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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS
Topics – Covered This Week (Click to View)
FEDERAL ISSUES
House Passes American Housing Rescue and Foreclosure Prevention Act. On May 8, the U.S. House of Representatives today passed the American Housing Rescue and Foreclosure Prevention Act (H.R. 3221), a comprehensive housing bill, which combines several mortgage bills that have been pending before the House, including H.R. 5830 (first reported in InfoBytes, April 18, 2008), H.R. 5579 (reported in InfoBytes, April 25, 2008), H.R. 1852 (first reported in InfoBytes, March 30, 2007), H.R. 1427 (reported in InfoBytes, March 25, 2007), and H.R. 5720, to address the mortgage crisis. The bill would: (i) expand the Federal Housing Administration (FHA) program by providing for FHA to insure up to $300 billion in mortgage loans to help refinance at-risk borrowers into viable FHA mortgages; (ii) provide $230 million for financial counseling regarding loss mitigation for mortgagors; (iii) increase regulation of Fannie Mae, Freddie Mac and the Federal Home Loan Bank System; (iv) temporarily increase the VA Home Loan limit and lengthen the time a lender must wait before starting foreclosure from three months to one year after a soldier returns from service; (v) expand access to reverse mortgages through FHA reform; (vi) protect mortgage servicers who enter into loan modifications from investor lawsuits if the mortgage servicer reasonably believes that the modification or workout plan will maximize the net present value to be realized on the loan over the value that would be realized through foreclosure; (vii) provide a refundable tax credit of up to $7500 for certain first-time homebuyers, provide a $350 ($700 for joint return) standard deduction for property taxes in 2008, and temporarily increase the tax credit for builders of low-income housing; and (viii) protect the right of states and cities to regulate the foreclosure process and the treatment of foreclosed property by clarifying that this Act, the National Bank Act, and the Home Owner’s Loan Act do not preempt State foreclosure laws for national banks or federally chartered thrifts. The White House opposes H.R. 3221, and has threatened to veto if presented to him in its current form. For a copy of the engrossed bill, please see http://www.govtrack.us/congress/billtext.xpd?bill=h110-3221&show-changes=0.
House Passes Neighborhood Stabilization Act. On May 8, the U.S. House of Representatives passed the Neighborhood Stabilization Act (H.R. 5818) (first reported in InfoBytes, April 18, 2008), which would establish a $15 billion HUD loan and grant program to help state and local governments purchase and rehabilitate vacant, foreclosed homes for resale or rental. The bill, introduced by Rep. Maxine Waters (D-CA), passed the House by a vote of 239-188. The bill proposes $7.5 billion in non-recourse, zero-interest loans to states to finance acquisition and rehabilitation costs. The loans would have to be repaid within 2 years for homeownership properties and 5 years for rental properties with 20 percent of appreciation at resale being paid back to the federal government. The bill also proposes $7.5 billion in grants to states to cover operating costs while the property is being stabilized. Each state’s loan and grant would be based on the state’s percentage of nationwide foreclosures over the last four calendar quarters, adjusted for the state’s relative median home price. Homes purchased for resale would be required to be sold to families having incomes not exceeding 140 percent of area median income (AMI). Properties purchased for rental would be required to serve families having incomes at or below the AMI. Lastly, the bill would provide eviction protections to tenants in foreclosed properties. For a copy of the engrossed bill, please see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h5818eh.txt.pdf.
FRB and FTC Issue Long-Awaited Risk-Based Pricing Notice Proposal. On May 8, the Federal Reserve Board (FRB) and Federal Trade Commission (FTC) announced a proposal to implement the last remaining major regulation pending under the Fair and Accurate Credit Transactions Act of 2003 (FACTA) - the requirement for creditors to provide a consumer with a risk-based pricing notice when they offer or provide credit to the consumer on terms less favorable than the terms available to other consumers (first reported in InfoBytes Special Alert, May 8, 2008 ). The rules would apply when a creditor adjusts the cost of credit based on information in a consumer's credit report. Section 311 of FACTA added a new Section 615(h) to the Fair Credit Reporting Act (FCRA). The provision requires that the notice be provided when a creditor offers or provides "credit on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that person." The proposal would generally require that a risk-based pricing notice be provided after the terms of credit have been set, but before the consumer becomes contractually obligated on a closed-end loan or before the first transaction in an open-end plan. Creditors could avoid providing an individualized risk-based pricing notice to those consumers who receive "materially less favorable" terms by instead providing a notice to all consumers "as soon as reasonably practicable" after obtaining the credit score.
The FACTA provision includes a required disclosure of the consumer's right to a free credit report. Although lenders had argued that this is simply a reference to the right provided elsewhere in FACTA to an annual free credit file disclosure, the agencies interpret it as conferring a right to an additional free file disclosure for any consumer who receives a risk-based pricing notice. The alternative up-front notice to all applicants, however, would not trigger a right to a free report because that notice is not a risk-based pricing notice. Comments on the proposal will be due 90 days after publication in the Federal Register, which is expected shortly. For a copy of the proposed rules, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20080508a1.pdf. For a copy of the agencies' respective press releases, please see http://www.federalreserve.gov/newsevents/press/bcreg/20080508a.htm (FRB) and http://www.ftc.gov/opa/2008/05/factfyi.shtm (FTC).
HUD Extends Comment Period on Proposed RESPA Reform Rule. On May 7, the U.S. Department of Housing and Urban Development (HUD) announced that it will extend the public comment period on its proposed rule to reform the Real Estate Settlement Procedures Act (RESPA). The comment period for the proposed rule will be extended 30 days until June 12, 2008. Prior to HUD’s announcement of an extension, the public comment period was set to expire on May 13, 2008. HUD’s proposed rule, entitled, “RESPA: HUD’s Proposed Rule to Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs” (reported in InfoBytes, March 14, 2008), seeks primarily to improve advance disclosure of firm and accurate settlement costs on page one of the Good Faith Estimate (GFE) in all RESPA covered transactions via a “GFE application.” For a copy of the HUD press release, please see http://www.hud.gov/news/release.cfm?content=pr08-061.cfm. For a copy of the proposed rule, please see http://edocket.access.gpo.gov/2008/pdf/08-1015.pdf. For a copy of Joe Kolar’s and Grant Mitchell’s powerpoint presentation summarizing the proposed rule, please see http://www.buckleykolar.com/publications/documents/RESPAWebinar_March192008.pdf.
FTC, OTS Submit Letters Regarding Proposed FNMA, FHMLC, and OFHEO Appraisal Agreement with NY AG. On April 30, the Federal Trade Commission (FTC) and the Office of Thrift Supervision (OTS) submitted formal letters addressing the proposed Fannie Mae, Freddie Mac, and Office of Federal Housing Enterprise Oversight (OFHEO) agreement with the New York Attorney General (NY AG) to establish the Home Valuation Code of Conduct, a code of conduct for real estate appraisal practices. On March 3, 2008, the NY AG announced settlement agreements with Fannie Mae, Freddie Mac, and OFHEO, the office within the Department of Housing and Urban Development that oversees Fannie Mae and Freddie Mac. Pursuant to the agreements, beginning on January 1, 2009, Fannie Mae and Freddie Mac will no longer purchase single-family mortgage loans, other than government-insured loans, from mortgage originators that do not agree to adopt the Home Valuation Code of Conduct with respect to such loans. The code provides for various restrictions, prohibitions, and requirements regarding appraisal reports used to secure mortgage loans. The FTC letter expresses support for proposals such as those contained in the code to protect the independence of appraisals and the integrity of the lending process, but raises concerns regarding the potential effect of certain provisions in the code on competition and consumers in the appraisal and mortgage lending markets. The OTS letter also expresses concern about the economic consequences that the code of conduct could have on the federal housing and mortgage markets. For a copy of the FTC letter, please see http://www.ftc.gov/os/2008/05/V080011comment.pdf. For a copy of the OTS letter, please see http://www.ots.treas.gov/docs/4/481084.pdf.
President Bush Signs Student Lending Bill. On May 7, President Bush signed into law H.R. 5715. The new law increases the maximum amount that a student may borrow for unsubsidized Stafford loans. The law also provides a six month grace period for parents borrowing under the PLUS federal student loan program. These provisions take effect on July 1, 2008. The law additionally allows parents who otherwise would not qualify for PLUS loans due to poor credit history to obtain such loans if they meet certain extenuating circumstance requirements. The law temporarily classifies the following as extenuating circumstances: being 180 days delinquent or less on a home mortgage or being 89 days delinquent or less on the repayment of any other type of debt for the time period between January 1, 2007 and December 31, 2009. The law also gives the Secretary of Education temporary authority to purchase student loans as a means of providing liquidity in the student loan market. For a copy of the bill, please see http://www.buckleykolar.com/documents/HR5715.pdf.
