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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

July 7, 2006

FEDERAL ISSUES

Senate Introduces Bill that Would Create Uniform Data Breach Standards. On June 26, Senator Bennett (R-UT) introduced S. 3568, the Data Security Act of 2006. This bill, which is the latest in a series of federal bills to address data security breaches, would require covered entities to (i) establish security procedures to protect sensitive customer information, and (ii) notify consumers in the event of a data breach that is “reasonably likely” to cause “substantial harm or inconvenience” to consumers. In addition, it would require the “banking agencies” (including the Securities and Exchange Commission, Commodities Futures Trading Commission, Federal Trade Commission, state insurance regulators, and other agencies) to coordinate in developing implementing regulations. The bill also would preempt state data breach statutes and would not create a private right of action for customers harmed by the failure of entities to comply with the bill’s stipulations. The bill has already been referred to the Senate Banking, Housing, and Urban Affairs Committee. A copy of the bill may be found using the search at http://thomas.loc.gov/.

Fed Issues Report on Consumer Credit Industry Practices. In June 2006, the Federal Reserve Board submitted a report to Congress focusing on consumer credit industry practices in soliciting and extending credit and the effects of such practices on consumer debt and insolvency. The report addresses concerns about whether there is a causal link between revolving credit use and consumer bankruptcies, and whether the practices of credit card issuers have led to household insolvencies. According to the report, credit card issuers generally do not solicit customers or extend credit to them indiscriminately; as a matter of industry practice, lenders carefully assess potential borrowers’ ability to repay debt. The report also concludes that the growth of consumer debt has not threatened the household sector of the economy, although certain recent industry practices have been deemed to potentially extend borrowers’ repayment periods beyond reasonable time frames. For a copy of the report, see http://www.federalreserve.gov/boarddocs/rptcongress/bankruptcy/bankruptcybillstudy200606.pdf.

Debt Collector Settles with FTC After Allegations of Illegal Collection Practices. On July 5, the Federal Trade Commission (FTC) announced that debt collection agency Whitewing Financial Group, Inc. agreed to a $150,000 settlement with the FTC stemming from allegations that Whitewing’s collection tactics violated federal law. It was alleged that Whitewing, a Houston based corporation, attempted to collect on very old debts that were often time-barred or had been otherwise discharged in a bankruptcy proceeding. The FTC asserted that while Whitewing did facially comply with the “validation notices” requirement under the Fair Debt Collection Practices Act by informing the debtor of their right to dispute the debt, Whitewing later misrepresented the status of the debts, leading debtors to believe that the debts were not beyond statutory limitations and were valid and enforceable. As part of the $150,000 settlement, of which all but $30,000 has been suspended because of Whitewing’s inability to pay, Whitewing also agreed to refrain from illegal practices when collecting debts. For the full text of the FTC’s materials on the Whitewing settlement please see http://www.ftc.gov/opa/2006/07/whitewing.htm.

HUD Extends Foreclosure Moratorium to Assist Hurricane Victims. On June 30, the Department of Housing and Urban Development (HUD) announced that it is extending the foreclosure moratorium on residential mortgage loans insured by the Federal Housing Authority (FHA). The Moratorium, put into place to assist Gulf Coast area hurricane victims, already once extended, will be extended further to August 31, 2006. HUD reminds FHA Mortgagees that they must commence foreclosure within the greater of 6 months from the date of default or 90 days from the expiration of action that barred foreclosure or request an extension of time. Mortgagees and their servicers are encouraged not to report delinquencies on loans in the Presidentially-declared disaster areas to credit reporting agencies until and unless a mortgage is referred to foreclosure. The full announcement may be read at http://hudclips.org/sub_nonhud/cgi/pdfforms/06-18ML.doc.

