alleging that they had reneged on an oral agreement to sell the notes at a discount. The Schneiders argued that any oral agreement to sell would be unenforceable under the statute of frauds. According to Highland Capital, however, the notes were securities under New York’s UCC, whose sale was not subject to the statute of frauds. The New York Court of Appeals agreed, stating that the notes passed the transferability, divisibility, and functionality tests. Moreover, the court emphasized that, although the notes had not been registered on McNaughton’s books, “the proper inquiry is whether the notes could have been registered on transfer books maintained by McNaughton, not whether they were registered on transfer books at the time of the litigation.” For a copy of the opinion, please contact .
Pennsylvania Court Lacks Jurisdiction Over Florida Website. On April 5, the Pennsylvania Court of Common Appeals in Allegheny County held that a Florida-based interactive web site did not have the minimum contacts necessary to permit the court's exercise of personal jurisdiction, because the website did not target any one jurisdiction or generate advertising revenue from business located in the plaintiff's chosen forum. Hollis v. Joseph, No. GD06-12677 (Pa. Ct. Comm. Pl., Allegheny Cty. Apr. 5, 2007). The plaintiff in the case sued the operators of DontDateHim.com for defamation in connection with certain statements allegedly posted on the website. Although the website was accessible to anyone connected to the Internet, according to the court, accessibility alone did not support personal jurisdiction. The court also explained that the bulk of the website's revenue came from advertisements that could not be definitively linked to Pennsylvania. For a copy of the case, please write to .
Evidence Obtained From the Internet Must be Properly Authenticated. A federal trail court recently determined that evidence obtained from the Internet must be properly authenticated in order to be admissible. Novak v. Tucows, Inc., Case 2:06-cv-01909-JFB-ARL (E.D.N.Y. Mar. 25, 2007). In Novak, the plaintiff attempted to introduce printouts of Internet sites that were obtained by a third party, the Internet Archive. The Internet Archive operates the “Wayback Machine,” which automatically archives copies of websites, so that prior versions of a website can be viewed even after the website operator has changed the site. The court determined that the Wayback Machine printouts were inadmissible hearsay, and refused to admit them into evidence because the plaintiff had not shown that the printouts were reliable copies of the defendant’s websites. This portion of the decision highlights the need to properly document storage processes for electronic evidence, in order to admit the records into evidence. Please contact for a copy of the decision.
“Moderately Interactive” Website Deemed a “Sufficient Contact” for Personal Jurisdiction. On April 5, the U.S. District Court of the District of Colorado ruled that a website specifically and purposefully targeting customers in Colorado and providing contact information for a Colorado distributor satisfied personal jurisdiction in the state. Nestle Prepared Foods Co. v. Pocket Foods Corp., D. Colo., No. 04-cv-02533 (April 5, 2007). Previously, the court held that plaintiff’s “hotpocket” trademark was infringed by products sold on the defendant’s website, but the issue remained whether personal jurisdiction over the defendants in Colorado was proper. Under Fed. R. Civ. Proc. 4(k)(1)(A), personal jurisdiction was required under a state long-arm statute because the federal statute at issue did not have a nationwide service of process. Colorado’s long-arm statute imparts jurisdiction to claims arising from torts committed in the state. In this instance, the court found that “the tort of trademark infringement” occurred when the defendant included Colorado on its website listing as a state where a product was for sale and a distributor was available to fill the order. The court’s analysis then shifted to determining whether “sufficient and minimum contacts” existed between the defendant and Colorado. The court found that the website was “moderately interactive,” such that the degree of interactivity and the commercial nature proved that the defendant “purposefully availed [itself] of the benefits and protections” of Colorado, thereby creating “sufficient minimum contacts.” Defendant argued that because the site did not generate any sales in Colorado, sufficient minimum contacts did not exist. However, the court found that whether or not the site resulted in Colorado sales was immaterial. Instead it was the defendant’s intention to market in Colorado that was the key in finding that the defendant could reasonably anticipate being haled into a Colorado court. On this reasoning, and on a determination that Colorado jurisdiction would promote judicial efficiency, the court concluded that Colorado jurisdiction was reasonable and proper. Please contact for a copy of the case.
Northern District of Illinois Grants Class Certification but Holds That FCRA Prescreening Provisions Preempt State UDAP Law, Are Not Basis for Injunction. Another judge in the U.S. District Court for the Northern District of Illinois, in the course of granting class certification in another FCRA firm-offer case, addressed two issues that are relatively novel in the prescreening context. First, the court dismissed the consumer’s claims that the defendants, an auto dealer and marketing company, violated the state’s unfair and deceptive acts or practices (UDAP) law, holding that FCRA preempts all state law regarding credit bureau prescreening practices. Second, citing cases arising under other FCRA provisions, the court held that FCRA does not allow private parties to obtain an injunction for violations of the prescreening provisions. In granting class certification, the court stated that the auto dealer was “partly correct in maintaining that this Court should consider the full context of the mailer in determining liability under FCRA,” implying that it would be open to considering whether the full offer met the definition of a “firm offer” even if the description in the mailer did not. But the court stated that “that context does not require a case-by-case analysis of each consumer that would doubtless preclude certification.” See Krey v. Castle Motor Sales, Inc., – F.R.D. –, 2007 WL 914268 (N.D. Ill. Mar. 21, 2007). For a copy of this decision, please contact .
MISCELLANY
FTC Hosts Events on Spam and Debt Collection. The Federal Trade Commission (FTC) will be holding a two day conference entitled “Spam Summit: The Next Generation of Threats and Solutions” in Washington DC on July 11 and 12, 2007. It will address several issues in technological and regulatory tools for controlling e-mail spam. For more information, see http://www.ftc.gov/opa/2007/04/spamsummit.shtm. The FTC will also hold a two-day workshop on recent changes in the debt collection industry, in Washington, D.C. on October 10 and 11, 2007. For more information see http://www.ftc.gov/opa/2007/03/fdcpawkshop.shtm.
GAO Report Recommends Stronger HUD Enforcement Authority under RESPA. On April 13, the Government Accountability Office (GAO) issued a report to the House of Representative's Committee on Financial Services regarding practices in the title insurance industry. Among other items, the report suggests increasing the Department of Housing and Urban Development’s (HUD's) enforcement authority under the Real Estate Settlement Procedures Act (RESPA), by granting it power to impose civil money penalties for violations of the statute’s prohibitions on referral fees. The report also encouraged HUD to work more closely with state regulators. The full seventy-four page GAO report is available at http://www.gao.gov/new.items/d07401.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 see here.
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.
John Kromer and Clinton Rockwell, together with Michael Goldberg of Corporate Risk Advisors, on April 19 spoke on a Pratt Audio Conference Series regarding non-traditional mortgage loans and federal and state agency guidance. For more information, please contact Mr. Kromer or Mr. Rockwell.
Frank Supik will speak on April 24 at the Postsecondary Electronic Standard Council’s Fourth Annual Conference on Technology and Standards in Washington, DC. Mr. Supik will speak on E-Document Requirements for Storage, Reproduction and Security. For more information, go to http://www.pesc.org/events/techstandards/fourth/.
Supreme Court Issues Widely Anticipated OCC Preemption Opinion. On April 17, the U.S. Supreme Court affirmed, in a 5-3 decision, a Sixth Circuit ruling that an operating subsidiary of a national bank was not subject to state mortgage lending laws or licensure (most recently reported in the December 1st, 2006 issue of InfoBytes). Watters v. Wachovia Bank, N.A., No. 05-1342, (U.S. April 17, 2007). For more details of this decision, please see InfoBytes’ recent Special Alert at http://www.buckleykolar.com/publications/InfoBytesSpecialAlert041707.htm. For a copy of this opinion, please see http://www.supremecourtus.gov/opinions/06pdf/05-1342.pdf.
