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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

May 26, 2006

COURTS

Ninth Circuit Rejects Quicken Loans’ Preemption Arguments Against California Residential Mortgage Lending Act Claims. On May 22, 2006, the U.S. Court of Appeals for the Ninth Circuit held that Quicken Loans must refund California borrowers the interest it charged during the time period between disbursing a loan’s funds and recordation of the deed of trust. Quicken Loans, Inc. v. Wood, No. 04-61244 (May 22, 2006). The case dealt with California’s Residential Mortgage Lending Act, which until 2003 precluded charging interest until the day before a loan was recorded. (The statute has been amended to remove this provision.) Quicken Loans argued, amongst other things, that the statute was preempted by DIDMCA and the Parity Act. Quicken also argued that the statute violated the U.S. Constitution’s Takings Clause and the Court held that the claim was not “ripe” despite the California Department of Corporation’s admission below that it considered its administrative actions as final. The court rejected these arguments. A copy of the decision is available at http://www.ca9.uscourts.gov/ca9/newopinions.nsf/.

Contract Clause Requiring “Written” Notice May Include Electronic Communications. The U.S. District Court for the Northern District of California recently held that a contract clause that required “written” notice for certain changes could be satisfied through electronic communications. Seagate US LLC v. Cigna Corp., C 05-4272 PVT (Apr. 21, 2006). In this case, Seagate US LLC (Seagate) brought an ERISA claim against Cigna Corp. (“Cigna”) arising from Seagate’s group life insurance policies with Cigna. Seagate electronically transmitted “Change in Beneficiary” notices to Cigna, and Cigna claimed that the policies only allowed such notices to be provided in a non-electronic hard copy. On Cigna’s motion for summary judgment, the court determined that the policy clause requiring “written” notice could encompass electronic communications; it therefore declined to dismiss the case. The Seagate ruling shows that contractual parties may need to reexamine their contracts and consider clarifying clauses that set forth acceptable methods of communication. Please contact Buckley Kolar to obtain a copy of the Order.

Supreme Court Declines to Review Decisions Upholding Restrictions on Telemarketers. On May 15, 2006, the United States Supreme Court declined to review two recent rulings upholding state and federal restrictions on telemarketers soliciting charitable donations. In the first case, charities who contracted with professional telemarketers to solicit donations argued that the Telemarketing Sales Rule (TSR) was beyond the FTC’s authority and violated the First Amendment. The Supreme Court declined to review the Fourth Circuit court’s decision which held that: (1) Congress intended for all conduct encompassed under the broadened definition of "telemarketing" in 15 U.S.C.S. § 6106(4) to be subject to FTC regulations passed for the purpose of preventing fraud and protecting the home; (2) the FTC was well within its statutory authority to enact the TSR; and (3) the TSR did not violate the First Amendment. Nat'l Fed. of the Blind v. FTC, 2006 U.S. LEXIS 3944. In the second case, nonprofit organizations alleged that a North Dakota statute prohibiting telephone solicitations to people on the state’s do-not-call registry, but exempting telephone solicitations made by volunteers or employee of charitable organizations, improperly excluded solicitations by professional solicitors and violated the professional solicitors’ freedom of speech. The Supreme Court declined to review the Eighth Circuit decision which held that the statute was constitutional since it significantly furthered the state's interest in residential privacy, did not substantially limit charitable solicitations, and was not overbroad. FOP v. Stenehjem, 2006 U.S. LEXIS 3907. The list of orders containing the denial of these Writs of Certiorari can be obtained at http://www.supremecourtus.gov/orders/courtorders/051506pzor.pdf. Please contact Buckley Kolar for copies of the Orders.

