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InfoBytes
CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS
Subprime Mortgage Lending Webinar – May 31 – Jerry Buckley and Matthew Previn will participate in a webcast entitled “Subprime Mortgage Lending: Managing Legal and Enforcement Risks” offered through West LegalWorks on May 31. The 90-minute discussion, second of a three part series on the subprime mortgage market, will discuss regulatory changes and litigation challenges posed by the growing wave of defaults by subprime borrowers. Among the topics to be discussed will be (i) recent developments in litigation involving subprime mortgages, (ii) regulatory response to subprime distress, and (iii) bankruptcy issues arising in the subprime context. Mr. Buckley and John Kromer spoke last month in the first installment of the series entitled “Legal Issues Associated with Managing Subprime Mortgage Portfolios.”
Topics – Covered This Week (Click to View)
FEDERAL ISSUES
Frank and Dingell Call for Stronger Federal UDAP Protection. On May 11, Rep. Barney Frank (D – Mass.), Chairman of the House Financial Services Committee and Rep. John Dingell (D – Mich.), Chairman of the House Energy and Commerce Committee, sent a joint letter to the federal banking agencies (Federal Reserve, OTS, OCC, and FDIC) and the Federal Trade Commission (FTC) demanding better policies and regulations to protect financial services consumers from unfair and deceptive acts and practices. The chairmen demanded steps to repair the existing “disjointed system that leaves many consumers with no idea where to turn when they have problems,” especially, they pointed out, in the wake of Watters v. Wachovia which “significantly reduced the application of state laws and enforcement over a large part of the financial sector” (for more information on Watters, see the April 17th InfoBytes Special Alert). Arguing that clear authority for such rulemaking existed under the Federal Trade Commission Act (FTC Act) and the Home Ownership and Equity Protection Act (HOEPA), the chairmen called on the agencies to adopt rules (i) “clearly defining unfair or deceptive acts and practices and mandatory requirements to prevent them” and (ii) have each agency use its authority under the FTC Act to “establish a consumer affairs division to receive, and take appropriate action upon, complaints.” For full text of the letter, please see http://www.house.gov/apps/list/press/financialsvcs_dem/press051107.shtml.
Proposed FHA Rule Prohibits Certain Downpayment "Gifts." On May 11, the Department of Housing and Urban Development (HUD) published a proposed rule specifying which forms of downpayment "gift" assistance are permissible for mortgages insured by the Federal Housing Administration (FHA). The rule provides that downpayment "gifts" from a family member, a governmental or public agency, a borrower's employer or labor union, or certain charitable or educational organizations are permissible. However, downpayment "gift" assistance from a seller of real property, as well as from others that may financially benefit from the transaction (such as a family member of the seller, a real estate agent, or a broker) is not permissible. The rule similarly prohibits downpayment "gift" assistance from a third party or entity that is reimbursed by a seller. HUD stated that the proposed restrictions are, in part, in response to instances in which a seller used a charitable organization's downpayment assistance program and then, after closing the loan, paid a "charitable donation" or "service fee" to the organization, effectively allowing the “gift” to serve as an inducement to the purchaser. Comments are due July 10, 2007. To view the proposed rule, please visit http://www.hudclips.org/sub_nonhud/cgi/pdf/9067.pdf.
Security Measures Taken Regarding Access to the NSLDS. On April 27, the Department of Education issued a press release announcing renewed access beginning April 30 to the National Student Loan Data System (NSLDS), which was shut down earlier that month over privacy concerns (reported in the April 27th issue of InfoBytes). The press release outlines several changes to the system to protect student privacy, including (i) requiring all searches to include, in addition to the borrower’s social security number, date of birth, and first name, (ii) suspending new on-line registrations for access to the NSLDS, and (iii) requiring users to input a random computer-generated letter and/or number sequence in order to access the database. The following week, Senator Ted Kennedy (D – Mass.), whose initial complaint led to the system’s suspension, issued a press release expressing “cautious optimism” that the changes would make the system more secure. The full press release is available at http://www.ifap.ed.gov/eannouncements/0427NSLDSAccess.html.
STATE ISSUES
Alaska Legislature Passes Broker, Lender, Loan Originator Licensing Law. On May 14, the Alaska House of Representatives approved, by unanimous consent, HB 162 which would create licensing scheme for mortgage lenders, mortgage brokers, and individual loan originators. Lenders and brokers would be required to become licensed with the Alaska Department of Commerce, Community, and Economic Development, as would individual loan originators, who are not allowed to work for more than one licensee. Annual reports would be required of all licensees, as well as biennial renewal fees, and loan originators would be required to complete 24 hours of regulator approved continuing education every two years. The new law would be effective on July 1, 2008, but persons making or brokering loans on that date would not be required to be licensed until March 1, 2009. For more on the status of the bill, which has been sent to the governor, please see http://www.legis.state.ak.us/basis/get_bill.asp?session=25&bill=Hb+162&submit=Display+Bill+Root.
California Proposes More Stringent Guidance on Non-Traditional Mortgages. On May 4, the California Department of Corporations issued proposed rules adopting, and going far beyond, the guidance on non-traditional mortgages issued by the CSBS/AARMR last year and subsequently adopted by many states (see the November 17, 2006 issue of InfoBytes). The proposed guidance would apply to licensees under the California Residential Mortgage Lending Act and the Finance Lender Law. Licensees would be required to implement best risk-management practices and to file an annual Nontraditional Mortgage Loan Survey regarding risk management, internal controls, and consumer complaints on the subject of these mortgage products. The proposed rules would also require specific disclosures to be given and records to be kept by licensees regarding non-traditional products. Licensees would also be subject to rules on false, misleading, and deceptive advertising for non-traditional products. California’s approach to adopting guidance in this area differs from the informal approach taken by most states, which have adopted the CSBS/AARMA Guidance verbatim, often as “best-practices” rather than formal rulemaking. Comments must be submitted to the Department of Corporations by July 2, 2007. For more information on the proposed guidance, please see http://www.corp.ca.gov/pol/rm/rm.htm#0107.