FRB Proposes Amendments to Regs for Electronic Consumer Disclosures. Today, the Federal Reserve Board (FRB) requested public comment on proposed amendments to five consumer financial services and fair lending regulations (Regulations B, E, M, Z, and DD) to clarify the requirements for providing consumer disclosures in electronic form. In 2001, the FRB published interim final rules to establish uniform standards for the electronic delivery of disclosures. However, the mandatory compliance date for these rules was later lifted and institutions have not been required to comply with the interim final rules. The proposal would amend the FRB's rules by (i) withdrawing certain portions of the 2001 interim final rules that restate or cross-reference provisions of the Electronic Signatures in Global and National Commerce Act (ESIGN), (ii) withdrawing provisions of the interim final rules that may impose undue burdens on electronic banking and commerce and may be unnecessary for consumer protection, and (iii) retaining certain provisions of the interim final rules that provide guidance on the use of electronic disclosures. The proposal would also implement certain provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which mandates certain disclosures for online credit card solicitations. The proposal provides for a 60-day comment period after publication in the Federal Register. For the press release, and copies of the proposed amendments, see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070420/default.htm.
Michigan Appeals Court Holds that Neither DIDMCA Nor AMTPA Preempts State Usury Limit for Loan Extensions. Recently, the Michigan Court of Appeals held that the preemption provisions of Section 501 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) and the Alternative Mortgage Transaction parity Act (AMTPA) did not apply to a Michigan state usury statute limiting the interest rate of an extension of an existing loan. Patrick v. Pines Investment Corp. et al., No. 272692 (Mich. Ct. App. Apr. 10, 2007). In this case, the original loan was a balloon loan that provided the borrowers a right to refinance at an interest rate based on the then prevailing market rate. At maturity, the borrowers agreed to extend the loan at higher, and increasing, interest rates, but eventually stopped payment and brought suit alleging a violation of the state usury statute, among other claims. The Court of Appeals held that providing for a different interest rate for a right to refinance, even if the rates end up higher than the original loan interest rate, is perfectly legal, so long as the interest rate for the extension is tied to an objective standard beyond the control of either party. Here, the rate was extended at a higher rate explicitly set by the defendant, and therefore the usury provisions applied. The Court then stated that DIDMCA applies to situations where state statutes expressly limit the rate of interest or otherwise restrict the interest rates to below market rates. Because the Michigan statute at question does not expressly limit the rate, and especially not a future interest rate, so long as it is tied to an objective market rate, the statute is not preempted. The defendants argued that the Michigan usury statute should not apply because the AMTPA preempted state laws limiting this type of mortgage transaction. The court disagreed, finding that the AMTPA applies to loan originations, not loan extensions. For a copy of the decision, please contact .
Federal District Court Holds That Mailer with “No Terms That Could Be Honored” Is Not Valid FCRA Firm Offer. The U.S. District Court for the Northern District of Illinois agreed with a consumer that a mortgage lender had not made a valid "firm offer" under the Fair Credit Reporting Act (FCRA) and granted summary judgment to the consumer. Murray v. GMAC Mortgage Corp., – F. Supp. 2d –, 2007 WL 1100608 (N.D. Ill. Apr. 10, 2007). This is the same case in which, in earlier proceedings, the U.S. Court of Appeals for the Seventh Circuit stated that the legality of a prescreened offer may be decided by “determin[ing] whether the four corners of the offer satisfy the statutory definition” of “firm offer.” See InfoBytes, February 24, 2006. Implicitly assuming that the Seventh Circuit’s “four corners” language applies to the mailer itself and not to the entire offer established in advance of the prescreening by the lender, the district court in the current decision found the mailing to contain "highly conditional terms" that amounted to no terms at all, providing the recipient with "no substantive information from which [to begin] to guess the worth of the offer to them as an individual." The court also noted that the mailing is "so unlike a firm offer that there are essentially no terms that could be honored." It rejected the lender’s argument that it would have been impractical to specify the terms in the mailer “because of the nature of mortgage lending,” stating that if that were the case, the lender had the option of not sending the mailing at all. Stating that it was following the rationale of Cole v. U.S. Capital, Inc. (see InfoBytes, December 3, 2004), the court said that did not "find value to justify the invasion of privacy that credit report disclosure represents" and, therefore, the mailing amounted to a sales pitch rather than a true offer of credit. The court stated that, because it had found that the firm offer was invalid, it did not need to address whether the disclosures in the mailing were laid out in a "clear and conspicuous" manner or whether the private right of action under FCRA for failure to provide proper disclosures was repealed by the Fair and Accurate Credit Transactions Act of 2003. The court also concluded that the issue of whether or not the lender’s conduct was "willful" could not be determined on a motion for summary judgment. For a copy of this decision, please contact .
First Circuit Upholds Dismissal of TILA Rescission Suit Based on Alleged Improper Notice. The U.S. Court of Appeals for the First Circuit has upheld the dismissal of a lawsuit seeking rescission of home loans and damages for alleged violations of the Truth in Lending Act (TILA). Santos-Rodriguez v. Doral Mortgage Corp., No. 06-1769 (1st Cir. Apr. 19, 2007). In this case, the plaintiffs alleged that Doral failed to provide sufficient notice of their rescission rights. The plaintiffs entered into same-lender refinancing transactions with Doral. Doral provided, and the borrowers signed, a rescission notice patterned after Regulation Z’s Model Form H-8. That form is designed for general transactions, while Model Form H-9 is designed for same-lender refinancings. The court stated that the plaintiffs’ argument that providing the different form violated TILA was “a non-starter.” The plaintiffs also argued that the rescission notice form Doral used was misleading because it did not adequately explain the effects of rescinding a same-lender refinance, as opposed to an original loan. The plaintiffs noted that the forms they signed did not disclose that rescinding a same-lender refinancing loan would not cancel the original loan. The court, in rejecting a “hyper-technical” compliance requirement, held that TILA’s disclosure requirements mandate only that the rescission notice inform the borrowers of their rights with regard to the security interest being created, not with regard to any prior transaction. A copy of the opinion is available at http://www.ca1.uscourts.gov/pdf.opinions/06-1769-01A.pdf.
Northern District of Illinois Grants Class Certification but Holds That FCRA Prescreening Provisions Preempt State UDAP Law, Are Not Basis for Injunction. Another judge in the U.S. District Court for the Northern District of Illinois, in the course of granting class certification in another FCRA firm-offer case, addressed two issues that are relatively novel in the prescreening context. First, the court dismissed the consumer’s claims that the defendants, an auto dealer and marketing company, violated the state’s unfair and deceptive acts or practices (UDAP) law, holding that FCRA preempts all state law regarding credit bureau prescreening practices. Second, citing cases arising under other FCRA provisions, the court held that FCRA does not allow private parties to obtain an injunction for violations of the prescreening provisions. In granting class certification, the court stated that the auto dealer was “partly correct in maintaining that this Court should consider the full context of the mailer in determining liability under FCRA,” implying that it would be open to considering whether the full offer met the definition of a “firm offer” even if the description in the mailer did not. But the court stated that “that context does not require a case-by-case analysis of each consumer that would doubtless preclude certification.” See Krey v. Castle Motor Sales, Inc., – F.R.D. –, 2007 WL 914268 (N.D. Ill. Mar. 21, 2007). For a copy of this decision, please contact .
Federal Regulators Encourage Lenders to Work with Struggling Borrowers. On April 17, the federal banking agencies (the FRB, FDIC, NCUA, OCC, and OTS) issued a joint statement encouraging lending institutions to work with borrowers who cannot make their mortgage loan payments to find solutions other than immediate foreclosure. The banking agencies point out that lending institutions will not face regulatory penalties if they pursue “prudent workout arrangements” with borrowers. Additionally, bank and thrift programs that transition moderate-to-low-income homeowners into less costly loans may receive favorable treatment under the Community Reinvestment Act (CRA). For the press release, and a link to the official announcement, please see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070417/default.htm.
