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InfoBytes
CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS
Topics – Covered This Week (Click to View)
FEDERAL ISSUES
Major Mortgage Companies Agree to Sen. Dodd’s Subprime “Principals.” On May 2, Senator Christopher Dodd (D-Conn), Chairman of the Senate Banking Committee, announced that several major mortgage bankers have agreed to his “Statement of Principals,” which outline steps that should be taken to prevent foreclosures among subprime borrowers with adjustable rate mortgages (ARMs). Sen. Dodd announced the principals in connection with his Homeownership Preservation Summit held last month and attended by several major participants in the subprime market. The principals state, in part, that servicers should (i) contact subprime ARM borrowers prior to the loan reset to assess the risk of default, (ii) modify loans prior to rate resets which borrowers cannot afford, seeking to “create a permanent solution for the borrower to ensure that the loan is sustainable for the life of the loan,” (iii) adopt a “modification policy” so that loan modifications “can be done on the scale required” using “dedicated resources,” and (iv) make refinancing to prime loans for eligible borrowers as streamlined and low-cost as possible. The principals also state that Freddie Mac and Fannie Mae (who have also agreed to the principals) should offer “new products and expanded programs” to encourage refinancing out of resetting subprime ARMs and also consider acquiring subprime portfolios to modify them according to the guidelines. In acknowledging that “not every foreclosure can be prevented nor every home saved,” the principals encourage all parties to work together to minimize the damage to borrowers, communities, and the mortgage market when saving the home is not possible. To view Sen. Dodd’s press release, please see http://dodd.senate.gov/index.php?q=node/3863.
FHA Reform and ILC Bills Go to the House Floor. This week, the House Financial Services Committee passed the Industrial Bank Holding Company Act of 2007 (H.R. 698) and the Expanding American Homeownership Act of 2007 (H.R. 1852), the Federal Housing Administration (FHA) reform bill, sending both bills to be voted on by the full House of Representatives. On May 2, the committee announced it had “overwhelmingly” approved H.R. 698, regulating industrial loan companies (ILCs) (first reported in the February 6th issue of InfoBytes), after the committee agreed to a single amendment introduced by Committee Chairman Barney Frank (D – Mass.). On May 3, the committee passed H.R. 1852 on FHA reform (first reported in the March 30th issue of InfoBytes) after agreeing to several amendments on topics such as (i) risk-based FHA insurance premiums, (ii) net-worth and bond requirements for FHA-approved brokers, and (iii) caps on FHA-insured reverse mortgage origination fees. Also among the many changes was an amendment introduced by Rep. Frank specifying the allocation of the controversial Affordable Housing Fund that would be created by the new law. According to the Financial Services Committee’s press release, the amendment would ensure that no funds from the FHA’s 203(b) single family loan program can be used for affordable housing purposes. To view this press release, see http://www.house.gov/apps/list/press/financialsvcs_dem/press050307.shtml. For the committee’s press release regarding H.R. 698, see http://www.house.gov/apps/list/press/financialsvcs_dem/press050207.shtml.
FRB to Hold Hearings on HOEPA Regulations. On May 3, the Federal Reserve Board (FRB) announced it will hold a public hearing in Washington, DC on June 14th on “how it might use its rulemaking authority to curb abusive lending practices in the home mortgage market, including the subprime sector.” The hearing is expected to focus on possible rulemaking under the Home Ownership and Equity Protection Act (HOEPA), and follows the submission last week of a letter by Democrats on the Senate Banking Committee calling for stronger HOEPA rules to prevent predatory and abusive lending practices (for more information, see the April 27th issue of InfoBytes). Four similar hearing were held last year on topics in predatory lending, nontraditional mortgage products, and the subprime mortgage market (for more information, see the May 5, 2006 issue of InfoBytes). For the official FRB press release, see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070503/default.htm.
OTS Issues Notice to Thrift Holding Company CEO’s on Nontraditional Mortgage Guidance. On April 27, the Office of Thrift Supervision (OTS) issued a memorandum to thrift holding company CEO's regarding the Interagency Guidance on Non-Traditional Mortgages (reported in the September 29, 2006 issue of InfoBytes). The OTS stated in the notice that its intent was to bring the guidance to the holding company CEO’s attention and make them “aware of [the OTS’s] supervisory expectations… If [a thrift holding company] offers alternative mortgage products, regardless of whether the activity is conducted within an insured financial institution or in another entity within [the holding company’s] corporate family, OTS expects [holding company management] to recognize and mitigate the risks inherent in such products.” The notice also refers CEO’s to the OTS’s recently released Examination Handbook Section 212, One- to Four-Family Residential Real Estate Lending (reported in the March 23rd issue of InfoBytes). A full text version of the OTS memorandum can be viewed at http://www.ots.treas.gov/docs/2/25256.pdf.
FinCEN Delays Implementing Revised SAR Forms. On April 26, the Financial Crimes Enforcement Network (FinCEN) announced the delay of implementing revised Suspicious Activity Reports (SARs). The revisions were intended to simplify SAR reporting procedures, and facilitate joint SAR filing by reporting institutions (as reported in the December 22, 2006 issue of InfoBytes). In its press release, FinCEN states that the delay involves managing data protocol issues that must be resolved prior to implementation. In the meantime, financial institutions are directed to “continue to report suspicious activities on the existing SAR forms.” For the official notice, to be published in the Federal Register, please see http://www.fincen.gov/sar_fr_notice.pdf.
National Money Laundering Strategy Released. On May 3, the Departments of Treasury, Justice, and Homeland Security released a joint report entitled the 2007 National Money Laundering Strategy. The report discusses trends in U.S. anti-money laundering efforts, and targets key issues including, in part, (i) the rising popularity of internet banking, (ii) the difficulties posed by money service businesses such as money transmitters, (iii) the exploitation of low registration requirements and lax oversight to launder money through shell corporations, and (iv) the use of more fungible and liquid insurance products to launder money. For the official press release, please see http://www.treas.gov/press/releases/hp386.htm.
SEC Developing Final Rule on Proxy Access to Nominate Corporate Directors. On April 24, the Securities and Exchange Commission (SEC) announced that it will host three roundtables next month on shareholder rights and the federal proxy rules to address (i) the federal role in upholding shareholders' state law rights, (ii) the purpose and effect of the federal proxy rules, (iii) non-binding proposals under the proxy rules, and (iv) binding proposals under the proxy rules. “Proxy access” refers to the ability of shareholders to nominate corporate directors directly on the company's proxy ballot. This issue that was brought to the fore in a key ruling in September by the U.S. Court of Appeals for the Second Circuit, where the court rejected the SEC's view that a company may exclude from its proxy materials a shareholder proposal calling for the inclusion of shareholder-nominated director candidates. In a move that prompted the SEC to consider changes to its proxy rules, the Second Circuit reinstated a lawsuit whereby the American Federation of State, County & Municipal Employees, Employees Pension Plan (AFSCME), a shareholder of American International Group, Inc. (AIG), sued to force AIG to include in its proxy materials a shareholder proposal calling for the inclusion of shareholder-nominated director candidates. American Federation of State, County & Municipal Employees, Employees Pension Plan v. American International Group Inc., (2d Cir., Docket No. 05-2825-cv, Sept. 5, 2006). For more information on the SEC roundtable, see http://www.sec.gov/news/press/2007/2007-71.htm.
STATE ISSUES
FTC and DOJ Comment on NY Bill Requiring Attorneys for More Real Estate Transactions. On April 27, the Federal Trace Commission (FTC) and the Department of Justice (DOJ) filed a joint comment to the New York State Assembly Committee on the Judiciary advising the rejection of an assembly bill (A. 1837), that would mandate certain real estate related services to be performed by lawyers, arguing it would restrain competition between attorneys and non-attorneys. In the joint comment, the FTC and DOJ argue that the bill’s expansion of the definition of “the historic and essential elements of the practice of relevant real estate law” to include, among other things, (i) conducting title searched, (ii) preparing title abstracts, (iii) preparing or issuing title insurance reports or commitments, and (iv) collecting title insurance premiums, would have the effect of barring non-attorneys from performing such functions. In addition, the proposed bill would also prohibit non-attorneys from, among other things, giving or negotiating the terms and conditions for the sale of real property and rendering opinions on the legal status of or requirements to clear real estate titles. The FTC and DOJ argue that the proposed bill would increase the cost of these services to consumers and increase the financial burden to consumers for negotiating and closing real estate transactions. Finally, the FTC and DOJ argue that there is no evidence demonstrating that New Yorkers have been harmed by non-attorneys participating in these real estate services, and that the restrictions on competition in the proposed bill are not warranted. For the full text of the joint comment letter, please see http://www.ftc.gov/be/V070004.pdf.