Minnesota Enacts Bill Adding Private Right of Action to Mortgage Law. On May 14, Minnesota Governor Tim Pawlenty signed S.F. 0988, a bill adding, among other things, a private right of action to the mortgage lending statute. This follows a major anti-predatory lending law (H.F. 1004) signed by the governor last month (reported in the April 27th issue of InfoBytes). SF 0988 establishes the right for individuals and companies to sue for actual, statutory, and punitive damages, as well as attorney’s fees, if they have been wronged by improper lending practices under several sections of the mortgage regulation statue, including in part, those (i) governing disclosures to a borrower, (ii) requiring income verification, and (iii) prohibiting the making of a loan without a “net tangible benefit” to the borrower. The new bill also, among other things, prohibits prepayment penalties on “subprime loans” which are defined as (i) an adjustable rate first lien loan with an APR more than two percentage points above the yield of a comparable U.S. Treasury Bill, (ii) a fixed rate first lien loan with an APR more than three percentage points above the treasury yield, or (iii) a subordinate lien loan with an APR five percentage points above the treasury yield. The bill also adds criminal penalties for mortgage fraud. This new law is effective on August 1, 2007. For more information on this bill, please see http://ros.leg.mn/revisor/pages/search_status/status_detail.php?b=House&f=SF0988&ssn=0&y=2007.
COURTS
Under TILA, Rescission Inappropriate Where Borrowers Cannot Tender Loan Proceeds. On May 14, the Fourth Circuit held that TILA does not require a mortgage lender to unconditionally release a security interest, and that rescission is inappropriate, where the borrowers seeking rescission are unable to tender the loan proceeds. American Mortgage Network, Inc. v. Shelton, No. 06-1576, 2007 U.S. App. LEXIS 11275 (4th Cir. May 14, 2007). Rather than returning the net loan proceeds in order to unwind the transaction, the borrowers offered to sell their home to the lender for the difference between the appraised value and the net loan proceeds. The lender declined, upon which the borrowers’ counsel notified the lender that it had forfeited the loan proceeds by refusing to unconditionally release its security interest within 20 days of cancellation. The trial court ruled in favor of the lender, and the Fourth Circuit affirmed, noting that the equitable goal of rescission under TILA is to restore the parties to the “status quo ante.” The Fourth Circuit adopted the view that “unilateral notification of cancellation does not automatically void the loan contract.” Further, according to the court, “[o]nce the trial judge… determined that the [borrowers] were unable to tender the loan proceeds, the remedy of unconditional rescission was inappropriate.” The court also concluded that the trial judge’s consideration of certain inequitable conduct by the borrowers was appropriate, as the right to rescind is subject to equitable considerations. For a copy of the opinion, please see http://pacer.ca4.uscourts.gov/opinion.pdf/061576.P.pdf.
Court Upholds Mailer That Discussed Range of Amounts and Rates as FCRA Firm Offer. The U.S. District Court for the Southern District of New York upheld as a valid Fair Credit Reporting Act (FCRA) firm offer a mailer soliciting customers for a home equity line of credit that showed a range of credit limits, depending on the borrower’s equity in the home, quoted a rate of 8.6% that “is available to our most creditworthy borrowers,” and also stated that interest rates could range from 3.75% to 18%. Gross v. Washington Mutual, Inc., No. 06 Civ. 4340, 2007 WL 1404435 (S.D.N.Y. May 10, 2007). Citing the opinion of another judge in the Southern District of New York in Nasca v. J.P. Morgan Chase Bank, N.A. (see the March 16th issue of InfoBytes), the court said that the plaintiff’s claim that the mailer must show the precise rate and amount of credit “find[s] no support within the text of the FCRA,” and also rejected the “value” test for firm offers articulated by the U.S. Court of Appeals for the Seventh Circuit in Cole v. U.S. Capital (see the December 3, 2004 issue of InfoBytes). For a copy of the decision, please contact .
Defendant Must Prove It Did Not Waive Privilege in FCRA Firm Offer Suit. A federal district court has ruled that the defendant must produce evidence to prove that it did not waive its attorney-client privilege in a Fair Credit Reporting Act (FCRA) “firm offer of credit” class action lawsuit. Claffey v. River Oaks Hyundai, No. 06 C 310 (N.D. Ill. May 9, 2007) (for more on this suit, see the December 15, 2006 issue of InfoBytes). In this case, the plaintiffs alleged that the defendants, Capital One Auto Finance, Inc. and several automobile dealers, accessed the plaintiffs’ credit information without their permission and without a legal basis. In its filings with the court, Capital One claimed that it did not “willfully” violate FCRA and had followed “reasonable procedures” to comply with the law. The plaintiffs argued that Capital One waived its attorney-client privilege by stating this defense, since the “willfulness” defense arose as a result of the advice of attorneys. The court rejected this argument as to the “willfulness” issue but agreed with the plaintiffs’ assertion that the defendants may have waived their attorney-client privilege as to their claim that they followed “reasonable procedures” to ensure compliance with FCRA in resolving consumer disputes. The court stated that if the defendant “actually [relied] on any documents or other evidence that would tend to suggest that its procedures included consultation with counsel, it will be deemed to have waived its attorney-client privilege” as to the “reasonable procedures” issue. The court ordered Capital One to produce the evidence it will rely on in its “reasonable procedures” contention so that the court can then decide whether it has waived its privilege. For a copy of the case, please contact .