Lender Settles with Connecticut Banking Department Over Non-Compliance Allegations. On April 11, Connecticut Governor M. Jodi Rell and Banking Commissioner Howard Pitkin jointly announced a settlement agreement with a mortgage lender over allegations that the lender had failed to comply with state law. The settlement centered on allegations that (i) 473 first mortgage loans in which the state regulator claimed that finance charges exceeded the lesser of $2000 or 5% of the loan amount, which is prohibited by Conn. Gen. Stat. § 36a-498a and (ii) 147 originators loan had originated loans without individual licensure. The lender has voluntarily repaid borrowers the allegedly overcharged loan fees, and implemented several policies to strengthen compliance including a system to document unregistered originators on a monthly basis. Under the settlement, the lender will pay a $401,750 civil money penalty to the Connecticut Department of Banking, as well as $100,000 to Neighborhood Reinvestment Corporation to provide homeownership assistance in Connecticut. For the official press release, and a link to the settlement agreement, please see http://www.ct.gov/dob/cwp/view.asp?a=2245&q=378338.
HUD Mortgagee Letter Clarifies Definition of “Existing Property” for HECMs. On April 12, the Department of Housing and Urban Development (HUD) issued a letter to all FHA-approved mortgagees clarifying its definition of “existing properties” with regard to its use as collateral for Home Equity Conversion Mortgages (HECMs). According to the letter, lenders must guarantee that: (i) real property used to secure a HECM serves as the borrower’s principal residence; (ii) construction of the property is complete and the property is habitable; (iii) loan proceeds are not used to purchase the property; and (iv) any loan that financed the construction and/or purchase of the home is satisfied and the HECM is secured by a first lien. For further details, the FHA mortgagee letter is available at http://www.hudclips.org/sub_nonhud/cgi/pdfforms/07-6ML.doc.
Montana Credit Freeze Bill Signed Into Law. A Montana bill (S.B. 116) permitting residents to place security freezes on their credit reports has been signed into law by Governor Brian Schweitzer. The law (whose passage was reported in the April 6th, 2007 edition of InfoBytes), which becomes effective July 1st, 2007, provides that credit reporting firms have five business days to implement a freeze after receiving a request. If a request comes from an identity theft victim specifically, then a credit reporting firm must implement the freeze within 24 hours. The service is free for identity theft victims whereas all others must pay a $3 fee. To view the full text of S.B. 116, as signed into law by the governor, please visit http://data.opi.mt.gov/bills/2007/billpdf/SB0116.pdf.
GAO Report Recommends Stronger HUD Enforcement Authority under RESPA. On April 13, the Government Accountability Office (GAO) issued a report to the House of Representative's Committee on Financial Services regarding practices in the title insurance industry. Among other items, the report suggests increasing the Department of Housing and Urban Development’s (HUD's) enforcement authority under the Real Estate Settlement Procedures Act (RESPA), by granting it power to impose civil money penalties for violations of the statute’s prohibitions on referral fees. The report also encouraged HUD to work more closely with state regulators. The full seventy-four page GAO report is available at http://www.gao.gov/new.items/d07401.pdf.
Supreme Court Issues Widely Anticipated OCC Preemption Opinion. On April 17, the U.S. Supreme Court affirmed, in a 5-3 decision, a Sixth Circuit ruling that an operating subsidiary of a national bank was not subject to state mortgage lending laws or licensure (most recently reported in the December 1st, 2006 issue of InfoBytes). Watters v. Wachovia Bank, N.A., No. 05-1342, (U.S. April 17, 2007). For more details of this decision, please see InfoBytes’ recent Special Alert at http://www.buckleykolar.com/publications/InfoBytesSpecialAlert041707.htm. For a copy of this opinion, please see http://www.supremecourtus.gov/opinions/06pdf/05-1342.pdf.
Michigan Appeals Court Holds that Neither DIDMCA Nor AMTPA Preempts State Usury Limit for Loan Extensions. Recently, the Michigan Court of Appeals held that the preemption provisions of Section 501 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) and the Alternative Mortgage Transaction parity Act (AMTPA) did not apply to a Michigan state usury statute limiting the interest rate of an extension of an existing loan. Patrick v. Pines Investment Corp. et al., No. 272692 (Mich. Ct. App. Apr. 10, 2007). In this case, the original loan was a balloon loan that provided the borrowers a right to refinance at an interest rate based on the then prevailing market rate. At maturity, the borrowers agreed to extend the loan at higher, and increasing, interest rates, but eventually stopped payment and brought suit alleging a violation of the state usury statute, among other claims. The Court of Appeals held that providing for a different interest rate for a right to refinance, even if the rates end up higher than the original loan interest rate, is perfectly legal, so long as the interest rate for the extension is tied to an objective standard beyond the control of either party. Here, the rate was extended at a higher rate explicitly set by the defendant, and therefore the usury provisions applied. The Court then stated that DIDMCA applies to situations where state statutes expressly limit the rate of interest or otherwise restrict the interest rates to below market rates. Because the Michigan statute at question does not expressly limit the rate, and especially not a future interest rate, so long as it is tied to an objective market rate, the statute is not preempted. The defendants argued that the Michigan usury statute should not apply because the AMTPA preempted state laws limiting this type of mortgage transaction. The court disagreed, finding that the AMTPA applies to loan originations, not loan extensions. For a copy of the decision, please contact .
New York Attorney General Announces Suit Against Drexel University, Settlement with Sallie Mae. On April 19, New York Attorney General Andrew Cuomo announced his intent to sue Drexel University over its student loan revenue sharing agreement with Education Finance Partners. This marks the first legal action in the Attorney General’s widely publicized investigation into relationships between lenders to students and universities (most recently reported in the April 6th issue of InfoBytes). Education Finance Partners, which is alleged to have agreed to pay Drexel a percentage of the net value of referred loans, reached a settlement with the Attorney General’s Office earlier this week in which it agreed to adopt the Attorney General’s Student Loan Code of Conduct and pay $2.5 million to a fund to educate student borrowers. (For more details, see the official press release at http://www.oag.state.ny.us/press/2007/apr/apr16b_07.html.) This follows an announcement of a settlement last week by the Attorney General with Sallie Mae, which also agreed to adopt the Code of Conduct and pay $2 million into the borrower education fund. In the press release regarding Drexel, Attorney General Cuomo is quoted as saying “We have proceeded against lenders and now we are proceeding against schools. . . . This office has been clear to schools: settle or we will commence litigation.” The announcement also mentions three New York universities, and one located in Rhode Island, that have agreed to adopt the code of conduct and repay money from Education Finance Partners paid under referral incentive agreements. The press release also asserts that Drexel University, which is located in Pennsylvania, “solicits and corresponds with students from New York” who “rely on Drexel’s representations about preferred lenders,” and therefore falls under the New York Attorney General’s jurisdiction in this matter. To view the official press release, please see http://www.oag.state.ny.us/press/2007/apr/apr19b_07.html.
Federal District Court Holds That Mailer with “No Terms That Could Be Honored” Is Not Valid FCRA Firm Offer. The U.S. District Court for the Northern District of Illinois agreed with a consumer that a mortgage lender had not made a valid "firm offer" under the Fair Credit Reporting Act (FCRA) and granted summary judgment to the consumer. Murray v. GMAC Mortgage Corp., – F. Supp. 2d –, 2007 WL 1100608 (N.D. Ill. Apr. 10, 2007). This is the same case in which, in earlier proceedings, the U.S. Court of Appeals for the Seventh Circuit stated that the legality of a prescreened offer may be decided by “determin[ing] whether the four corners of the offer satisfy the statutory definition” of “firm offer.” See InfoBytes, February 24, 2006. Implicitly assuming that the Seventh Circuit’s “four corners” language applies to the mailer itself and not to the entire offer established in advance of the prescreening by the lender, the district court in the current decision found the mailing to contain "highly conditional terms" that amounted to no terms at all, providing the recipient with "no substantive information from which [to begin] to guess the worth of the offer to them as an individual." The court also noted that the mailing is "so unlike a firm offer that there are essentially no terms that could be honored." It rejected the lender’s argument that it would have been impractical to specify the terms in the mailer “because of the nature of mortgage lending,” stating that if that were the case, the lender had the option of not sending the mailing at all. Stating that it was following the rationale of Cole v. U.S. Capital, Inc. (see InfoBytes, December 3, 2004), the court said that did not "find value to justify the invasion of privacy that credit report disclosure represents" and, therefore, the mailing amounted to a sales pitch rather than a true offer of credit. The court stated that, because it had found that the firm offer was invalid, it did not need to address whether the disclosures in the mailing were laid out in a "clear and conspicuous" manner or whether the private right of action under FCRA for failure to provide proper disclosures was repealed by the Fair and Accurate Credit Transactions Act of 2003. The court also concluded that the issue of whether or not the lender’s conduct was "willful" could not be determined on a motion for summary judgment. For a copy of this decision, please contact .
