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InfoBytes
CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS
Topics – Covered This Week (Click to View)
FEDERAL ISSUES
Fannie Mae Lender Letter Regarding Subprime Mortgage Lending Statement. On August 15, Fannie Mae issued Lender Letter 03-07 outlining the adoption of the standards set forth in the federal interagency Statement on Subprime Mortgage Lending (covered in the June 29th issue of InfoBytes). Fannie Mae’s guidance discusses, among other things, (i) risk management and underwriting standards including underwriting to the fully amortizing rate, (ii) workout arrangements and foreclosure procedures, (iii) prohibition of prepayment penalties and loans without escrow accounts, and (iv) the addition of a representation and warranty to seller agreements requiring that loans sold comply with the Subprime Statement. All loans covered by the Statement with application dates on or after September 13, 2007 will be required to comply with this letter. One note of interest in the Lender Letter is that it appears to require Fannie Mae sellers to define for themselves which loans are “subprime,” similar to the approach taken by the federal banking agencies in the interagency guidance. Fannie Mae issued further related guidance on August 21. In Announcement 07-15, which updated Fannie Mae’s underwriting standards for ARM products with fixed-rate periods of three years or less (referred to in the Announcement as “Short-Term ARMs”), Fannie Mae states that it now requires that the borrower of a Short-Term ARM be qualified on “the greater of the qualifying rate specified for the transaction, or the fully indexed rate” and “assuming a fully amortizing payment schedule.” The Announcement does not appear to apply that new requirement on ARM products with a fixed-rate period of longer than three years, such as the traditional Fannie Mae 5- and 7-year fixed-rate Arm products. To find both pieces of guidance, go to https://www.efanniemae.com/sf/guides/ssg/2007annlenltr.jsp?referrer=frpromo.
FinCEN and Banking Agencies Release New BSA/AML Manual. On August 24, the Financial Crimes Enforcement Network (FinCEN) together with the federal banking agencies (FRB, FDIC, OTS, OCC, and NCUA) and the Conference of State Bank Supervisors announced the release of a new Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual. The revised portions, which incorporate guidance since the previous edition’s publication in July 2006, are noted in the manual’s index. For the official FinCEN press release, see http://www.fincen.gov/FFIEC_NR.html.
Dodd Calls on Treasury and HUD to Modernize FHA. On August 23, Senator Chris Dodd (D – CT), Chairman of the Senate Banking Committee, sent a letter to the Secretaries of the Treasury and Housing and Urban Development (HUD) requesting that they “expedite” their plans of modernizing the Federal Housing Administration (FHA) in order to help fight the current wave of mortgagor defaults. Dodd, citing the FHA-insurance fund’s current strength, stated in his letter that “it is essential that the FHA act effectively and prudentially to preserve homeownership for as many Americans as possible.” The Senate Banking Committee press release can be found at http://banking.senate.gov/index.cfm?Fuseaction=Articles.Detail&Article_id=179.
STATE ISSUES
North Carolina Amends Predatory Lending Law. On August 16, the Governor of North Carolina signed into law House Bill 1817, which amends the state’s high cost home loan statute. Points and fees under the statute now include all mortgage broker compensation paid from any source, including compensation paid in a table-funded transaction. In addition, the statute now provides that mortgage brokers who broker a high-cost home loan in violation of the statute will be jointly liable with the lender. This provision could have an interesting interaction with federal law when high-cost home loans are brokered to federally-chartered institutions. The bill also adds a new section to the high cost home loan statute which strictly regulates rate spread home loans. The bill describes rate spread home loans as a home loan in which the difference between the loan’s APR and the yield on U.S. Treasury Securities exceeds 3% for first mortgages, and 5% for second mortgages. In addition, the loan’s APR must equal or exceed the conventional mortgage rate by 1.75 percentage points for a first mortgage, or 3 percentage points for a second mortgage. Prepayment fees or penalties cannot be charged for rate spread home loans. In addition, the lender cannot make a rate spread home loan without first considering the borrower’s ability to repay. A violation of these provisions will be considered usurious and will be subject to the same penalties as usurious loans. The law goes into effect January 1, 2008. For more information on this bill, please see http://www.ncga.state.nc.us/gascripts/BillLookUp/BillLookUp.pl?Session=2007&BillID=H1817.
COURTS
District Court Rejects "Material Terms," "Value" Tests for FCRA Firm Offers. A federal district court held that the Fair Credit Reporting Act (FCRA) does not require that a mailer in a prescreened credit solicitation disclose "all of the material terms [of] the offer." Phinn v. Capital One Auto Finance, Inc., No. 07-CV-10940-DT, 2007 WL 1675282 (E.D. Mich. June 11, 2007). It cited with approval the Southern District of New York's decision in Nasca v. J.P. Morgan Chase Bank, which noted that FCRA specifically enumerates certain disclosures that must be in mailers, and stated that the courts should not read additional disclosure requirements into the statute. In addition, the court rejected the requirement articulated by the Seventh Circuit in Cole v. U.S. Capital that firm offers must contain enough details regarding the terms of the loans being offered to make it possible for the consumer to determine whether the loan has "value." The court explained that "while there may be much to be said for the Cole test, the weight of authority trends heavily in the opposite direction." The court noted that even the Seventh Circuit's Murray v. GMAC Mortgage case limited Cole to "sham offer[s] used to pitch a product rather than extend credit." See the March 16, 2007, December 3, 2004, and January 20, 2006 issues of InfoBytes for discussions of the Nasca, Cole, and Murray cases, respectively. For a copy of the Phinn decision, please contact .