OTS Issues FCRA and Junk Fax Prevention Bulletin. On May 7, the Office of Thrift Supervision (OTS) issued Regulatory Bulletin 37-22 to update Section 1300 of the Examination Handbook regarding compliance with the medical information rules recently promulgated under the Fair Credit Reporting Act (FCRA), and compliance with telemarketing and fax advertising requirements in the Telephone Consumer Protection Act (TCPA) and the Junk Fax Prevention Act (JFPA), respectively. The Examination Handbook will now reflect the new medical rules pursuant to Section 604(g) of FCRA, which generally prohibits creditors from obtaining and using medical information in connection with any determination of the consumer’s eligibility, or continued eligibility, for credit. The Examination Handbook will also incorporate new telemarketing and fax advertising rules pursuant to the TCPA and the JFPA, which respectively (i) require institutions that engage in telemarketing to have procedures for identifying themselves to consumers, establishing their own internal do-not-call list, and using a version of the national do-not-call list that is no older than 31 days, and (ii) establish new rules on sending fax advertising that require a business relationship, opt-out notices, and 24-hour availability for opt outs. For a copy of this bulletin, please see http://www.ots.treas.gov/docs/7/74838.pdf.
STATE ISSUES
Colorado Adopts Emergency Rule Making Initial and Continuing Education Mandatory for Mortgage Brokers. The Director of the Colorado Division of Real Estate recently issued an emergency rule, Rule 1-4-1: Mortgage Broker Licensing Education, to impose initial and continuing education requirements on Colorado Mortgage Brokers. Most notably, all currently licensed Colorado mortgage brokers must complete 40 hours of education and pass a two-part examination by January 1, 2009. In addition, effective January 1, 2009, all mortgage broker applicants must complete 40 hours of education and pass a two-part examination within the three years immediately preceding of the date of application. We note that these education requirements are in addition to the nine hours of continuing education requirements that licensed mortgage brokers must complete every three year renewal cycle, beginning with the licensee’s second cycle. The emergency rule became effective on May 2, 2008. For a copy of the full text of the rule, please see http://www.dora.state.co.us/real-estate/rulemaking/MB/EmergencyRule050208.pdf.
Iowa Governor Signs Security Freeze Bill. On April 11, the Iowa Governor, Chester Culver, signed S.F. 2277 requiring consumer reporting agencies to comply with a consumer’s request to place a security freeze on the consumer’s credit report. Entities that are unable to obtain a person’s credit report due to a security freeze are permitted to treat credit applications as incomplete. The law becomes effective on July 1, 2008. For a copy of the enrolled bill, please see http://www.buckleykolar.com/documents/IASF2277.pdf.
New York Assembly Passes Mortgage Foreclosure Legislation. On May 7, the New York State Assembly passed four bills that included financial assistance for borrowers facing foreclosure and a foreclosure moratorium. The legislation would (i) provide $25 million in temporary financial assistance to homeowners with sub-prime or unconventional mortgages facing foreclosure, capped at an amount equal to three months of mortgage payments and provide legal services and counseling to assist certain homeowners in default or foreclosure, (ii) establish requirements on all home loans, including (A) establishing a lender’s responsibility to verify a borrower’s ability to repay loans and to verify income, (B) establishing an agency relationship between the mortgage broker and borrower, and (C) prohibiting practices such as balloon payments, negative amortization and prepayment penalties, (iii) allow a court to delay the actual order to transfer title when faced with the foreclosure of a sub-prime mortgage under specific conditions for no more than one year in order to allow the mortgagor to apply for relief, and (iv) require mortgage lenders and brokers to provide consumers with a bill of rights pamphlet that must be read and signed by the consumer prior to applying for a mortgage, enumerating all information that a prospective homeowner needs to know in order to make a decision about a home loan including how to file a complaint with the Banking Department or the Department of State. The bills have been sent to the state senate. For a copy of the State Assembly press release, which includes links to the four bills, please see http://assembly.state.ny.us/Press/20080507/.
Minnesota Amends Foreclosure Law and Authorizes Electronic Document Recording. On April 25, Minnesota Governor Tim Pawlenty signed a bill (H.F. 3516) to amend Minnesota’s foreclosure law and authorize electronic recording of documents. The new law requires the name of the transaction agent, mortgage servicer, and mortgage originator to be recorded on the notice of pendency, notice of sale, and certificate of sale. The new law also creates a Statewide Foreclosure Data Collection group to study the most efficient and cost-effective way to develop and implement an electronic filing system for foreclosure data. Lastly, the new law authorizes electronic recording and signing of documents in connection with any law that requires, as a condition for recording, respectively (i) that a document be an original, on paper, or another tangible medium, or in writing, or (ii) that a document be signed. The foreclosure notice requirements become effective August 1, 2008; the Statewide Foreclosure Data Collection group electronic filing study is effective immediately; and the authorization for electronic recording and signing of documents is effective July 1, 2008. For a copy of the bill, please see http://www.buckleykolar.com/documents/MNHF3516.pdf.
Oregon Amends Mortgage Lending Rules. The Oregon Department of Consumer and Business Services, Division of Finance and Corporate Securities recently issued amendments to its mortgage lending rules, Or. Admin. Code §§ 441-860-0010, 441-870-0030. Pursuant to the amendments, failing to disclose in writing, before negotiating loan terms, relationships with builders or realtors who are a party to the transaction is now considered a fraudulent, deceptive, or manipulative act or practice. The new rule also describes additional deceptive advertising practices. The amendments became effective May 7, 2008. For a copy of the amended rules, please see http://www.dfcs.oregon.gov/rules_statutes/rulemaking/441_870_0080.pdf.
COURTS
Massachusetts Intermediate Appeals Court Upholds Fremont Preliminary Injunction. On May 2, a Massachusetts appellate judge upheld the trial court's entry of a preliminary injunction (the "Order") requested by the Massachusetts Attorney General (the "Mass AG") against Fremont Investment & Loan ("Fremont") (first reported in InfoBytes Special Alert, Feb. 27, 2008), including the Order's later modification to prohibit future servicing sales by Fremont unless the new servicer agreed to abide by the terms of the Order (reported in InfoBytes Special Alert, May 7, 2008). The Order prohibits Fremont from foreclosing on mortgage loans secured by owner-occupied property without first obtaining permission from the Mass AG or, if the Mass AG does not give permission, the trial court. The trial court declared certain loans presumptively unfair; for those loans, Fremont must give the Mass AG 45 days advance written notice of the proposed foreclosure, identifying why foreclosure is reasonable under the circumstances. The Mass AG has the opportunity to object, and if it does, and Fremont and the Mass AG cannot work out a resolution of the issue, the court will determine whether to approve the foreclosure after considering whether (i) the loan was actually unfair (as opposed to presumptively), (ii) the home is actually occupied by the borrower as the primary residence, (iii) Fremont took reasonable steps to work out the loan, and (iv) there is any fair or reasonable alternative to foreclosure. The appellate justice held that the trial court did not impermissibly expand the scope of Massachusetts's high cost home loan law, Chapter 183C, in looking to that law to determine whether Fremont's conduct was unfair. Rather, the appellate justice held that it "has long been understood that a factor to be considered in determining whether a practice should be deemed unfair is whether it is within the penumbra of some common-law, statutory or other established concept of unfairness." The appellate justice also concluded that the Order was permissible based on the trial court's reliance on the recent federal agency guidance. The appellate justice did not address the fact that this recent federal agency guidance was issued after the loans in question had been originated. The appellate justice also upheld the trial court's determination that the existence of four loan characteristics combined could indicate that a loan is unfair even if the characteristics, on an individual basis, "were and are legal." The appellate justice held that it was not enough that the characteristics were not prohibited by law for the statutory exemption from liability under the Massachusetts unfair practices law—they must be expressly permitted by other laws to be eligible for the exemption. The appellate justice also upheld the trial court's requirement that Fremont obtain permission from either the Mass AG or the court to foreclose and make additional showings if the loan was presumptively unfair. Fremont has until May 15 to appeal the decision of the appellate justice.
Buckley Kolar filed an Amicus Curiae brief before the appellate justice on behalf of the American Financial Services Association, the Consumer Mortgage Coalition, the Housing Policy Council of the Financial Services Roundtable and the Mortgage Bankers Association (for a copy of this brief, please see Amicus Brief filed by Buckley Kolar). A copy of the appellate decision is available at http://www.buckleykolar.com/documents/MassachusettsvFremont.pdf.
HOEPA and Fiduciary Duty Claims Against Mortgage Lender Dismissed but not Disclosure and UDAP Claims. On January 18, the United States Bankruptcy Court for the District of Massachusetts dismissed several claims brought by a borrower against a mortgage lender in the course of the borrower’s bankruptcy proceedings. See In re Vincent, 381 B.R. 564 (Bankr. D. Mass. 2008). The borrower alleged that the lender violated the Home Ownership and Equity Protection Act (HOEPA) by refinancing her mortgage loan without verifying her income or considering her ability to repay the loan. According to the court, however, neither the APR nor the “points and fees” on the loan were sufficiently high to trigger HOEPA’s requirements. Moreover, the borrower’s claim was time barred. The court also dismissed the borrower’s breach of contract and fiduciary duties claims, as the borrower did not identify any way in which the lender breached the contract, and the fact that the borrower “alone placed trust” in the lender was “not enough to transform the relationship into a fiduciary one.” The court, however, granted the borrower leave to amend her Massachusetts Consumer Credit Cost Disclosure Act (MCCCDA) claim, which alleged in relevant part that the APR on the loan was higher than that disclosed by the lender, but did not indicate how the allegedly correct rate was calculated. The court also did not dismiss the borrower’s claims that the lender “knowingly and fraudulently filled out [her] loan application in order to have [her] enter into a transaction she could not afford,” and therefore committed fraud and violated Massachusetts’ UDAP law. For a copy of the opinion, please see http://www.buckleykolar.com/documents/VincentvAmeriquest.pdf.