Federal Regulators Encourage Lenders to Work with Struggling Borrowers. On April 17, the federal banking agencies (the FRB, FDIC, NCUA, OCC, and OTS) issued a joint statement encouraging lending institutions to work with borrowers who cannot make their mortgage loan payments to find solutions other than immediate foreclosure. The banking agencies point out that lending institutions will not face regulatory penalties if they pursue “prudent workout arrangements” with borrowers. Additionally, bank and thrift programs that transition moderate-to-low-income homeowners into less costly loans may receive favorable treatment under the Community Reinvestment Act (CRA). For the press release, and a link to the official announcement, please see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070417/default.htm.
Montana Credit Freeze Bill Signed Into Law. A Montana bill (S.B. 116) permitting residents to place security freezes on their credit reports has been signed into law by Governor Brian Schweitzer. The law (whose passage was reported in the April 6th, 2007 edition of InfoBytes), which becomes effective July 1st, 2007, provides that credit reporting firms have five business days to implement a freeze after receiving a request. If a request comes from an identity theft victim specifically, then a credit reporting firm must implement the freeze within 24 hours. The service is free for identity theft victims whereas all others must pay a $3 fee. To view the full text of S.B. 116, as signed into law by the governor, please visit http://data.opi.mt.gov/bills/2007/billpdf/SB0116.pdf.
Supreme Court Issues Widely Anticipated OCC Preemption Opinion. On April 17, the U.S. Supreme Court affirmed, in a 5-3 decision, a Sixth Circuit ruling that an operating subsidiary of a national bank was not subject to state mortgage lending laws or licensure (most recently reported in the December 1st, 2006 issue of InfoBytes). Watters v. Wachovia Bank, N.A., No. 05-1342, (U.S. April 17, 2007). For more details of this decision, please see InfoBytes’ recent Special Alert at http://www.buckleykolar.com/publications/InfoBytesSpecialAlert041707.htm. For a copy of this opinion, please see http://www.supremecourtus.gov/opinions/06pdf/05-1342.pdf.
FRB Proposes Amendments to Regs for Electronic Consumer Disclosures. Today, the Federal Reserve Board (FRB) requested public comment on proposed amendments to five consumer financial services and fair lending regulations (Regulations B, E, M, Z, and DD) to clarify the requirements for providing consumer disclosures in electronic form. In 2001, the FRB published interim final rules to establish uniform standards for the electronic delivery of disclosures. However, the mandatory compliance date for these rules was later lifted and institutions have not been required to comply with the interim final rules. The proposal would amend the FRB's rules by (i) withdrawing certain portions of the 2001 interim final rules that restate or cross-reference provisions of the Electronic Signatures in Global and National Commerce Act (ESIGN), (ii) withdrawing provisions of the interim final rules that may impose undue burdens on electronic banking and commerce and may be unnecessary for consumer protection, and (iii) retaining certain provisions of the interim final rules that provide guidance on the use of electronic disclosures. The proposal would also implement certain provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which mandates certain disclosures for online credit card solicitations. The proposal provides for a 60-day comment period after publication in the Federal Register. For the press release, and copies of the proposed amendments, see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070420/default.htm.
Federal District Court Holds That Mailer with “No Terms That Could Be Honored” Is Not Valid FCRA Firm Offer. The U.S. District Court for the Northern District of Illinois agreed with a consumer that a mortgage lender had not made a valid "firm offer" under the Fair Credit Reporting Act (FCRA) and granted summary judgment to the consumer. Murray v. GMAC Mortgage Corp., – F. Supp. 2d –, 2007 WL 1100608 (N.D. Ill. Apr. 10, 2007). This is the same case in which, in earlier proceedings, the U.S. Court of Appeals for the Seventh Circuit stated that the legality of a prescreened offer may be decided by “determin[ing] whether the four corners of the offer satisfy the statutory definition” of “firm offer.” See InfoBytes, February 24, 2006. Implicitly assuming that the Seventh Circuit’s “four corners” language applies to the mailer itself and not to the entire offer established in advance of the prescreening by the lender, the district court in the current decision found the mailing to contain "highly conditional terms" that amounted to no terms at all, providing the recipient with "no substantive information from which [to begin] to guess the worth of the offer to them as an individual." The court also noted that the mailing is "so unlike a firm offer that there are essentially no terms that could be honored." It rejected the lender’s argument that it would have been impractical to specify the terms in the mailer “because of the nature of mortgage lending,” stating that if that were the case, the lender had the option of not sending the mailing at all. Stating that it was following the rationale of Cole v. U.S. Capital, Inc. (see InfoBytes, December 3, 2004), the court said that did not "find value to justify the invasion of privacy that credit report disclosure represents" and, therefore, the mailing amounted to a sales pitch rather than a true offer of credit. The court stated that, because it had found that the firm offer was invalid, it did not need to address whether the disclosures in the mailing were laid out in a "clear and conspicuous" manner or whether the private right of action under FCRA for failure to provide proper disclosures was repealed by the Fair and Accurate Credit Transactions Act of 2003. The court also concluded that the issue of whether or not the lender’s conduct was "willful" could not be determined on a motion for summary judgment. For a copy of this decision, please contact .
New York Attorney General Announces Suit Against Drexel University, Settlement with Sallie Mae. On April 19, New York Attorney General Andrew Cuomo announced his intent to sue Drexel University over its student loan revenue sharing agreement with Education Finance Partners. This marks the first legal action in the Attorney General’s widely publicized investigation into relationships between lenders to students and universities (most recently reported in the April 6th issue of InfoBytes). Education Finance Partners, which is alleged to have agreed to pay Drexel a percentage of the net value of referred loans, reached a settlement with the Attorney General’s Office earlier this week in which it agreed to adopt the Attorney General’s Student Loan Code of Conduct and pay $2.5 million to a fund to educate student borrowers. (For more details, see the official press release at http://www.oag.state.ny.us/press/2007/apr/apr16b_07.html.) This follows an announcement of a settlement last week by the Attorney General with Sallie Mae, which also agreed to adopt the Code of Conduct and pay $2 million into the borrower education fund. In the press release regarding Drexel, Attorney General Cuomo is quoted as saying “We have proceeded against lenders and now we are proceeding against schools. . . . This office has been clear to schools: settle or we will commence litigation.” The announcement also mentions three New York universities, and one located in Rhode Island, that have agreed to adopt the code of conduct and repay money from Education Finance Partners paid under referral incentive agreements. The press release also asserts that Drexel University, which is located in Pennsylvania, “solicits and corresponds with students from New York” who “rely on Drexel’s representations about preferred lenders,” and therefore falls under the New York Attorney General’s jurisdiction in this matter. To view the official press release, please see http://www.oag.state.ny.us/press/2007/apr/apr19b_07.html.
Federal Regulators Encourage Lenders to Work with Struggling Borrowers. On April 17, the federal banking agencies (the FRB, FDIC, NCUA, OCC, and OTS) issued a joint statement encouraging lending institutions to work with borrowers who cannot make their mortgage loan payments to find solutions other than immediate foreclosure. The banking agencies point out that lending institutions will not face regulatory penalties if they pursue “prudent workout arrangements” with borrowers. Additionally, bank and thrift programs that transition moderate-to-low-income homeowners into less costly loans may receive favorable treatment under the Community Reinvestment Act (CRA). For the press release, and a link to the official announcement, please see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070417/default.htm.