Mississippi Governor Signs Credit Freeze Law. On April 21, Mississippi Governor Haley Barbour signed S.B. 3034 establishing a credit security freeze in that state (reported in the April 6th issue of InfoBytes). The law requires consumer reporting agencies to place a security freeze in consumer files upon the written request by certain consumers, caps the charge for such a freeze at $10, and provides for “temporary lift” of the freeze. For more information on the bill, see http://billstatus.ls.state.ms.us/2007/html/history/SB/SB3034.htm.
Maryland Enacts Bill for Pilot Electronic Real Estate Records Recording Program. On April 24, Maryland Governor Martin O’Malley signed into law H.B. 331 to grant the Maryland Administrative Office of the Courts authority to establish a pilot program for real property records. The law goes into effect June 1, 2007. For more information regarding the act, see http://mlis.state.md.us/2007rs/billfile/HB0331.htm.
First Settlement under New York Data Breach Law. On April 26, the Office of the New York Attorney General announced a settlement with CS STARS LLC under New York’s Information Security Breach and Notification Law over failure to provide notification regarding the loss of personal information for more than half a million New York consumers. CS STARS, a Chicago-based claims management firm, did not notify the owner of the personal data for more than seven weeks following the theft of an employee’s laptop. In the settlement agreement CS STARS LLC admitted to no wrongdoing, but agreed to strengthen its data security practices and pay the Attorney General’s Office $60,000 for investigation costs. For the official press release, see http://www.oag.state.ny.us/press/2007/apr/apr26a_07.html.
COURTS
U.S. District Court Allows Class Certification in Rescission Case, Finds Adverse Action in Alleged “Bait and Switch.” On April 23, the U.S. District Court for the Northern District of Illinois issued two rulings in a consolidated group of consumer class actions against Ameriquest and its affiliates. In re Ameriquest Mortgage Co. Mortgage Lending Practices Litigation, 2007 WL 1202544 (N.D. Ill. April 23, 2007). First, the court held that a class can be certified for declaratory judgment that loans are rescindable. The court distinguished between a class action that seeks to rescind loans and a class action that seeks a declaratory judgment that loans are rescindable, allowing individual class members to decide whether to rescind. The court reasoned that while class certification might be inappropriate in the former case because rescission is a personal remedy, it is appropriate in the latter because consumers may still pursue rescission claims individually. In so holding, the court disagreed with the opinion of the U.S. Court of Appeals for the First Circuit in McKenna v. First Horizon Home Loan Corp., where that court held that rescission cases are not suitable for classwide resolution. (For a discussion of McKenna, see the February 2nd issue of InfoBytes.) The U.S. Court of Appeals for the Seventh Circuit, which includes Illinois, has accepted a petition for appeal in Andrews v. Chevy Chase Bank, FSB (reported in the February 9th issue of InfoBytes).
Second, the decision addressed the borrower's claim that Ameriquest took adverse action against a group of borrowers whose loans closed, but who alleged that Ameriquest had misrepresented the terms of the loans that they actually obtained at closing. The court acknowledged that the counteroffer exception in Regulation B, which implements the Equal Credit Opportunity Act (ECOA), would normally mean that adverse action had not occurred, and also noted that the ECOA exception applies to FCRA adverse action. The court noted, however, that “the complaint alleges a bait-and-switch departure from offers the defendants made, not a series of rejections and counteroffers in response to any offers made by plaintiffs” (emphasis in original). Therefore, “[b]ecause the complaint does not clearly demonstrate that plaintiffs accepted counteroffers of credit,” the court denied the motion to dismiss on this issue. If accepted by other courts, this reasoning would seem to create an ECOA cause of action for an adverse action violation, with potential punitive damages of up to $10,000 per violation or $500,000 in a class action, whenever a consumer whose loan closed alleges a mismatch between a lender’s representations and the loan terms actually provided–a sweeping expansion of the definition of adverse action in ECOA to apply to alleged deceptive sales practices. In addition, almost all courts have held that the private right of action for violation of the FCRA adverse action provision was repealed by the Fair and Accurate Credit Transactions Act of 2003 – an issue not addressed in the court’s opinion. For a copy of this opinion, please contact .
Seventh Circuit Rules Against Equifax in FCRA Case. The U.S. Court of Appeals for the Seventh Circuit has reversed a ruling of summary judgment in favor of Equifax in a case involving the meaning of the phrase “clearly and accurately disclose” used in the Fair Credit Reporting Act (FCRA). Gillespie v. Equifax Information Services, LLC, No. 06-1952, 2007 WL 1287649 (7th Cir., May 3, 2007). (For more on the district court opinion, please see the June 16, 2006 issue of InfoBytes.) Under the FCRA, a consumer reporting agency cannot keep information regarding delinquent or charged-off accounts in a credit file for more than, effectively, seven and one-half years, but a reporting agency can keep records of accounts paid as agreed in a file for up to ten years. In this case, the plaintiffs brought suit over Equifax’s practice of reporting both delinquencies and any ensuing payments in the “Date of Last Activity” field on the consumer’s credit report. Under Equifax’s practices, if a consumer’s account became delinquent, and if the consumer subsequently began making timely payments again, Equifax apparently could, the plaintiffs argued, keep the delinquency on the credit report for more than seven and one-half years as a record of an account paid as agreed. The plaintiffs argued that Equifax’s disclosures, which must be “clear and accurate” under the FCRA, did not allow consumers to determine whether Equifax was properly calculating the seven and one-half year period. The appeals court reversed the district court’s summary judgment, finding that “Equifax’s disclosure to the plaintiffs may be accurate but it is not necessarily clear.” The appeals court remanded the case to the district court to determine any potential liability and to address the question of class certification, emphasizing that it was “only deciding that the case must continue. . . [not the] issue of Equifax’s liability. For a copy of this opinion, please contact .
U.S. District Court in Ohio "Preliminarily" Supports Injunctive Relief for Private Litigants under FCRA. The U.S. District Court for the Northern District of Ohio, in Alarcon v. TransUnion Marketing, 2007 WL 1201624 (N.D. Ohio Apr. 20, 2007), denied the Experian's motion for a partial judgment on the pleadings to the effect that no injunctive relief is available to private litigants under the Fair Credit Reporting Act (FCRA). The court further stated that it "is preliminarily persuaded by the reasoning in Andrews [v. Trans Union Corp., 7 F. Supp. 2d 1056, 1084 (C.D. Cal. 1998)] that injunctive relief for a prevailing private litigant would further the purposes of the FCRA." Most courts have not recognized a right for private plaintiffs to obtain an injunction under FCRA. Finally, the court criticized the defendants for making excessive motions, stating: “The Court already has the impression that the defendants plan to use their ‘Goliath’ position to beat down the plaintiff (‘David’), rather than expend their energies to reach a joint resolution reasonably satisfying to all.” For a copy of the decision, please contact .
Court Rules Retroactive Interest Rate Increases Not Unconscionable under California Law. On April 20, a federal district court in California dismissed a complaint alleging that FIA Card Services, N.A., a credit card issuer, violated California’s Consumer Legal Remedies Act (CLRA) and Unfair Competition Law (UCL) by retroactively increasing credit card interest rates. Augustine v. FIA Card Services, N.A., No. 2:06-cv-2013-GEB-EFB (E.D. Cal. Apr. 20, 2007). Although the plaintiff conceded that the practice was disclosed in the credit card agreement, she nonetheless claimed that it constituted an unfair and deceptive practice, because the lender allegedly failed to provide adequate notice of, and did not disclose the evaluation process used for, retroactive rate increases. According to the court, however, the plaintiff did not plead facts to support a claim of misrepresentation under the CLRA, and the practice of retroactively increasing interest rates was not unconscionable. Moreover, the court noted that, under California case law, the CLRA does not apply to credit card transactions. The court also ruled that the plaintiff’s UCL claims were preempted by federal banking law and regulations, which generally allow lenders to extend loans without regard to state laws concerning terms of credit and disclosures. For a copy of the opinion, please contact .
California District Court Allows Class Action to Proceed Against Target for Alleged ADA Violations in Not Allowing Adequate Access to Blind Consumers. On April 25, the U.S. District Court for the Northern District of California certified as a class all blind consumers who, because of Target Corporation's allegedly visually dependent website, were denied access to a physical Target store. Nat'l Fed'n of the Blind v. Target Corp, No. C 06-01802 (N.D. California, April 25, 2007). The National Federation of the Blind (NFB) stated in its complaint that Target violated the Americans With Disabilities Act (ADA), 42 U.S.C. § 12182, because its website "contains thousands of access barriers that make it difficult if not impossible for blind customers to use the website." Judge Marilyn Hall Patel said that the nexus requirement of the ADA was met for the limited class of claims made by "all legally blind individuals...who have attempted to access Target.com and a result have been denied access to the enjoyment of goods and services offered in Target stores." The NFB was urged by the court to present affidavits to support the needed nexus, since statements that the class members "would prefer to shop online is not sufficient to establish a nexus with the stores for the purposes of the ADA." The Court has granted 30 days for an eligible plaintiff - as defined by the Court - to be presented, at which point the Court will issue a final ruling on the class certification motion. For a copy of the court order, please write to .
