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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

FEDERAL ISSUES

The OCC Reminds National Banks to Avoid Sham Affiliated Business Arrangements. OCC Bulletin OCC 2005-27 notes that RESPA prohibits affiliated business arrangements that are simply a pretext for paid referrals, and contains a link to the 1996 HUD Policy Statement on “Sham Controlled Business Arrangements.” The bulletin is available at http://www.occ.treas.gov/ftp/bulletin/2005-27.doc.

FTC Settles Adware Charges Against Advertising.com. On August 3, 2005, the FTC announced that it had reached a proposed settlement with Advertising.com in connection with its distribution of computer security software that also contained adware. The FTC alleged that Advertising.com (which now is a part of America Online) engaged in a deceptive practice by failing to provide adequate disclosure of the adware functions contained in its security software package. The settlement has been published for public comment. For more information see http://www.ftc.gov/opa/2005/08/spyblast.htm.

Federal Reserve Board Adjusts HOEPA Dollar-Amount Trigger. The Federal Reserve Board annually adjusts for inflation the minimum amount that a loan's associated points and fees must exceed in order to trigger the points and fees test for the additional consumer protections of the Home Ownership and Equity Protection Act. On August 4, the Board announced that for calendar year 2006 this minimum amount will be $528. During 2006, if the total points and fees payable by a loan borrower at or before closing on the loan will exceed the greater of 8 percent of the total loan amount (as defined in Regulation Z) or $528, the loan will be a HOEPA loan. For more information see http://www.federalreserve.gov/boarddocs/press/bcreg/2005/200508042/attachment.pdf.

KB Home Agrees to Pay $2 Million to Settle FTC Charges. According to the FTC, KB Home violated a 1979 FTC consent order by providing a new home warranty that required both the homeowner and KB Home to arbitrate any warranty disputes and to pay a filing fee in the arbitration. The order had required that any home warranty offered by KB Home allow the consumer to choose between arbitration and filing in court and not require the consumer to pay any arbitration fees. The consent decree, which modifies a 1991 consent decree that also alleged violations of the FTC order, also prohibits future violations of the 1979 order, requires the company to modify existing warranties to make them consistent with that order, and extends some homeowners’ coverage by a year. See United States v. KB Home, Civ. No. 91-0872K (BTM) (S.D. Cal., filed Aug. 3, 2005). Court documents and the FTC’s press release are available at http://www.ftc.gov/os/caselist/kbhome/kbhome.htm.

FTC Issues Final Rule Revising Do Not Call Registry Fees. On July 26, 2005, the Federal Trade Commission (“FTC”) announced that it issued a final rule revising the fees charged to entities accessing the National Do Not Call Registry (“Registry”). The rule will become effective September 1, 2005 and amends section 310.8 of the Telemarketing Sales Rule. The final rule revises the Registry’s fee structure so that entities will be required to pay $56 per area code, or $15,400 for any entity accessing 280 area codes or more. Entities will still be able to obtain the first five area codes of data at no cost, and “exempt” entities may still access the Registry for free. For more information, please go to http://www.ftc.gov/opa/2005/07/fyi0554.htm. The text of the Federal Register notice can be obtained at http://www.ftc.gov/os/2005/07/052605DNCfeefrn.pdf.

COURTS

Federal Judge Rules Against Spitzer On Requests For Information From National Banks. On July 29, Judge Sidney H. Stein of the U.S. District Court for the Southern District of New York denied a motion for discovery sought by New York Attorney General Eliot Spitzer. The case involves two actions brought against Spitzer, one by the Clearing House Association, and the other by the Office of the Comptroller of the Currency (“OCC”). Spitzer has been seeking information related to the lending practices of national banks, suggesting that a “significant disparity” exists between rates charged to minorities and those charged to non-minorities, which he says implicate New York civil rights laws. The Clearing House Association, however, as well as the OCC, maintains that the OCC exercises exclusive visitorial powers over national banks. The order stated that, even under the broad rubric of the federal rules governing discovery, the “actions turn on purely legal issues, the resolution of which will not be assisted by the requested discovery…” The Clearing House Association v. Spitzer, (S.D.N.Y. No. 05 Civ. 5629, July 29, 2005).