FEDERAL ISSUES

Sensitive Personal Information on 26.5 Million Veterans Stolen. On May 22, 2006, the Department of Veterans Affairs (VA) announced that thieves recently obtained electronic data on up to 26.5 million veterans and some spouses. The compromised information included the veterans’ and spouses’ names, social security numbers and birth dates. The information was taken when a VA employee improperly brought the electronic data home and his home was burglarized. Although authorities do not believe that the thieves targeted the items because of the data, they established a toll-free number for veterans who are concerned or would like additional information at 1-800-FED-INFO. Although current federal law does not require that individuals be notified when the security of their personal information is breached, several House committees have passed or are currently considering legislation to protect consumers’ sensitive personal information. H.R. 4127, the Data Accountability and Trust Act, was recently approved by the House Committee on Energy and Commerce, and is intended to “protect consumers by requiring reasonable security policies and procedures to protect computerized data containing personal information, and to provide for nationwide notice in the event of a security breach.” H.R. 5318, the Cybersecurity Enhancement and Consumer Data Protection Act, was recently approved by a House Judiciary Subcommittee and would require companies to notify the appropriate authorities when they know of a major security breach that leads to a significant risk of identity theft. Failure to do so, with the intent to prevent, obstruct, or impede a lawful investigation of such breach, would be a criminal offense that could result in a fine of up to $1 million dollars or five years in prison. For a copy of the bills, see http://thomas.loc.gov. For more information on the VA security breach, see http://www.firstgov.gov/veteransinfo.shtml.

House Financial Services Committee Requests Information Regarding Efforts to Influence State Title Insurance Settlements. On May 25, 2006, the House Financial Services Committee released a May 24th letter to Land America Financial Group, Inc. ("Land America") requesting that Land America and its affiliates provide all documents and records in its possession relating to Colorado Deputy Insurance Commissioner Erin Toll. The Committee's request is related to information it recently received regarding alleged "indirect threats or pressure on the part of a title insurance company [made] in an apparent effort to limit or influence a proposed State title insurance settlement." A copy of the letter is available at http://financialservices.house.gov/media/pdf/05-25-06%20Title%20Insurance%20Letter.pdf.

Former Chairman and CEO of Failed Bank Found Guilty of Fraud. On May 10, Eduardo A. Masferrer, former Chairman of the Board and CEO of Hamilton Bank, N.A., a failed Miami-based national bank that once had assets of $1.3 billion, was found guilty on sixteen counts of fraud in connection with the operation of the bank, as well as obstruction of an Office of the Comptroller of the Currency (OCC) investigation into the activities of the bank. Masferrer and other bank executives fraudulently inflated bank income and earnings based on questionable swaps transactions in 1998 involving Russian and Latin American loans. They did not improve the bank's systems or re-characterize these questionable transactions after receiving a safety and soundness notice in 1998 and a Cease and Desist Order in 2000. Instead, they concealed material information from the OCC. The bank was closed and the Federal Deposit Insurance Corporation was named receiver in 2002, and Masferrer was charged with the offenses that he has now been convicted of. For more details, see http://www.usdoj.gov/usao/fls/060510-01.html.

International Advance-Fee Credit Card Operation Settles FTC Charges. On May 24, 2006, the Federal Trade Commission (FTC) announced that a cross-border telemarketing enterprise settled charges that their business practices violated the FTC Act and the FTC’s Telemarketing Sales Rule (TSR). In November, 2004, the FTC filed a complaint alleging that 3R Bancorp and its co-defendants (collectively, 3R) while operating out of the U.S., Canada and India, targeted consumers with poor credit and falsely informed them that they were pre-approved for a low interest, high credit-limit credit card that did not require a security deposit. The FTC also alleged that 3R collected significant up-front fees from the targets, but never delivered the credit cards to consumers. Under the settlement, 3R will pay full redress to consumers, which amounts to $1.85 million, and halt their illegal practices, including calling numbers registered on the National Do Not Call Registry. 3R is also permanently banned from selling or marketing credit-related products, programs, or services. For more information, see http://www.ftc.gov/opa/2006/05/3rbancorp.htm.