Montana Credit Freeze Bill Signed Into Law. A Montana bill (S.B. 116) permitting residents to place security freezes on their credit reports has been signed into law by Governor Brian Schweitzer. The law (whose passage was reported in the April 6th, 2007 edition of InfoBytes), which becomes effective July 1st, 2007, provides that credit reporting firms have five business days to implement a freeze after receiving a request. If a request comes from an identity theft victim specifically, then a credit reporting firm must implement the freeze within 24 hours. The service is free for identity theft victims whereas all others must pay a $3 fee. To view the full text of S.B. 116, as signed into law by the governor, please visit http://data.opi.mt.gov/bills/2007/billpdf/SB0116.pdf.
Supreme Court Issues Widely Anticipated OCC Preemption Opinion. On April 17, the U.S. Supreme Court affirmed, in a 5-3 decision, a Sixth Circuit ruling that an operating subsidiary of a national bank was not subject to state mortgage lending laws or licensure (most recently reported in the December 1st, 2006 issue of InfoBytes). Watters v. Wachovia Bank, N.A., No. 05-1342, (U.S. April 17, 2007). For more details of this decision, please see InfoBytes’ recent Special Alert at http://www.buckleykolar.com/publications/InfoBytesSpecialAlert041707.htm. For a copy of this opinion, please see http://www.supremecourtus.gov/opinions/06pdf/05-1342.pdf.
Federal District Court Holds That Mailer with “No Terms That Could Be Honored” Is Not Valid FCRA Firm Offer. The U.S. District Court for the Northern District of Illinois agreed with a consumer that a mortgage lender had not made a valid "firm offer" under the Fair Credit Reporting Act (FCRA) and granted summary judgment to the consumer. Murray v. GMAC Mortgage Corp., – F. Supp. 2d –, 2007 WL 1100608 (N.D. Ill. Apr. 10, 2007). This is the same case in which, in earlier proceedings, the U.S. Court of Appeals for the Seventh Circuit stated that the legality of a prescreened offer may be decided by “determin[ing] whether the four corners of the offer satisfy the statutory definition” of “firm offer.” See InfoBytes, February 24, 2006. Implicitly assuming that the Seventh Circuit’s “four corners” language applies to the mailer itself and not to the entire offer established in advance of the prescreening by the lender, the district court in the current decision found the mailing to contain "highly conditional terms" that amounted to no terms at all, providing the recipient with "no substantive information from which [to begin] to guess the worth of the offer to them as an individual." The court also noted that the mailing is "so unlike a firm offer that there are essentially no terms that could be honored." It rejected the lender’s argument that it would have been impractical to specify the terms in the mailer “because of the nature of mortgage lending,” stating that if that were the case, the lender had the option of not sending the mailing at all. Stating that it was following the rationale of Cole v. U.S. Capital, Inc. (see InfoBytes, December 3, 2004), the court said that did not "find value to justify the invasion of privacy that credit report disclosure represents" and, therefore, the mailing amounted to a sales pitch rather than a true offer of credit. The court stated that, because it had found that the firm offer was invalid, it did not need to address whether the disclosures in the mailing were laid out in a "clear and conspicuous" manner or whether the private right of action under FCRA for failure to provide proper disclosures was repealed by the Fair and Accurate Credit Transactions Act of 2003. The court also concluded that the issue of whether or not the lender’s conduct was "willful" could not be determined on a motion for summary judgment. For a copy of this decision, please contact .
Michigan Appeals Court Holds that Neither DIDMCA Nor AMTPA Preempts State Usury Limit for Loan Extensions. Recently, the Michigan Court of Appeals held that the preemption provisions of Section 501 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) and the Alternative Mortgage Transaction parity Act (AMTPA) did not apply to a Michigan state usury statute limiting the interest rate of an extension of an existing loan. Patrick v. Pines Investment Corp. et al., No. 272692 (Mich. Ct. App. Apr. 10, 2007). In this case, the original loan was a balloon loan that provided the borrowers a right to refinance at an interest rate based on the then prevailing market rate. At maturity, the borrowers agreed to extend the loan at higher, and increasing, interest rates, but eventually stopped payment and brought suit alleging a violation of the state usury statute, among other claims. The Court of Appeals held that providing for a different interest rate for a right to refinance, even if the rates end up higher than the original loan interest rate, is perfectly legal, so long as the interest rate for the extension is tied to an objective standard beyond the control of either party. Here, the rate was extended at a higher rate explicitly set by the defendant, and therefore the usury provisions applied. The Court then stated that DIDMCA applies to situations where state statutes expressly limit the rate of interest or otherwise restrict the interest rates to below market rates. Because the Michigan statute at question does not expressly limit the rate, and especially not a future interest rate, so long as it is tied to an objective market rate, the statute is not preempted. The defendants argued that the Michigan usury statute should not apply because the AMTPA preempted state laws limiting this type of mortgage transaction. The court disagreed, finding that the AMTPA applies to loan originations, not loan extensions. For a copy of the decision, please contact .
Challenge to Private Right of Action for FCRA Five Digit Provision Rejected. A California federal court rejected a defendant’s contention that there is no private cause of action under the Fair Credit Reporting Act’s (FCRA) prohibition against printing more than five digits and/or the expiration date of a credit card account on receipts. Loewardy v. Oakley, Inc., Case No. SACV 07-53 (C.D. Cal., “in chambers” order issued April 10, 2007). Plaintiff sued the defendant, on behalf of herself and a putative class, alleging that the defendant violated the FCRA by including more than the last five digits and/or expiration date of her credit card on receipts. The defendant moved to dismiss, arguing that there is no private right of action under the FCRA provision at issue because it protects “cardholders” – who may be individuals or entities – as opposed to “consumers” (who are provided a private cause of action under FCRA). The District Court rejected this argument, noting that FCRA generally provides consumers with a private cause of action for willful or negligent violations of all of FCRA’s requirements, and holding that such private rights of action are not eliminated simply because the provision at issue more broadly refers to “cardholders.” The Court also noted that the plaintiff expressly limited her putative class to individual consumers. For a copy of this decision please contact .
First Circuit Upholds Dismissal of TILA Rescission Suit Based on Alleged Improper Notice. The U.S. Court of Appeals for the First Circuit has upheld the dismissal of a lawsuit seeking rescission of home loans and damages for alleged violations of the Truth in Lending Act (TILA). Santos-Rodriguez v. Doral Mortgage Corp., No. 06-1769 (1st Cir. Apr. 19, 2007). In this case, the plaintiffs alleged that Doral failed to provide sufficient notice of their rescission rights. The plaintiffs entered into same-lender refinancing transactions with Doral. Doral provided, and the borrowers signed, a rescission notice patterned after Regulation Z’s Model Form H-8. That form is designed for general transactions, while Model Form H-9 is designed for same-lender refinancings. The court stated that the plaintiffs’ argument that providing the different form violated TILA was “a non-starter.” The plaintiffs also argued that the rescission notice form Doral used was misleading because it did not adequately explain the effects of rescinding a same-lender refinance, as opposed to an original loan. The plaintiffs noted that the forms they signed did not disclose that rescinding a same-lender refinancing loan would not cancel the original loan. The court, in rejecting a “hyper-technical” compliance requirement, held that TILA’s disclosure requirements mandate only that the rescission notice inform the borrowers of their rights with regard to the security interest being created, not with regard to any prior transaction. A copy of the opinion is available at http://www.ca1.uscourts.gov/pdf.opinions/06-1769-01A.pdf.
Maryland Court of Appeals Enforces Credit Card Choice of Law Provision. Notwithstanding a credit card holder’s argument that Maryland law had been violated by the card issuer’s failure to obtain her signature before opening her credit card account, the Maryland Court of Appeals applied the law of South Dakota, which authorizes the issuance of credit cards without such signatures. Jackson v. Pasadena Receivables, Inc., Appeal No. 106 (Md., opinion issued April 11, 2007). After using her credit card for about nine years, and without denying that she had charged the amounts at issue, the cardholder defended a collection effort by alleging that she had never signed the credit card application in violation of the Maryland Retail Credit Accounts Law (MRCAL). The MRCAL requires that retail credit account agreements be signed or else the holder forfeits accrued finance charges. The district court rejected this argument, applying the law of South Dakota, which allows for a card to be issued without a cardholder signature, as provided for in the credit card agreement’s choice of law provision. Both the Maryland Circuit Court and the Maryland Court of Appeals affirmed the lower court. According to the Court of Appeals, the credit card agreement clearly incorporated the law of South Dakota – the home state of the credit card issuer – and application of South Dakota law was not contrary to fundamental Maryland policy. Indeed, Maryland laws enacted more recently than the MRCAL, as well as an opinion issued by the Maryland Commissioner of Consumer Credit, specifically authorize the opening of credit card accounts without obtaining the signature of the cardholder. For a copy of this decision, please contact .