FCRA Settlement Included Assignment of Indemnity Rights; Insurer May Intervene Before Settlement. On April 29, an Illinois federal district court permitted an insurance company to intervene in a proposed settlement of alleged Fair Credit Reporting Act (FCRA) violations involving a car dealership who, as part of the settlement agreement, assigned its indemnity rights against the insurer. Blair v. Shaver Imports, Inc., 2008 WL 1924888, No. 06-398 (N.D. Ill. Apr. 29, 2008). In this case, the class filed suit against a dealership for wrongfully obtaining prescreened credit reports. The parties entered into a proposed settlement requiring the dealership to confess judgment in the amount of $1 million, the limits of coverage under their insurance policy, and the class released the dealership in return for an assignment of the indemnity rights against the insurance company. The insurance company initially denied coverage and refused to provide a defense, but intervened after the court in a nearly identical case found that the insurance company had a duty to defend the FCRA claims. The plaintiffs objected to the insurance company’s intervention, arguing essentially that the insurance company would be able to defend itself in subsequent litigation. The court found that intervention was proper. It noted, among other things, that (i) no party in the litigation had interests aligned with the insurance company; (ii) there was no discussion regarding the amount of judgment because the dealership simply agreed to confess to the maximum amount of its indemnity rights; and (iii) there had been no informed discussion regarding the validity of the underlying claim or if any of the actions were willful. For a copy of this case, please see http://www.buckleykolar.com/documents/BlairvShaverImports.pdf.
Lender Must Reinvestigate Report of Repossession with No Late Payments. On May 2, a federal district court denied motions for summary judgment involving a wrongful late payment notation on a credit report. Krajewski v. American Honda Finance Corp., 2008 WL 1946839, No. 07-1793, (E.D. Pa. May 2, 2008). On two occasions the consumer notified the consumer reporting agency that notations on her credit report were erroneous. The consumer also alleged that an auto finance company failed to investigate two automated consumer dispute verification (ADCV) forms sent by the consumer reporting agency. The court held that while the first ADCV did not specifically ask for an investigation of the consumer’s payment history, the second ADCV did, and therefore a jury should decide whether the auto finance company violated the Fair Credit Reporting Act (FCRA). The court also held that a jury must decide whether the consumer reporting agency failed to assure maximum accuracy of the credit report by reporting a repossession without knowing whether the payments were late. In this case, the car was repossessed because it had been seized by the police and not because of any delinquency in payments. However, the court dismissed the FCRA claim regarding the failure of the credit bureau to reinvestigate because any reinvestigation would have required the bureau to engage in a costly interpretation of the auto loan contract. The court also denied the repossession company’s motion for summary judgment for violation of the Fair Debt Collection Practices Act (FDCPA), stating that there was a factual dispute over whether the car was “exposed” for seizure within the meaning of the loan agreement. The court also denied summary judgment on claims of breach of contract and violations of the UCC, but granted the auto finance company’s motion for summary judgment on the conversion claim. For a copy of this decision, please see http://www.buckleykolar.com/documents/KrajewskivAmericanHondaFinanceCorp.pdf.
Merely Reporting Account History Does Not Violate Discharge Injunction. A federal district court has granted a defendant’s motion for summary judgment on a plaintiff’s bankruptcy and Fair Credit Reporting Act (FCRA) claims. Davis v. Farm Bureau Bank, FSB, 2008 WL 1924247, No. SA-07-CA-967 (W.D. Tex. Apr. 30, 2008). In this case, the plaintiff filed for Chapter 7 bankruptcy protection and was granted a discharge from bankruptcy in 2001. The defendant Farm Bureau Bank was a creditor in the bankruptcy proceedings. In 2007, the plaintiff checked his consumer credit report and noticed that the defendant’s debt was listed as having been charged off as bad debt in 2006 and that the credit grantor had closed the account. The defendant first learned about the entry on the credit report when the plaintiff filed suit, and it immediately worked to correct the entry. At no time after the bankruptcy discharge did the defendant attempt to collect the debt. The plaintiff moved to hold the defendant in contempt of the bankruptcy court order. The court granted summary judgment in favor of the defendant on this claim, because the plaintiff presented no evidence that the bank knowingly violated a specific court order. The plaintiff also claimed that the bank violated FCRA by failing to correct the credit report entries. The court also rejected this claim, finding that the plaintiff only notified the creditor of the alleged error by filing suit and noting that FCRA only provides a private right of action for failing to reinvestigate an item that the consumer has disputed with the credit bureau. The court also rejected the plaintiff’s state-law tort claim for unreasonable collection efforts, finding that the defendant had not engaged in any collection effort. For a copy of the opinion, please see http://www.buckleykolar.com/documents/DavisvFarmBureauBank.pdf.
No TILA Disclosures Required If Contract Never Consummated. On April 29, the U.S. District Court for the Southern District of Florida granted Bev Smith Ford’s motion to dismiss federal and state claims brought by Eric Hunter, Christopher Tenore and Michelle Tenore based on an auto dealer’s conditional sales contract. Hunter v. Bev Smith Ford, LLC, 2008 WL 1925265, No. 07-80665-CIV (S.C.Fla. April 29, 2008). The Tenores purchased a Ford Expedition from Bev Smith Ford. At the time of purchase, the dealership completed a retail installment sales contract (RISC), which contained the financing disclosures required by the Truth in Lending Act (TILA). The RISC also contained a clause stating that the dealership does not provide financing, and that if a lender could not be found, the dealership could rescind the contract. The Tenores traded in their Ford pickup truck, and Ed Hunter purchased it the next day, signing a RISC with the same financing contingency and disclosures. A few days later, Bev Smith Ford rescinded the contract, the Tenores returned the Expedition, and the dealership repossessed the truck from Hunter and returned it to the Tenores. Hunter and the Tenores sued Bev Smith Ford claiming violations of the TILA, Florida Motor Vehicle Retail Sales Finance Act (MVRSFA), Fair Credit Reporting Act (FCRA), Equal Credit Opportunity Act (ECOA), Florida Consumer Collection Practices Act (FCCPA), Florida Deceptive and Unfair Trade Practices Act (FDUTPA), and breach of contract. In dismissing these claims, the court found that because of the financing contingency, the RISC was a conditional contract, and the contract was not consummated since no financing was found. Under TILA, the required disclosures must be made prior to consummation, but since the contract was never consummated, no violation of TILA could have occurred. MVRSFA requires that TILA disclosures be given in the contract. The plaintiffs argued that the financing terms were merely illusory because the contract formation was contingent upon obtaining the financing. However, the court found that all the essential terms of the contract had been disclosed before the buyer signed, and the fact that a contingency was placed on the contract did not change the accuracy of the listed essential terms. The plaintiffs also argued that the dealership violated FCRA by obtaining a credit report when it did not intend to act as a creditor, but the court dismissed this claim, stating that obtaining a credit report in order to determine the consumer’s eligibility to enter into the business transaction is a permissible purpose. Under their ECOA claim, the plaintiffs claimed that the dealership was a creditor and should have provided an adverse action notice. The court dismissed this claim as well, holding that the dealership did not regularly participate in credit decisions or set the terms of credit and was therefore not a creditor. The court further found that Bev Smith Ford did not violate FDCPA (no collections were at issue) or the Florida state unfair and deceptive acts or practices statute (the RISC did not violate any laws asserted by plaintiffs), and there was no breach of contract since no contract was formed. For a copy of the opinion, please see http://www.buckleykolar.com/documents/HuntervBevSmithFord.pdf.
Amended Sarbanes-Oxley Statute of Limitations Period Does Not Revive Securities Claims. On April 23, the U.S. Court of Appeals for the Eleventh Circuit affirmed the dismissal of the plaintiffs’ claims brought under sections 12(a) and 15 of the Securities Act of 1933 (“Securities Act”) based upon their failure to timely file the claims prior to the expiration of the three-year statute of limitations period provided in section 13 of the Securities Act. Berman v. Blount Parrish & Co., No. 07-15956 (11th Cir. Apr. 23, 2008). On appeal, the plaintiffs argued for the first time that Section 804(a) of the Sarbanes-Oxley Act of 2002, effective July 30, 2002 amended the statute of limitations period to five years and “revived their claims, thus rendering their complaint timely.” The Court rejected this argument noting other circuit court decisions that reasoned there is no statutory authority or legislative history permitting express retroactivity when retroactive treatment would strip defendants of any affirmative defense they previously possessed and may have reasonably relied upon. Every circuit court that has considered this retroactivity argument in the context of the Sarbanes-Oxley Act has rejected it. For a copy of the opinion, please see http://www.buckleykolar.com/documents/BermanvBlountParrishCo.pdf.