No CDA Immunity for Operator of Roommate Matching Website. On May 15, the Ninth Circuit Court of Appeals ruled that a website operator that distributes member profiles generated using form questionnaires was not entitled to immunity under the Communications Decency Act (CDA). Fair Housing Council of San Fernando Valley v. Roommate.com, LLC, Appeal Nos. 04-56916 & 04-57173 (9th Cir., opinion issued May 15, 2007). The underlying lawsuit alleged that Roommate.com violated the Fair Housing Act (FHA) and various state laws by generating, publishing, and electronically distributing member profiles generated from questionnaire responses. The questionnaire included “drop-down” and “select-a-box” responses, the content of which was created by Roommate.com, as well as an open-ended “Additional Comments” section in which members could include any information they choose. The district court held that Section 230(c) of the CDA, which grants broad immunity from liability to providers of interactive computer services for content created by third parties, barred the FHA claim. In a divided opinion, the appellate panel reversed, holding that Roommate.com was not immune from liability for the content created by responses to the “drop-down” and “select-a-box” portions of the questionnaire because Roommate.com “channeled” the information through its compatible preferences search function and e-mail notifications function that excluded incompatible profiles. According to the panel, this made Roommate.com “more than a passive pass-through of information provided by others…. By categorizing, channeling and limiting the distribution of users’ profiles, Roommate provides an additional layer of information that it is ‘responsible’ at least ‘in part’ for creating or developing.” On the other hand, a majority of the panel also held that Roommate.com was immune from liability for publishing the content created by members in the “Additional Comments” portion of their profiles, because Roommate.com’s involvement in that content was insufficient to make it a content provider. The panel was careful to distinguish that, while these activities eliminated CDA immunity, they did not necessarily violate the FHA – whether or not the activities described violate the FHA was a question for the district court on remand. For a copy of this decision, please contact .
6th Circuit Reverses District Court, Reduces Punitive Damage Award in FCRA Case. This week, the U.S. Circuit Court of Appeals for the Sixth Circuit reversed a District Court ruling that granted a single consumer over $2.6 million in punitive damages for a violation of the Fair Credit Reporting Act ("FCRA"). Bach v. First Union Nat'l Bank, No. 06-3660, 2007 WL 1412313 (6th Cir. 2007). The defendant, First Union National Bank, claimed that the punitive damage award of $2,628,600 in addition to a $400,000 compensatory damage award violated the Due Process Clause of the 14th Amendment, and the Sixth Circuit agreed. Relying on State Farm Mutual Automobile Inssurance Co. v. Campbell, 538 U.S. 408 (2003), a Supreme Court decision that sets forth specific factors to consider in determining whether a punitive damage award offends the Constitution, the Sixth Circuit found that the punitive award was unjustified. Specifically, the Sixth Circuit court held both the level of reprehensibility of the defendant's misconduct and the disparity between the actual and potential harm to the victim and the amount of the award counseled for a reduction of the amount. While warning that determining the constitutionality of punitive awards is a "highly fact-intensive exercise," the Sixth Circuit stated that it would establish a constitutional maximum punitive damage amount to be applied by the trial court in this case. Using "guideposts" from the State Farm and other Supreme Court decisions, the court settled on a 1:1 ratio of punitive to compensatory damages (i.e., no more than $400,000). For a copy of this decision, please see http://www.ca6.uscourts.gov/opinions.pdf/07a0176p-06.pdf.
“Sliding-Scale” Jurisdictional Test for Internet Solicitations Rejected. The 5th District Appellate Court of Illinois held that a defendant’s website did not subject it to general jurisdiction in Illinois. Howard v. Missouri Bone and Joint Center, Inc., No. 5-05-0476 (App. Ct. Ill., 5th Dist., April 24, 2007). The court reached this conclusion despite rejecting the emerging “sliding-scale” test, which bases the exercise of jurisdiction on the “level of interactivity” and “commercial nature of the exchange of information” on the website (citing Zippo Manufacturing Co. v. Zippo Dot com, Inc., 952 F. Supp. 1119, 1124 (W.D. Pa. 1997). The plaintiff in Howard argued that, because the website included online appointment requests, patient surveys, and a link to contact the defendant, it was interactive enough to subject the defendant to general jurisdiction in Illinois. The Appellate Court disagreed, holding the level of interactivity to be irrelevant. Instead, the court used the “traditional” jurisdictional test – whether the defendant had “continuous and systematic general business contacts” with Illinois or was “carrying on business activity in Illinois, not occasionally or casually, but with a fair measure of permanence and continuity” (citations omitted). The court likened the website content to advertising or solicitation of business, activities that had never been found to satisfy the traditional test for general jurisdiction. A copy of this decision is available here.
Federal Court Rules on Sufficiency of “Materially False” CAN-SPAM Allegations. The U.S. District Court for the District of Arizona recently held that an indictment that describes the message content and sending patterns of an unsolicited e-mail sent in violation of the CAN-SPAM Act sufficiently alleges the violation to allow the defendant to formulate a defense. U.S. v. Clason, No. 05-870 (D. Ariz. Apr. 24, 2007). The defendant, charged with sending an unsolicited e-mail with a "materially false" header and domain name information, moved for the government to provide a bill of particulars with regard to three counts of the indictment. In denying the motion, the court reasoned that, in the relative absence of case law, the defendant could rely on the statute's definition of what acts constitute "material falsification" in order to better understand the charges. A copy of this opinion is available here.
MISCELLANY
More Than 250 Counties Have Adopted Electronic Property Recording Systems. According to the Property Records Industry Association (PRIA), more than 250 counties across the nation have implemented electronic recording systems for land records. PRIA maintains a full list of the counties whose eRecording implementations have been verified to meet PRIA standards. For PRIA’s official press release, see http://www.pria.us/pressrelease/2007/PRIARelease/250eRecordingCountiesPressRelease.pdf.
MBA Conference on Electronic Mortgages. The Mortgage Bankers Association (MBA) is holding an eMortgage Investor Summit on Sunday, May 20th in conjunction with the MBA Secondary Marketing Conference at the Marriott Marquis in New York City. Buckley Kolar LLP is one of the sponsors of the Summit and is a participant in the eMortgage Adoption Task Force. Margo Tank will be attending for Buckley Kolar LLP.
FIRM NEWS
Jeff Naimon and Kirk Jensen will be speaking 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. Mr. Naimon will be on the RESPA panel and Mr. Jensen will be speaking on arbitration. For more information, or to register, go to http://www.americanconference.com/Litigation/creditlit.htm.
