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InfoBytes
CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS
Topics – Covered This Week (Click to View)
FEDERAL ISSUES
Agencies Encourage Servicers to Mitigate Loss While “Preserving Homeownership.” On September 4, the federal banking agencies (FRB, FDIC, OCC, OTS, and NCUA) and the Conference of State Bank Supervisors (CSBS) issued a statement “encouraging” financial institutions that pool and service securitized mortgages take steps to mitigate loss without foreclosure. The agencies stated that servicers “should review the governing documents for the securitization trusts to determine the full extent of their authority to restructure loans that are delinquent or in default or are in imminent risk of default.” The statement also brought attention to guidance from the Treasury Department and the Securities and Exchange Commission that loan modifications to prevent defaults would not violate tax or accounting rules (see the July 27th issue of InfoBytes). “Servicers are encouraged,” the statement said, “to use [their] authority… to take appropriate steps when an increased default risk is identified.” “Appropriate steps” were defined to include, if permissible under the securitization agreements: (i) actively identifying borrowers at higher risk of default, particularly due to payment shock, (ii) contacting borrowers to determine their ability to repay, (iii) assessing whether “there is a reasonable basis to conclude that default is ‘reasonably foreseeable,’” and (iv) “exploring” solutions that mitigate loss while avoiding “foreclosure or other actions that result in a loss of homeownership.” For the official press release, please see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070904/default.htm.
FDIC, CSBS, and AARMR “Caution” Servicers to Avoid DTI Ratios Above 50% in Loan Modifications. On September 4, in a joint press release, the Federal Deposit Insurance Corporation (FDIC), the CSBS, and the American Association of Residential Mortgage Regulators (AARMR) announced that they were urging financial institutions they supervise that, when they modify loans in the course of conducting loss mitigation, they should avoid loans with debt-to-income (DTI) ratios above 50 percent. This release, as well as the FDIC’s attendant Financial Institution Letter, were considered to be supplements to the interagency announcement on servicer loss mitigation (discussed above). The agencies note that the “DTI ratio should include the customer’s total monthly housing-related payments (e.g., principal, interest, taxes, and insurance [PITI]…)” and that “attention should also be given to the borrower’s other obligations and resources.” FDIC Chairman Sheila Bair expressed hope that the guidance would provide “a benchmark for servicers to consider when working with borrowers.” The joint press release can be found at http://www.fdic.gov/news/news/press/2007/pr07074.html.
Dodd Announces Anti-Predatory Lending Legislation. In a September 5th press release, Senate Banking Committee Chairman Christopher Dodd (D – CT) announced his intention to introduce major anti-predatory lending legislation, “to put an end to the practices that have forced thousands of Americans into foreclosure.” Senator Dodd, who is currently seeking the Democratic nomination for the presidency, has not yet introduced or released text of the bill, but has released an outline of its major provisions. These include, among other measures: (i) an expansion of the loans covered by the Home Ownership and Equity Protection Act (HOEPA) by including yield spread premiums in the HOEPA rates-and-fees trigger calculation, (ii) the prohibition of balloon payments, yield spread premiums, and prepayment penalties for HOEPA loans, (iii) the creation of a fiduciary obligation of brokers to borrowers, and where brokers receive yield spread premiums, of lenders to borrowers, (iv) a prohibition on “steering” by prohibiting giving a “subprime” loan to a borrower qualifying for a “prime” loan, (v) holding lenders liable for appraisals “to avoid the appraisal problems created in the current climate,” (vi) tighter requirements on home loan servicing including limiting fees, (vii) encouraging foreclosure prevention counseling, and (viii) granting the FDIC and OCC unfair and deceptive acts and practices rulemaking authority under the FTC Act as currently granted to the OTS. For the Senate Banking Committee press release, see http://banking.senate.gov/.