New York Court Holds That Promissory Notes Are Securities Under UCC. The New York Court of Appeals has held that promissory notes are securities within the meaning of the Uniform Commercial Code (UCC). Highland Capital Management LP v. Schneider, No. 38 (N.Y. App. Apr. 3, 2007). This case, a certified question from the U.S. Court of Appeals for the Second Circuit, arose out of the acquisition of two women’s clothing companies by McNaughton, an apparel company, from members of the Schneider family (the defendants in the case), in which McNaughton signed eight promissory notes with an aggregate face value of $69 million. Each note bore a restrictive legend stating that the note had not been registered under the 1933 Securities Act and thus could not be transferred without registration or an attorney’s opinion that registration was not required. McNaughton was subsequently acquired by another apparel company, which redeemed the notes at par value plus interest. Highland Capital, an investment management firm and hedge fund, then sued the Schneiders, alleging that they had reneged on an oral agreement to sell the notes at a discount. The Schneiders argued that any oral agreement to sell would be unenforceable under the statute of frauds. According to Highland Capital, however, the notes were securities under New York’s UCC, whose sale was not subject to the statute of frauds. The New York Court of Appeals agreed, stating that the notes passed the transferability, divisibility, and functionality tests. Moreover, the court emphasized that, although the notes had not been registered on McNaughton’s books, “the proper inquiry is whether the notes could have been registered on transfer books maintained by McNaughton, not whether they were registered on transfer books at the time of the litigation.” For a copy of the opinion, please contact .
Pennsylvania Court Lacks Jurisdiction Over Florida Website. On April 5, the Pennsylvania Court of Common Appeals in Allegheny County held that a Florida-based interactive web site did not have the minimum contacts necessary to permit the court's exercise of personal jurisdiction, because the website did not target any one jurisdiction or generate advertising revenue from business located in the plaintiff's chosen forum. Hollis v. Joseph, No. GD06-12677 (Pa. Ct. Comm. Pl., Allegheny Cty. Apr. 5, 2007). The plaintiff in the case sued the operators of DontDateHim.com for defamation in connection with certain statements allegedly posted on the website. Although the website was accessible to anyone connected to the Internet, according to the court, accessibility alone did not support personal jurisdiction. The court also explained that the bulk of the website's revenue came from advertisements that could not be definitively linked to Pennsylvania. For a copy of the case, please write to .
Evidence Obtained From the Internet Must be Properly Authenticated. A federal trail court recently determined that evidence obtained from the Internet must be properly authenticated in order to be admissible. Novak v. Tucows, Inc., Case 2:06-cv-01909-JFB-ARL (E.D.N.Y. Mar. 25, 2007). In Novak, the plaintiff attempted to introduce printouts of Internet sites that were obtained by a third party, the Internet Archive. The Internet Archive operates the “Wayback Machine,” which automatically archives copies of websites, so that prior versions of a website can be viewed even after the website operator has changed the site. The court determined that the Wayback Machine printouts were inadmissible hearsay, and refused to admit them into evidence because the plaintiff had not shown that the printouts were reliable copies of the defendant’s websites. This portion of the decision highlights the need to properly document storage processes for electronic evidence, in order to admit the records into evidence. Please contact for a copy of the decision.
“Moderately Interactive” Website Deemed a “Sufficient Contact” for Personal Jurisdiction. On April 5, the U.S. District Court of the District of Colorado ruled that a website specifically and purposefully targeting customers in Colorado and providing contact information for a Colorado distributor satisfied personal jurisdiction in the state. Nestle Prepared Foods Co. v. Pocket Foods Corp., D. Colo., No. 04-cv-02533 (April 5, 2007). Previously, the court held that plaintiff’s “hotpocket” trademark was infringed by products sold on the defendant’s website, but the issue remained whether personal jurisdiction over the defendants in Colorado was proper. Under Fed. R. Civ. Proc. 4(k)(1)(A), personal jurisdiction was required under a state long-arm statute because the federal statute at issue did not have a nationwide service of process. Colorado’s long-arm statute imparts jurisdiction to claims arising from torts committed in the state. In this instance, the court found that “the tort of trademark infringement” occurred when the defendant included Colorado on its website listing as a state where a product was for sale and a distributor was available to fill the order. The court’s analysis then shifted to determining whether “sufficient and minimum contacts” existed between the defendant and Colorado. The court found that the website was “moderately interactive,” such that the degree of interactivity and the commercial nature proved that the defendant “purposefully availed [itself] of the benefits and protections” of Colorado, thereby creating “sufficient minimum contacts.” Defendant argued that because the site did not generate any sales in Colorado, sufficient minimum contacts did not exist. However, the court found that whether or not the site resulted in Colorado sales was immaterial. Instead it was the defendant’s intention to market in Colorado that was the key in finding that the defendant could reasonably anticipate being haled into a Colorado court. On this reasoning, and on a determination that Colorado jurisdiction would promote judicial efficiency, the court concluded that Colorado jurisdiction was reasonable and proper. Please contact for a copy of the case.
Northern District of Illinois Grants Class Certification but Holds That FCRA Prescreening Provisions Preempt State UDAP Law, Are Not Basis for Injunction. Another judge in the U.S. District Court for the Northern District of Illinois, in the course of granting class certification in another FCRA firm-offer case, addressed two issues that are relatively novel in the prescreening context. First, the court dismissed the consumer’s claims that the defendants, an auto dealer and marketing company, violated the state’s unfair and deceptive acts or practices (UDAP) law, holding that FCRA preempts all state law regarding credit bureau prescreening practices. Second, citing cases arising under other FCRA provisions, the court held that FCRA does not allow private parties to obtain an injunction for violations of the prescreening provisions. In granting class certification, the court stated that the auto dealer was “partly correct in maintaining that this Court should consider the full context of the mailer in determining liability under FCRA,” implying that it would be open to considering whether the full offer met the definition of a “firm offer” even if the description in the mailer did not. But the court stated that “that context does not require a case-by-case analysis of each consumer that would doubtless preclude certification.” See Krey v. Castle Motor Sales, Inc., – F.R.D. –, 2007 WL 914268 (N.D. Ill. Mar. 21, 2007). For a copy of this decision, please contact .
House Passes Bill Giving Shareholders Vote on Executive Pay. Today, the U.S. House of Representatives passed H.R. 1257 which would give shareholders a non-binding vote on executive pay and “golden parachute” compensation (previously reported in the March 2nd issue of InfoBytes). The bill was passed by a vote of 269 to 134, and will now be referred to the Senate. For the House Financial Services Committee press release, see http://www.house.gov/apps/list/press/financialsvcs_dem/press042007.shtml.
SEC Announces First SAR Enforcement Action Against a Broker-Dealer. On April 11, the Securities and Exchange Commission (SEC) filed an order instituting administrative and cease-and-desist proceedings against Park Financial Group, Inc. for anti-money laundering non-compliance. The SEC's filing alleges, among other items, that Park failed to file Suspicious Activity Reports (SARs) required by the Bank Secrecy Act as amended by the 2002 USA PATRIOT Act. This is the SEC's first case against a securities broker-dealer involving SARs. The SEC press release is available at http://www.sec.gov/litigation/admin/2007/34-55614.pdf. The order can be viewed at http://www.sec.gov/litigation/admin/2007/34-55614-o.pdf. The SEC also recently announced its new “AML Source Tool,” which is designed to serve as an anti-money laundering compliance database and guide for broker-dealers. For more information, please see http://www.sec.gov/news/press/2007/2007-67.htm.