Eleventh Circuit Upholds Petition to Compel Arbitration. In Community State Bank v. Strong, No. 06-11582 (11th Cir., opinion issued April 27, 2007), the Eleventh Circuit reversed a district court’s dismissal of a petition to compel arbitration, determining that the petition implicated federal question jurisdiction. The petition was filed in connection with a dispute over the making of a “payday loan.” The borrower initially filed a state class action lawsuit against his lender alleging violations of state usury laws. The lender’s attempt to remove the state case to federal court failed because the borrower raised no federal questions in his state lawsuit. The lender filed a separate petition to compel arbitration, which the district court dismissed for the same federal jurisdictional deficiencies identified in the state case. The Eleventh Circuit reversed this decision, however, holding that to determine whether federal question jurisdiction exists over the petition to compel arbitration, the district court should not have limited its inquiry to the borrower’s state court claims. Instead, the district court should have examined the claims raised in the petition, which included an allegation that the borrower could have alleged a federal claim in the original dispute. Accordingly, the petition raised a federal question, providing the district court with jurisdiction. For a copy of this decision, please see http://www.ca11.uscourts.gov/opinions/ops/200611582.pdf.
Preparing Mortgage Application Not an Unauthorized Practice of Law in Indiana. This week, the Indiana Supreme Court ruled that the preparation of mortgage documents by non-attorneys does not constitute the unauthorized practice of law, regardless of whether a fee is charged for the document preparation. In Charter One Mortgage Corp. v. Condra, No. 49S05-0612-CV-497 (Ind. 2007), the borrower filed a class action law suit alleging that Charter One's document preparation fee violated Indiana law. Condra relied on a prior Indiana Supreme Court case, Miller v. Vance, 463 N.E.2d 250 (Ind. 1984), that concluded that while having a bank employee fill in blanks on a mortgage instrument was not the practice of law, the bank could not make a separate charge for such document preparation. In Condra, the Court held that the Miller decision was overbroad. Instead, it is the nature of the activity, and not whether there is compensation provided, that determines whether an activity constitutes the practice of law. Consequently, the Court agreed with the holding in Miller that merely filling out blanks on a prepared legal document, such as a mortgage application, requires only common knowledge regarding the information necessary to be included and is not the practice of law. However, it overruled Miller to the extent that Miller concluded that the act of charging a fee for such document preparation would "transmogrify" such action into the practice of law. The Court declined to decide the issue of whether the National Bank Act preempted the Indiana law against the unauthorized practice of law for national banks. For a copy of this case, please see http://www.in.gov/judiciary/opinions/pdf/05020701trb.pdf.
Complaint Filed Against MBS Issuer for Fraudulently Marketing Securities and not Pursuing Foreclosures to Protect Purchaser. Banker's Life Insurance filed a complaint in U.S. District Court Middle District of Florida on April 23 alleging, among other things, that Credit Suisse First Boston (CSFB) knowingly withheld information on mortgage loan pools and knowingly purchased defective mortgage loans from sources it controlled. Bankers Life Insurance Co. v. Credit Suisse First Boston Corp., 8:07-cv-00690-EAK-MSS (M.D. Fla. Apr. 23, 2007). Among other allegations, Banker's Life also claimed that CSFB attempted to avoid responsibility by "disclosing" that no due diligence had been performed on the loans while withholding relevant and essential facts. Banker's Life also alleged that CSFB and Select Portfolio Servicing, Inc. (SPS), made "improper advances of principal and interest to maintain the illusion that numerous mortgage loans" were "good performing loans and to conceal the material deficiency" of them. Moreover, Banker's Life alleged that CSFB and SPS failed to pursue foreclosures and other remedies in a timely manner to protect Banker's Life. The total principal balance of the transactions that may be impacted by this complaint is $302,634,786. For a copy of the complaint, please contact .
FIRM NEWS
Buckley Kolar announced the opening of its Los Angeles Office on May 2. The office is located at 2029 Century Park East Suite 900, Los Angeles, CA 90067. Resident in the office are Joseph T. Lynyak III and Clinton R. Rockwell. The complete announcement is available here. See the amended contact information for Joseph T. Lynyak and Clinton R. Rockwell on the Buckley Kolar website.
Jerry Buckley, Joe Kolar, and Andrea “Lee” Negroni will are speaking at the MBA Legal Issues and Regulatory Compliance Conference being held May 6-9 in New Orleans. Mr. Buckley will be speaking on legal issues in eMortgages for panel entitled Update on Industry Technology-Legal Developments and the Road to eMortgages on May 7 RESPA and on the electronic commerce panels. Mr. Kolar will be speaking on May 9 regarding suitability on a panel entitled “New Approaches to Anti-Abusive Lending Protections.” Mrs. Negroni is speaking on the "Hot Topics for Corporate Counsel" panel on May 8 on the subject of "Outsourcing Legal and Compliance Work to Indian Legal Process Outsource (LPO) Companies."
Jeff Naimon will be speaking at 1:00 pm (EDT) on May 10 at the A.S. Pratt Audio Conference Series on recent trends in loan file review. For more information, or to register, please see http://www.aspratt.com/audio/wmp/.
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.
Frank Supik will speak at the Equipment Leasing and Finance Association’s Legal Forum on May 7th in Miami, Florida. Mr. Supik will participate in a panel discussion entitled “Doing Deals in a Paperless Society (Electronic Chattel Paper). To e-Business and Beyond!” For more information or to register for the conference, go to http://www.elfaonline.org/events/2007/LF/.
Jerry Buckley and John Kromer participated in a webcast seminar entitled “Legal Issues Associated with Managing Subprime Mortgage Portfolios” on April 27th through West LegalWorks. The seminar addressed several topics on legal compliance with a focus on “legislative and regulatory proposals to impose stricter underwriting standards or ban certain loan products.”
The Equipment Leasing and Finance Foundation released a new report on April 16th, “Paperless Transaction: The Competitive Edge,” to help the equipment financing industry understand how to take advantage of the benefits, address the challenges and envision a future of a full paperless business process. The report was sponsored by McCue Systems and produced by Buckley Kolar LLP. For more information, and to procure a copy of the report, go to http://www.leasefoundation.org/positive/index.cfm?fuseaction=display_article&artID=7279.
Major Mortgage Companies Agree to Sen. Dodd’s Subprime “Principals.” On May 2, Senator Christopher Dodd (D-Conn), Chairman of the Senate Banking Committee, announced that several major mortgage bankers have agreed to his “Statement of Principals,” which outline steps that should be taken to prevent foreclosures among subprime borrowers with adjustable rate mortgages (ARMs). Sen. Dodd announced the principals in connection with his Homeownership Preservation Summit held last month and attended by several major participants in the subprime market. The principals state, in part, that servicers should (i) contact subprime ARM borrowers prior to the loan reset to assess the risk of default, (ii) modify loans prior to rate resets which borrowers cannot afford, seeking to “create a permanent solution for the borrower to ensure that the loan is sustainable for the life of the loan,” (iii) adopt a “modification policy” so that loan modifications “can be done on the scale required” using “dedicated resources,” and (iv) make refinancing to prime loans for eligible borrowers as streamlined and low-cost as possible. The principals also state that Freddie Mac and Fannie Mae (who have also agreed to the principals) should offer “new products and expanded programs” to encourage refinancing out of resetting subprime ARMs and also consider acquiring subprime portfolios to modify them according to the guidelines. In acknowledging that “not every foreclosure can be prevented nor every home saved,” the principals encourage all parties to work together to minimize the damage to borrowers, communities, and the mortgage market when saving the home is not possible. To view Sen. Dodd’s press release, please see http://dodd.senate.gov/index.php?q=node/3863.
U.S. District Court Allows Class Certification in Rescission Case, Finds Adverse Action in Alleged “Bait and Switch.” On April 23, the U.S. District Court for the Northern District of Illinois issued two rulings in a consolidated group of consumer class actions against Ameriquest and its affiliates. In re Ameriquest Mortgage Co. Mortgage Lending Practices Litigation, 2007 WL 1202544 (N.D. Ill. April 23, 2007). First, the court held that a class can be certified for declaratory judgment that loans are rescindable. The court distinguished between a class action that seeks to rescind loans and a class action that seeks a declaratory judgment that loans are rescindable, allowing individual class members to decide whether to rescind. The court reasoned that while class certification might be inappropriate in the former case because rescission is a personal remedy, it is appropriate in the latter because consumers may still pursue rescission claims individually. In so holding, the court disagreed with the opinion of the U.S. Court of Appeals for the First Circuit in McKenna v. First Horizon Home Loan Corp., where that court held that rescission cases are not suitable for classwide resolution. (For a discussion of McKenna, see the February 2nd issue of InfoBytes.) The U.S. Court of Appeals for the Seventh Circuit, which includes Illinois, has accepted a petition for appeal in Andrews v. Chevy Chase Bank, FSB (reported in the February 9th issue of InfoBytes).