STATE ISSUES
North Carolina Adopts Mortgage Debt Collection and Servicing Act; Clarifies Statute of Limitations for Usury. On August 16, the governor of North Carolina signed into law the Mortgage Debt Collection and Servicing Act (H.B. 1374). The law extends the state's jurisdiction over persons who acquire servicing rights to loans made in North Carolina. Such persons will be deemed to have consented to the jurisdiction of North Carolina courts for any claims related to the loan. The law also revises the mandatory notice to be given to the debtor in a foreclosure action, and provides that a claim for usury (subject to the 2-year statute of limitations for usury), including a claim for usurious points and fees, accrues with each payment made and accepted on the loan. This portion of the act is effective August 16, 2007, in response to a recent decision of the North Carolina Supreme Court on the statute of limitations for usury (see the December 22, 2006 issue of InfoBytes). The act also imposes various obligations on servicers of home loans and provides penalties for noncompliance, effective April 1, 2008. Among the significant new requirements are that servicers must impose fees within 45 days of the date the fees accrue, and if imposed, servicing-related fees must be explained to the borrower clearly and conspicuously within 30 days. Full loan payments on home mortgage loans must be credited within one business day of the date received, or an explanation of the servicer’s action must be provided to the borrower within 10 business days. A servicer must pay escrow items promptly to avoid late penalties. Disputes concerning home loan accounts or borrower claims of error must be kept until the loan is paid off, satisfied, or sold. A servicer must respond within 25 days of a borrower’s written request for a copy of the original note, statement identifying fees assessed on the account, or a payment history covering at least two years. The first response is free and the servicer may charge up to $50 for additional statements. A borrower may sue for violation of the Mortgage Debt Collection and Servicing Act, but prior to suit, the borrower must notify the servicer in writing of any claimed errors or disputes that form the basis of the claim. For more information regarding this act, please see http://www.ncleg.net/Sessions/2007/Bills/House/PDF/H1374v7.pdf.
COURTS
District Court: National Bank Usury Preemption Follows Assigned Credit-Card Accounts. On August 30, a federal district court dismissed a borrower’s Fair Debt Collection Practices Act (FDCPA) claim, accusing a non-bank debt purchaser of collecting usurious interest, reasoning that the debt was originated by a national bank and therefore enjoys National Bank Act (NBA) usury preemption. Munoz v. Pipestone Financial, LLC, No. 04-4142, 2007 U.S. Dist. LEXIS 64314 (D. Minn. August 30, 2007). The plaintiff opened a credit-card account from First USA Bank, a Delaware-based national bank, which after closing the account sold the debt to Pipestone. Pipestone then took legal action to collect the balance of the account, to which it continued to add interest accruing at a rate greater than permitted by relevant state usury law. The plaintiff alleged that this was a violation of the FDCPA’s prohibition against collecting or attempting to collect a fee that is not authorized by applicable law or by the loan agreement. The court held, however, that First USA’s preemption of state usury law under the NBA followed the loan through assignment. In dismissing this count of the plaintiff’s claim, the court quoted Phipps v. FDIC, 417 F.3d, (8th Cir. 2005), stating “courts must look at the originating entity… not the assigning entity… in determining whether the NBA applies.” On the second count of the borrower’s complaint, which alleged that Pipestone and the law firm hired to pursue the debt in court had attempted to collect legal fees that violated the FDCPA, the court granted summary judgment to the plaintiff. The borrower signed an initial credit card agreement consenting to pay “expenses actually incurred” and “reasonable [attorney] fees” in connection collecting the debt. However, the court found that by agreeing to pay a percentage of money collected from their borrower to their attorneys, Pipestone could not additionally demand legal fees at the outset of the legal action as they had not been “actually incurred.” For a copy of this opinion, please contact .
Borrowers’ Discrimination Case Survives Lenders’ Motion to Dismiss. A federal district court denied a defendant lenders’ motion to dismiss a discrimination suit brought by three African American couples alleging that the lenders discriminated against them on the basis of race by adding terms and conditions to their mortgage contracts that were not applied to similarly-situated Caucasian borrowers. Anderson v. Wachovia Mortgage Corp., Civ. No. 06-567-SLR, 2007 U.S. Dist. LEXIS 51833 (D. Del. July 18, 2007). The plaintiffs alleged that the defendants were liable for racial discrimination under 42 U.S.C. § 1981. The court denied the defendants’ motion to dismiss the plaintiffs’ § 1981 claims as time-barred, finding that it lacked sufficient information to determine the precise nature of the contracts at issue, a factor essential to determining the appropriate statute of limitations for the plaintiffs’ § 1981 claims. The court also found that the allegations in the complaint were sufficient to draw a reasonable inference of intentional racial discrimination. In denying the defendants’ motion to dismiss the § 1981 claims on this basis, the court analyzed the plaintiffs’ allegations in light of the elements for a prima facie § 1981 claim described by the Third Circuit in Brown v. Philip Morris, Inc., 250 F.3d 789 (3d Cir. 2001) (“(1) [that plaintiff] is a member of a racial minority; (2) intent to discriminate on the basis of race by the defendant; and (3) discrimination concerning one or more of the activities enumerated in the statute, which includes the right to make and enforce contracts.”). The plaintiffs also alleged that the defendants were liable under Delaware law for tortious interference with contractual relations, breach of contract, and breach of the covenant of good faith and fair dealing. The court did grant the defendants’ motion to dismiss with respect to the breach of contract and tortious interference with contractual relations claims, but found that the plaintiffs had stated a claim for breach of the implied covenant of good faith and fair dealing sufficient to withstand the defendants’ motion to dismiss. Please contact for a copy of this decision.