New York Court Holds That Promissory Notes Are Securities Under UCC. The New York Court of Appeals has held that promissory notes are securities within the meaning of the Uniform Commercial Code (UCC). Highland Capital Management LP v. Schneider, No. 38 (N.Y. App. Apr. 3, 2007). This case, a certified question from the U.S. Court of Appeals for the Second Circuit, arose out of the acquisition of two women’s clothing companies by McNaughton, an apparel company, from members of the Schneider family (the defendants in the case), in which McNaughton signed eight promissory notes with an aggregate face value of $69 million. Each note bore a restrictive legend stating that the note had not been registered under the 1933 Securities Act and thus could not be transferred without registration or an attorney’s opinion that registration was not required. McNaughton was subsequently acquired by another apparel company, which redeemed the notes at par value plus interest. Highland Capital, an investment management firm and hedge fund, then sued the Schneiders, alleging that they had reneged on an oral agreement to sell the notes at a discount. The Schneiders argued that any oral agreement to sell would be unenforceable under the statute of frauds. According to Highland Capital, however, the notes were securities under New York’s UCC, whose sale was not subject to the statute of frauds. The New York Court of Appeals agreed, stating that the notes passed the transferability, divisibility, and functionality tests. Moreover, the court emphasized that, although the notes had not been registered on McNaughton’s books, “the proper inquiry is whether the notes could have been registered on transfer books maintained by McNaughton, not whether they were registered on transfer books at the time of the litigation.” For a copy of the opinion, please contact .
FRB Proposes Amendments to Regs for Electronic Consumer Disclosures. Today, the Federal Reserve Board (FRB) requested public comment on proposed amendments to five consumer financial services and fair lending regulations (Regulations B, E, M, Z, and DD) to clarify the requirements for providing consumer disclosures in electronic form. In 2001, the FRB published interim final rules to establish uniform standards for the electronic delivery of disclosures. However, the mandatory compliance date for these rules was later lifted and institutions have not been required to comply with the interim final rules. The proposal would amend the FRB's rules by (i) withdrawing certain portions of the 2001 interim final rules that restate or cross-reference provisions of the Electronic Signatures in Global and National Commerce Act (ESIGN), (ii) withdrawing provisions of the interim final rules that may impose undue burdens on electronic banking and commerce and may be unnecessary for consumer protection, and (iii) retaining certain provisions of the interim final rules that provide guidance on the use of electronic disclosures. The proposal would also implement certain provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which mandates certain disclosures for online credit card solicitations. The proposal provides for a 60-day comment period after publication in the Federal Register. For the press release, and copies of the proposed amendments, see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070420/default.htm.
Pennsylvania Court Lacks Jurisdiction Over Florida Website. On April 5, the Pennsylvania Court of Common Appeals in Allegheny County held that a Florida-based interactive web site did not have the minimum contacts necessary to permit the court's exercise of personal jurisdiction, because the website did not target any one jurisdiction or generate advertising revenue from business located in the plaintiff's chosen forum. Hollis v. Joseph, No. GD06-12677 (Pa. Ct. Comm. Pl., Allegheny Cty. Apr. 5, 2007). The plaintiff in the case sued the operators of DontDateHim.com for defamation in connection with certain statements allegedly posted on the website. Although the website was accessible to anyone connected to the Internet, according to the court, accessibility alone did not support personal jurisdiction. The court also explained that the bulk of the website's revenue came from advertisements that could not be definitively linked to Pennsylvania. For a copy of the case, please write to .
Evidence Obtained From the Internet Must be Properly Authenticated. A federal trail court recently determined that evidence obtained from the Internet must be properly authenticated in order to be admissible. Novak v. Tucows, Inc., Case 2:06-cv-01909-JFB-ARL (E.D.N.Y. Mar. 25, 2007). In Novak, the plaintiff attempted to introduce printouts of Internet sites that were obtained by a third party, the Internet Archive. The Internet Archive operates the “Wayback Machine,” which automatically archives copies of websites, so that prior versions of a website can be viewed even after the website operator has changed the site. The court determined that the Wayback Machine printouts were inadmissible hearsay, and refused to admit them into evidence because the plaintiff had not shown that the printouts were reliable copies of the defendant’s websites. This portion of the decision highlights the need to properly document storage processes for electronic evidence, in order to admit the records into evidence. Please contact for a copy of the decision.
“Moderately Interactive” Website Deemed a “Sufficient Contact” for Personal Jurisdiction. On April 5, the U.S. District Court of the District of Colorado ruled that a website specifically and purposefully targeting customers in Colorado and providing contact information for a Colorado distributor satisfied personal jurisdiction in the state. Nestle Prepared Foods Co. v. Pocket Foods Corp., D. Colo., No. 04-cv-02533 (April 5, 2007). Previously, the court held that plaintiff’s “hotpocket” trademark was infringed by products sold on the defendant’s website, but the issue remained whether personal jurisdiction over the defendants in Colorado was proper. Under Fed. R. Civ. Proc. 4(k)(1)(A), personal jurisdiction was required under a state long-arm statute because the federal statute at issue did not have a nationwide service of process. Colorado’s long-arm statute imparts jurisdiction to claims arising from torts committed in the state. In this instance, the court found that “the tort of trademark infringement” occurred when the defendant included Colorado on its website listing as a state where a product was for sale and a distributor was available to fill the order. The court’s analysis then shifted to determining whether “sufficient and minimum contacts” existed between the defendant and Colorado. The court found that the website was “moderately interactive,” such that the degree of interactivity and the commercial nature proved that the defendant “purposefully availed [itself] of the benefits and protections” of Colorado, thereby creating “sufficient minimum contacts.” Defendant argued that because the site did not generate any sales in Colorado, sufficient minimum contacts did not exist. However, the court found that whether or not the site resulted in Colorado sales was immaterial. Instead it was the defendant’s intention to market in Colorado that was the key in finding that the defendant could reasonably anticipate being haled into a Colorado court. On this reasoning, and on a determination that Colorado jurisdiction would promote judicial efficiency, the court concluded that Colorado jurisdiction was reasonable and proper. Please contact for a copy of the case.
Montana Credit Freeze Bill Signed Into Law. A Montana bill (S.B. 116) permitting residents to place security freezes on their credit reports has been signed into law by Governor Brian Schweitzer. The law (whose passage was reported in the April 6th, 2007 edition of InfoBytes), which becomes effective July 1st, 2007, provides that credit reporting firms have five business days to implement a freeze after receiving a request. If a request comes from an identity theft victim specifically, then a credit reporting firm must implement the freeze within 24 hours. The service is free for identity theft victims whereas all others must pay a $3 fee. To view the full text of S.B. 116, as signed into law by the governor, please visit http://data.opi.mt.gov/bills/2007/billpdf/SB0116.pdf.
FTC Hosts Events on Spam and Debt Collection. The Federal Trade Commission (FTC) will be holding a two day conference entitled “Spam Summit: The Next Generation of Threats and Solutions” in Washington DC on July 11 and 12, 2007. It will address several issues in technological and regulatory tools for controlling e-mail spam. For more information, see http://www.ftc.gov/opa/2007/04/spamsummit.shtm. The FTC will also hold a two-day workshop on recent changes in the debt collection industry, in Washington, D.C. on October 10 and 11, 2007. For more information see http://www.ftc.gov/opa/2007/03/fdcpawkshop.shtm.
Challenge to Private Right of Action for FCRA Five Digit Provision Rejected. A California federal court rejected a defendant’s contention that there is no private cause of action under the Fair Credit Reporting Act’s (FCRA) prohibition against printing more than five digits and/or the expiration date of a credit card account on receipts. Loewardy v. Oakley, Inc., Case No. SACV 07-53 (C.D. Cal., “in chambers” order issued April 10, 2007). Plaintiff sued the defendant, on behalf of herself and a putative class, alleging that the defendant violated the FCRA by including more than the last five digits and/or expiration date of her credit card on receipts. The defendant moved to dismiss, arguing that there is no private right of action under the FCRA provision at issue because it protects “cardholders” – who may be individuals or entities – as opposed to “consumers” (who are provided a private cause of action under FCRA). The District Court rejected this argument, noting that FCRA generally provides consumers with a private cause of action for willful or negligent violations of all of FCRA’s requirements, and holding that such private rights of action are not eliminated simply because the provision at issue more broadly refers to “cardholders.” The Court also noted that the plaintiff expressly limited her putative class to individual consumers. For a copy of this decision please contact .