Third Circuit Holds that Debtors Have Limited Recourse Against Creditors’ Post-Petition Fees. In In re: Joubert, the U.S. Court of Appeals for the Third Circuit addressed a Chapter 13 debtor’s assertion that a creditor had improperly added post-petition fees to its claim by adding some of the creditor’s legal fees to a mortgage refinancing. The legal fees at issue were incurred after the debtor filed her bankruptcy petition, but prior to the confirmation of the debtor’s bankruptcy plan. The court held that the debtor did not have a private cause of action under § 506(b) of the bankruptcy code, but could only pursue a claim that the creditor’s conduct was in contempt of the bankruptcy court’s earlier actions. For a copy of the decision see http://caselaw.lp.findlaw.com/data2/circs/3rd/041373p.pdf.

Debt Collector Attempting Collection from Consumer in Bankruptcy Qualified for 'Bona Fide Error' Defense under FDCPA. The U.S. District Court for the Northern District of Illinois found that a debt collector did not violate the Fair Debt Collection Practices Act ("FDCPA") when it sent a collection letter to a consumer who had filed for bankruptcy protection, even though the debt collector failed to utilize an available database to determine the consumer's status prior to sending the letter. In its decision, the Court pointed out that the debt collector maintained procedures to conduct bankruptcy searches on those types of accounts which experience had taught it were most likely to be the subject of bankruptcy petition, and such accounts did not include the type of account at hand. Further, the Court determined that these procedures meet the reasonableness test of the bona fide error defense under § 1692k(c) of the FDCPA. Cross v. Risk Management Alternatives, Inc., No. 1:02-cv-8136 (N.D. Ill. June 22, 2005).

Violation of State Law Serves as Basis for Action Under TILA. The U.S. Circuit Court of Appeals for the First Circuit determined that although § 123 of the Truth in Lending Act ("TILA," 15 U.S.C. § 1633) exempts loan transactions regulated by Massachusetts law from most of TILA's requirements, the exemption does not prevent a customer from suing a lender for damages under § 130 of TILA for failing to fulfill the state law's requirements for responding to a valid rescission notice. The Court noted that in an exempt state, the Federal Reserve has constructed a system whereby a creditor can be held liable under § 130 for failing to comply with any state law requirement that is equivalent to an actionable requirement under TILA. The Court then determined that the state statutory disclosure and rescission requirements in this case were substantively identical to the federal TILA requirements. Joining the other Circuits which have ruled on the issue, the First Circuit found that the consumer's allegations of a violation of these identical state requirements serve as a basis for an action for damages under § 130 of TILA. Belini, et al. v. Washington Mutual Bank, FA, Nos. 04-2532 & 04-2533 (1st Cir. June 15, 2005). A copy of the opinion may be obtained at: http://www.ca1.uscourts.gov/cgi-bin/getopn.pl?OPINION=04-2532.01A.

N.D. Illinois Case Denies Class Certification in TILA Rescission Claims. In response to a motion for class certification in two separate but related TILA cases, the U.S. District Court for the N.D. of Illinois, Eastern Division, denied the plaintiffs’ request for a declaration that any class member who so desires may rescind their transactions. The court’s decision rested on several factors, including the absence of an express provision allowing class actions within § 125(b) of TILA, which governs rescission claims. The significance of the absence of this provision is further bolstered given the fact that § 130, governing TILA damages, was amended by Congress to specifically include class actions. A separate ground for the court’s decisions held that a class action for an equitable claim may result in the cost of recovery exceeding the cost of harm which would be contrary to the purpose of an equitable remedy (to return the injured party to his position before the transaction). Similarly, in order to determine the appropriate relief for an equitable claim, the court must be able to consider the particular circumstances surrounding each loan transaction, a practice which could not be performed on a class wide basis. This decision follows in line with several federal court rulings which rejected efforts to obtain class certification of TILA rescission claims. Murry, et al. v. America’s Mortgage Banc, Inc., et al., No. 03-C-5811 (N.D. Ill. 05/05/05) and Greenleaf v. BWM Mortgage, LLC, et al., No. 03-C-6186 (N.D. Ill. 05/05/05).