FIRM NEWS
Richard DiSalvo moderated a workshop at the Annual Payment Card Institute May 6, in Arlington, Virginia. The workshop was entitled, “Solicitation Dos and Don’ts.” For more information, please see http://www.eeiconferences.com/pmtcard.htm.
Jeff Naimon spoke with Rod Alba, of Washington Consulting Associates, at the Federal Home Loan Bank MPF Program May 7 webinar on HUD’s recent RESPA proposal.
Christa Southworth wrote an article for the May issue of Mortgage Banking Magazine. The article is entitled, “No Assignment, No Foreclosure?” For more information, please see http://www.mortgagebankingmagazine.com.
Jerry Buckley, Margo Tank, and Lane Macalester will be speaking at the Managing Electronic Records (MER) Conference on May 19-21 in Chicago, Illinois. Their panel entitled, "Legal Considerations for Conducting Business Electronically: Practical Guidance," will focus on how the Electronic Signatures and Global and National Commerce Act (ESIGN) and the Uniform Electronic Transactions Act (UETA) now make it possible to present and store information and to sign agreements electronically in circumstances where, in the past, paper documents and wet signatures would have been required. Mr. Buckley, Ms. Tank, and Ms. Macalester will discuss the new challenges presented and provide practical guidance to the industry. For more information or to register, please visit www.merconference.com.
Joseph Kolar will be speaking at the Mealey’s Subprime Mortgage Litigation & Insurance Coverage Conference on June 20 in Washington, DC. Mr. Kolar’s presentation is entitled, “The New Structure of the Mortgage Lending Industry.” For more information or to register, please see http://bookstore.lexis.com/bookstore/product/69880t.html.
House Passes American Housing Rescue and Foreclosure Prevention Act. On May 8, the U.S. House of Representatives today passed the American Housing Rescue and Foreclosure Prevention Act (H.R. 3221), a comprehensive housing bill, which combines several mortgage bills that have been pending before the House, including H.R. 5830 (first reported in InfoBytes, April 18, 2008), H.R. 5579 (reported in InfoBytes, April 25, 2008), H.R. 1852 (first reported in InfoBytes, March 30, 2007), H.R. 1427 (reported in InfoBytes, March 25, 2007), and H.R. 5720, to address the mortgage crisis. The bill would: (i) expand the Federal Housing Administration (FHA) program by providing for FHA to insure up to $300 billion in mortgage loans to help refinance at-risk borrowers into viable FHA mortgages; (ii) provide $230 million for financial counseling regarding loss mitigation for mortgagors; (iii) increase regulation of Fannie Mae, Freddie Mac and the Federal Home Loan Bank System; (iv) temporarily increase the VA Home Loan limit and lengthen the time a lender must wait before starting foreclosure from three months to one year after a soldier returns from service; (v) expand access to reverse mortgages through FHA reform; (vi) protect mortgage servicers who enter into loan modifications from investor lawsuits if the mortgage servicer reasonably believes that the modification or workout plan will maximize the net present value to be realized on the loan over the value that would be realized through foreclosure; (vii) provide a refundable tax credit of up to $7500 for certain first-time homebuyers, provide a $350 ($700 for joint return) standard deduction for property taxes in 2008, and temporarily increase the tax credit for builders of low-income housing; and (viii) protect the right of states and cities to regulate the foreclosure process and the treatment of foreclosed property by clarifying that this Act, the National Bank Act, and the Home Owner’s Loan Act do not preempt State foreclosure laws for national banks or federally chartered thrifts. The White House opposes H.R. 3221, and has threatened to veto if presented to him in its current form. For a copy of the engrossed bill, please see http://www.govtrack.us/congress/billtext.xpd?bill=h110-3221&show-changes=0.
House Passes Neighborhood Stabilization Act. On May 8, the U.S. House of Representatives passed the Neighborhood Stabilization Act (H.R. 5818) (first reported in InfoBytes, April 18, 2008), which would establish a $15 billion HUD loan and grant program to help state and local governments purchase and rehabilitate vacant, foreclosed homes for resale or rental. The bill, introduced by Rep. Maxine Waters (D-CA), passed the House by a vote of 239-188. The bill proposes $7.5 billion in non-recourse, zero-interest loans to states to finance acquisition and rehabilitation costs. The loans would have to be repaid within 2 years for homeownership properties and 5 years for rental properties with 20 percent of appreciation at resale being paid back to the federal government. The bill also proposes $7.5 billion in grants to states to cover operating costs while the property is being stabilized. Each state’s loan and grant would be based on the state’s percentage of nationwide foreclosures over the last four calendar quarters, adjusted for the state’s relative median home price. Homes purchased for resale would be required to be sold to families having incomes not exceeding 140 percent of area median income (AMI). Properties purchased for rental would be required to serve families having incomes at or below the AMI. Lastly, the bill would provide eviction protections to tenants in foreclosed properties. For a copy of the engrossed bill, please see http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:h5818eh.txt.pdf.
HUD Extends Comment Period on Proposed RESPA Reform Rule. On May 7, the U.S. Department of Housing and Urban Development (HUD) announced that it will extend the public comment period on its proposed rule to reform the Real Estate Settlement Procedures Act (RESPA). The comment period for the proposed rule will be extended 30 days until June 12, 2008. Prior to HUD’s announcement of an extension, the public comment period was set to expire on May 13, 2008. HUD’s proposed rule, entitled, “RESPA: HUD’s Proposed Rule to Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs” (reported in InfoBytes, March 14, 2008), seeks primarily to improve advance disclosure of firm and accurate settlement costs on page one of the Good Faith Estimate (GFE) in all RESPA covered transactions via a “GFE application.” For a copy of the HUD press release, please see http://www.hud.gov/news/release.cfm?content=pr08-061.cfm. For a copy of the proposed rule, please see http://edocket.access.gpo.gov/2008/pdf/08-1015.pdf. For a copy of Joe Kolar’s and Grant Mitchell’s powerpoint presentation summarizing the proposed rule, please see http://www.buckleykolar.com/publications/documents/RESPAWebinar_March192008.pdf.
FTC, OTS Submit Letters Regarding Proposed FNMA, FHMLC, and OFHEO Appraisal Agreement with NY AG. On April 30, the Federal Trade Commission (FTC) and the Office of Thrift Supervision (OTS) submitted formal letters addressing the proposed Fannie Mae, Freddie Mac, and Office of Federal Housing Enterprise Oversight (OFHEO) agreement with the New York Attorney General (NY AG) to establish the Home Valuation Code of Conduct, a code of conduct for real estate appraisal practices. On March 3, 2008, the NY AG announced settlement agreements with Fannie Mae, Freddie Mac, and OFHEO, the office within the Department of Housing and Urban Development that oversees Fannie Mae and Freddie Mac. Pursuant to the agreements, beginning on January 1, 2009, Fannie Mae and Freddie Mac will no longer purchase single-family mortgage loans, other than government-insured loans, from mortgage originators that do not agree to adopt the Home Valuation Code of Conduct with respect to such loans. The code provides for various restrictions, prohibitions, and requirements regarding appraisal reports used to secure mortgage loans. The FTC letter expresses support for proposals such as those contained in the code to protect the independence of appraisals and the integrity of the lending process, but raises concerns regarding the potential effect of certain provisions in the code on competition and consumers in the appraisal and mortgage lending markets. The OTS letter also expresses concern about the economic consequences that the code of conduct could have on the federal housing and mortgage markets. For a copy of the FTC letter, please see http://www.ftc.gov/os/2008/05/V080011comment.pdf. For a copy of the OTS letter, please see http://www.ots.treas.gov/docs/4/481084.pdf.
Colorado Adopts Emergency Rule Making Initial and Continuing Education Mandatory for Mortgage Brokers. The Director of the Colorado Division of Real Estate recently issued an emergency rule, Rule 1-4-1: Mortgage Broker Licensing Education, to impose initial and continuing education requirements on Colorado Mortgage Brokers. Most notably, all currently licensed Colorado mortgage brokers must complete 40 hours of education and pass a two-part examination by January 1, 2009. In addition, effective January 1, 2009, all mortgage broker applicants must complete 40 hours of education and pass a two-part examination within the three years immediately preceding of the date of application. We note that these education requirements are in addition to the nine hours of continuing education requirements that licensed mortgage brokers must complete every three year renewal cycle, beginning with the licensee’s second cycle. The emergency rule became effective on May 2, 2008. For a copy of the full text of the rule, please see http://www.dora.state.co.us/real-estate/rulemaking/MB/EmergencyRule050208.pdf.