Eleventh Circuit Holds Arbitration Agreement Unconscionable and Unenforceable. The U.S. Court of Appeals for the Eleventh Circuit recently reversed a federal district court’s decision to compel arbitration, finding the class action waiver in the arbitration provision to be unconscionable. Dale v. Comcast Corporation, No. 06-15516 (11th Cir., opinion filed Sept. 4, 2007). In Dale, plaintiffs alleged that Comcast collected inflated “pass-through” franchise fees in violation of state law based on the Cable Communications Policy Act. Following removal, the district court granted Comcast’s motion to compel arbitration on the basis of an arbitration provision in Comcast’s welcome kit, invoices and annual notice. This provision included a class action waiver as well as a severability clause that rendered the entire arbitration provision unenforceable in the event the class action waiver was not enforced. Plaintiffs appealed the decision, and the Eleventh Circuit reversed, refusing to enforce the arbitration provision after finding the class action waiver to be substantively unconscionable. According to the Court of Appeals, the class action waiver effectively foreclosed plaintiffs’ claims, which were quite small (allegedly less than $1 per class member), potentially exposed plaintiffs to pay attorneys’ fees and other costs associated with the arbitration, and were unlikely to allow for the recovery of attorneys’ fees. Thus, in this case, the waiver allowed Comcast to engage in potentially unlawful “unchecked market behavior,” rendering it substantively unconscionable. As a result of the arbitration provision’s severability clause, the entire provision was unenforceable. For a copy of this decision, please see http://www.ca11.uscourts.gov/opinions/ops/200615516.pdf.
FACTA Credit Card Truncation Found to Apply to Electronic Receipts. In a recent case, a California federal district court rejected the argument that a statutory prohibition against printing the expiration dates of credit or debit cards on receipts does not include electronic transmissions of receipts.Vasquez-Torres v. Stubhub, Inc., No. 07-1328, 2007 U.S. Dist. LEXIS 63719 (C.D. Cal., Jul. 2, 2007). In this case, after completing online transactions, the merchant sent the consumer electronically printed receipts that included the expiration date of the card used. The plaintiff claimed that this violated a provision of the Fair and Accurate Transactions Act of 2003 (FACTA) that prohibits any person "that accepts credit cards or debit cards for the transaction of business" from printing the expiration date of the card "upon any receipt provided to the cardholder at the point of the sale or transaction." The merchant argued that because it only provided electronic transmissions that included the information, it did not "print" the receipt. The court disagreed and denied the motion to dismiss, stating that the common definition of "print" includes anything that makes an impression, which does include an image on a computer screen. The court also stated that Congress, in enacting this provision, likely "intended to prevent identity theft in all its forms," which would include information transmitted electronically. For a copy of this decision, please contact .
Court Rules That Class Arbitration Waivers May Not Be Enforced. On August 30, the California Supreme Court held that, in some cases, class arbitration waivers should not be enforced if they would undermine the vindication of individuals’ statutory rights. Gentry v. Superior Court of Los Angeles County, No. S141502, 2007 WL 2445122 (Cal. Aug. 30, 2007). This case arose in the context of employment law, with individual employees seeking overtime pay. The employees had agreed to arbitration, and the arbitration agreement precluded class-wide arbitration. The California Supreme Court, in Discover Bank v. Superior Court, 36 Cal.4th 148 (Cal. 2005), had previously held that some class arbitration waivers in consumer contracts of adhesion were unenforceable, as being contrary to public policy. The Gentry court clarified that holding, stating that a class arbitration waiver should not be enforced if class arbitration would be a substantially more effective method of asserting the rights of individuals than personal arbitration. The court said, “If [a court] concludes . . . that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver.” The court then remanded the case to determine whether class arbitration should be pursued, in spite of the waiver. For a copy of the opinion, please see http://www.courtinfo.ca.gov/opinions/documents/S141502.PDF.