FCRA Does Not Preempt Alaska Insurance Law Restricting Use of Credit Reports. On August 17, the Alaska Supreme Court found that FCRA does not preempt an Alaska insurance statute that limits insurance companies' use of credit reports for underwriting purposes in renewals of existing policies. State of Alaska v. Progressive Cas. Ins. Co., 2007 WL 2333341 (Alaska August 17, 2007). The court determined that FCRA is not subject to the McCarran-Ferguson Act's federal anti-preemption provisions relating to certain state insurance laws because FCRA specifically relates to the business of insurance. As such, to the extent that FCRA's provisions conflict with a state insurance statute, FCRA will preempt the state insurance statute. In order to determine whether the state insurance statute at issue conflicted with FCRA, the court relied on the test in Credit Data of Arizona, Inc. v. State of Arizona, 602 F.2d 195 (9th Cir. 1979), which held that a state law is inconsistent with federal law to the extent that (i) it is impossible to comply simultaneously with both, or (ii) the state regulation obstructs the execution of the purpose of the federal regulation. The court held that the Alaska statute at issue and FCRA do not conflict because FCRA does not provide insurers with an absolute right to use credit for underwriting purposes, and the Alaska statute merely requires consumer consent before an insurer can utilize the consumer's credit report in a renewal. Accordingly, the Alaska statute's restriction on credit score usage would not result in an enforcement action under FCRA. Moreover, the purpose of both FCRA and the state provision is the protection of consumers and, therefore, the state provision does not "stand as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress expressed in the FCRA." This decision can be found at http://www.state.ak.us/courts/ops/sp-6145.pdf.
"Reasonable Investigation" Under FCRA is Question For Jury. On August 7, a federal district court denied summary judgment in an action brought under the Fair Credit Reporting Act (FCRA). Amendoeira v. Monogram Credit Card Bank, No. CV 05-4588, 2007 WL 2325080 (E.D.N.Y. Aug. 7, 2007). The plaintiff alleged that the defendant, GE Money Bank, failed to conduct a "reasonable investigation" of a notice of disputed credit information as required by FCRA. In denying the bank's motion for summary judgment, the court ruled that important issues of fact persisted in the case. The court cited Rosenberg v. Cavalry Investments, LLC, No. 03-1087 2005 WL 2490353 (D. Conn. Sept. 30, 2005) in support of its conclusion that the "issue of reasonableness of investigation is question of fact for [the] jury." For a copy of this decision, please contact .
Non-Resident’s Accessing Credit Report of Resident Gave Rise to Personal Jurisdiction. A federal district court held, in a case alleging violations of the Fair Credit Reporting Act (FCRA), that unauthorized access of a credit report can give rise to personal jurisdiction. Smith v. Cutler, Civil No. 07-78 WJ/DJS, 2007 WL 2322938 (D.N.M. July 18, 2007). In this case, the plaintiffs, New Mexico residents, alleged that defendant Cutler, president and CEO of Your Best Rate Financial, LLC (YBRF), a Georgia resident, accessed the plaintiffs’ credit report for an impermissible purpose. The plaintiffs had previously taken out a mortgage with YBRF, which they subsequently repaid by refinancing with another lender. The plaintiffs then filed suit against YBRF in state court, alleging fraud and Unfair and Deceptive Acts and Practices violations. While that suit was ongoing, Cutler accessed the plaintiffs’ credit report and e-mailed the report to the plaintiffs’ attorney, apparently in an attempt to induce a settlement. After that state court suit was resolved, the plaintiffs filed this federal suit against Cutler and YBRF, alleging FCRA violations. Cutler individually moved for dismissal based on lack of personal jurisdiction. The court denied his motion, holding that personal jurisdiction can exist in a forum where a non-resident defendant obtains a credit report without the permission of the resident plaintiff. The court, in endorsing the “place of the wrong” rule, explained that personal jurisdiction can exist when a defendant “purposefully caused an ‘event’ to occur in the forum state because the alleged conduct of defendant was intentionally calculated to cause injury to a resident of a forum state.” For a copy of this decision, please contact .
DOJ Amicus Brief Opposes Primary Liability For Third Parties Under SEC Rule 10b-5. On August 15, U.S. Solicitor General Paul Clement filed an amicus brief on behalf of the Department of Justice (DOJ), supporting the view that a third party cannot be held liable for damages to private investors, even if the third party participated in a fraudulent scheme with a company that disseminated false earnings or other information to the public, if the third party did not itself make misstatements or otherwise engage in deceptive practices upon which investors relied. Stoneridge Investment Partners LLC v. Scientific-Atlanta, Inc. U.S., No. 06-43. The DOJ argued that permitting primary liability under such circumstances “would constitute a sweeping expansion of the judicially inferred private right of action in [Securities Exchange Act] Section 10(b) and [SEC] Rule 10b-5, potentially exposing customers, vendors, and other actors far removed from the market to billions of dollars in liability when issuers of securities make misstatements to the market.” Previously, the Solicitor General declined to file an amicus brief on behalf of the Securities and Exchange Commission (SEC). The SEC had sought to express a position contrary to DOJ – that third parties who participate in a fraudulent scheme, resulting in the issuance of misstatements to investors by a public company, could be held liable for damages under Rule 10b-5 as primary violators, although they did not make misstatements to investors and were not under a duty to disclose material information to investors. A copy of the Solicitor General’s brief can be found at http://www.usdoj.gov/osg/briefs/2007/3mer/1ami/2006-0043.mer.ami.pdf.