New York Assembly Passes Mortgage Foreclosure Legislation. On May 7, the New York State Assembly passed four bills that included financial assistance for borrowers facing foreclosure and a foreclosure moratorium. The legislation would (i) provide $25 million in temporary financial assistance to homeowners with sub-prime or unconventional mortgages facing foreclosure, capped at an amount equal to three months of mortgage payments and provide legal services and counseling to assist certain homeowners in default or foreclosure, (ii) establish requirements on all home loans, including (A) establishing a lender’s responsibility to verify a borrower’s ability to repay loans and to verify income, (B) establishing an agency relationship between the mortgage broker and borrower, and (C) prohibiting practices such as balloon payments, negative amortization and prepayment penalties, (iii) allow a court to delay the actual order to transfer title when faced with the foreclosure of a sub-prime mortgage under specific conditions for no more than one year in order to allow the mortgagor to apply for relief, and (iv) require mortgage lenders and brokers to provide consumers with a bill of rights pamphlet that must be read and signed by the consumer prior to applying for a mortgage, enumerating all information that a prospective homeowner needs to know in order to make a decision about a home loan including how to file a complaint with the Banking Department or the Department of State. The bills have been sent to the state senate. For a copy of the State Assembly press release, which includes links to the four bills, please see http://assembly.state.ny.us/Press/20080507/.
Minnesota Amends Foreclosure Law and Authorizes Electronic Document Recording. On April 25, Minnesota Governor Tim Pawlenty signed a bill (H.F. 3516) to amend Minnesota’s foreclosure law and authorize electronic recording of documents. The new law requires the name of the transaction agent, mortgage servicer, and mortgage originator to be recorded on the notice of pendency, notice of sale, and certificate of sale. The new law also creates a Statewide Foreclosure Data Collection group to study the most efficient and cost-effective way to develop and implement an electronic filing system for foreclosure data. Lastly, the new law authorizes electronic recording and signing of documents in connection with any law that requires, as a condition for recording, respectively (i) that a document be an original, on paper, or another tangible medium, or in writing, or (ii) that a document be signed. The foreclosure notice requirements become effective August 1, 2008; the Statewide Foreclosure Data Collection group electronic filing study is effective immediately; and the authorization for electronic recording and signing of documents is effective July 1, 2008. For a copy of the bill, please see http://www.buckleykolar.com/documents/MNHF3516.pdf.
Oregon Amends Mortgage Lending Rules. The Oregon Department of Consumer and Business Services, Division of Finance and Corporate Securities recently issued amendments to its mortgage lending rules, Or. Admin. Code §§ 441-860-0010, 441-870-0030. Pursuant to the amendments, failing to disclose in writing, before negotiating loan terms, relationships with builders or realtors who are a party to the transaction is now considered a fraudulent, deceptive, or manipulative act or practice. The new rule also describes additional deceptive advertising practices. The amendments became effective May 7, 2008. For a copy of the amended rules, please see http://www.dfcs.oregon.gov/rules_statutes/rulemaking/441_870_0080.pdf.
Massachusetts Intermediate Appeals Court Upholds Fremont Preliminary Injunction. On May 2, a Massachusetts appellate judge upheld the trial court's entry of a preliminary injunction (the "Order") requested by the Massachusetts Attorney General (the "Mass AG") against Fremont Investment & Loan ("Fremont") (first reported in InfoBytes Special Alert, Feb. 27, 2008), including the Order's later modification to prohibit future servicing sales by Fremont unless the new servicer agreed to abide by the terms of the Order (reported in InfoBytes Special Alert, May 7, 2008). The Order prohibits Fremont from foreclosing on mortgage loans secured by owner-occupied property without first obtaining permission from the Mass AG or, if the Mass AG does not give permission, the trial court. The trial court declared certain loans presumptively unfair; for those loans, Fremont must give the Mass AG 45 days advance written notice of the proposed foreclosure, identifying why foreclosure is reasonable under the circumstances. The Mass AG has the opportunity to object, and if it does, and Fremont and the Mass AG cannot work out a resolution of the issue, the court will determine whether to approve the foreclosure after considering whether (i) the loan was actually unfair (as opposed to presumptively), (ii) the home is actually occupied by the borrower as the primary residence, (iii) Fremont took reasonable steps to work out the loan, and (iv) there is any fair or reasonable alternative to foreclosure. The appellate justice held that the trial court did not impermissibly expand the scope of Massachusetts's high cost home loan law, Chapter 183C, in looking to that law to determine whether Fremont's conduct was unfair. Rather, the appellate justice held that it "has long been understood that a factor to be considered in determining whether a practice should be deemed unfair is whether it is within the penumbra of some common-law, statutory or other established concept of unfairness." The appellate justice also concluded that the Order was permissible based on the trial court's reliance on the recent federal agency guidance. The appellate justice did not address the fact that this recent federal agency guidance was issued after the loans in question had been originated. The appellate justice also upheld the trial court's determination that the existence of four loan characteristics combined could indicate that a loan is unfair even if the characteristics, on an individual basis, "were and are legal." The appellate justice held that it was not enough that the characteristics were not prohibited by law for the statutory exemption from liability under the Massachusetts unfair practices law—they must be expressly permitted by other laws to be eligible for the exemption. The appellate justice also upheld the trial court's requirement that Fremont obtain permission from either the Mass AG or the court to foreclose and make additional showings if the loan was presumptively unfair. Fremont has until May 15 to appeal the decision of the appellate justice.
Buckley Kolar filed an Amicus Curiae brief before the appellate justice on behalf of the American Financial Services Association, the Consumer Mortgage Coalition, the Housing Policy Council of the Financial Services Roundtable and the Mortgage Bankers Association (for a copy of this brief, please see Amicus Brief filed by Buckley Kolar). A copy of the appellate decision is available at http://www.buckleykolar.com/documents/MassachusettsvFremont.pdf.
HOEPA and Fiduciary Duty Claims Against Mortgage Lender Dismissed but not Disclosure and UDAP Claims. On January 18, the United States Bankruptcy Court for the District of Massachusetts dismissed several claims brought by a borrower against a mortgage lender in the course of the borrower’s bankruptcy proceedings. See In re Vincent, 381 B.R. 564 (Bankr. D. Mass. 2008). The borrower alleged that the lender violated the Home Ownership and Equity Protection Act (HOEPA) by refinancing her mortgage loan without verifying her income or considering her ability to repay the loan. According to the court, however, neither the APR nor the “points and fees” on the loan were sufficiently high to trigger HOEPA’s requirements. Moreover, the borrower’s claim was time barred. The court also dismissed the borrower’s breach of contract and fiduciary duties claims, as the borrower did not identify any way in which the lender breached the contract, and the fact that the borrower “alone placed trust” in the lender was “not enough to transform the relationship into a fiduciary one.” The court, however, granted the borrower leave to amend her Massachusetts Consumer Credit Cost Disclosure Act (MCCCDA) claim, which alleged in relevant part that the APR on the loan was higher than that disclosed by the lender, but did not indicate how the allegedly correct rate was calculated. The court also did not dismiss the borrower’s claims that the lender “knowingly and fraudulently filled out [her] loan application in order to have [her] enter into a transaction she could not afford,” and therefore committed fraud and violated Massachusetts’ UDAP law. For a copy of the opinion, please see http://www.buckleykolar.com/documents/VincentvAmeriquest.pdf.
President Bush Signs Student Lending Bill. On May 7, President Bush signed into law H.R. 5715. The new law increases the maximum amount that a student may borrow for unsubsidized Stafford loans. The law also provides a six month grace period for parents borrowing under the PLUS federal student loan program. These provisions take effect on July 1, 2008. The law additionally allows parents who otherwise would not qualify for PLUS loans due to poor credit history to obtain such loans if they meet certain extenuating circumstance requirements. The law temporarily classifies the following as extenuating circumstances: being 180 days delinquent or less on a home mortgage or being 89 days delinquent or less on the repayment of any other type of debt for the time period between January 1, 2007 and December 31, 2009. The law also gives the Secretary of Education temporary authority to purchase student loans as a means of providing liquidity in the student loan market. For a copy of the bill, please see http://www.buckleykolar.com/documents/HR5715.pdf.
FRB and FTC Issue Long-Awaited Risk-Based Pricing Notice Proposal. On May 8, the Federal Reserve Board (FRB) and Federal Trade Commission (FTC) announced a proposal to implement the last remaining major regulation pending under the Fair and Accurate Credit Transactions Act of 2003 (FACTA) - the requirement for creditors to provide a consumer with a risk-based pricing notice when they offer or provide credit to the consumer on terms less favorable than the terms available to other consumers (first reported in InfoBytes Special Alert, May 8, 2008). The rules would apply when a creditor adjusts the cost of credit based on information in a consumer's credit report. Section 311 of FACTA added a new Section 615(h) to the Fair Credit Reporting Act (FCRA). The provision requires that the notice be provided when a creditor offers or provides "credit on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that person." The proposal would generally require that a risk-based pricing notice be provided after the terms of credit have been set, but before the consumer becomes contractually obligated on a closed-end loan or before the first transaction in an open-end plan. Creditors could avoid providing an individualized risk-based pricing notice to those consumers who receive "materially less favorable" terms by instead providing a notice to all consumers "as soon as reasonably practicable" after obtaining the credit score.