Montana Credit Freeze Bill Signed Into Law. A Montana bill (S.B. 116) permitting residents to place security freezes on their credit reports has been signed into law by Governor Brian Schweitzer. The law (whose passage was reported in the April 6th, 2007 edition of InfoBytes), which becomes effective July 1st, 2007, provides that credit reporting firms have five business days to implement a freeze after receiving a request. If a request comes from an identity theft victim specifically, then a credit reporting firm must implement the freeze within 24 hours. The service is free for identity theft victims whereas all others must pay a $3 fee. To view the full text of S.B. 116, as signed into law by the governor, please visit http://data.opi.mt.gov/bills/2007/billpdf/SB0116.pdf.
Northern District of Illinois Grants Class Certification but Holds That FCRA Prescreening Provisions Preempt State UDAP Law, Are Not Basis for Injunction. Another judge in the U.S. District Court for the Northern District of Illinois, in the course of granting class certification in another FCRA firm-offer case, addressed two issues that are relatively novel in the prescreening context. First, the court dismissed the consumer’s claims that the defendants, an auto dealer and marketing company, violated the state’s unfair and deceptive acts or practices (UDAP) law, holding that FCRA preempts all state law regarding credit bureau prescreening practices. Second, citing cases arising under other FCRA provisions, the court held that FCRA does not allow private parties to obtain an injunction for violations of the prescreening provisions. In granting class certification, the court stated that the auto dealer was “partly correct in maintaining that this Court should consider the full context of the mailer in determining liability under FCRA,” implying that it would be open to considering whether the full offer met the definition of a “firm offer” even if the description in the mailer did not. But the court stated that “that context does not require a case-by-case analysis of each consumer that would doubtless preclude certification.” See Krey v. Castle Motor Sales, Inc., – F.R.D. –, 2007 WL 914268 (N.D. Ill. Mar. 21, 2007). For a copy of this decision, please contact .
FTC Hosts Events on Spam and Debt Collection. The Federal Trade Commission (FTC) will be holding a two day conference entitled “Spam Summit: The Next Generation of Threats and Solutions” in Washington DC on July 11 and 12, 2007. It will address several issues in technological and regulatory tools for controlling e-mail spam. For more information, see http://www.ftc.gov/opa/2007/04/spamsummit.shtm. The FTC will also hold a two-day workshop on recent changes in the debt collection industry, in Washington, D.C. on October 10 and 11, 2007. For more information see http://www.ftc.gov/opa/2007/03/fdcpawkshop.shtm.
Supreme Court Issues Widely Anticipated OCC Preemption Opinion. On April 17, the U.S. Supreme Court affirmed, in a 5-3 decision, a Sixth Circuit ruling that an operating subsidiary of a national bank was not subject to state mortgage lending laws or licensure (most recently reported in the December 1st, 2006 issue of InfoBytes). Watters v. Wachovia Bank, N.A., No. 05-1342, (U.S. April 17, 2007). For more details of this decision, please see InfoBytes’ recent Special Alert at http://www.buckleykolar.com/publications/InfoBytesSpecialAlert041707.htm. For a copy of this opinion, please see http://www.supremecourtus.gov/opinions/06pdf/05-1342.pdf.
FRB Proposes Amendments to Regs for Electronic Consumer Disclosures. Today, the Federal Reserve Board (FRB) requested public comment on proposed amendments to five consumer financial services and fair lending regulations (Regulations B, E, M, Z, and DD) to clarify the requirements for providing consumer disclosures in electronic form. In 2001, the FRB published interim final rules to establish uniform standards for the electronic delivery of disclosures. However, the mandatory compliance date for these rules was later lifted and institutions have not been required to comply with the interim final rules. The proposal would amend the FRB's rules by (i) withdrawing certain portions of the 2001 interim final rules that restate or cross-reference provisions of the Electronic Signatures in Global and National Commerce Act (ESIGN), (ii) withdrawing provisions of the interim final rules that may impose undue burdens on electronic banking and commerce and may be unnecessary for consumer protection, and (iii) retaining certain provisions of the interim final rules that provide guidance on the use of electronic disclosures. The proposal would also implement certain provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which mandates certain disclosures for online credit card solicitations. The proposal provides for a 60-day comment period after publication in the Federal Register. For the press release, and copies of the proposed amendments, see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070420/default.htm.
Federal District Court Holds That Mailer with “No Terms That Could Be Honored” Is Not Valid FCRA Firm Offer. The U.S. District Court for the Northern District of Illinois agreed with a consumer that a mortgage lender had not made a valid "firm offer" under the Fair Credit Reporting Act (FCRA) and granted summary judgment to the consumer. Murray v. GMAC Mortgage Corp., – F. Supp. 2d –, 2007 WL 1100608 (N.D. Ill. Apr. 10, 2007). This is the same case in which, in earlier proceedings, the U.S. Court of Appeals for the Seventh Circuit stated that the legality of a prescreened offer may be decided by “determin[ing] whether the four corners of the offer satisfy the statutory definition” of “firm offer.” See InfoBytes, February 24, 2006. Implicitly assuming that the Seventh Circuit’s “four corners” language applies to the mailer itself and not to the entire offer established in advance of the prescreening by the lender, the district court in the current decision found the mailing to contain "highly conditional terms" that amounted to no terms at all, providing the recipient with "no substantive information from which [to begin] to guess the worth of the offer to them as an individual." The court also noted that the mailing is "so unlike a firm offer that there are essentially no terms that could be honored." It rejected the lender’s argument that it would have been impractical to specify the terms in the mailer “because of the nature of mortgage lending,” stating that if that were the case, the lender had the option of not sending the mailing at all. Stating that it was following the rationale of Cole v. U.S. Capital, Inc. (see InfoBytes, December 3, 2004), the court said that did not "find value to justify the invasion of privacy that credit report disclosure represents" and, therefore, the mailing amounted to a sales pitch rather than a true offer of credit. The court stated that, because it had found that the firm offer was invalid, it did not need to address whether the disclosures in the mailing were laid out in a "clear and conspicuous" manner or whether the private right of action under FCRA for failure to provide proper disclosures was repealed by the Fair and Accurate Credit Transactions Act of 2003. The court also concluded that the issue of whether or not the lender’s conduct was "willful" could not be determined on a motion for summary judgment. For a copy of this decision, please contact .
Maryland Court of Appeals Enforces Credit Card Choice of Law Provision. Notwithstanding a credit card holder’s argument that Maryland law had been violated by the card issuer’s failure to obtain her signature before opening her credit card account, the Maryland Court of Appeals applied the law of South Dakota, which authorizes the issuance of credit cards without such signatures. Jackson v. Pasadena Receivables, Inc., Appeal No. 106 (Md., opinion issued April 11, 2007). After using her credit card for about nine years, and without denying that she had charged the amounts at issue, the cardholder defended a collection effort by alleging that she had never signed the credit card application in violation of the Maryland Retail Credit Accounts Law (MRCAL). The MRCAL requires that retail credit account agreements be signed or else the holder forfeits accrued finance charges. The district court rejected this argument, applying the law of South Dakota, which allows for a card to be issued without a cardholder signature, as provided for in the credit card agreement’s choice of law provision. Both the Maryland Circuit Court and the Maryland Court of Appeals affirmed the lower court. According to the Court of Appeals, the credit card agreement clearly incorporated the law of South Dakota – the home state of the credit card issuer – and application of South Dakota law was not contrary to fundamental Maryland policy. Indeed, Maryland laws enacted more recently than the MRCAL, as well as an opinion issued by the Maryland Commissioner of Consumer Credit, specifically authorize the opening of credit card accounts without obtaining the signature of the cardholder. For a copy of this decision, please contact .
© Buckley Kolar, LLP 2005. INFOBYTES is not intended as legal advice to any person or firm. It is provided as a client service and information contained herein is drawn from various public sources, including other publications.
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