Attorneys from Buckley Kolar recently presented hour-long audio seminars to banks and financial institutions across the country through Alex eSolutions, a division of A.S. Pratt/Sheshunoff Information Services. The recent seminars include (i) Jeffrey Naimon, “Recent Trends in Loan File Review” (May 10, 2007) and (ii) John P. Kromer and Clinton Rockwell, “Non-Traditional Mortgage Loans and Federal and State Agency Guidance” (April 19, 2007). To learn more about, or purchase recordings of, the A.S. Pratt Audio Conference Series, please see http://www.aspratt.com/audio/wmp/.
Frank and Dingell Call for Stronger Federal UDAP Protection. On May 11, Rep. Barney Frank (D – Mass.), Chairman of the House Financial Services Committee and Rep. John Dingell (D – Mich.), Chairman of the House Energy and Commerce Committee, sent a joint letter to the federal banking agencies (Federal Reserve, OTS, OCC, and FDIC) and the Federal Trade Commission (FTC) demanding better policies and regulations to protect financial services consumers from unfair and deceptive acts and practices. The chairmen demanded steps to repair the existing “disjointed system that leaves many consumers with no idea where to turn when they have problems,” especially, they pointed out, in the wake of Watters v. Wachovia which “significantly reduced the application of state laws and enforcement over a large part of the financial sector” (for more information on Watters, see the April 17th InfoBytes Special Alert). Arguing that clear authority for such rulemaking existed under the Federal Trade Commission Act (FTC Act) and the Home Ownership and Equity Protection Act (HOEPA), the chairmen called on the agencies to adopt rules (i) “clearly defining unfair or deceptive acts and practices and mandatory requirements to prevent them” and (ii) have each agency use its authority under the FTC Act to “establish a consumer affairs division to receive, and take appropriate action upon, complaints.” For full text of the letter, please see http://www.house.gov/apps/list/press/financialsvcs_dem/press051107.shtml.
Alaska Legislature Passes Broker, Lender, Loan Originator Licensing Law. On May 14, the Alaska House of Representatives approved, by unanimous consent, HB 162 which would create licensing scheme for mortgage lenders, mortgage brokers, and individual loan originators. Lenders and brokers would be required to become licensed with the Alaska Department of Commerce, Community, and Economic Development, as would individual loan originators, who are not allowed to work for more than one licensee. Annual reports would be required of all licensees, as well as biennial renewal fees, and loan originators would be required to complete 24 hours of regulator approved continuing education every two years. The new law would be effective on July 1, 2008, but persons making or brokering loans on that date would not be required to be licensed until March 1, 2009. For more on the status of the bill, which has been sent to the governor, please see http://www.legis.state.ak.us/basis/get_bill.asp?session=25&bill=Hb+162&submit=Display+Bill+Root.
California Proposes More Stringent Guidance on Non-Traditional Mortgages. On May 4, the California Department of Corporations issued proposed rules adopting, and going far beyond, the guidance on non-traditional mortgages issued by the CSBS/AARMR last year and subsequently adopted by many states (see the November 17, 2006 issue of InfoBytes). The proposed guidance would apply to licensees under the California Residential Mortgage Lending Act and the Finance Lender Law. Licensees would be required to implement best risk-management practices and to file an annual Nontraditional Mortgage Loan Survey regarding risk management, internal controls, and consumer complaints on the subject of these mortgage products. The proposed rules would also require specific disclosures to be given and records to be kept by licensees regarding non-traditional products. Licensees would also be subject to rules on false, misleading, and deceptive advertising for non-traditional products. California’s approach to adopting guidance in this area differs from the informal approach taken by most states, which have adopted the CSBS/AARMA Guidance verbatim, often as “best-practices” rather than formal rulemaking. Comments must be submitted to the Department of Corporations by July 2, 2007. For more information on the proposed guidance, please see http://www.corp.ca.gov/pol/rm/rm.htm#0107.
Minnesota Enacts Bill Adding Private Right of Action to Mortgage Law. On May 14, Minnesota Governor Tim Pawlenty signed S.F. 0988, a bill adding, among other things, a private right of action to the mortgage lending statute. This follows a major anti-predatory lending law (H.F. 1004) signed by the governor last month (reported in the April 27th issue of InfoBytes). SF 0988 establishes the right for individuals and companies to sue for actual, statutory, and punitive damages, as well as attorney’s fees, if they have been wronged by improper lending practices under several sections of the mortgage regulation statue, including in part, those (i) governing disclosures to a borrower, (ii) requiring income verification, and (iii) prohibiting the making of a loan without a “net tangible benefit” to the borrower. The new bill also, among other things, prohibits prepayment penalties on “subprime loans” which are defined as (i) an adjustable rate first lien loan with an APR more than two percentage points above the yield of a comparable U.S. Treasury Bill, (ii) a fixed rate first lien loan with an APR more than three percentage points above the treasury yield, or (iii) a subordinate lien loan with an APR five percentage points above the treasury yield. The bill also adds criminal penalties for mortgage fraud. This new law is effective on August 1, 2007. For more information on this bill, please see http://ros.leg.mn/revisor/pages/search_status/status_detail.php?b=House&f=SF0988&ssn=0&y=2007.
Under TILA, Rescission Inappropriate Where Borrowers Cannot Tender Loan Proceeds. On May 14, the Fourth Circuit held that TILA does not require a mortgage lender to unconditionally release a security interest, and that rescission is inappropriate, where the borrowers seeking rescission are unable to tender the loan proceeds. American Mortgage Network, Inc. v. Shelton, No. 06-1576, 2007 U.S. App. LEXIS 11275 (4th Cir. May 14, 2007). Rather than returning the net loan proceeds in order to unwind the transaction, the borrowers offered to sell their home to the lender for the difference between the appraised value and the net loan proceeds. The lender declined, upon which the borrowers’ counsel notified the lender that it had forfeited the loan proceeds by refusing to unconditionally release its security interest within 20 days of cancellation. The trial court ruled in favor of the lender, and the Fourth Circuit affirmed, noting that the equitable goal of rescission under TILA is to restore the parties to the “status quo ante.” The Fourth Circuit adopted the view that “unilateral notification of cancellation does not automatically void the loan contract.” Further, according to the court, “[o]nce the trial judge… determined that the [borrowers] were unable to tender the loan proceeds, the remedy of unconditional rescission was inappropriate.” The court also concluded that the trial judge’s consideration of certain inequitable conduct by the borrowers was appropriate, as the right to rescind is subject to equitable considerations. For a copy of the opinion, please see http://pacer.ca4.uscourts.gov/opinion.pdf/061576.P.pdf.