Second Circuit Decision Supports Attorney Disclaimer on Form Collection Letter. On June 21, 2005, the Second Circuit Court of Appeals found there was no violation of the Fair Debt Collection Practices Act (“FDCPA”) when a law firm sends a form collection letter on stationary to a consumer on behalf of its client that includes a disclosure that no attorney had reviewed the consumer’s accounts. Under FDCPA, it is unlawful to falsely represent that communication is from an attorney. A number of law firms have been found liable for failure to disclose that no attorney had reviewed the file. The Second Circuit found that the disclosure in this case was adequate to alleviate the concerns of FDCPA. The Court explained “an attorney can, in fact, send a debt collection letter without being meaningfully involved as an attorney within the collection process, so long as that letter includes disclaimers that should make clear even to the ‘least sophisticated consumer’ that the law firm or attorney sending the letter is not, at the time of the letter’s transmission, acting as an attorney.” The case is Greco v. Trauner, Cohen & Thomas LLP, 412 F.3d. 360 (2nd Cir. 2005). The decision can be found at http://caselaw.lp.findlaw.com/data2/circs/2nd/044605p.pdf.

Seventh Circuit: “No Harm, No Foul” in FCRA Negligence Claim. The U.S. Court of Appeals for the Seventh Circuit held in an unreported case that a plaintiff must prove injury in order to recover in a negligence claim under the FCRA. Although the defendant consumer reporting agency admitted that it had violated FCRA by mailing the results of its reinvestigation of a disputed item to an incorrect address, the plaintiff did not allege that he was injured by this violation. As a result, the court of appeals upheld the lower court’s dismissal of that count of the complaint. It also upheld the district court’s holding that a claim for failure to reinvestigate an item properly or for failing to follow reasonable procedures to ensure the maximum possible accuracy of the information in consumer reports requires evidence that the consumer reporting agency reported inaccurate information. Kuehling v. Trans Union, LLC, 2005 WL 1576226 (7th Cir. July 6, 2005).

Missouri Court Severs Unconscionable Terms From Arbitration Agreement. In Sprague v. Household International, No. 04-0106-CV-W-NKL (W.D. Mo. June 15, 2005), the court severed provisions of an arbitration agreement that it found were unconscionable and enforced the remainder of the agreement in arbitration. The court found that the agreement’s cost-splitting and confidentiality provisions unconscionable. The court also found the class action prohibition unconscionable, even though a class action was not an option because the plaintiffs had opted out of a nationwide class action based on the same claims. However, the court held that Household’s reservation of a right to pursue judicial foreclosure was not unconscionable because the plaintiffs also could seek a judicial injunction against foreclosure.

U.S. District Court Limits Fees Included In Calculation of “high cost mortgages” Under HOEPA. On June 20, 2005, the U.S. District Court for the Eastern District of Pennsylvania ruled that only the excessive portion of a title insurance premium should be deemed “points and fees” for the purposes of determining whether a loan qualifies as a “high cost mortgage” under the Home Ownership and Equity Protection Act (HOEPA). Plaintiffs in the case alleged that they paid an unreasonably high premium for title insurance in connection with their loan, that the entire premium should be deemed “points and fees,” and that the loan thereby qualified as a HOEPA loan, triggering disclosure requirements that the lender had not complied with. The court held, however, that only the unreasonable portion of the premium (i.e., the amount by which it exceeded market rates for comparable title insurance) constituted “points and fees,” leaving the loan below the HOEPA threshold. This applies the by-now-widespread interpretation of the Truth In Lending Act definition of finance charges as applying only to the unreasonable portion of otherwise excluded charges to the HOEPA context. Strong v. Option One Mortgage Corp. (In re Strong), 2005 WL 1463245 (E.D. Pa. 06/20/05).

MISCELLANY

Kovacic To Be Nominated To FTC. The White House announced that the President will nominate former FTC General Counsel William E. Kovacic to the Commission, replacing retired Commissioner Orson Swindle. See http://www.whitehouse.gov/news/releases/2005/07/20050728-4.html.

FIRM NEWS

Jon Jerison and Lee Negroni authored an article entitled "The Facts on FACTA," a summary of the Fair and Accurate Credit Transactions Act of 2003, which was published in the August 2005 issue of Scotsman Guide (www.scotsmanguide.com).

John Kromer, Lee Negroni and Clint Rockwell will present an “Update on Federal and State Laws” at the American Association of Residential Mortgage Regulator's annual conference in Portland, Oregon, August 21 to 24. For more information, see www.aarmr.org.

On August 7, 2005, Kirk Jensen will be speaking on “What Empirical Evidence Says About Consumer Arbitration” at the ABA annual meeting in Chicago, IL. For more information, see http://www.abanet.org/annual/2005/.

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© Buckley Kolar, LLP 2005. 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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