Amended Bankruptcy Code §1325 Prevents Cram-Down of Creditors’ Claim. Reversing a number of bankruptcy court decisions, a New York federal district court held that, under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) amendment to §1325 of the Bankruptcy Code, a creditor holds an undivided purchase money security interest (PMSI) in connection with a motor vehicle sale in which the purchase price of a new vehicle includes the “negative equity” of the trade-in (i.e., the difference between the loan balance on the trade-in and the vehicle’s actual market value). General Motors Acceptance Corp. v. Peaslee, Nos. 07-CV-6037L, 6072L, 6121L, 6168L, 6202L (W.D.N.Y., opinion issued Aug. 15, 2007). Amended § 1325 prevents a bankruptcy court from applying §506 of the Bankruptcy Code to reduce (or “cram-down”) a creditor’s PMSI on a debt. Each of the bankruptcy court decisions involved in this appeal had reduced the creditor’s automobile loan claim to the value of the secured vehicle under §506 because some portion of the claim was not a PMSI. The district court, looking to the legislative history of the BAPCPA, as well as §9-103 of the UCC and New York’s Motor Vehicle Retail Installment Sales Act, for interpretive guidance, held that amended § 1325 “prohibits the bifurcation of any claim if the debt is secured by a PMSI” – even the portions attributable to the payoff of the negative equity on the trade-in vehicle. For a copy of this decision please contact .
Fannie Mae Lender Letter Regarding Subprime Mortgage Lending Statement. On August 15, Fannie Mae issued Lender Letter 03-07 outlining the adoption of the standards set forth in the federal interagency Statement on Subprime Mortgage Lending (covered in the June 29th issue of InfoBytes). Fannie Mae’s guidance discusses, among other things, (i) risk management and underwriting standards including underwriting to the fully amortizing rate, (ii) workout arrangements and foreclosure procedures, (iii) prohibition of prepayment penalties and loans without escrow accounts, and (iv) the addition of a representation and warranty to seller agreements requiring that loans sold comply with the Subprime Statement. All loans covered by the Statement with application dates on or after September 13, 2007 will be required to comply with this letter. One note of interest in the Lender Letter is that it appears to require Fannie Mae sellers to define for themselves which loans are “subprime,” similar to the approach taken by the federal banking agencies in the interagency guidance. Fannie Mae issued further related guidance on August 21. In Announcement 07-15, which updated Fannie Mae’s underwriting standards for ARM products with fixed-rate periods of three years or less (referred to in the Announcement as “Short-Term ARMs”), Fannie Mae states that it now requires that the borrower of a Short-Term ARM be qualified on “the greater of the qualifying rate specified for the transaction, or the fully indexed rate” and “assuming a fully amortizing payment schedule.” The Announcement does not appear to apply that new requirement on ARM products with a fixed-rate period of longer than three years, such as the traditional Fannie Mae 5- and 7-year fixed-rate Arm products. To find both pieces of guidance, go to https://www.efanniemae.com/sf/guides/ssg/2007annlenltr.jsp?referrer=frpromo.
North Carolina Amends Predatory Lending Law. On August 16, the Governor of North Carolina signed into law House Bill 1817, which amends the state’s high cost home loan statute. Points and fees under the statute now include all mortgage broker compensation paid from any source, including compensation paid in a table-funded transaction. In addition, the statute now provides that mortgage brokers who broker a high-cost home loan in violation of the statute will be jointly liable with the lender. This provision could have an interesting interaction with federal law when high-cost home loans are brokered to federally-chartered institutions. The bill also adds a new section to the high cost home loan statute which strictly regulates rate spread home loans. The bill describes rate spread home loans as a home loan in which the difference between the loan’s APR and the yield on U.S. Treasury Securities exceeds 3% for first mortgages, and 5% for second mortgages. In addition, the loan’s APR must equal or exceed the conventional mortgage rate by 1.75 percentage points for a first mortgage, or 3 percentage points for a second mortgage. Prepayment fees or penalties cannot be charged for rate spread home loans. In addition, the lender cannot make a rate spread home loan without first considering the borrower’s ability to repay. A violation of these provisions will be considered usurious and will be subject to the same penalties as usurious loans. The law goes into effect January 1, 2008. For more information on this bill, please see http://www.ncga.state.nc.us/gascripts/BillLookUp/BillLookUp.pl?Session=2007&BillID=H1817.
Non-Resident’s Accessing Credit Report of Resident Gave Rise to Personal Jurisdiction. A federal district court held, in a case alleging violations of the Fair Credit Reporting Act (FCRA), that unauthorized access of a credit report can give rise to personal jurisdiction. Smith v. Cutler, Civil No. 07-78 WJ/DJS, 2007 WL 2322938 (D.N.M. July 18, 2007). In this case, the plaintiffs, New Mexico residents, alleged that defendant Cutler, president and CEO of Your Best Rate Financial, LLC (YBRF), a Georgia resident, accessed the plaintiffs’ credit report for an impermissible purpose. The plaintiffs had previously taken out a mortgage with YBRF, which they subsequently repaid by refinancing with another lender. The plaintiffs then filed suit against YBRF in state court, alleging fraud and Unfair and Deceptive Acts and Practices violations. While that suit was ongoing, Cutler accessed the plaintiffs’ credit report and e-mailed the report to the plaintiffs’ attorney, apparently in an attempt to induce a settlement. After that state court suit was resolved, the plaintiffs filed this federal suit against Cutler and YBRF, alleging FCRA violations. Cutler individually moved for dismissal based on lack of personal jurisdiction. The court denied his motion, holding that personal jurisdiction can exist in a forum where a non-resident defendant obtains a credit report without the permission of the resident plaintiff. The court, in endorsing the “place of the wrong” rule, explained that personal jurisdiction can exist when a defendant “purposefully caused an ‘event’ to occur in the forum state because the alleged conduct of defendant was intentionally calculated to cause injury to a resident of a forum state.” For a copy of this decision, please contact .