Second, the decision addressed the borrower's claim that Ameriquest took adverse action against a group of borrowers whose loans closed, but who alleged that Ameriquest had misrepresented the terms of the loans that they actually obtained at closing. The court acknowledged that the counteroffer exception in Regulation B, which implements the Equal Credit Opportunity Act (ECOA), would normally mean that adverse action had not occurred, and also noted that the ECOA exception applies to FCRA adverse action. The court noted, however, that “the complaint alleges a bait-and-switch departure from offers the defendants made, not a series of rejections and counteroffers in response to any offers made by plaintiffs” (emphasis in original). Therefore, “[b]ecause the complaint does not clearly demonstrate that plaintiffs accepted counteroffers of credit,” the court denied the motion to dismiss on this issue. If accepted by other courts, this reasoning would seem to create an ECOA cause of action for an adverse action violation, with potential punitive damages of up to $10,000 per violation or $500,000 in a class action, whenever a consumer whose loan closed alleges a mismatch between a lender’s representations and the loan terms actually provided–a sweeping expansion of the definition of adverse action in ECOA to apply to alleged deceptive sales practices. In addition, almost all courts have held that the private right of action for violation of the FCRA adverse action provision was repealed by the Fair and Accurate Credit Transactions Act of 2003 – an issue not addressed in the court’s opinion. For a copy of this opinion, please contact .
FRB to Hold Hearings on HOEPA Regulations. On May 3, the Federal Reserve Board (FRB) announced it will hold a public hearing in Washington, DC on June 14th on “how it might use its rulemaking authority to curb abusive lending practices in the home mortgage market, including the subprime sector.” The hearing is expected to focus on possible rulemaking under the Home Ownership and Equity Protection Act (HOEPA), and follows the submission last week of a letter by Democrats on the Senate Banking Committee calling for stronger HOEPA rules to prevent predatory and abusive lending practices (for more information, see the April 27th issue of InfoBytes). Four similar hearing were held last year on topics in predatory lending, nontraditional mortgage products, and the subprime mortgage market (for more information, see the May 5, 2006 issue of InfoBytes). For the official FRB press release, see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070503/default.htm.
Seventh Circuit Rules Against Equifax in FCRA Case. The U.S. Court of Appeals for the Seventh Circuit has reversed a ruling of summary judgment in favor of Equifax in a case involving the meaning of the phrase “clearly and accurately disclose” used in the Fair Credit Reporting Act (FCRA). Gillespie v. Equifax Information Services, LLC, No. 06-1952, 2007 WL 1287649 (7th Cir., May 3, 2007). (For more on the district court opinion, please see the June 16, 2006 issue of InfoBytes.) Under the FCRA, a consumer reporting agency cannot keep information regarding delinquent or charged-off accounts in a credit file for more than, effectively, seven and one-half years, but a reporting agency can keep records of accounts paid as agreed in a file for up to ten years. In this case, the plaintiffs brought suit over Equifax’s practice of reporting both delinquencies and any ensuing payments in the “Date of Last Activity” field on the consumer’s credit report. Under Equifax’s practices, if a consumer’s account became delinquent, and if the consumer subsequently began making timely payments again, Equifax apparently could, the plaintiffs argued, keep the delinquency on the credit report for more than seven and one-half years as a record of an account paid as agreed. The plaintiffs argued that Equifax’s disclosures, which must be “clear and accurate” under the FCRA, did not allow consumers to determine whether Equifax was properly calculating the seven and one-half year period. The appeals court reversed the district court’s summary judgment, finding that “Equifax’s disclosure to the plaintiffs may be accurate but it is not necessarily clear.” The appeals court remanded the case to the district court to determine any potential liability and to address the question of class certification, emphasizing that it was “only deciding that the case must continue. . . [not the] issue of Equifax’s liability. For a copy of this opinion, please contact .
Complaint Filed Against MBS Issuer for Fraudulently Marketing Securities and not Pursuing Foreclosures to Protect Purchaser. Banker's Life Insurance filed a complaint in U.S. District Court Middle District of Florida on April 23 alleging, among other things, that Credit Suisse First Boston (CSFB) knowingly withheld information on mortgage loan pools and knowingly purchased defective mortgage loans from sources it controlled. Bankers Life Insurance Co. v. Credit Suisse First Boston Corp., 8:07-cv-00690-EAK-MSS (M.D. Fla. Apr. 23, 2007). Among other allegations, Banker's Life also claimed that CSFB attempted to avoid responsibility by "disclosing" that no due diligence had been performed on the loans while withholding relevant and essential facts. Banker's Life also alleged that CSFB and Select Portfolio Servicing, Inc. (SPS), made "improper advances of principal and interest to maintain the illusion that numerous mortgage loans" were "good performing loans and to conceal the material deficiency" of them. Moreover, Banker's Life alleged that CSFB and SPS failed to pursue foreclosures and other remedies in a timely manner to protect Banker's Life. The total principal balance of the transactions that may be impacted by this complaint is $302,634,786. For a copy of the complaint, please contact .
FTC and DOJ Comment on NY Bill Requiring Attorneys for More Real Estate Transactions. On April 27, the Federal Trace Commission (FTC) and the Department of Justice (DOJ) filed a joint comment to the New York State Assembly Committee on the Judiciary advising the rejection of an assembly bill (A. 1837), that would mandate certain real estate related services to be performed by lawyers, arguing it would restrain competition between attorneys and non-attorneys. In the joint comment, the FTC and DOJ argue that the bill’s expansion of the definition of “the historic and essential elements of the practice of relevant real estate law” to include, among other things, (i) conducting title searched, (ii) preparing title abstracts, (iii) preparing or issuing title insurance reports or commitments, and (iv) collecting title insurance premiums, would have the effect of barring non-attorneys from performing such functions. In addition, the proposed bill would also prohibit non-attorneys from, among other things, giving or negotiating the terms and conditions for the sale of real property and rendering opinions on the legal status of or requirements to clear real estate titles. The FTC and DOJ argue that the proposed bill would increase the cost of these services to consumers and increase the financial burden to consumers for negotiating and closing real estate transactions. Finally, the FTC and DOJ argue that there is no evidence demonstrating that New Yorkers have been harmed by non-attorneys participating in these real estate services, and that the restrictions on competition in the proposed bill are not warranted. For the full text of the joint comment letter, please see http://www.ftc.gov/be/V070004.pdf.
Preparing Mortgage Application Not an Unauthorized Practice of Law in Indiana. This week, the Indiana Supreme Court ruled that the preparation of mortgage documents by non-attorneys does not constitute the unauthorized practice of law, regardless of whether a fee is charged for the document preparation. In Charter One Mortgage Corp. v. Condra, No. 49S05-0612-CV-497 (Ind. 2007), the borrower filed a class action law suit alleging that Charter One's document preparation fee violated Indiana law. Condra relied on a prior Indiana Supreme Court case, Miller v. Vance, 463 N.E.2d 250 (Ind. 1984), that concluded that while having a bank employee fill in blanks on a mortgage instrument was not the practice of law, the bank could not make a separate charge for such document preparation. In Condra, the Court held that the Miller decision was overbroad. Instead, it is the nature of the activity, and not whether there is compensation provided, that determines whether an activity constitutes the practice of law. Consequently, the Court agreed with the holding in Miller that merely filling out blanks on a prepared legal document, such as a mortgage application, requires only common knowledge regarding the information necessary to be included and is not the practice of law. However, it overruled Miller to the extent that Miller concluded that the act of charging a fee for such document preparation would "transmogrify" such action into the practice of law. The Court declined to decide the issue of whether the National Bank Act preempted the Indiana law against the unauthorized practice of law for national banks. For a copy of this case, please see http://www.in.gov/judiciary/opinions/pdf/05020701trb.pdf.
U.S. District Court in Ohio "Preliminarily" Supports Injunctive Relief for Private Litigants under FCRA. The U.S. District Court for the Northern District of Ohio, in Alarcon v. TransUnion Marketing, 2007 WL 1201624 (N.D. Ohio Apr. 20, 2007), denied the Experian's motion for a partial judgment on the pleadings to the effect that no injunctive relief is available to private litigants under the Fair Credit Reporting Act (FCRA). The court further stated that it "is preliminarily persuaded by the reasoning in Andrews [v. Trans Union Corp., 7 F. Supp. 2d 1056, 1084 (C.D. Cal. 1998)] that injunctive relief for a prevailing private litigant would further the purposes of the FCRA." Most courts have not recognized a right for private plaintiffs to obtain an injunction under FCRA. Finally, the court criticized the defendants for making excessive motions, stating: “The Court already has the impression that the defendants plan to use their ‘Goliath’ position to beat down the plaintiff (‘David’), rather than expend their energies to reach a joint resolution reasonably satisfying to all.” For a copy of the decision, please contact .