Court Upholds Mailer That Discussed Range of Amounts and Rates as FCRA Firm Offer. The U.S. District Court for the Southern District of New York upheld as a valid Fair Credit Reporting Act (FCRA) firm offer a mailer soliciting customers for a home equity line of credit that showed a range of credit limits, depending on the borrower’s equity in the home, quoted a rate of 8.6% that “is available to our most creditworthy borrowers,” and also stated that interest rates could range from 3.75% to 18%. Gross v. Washington Mutual, Inc., No. 06 Civ. 4340, 2007 WL 1404435 (S.D.N.Y. May 10, 2007). Citing the opinion of another judge in the Southern District of New York in Nasca v. J.P. Morgan Chase Bank, N.A. (see the March 16th issue of InfoBytes), the court said that the plaintiff’s claim that the mailer must show the precise rate and amount of credit “find[s] no support within the text of the FCRA,” and also rejected the “value” test for firm offers articulated by the U.S. Court of Appeals for the Seventh Circuit in Cole v. U.S. Capital (see the December 3, 2004 issue of InfoBytes). For a copy of the decision, please contact .
6th Circuit Reverses District Court, Reduces Punitive Damage Award in FCRA Case. This week, the U.S. Circuit Court of Appeals for the Sixth Circuit reversed a District Court ruling that granted a single consumer over $2.6 million in punitive damages for a violation of the Fair Credit Reporting Act ("FCRA"). Bach v. First Union Nat'l Bank, No. 06-3660, 2007 WL 1412313 (6th Cir. 2007). The defendant, First Union National Bank, claimed that the punitive damage award of $2,628,600 in addition to a $400,000 compensatory damage award violated the Due Process Clause of the 14th Amendment, and the Sixth Circuit agreed. Relying on State Farm Mutual Automobile Inssurance Co. v. Campbell, 538 U.S. 408 (2003), a Supreme Court decision that sets forth specific factors to consider in determining whether a punitive damage award offends the Constitution, the Sixth Circuit found that the punitive award was unjustified. Specifically, the Sixth Circuit court held both the level of reprehensibility of the defendant's misconduct and the disparity between the actual and potential harm to the victim and the amount of the award counseled for a reduction of the amount. While warning that determining the constitutionality of punitive awards is a "highly fact-intensive exercise," the Sixth Circuit stated that it would establish a constitutional maximum punitive damage amount to be applied by the trial court in this case. Using "guideposts" from the State Farm and other Supreme Court decisions, the court settled on a 1:1 ratio of punitive to compensatory damages (i.e., no more than $400,000). For a copy of this decision, please see http://www.ca6.uscourts.gov/opinions.pdf/07a0176p-06.pdf.
No CDA Immunity for Operator of Roommate Matching Website. On May 15, the Ninth Circuit Court of Appeals ruled that a website operator that distributes member profiles generated using form questionnaires was not entitled to immunity under the Communications Decency Act (CDA). Fair Housing Council of San Fernando Valley v. Roommate.com, LLC, Appeal Nos. 04-56916 & 04-57173 (9th Cir., opinion issued May 15, 2007). The underlying lawsuit alleged that Roommate.com violated the Fair Housing Act (FHA) and various state laws by generating, publishing, and electronically distributing member profiles generated from questionnaire responses. The questionnaire included “drop-down” and “select-a-box” responses, the content of which was created by Roommate.com, as well as an open-ended “Additional Comments” section in which members could include any information they choose. The district court held that Section 230(c) of the CDA, which grants broad immunity from liability to providers of interactive computer services for content created by third parties, barred the FHA claim. In a divided opinion, the appellate panel reversed, holding that Roommate.com was not immune from liability for the content created by responses to the “drop-down” and “select-a-box” portions of the questionnaire because Roommate.com “channeled” the information through its compatible preferences search function and e-mail notifications function that excluded incompatible profiles. According to the panel, this made Roommate.com “more than a passive pass-through of information provided by others…. By categorizing, channeling and limiting the distribution of users’ profiles, Roommate provides an additional layer of information that it is ‘responsible’ at least ‘in part’ for creating or developing.” On the other hand, a majority of the panel also held that Roommate.com was immune from liability for publishing the content created by members in the “Additional Comments” portion of their profiles, because Roommate.com’s involvement in that content was insufficient to make it a content provider. The panel was careful to distinguish that, while these activities eliminated CDA immunity, they did not necessarily violate the FHA – whether or not the activities described violate the FHA was a question for the district court on remand. For a copy of the decision, please contact .
Proposed FHA Rule Prohibits Certain Downpayment "Gifts." On May 11, the Department of Housing and Urban Development (HUD) published a proposed rule specifying which forms of downpayment "gift" assistance are permissible for mortgages insured by the Federal Housing Administration (FHA). The rule provides that downpayment "gifts" from a family member, a governmental or public agency, a borrower's employer or labor union, or certain charitable or educational organizations are permissible. However, downpayment "gift" assistance from a seller of real property, as well as from others that may financially benefit from the transaction (such as a family member of the seller, a real estate agent, or a broker) is not permissible. The rule similarly prohibits downpayment "gift" assistance from a third party or entity that is reimbursed by a seller. HUD stated that the proposed restrictions are, in part, in response to instances in which a seller used a charitable organization's downpayment assistance program and then, after closing the loan, paid a "charitable donation" or "service fee" to the organization, effectively allowing the “gift” to serve as an inducement to the purchaser. Comments are due July 10, 2007. To view the proposed rule, please visit http://www.hudclips.org/sub_nonhud/cgi/pdf/9067.pdf.