"Reasonable Investigation" Under FCRA is Question For Jury. On August 7, a federal district court denied summary judgment in an action brought under the Fair Credit Reporting Act (FCRA). Amendoeira v. Monogram Credit Card Bank, No. CV 05-4588, 2007 WL 2325080 (E.D.N.Y. Aug. 7, 2007). The plaintiff alleged that the defendant, GE Money Bank, failed to conduct a "reasonable investigation" of a notice of disputed credit information as required by FCRA. In denying the bank's motion for summary judgment, the court ruled that important issues of fact persisted in the case. The court cited Rosenberg v. Cavalry Investments, LLC, No. 03-1087 2005 WL 2490353 (D. Conn. Sept. 30, 2005) in support of its conclusion that the "issue of reasonableness of investigation is question of fact for [the] jury." For a copy of this decision, please contact .
District Court Rejects "Material Terms," "Value" Tests for FCRA Firm Offers. A federal district court held that the Fair Credit Reporting Act (FCRA) does not require that a mailer in a prescreened credit solicitation disclose "all of the material terms [of] the offer." Phinn v. Capital One Auto Finance, Inc., No. 07-CV-10940-DT, 2007 WL 1675282 (E.D. Mich. June 11, 2007). It cited with approval the Southern District of New York's decision in Nasca v. J.P. Morgan Chase Bank, which noted that FCRA specifically enumerates certain disclosures that must be in mailers, and stated that the courts should not read additional disclosure requirements into the statute. In addition, the court rejected the requirement articulated by the Seventh Circuit in Cole v. U.S. Capital that firm offers must contain enough details regarding the terms of the loans being offered to make it possible for the consumer to determine whether the loan has "value." The court explained that "while there may be much to be said for the Cole test, the weight of authority trends heavily in the opposite direction." The court noted that even the Seventh Circuit's Murray v. GMAC Mortgage case limited Cole to "sham offer[s] used to pitch a product rather than extend credit." See the March 16, 2007, December 3, 2004, and January 20, 2006 issues of InfoBytes for discussions of the Nasca, Cole, and Murray cases, respectively. For a copy of the Phinn decision, please contact .
Dodd Calls on Treasury and HUD to Modernize FHA. On August 23, Senator Chris Dodd (D – CT), Chairman of the Senate Banking Committee, sent a letter to the Secretaries of the Treasury and Housing and Urban Development (HUD) requesting that they “expedite” their plans of modernizing the Federal Housing Administration (FHA) in order to help fight the current wave of mortgagor defaults. Dodd, citing the FHA-insurance fund’s current strength, stated in his letter that “it is essential that the FHA act effectively and prudentially to preserve homeownership for as many Americans as possible.” The Senate Banking Committee press release can be found at http://banking.senate.gov/index.cfm?Fuseaction=Articles.Detail&Article_id=179.
FinCEN and Banking Agencies Release New BSA/AML Manual. On August 24, the Financial Crimes Enforcement Network (FinCEN) together with the federal banking agencies (FRB, FDIC, OTS, OCC, and NCUA) and the Conference of State Bank Supervisors announced the release of a new Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual. The revised portions, which incorporate guidance since the previous edition’s publication in July 2006, are noted in the manual’s index. For the official FinCEN press release, see http://www.fincen.gov/FFIEC_NR.html.
"Reasonable Investigation" Under FCRA is Question For Jury. On August 7, a federal district court denied summary judgment in an action brought under the Fair Credit Reporting Act (FCRA). Amendoeira v. Monogram Credit Card Bank, No. CV 05-4588, 2007 WL 2325080 (E.D.N.Y. Aug. 7, 2007). The plaintiff alleged that the defendant, GE Money Bank, failed to conduct a "reasonable investigation" of a notice of disputed credit information as required by FCRA. In denying the bank's motion for summary judgment, the court ruled that important issues of fact persisted in the case. The court cited Rosenberg v. Cavalry Investments, LLC, No. 03-1087 2005 WL 2490353 (D. Conn. Sept. 30, 2005) in support of its conclusion that the "issue of reasonableness of investigation is question of fact for [the] jury." For a copy of this decision, please contact .
Non-Resident’s Accessing Credit Report of Resident Gave Rise to Personal Jurisdiction. A federal district court held, in a case alleging violations of the Fair Credit Reporting Act (FCRA), that unauthorized access of a credit report can give rise to personal jurisdiction. Smith v. Cutler, Civil No. 07-78 WJ/DJS, 2007 WL 2322938 (D.N.M. July 18, 2007). In this case, the plaintiffs, New Mexico residents, alleged that defendant Cutler, president and CEO of Your Best Rate Financial, LLC (YBRF), a Georgia resident, accessed the plaintiffs’ credit report for an impermissible purpose. The plaintiffs had previously taken out a mortgage with YBRF, which they subsequently repaid by refinancing with another lender. The plaintiffs then filed suit against YBRF in state court, alleging fraud and Unfair and Deceptive Acts and Practices violations. While that suit was ongoing, Cutler accessed the plaintiffs’ credit report and e-mailed the report to the plaintiffs’ attorney, apparently in an attempt to induce a settlement. After that state court suit was resolved, the plaintiffs filed this federal suit against Cutler and YBRF, alleging FCRA violations. Cutler individually moved for dismissal based on lack of personal jurisdiction. The court denied his motion, holding that personal jurisdiction can exist in a forum where a non-resident defendant obtains a credit report without the permission of the resident plaintiff. The court, in endorsing the “place of the wrong” rule, explained that personal jurisdiction can exist when a defendant “purposefully caused an ‘event’ to occur in the forum state because the alleged conduct of defendant was intentionally calculated to cause injury to a resident of a forum state.” For a copy of this decision, please contact .