FIRM NEWS
Jonathan Jerison was quoted in an American Banker article entitled “Credit Limit Omissions Spur Suits Tied to High-End Cards” discussing credit card issuers’ obligation under the Fair Credit Reporting Act (FCRA) to give information on the account’s upper limit. While some have been asserting that under FCRA “omission equals inaccuracy,” Mr. Jerison was quoted as saying, “the way I see it, FCRA doesn’t require a lender to report everything about a consumer’s account; it does require what it does report to be accurate.”
Joseph Lynyak will be speaking at the Mortgage Banker’s Association’s Regulatory Compliance Conference in Washington, DC on September 23rd. Mr. Lynyak will be speaking on fair lending and HMDA compliance issues. To learn more or register, please go to http://events.mortgagebankers.org/regcomp2007/register.
Joseph Lynyak will also be speaking at the ACI's Subprime Lending Litigation & Regulatory Enforcement Conference in Washington, DC on September 27th. Mr. Lynyak will be speaking on a panel entitled “Redlining and Reverse Redlining: Proactive Defenses and Preventive Measures.” To learn more or register, please see https://www.americanconference.com/Finance/subprimelit.htm.
Robert Serino will be speaking at the American Bar Association’s National Institute on Banking Law II in Chicago on September 27th and 28th. Mr. Serino will be lecturing on Anti-Money Laundering and Bank Secrecy. For more information or to register, please see http://www.abanet.org/cle/programs/n07bla1.html.
Lee Negroni, together with Summer Associate Joya Raha, has authored an article on the law of mortgage broker fiduciary duty to consumer clients to be published in the October issue of Mortgage Banking Magazine.
MISCELLANY
ESRA to Hold Conference on E-Signatures. The Electronic Signatures & Records Association (ESRA) will hold a conference entitled “Getting E-Signatures Right: Key Business, Technology, and Legal Developments” on November 13-14, 2007 in Washington, DC. Some of the conference topics include (i) success of the ESIGN Act, (ii) long term retention of electronically signed records, (iii) various industry sector case studies and (iv) key trends. Congressman Jay Inslee (D – WA) will be among the speakers, as well as Jeremiah Buckley and Margo Tank of Buckley Kolar, LLP. To learn more about the conference go to http://www.esignrecords.org/events/ESRA-announcement081507.pdf.
Agencies Encourage Servicers to Mitigate Loss While “Preserving Homeownership.” On September 4, the federal banking agencies (FRB, FDIC, OCC, OTS, and NCUA) and the Conference of State Bank Supervisors (CSBS) issued a statement “encouraging” financial institutions that pool and service securitized mortgages take steps to mitigate loss without foreclosure. The agencies stated that servicers “should review the governing documents for the securitization trusts to determine the full extent of their authority to restructure loans that are delinquent or in default or are in imminent risk of default.” The statement also brought attention to guidance from the Treasury Department and the Securities and Exchange Commission that loan modifications to prevent defaults would not violate tax or accounting rules (see the July 27th issue of InfoBytes). “Servicers are encouraged,” the statement said, “to use [their] authority… to take appropriate steps when an increased default risk is identified.” “Appropriate steps” were defined to include, if permissible under the securitization agreements: (i) actively identifying borrowers at higher risk of default, particularly due to payment shock, (ii) contacting borrowers to determine their ability to repay, (iii) assessing whether “there is a reasonable basis to conclude that default is ‘reasonably foreseeable,’” and (iv) “exploring” solutions that mitigate loss while avoiding “foreclosure or other actions that result in a loss of homeownership.” For the official press release, please see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070904/default.htm.