Frank and Dingell Call for Stronger Federal UDAP Protection. On May 11, Rep. Barney Frank (D – Mass.), Chairman of the House Financial Services Committee and Rep. John Dingell (D – Mich.), Chairman of the House Energy and Commerce Committee, sent a joint letter to the federal banking agencies (Federal Reserve, OTS, OCC, and FDIC) and the Federal Trade Commission (FTC) demanding better policies and regulations to protect financial services consumers from unfair and deceptive acts and practices. The chairmen demanded steps to repair the existing “disjointed system that leaves many consumers with no idea where to turn when they have problems,” especially, they pointed out, in the wake of Watters v. Wachovia which “significantly reduced the application of state laws and enforcement over a large part of the financial sector” (for more information on Watters, see the April 17th InfoBytes Special Alert). Arguing that clear authority for such rulemaking existed under the Federal Trade Commission Act (FTC Act) and the Home Ownership and Equity Protection Act (HOEPA), the chairmen called on the agencies to adopt rules (i) “clearly defining unfair or deceptive acts and practices and mandatory requirements to prevent them” and (ii) have each agency use its authority under the FTC Act to “establish a consumer affairs division to receive, and take appropriate action upon, complaints.” For full text of the letter, please see http://www.house.gov/apps/list/press/financialsvcs_dem/press051107.shtml.
Frank and Dingell Call for Stronger Federal UDAP Protection. On May 11, Rep. Barney Frank (D – Mass.), Chairman of the House Financial Services Committee and Rep. John Dingell (D – Mich.), Chairman of the House Energy and Commerce Committee, sent a joint letter to the federal banking agencies (Federal Reserve, OTS, OCC, and FDIC) and the Federal Trade Commission (FTC) demanding better policies and regulations to protect financial services consumers from unfair and deceptive acts and practices. The chairmen demanded steps to repair the existing “disjointed system that leaves many consumers with no idea where to turn when they have problems,” especially, they pointed out, in the wake of Watters v. Wachovia which “significantly reduced the application of state laws and enforcement over a large part of the financial sector” (for more information on Watters, see the April 17th InfoBytes Special Alert). Arguing that clear authority for such rulemaking existed under the Federal Trade Commission Act (FTC Act) and the Home Ownership and Equity Protection Act (HOEPA), the chairmen called on the agencies to adopt rules (i) “clearly defining unfair or deceptive acts and practices and mandatory requirements to prevent them” and (ii) have each agency use its authority under the FTC Act to “establish a consumer affairs division to receive, and take appropriate action upon, complaints.” For full text of the letter, please see http://www.house.gov/apps/list/press/financialsvcs_dem/press051107.shtml.
Defendant Must Prove It Did Not Waive Privilege in FCRA Firm Offer Suit. A federal district court has ruled that the defendant must produce evidence to prove that it did not waive its attorney-client privilege in a Fair Credit Reporting Act (FCRA) “firm offer of credit” class action lawsuit. Claffey v. River Oaks Hyundai, No. 06 C 310 (N.D. Ill. May 9, 2007) (for more on this suit, see the December 15, 2006 issue of InfoBytes). In this case, the plaintiffs alleged that the defendants, Capital One Auto Finance, Inc. and several automobile dealers, accessed the plaintiffs’ credit information without their permission and without a legal basis. In its filings with the court, Capital One claimed that it did not “willfully” violate FCRA and had followed “reasonable procedures” to comply with the law. The plaintiffs argued that Capital One waived its attorney-client privilege by stating this defense, since the “willfulness” defense arose as a result of the advice of attorneys. The court rejected this argument as to the “willfulness” issue but agreed with the plaintiffs’ assertion that the defendants may have waived their attorney-client privilege as to their claim that they followed “reasonable procedures” to ensure compliance with FCRA in resolving consumer disputes. The court stated that if the defendant “actually [relied] on any documents or other evidence that would tend to suggest that its procedures included consultation with counsel, it will be deemed to have waived its attorney-client privilege” as to the “reasonable procedures” issue. The court ordered Capital One to produce the evidence it will rely on in its “reasonable procedures” contention so that the court can then decide whether it has waived its privilege. For a copy of the case, please contact .
Security Measures Taken Regarding Access to the NSLDS. On April 27, the Department of Education issued a press release announcing renewed access beginning April 30 to the National Student Loan Data System (NSLDS), which was shut down earlier that month over privacy concerns (reported in the April 27th issue of InfoBytes). The press release outlines several changes to the system to protect student privacy, including (i) requiring all searches to include, in addition to the borrower’s social security number, date of birth, and first name, (ii) suspending new on-line registrations for access to the NSLDS, and (iii) requiring users to input a random computer-generated letter and/or number sequence in order to access the database. The following week, Senator Ted Kennedy (D – Mass.), whose initial complaint led to the system’s suspension, issued a press release expressing “cautious optimism” that the changes would make the system more secure. The full press release is available at http://www.ifap.ed.gov/eannouncements/0427NSLDSAccess.html.
Under TILA, Rescission Inappropriate Where Borrowers Cannot Tender Loan Proceeds. On May 14, the Fourth Circuit held that TILA does not require a mortgage lender to unconditionally release a security interest, and that rescission is inappropriate, where the borrowers seeking rescission are unable to tender the loan proceeds. American Mortgage Network, Inc. v. Shelton, No. 06-1576, 2007 U.S. App. LEXIS 11275 (4th Cir. May 14, 2007). Rather than returning the net loan proceeds in order to unwind the transaction, the borrowers offered to sell their home to the lender for the difference between the appraised value and the net loan proceeds. The lender declined, upon which the borrowers’ counsel notified the lender that it had forfeited the loan proceeds by refusing to unconditionally release its security interest within 20 days of cancellation. The trial court ruled in favor of the lender, and the Fourth Circuit affirmed, noting that the equitable goal of rescission under TILA is to restore the parties to the “status quo ante.” The Fourth Circuit adopted the view that “unilateral notification of cancellation does not automatically void the loan contract.” Further, according to the court, “[o]nce the trial judge… determined that the [borrowers] were unable to tender the loan proceeds, the remedy of unconditional rescission was inappropriate.” The court also concluded that the trial judge’s consideration of certain inequitable conduct by the borrowers was appropriate, as the right to rescind is subject to equitable considerations. For a copy of the opinion, please see http://pacer.ca4.uscourts.gov/opinion.pdf/061576.P.pdf.