HUD Announces $74.5 Million Texas Hurricane Recovery Effort. On May 22, 2006, the U.S. Department of Housing and Urban Development (HUD) announced the approval of $74.5 million in aid for 29 east Texas counties affected by Hurricane Rita. HUD’s Community Development Block Grant Program will provide the funding and four regional planning agencies will distribute the money. The recovery efforts will focus on meeting the Texas Gulf Coast’s infrastructure and housing needs. For more information, see http://www.hud.gov/news/release.cfm?content=pr06-054.cfm. A copy of the approved plan is available at http://www.hud.gov/content/releases/pr06-054.pdf.

Bernanke Discusses Importance of Financial Literacy Before Senate Committee. On May 23, 2006, in a speech before the Senate Committee on Banking, Housing and Urban Affairs, Chairman Ben S. Bernanke discussed the importance of financial literacy both as a source of improved consumer decision-making and as a means of improving the financial markets’ efficiency. Chairman Bernanke noted that recent technological advances have increased the availability of credit, and as a result, the availability of potential credit providers has also increased. Thus, consumers must be financially knowledgeable in order to choose wisely from the extensive variety of products and providers that are available. In addition, Chairman Bernanke noted that financial service firms, like other businesses, will respond to market pressures imposed on them by knowledgeable consumers by providing better products at better prices. Chairman Bernanke also highlighted several Federal Reserve financial education initiatives and discussed some of the challenges that financial educators and policymakers face as they attempt to improve financial literacy. For a copy of Bernanke’s remarks, see http://www.federalreserve.gov/boarddocs/testimony/2006/20060523/default.htm.

Comptroller Dugan Says Supervisory Process Must Support a Competitive, Safe and Sound Banking Industry. On May 19, 2006, Comptroller of the Currency John C. Dugan spoke before the Conference on Bank Structure and Competition about recent trends, risks and regulatory responses in the increasingly global landscape of the real estate banking industry. Comptroller Dugan noted that competition has fueled industry innovation and led to two main industry strategies. Larger banks generally have introduced new products and services on the global market while enhancing pre-existing services, taking advantage of technology to decrease the costs associated with handling large volume transactions. Midsize and local banks have tended to focus on an area of expertise—such as originating commercial loans, servicing a geographic area or a functional segment—while maintaining their strong commitment to customer service. Comptroller Dugan also discussed concentration risks in commercial real estate and payment shock and reputation risks in residential real estate. For the full text of Comptroller Dugan's speech, see http://www.occ.treas.gov/ftp/release/2006-61a.pdf.

STATE ISSUES

Wisconsin Passes Uniform Real Property Electronic Recording Act. This week, the Governor of Wisconsin signed SB 616, Wisconsin’s enactment of the Uniform Real Property Electronic Recording Act (URPERA). URPERA is a uniform law, promulgated by the National Conference of Commissioners on Uniform State Laws, that is designed to provide additional specific statutory authority for county recorders to accept electronic records for recordation, establish a council that will adopt standards to implement Wisconsin’s URPERA and provide rule-making authority for the council. SB 616 can be accessed at http://folio.legis.state.wi.us/cgi-bin/om_isapi.dll?clientID=base=billhist.nfo&record={8262}&recordswithhits=on&zz=.

MISCELLANY

Bush to Nominate Donald L. Kohn to be Vice Chairman of the Federal Reserve. On May 18, 2006, President Bush announced that he intends to nominate Donald L. Kohn to be Vice Chairman of the Federal Reserve for a four year term. Mr. Kohn is currently a Governor of the Federal Reserve and was previously Advisor to the Federal Reserve for Monetary Policy. For a copy of the White House’s personnel announcement, see http://www.whitehouse.gov/news/releases/2006/05/20060518-12.html.

FIRM NEWS

On June 8, 2006, Frank Supik will speak at The Master's Conference on the use of electronic records to satisfy regulatory requirements. The Master's Conference will be held at the Kellogg Conference Hotel at Gallaudet University in Washington, DC. For more information, see www.themastersconference.com.

© Buckley Kolar, LLP 2006. INFOBYTES is not intended as legal advice to any person or firm. It is provided as a client service and information contained herein is drawn from various public sources, including other publications.

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