The FACTA provision includes a required disclosure of the consumer's right to a free credit report. Although lenders had argued that this is simply a reference to the right provided elsewhere in FACTA to an annual free credit file disclosure, the agencies interpret it as conferring a right to an additional free file disclosure for any consumer who receives a risk-based pricing notice. The alternative up-front notice to all applicants, however, would not trigger a right to a free report because that notice is not a risk-based pricing notice. Comments on the proposal will be due 90 days after publication in the Federal Register, which is expected shortly. For a copy of the proposed rules, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20080508a1.pdf. For a copy of the agencies' respective press releases, please see http://www.federalreserve.gov/newsevents/press/bcreg/20080508a.htm (FRB) and http://www.ftc.gov/opa/2008/05/factfyi.shtm (FTC).
OTS Issues FCRA and Junk Fax Prevention Bulletin. On May 7, the Office of Thrift Supervision (OTS) issued Regulatory Bulletin 37-22 to update Section 1300 of the Examination Handbook regarding compliance with the medical information rules recently promulgated under the Fair Credit Reporting Act (FCRA), and compliance with telemarketing and fax advertising requirements in the Telephone Consumer Protection Act (TCPA) and the Junk Fax Prevention Act (JFPA), respectively. The Examination Handbook will now reflect the new medical rules pursuant to Section 604(g) of FCRA, which generally prohibits creditors from obtaining and using medical information in connection with any determination of the consumer’s eligibility, or continued eligibility, for credit. The Examination Handbook will also incorporate new telemarketing and fax advertising rules pursuant to the TCPA and the JFPA, which respectively (i) require institutions that engage in telemarketing to have procedures for identifying themselves to consumers, establishing their own internal do-not-call list, and using a version of the national do-not-call list that is no older than 31 days, and (ii) establish new rules on sending fax advertising that require a business relationship, opt-out notices, and 24-hour availability for opt outs. For a copy of this bulletin, please see http://www.ots.treas.gov/docs/7/74838.pdf.
FCRA Settlement Included Assignment of Indemnity Rights; Insurer May Intervene Before Settlement. On April 29, an Illinois federal district court permitted an insurance company to intervene in a proposed settlement of alleged Fair Credit Reporting Act (FCRA) violations involving a car dealership who, as part of the settlement agreement, assigned its indemnity rights against the insurer. Blair v. Shaver Imports, Inc., 2008 WL 1924888, No. 06-398 (N.D. Ill. Apr. 29, 2008). In this case, the class filed suit against a dealership for wrongfully obtaining prescreened credit reports. The parties entered into a proposed settlement requiring the dealership to confess judgment in the amount of $1 million, the limits of coverage under their insurance policy, and the class released the dealership in return for an assignment of the indemnity rights against the insurance company. The insurance company initially denied coverage and refused to provide a defense, but intervened after the court in a nearly identical case found that the insurance company had a duty to defend the FCRA claims. The plaintiffs objected to the insurance company’s intervention, arguing essentially that the insurance company would be able to defend itself in subsequent litigation. The court found that intervention was proper. It noted, among other things, that (i) no party in the litigation had interests aligned with the insurance company; (ii) there was no discussion regarding the amount of judgment because the dealership simply agreed to confess to the maximum amount of its indemnity rights; and (iii) there had been no informed discussion regarding the validity of the underlying claim or if any of the actions were willful. For a copy of this case, please see http://www.buckleykolar.com/documents/BlairvShaverImports.pdf.
Lender Must Reinvestigate Report of Repossession with No Late Payments. On May 2, a federal district court denied motions for summary judgment involving a wrongful late payment notation on a credit report. Krajewski v. American Honda Finance Corp., 2008 WL 1946839, No. 07-1793, (E.D. Pa. May 2, 2008). On two occasions the consumer notified the consumer reporting agency that notations on her credit report were erroneous. The consumer also alleged that an auto finance company failed to investigate two automated consumer dispute verification (ADCV) forms sent by the consumer reporting agency. The court held that while the first ADCV did not specifically ask for an investigation of the consumer’s payment history, the second ADCV did, and therefore a jury should decide whether the auto finance company violated the Fair Credit Reporting Act (FCRA). The court also held that a jury must decide whether the consumer reporting agency failed to assure maximum accuracy of the credit report by reporting a repossession without knowing whether the payments were late. In this case, the car was repossessed because it had been seized by the police and not because of any delinquency in payments. However, the court dismissed the FCRA claim regarding the failure of the credit bureau to reinvestigate because any reinvestigation would have required the bureau to engage in a costly interpretation of the auto loan contract. The court also denied the repossession company’s motion for summary judgment for violation of the Fair Debt Collection Practices Act (FDCPA), stating that there was a factual dispute over whether the car was “exposed” for seizure within the meaning of the loan agreement. The court also denied summary judgment on claims of breach of contract and violations of the UCC, but granted the auto finance company’s motion for summary judgment on the conversion claim. For a copy of this decision, please see http://www.buckleykolar.com/documents/KrajewskivAmericanHondaFinanceCorp.pdf.
Merely Reporting Account History Does Not Violate Discharge Injunction. A federal district court has granted a defendant’s motion for summary judgment on a plaintiff’s bankruptcy and Fair Credit Reporting Act (FCRA) claims. Davis v. Farm Bureau Bank, FSB, 2008 WL 1924247, No. SA-07-CA-967 (W.D. Tex. Apr. 30, 2008). In this case, the plaintiff filed for Chapter 7 bankruptcy protection and was granted a discharge from bankruptcy in 2001. The defendant Farm Bureau Bank was a creditor in the bankruptcy proceedings. In 2007, the plaintiff checked his consumer credit report and noticed that the defendant’s debt was listed as having been charged off as bad debt in 2006 and that the credit grantor had closed the account. The defendant first learned about the entry on the credit report when the plaintiff filed suit, and it immediately worked to correct the entry. At no time after the bankruptcy discharge did the defendant attempt to collect the debt. The plaintiff moved to hold the defendant in contempt of the bankruptcy court order. The court granted summary judgment in favor of the defendant on this claim, because the plaintiff presented no evidence that the bank knowingly violated a specific court order. The plaintiff also claimed that the bank violated FCRA by failing to correct the credit report entries. The court also rejected this claim, finding that the plaintiff only notified the creditor of the alleged error by filing suit and noting that FCRA only provides a private right of action for failing to reinvestigate an item that the consumer has disputed with the credit bureau. The court also rejected the plaintiff’s state-law tort claim for unreasonable collection efforts, finding that the defendant had not engaged in any collection effort. For a copy of the opinion, please see http://www.buckleykolar.com/documents/DavisvFarmBureauBank.pdf.
No TILA Disclosures Required If Contract Never Consummated. On April 29, the U.S. District Court for the Southern District of Florida granted Bev Smith Ford’s motion to dismiss federal and state claims brought by Eric Hunter, Christopher Tenore and Michelle Tenore based on an auto dealer’s conditional sales contract. Hunter v. Bev Smith Ford, LLC, 2008 WL 1925265, No. 07-80665-CIV (S.C.Fla. April 29, 2008). The Tenores purchased a Ford Expedition from Bev Smith Ford. At the time of purchase, the dealership completed a retail installment sales contract (RISC), which contained the financing disclosures required by the Truth in Lending Act (TILA). The RISC also contained a clause stating that the dealership does not provide financing, and that if a lender could not be found, the dealership could rescind the contract. The Tenores traded in their Ford pickup truck, and Ed Hunter purchased it the next day, signing a RISC with the same financing contingency and disclosures. A few days later, Bev Smith Ford rescinded the contract, the Tenores returned the Expedition, and the dealership repossessed the truck from Hunter and returned it to the Tenores. Hunter and the Tenores sued Bev Smith Ford claiming violations of the TILA, Florida Motor Vehicle Retail Sales Finance Act (MVRSFA), Fair Credit Reporting Act (FCRA), Equal Credit Opportunity Act (ECOA), Florida Consumer Collection Practices Act (FCCPA), Florida Deceptive and Unfair Trade Practices Act (FDUTPA), and breach of contract. In dismissing these claims, the court found that because of the financing contingency, the RISC was a conditional contract, and the contract was not consummated since no financing was found. Under TILA, the required disclosures must be made prior to consummation, but since the contract was never consummated, no violation of TILA could have occurred. MVRSFA requires that TILA disclosures be given in the contract. The plaintiffs argued that the financing terms were merely illusory because the contract formation was contingent upon obtaining the financing. However, the court found that all the essential terms of the contract had been disclosed before the buyer signed, and the fact that a contingency was placed on the contract did not change the accuracy of the listed essential terms. The plaintiffs also argued that the dealership violated FCRA by obtaining a credit report when it did not intend to act as a creditor, but the court dismissed this claim, stating that obtaining a credit report in order to determine the consumer’s eligibility to enter into the business transaction is a permissible purpose. Under their ECOA claim, the plaintiffs claimed that the dealership was a creditor and should have provided an adverse action notice. The court dismissed this claim as well, holding that the dealership did not regularly participate in credit decisions or set the terms of credit and was therefore not a creditor. The court further found that Bev Smith Ford did not violate FDCPA (no collections were at issue) or the Florida state unfair and deceptive acts or practices statute (the RISC did not violate any laws asserted by plaintiffs), and there was no breach of contract since no contract was formed. For a copy of the opinion, please see http://www.buckleykolar.com/documents/HuntervBevSmithFord.pdf.