BANKS

Federal Reserve Governor Bies Addresses Challenges of Basel II Implementation. On July 4, Federal Reserve Board Governor Susan Schmidt Bies spoke to the Risk Capital 2006 Forum in Paris, France about the notice of proposed rulemaking implementing Basel II. Governor Bies focused her remarks on the rationales for moving towards Basel II; (i) bridging the gap between regulatory capital requirements and internal bank practice, and (ii) achieving greater safety and soundness through risk monitoring and minimum capital levels. Governor Bies also discussed the gradual transition to Basel II and the necessary improvements needed in the risk models. The full text of the speech can be found at http://www.federalreserve.gov/boarddocs/speeches/2006/20060704/.

Office of Thrift Supervision Conference Call Concerning BSA/AML. On Monday, July 31, from 2:00 to 3:30, the Office of Thrift Supervision will host a conference call regarding Bank Secrecy Act/Anti-Money Laundering Act (BSA/AML) compliance. The call will focus on BSA/AML best practices, common violations, enforcement actions, and strategies to building an effective BSA/AML compliance program. Registration prior to the call is required. For the full text of the announcements, please see http://www.ots.treas.gov/docs/4/480202.pdf.

COURTS

Case Tests Whether Internet Message Board Bears Fair Housing Act Liability for Classified Ads. A recently briefed case, filed in February by the Chicago Lawyers Committee for Civil Rights against craigslist inc., alleges that craigslist is liable under the Fair Housing Act (FHA) for publishing discriminatory housing advertisements in its online classified advertisements. The complaint alleges that classified ads posted in the "I am offering housing" area of the craigslist Chicago website expressed racial, ethnic, gender, and religious preferences, and that craigslist's publication of these ads without prior screening violated Section 804(c) of the FHA. Craigslist has responded that it has complete immunity from liability for such third-party postings under the Communications Decency Act, 47 U.S.C. 230(c). The case has attracted significant media attention as well as amici curiae including the National Fair Housing Alliance for the plaintiff, and Amazon, AOL, Ebay, Google, and Yahoo! (among others) for the defendant. Currently before the court is craigslist's motion for judgment on the pleadings. No hearing date has been set for oral arguments on this motion. Chicago Lawyers Committee for Civil Rights Under Law v. craigslist, 1:06-cv-00657 (N.D.Ill.). For a copy of the complaint or briefs, please e-mail .

Eleventh Circuit Reverses Grant of Summary Judgment in TILA Rescission Case. The United States Court of Appeals for the Eleventh Circuit held that the plaintiff borrower's failure to disclose his TILA rescission claims as contingent assets in his pending Chapter 13 bankruptcy action does not bar such TILA claims under principles of judicial/equitable estoppel. In reversing the district court’s grant of summary judgment, the Court of Appeals applied a two-factor test under the doctrine of judicial estoppel, evaluating whether (i) “the allegedly inconsistent positions… [were] taken under oath in a prior proceeding,” and (ii) such inconsistent positions were “calculated to make a mockery of the judicial system.” The Court first concluded that the plaintiff borrower “failed to assert his TILA claim as an asset in the [Chapter 13] bankruptcy proceeding”—thus meeting the first prong of the judicial estoppel test. In evaluating the second prong of the test—the borrower plaintiff’s intent—the Court found that there was significant evidence in the record that the borrower plaintiff “did not intend to conceal his TILA claim from his creditors.” Moreover, based on the fact that the note holder filed a complaint for declaratory judgment and equitable relief as part of the bankruptcy proceeding after the Chapter 13 plan was confirmed, but before the period for objecting to the confirmation of the plan had ended, the lender defendants knew about the plaintiff borrower’s potential TILA claim within the time period during which they could seek revocation of the confirmation of the Chapter 13 reorganization plan (and thus seek conversion to Chapter 7). For these reasons, the Court of Appeals reversed the district court’s grant of summary judgment in favor of the lender defendants. Ajaka v. Brooksamerica Mortgage Corporation et al., No. 05-12105 (June 29, 2006). To view the court’s opinion in its entirety, please see http://www.ca11.uscourts.gov/opinions/ops/200512105.pdf.