FDIC, CSBS, and AARMR “Caution” Servicers to Avoid DTI Ratios Above 50% in Loan Modifications. On September 4, in a joint press release, the Federal Deposit Insurance Corporation (FDIC), the CSBS, and the American Association of Residential Mortgage Regulators (AARMR) announced that they were urging financial institutions they supervise that, when they modify loans in the course of conducting loss mitigation, they should avoid loans with debt-to-income (DTI) ratios above 50 percent. This release, as well as the FDIC’s attendant Financial Institution Letter, were considered to be supplements to the interagency announcement on servicer loss mitigation (discussed above). The agencies note that the “DTI ratio should include the customer’s total monthly housing-related payments (e.g., principal, interest, taxes, and insurance [PITI]…)” and that “attention should also be given to the borrower’s other obligations and resources.” FDIC Chairman Sheila Bair expressed hope that the guidance would provide “a benchmark for servicers to consider when working with borrowers.” The joint press release can be found at http://www.fdic.gov/news/news/press/2007/pr07074.html.
North Carolina Adopts Mortgage Debt Collection and Servicing Act; Clarifies Statute of Limitations for Usury. On August 16, the governor of North Carolina signed into law the Mortgage Debt Collection and Servicing Act (H.B. 1374). The law extends the state's jurisdiction over persons who acquire servicing rights to loans made in North Carolina. Such persons will be deemed to have consented to the jurisdiction of North Carolina courts for any claims related to the loan. The law also revises the mandatory notice to be given to the debtor in a foreclosure action, and provides that a claim for usury (subject to the 2-year statute of limitations for usury), including a claim for usurious points and fees, accrues with each payment made and accepted on the loan. This portion of the act is effective August 16, 2007, in response to a recent decision of the North Carolina Supreme Court on the statute of limitations for usury (see the December 22, 2006 issue of InfoBytes). The act also imposes various obligations on servicers of home loans and provides penalties for noncompliance, effective April 1, 2008. Among the significant new requirements are that servicers must impose fees within 45 days of the date the fees accrue, and if imposed, servicing-related fees must be explained to the borrower clearly and conspicuously within 30 days. Full loan payments on home mortgage loans must be credited within one business day of the date received, or an explanation of the servicer’s action must be provided to the borrower within 10 business days. A servicer must pay escrow items promptly to avoid late penalties. Disputes concerning home loan accounts or borrower claims of error must be kept until the loan is paid off, satisfied, or sold. A servicer must respond within 25 days of a borrower’s written request for a copy of the original note, statement identifying fees assessed on the account, or a payment history covering at least two years. The first response is free and the servicer may charge up to $50 for additional statements. A borrower may sue for violation of the Mortgage Debt Collection and Servicing Act, but prior to suit, the borrower must notify the servicer in writing of any claimed errors or disputes that form the basis of the claim. For more information regarding this act, please see http://www.ncleg.net/Sessions/2007/Bills/House/PDF/H1374v7.pdf.
Borrowers’ Discrimination Case Survives Lenders’ Motion to Dismiss. A federal district court denied a defendant lenders’ motion to dismiss a discrimination suit brought by three African American couples alleging that the lenders discriminated against them on the basis of race by adding terms and conditions to their mortgage contracts that were not applied to similarly-situated Caucasian borrowers. Anderson v. Wachovia Mortgage Corp., Civ. No. 06-567-SLR, 2007 U.S. Dist. LEXIS 51833 (D. Del. July 18, 2007). The plaintiffs alleged that the defendants were liable for racial discrimination under 42 U.S.C. § 1981. The court denied the defendants’ motion to dismiss the plaintiffs’ § 1981 claims as time-barred, finding that it lacked sufficient information to determine the precise nature of the contracts at issue, a factor essential to determining the appropriate statute of limitations for the plaintiffs’ § 1981 claims. The court also found that the allegations in the complaint were sufficient to draw a reasonable inference of intentional racial discrimination. In denying the defendants’ motion to dismiss the § 1981 claims on this basis, the court analyzed the plaintiffs’ allegations in light of the elements for a prima facie § 1981 claim described by the Third Circuit in Brown v. Philip Morris, Inc., 250 F.3d 789 (3d Cir. 2001) (“(1) [that plaintiff] is a member of a racial minority; (2) intent to discriminate on the basis of race by the defendant; and (3) discrimination concerning one or more of the activities enumerated in the statute, which includes the right to make and enforce contracts.”). The plaintiffs also alleged that the defendants were liable under Delaware law for tortious interference with contractual relations, breach of contract, and breach of the covenant of good faith and fair dealing. The court did grant the defendants’ motion to dismiss with respect to the breach of contract and tortious interference with contractual relations claims, but found that the plaintiffs had stated a claim for breach of the implied covenant of good faith and fair dealing sufficient to withstand the defendants’ motion to dismiss. Please contact for a copy of this decision.