Court Upholds Mailer That Discussed Range of Amounts and Rates as FCRA Firm Offer. The U.S. District Court for the Southern District of New York upheld as a valid Fair Credit Reporting Act (FCRA) firm offer a mailer soliciting customers for a home equity line of credit that showed a range of credit limits, depending on the borrower’s equity in the home, quoted a rate of 8.6% that “is available to our most creditworthy borrowers,” and also stated that interest rates could range from 3.75% to 18%. Gross v. Washington Mutual, Inc., No. 06 Civ. 4340, 2007 WL 1404435 (S.D.N.Y. May 10, 2007). Citing the opinion of another judge in the Southern District of New York in Nasca v. J.P. Morgan Chase Bank, N.A. (see the March 16th issue of InfoBytes), the court said that the plaintiff’s claim that the mailer must show the precise rate and amount of credit “find[s] no support within the text of the FCRA,” and also rejected the “value” test for firm offers articulated by the U.S. Court of Appeals for the Seventh Circuit in Cole v. U.S. Capital (see the December 3, 2004 issue of InfoBytes). For a copy of the decision, please contact .
Defendant Must Prove It Did Not Waive Privilege in FCRA Firm Offer Suit. A federal district court has ruled that the defendant must produce evidence to prove that it did not waive its attorney-client privilege in a Fair Credit Reporting Act (FCRA) “firm offer of credit” class action lawsuit. Claffey v. River Oaks Hyundai, No. 06 C 310 (N.D. Ill. May 9, 2007) (for more on this suit, see the December 15, 2006 issue of InfoBytes). In this case, the plaintiffs alleged that the defendants, Capital One Auto Finance, Inc. and several automobile dealers, accessed the plaintiffs’ credit information without their permission and without a legal basis. In its filings with the court, Capital One claimed that it did not “willfully” violate FCRA and had followed “reasonable procedures” to comply with the law. The plaintiffs argued that Capital One waived its attorney-client privilege by stating this defense, since the “willfulness” defense arose as a result of the advice of attorneys. The court rejected this argument as to the “willfulness” issue but agreed with the plaintiffs’ assertion that the defendants may have waived their attorney-client privilege as to their claim that they followed “reasonable procedures” to ensure compliance with FCRA in resolving consumer disputes. The court stated that if the defendant “actually [relied] on any documents or other evidence that would tend to suggest that its procedures included consultation with counsel, it will be deemed to have waived its attorney-client privilege” as to the “reasonable procedures” issue. The court ordered Capital One to produce the evidence it will rely on in its “reasonable procedures” contention so that the court can then decide whether it has waived its privilege. For a copy of the case, please contact .
No CDA Immunity for Operator of Roommate Matching Website. On May 15, the Ninth Circuit Court of Appeals ruled that a website operator that distributes member profiles generated using form questionnaires was not entitled to immunity under the Communications Decency Act (CDA). Fair Housing Council of San Fernando Valley v. Roommate.com, LLC, Appeal Nos. 04-56916 & 04-57173 (9th Cir., opinion issued May 15, 2007). The underlying lawsuit alleged that Roommate.com violated the Fair Housing Act (FHA) and various state laws by generating, publishing, and electronically distributing member profiles generated from questionnaire responses. The questionnaire included “drop-down” and “select-a-box” responses, the content of which was created by Roommate.com, as well as an open-ended “Additional Comments” section in which members could include any information they choose. The district court held that Section 230(c) of the CDA, which grants broad immunity from liability to providers of interactive computer services for content created by third parties, barred the FHA claim. In a divided opinion, the appellate panel reversed, holding that Roommate.com was not immune from liability for the content created by responses to the “drop-down” and “select-a-box” portions of the questionnaire because Roommate.com “channeled” the information through its compatible preferences search function and e-mail notifications function that excluded incompatible profiles. According to the panel, this made Roommate.com “more than a passive pass-through of information provided by others…. By categorizing, channeling and limiting the distribution of users’ profiles, Roommate provides an additional layer of information that it is ‘responsible’ at least ‘in part’ for creating or developing.” On the other hand, a majority of the panel also held that Roommate.com was immune from liability for publishing the content created by members in the “Additional Comments” portion of their profiles, because Roommate.com’s involvement in that content was insufficient to make it a content provider. The panel was careful to distinguish that, while these activities eliminated CDA immunity, they did not necessarily violate the FHA – whether or not the activities described violate the FHA was a question for the district court on remand. For a copy of this decision, please contact .
6th Circuit Reverses District Court, Reduces Punitive Damage Award in FCRA Case. This week, the U.S. Circuit Court of Appeals for the Sixth Circuit reversed a District Court ruling that granted a single consumer over $2.6 million in punitive damages for a violation of the Fair Credit Reporting Act ("FCRA"). Bach v. First Union Nat'l Bank, No. 06-3660, 2007 WL 1412313 (6th Cir. 2007). The defendant, First Union National Bank, claimed that the punitive damage award of $2,628,600 in addition to a $400,000 compensatory damage award violated the Due Process Clause of the 14th Amendment, and the Sixth Circuit agreed. Relying on State Farm Mutual Automobile Inssurance Co. v. Campbell, 538 U.S. 408 (2003), a Supreme Court decision that sets forth specific factors to consider in determining whether a punitive damage award offends the Constitution, the Sixth Circuit found that the punitive award was unjustified. Specifically, the Sixth Circuit court held both the level of reprehensibility of the defendant's misconduct and the disparity between the actual and potential harm to the victim and the amount of the award counseled for a reduction of the amount. While warning that determining the constitutionality of punitive awards is a "highly fact-intensive exercise," the Sixth Circuit stated that it would establish a constitutional maximum punitive damage amount to be applied by the trial court in this case. Using "guideposts" from the State Farm and other Supreme Court decisions, the court settled on a 1:1 ratio of punitive to compensatory damages (i.e., no more than $400,000). For a copy of this decision, please see http://www.ca6.uscourts.gov/opinions.pdf/07a0176p-06.pdf.