District Court Rejects "Material Terms," "Value" Tests for FCRA Firm Offers. A federal district court held that the Fair Credit Reporting Act (FCRA) does not require that a mailer in a prescreened credit solicitation disclose "all of the material terms [of] the offer." Phinn v. Capital One Auto Finance, Inc., No. 07-CV-10940-DT, 2007 WL 1675282 (E.D. Mich. June 11, 2007). It cited with approval the Southern District of New York's decision in Nasca v. J.P. Morgan Chase Bank, which noted that FCRA specifically enumerates certain disclosures that must be in mailers, and stated that the courts should not read additional disclosure requirements into the statute. In addition, the court rejected the requirement articulated by the Seventh Circuit in Cole v. U.S. Capital that firm offers must contain enough details regarding the terms of the loans being offered to make it possible for the consumer to determine whether the loan has "value." The court explained that "while there may be much to be said for the Cole test, the weight of authority trends heavily in the opposite direction." The court noted that even the Seventh Circuit's Murray v. GMAC Mortgage case limited Cole to "sham offer[s] used to pitch a product rather than extend credit." See the March 16, 2007, December 3, 2004, and January 20, 2006 issues of InfoBytes for discussions of the Nasca, Cole, and Murray cases, respectively. For a copy of the Phinn decision, please contact .
Non-Resident’s Accessing Credit Report of Resident Gave Rise to Personal Jurisdiction. A federal district court held, in a case alleging violations of the Fair Credit Reporting Act (FCRA), that unauthorized access of a credit report can give rise to personal jurisdiction. Smith v. Cutler, Civil No. 07-78 WJ/DJS, 2007 WL 2322938 (D.N.M. July 18, 2007). In this case, the plaintiffs, New Mexico residents, alleged that defendant Cutler, president and CEO of Your Best Rate Financial, LLC (YBRF), a Georgia resident, accessed the plaintiffs’ credit report for an impermissible purpose. The plaintiffs had previously taken out a mortgage with YBRF, which they subsequently repaid by refinancing with another lender. The plaintiffs then filed suit against YBRF in state court, alleging fraud and Unfair and Deceptive Acts and Practices violations. While that suit was ongoing, Cutler accessed the plaintiffs’ credit report and e-mailed the report to the plaintiffs’ attorney, apparently in an attempt to induce a settlement. After that state court suit was resolved, the plaintiffs filed this federal suit against Cutler and YBRF, alleging FCRA violations. Cutler individually moved for dismissal based on lack of personal jurisdiction. The court denied his motion, holding that personal jurisdiction can exist in a forum where a non-resident defendant obtains a credit report without the permission of the resident plaintiff. The court, in endorsing the “place of the wrong” rule, explained that personal jurisdiction can exist when a defendant “purposefully caused an ‘event’ to occur in the forum state because the alleged conduct of defendant was intentionally calculated to cause injury to a resident of a forum state.” For a copy of this decision, please contact .
District Court Rejects "Material Terms," "Value" Tests for FCRA Firm Offers. A federal district court held that the Fair Credit Reporting Act (FCRA) does not require that a mailer in a prescreened credit solicitation disclose "all of the material terms [of] the offer." Phinn v. Capital One Auto Finance, Inc., No. 07-CV-10940-DT, 2007 WL 1675282 (E.D. Mich. June 11, 2007). It cited with approval the Southern District of New York's decision in Nasca v. J.P. Morgan Chase Bank, which noted that FCRA specifically enumerates certain disclosures that must be in mailers, and stated that the courts should not read additional disclosure requirements into the statute. In addition, the court rejected the requirement articulated by the Seventh Circuit in Cole v. U.S. Capital that firm offers must contain enough details regarding the terms of the loans being offered to make it possible for the consumer to determine whether the loan has "value." The court explained that "while there may be much to be said for the Cole test, the weight of authority trends heavily in the opposite direction." The court noted that even the Seventh Circuit's Murray v. GMAC Mortgage case limited Cole to "sham offer[s] used to pitch a product rather than extend credit." See the March 16, 2007, December 3, 2004, and January 20, 2006 issues of InfoBytes for discussions of the Nasca, Cole, and Murray cases, respectively. For a copy of the Phinn decision, please contact .
FinCEN and Banking Agencies Release New BSA/AML Manual. On August 24, the Financial Crimes Enforcement Network (FinCEN) together with the federal banking agencies (FRB, FDIC, OTS, OCC, and NCUA) and the Conference of State Bank Supervisors announced the release of a new Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual. The revised portions, which incorporate guidance since the previous edition’s publication in July 2006, are noted in the manual’s index. For the official FinCEN press release, see http://www.fincen.gov/FFIEC_NR.html.