Amended Sarbanes-Oxley Statute of Limitations Period Does Not Revive Securities Claims. On April 23, the U.S. Court of Appeals for the Eleventh Circuit affirmed the dismissal of the plaintiffs’ claims brought under sections 12(a) and 15 of the Securities Act of 1933 (“Securities Act”) based upon their failure to timely file the claims prior to the expiration of the three-year statute of limitations period provided in section 13 of the Securities Act. Berman v. Blount Parrish & Co., No. 07-15956 (11th Cir. Apr. 23, 2008). On appeal, the plaintiffs argued for the first time that Section 804(a) of the Sarbanes-Oxley Act of 2002, effective July 30, 2002 amended the statute of limitations period to five years and “revived their claims, thus rendering their complaint timely.” The Court rejected this argument noting other circuit court decisions that reasoned there is no statutory authority or legislative history permitting express retroactivity when retroactive treatment would strip defendants of any affirmative defense they previously possessed and may have reasonably relied upon. Every circuit court that has considered this retroactivity argument in the context of the Sarbanes-Oxley Act has rejected it. For a copy of the opinion, please see http://www.buckleykolar.com/documents/BermanvBlountParrishCo.pdf .
Massachusetts Intermediate Appeals Court Upholds Fremont Preliminary Injunction. On May 2, a Massachusetts appellate judge upheld the trial court's entry of a preliminary injunction (the "Order") requested by the Massachusetts Attorney General (the "Mass AG") against Fremont Investment & Loan ("Fremont") (first reported in InfoBytes Special Alert, Feb. 27, 2008), including the Order's later modification to prohibit future servicing sales by Fremont unless the new servicer agreed to abide by the terms of the Order (reported in InfoBytes Special Alert, May 7, 2008). The Order prohibits Fremont from foreclosing on mortgage loans secured by owner-occupied property without first obtaining permission from the Mass AG or, if the Mass AG does not give permission, the trial court. The trial court declared certain loans presumptively unfair; for those loans, Fremont must give the Mass AG 45 days advance written notice of the proposed foreclosure, identifying why foreclosure is reasonable under the circumstances. The Mass AG has the opportunity to object, and if it does, and Fremont and the Mass AG cannot work out a resolution of the issue, the court will determine whether to approve the foreclosure after considering whether (i) the loan was actually unfair (as opposed to presumptively), (ii) the home is actually occupied by the borrower as the primary residence, (iii) Fremont took reasonable steps to work out the loan, and (iv) there is any fair or reasonable alternative to foreclosure. The appellate justice held that the trial court did not impermissibly expand the scope of Massachusetts's high cost home loan law, Chapter 183C, in looking to that law to determine whether Fremont's conduct was unfair. Rather, the appellate justice held that it "has long been understood that a factor to be considered in determining whether a practice should be deemed unfair is whether it is within the penumbra of some common-law, statutory or other established concept of unfairness." The appellate justice also concluded that the Order was permissible based on the trial court's reliance on the recent federal agency guidance. The appellate justice did not address the fact that this recent federal agency guidance was issued after the loans in question had been originated. The appellate justice also upheld the trial court's determination that the existence of four loan characteristics combined could indicate that a loan is unfair even if the characteristics, on an individual basis, "were and are legal." The appellate justice held that it was not enough that the characteristics were not prohibited by law for the statutory exemption from liability under the Massachusetts unfair practices law—they must be expressly permitted by other laws to be eligible for the exemption. The appellate justice also upheld the trial court's requirement that Fremont obtain permission from either the Mass AG or the court to foreclose and make additional showings if the loan was presumptively unfair. Fremont has until May 15 to appeal the decision of the appellate justice.
Buckley Kolar filed an Amicus Curiae brief before the appellate justice on behalf of the American Financial Services Association, the Consumer Mortgage Coalition, the Housing Policy Council of the Financial Services Roundtable and the Mortgage Bankers Association (for a copy of this brief, please see Amicus Brief filed by Buckley Kolar). A copy of the appellate decision is available at http://www.buckleykolar.com/documents/MassachusettsvFremont.pdf.
HOEPA and Fiduciary Duty Claims Against Mortgage Lender Dismissed but not Disclosure and UDAP Claims. On January 18, the United States Bankruptcy Court for the District of Massachusetts dismissed several claims brought by a borrower against a mortgage lender in the course of the borrower’s bankruptcy proceedings. See In re Vincent, 381 B.R. 564 (Bankr. D. Mass. 2008). The borrower alleged that the lender violated the Home Ownership and Equity Protection Act (HOEPA) by refinancing her mortgage loan without verifying her income or considering her ability to repay the loan. According to the court, however, neither the APR nor the “points and fees” on the loan were sufficiently high to trigger HOEPA’s requirements. Moreover, the borrower’s claim was time barred. The court also dismissed the borrower’s breach of contract and fiduciary duties claims, as the borrower did not identify any way in which the lender breached the contract, and the fact that the borrower “alone placed trust” in the lender was “not enough to transform the relationship into a fiduciary one.” The court, however, granted the borrower leave to amend her Massachusetts Consumer Credit Cost Disclosure Act (MCCCDA) claim, which alleged in relevant part that the APR on the loan was higher than that disclosed by the lender, but did not indicate how the allegedly correct rate was calculated. The court also did not dismiss the borrower’s claims that the lender “knowingly and fraudulently filled out [her] loan application in order to have [her] enter into a transaction she could not afford,” and therefore committed fraud and violated Massachusetts’ UDAP law. For a copy of the opinion, please see http://www.buckleykolar.com/documents/VincentvAmeriquest.pdf.
FCRA Settlement Included Assignment of Indemnity Rights; Insurer May Intervene Before Settlement. On April 29, an Illinois federal district court permitted an insurance company to intervene in a proposed settlement of alleged Fair Credit Reporting Act (FCRA) violations involving a car dealership who, as part of the settlement agreement, assigned its indemnity rights against the insurer. Blair v. Shaver Imports, Inc., 2008 WL 1924888, No. 06-398 (N.D. Ill. Apr. 29, 2008). In this case, the class filed suit against a dealership for wrongfully obtaining prescreened credit reports. The parties entered into a proposed settlement requiring the dealership to confess judgment in the amount of $1 million, the limits of coverage under their insurance policy, and the class released the dealership in return for an assignment of the indemnity rights against the insurance company. The insurance company initially denied coverage and refused to provide a defense, but intervened after the court in a nearly identical case found that the insurance company had a duty to defend the FCRA claims. The plaintiffs objected to the insurance company’s intervention, arguing essentially that the insurance company would be able to defend itself in subsequent litigation. The court found that intervention was proper. It noted, among other things, that (i) no party in the litigation had interests aligned with the insurance company; (ii) there was no discussion regarding the amount of judgment because the dealership simply agreed to confess to the maximum amount of its indemnity rights; and (iii) there had been no informed discussion regarding the validity of the underlying claim or if any of the actions were willful. For a copy of this case, please see http://www.buckleykolar.com/documents/BlairvShaverImports.pdf.
Lender Must Reinvestigate Report of Repossession with No Late Payments. On May 2, a federal district court denied motions for summary judgment involving a wrongful late payment notation on a credit report. Krajewski v. American Honda Finance Corp., 2008 WL 1946839, No. 07-1793, (E.D. Pa. May 2, 2008). On two occasions the consumer notified the consumer reporting agency that notations on her credit report were erroneous. The consumer also alleged that an auto finance company failed to investigate two automated consumer dispute verification (ADCV) forms sent by the consumer reporting agency. The court held that while the first ADCV did not specifically ask for an investigation of the consumer’s payment history, the second ADCV did, and therefore a jury should decide whether the auto finance company violated the Fair Credit Reporting Act (FCRA). The court also held that a jury must decide whether the consumer reporting agency failed to assure maximum accuracy of the credit report by reporting a repossession without knowing whether the payments were late. In this case, the car was repossessed because it had been seized by the police and not because of any delinquency in payments. However, the court dismissed the FCRA claim regarding the failure of the credit bureau to reinvestigate because any reinvestigation would have required the bureau to engage in a costly interpretation of the auto loan contract. The court also denied the repossession company’s motion for summary judgment for violation of the Fair Debt Collection Practices Act (FDCPA), stating that there was a factual dispute over whether the car was “exposed” for seizure within the meaning of the loan agreement. The court also denied summary judgment on claims of breach of contract and violations of the UCC, but granted the auto finance company’s motion for summary judgment on the conversion claim. For a copy of this decision, please see http://www.buckleykolar.com/documents/KrajewskivAmericanHondaFinanceCorp.pdf.