Dodd Announces Anti-Predatory Lending Legislation. In a September 5th press release, Senate Banking Committee Chairman Christopher Dodd (D – CT) announced his intention to introduce major anti-predatory lending legislation, “to put an end to the practices that have forced thousands of Americans into foreclosure.” Senator Dodd, who is currently seeking the Democratic nomination for the presidency, has not yet introduced or released text of the bill, but has released an outline of its major provisions. These include, among other measures: (i) an expansion of the loans covered by the Home Ownership and Equity Protection Act (HOEPA) by including yield spread premiums in the HOEPA rates-and-fees trigger calculation, (ii) the prohibition of balloon payments, yield spread premiums, and prepayment penalties for HOEPA loans, (iii) the creation of a fiduciary obligation of brokers to borrowers, and where brokers receive yield spread premiums, of lenders to borrowers, (iv) a prohibition on “steering” by prohibiting giving a “subprime” loan to a borrower qualifying for a “prime” loan, (v) holding lenders liable for appraisals “to avoid the appraisal problems created in the current climate,” (vi) tighter requirements on home loan servicing including limiting fees, (vii) encouraging foreclosure prevention counseling, and (viii) granting the FDIC and OCC unfair and deceptive acts and practices rulemaking authority under the FTC Act as currently granted to the OTS. For the Senate Banking Committee press release, see http://banking.senate.gov/.
Agencies Encourage Servicers to Mitigate Loss While “Preserving Homeownership.” On September 4, the federal banking agencies (FRB, FDIC, OCC, OTS, and NCUA) and the Conference of State Bank Supervisors (CSBS) issued a statement “encouraging” financial institutions that pool and service securitized mortgages take steps to mitigate loss without foreclosure. The agencies stated that servicers “should review the governing documents for the securitization trusts to determine the full extent of their authority to restructure loans that are delinquent or in default or are in imminent risk of default.” The statement also brought attention to guidance from the Treasury Department and the Securities and Exchange Commission that loan modifications to prevent defaults would not violate tax or accounting rules (see the July 27th issue of InfoBytes). “Servicers are encouraged,” the statement said, “to use [their] authority… to take appropriate steps when an increased default risk is identified.” “Appropriate steps” were defined to include, if permissible under the securitization agreements: (i) actively identifying borrowers at higher risk of default, particularly due to payment shock, (ii) contacting borrowers to determine their ability to repay, (iii) assessing whether “there is a reasonable basis to conclude that default is ‘reasonably foreseeable,’” and (iv) “exploring” solutions that mitigate loss while avoiding “foreclosure or other actions that result in a loss of homeownership.” For the official press release, please see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070904/default.htm.
FDIC, CSBS, and AARMR “Caution” Servicers to Avoid DTI Ratios Above 50% in Loan Modifications. On September 4, in a joint press release, the Federal Deposit Insurance Corporation (FDIC), the CSBS, and the American Association of Residential Mortgage Regulators (AARMR) announced that they were urging financial institutions they supervise that, when they modify loans in the course of conducting loss mitigation, they should avoid loans with debt-to-income (DTI) ratios above 50 percent. This release, as well as the FDIC’s attendant Financial Institution Letter, were considered to be supplements to the interagency announcement on servicer loss mitigation (discussed above). The agencies note that the “DTI ratio should include the customer’s total monthly housing-related payments (e.g., principal, interest, taxes, and insurance [PITI]…)” and that “attention should also be given to the borrower’s other obligations and resources.” FDIC Chairman Sheila Bair expressed hope that the guidance would provide “a benchmark for servicers to consider when working with borrowers.” The joint press release can be found at http://www.fdic.gov/news/news/press/2007/pr07074.html.