Credit Card Company Pays $11 Million Settlement. Georgia-based Columbus Bank and Trust Company and CompuCredit Corporation recently settled a case brought by New York Attorney General Eliot Spitzer concerning their credit card practices. According to Spitzer’s complaint, Columbus Bank, in a partnership with CompuCredit, marketed credit cards to low-income consumers and consumers with bad credit. Columbus Bank then charged these consumers substantial fees, including high annual fees and activation charges. The complaint also alleged that Columbus Bank used harassing marketing tactics, such as calling customers multiple times per day and contacting customers’ neighbors. Pursuant to the settlement agreement, Columbus Bank and CompuCredit will (i) pay $11 million in restitution to New York consumers, (ii) pay $525,000 in civil penalties and costs, and (iii) reform their credit card practices and disclosures. To view the New York Attorney General’s press release, go to http://www.oag.state.ny.us/press/2006/jul/jul3b_06.html.

STATE ISSUES

South Carolina Amends Law Potentially Restricting Rebates in Real Estate Transactions. South Carolina recently enacted legislation, H.R. 3478, that appears to clarify that the payment of rebates or similar inducements to consumers in a real estate transaction are permissible under South Carolina law. Section 40-57-145 of the South Carolina Code was previously amended in 2004 (S.C. Act No. 218, S. 949, 115th Session (2004)) to outlaw the payment "of a commission or compensation to an unlicensed individual." The 2004 amendment removed the qualification language from the statute that stated that such payment was grounds for disciplinary action only if it were paid to an unlicensed individual for "conducting activities requiring a license." By eliminating that qualification, the statute rendered it unclear as to whether licensees could make any kind of payment to an unlicensed person, including rebates or other inducements to consumers who were parties to a real estate transaction. After several attempts to clarify the 2004 amendment, the South Carolina legislature enacted the 2006 amendment, which reads that an action is grounds for disciplinary action if the licensee "pays a commission or compensation to an unlicensed individual for activities requiring a license under this chapter." The 2006 amendment also includes a further clarification that "a licensee may not pay or offer to pay a referral fee or finder's fee to an unlicensed individual that is not a party in the real estate transaction." This statutory amendment appears to allow rebates and other inducements to consumers under South Carolina law. The 2006 amendment became effective June 12, 2006. For full text of the bill, please see http://www.scstatehouse.net/html-pages/legpage.html.

Rhode Island Passes New Predatory Lending Bill. Rhode Island’s General Assembly passed a new predatory lending law, the Home Loan Protection Act, on June 23, 2006. The Act prohibits several common predatory practices, including “flipping”, recommending default, and acceleration at the sole discretion of the lender. Additionally, for high-cost home loans, the Act prohibits financing points and fees, increasing the interest rate after default, and balloon payments that are more than twice as large as the average of earlier payments. The Act also would require lenders to verify a borrower’s income and ability to pay before making a high-cost home loan. The Rhode Island law differs from the federal Home Owner and Equity Protection Act (HOEPA) in a few important ways. First, while HOEPA applies only to closed-end loans, the Rhode Island Act applies to both closed-end and open-end loans. Second, while the interest-rate trigger for applicability of HOEPA is 10% for secondary liens, the trigger for the Rhode Island Act is only 9%. Third, the points and fees trigger for HOEPA applicability is 8% for all loans, but the Rhode Island Act has a points and fees trigger threshold that is only 5% for loans greater than $50,000. Finally, the Rhode Island Act defines points and fees to include yield spread premiums over 1% of the loan amount and the maximum possible prepayment penalty on the loan, in addition to the costs included in points and fees under HOEPA. If signed by Rhode Island ’s governor, the Act would become effective on December 31, 2006. For text of the bill, see http://www.rilin.state.ri.us/Billtext/BillText06/HouseText06/H7814A.pdf.

© 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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