OTS Issues Notice to Thrift Holding Company CEO’s on Nontraditional Mortgage Guidance. On April 27, the Office of Thrift Supervision (OTS) issued a memorandum to thrift holding company CEO's regarding the Interagency Guidance on Non-Traditional Mortgages (reported in the September 29, 2006 issue of InfoBytes). The OTS stated in the notice that its intent was to bring the guidance to the holding company CEO’s attention and make them “aware of [the OTS’s] supervisory expectations… If [a thrift holding company] offers alternative mortgage products, regardless of whether the activity is conducted within an insured financial institution or in another entity within [the holding company’s] corporate family, OTS expects [holding company management] to recognize and mitigate the risks inherent in such products.” The notice also refers CEO’s to the OTS’s recently released Examination Handbook Section 212, One- to Four-Family Residential Real Estate Lending (reported in the March 23rd issue of InfoBytes). A full text version of the OTS memorandum can be viewed at http://www.ots.treas.gov/docs/2/25256.pdf.
FinCEN Delays Implementing Revised SAR Forms. On April 26, the Financial Crimes Enforcement Network (FinCEN) announced the delay of implementing revised Suspicious Activity Reports (SARs). The revisions were intended to simplify SAR reporting procedures, and facilitate joint SAR filing by reporting institutions (as reported in the December 22, 2006 issue of InfoBytes). In its press release, FinCEN states that the delay involves managing data protocol issues that must be resolved prior to implementation. In the meantime, financial institutions are directed to “continue to report suspicious activities on the existing SAR forms.” For the official notice, to be published in the Federal Register, please see http://www.fincen.gov/sar_fr_notice.pdf.
Maryland Enacts Bill for Pilot Electronic Real Estate Records Recording Program. On April 24, Maryland Governor Martin O’Malley signed into law H.B. 331 to grant the Maryland Administrative Office of the Courts authority to establish a pilot program for real property records. The law goes into effect June 1, 2007. For more information regarding the act, see http://mlis.state.md.us/2007rs/billfile/HB0331.htm.
FHA Reform and ILC Bills Go to the House Floor. This week, the House Financial Services Committee passed the Industrial Bank Holding Company Act of 2007 (H.R. 698) and the Expanding American Homeownership Act of 2007 (H.R. 1852), the Federal Housing Administration (FHA) reform bill, sending both bills to be voted on by the full House of Representatives. On May 2, the committee announced it had “overwhelmingly” approved H.R. 698, regulating industrial loan companies (ILCs) (first reported in the February 6th issue of InfoBytes), after the committee agreed to a single amendment introduced by Committee Chairman Barney Frank (D – Mass.). On May 3, the committee passed H.R. 1852 on FHA reform (first reported in the March 30th issue of InfoBytes) after agreeing to several amendments on topics such as (i) risk-based FHA insurance premiums, (ii) net-worth and bond requirements for FHA-approved brokers, and (iii) caps on FHA-insured reverse mortgage origination fees. Also among the many changes was an amendment introduced by Rep. Frank specifying the allocation of the controversial Affordable Housing Fund that would be created by the new law. According to the Financial Services Committee’s press release, the amendment would ensure that no funds from the FHA’s 203(b) single family loan program can be used for affordable housing purposes. To view this press release, see http://www.house.gov/apps/list/press/financialsvcs_dem/press050307.shtml. For the committee’s press release regarding H.R. 698, see http://www.house.gov/apps/list/press/financialsvcs_dem/press050207.shtml.
U.S. District Court Allows Class Certification in Rescission Case, Finds Adverse Action in Alleged “Bait and Switch.” On April 23, the U.S. District Court for the Northern District of Illinois issued two rulings in a consolidated group of consumer class actions against Ameriquest and its affiliates. In re Ameriquest Mortgage Co. Mortgage Lending Practices Litigation, 2007 WL 1202544 (N.D. Ill. April 23, 2007). First, the court held that a class can be certified for declaratory judgment that loans are rescindable. The court distinguished between a class action that seeks to rescind loans and a class action that seeks a declaratory judgment that loans are rescindable, allowing individual class members to decide whether to rescind. The court reasoned that while class certification might be inappropriate in the former case because rescission is a personal remedy, it is appropriate in the latter because consumers may still pursue rescission claims individually. In so holding, the court disagreed with the opinion of the U.S. Court of Appeals for the First Circuit in McKenna v. First Horizon Home Loan Corp., where that court held that rescission cases are not suitable for classwide resolution. (For a discussion of McKenna, see the February 2nd issue of InfoBytes.) The U.S. Court of Appeals for the Seventh Circuit, which includes Illinois, has accepted a petition for appeal in Andrews v. Chevy Chase Bank, FSB (reported in the February 9th issue of InfoBytes).
Second, the decision addressed the borrower's claim that Ameriquest took adverse action against a group of borrowers whose loans closed, but who alleged that Ameriquest had misrepresented the terms of the loans that they actually obtained at closing. The court acknowledged that the counteroffer exception in Regulation B, which implements the Equal Credit Opportunity Act (ECOA), would normally mean that adverse action had not occurred, and also noted that the ECOA exception applies to FCRA adverse action. The court noted, however, that “the complaint alleges a bait-and-switch departure from offers the defendants made, not a series of rejections and counteroffers in response to any offers made by plaintiffs” (emphasis in original). Therefore, “[b]ecause the complaint does not clearly demonstrate that plaintiffs accepted counteroffers of credit,” the court denied the motion to dismiss on this issue. If accepted by other courts, this reasoning would seem to create an ECOA cause of action for an adverse action violation, with potential punitive damages of up to $10,000 per violation or $500,000 in a class action, whenever a consumer whose loan closed alleges a mismatch between a lender’s representations and the loan terms actually provided–a sweeping expansion of the definition of adverse action in ECOA to apply to alleged deceptive sales practices. In addition, almost all courts have held that the private right of action for violation of the FCRA adverse action provision was repealed by the Fair and Accurate Credit Transactions Act of 2003 – an issue not addressed in the court’s opinion. For a copy of this opinion, please contact .
Court Rules Retroactive Interest Rate Increases Not Unconscionable under California Law. On April 20, a federal district court in California dismissed a complaint alleging that FIA Card Services, N.A., a credit card issuer, violated California’s Consumer Legal Remedies Act (CLRA) and Unfair Competition Law (UCL) by retroactively increasing credit card interest rates. Augustine v. FIA Card Services, N.A., No. 2:06-cv-2013-GEB-EFB (E.D. Cal. Apr. 20, 2007). Although the plaintiff conceded that the practice was disclosed in the credit card agreement, she nonetheless claimed that it constituted an unfair and deceptive practice, because the lender allegedly failed to provide adequate notice of, and did not disclose the evaluation process used for, retroactive rate increases. According to the court, however, the plaintiff did not plead facts to support a claim of misrepresentation under the CLRA, and the practice of retroactively increasing interest rates was not unconscionable. Moreover, the court noted that, under California case law, the CLRA does not apply to credit card transactions. The court also ruled that the plaintiff’s UCL claims were preempted by federal banking law and regulations, which generally allow lenders to extend loans without regard to state laws concerning terms of credit and disclosures. For a copy of the opinion, please contact .
FinCEN Delays Implementing Revised SAR Forms. On April 26, the Financial Crimes Enforcement Network (FinCEN) announced the delay of implementing revised Suspicious Activity Reports (SARs). The revisions were intended to simplify SAR reporting procedures, and facilitate joint SAR filing by reporting institutions (as reported in the December 22, 2006 issue of InfoBytes). In its press release, FinCEN states that the delay involves managing data protocol issues that must be resolved prior to implementation. In the meantime, financial institutions are directed to “continue to report suspicious activities on the existing SAR forms.” For the official notice, to be published in the Federal Register, please see http://www.fincen.gov/sar_fr_notice.pdf.
Eleventh Circuit Upholds Petition to Compel Arbitration. In Community State Bank v. Strong, No. 06-11582 (11th Cir., opinion issued April 27, 2007), the Eleventh Circuit reversed a district court’s dismissal of a petition to compel arbitration, determining that the petition implicated federal question jurisdiction. The petition was filed in connection with a dispute over the making of a “payday loan.” The borrower initially filed a state class action lawsuit against his lender alleging violations of state usury laws. The lender’s attempt to remove the state case to federal court failed because the borrower raised no federal questions in his state lawsuit. The lender filed a separate petition to compel arbitration, which the district court dismissed for the same federal jurisdictional deficiencies identified in the state case. The Eleventh Circuit reversed this decision, however, holding that to determine whether federal question jurisdiction exists over the petition to compel arbitration, the district court should not have limited its inquiry to the borrower’s state court claims. Instead, the district court should have examined the claims raised in the petition, which included an allegation that the borrower could have alleged a federal claim in the original dispute. Accordingly, the petition raised a federal question, providing the district court with jurisdiction. For a copy of this decision, please see http://www.ca11.uscourts.gov/opinions/ops/200611582.pdf.