Amended Bankruptcy Code §1325 Prevents Cram-Down of Creditors’ Claim. Reversing a number of bankruptcy court decisions, a New York federal district court held that, under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) amendment to §1325 of the Bankruptcy Code, a creditor holds an undivided purchase money security interest (PMSI) in connection with a motor vehicle sale in which the purchase price of a new vehicle includes the “negative equity” of the trade-in (i.e., the difference between the loan balance on the trade-in and the vehicle’s actual market value). General Motors Acceptance Corp. v. Peaslee, Nos. 07-CV-6037L, 6072L, 6121L, 6168L, 6202L (W.D.N.Y., opinion issued Aug. 15, 2007). Amended § 1325 prevents a bankruptcy court from applying §506 of the Bankruptcy Code to reduce (or “cram-down”) a creditor’s PMSI on a debt. Each of the bankruptcy court decisions involved in this appeal had reduced the creditor’s automobile loan claim to the value of the secured vehicle under §506 because some portion of the claim was not a PMSI. The district court, looking to the legislative history of the BAPCPA, as well as §9-103 of the UCC and New York’s Motor Vehicle Retail Installment Sales Act, for interpretive guidance, held that amended § 1325 “prohibits the bifurcation of any claim if the debt is secured by a PMSI” – even the portions attributable to the payoff of the negative equity on the trade-in vehicle. For a copy of this decision please contact .
DOJ Amicus Brief Opposes Primary Liability For Third Parties Under SEC Rule 10b-5. On August 15, U.S. Solicitor General Paul Clement filed an amicus brief on behalf of the Department of Justice (DOJ), supporting the view that a third party cannot be held liable for damages to private investors, even if the third party participated in a fraudulent scheme with a company that disseminated false earnings or other information to the public, if the third party did not itself make misstatements or otherwise engage in deceptive practices upon which investors relied. Stoneridge Investment Partners LLC v. Scientific-Atlanta, Inc. U.S., No. 06-43. The DOJ argued that permitting primary liability under such circumstances “would constitute a sweeping expansion of the judicially inferred private right of action in [Securities Exchange Act] Section 10(b) and [SEC] Rule 10b-5, potentially exposing customers, vendors, and other actors far removed from the market to billions of dollars in liability when issuers of securities make misstatements to the market.” Previously, the Solicitor General declined to file an amicus brief on behalf of the Securities and Exchange Commission (SEC). The SEC had sought to express a position contrary to DOJ – that third parties who participate in a fraudulent scheme, resulting in the issuance of misstatements to investors by a public company, could be held liable for damages under Rule 10b-5 as primary violators, although they did not make misstatements to investors and were not under a duty to disclose material information to investors. A copy of the Solicitor General’s brief can be found at http://www.usdoj.gov/osg/briefs/2007/3mer/1ami/2006-0043.mer.ami.pdf.
Non-Resident’s Accessing Credit Report of Resident Gave Rise to Personal Jurisdiction. A federal district court held, in a case alleging violations of the Fair Credit Reporting Act (FCRA), that unauthorized access of a credit report can give rise to personal jurisdiction. Smith v. Cutler, Civil No. 07-78 WJ/DJS, 2007 WL 2322938 (D.N.M. July 18, 2007). In this case, the plaintiffs, New Mexico residents, alleged that defendant Cutler, president and CEO of Your Best Rate Financial, LLC (YBRF), a Georgia resident, accessed the plaintiffs’ credit report for an impermissible purpose. The plaintiffs had previously taken out a mortgage with YBRF, which they subsequently repaid by refinancing with another lender. The plaintiffs then filed suit against YBRF in state court, alleging fraud and Unfair and Deceptive Acts and Practices violations. While that suit was ongoing, Cutler accessed the plaintiffs’ credit report and e-mailed the report to the plaintiffs’ attorney, apparently in an attempt to induce a settlement. After that state court suit was resolved, the plaintiffs filed this federal suit against Cutler and YBRF, alleging FCRA violations. Cutler individually moved for dismissal based on lack of personal jurisdiction. The court denied his motion, holding that personal jurisdiction can exist in a forum where a non-resident defendant obtains a credit report without the permission of the resident plaintiff. The court, in endorsing the “place of the wrong” rule, explained that personal jurisdiction can exist when a defendant “purposefully caused an ‘event’ to occur in the forum state because the alleged conduct of defendant was intentionally calculated to cause injury to a resident of a forum state.” For a copy of this decision, please contact .
FCRA Does Not Preempt Alaska Insurance Law Restricting Use of Credit Reports. On August 17, the Alaska Supreme Court found that FCRA does not preempt an Alaska insurance statute that limits insurance companies' use of credit reports for underwriting purposes in renewals of existing policies. State of Alaska v. Progressive Cas. Ins. Co., 2007 WL 2333341 (Alaska August 17, 2007). The court determined that FCRA is not subject to the McCarran-Ferguson Act's federal anti-preemption provisions relating to certain state insurance laws because FCRA specifically relates to the business of insurance. As such, to the extent that FCRA's provisions conflict with a state insurance statute, FCRA will preempt the state insurance statute. In order to determine whether the state insurance statute at issue conflicted with FCRA, the court relied on the test in Credit Data of Arizona, Inc. v. State of Arizona, 602 F.2d 195 (9th Cir. 1979), which held that a state law is inconsistent with federal law to the extent that (i) it is impossible to comply simultaneously with both, or (ii) the state regulation obstructs the execution of the purpose of the federal regulation. The court held that the Alaska statute at issue and FCRA do not conflict because FCRA does not provide insurers with an absolute right to use credit for underwriting purposes, and the Alaska statute merely requires consumer consent before an insurer can utilize the consumer's credit report in a renewal. Accordingly, the Alaska statute's restriction on credit score usage would not result in an enforcement action under FCRA. Moreover, the purpose of both FCRA and the state provision is the protection of consumers and, therefore, the state provision does not "stand as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress expressed in the FCRA." This decision can be found at http://www.state.ak.us/courts/ops/sp-6145.pdf.