“Sliding-Scale” Jurisdictional Test for Internet Solicitations Rejected. The 5th District Appellate Court of Illinois held that a defendant’s website did not subject it to general jurisdiction in Illinois. Howard v. Missouri Bone and Joint Center, Inc., No. 5-05-0476 (App. Ct. Ill., 5th Dist., April 24, 2007). The court reached this conclusion despite rejecting the emerging “sliding-scale” test, which bases the exercise of jurisdiction on the “level of interactivity” and “commercial nature of the exchange of information” on the website (citing Zippo Manufacturing Co. v. Zippo Dot com, Inc., 952 F. Supp. 1119, 1124 (W.D. Pa. 1997). The plaintiff in Howard argued that, because the website included online appointment requests, patient surveys, and a link to contact the defendant, it was interactive enough to subject the defendant to general jurisdiction in Illinois. The Appellate Court disagreed, holding the level of interactivity to be irrelevant. Instead, the court used the “traditional” jurisdictional test – whether the defendant had “continuous and systematic general business contacts” with Illinois or was “carrying on business activity in Illinois, not occasionally or casually, but with a fair measure of permanence and continuity” (citations omitted). The court likened the website content to advertising or solicitation of business, activities that had never been found to satisfy the traditional test for general jurisdiction. A copy of this decision is available here.
Federal Court Rules on Sufficiency of “Materially False” CAN-SPAM Allegations. The U.S. District Court for the District of Arizona recently held that an indictment that describes the message content and sending patterns of an unsolicited e-mail sent in violation of the CAN-SPAM Act sufficiently alleges the violation to allow the defendant to formulate a defense. U.S. v. Clason, No. 05-870 (D. Ariz. Apr. 24, 2007). The defendant, charged with sending an unsolicited e-mail with a "materially false" header and domain name information, moved for the government to provide a bill of particulars with regard to three counts of the indictment. In denying the motion, the court reasoned that, in the relative absence of case law, the defendant could rely on the statute's definition of what acts constitute "material falsification" in order to better understand the charges. A copy of this opinion is available here.
No CDA Immunity for Operator of Roommate Matching Website. On May 15, the Ninth Circuit Court of Appeals ruled that a website operator that distributes member profiles generated using form questionnaires was not entitled to immunity under the Communications Decency Act (CDA). Fair Housing Council of San Fernando Valley v. Roommate.com, LLC, Appeal Nos. 04-56916 & 04-57173 (9th Cir., opinion issued May 15, 2007). The underlying lawsuit alleged that Roommate.com violated the Fair Housing Act (FHA) and various state laws by generating, publishing, and electronically distributing member profiles generated from questionnaire responses. The questionnaire included “drop-down” and “select-a-box” responses, the content of which was created by Roommate.com, as well as an open-ended “Additional Comments” section in which members could include any information they choose. The district court held that Section 230(c) of the CDA, which grants broad immunity from liability to providers of interactive computer services for content created by third parties, barred the FHA claim. In a divided opinion, the appellate panel reversed, holding that Roommate.com was not immune from liability for the content created by responses to the “drop-down” and “select-a-box” portions of the questionnaire because Roommate.com “channeled” the information through its compatible preferences search function and e-mail notifications function that excluded incompatible profiles. According to the panel, this made Roommate.com “more than a passive pass-through of information provided by others…. By categorizing, channeling and limiting the distribution of users’ profiles, Roommate provides an additional layer of information that it is ‘responsible’ at least ‘in part’ for creating or developing.” On the other hand, a majority of the panel also held that Roommate.com was immune from liability for publishing the content created by members in the “Additional Comments” portion of their profiles, because Roommate.com’s involvement in that content was insufficient to make it a content provider. The panel was careful to distinguish that, while these activities eliminated CDA immunity, they did not necessarily violate the FHA – whether or not the activities described violate the FHA was a question for the district court on remand. For a copy of this decision, please contact .
“Sliding-Scale” Jurisdictional Test for Internet Solicitations Rejected. The 5th District Appellate Court of Illinois held that a defendant’s website did not subject it to general jurisdiction in Illinois. Howard v. Missouri Bone and Joint Center, Inc., No. 5-05-0476 (App. Ct. Ill., 5th Dist., April 24, 2007). The court reached this conclusion despite rejecting the emerging “sliding-scale” test, which bases the exercise of jurisdiction on the “level of interactivity” and “commercial nature of the exchange of information” on the website (citing Zippo Manufacturing Co. v. Zippo Dot com, Inc., 952 F. Supp. 1119, 1124 (W.D. Pa. 1997). The plaintiff in Howard argued that, because the website included online appointment requests, patient surveys, and a link to contact the defendant, it was interactive enough to subject the defendant to general jurisdiction in Illinois. The Appellate Court disagreed, holding the level of interactivity to be irrelevant. Instead, the court used the “traditional” jurisdictional test – whether the defendant had “continuous and systematic general business contacts” with Illinois or was “carrying on business activity in Illinois, not occasionally or casually, but with a fair measure of permanence and continuity” (citations omitted). The court likened the website content to advertising or solicitation of business, activities that had never been found to satisfy the traditional test for general jurisdiction. A copy of this decision is available here.
Federal Court Rules on Sufficiency of “Materially False” CAN-SPAM Allegations. The U.S. District Court for the District of Arizona recently held that an indictment that describes the message content and sending patterns of an unsolicited e-mail sent in violation of the CAN-SPAM Act sufficiently alleges the violation to allow the defendant to formulate a defense. U.S. v. Clason, No. 05-870 (D. Ariz. Apr. 24, 2007). The defendant, charged with sending an unsolicited e-mail with a "materially false" header and domain name information, moved for the government to provide a bill of particulars with regard to three counts of the indictment. In denying the motion, the court reasoned that, in the relative absence of case law, the defendant could rely on the statute's definition of what acts constitute "material falsification" in order to better understand the charges. A copy of this opinion is available here.
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