Preparing Mortgage Application Not an Unauthorized Practice of Law in Indiana. This week, the Indiana Supreme Court ruled that the preparation of mortgage documents by non-attorneys does not constitute the unauthorized practice of law, regardless of whether a fee is charged for the document preparation. In Charter One Mortgage Corp. v. Condra, No. 49S05-0612-CV-497 (Ind. 2007), the borrower filed a class action law suit alleging that Charter One's document preparation fee violated Indiana law. Condra relied on a prior Indiana Supreme Court case, Miller v. Vance, 463 N.E.2d 250 (Ind. 1984), that concluded that while having a bank employee fill in blanks on a mortgage instrument was not the practice of law, the bank could not make a separate charge for such document preparation. In Condra, the Court held that the Miller decision was overbroad. Instead, it is the nature of the activity, and not whether there is compensation provided, that determines whether an activity constitutes the practice of law. Consequently, the Court agreed with the holding in Miller that merely filling out blanks on a prepared legal document, such as a mortgage application, requires only common knowledge regarding the information necessary to be included and is not the practice of law. However, it overruled Miller to the extent that Miller concluded that the act of charging a fee for such document preparation would "transmogrify" such action into the practice of law. The Court declined to decide the issue of whether the National Bank Act preempted the Indiana law against the unauthorized practice of law for national banks. For a copy of this case, please see http://www.in.gov/judiciary/opinions/pdf/05020701trb.pdf.
National Money Laundering Strategy Released. On May 3, the Departments of Treasury, Justice, and Homeland Security released a joint report entitled the 2007 National Money Laundering Strategy. The report discusses trends in U.S. anti-money laundering efforts, and targets key issues including, in part, (i) the rising popularity of internet banking, (ii) the difficulties posed by money service businesses such as money transmitters, (iii) the exploitation of low registration requirements and lax oversight to launder money through shell corporations, and (iv) the use of more fungible and liquid insurance products to launder money. For the official press release, please see http://www.treas.gov/press/releases/hp386.htm.
Seventh Circuit Rules Against Equifax in FCRA Case. The U.S. Court of Appeals for the Seventh Circuit has reversed a ruling of summary judgment in favor of Equifax in a case involving the meaning of the phrase “clearly and accurately disclose” used in the Fair Credit Reporting Act (FCRA). Gillespie v. Equifax Information Services, LLC, No. 06-1952, 2007 WL 1287649 (7th Cir., May 3, 2007). (For more on the district court opinion, please see the June 16, 2006 issue of InfoBytes.) Under the FCRA, a consumer reporting agency cannot keep information regarding delinquent or charged-off accounts in a credit file for more than, effectively, seven and one-half years, but a reporting agency can keep records of accounts paid as agreed in a file for up to ten years. In this case, the plaintiffs brought suit over Equifax’s practice of reporting both delinquencies and any ensuing payments in the “Date of Last Activity” field on the consumer’s credit report. Under Equifax’s practices, if a consumer’s account became delinquent, and if the consumer subsequently began making timely payments again, Equifax apparently could, the plaintiffs argued, keep the delinquency on the credit report for more than seven and one-half years as a record of an account paid as agreed. The plaintiffs argued that Equifax’s disclosures, which must be “clear and accurate” under the FCRA, did not allow consumers to determine whether Equifax was properly calculating the seven and one-half year period. The appeals court reversed the district court’s summary judgment, finding that “Equifax’s disclosure to the plaintiffs may be accurate but it is not necessarily clear.” The appeals court remanded the case to the district court to determine any potential liability and to address the question of class certification, emphasizing that it was “only deciding that the case must continue. . . [not the] issue of Equifax’s liability. For a copy of this opinion, please contact .
U.S. District Court in Ohio "Preliminarily" Supports Injunctive Relief for Private Litigants under FCRA. The U.S. District Court for the Northern District of Ohio, in Alarcon v. TransUnion Marketing, 2007 WL 1201624 (N.D. Ohio Apr. 20, 2007), denied the Experian's motion for a partial judgment on the pleadings to the effect that no injunctive relief is available to private litigants under the Fair Credit Reporting Act (FCRA). The court further stated that it "is preliminarily persuaded by the reasoning in Andrews [v. Trans Union Corp., 7 F. Supp. 2d 1056, 1084 (C.D. Cal. 1998)] that injunctive relief for a prevailing private litigant would further the purposes of the FCRA." Most courts have not recognized a right for private plaintiffs to obtain an injunction under FCRA. Finally, the court criticized the defendants for making excessive motions, stating: “The Court already has the impression that the defendants plan to use their ‘Goliath’ position to beat down the plaintiff (‘David’), rather than expend their energies to reach a joint resolution reasonably satisfying to all.” For a copy of the decision, please contact .
Court Rules Retroactive Interest Rate Increases Not Unconscionable under California Law. On April 20, a federal district court in California dismissed a complaint alleging that FIA Card Services, N.A., a credit card issuer, violated California’s Consumer Legal Remedies Act (CLRA) and Unfair Competition Law (UCL) by retroactively increasing credit card interest rates. Augustine v. FIA Card Services, N.A., No. 2:06-cv-2013-GEB-EFB (E.D. Cal. Apr. 20, 2007). Although the plaintiff conceded that the practice was disclosed in the credit card agreement, she nonetheless claimed that it constituted an unfair and deceptive practice, because the lender allegedly failed to provide adequate notice of, and did not disclose the evaluation process used for, retroactive rate increases. According to the court, however, the plaintiff did not plead facts to support a claim of misrepresentation under the CLRA, and the practice of retroactively increasing interest rates was not unconscionable. Moreover, the court noted that, under California case law, the CLRA does not apply to credit card transactions. The court also ruled that the plaintiff’s UCL claims were preempted by federal banking law and regulations, which generally allow lenders to extend loans without regard to state laws concerning terms of credit and disclosures. For a copy of the opinion, please contact .
Mississippi Governor Signs Credit Freeze Law. On April 21, Mississippi Governor Haley Barbour signed S.B. 3034 establishing a credit security freeze in that state (reported in the April 6th issue of InfoBytes). The law requires consumer reporting agencies to place a security freeze in consumer files upon the written request by certain consumers, caps the charge for such a freeze at $10, and provides for “temporary lift” of the freeze. For more information on the bill, see http://billstatus.ls.state.ms.us/2007/html/history/SB/SB3034.htm.
First Settlement under New York Data Breach Law. On April 26, the Office of the New York Attorney General announced a settlement with CS STARS LLC under New York’s Information Security Breach and Notification Law over failure to provide notification regarding the loss of personal information for more than half a million New York consumers. CS STARS, a Chicago-based claims management firm, did not notify the owner of the personal data for more than seven weeks following the theft of an employee’s laptop. In the settlement agreement CS STARS LLC admitted to no wrongdoing, but agreed to strengthen its data security practices and pay the Attorney General’s Office $60,000 for investigation costs. For the official press release, see http://www.oag.state.ny.us/press/2007/apr/apr26a_07.html.
Eleventh Circuit Upholds Petition to Compel Arbitration. In Community State Bank v. Strong, No. 06-11582 (11th Cir., opinion issued April 27, 2007), the Eleventh Circuit reversed a district court’s dismissal of a petition to compel arbitration, determining that the petition implicated federal question jurisdiction. The petition was filed in connection with a dispute over the making of a “payday loan.” The borrower initially filed a state class action lawsuit against his lender alleging violations of state usury laws. The lender’s attempt to remove the state case to federal court failed because the borrower raised no federal questions in his state lawsuit. The lender filed a separate petition to compel arbitration, which the district court dismissed for the same federal jurisdictional deficiencies identified in the state case. The Eleventh Circuit reversed this decision, however, holding that to determine whether federal question jurisdiction exists over the petition to compel arbitration, the district court should not have limited its inquiry to the borrower’s state court claims. Instead, the district court should have examined the claims raised in the petition, which included an allegation that the borrower could have alleged a federal claim in the original dispute. Accordingly, the petition raised a federal question, providing the district court with jurisdiction. For a copy of this decision, please see http://www.ca11.uscourts.gov/opinions/ops/200611582.pdf.