"Reasonable Investigation" Under FCRA is Question For Jury. On August 7, a federal district court denied summary judgment in an action brought under the Fair Credit Reporting Act (FCRA). Amendoeira v. Monogram Credit Card Bank, No. CV 05-4588, 2007 WL 2325080 (E.D.N.Y. Aug. 7, 2007). The plaintiff alleged that the defendant, GE Money Bank, failed to conduct a "reasonable investigation" of a notice of disputed credit information as required by FCRA. In denying the bank's motion for summary judgment, the court ruled that important issues of fact persisted in the case. The court cited Rosenberg v. Cavalry Investments, LLC, No. 03-1087 2005 WL 2490353 (D. Conn. Sept. 30, 2005) in support of its conclusion that the "issue of reasonableness of investigation is question of fact for [the] jury." For a copy of this decision, please contact .
District Court Rejects "Material Terms," "Value" Tests for FCRA Firm Offers. A federal district court held that the Fair Credit Reporting Act (FCRA) does not require that a mailer in a prescreened credit solicitation disclose "all of the material terms [of] the offer." Phinn v. Capital One Auto Finance, Inc., No. 07-CV-10940-DT, 2007 WL 1675282 (E.D. Mich. June 11, 2007). It cited with approval the Southern District of New York's decision in Nasca v. J.P. Morgan Chase Bank, which noted that FCRA specifically enumerates certain disclosures that must be in mailers, and stated that the courts should not read additional disclosure requirements into the statute. In addition, the court rejected the requirement articulated by the Seventh Circuit in Cole v. U.S. Capital that firm offers must contain enough details regarding the terms of the loans being offered to make it possible for the consumer to determine whether the loan has "value." The court explained that "while there may be much to be said for the Cole test, the weight of authority trends heavily in the opposite direction." The court noted that even the Seventh Circuit's Murray v. GMAC Mortgage case limited Cole to "sham offer[s] used to pitch a product rather than extend credit." See the March 16, 2007, December 3, 2004, and January 20, 2006 issues of InfoBytes for discussions of the Nasca, Cole, and Murray cases, respectively. For a copy of the Phinn decision, please contact .
DOJ Amicus Brief Opposes Primary Liability For Third Parties Under SEC Rule 10b-5. On August 15, U.S. Solicitor General Paul Clement filed an amicus brief on behalf of the Department of Justice (DOJ), supporting the view that a third party cannot be held liable for damages to private investors, even if the third party participated in a fraudulent scheme with a company that disseminated false earnings or other information to the public, if the third party did not itself make misstatements or otherwise engage in deceptive practices upon which investors relied. Stoneridge Investment Partners LLC v. Scientific-Atlanta, Inc. U.S., No. 06-43. The DOJ argued that permitting primary liability under such circumstances “would constitute a sweeping expansion of the judicially inferred private right of action in [Securities Exchange Act] Section 10(b) and [SEC] Rule 10b-5, potentially exposing customers, vendors, and other actors far removed from the market to billions of dollars in liability when issuers of securities make misstatements to the market.” Previously, the Solicitor General declined to file an amicus brief on behalf of the Securities and Exchange Commission (SEC). The SEC had sought to express a position contrary to DOJ – that third parties who participate in a fraudulent scheme, resulting in the issuance of misstatements to investors by a public company, could be held liable for damages under Rule 10b-5 as primary violators, although they did not make misstatements to investors and were not under a duty to disclose material information to investors. A copy of the Solicitor General’s brief can be found at http://www.usdoj.gov/osg/briefs/2007/3mer/1ami/2006-0043.mer.ami.pdf.
Amended Bankruptcy Code §1325 Prevents Cram-Down of Creditors’ Claim. Reversing a number of bankruptcy court decisions, a New York federal district court held that, under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) amendment to §1325 of the Bankruptcy Code, a creditor holds an undivided purchase money security interest (PMSI) in connection with a motor vehicle sale in which the purchase price of a new vehicle includes the “negative equity” of the trade-in (i.e., the difference between the loan balance on the trade-in and the vehicle’s actual market value). General Motors Acceptance Corp. v. Peaslee, Nos. 07-CV-6037L, 6072L, 6121L, 6168L, 6202L (W.D.N.Y., opinion issued Aug. 15, 2007). Amended § 1325 prevents a bankruptcy court from applying §506 of the Bankruptcy Code to reduce (or “cram-down”) a creditor’s PMSI on a debt. Each of the bankruptcy court decisions involved in this appeal had reduced the creditor’s automobile loan claim to the value of the secured vehicle under §506 because some portion of the claim was not a PMSI. The district court, looking to the legislative history of the BAPCPA, as well as §9-103 of the UCC and New York’s Motor Vehicle Retail Installment Sales Act, for interpretive guidance, held that amended § 1325 “prohibits the bifurcation of any claim if the debt is secured by a PMSI” – even the portions attributable to the payoff of the negative equity on the trade-in vehicle. For a copy of this decision please contact .