Merely Reporting Account History Does Not Violate Discharge Injunction. A federal district court has granted a defendant’s motion for summary judgment on a plaintiff’s bankruptcy and Fair Credit Reporting Act (FCRA) claims. Davis v. Farm Bureau Bank, FSB, 2008 WL 1924247, No. SA-07-CA-967 (W.D. Tex. Apr. 30, 2008). In this case, the plaintiff filed for Chapter 7 bankruptcy protection and was granted a discharge from bankruptcy in 2001. The defendant Farm Bureau Bank was a creditor in the bankruptcy proceedings. In 2007, the plaintiff checked his consumer credit report and noticed that the defendant’s debt was listed as having been charged off as bad debt in 2006 and that the credit grantor had closed the account. The defendant first learned about the entry on the credit report when the plaintiff filed suit, and it immediately worked to correct the entry. At no time after the bankruptcy discharge did the defendant attempt to collect the debt. The plaintiff moved to hold the defendant in contempt of the bankruptcy court order. The court granted summary judgment in favor of the defendant on this claim, because the plaintiff presented no evidence that the bank knowingly violated a specific court order. The plaintiff also claimed that the bank violated FCRA by failing to correct the credit report entries. The court also rejected this claim, finding that the plaintiff only notified the creditor of the alleged error by filing suit and noting that FCRA only provides a private right of action for failing to reinvestigate an item that the consumer has disputed with the credit bureau. The court also rejected the plaintiff’s state-law tort claim for unreasonable collection efforts, finding that the defendant had not engaged in any collection effort. For a copy of the opinion, please see http://www.buckleykolar.com/documents/DavisvFarmBureauBank.pdf.
No TILA Disclosures Required If Contract Never Consummated. On April 29, the U.S. District Court for the Southern District of Florida granted Bev Smith Ford’s motion to dismiss federal and state claims brought by Eric Hunter, Christopher Tenore and Michelle Tenore based on an auto dealer’s conditional sales contract. Hunter v. Bev Smith Ford, LLC, 2008 WL 1925265, No. 07-80665-CIV (S.C.Fla. April 29, 2008). The Tenores purchased a Ford Expedition from Bev Smith Ford. At the time of purchase, the dealership completed a retail installment sales contract (RISC), which contained the financing disclosures required by the Truth in Lending Act (TILA). The RISC also contained a clause stating that the dealership does not provide financing, and that if a lender could not be found, the dealership could rescind the contract. The Tenores traded in their Ford pickup truck, and Ed Hunter purchased it the next day, signing a RISC with the same financing contingency and disclosures. A few days later, Bev Smith Ford rescinded the contract, the Tenores returned the Expedition, and the dealership repossessed the truck from Hunter and returned it to the Tenores. Hunter and the Tenores sued Bev Smith Ford claiming violations of the TILA, Florida Motor Vehicle Retail Sales Finance Act (MVRSFA), Fair Credit Reporting Act (FCRA), Equal Credit Opportunity Act (ECOA), Florida Consumer Collection Practices Act (FCCPA), Florida Deceptive and Unfair Trade Practices Act (FDUTPA), and breach of contract. In dismissing these claims, the court found that because of the financing contingency, the RISC was a conditional contract, and the contract was not consummated since no financing was found. Under TILA, the required disclosures must be made prior to consummation, but since the contract was never consummated, no violation of TILA could have occurred. MVRSFA requires that TILA disclosures be given in the contract. The plaintiffs argued that the financing terms were merely illusory because the contract formation was contingent upon obtaining the financing. However, the court found that all the essential terms of the contract had been disclosed before the buyer signed, and the fact that a contingency was placed on the contract did not change the accuracy of the listed essential terms. The plaintiffs also argued that the dealership violated FCRA by obtaining a credit report when it did not intend to act as a creditor, but the court dismissed this claim, stating that obtaining a credit report in order to determine the consumer’s eligibility to enter into the business transaction is a permissible purpose. Under their ECOA claim, the plaintiffs claimed that the dealership was a creditor and should have provided an adverse action notice. The court dismissed this claim as well, holding that the dealership did not regularly participate in credit decisions or set the terms of credit and was therefore not a creditor. The court further found that Bev Smith Ford did not violate FDCPA (no collections were at issue) or the Florida state unfair and deceptive acts or practices statute (the RISC did not violate any laws asserted by plaintiffs), and there was no breach of contract since no contract was formed. For a copy of the opinion, please see http://www.buckleykolar.com/documents/HuntervBevSmithFord.pdf.
Amended Sarbanes-Oxley Statute of Limitations Period Does Not Revive Securities Claims. On April 23, the U.S. Court of Appeals for the Eleventh Circuit affirmed the dismissal of the plaintiffs’ claims brought under sections 12(a) and 15 of the Securities Act of 1933 (“Securities Act”) based upon their failure to timely file the claims prior to the expiration of the three-year statute of limitations period provided in section 13 of the Securities Act. Berman v. Blount Parrish & Co., No. 07-15956 (11th Cir. Apr. 23, 2008). On appeal, the plaintiffs argued for the first time that Section 804(a) of the Sarbanes-Oxley Act of 2002, effective July 30, 2002 amended the statute of limitations period to five years and “revived their claims, thus rendering their complaint timely.” The Court rejected this argument noting other circuit court decisions that reasoned there is no statutory authority or legislative history permitting express retroactivity when retroactive treatment would strip defendants of any affirmative defense they previously possessed and may have reasonably relied upon. Every circuit court that has considered this retroactivity argument in the context of the Sarbanes-Oxley Act has rejected it. For a copy of the opinion, please see http://www.buckleykolar.com/documents/BermanvBlountParrishCo.pdf.
FCRA Settlement Included Assignment of Indemnity Rights; Insurer May Intervene Before Settlement. On April 29, an Illinois federal district court permitted an insurance company to intervene in a proposed settlement of alleged Fair Credit Reporting Act (FCRA) violations involving a car dealership who, as part of the settlement agreement, assigned its indemnity rights against the insurer. Blair v. Shaver Imports, Inc., 2008 WL 1924888, No. 06-398 (N.D. Ill. Apr. 29, 2008). In this case, the class filed suit against a dealership for wrongfully obtaining prescreened credit reports. The parties entered into a proposed settlement requiring the dealership to confess judgment in the amount of $1 million, the limits of coverage under their insurance policy, and the class released the dealership in return for an assignment of the indemnity rights against the insurance company. The insurance company initially denied coverage and refused to provide a defense, but intervened after the court in a nearly identical case found that the insurance company had a duty to defend the FCRA claims. The plaintiffs objected to the insurance company’s intervention, arguing essentially that the insurance company would be able to defend itself in subsequent litigation. The court found that intervention was proper. It noted, among other things, that (i) no party in the litigation had interests aligned with the insurance company; (ii) there was no discussion regarding the amount of judgment because the dealership simply agreed to confess to the maximum amount of its indemnity rights; and (iii) there had been no informed discussion regarding the validity of the underlying claim or if any of the actions were willful. For a copy of this case, please see http://www.buckleykolar.com/documents/BlairvShaverImports.pdf.
Iowa Governor Signs Security Freeze Bill. On April 11, the Iowa Governor, Chester Culver, signed S.F. 2277 requiring consumer reporting agencies to comply with a consumer’s request to place a security freeze on the consumer’s credit report. Entities that are unable to obtain a person’s credit report due to a security freeze are permitted to treat credit applications as incomplete. The law becomes effective on July 1, 2008. For a copy of the enrolled bill, please see http://www.buckleykolar.com/documents/IASF2277.pdf.
Minnesota Amends Foreclosure Law and Authorizes Electronic Document Recording. On April 25, Minnesota Governor Tim Pawlenty signed a bill (H.F. 3516) to amend Minnesota’s foreclosure law and authorize electronic recording of documents. The new law requires the name of the transaction agent, mortgage servicer, and mortgage originator to be recorded on the notice of pendency, notice of sale, and certificate of sale. The new law also creates a Statewide Foreclosure Data Collection group to study the most efficient and cost-effective way to develop and implement an electronic filing system for foreclosure data. Lastly, the new law authorizes electronic recording and signing of documents in connection with any law that requires, as a condition for recording, respectively (i) that a document be an original, on paper, or another tangible medium, or in writing, or (ii) that a document be signed. The foreclosure notice requirements become effective August 1, 2008; the Statewide Foreclosure Data Collection group electronic filing study is effective immediately; and the authorization for electronic recording and signing of documents is effective July 1, 2008. For a copy of the bill, please see http://www.buckleykolar.com/documents/MNHF3516.pdf.
Iowa Governor Signs Security Freeze Bill. On April 11, the Iowa Governor, Chester Culver, signed S.F. 2277 requiring consumer reporting agencies to comply with a consumer’s request to place a security freeze on the consumer’s credit report. Entities that are unable to obtain a person’s credit report due to a security freeze are permitted to treat credit applications as incomplete. The law becomes effective on July 1, 2008. For a copy of the enrolled bill, please see http://www.buckleykolar.com/documents/IASF2277.pdf.
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