District Court: National Bank Usury Preemption Follows Assigned Credit-Card Accounts. On August 30, a federal district court dismissed a borrower’s Fair Debt Collection Practices Act (FDCPA) claim, accusing a non-bank debt purchaser of collecting usurious interest, reasoning that the debt was originated by a national bank and therefore enjoys National Bank Act (NBA) usury preemption. Munoz v. Pipestone Financial, LLC, No. 04-4142, 2007 U.S. Dist. LEXIS 64314 (D. Minn. August 30, 2007). The plaintiff opened a credit-card account from First USA Bank, a Delaware-based national bank, which after closing the account sold the debt to Pipestone. Pipestone then took legal action to collect the balance of the account, to which it continued to add interest accruing at a rate greater than permitted by relevant state usury law. The plaintiff alleged that this was a violation of the FDCPA’s prohibition against collecting or attempting to collect a fee that is not authorized by applicable law or by the loan agreement. The court held, however, that First USA’s preemption of state usury law under the NBA followed the loan through assignment. In dismissing this count of the plaintiff’s claim, the court quoted Phipps v. FDIC, 417 F.3d, (8th Cir. 2005), stating “courts must look at the originating entity… not the assigning entity… in determining whether the NBA applies.” On the second count of the borrower’s complaint, which alleged that Pipestone and the law firm hired to pursue the debt in court had attempted to collect legal fees that violated the FDCPA, the court granted summary judgment to the plaintiff. The borrower signed an initial credit card agreement consenting to pay “expenses actually incurred” and “reasonable [attorney] fees” in connection collecting the debt. However, the court found that by agreeing to pay a percentage of money collected from their borrower to their attorneys, Pipestone could not additionally demand legal fees at the outset of the legal action as they had not been “actually incurred.” For a copy of this opinion, please contact .
Agencies Encourage Servicers to Mitigate Loss While “Preserving Homeownership.” On September 4, the federal banking agencies (FRB, FDIC, OCC, OTS, and NCUA) and the Conference of State Bank Supervisors (CSBS) issued a statement “encouraging” financial institutions that pool and service securitized mortgages take steps to mitigate loss without foreclosure. The agencies stated that servicers “should review the governing documents for the securitization trusts to determine the full extent of their authority to restructure loans that are delinquent or in default or are in imminent risk of default.” The statement also brought attention to guidance from the Treasury Department and the Securities and Exchange Commission that loan modifications to prevent defaults would not violate tax or accounting rules (see the July 27th issue of InfoBytes). “Servicers are encouraged,” the statement said, “to use [their] authority… to take appropriate steps when an increased default risk is identified.” “Appropriate steps” were defined to include, if permissible under the securitization agreements: (i) actively identifying borrowers at higher risk of default, particularly due to payment shock, (ii) contacting borrowers to determine their ability to repay, (iii) assessing whether “there is a reasonable basis to conclude that default is ‘reasonably foreseeable,’” and (iv) “exploring” solutions that mitigate loss while avoiding “foreclosure or other actions that result in a loss of homeownership.” For the official press release, please see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070904/default.htm.
Eleventh Circuit Holds Arbitration Agreement Unconscionable and Unenforceable. The U.S. Court of Appeals for the Eleventh Circuit recently reversed a federal district court’s decision to compel arbitration, finding the class action waiver in the arbitration provision to be unconscionable. Dale v. Comcast Corporation, No. 06-15516 (11th Cir., opinion filed Sept. 4, 2007). In Dale, plaintiffs alleged that Comcast collected inflated “pass-through” franchise fees in violation of state law based on the Cable Communications Policy Act. Following removal, the district court granted Comcast’s motion to compel arbitration on the basis of an arbitration provision in Comcast’s welcome kit, invoices and annual notice. This provision included a class action waiver as well as a severability clause that rendered the entire arbitration provision unenforceable in the event the class action waiver was not enforced. Plaintiffs appealed the decision, and the Eleventh Circuit reversed, refusing to enforce the arbitration provision after finding the class action waiver to be substantively unconscionable. According to the Court of Appeals, the class action waiver effectively foreclosed plaintiffs’ claims, which were quite small (allegedly less than $1 per class member), potentially exposed plaintiffs to pay attorneys’ fees and other costs associated with the arbitration, and were unlikely to allow for the recovery of attorneys’ fees. Thus, in this case, the waiver allowed Comcast to engage in potentially unlawful “unchecked market behavior,” rendering it substantively unconscionable. As a result of the arbitration provision’s severability clause, the entire provision was unenforceable. For a copy of this decision, please see http://www.ca11.uscourts.gov/opinions/ops/200615516.pdf.