FCRA Does Not Preempt Alaska Insurance Law Restricting Use of Credit Reports. On August 17, the Alaska Supreme Court found that FCRA does not preempt an Alaska insurance statute that limits insurance companies' use of credit reports for underwriting purposes in renewals of existing policies. State of Alaska v. Progressive Cas. Ins. Co., 2007 WL 2333341 (Alaska August 17, 2007). The court determined that FCRA is not subject to the McCarran-Ferguson Act's federal anti-preemption provisions relating to certain state insurance laws because FCRA specifically relates to the business of insurance. As such, to the extent that FCRA's provisions conflict with a state insurance statute, FCRA will preempt the state insurance statute. In order to determine whether the state insurance statute at issue conflicted with FCRA, the court relied on the test in Credit Data of Arizona, Inc. v. State of Arizona, 602 F.2d 195 (9th Cir. 1979), which held that a state law is inconsistent with federal law to the extent that (i) it is impossible to comply simultaneously with both, or (ii) the state regulation obstructs the execution of the purpose of the federal regulation. The court held that the Alaska statute at issue and FCRA do not conflict because FCRA does not provide insurers with an absolute right to use credit for underwriting purposes, and the Alaska statute merely requires consumer consent before an insurer can utilize the consumer's credit report in a renewal. Accordingly, the Alaska statute's restriction on credit score usage would not result in an enforcement action under FCRA. Moreover, the purpose of both FCRA and the state provision is the protection of consumers and, therefore, the state provision does not "stand as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress expressed in the FCRA." This decision can be found at http://www.state.ak.us/courts/ops/sp-6145.pdf.
FinCEN and Banking Agencies Release New BSA/AML Manual. On August 24, the Financial Crimes Enforcement Network (FinCEN) together with the federal banking agencies (FRB, FDIC, OTS, OCC, and NCUA) and the Conference of State Bank Supervisors announced the release of a new Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual. The revised portions, which incorporate guidance since the previous edition’s publication in July 2006, are noted in the manual’s index. For the official FinCEN press release, see http://www.fincen.gov/FFIEC_NR.html.
Non-Resident’s Accessing Credit Report of Resident Gave Rise to Personal Jurisdiction. A federal district court held, in a case alleging violations of the Fair Credit Reporting Act (FCRA), that unauthorized access of a credit report can give rise to personal jurisdiction. Smith v. Cutler, Civil No. 07-78 WJ/DJS, 2007 WL 2322938 (D.N.M. July 18, 2007). In this case, the plaintiffs, New Mexico residents, alleged that defendant Cutler, president and CEO of Your Best Rate Financial, LLC (YBRF), a Georgia resident, accessed the plaintiffs’ credit report for an impermissible purpose. The plaintiffs had previously taken out a mortgage with YBRF, which they subsequently repaid by refinancing with another lender. The plaintiffs then filed suit against YBRF in state court, alleging fraud and Unfair and Deceptive Acts and Practices violations. While that suit was ongoing, Cutler accessed the plaintiffs’ credit report and e-mailed the report to the plaintiffs’ attorney, apparently in an attempt to induce a settlement. After that state court suit was resolved, the plaintiffs filed this federal suit against Cutler and YBRF, alleging FCRA violations. Cutler individually moved for dismissal based on lack of personal jurisdiction. The court denied his motion, holding that personal jurisdiction can exist in a forum where a non-resident defendant obtains a credit report without the permission of the resident plaintiff. The court, in endorsing the “place of the wrong” rule, explained that personal jurisdiction can exist when a defendant “purposefully caused an ‘event’ to occur in the forum state because the alleged conduct of defendant was intentionally calculated to cause injury to a resident of a forum state.” For a copy of this decision, please contact .
"Reasonable Investigation" Under FCRA is Question For Jury. On August 7, a federal district court denied summary judgment in an action brought under the Fair Credit Reporting Act (FCRA). Amendoeira v. Monogram Credit Card Bank, No. CV 05-4588, 2007 WL 2325080 (E.D.N.Y. Aug. 7, 2007). The plaintiff alleged that the defendant, GE Money Bank, failed to conduct a "reasonable investigation" of a notice of disputed credit information as required by FCRA. In denying the bank's motion for summary judgment, the court ruled that important issues of fact persisted in the case. The court cited Rosenberg v. Cavalry Investments, LLC, No. 03-1087 2005 WL 2490353 (D. Conn. Sept. 30, 2005) in support of its conclusion that the "issue of reasonableness of investigation is question of fact for [the] jury." For a copy of this decision, please contact .
District Court Rejects "Material Terms," "Value" Tests for FCRA Firm Offers. A federal district court held that the Fair Credit Reporting Act (FCRA) does not require that a mailer in a prescreened credit solicitation disclose "all of the material terms [of] the offer." Phinn v. Capital One Auto Finance, Inc., No. 07-CV-10940-DT, 2007 WL 1675282 (E.D. Mich. June 11, 2007). It cited with approval the Southern District of New York's decision in Nasca v. J.P. Morgan Chase Bank, which noted that FCRA specifically enumerates certain disclosures that must be in mailers, and stated that the courts should not read additional disclosure requirements into the statute. In addition, the court rejected the requirement articulated by the Seventh Circuit in Cole v. U.S. Capital that firm offers must contain enough details regarding the terms of the loans being offered to make it possible for the consumer to determine whether the loan has "value." The court explained that "while there may be much to be said for the Cole test, the weight of authority trends heavily in the opposite direction." The court noted that even the Seventh Circuit's Murray v. GMAC Mortgage case limited Cole to "sham offer[s] used to pitch a product rather than extend credit." See the March 16, 2007, December 3, 2004, and January 20, 2006 issues of InfoBytes for discussions of the Nasca, Cole, and Murray cases, respectively. For a copy of the Phinn decision, please contact .
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