Complaint Filed Against MBS Issuer for Fraudulently Marketing Securities and not Pursuing Foreclosures to Protect Purchaser. Banker's Life Insurance filed a complaint in U.S. District Court Middle District of Florida on April 23 alleging, among other things, that Credit Suisse First Boston (CSFB) knowingly withheld information on mortgage loan pools and knowingly purchased defective mortgage loans from sources it controlled. Bankers Life Insurance Co. v. Credit Suisse First Boston Corp., 8:07-cv-00690-EAK-MSS (M.D. Fla. Apr. 23, 2007). Among other allegations, Banker's Life also claimed that CSFB attempted to avoid responsibility by "disclosing" that no due diligence had been performed on the loans while withholding relevant and essential facts. Banker's Life also alleged that CSFB and Select Portfolio Servicing, Inc. (SPS), made "improper advances of principal and interest to maintain the illusion that numerous mortgage loans" were "good performing loans and to conceal the material deficiency" of them. Moreover, Banker's Life alleged that CSFB and SPS failed to pursue foreclosures and other remedies in a timely manner to protect Banker's Life. The total principal balance of the transactions that may be impacted by this complaint is $302,634,786. For a copy of the complaint, please contact .
SEC Developing Final Rule on Proxy Access to Nominate Corporate Directors. On April 24, the Securities and Exchange Commission (SEC) announced that it will host three roundtables next month on shareholder rights and the federal proxy rules to address (i) the federal role in upholding shareholders' state law rights, (ii) the purpose and effect of the federal proxy rules, (iii) non-binding proposals under the proxy rules, and (iv) binding proposals under the proxy rules. “Proxy access” refers to the ability of shareholders to nominate corporate directors directly on the company's proxy ballot. This issue that was brought to the fore in a key ruling in September by the U.S. Court of Appeals for the Second Circuit, where the court rejected the SEC's view that a company may exclude from its proxy materials a shareholder proposal calling for the inclusion of shareholder-nominated director candidates. In a move that prompted the SEC to consider changes to its proxy rules, the Second Circuit reinstated a lawsuit whereby the American Federation of State, County & Municipal Employees, Employees Pension Plan (AFSCME), a shareholder of American International Group, Inc. (AIG), sued to force AIG to include in its proxy materials a shareholder proposal calling for the inclusion of shareholder-nominated director candidates. American Federation of State, County & Municipal Employees, Employees Pension Plan v. American International Group Inc., (2d Cir., Docket No. 05-2825-cv, Sept. 5, 2006). For more information on the SEC roundtable, see http://www.sec.gov/news/press/2007/2007-71.htm.
U.S. District Court Allows Class Certification in Rescission Case, Finds Adverse Action in Alleged “Bait and Switch.” On April 23, the U.S. District Court for the Northern District of Illinois issued two rulings in a consolidated group of consumer class actions against Ameriquest and its affiliates. In re Ameriquest Mortgage Co. Mortgage Lending Practices Litigation, 2007 WL 1202544 (N.D. Ill. April 23, 2007). First, the court held that a class can be certified for declaratory judgment that loans are rescindable. The court distinguished between a class action that seeks to rescind loans and a class action that seeks a declaratory judgment that loans are rescindable, allowing individual class members to decide whether to rescind. The court reasoned that while class certification might be inappropriate in the former case because rescission is a personal remedy, it is appropriate in the latter because consumers may still pursue rescission claims individually. In so holding, the court disagreed with the opinion of the U.S. Court of Appeals for the First Circuit in McKenna v. First Horizon Home Loan Corp., where that court held that rescission cases are not suitable for classwide resolution. (For a discussion of McKenna, see the February 2nd issue of InfoBytes.) The U.S. Court of Appeals for the Seventh Circuit, which includes Illinois, has accepted a petition for appeal in Andrews v. Chevy Chase Bank, FSB (reported in the February 9th issue of InfoBytes).
Second, the decision addressed the borrower's claim that Ameriquest took adverse action against a group of borrowers whose loans closed, but who alleged that Ameriquest had misrepresented the terms of the loans that they actually obtained at closing. The court acknowledged that the counteroffer exception in Regulation B, which implements the Equal Credit Opportunity Act (ECOA), would normally mean that adverse action had not occurred, and also noted that the ECOA exception applies to FCRA adverse action. The court noted, however, that “the complaint alleges a bait-and-switch departure from offers the defendants made, not a series of rejections and counteroffers in response to any offers made by plaintiffs” (emphasis in original). Therefore, “[b]ecause the complaint does not clearly demonstrate that plaintiffs accepted counteroffers of credit,” the court denied the motion to dismiss on this issue. If accepted by other courts, this reasoning would seem to create an ECOA cause of action for an adverse action violation, with potential punitive damages of up to $10,000 per violation or $500,000 in a class action, whenever a consumer whose loan closed alleges a mismatch between a lender’s representations and the loan terms actually provided–a sweeping expansion of the definition of adverse action in ECOA to apply to alleged deceptive sales practices. In addition, almost all courts have held that the private right of action for violation of the FCRA adverse action provision was repealed by the Fair and Accurate Credit Transactions Act of 2003 – an issue not addressed in the court’s opinion. For a copy of this opinion, please contact .
Seventh Circuit Rules Against Equifax in FCRA Case. The U.S. Court of Appeals for the Seventh Circuit has reversed a ruling of summary judgment in favor of Equifax in a case involving the meaning of the phrase “clearly and accurately disclose” used in the Fair Credit Reporting Act (FCRA). Gillespie v. Equifax Information Services, LLC, No. 06-1952, 2007 WL 1287649 (7th Cir., May 3, 2007). (For more on the district court opinion, please see the June 16, 2006 issue of InfoBytes.) Under the FCRA, a consumer reporting agency cannot keep information regarding delinquent or charged-off accounts in a credit file for more than, effectively, seven and one-half years, but a reporting agency can keep records of accounts paid as agreed in a file for up to ten years. In this case, the plaintiffs brought suit over Equifax’s practice of reporting both delinquencies and any ensuing payments in the “Date of Last Activity” field on the consumer’s credit report. Under Equifax’s practices, if a consumer’s account became delinquent, and if the consumer subsequently began making timely payments again, Equifax apparently could, the plaintiffs argued, keep the delinquency on the credit report for more than seven and one-half years as a record of an account paid as agreed. The plaintiffs argued that Equifax’s disclosures, which must be “clear and accurate” under the FCRA, did not allow consumers to determine whether Equifax was properly calculating the seven and one-half year period. The appeals court reversed the district court’s summary judgment, finding that “Equifax’s disclosure to the plaintiffs may be accurate but it is not necessarily clear.” The appeals court remanded the case to the district court to determine any potential liability and to address the question of class certification, emphasizing that it was “only deciding that the case must continue. . . [not the] issue of Equifax’s liability. For a copy of this opinion, please contact .
U.S. District Court in Ohio "Preliminarily" Supports Injunctive Relief for Private Litigants under FCRA. The U.S. District Court for the Northern District of Ohio, in Alarcon v. TransUnion Marketing, 2007 WL 1201624 (N.D. Ohio Apr. 20, 2007), denied the Experian's motion for a partial judgment on the pleadings to the effect that no injunctive relief is available to private litigants under the Fair Credit Reporting Act (FCRA). The court further stated that it "is preliminarily persuaded by the reasoning in Andrews [v. Trans Union Corp., 7 F. Supp. 2d 1056, 1084 (C.D. Cal. 1998)] that injunctive relief for a prevailing private litigant would further the purposes of the FCRA." Most courts have not recognized a right for private plaintiffs to obtain an injunction under FCRA. Finally, the court criticized the defendants for making excessive motions, stating: “The Court already has the impression that the defendants plan to use their ‘Goliath’ position to beat down the plaintiff (‘David’), rather than expend their energies to reach a joint resolution reasonably satisfying to all.” For a copy of the decision, please contact .
Court Rules Retroactive Interest Rate Increases Not Unconscionable under California Law. On April 20, a federal district court in California dismissed a complaint alleging that FIA Card Services, N.A., a credit card issuer, violated California’s Consumer Legal Remedies Act (CLRA) and Unfair Competition Law (UCL) by retroactively increasing credit card interest rates. Augustine v. FIA Card Services, N.A., No. 2:06-cv-2013-GEB-EFB (E.D. Cal. Apr. 20, 2007). Although the plaintiff conceded that the practice was disclosed in the credit card agreement, she nonetheless claimed that it constituted an unfair and deceptive practice, because the lender allegedly failed to provide adequate notice of, and did not disclose the evaluation process used for, retroactive rate increases. According to the court, however, the plaintiff did not plead facts to support a claim of misrepresentation under the CLRA, and the practice of retroactively increasing interest rates was not unconscionable. Moreover, the court noted that, under California case law, the CLRA does not apply to credit card transactions. The court also ruled that the plaintiff’s UCL claims were preempted by federal banking law and regulations, which generally allow lenders to extend loans without regard to state laws concerning terms of credit and disclosures. For a copy of the opinion, please contact .
California District Court Allows Class Action to Proceed Against Target for Alleged ADA Violations in Not Allowing Adequate Access to Blind Consumers. On April 25, the U.S. District Court for the Northern District of California certified as a class all blind consumers who, because of Target Corporation's ("Target") allegedly visually dependent website, were denied access to a physical Target store. Nat'l Fed'n of the Blind v. Target Corp, No. C 06-01802 (N.D. California, April 25, 2007). The National Federation of the Blind ("NFB") stated in its complaint that Target violated the Americans With Disabilities Act ("ADA"), 42 U.S.C. § 12182, because its website "contains thousands of access barriers that make it difficult if not impossible for blind customers to use the website." Judge Marilyn Hall Patel said that the nexus requirement of the ADA was met for the limited class of claims made by "all legally blind individuals...who have attempted to access Target.com and a result have been denied access to the enjoyment of goods and services offered in Target stores." The NFB was urged by the court to present affidavits to support the needed nexus, since statements that the class members "would prefer to shop online is not sufficient to establish a nexus with the stores for the purposes of the ADA." The Court has granted 30 days for an eligible plaintiff - as defined by the Court - to be presented, at which point the Court will issue a final ruling on the class certification motion. For a copy of the court order, please write to .
Eleventh Circuit Upholds Petition to Compel Arbitration. In Community State Bank v. Strong, No. 06-11582 (11th Cir., opinion issued April 27, 2007), the Eleventh Circuit reversed a district court’s dismissal of a petition to compel arbitration, determining that the petition implicated federal question jurisdiction. The petition was filed in connection with a dispute over the making of a “payday loan.” The borrower initially filed a state class action lawsuit against his lender alleging violations of state usury laws. The lender’s attempt to remove the state case to federal court failed because the borrower raised no federal questions in his state lawsuit. The lender filed a separate petition to compel arbitration, which the district court dismissed for the same federal jurisdictional deficiencies identified in the state case. The Eleventh Circuit reversed this decision, however, holding that to determine whether federal question jurisdiction exists over the petition to compel arbitration, the district court should not have limited its inquiry to the borrower’s state court claims. Instead, the district court should have examined the claims raised in the petition, which included an allegation that the borrower could have alleged a federal claim in the original dispute. Accordingly, the petition raised a federal question, providing the district court with jurisdiction. For a copy of this decision, please see http://www.ca11.uscourts.gov/opinions/ops/200611582.pdf.
Preparing Mortgage Application Not an Unauthorized Practice of Law in Indiana. This week, the Indiana Supreme Court ruled that the preparation of mortgage documents by non-attorneys does not constitute the unauthorized practice of law, regardless of whether a fee is charged for the document preparation. In Charter One Mortgage Corp. v. Condra, No. 49S05-0612-CV-497 (Ind. 2007), the borrower filed a class action law suit alleging that Charter One's document preparation fee violated Indiana law. Condra relied on a prior Indiana Supreme Court case, Miller v. Vance, 463 N.E.2d 250 (Ind. 1984), that concluded that while having a bank employee fill in blanks on a mortgage instrument was not the practice of law, the bank could not make a separate charge for such document preparation. In Condra, the Court held that the Miller decision was overbroad. Instead, it is the nature of the activity, and not whether there is compensation provided, that determines whether an activity constitutes the practice of law. Consequently, the Court agreed with the holding in Miller that merely filling out blanks on a prepared legal document, such as a mortgage application, requires only common knowledge regarding the information necessary to be included and is not the practice of law. However, it overruled Miller to the extent that Miller concluded that the act of charging a fee for such document preparation would "transmogrify" such action into the practice of law. The Court declined to decide the issue of whether the National Bank Act preempted the Indiana law against the unauthorized practice of law for national banks. For a copy of this case, please see http://www.in.gov/judiciary/opinions/pdf/05020701trb.pdf.
Complaint Filed Against MBS Issuer for Fraudulently Marketing Securities and not Pursuing Foreclosures to Protect Purchaser. Banker's Life Insurance filed a complaint in U.S. District Court Middle District of Florida on April 23 alleging, among other things, that Credit Suisse First Boston (CSFB) knowingly withheld information on mortgage loan pools and knowingly purchased defective mortgage loans from sources it controlled. Bankers Life Insurance Co. v. Credit Suisse First Boston Corp., 8:07-cv-00690-EAK-MSS (M.D. Fla. Apr. 23, 2007). Among other allegations, Banker's Life also claimed that CSFB attempted to avoid responsibility by "disclosing" that no due diligence had been performed on the loans while withholding relevant and essential facts. Banker's Life also alleged that CSFB and Select Portfolio Servicing, Inc. (SPS), made "improper advances of principal and interest to maintain the illusion that numerous mortgage loans" were "good performing loans and to conceal the material deficiency" of them. Moreover, Banker's Life alleged that CSFB and SPS failed to pursue foreclosures and other remedies in a timely manner to protect Banker's Life. The total principal balance of the transactions that may be impacted by this complaint is $302,634,786. For a copy of the complaint, please contact .
California District Court Allows Class Action to Proceed Against Target for Alleged ADA Violations in Not Allowing Adequate Access to Blind Consumers. On April 25, the U.S. District Court for the Northern District of California certified as a class all blind consumers who, because of Target Corporation's ("Target") allegedly visually dependent website, were denied access to a physical Target store. Nat'l Fed'n of the Blind v. Target Corp, No. C 06-01802 (N.D. California, April 25, 2007). The National Federation of the Blind ("NFB") stated in its complaint that Target violated the Americans With Disabilities Act ("ADA"), 42 U.S.C. § 12182, because its website "contains thousands of access barriers that make it difficult if not impossible for blind customers to use the website." Judge Marilyn Hall Patel said that the nexus requirement of the ADA was met for the limited class of claims made by "all legally blind individuals...who have attempted to access Target.com and a result have been denied access to the enjoyment of goods and services offered in Target stores." The NFB was urged by the court to present affidavits to support the needed nexus, since statements that the class members "would prefer to shop online is not sufficient to establish a nexus with the stores for the purposes of the ADA." The Court has granted 30 days for an eligible plaintiff - as defined by the Court - to be presented, at which point the Court will issue a final ruling on the class certification motion. For a copy of the court order, please write to .
Mississippi Governor Signs Credit Freeze Law. On April 21, Mississippi Governor Haley Barbour signed S.B. 3034 establishing a credit security freeze in that state (reported in the April 6th issue of InfoBytes). The law requires consumer reporting agencies to place a security freeze in consumer files upon the written request by certain consumers, caps the charge for such a freeze at $10, and provides for “temporary lift” of the freeze. For more information on the bill, see http://billstatus.ls.state.ms.us/2007/html/history/SB/SB3034.htm.
Maryland Enacts Bill for Pilot Electronic Real Estate Records Recording Program. On April 24, Maryland Governor Martin O’Malley signed into law H.B. 331 to grant the Maryland Administrative Office of the Courts authority to establish a pilot program for real property records. The law goes into effect June 1, 2007. For more information regarding the act, see http://mlis.state.md.us/2007rs/billfile/HB0331.htm.
First Settlement under New York Data Breach Law. On April 26, the Office of the New York Attorney General announced a settlement with CS STARS LLC under New York’s Information Security Breach and Notification Law over failure to provide notification regarding the loss of personal information for more than half a million New York consumers. CS STARS, a Chicago-based claims management firm, did not notify the owner of the personal data for more than seven weeks following the theft of an employee’s laptop. In the settlement agreement CS STARS LLC admitted to no wrongdoing, but agreed to strengthen its data security practices and pay the Attorney General’s Office $60,000 for investigation costs. For the official press release, see http://www.oag.state.ny.us/press/2007/apr/apr26a_07.html.
Mississippi Governor Signs Credit Freeze Law. On April 21, Mississippi Governor Haley Barbour signed S.B. 3034 establishing a credit security freeze in that state (reported in the April 6th issue of InfoBytes). The law requires consumer reporting agencies to place a security freeze in consumer files upon the written request by certain consumers, caps the charge for such a freeze at $10, and provides for “temporary lift” of the freeze. For more information on the bill, see http://billstatus.ls.state.ms.us/2007/html/history/SB/SB3034.htm.
First Settlement under New York Data Breach Law. On April 26, the Office of the New York Attorney General announced a settlement with CS STARS LLC under New York’s Information Security Breach and Notification Law over failure to provide notification regarding the loss of personal information for more than half a million New York consumers. CS STARS, a Chicago-based claims management firm, did not notify the owner of the personal data for more than seven weeks following the theft of an employee’s laptop. In the settlement agreement CS STARS LLC admitted to no wrongdoing, but agreed to strengthen its data security practices and pay the Attorney General’s Office $60,000 for investigation costs. For the official press release, see http://www.oag.state.ny.us/press/2007/apr/apr26a_07.html.
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