Court Rules That Class Arbitration Waivers May Not Be Enforced. On August 30, the California Supreme Court held that, in some cases, class arbitration waivers should not be enforced if they would undermine the vindication of individuals’ statutory rights. Gentry v. Superior Court of Los Angeles County, No. S141502, 2007 WL 2445122 (Cal. Aug. 30, 2007). This case arose in the context of employment law, with individual employees seeking overtime pay. The employees had agreed to arbitration, and the arbitration agreement precluded class-wide arbitration. The California Supreme Court, in Discover Bank v. Superior Court, 36 Cal.4th 148 (Cal. 2005), had previously held that some class arbitration waivers in consumer contracts of adhesion were unenforceable, as being contrary to public policy. The Gentry court clarified that holding, stating that a class arbitration waiver should not be enforced if class arbitration would be a substantially more effective method of asserting the rights of individuals than personal arbitration. The court said, “If [a court] concludes . . . that a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration, and finds that the disallowance of the class action will likely lead to a less comprehensive enforcement of overtime laws for the employees alleged to be affected by the employer’s violations, it must invalidate the class arbitration waiver.” The court then remanded the case to determine whether class arbitration should be pursued, in spite of the waiver. For a copy of the opinion, please see http://www.courtinfo.ca.gov/opinions/documents/S141502.PDF.
District Court: National Bank Usury Preemption Follows Assigned Credit-Card Accounts. On August 30, a federal district court dismissed a borrower’s Fair Debt Collection Practices Act (FDCPA) claim, accusing a non-bank debt purchaser of collecting usurious interest, reasoning that the debt was originated by a national bank and therefore enjoys National Bank Act (NBA) usury preemption. Munoz v. Pipestone Financial, LLC, No. 04-4142, 2007 U.S. Dist. LEXIS 64314 (D. Minn. August 30, 2007). The plaintiff opened a credit-card account from First USA Bank, a Delaware-based national bank, which after closing the account sold the debt to Pipestone. Pipestone then took legal action to collect the balance of the account, to which it continued to add interest accruing at a rate greater than permitted by relevant state usury law. The plaintiff alleged that this was a violation of the FDCPA’s prohibition against collecting or attempting to collect a fee that is not authorized by applicable law or by the loan agreement. The court held, however, that First USA’s preemption of state usury law under the NBA followed the loan through assignment. In dismissing this count of the plaintiff’s claim, the court quoted Phipps v. FDIC, 417 F.3d, (8th Cir. 2005), stating “courts must look at the originating entity… not the assigning entity… in determining whether the NBA applies.” On the second count of the borrower’s complaint, which alleged that Pipestone and the law firm hired to pursue the debt in court had attempted to collect legal fees that violated the FDCPA, the court granted summary judgment to the plaintiff. The borrower signed an initial credit card agreement consenting to pay “expenses actually incurred” and “reasonable [attorney] fees” in connection collecting the debt. However, the court found that by agreeing to pay a percentage of money collected from their borrower to their attorneys, Pipestone could not additionally demand legal fees at the outset of the legal action as they had not been “actually incurred.” For a copy of this opinion, please contact .
Borrowers’ Discrimination Case Survives Lenders’ Motion to Dismiss. A federal district court denied a defendant lenders’ motion to dismiss a discrimination suit brought by three African American couples alleging that the lenders discriminated against them on the basis of race by adding terms and conditions to their mortgage contracts that were not applied to similarly-situated Caucasian borrowers. Anderson v. Wachovia Mortgage Corp., Civ. No. 06-567-SLR, 2007 U.S. Dist. LEXIS 51833 (D. Del. July 18, 2007). The plaintiffs alleged that the defendants were liable for racial discrimination under 42 U.S.C. § 1981. The court denied the defendants’ motion to dismiss the plaintiffs’ § 1981 claims as time-barred, finding that it lacked sufficient information to determine the precise nature of the contracts at issue, a factor essential to determining the appropriate statute of limitations for the plaintiffs’ § 1981 claims. The court also found that the allegations in the complaint were sufficient to draw a reasonable inference of intentional racial discrimination. In denying the defendants’ motion to dismiss the § 1981 claims on this basis, the court analyzed the plaintiffs’ allegations in light of the elements for a prima facie § 1981 claim described by the Third Circuit in Brown v. Philip Morris, Inc., 250 F.3d 789 (3d Cir. 2001) (“(1) [that plaintiff] is a member of a racial minority; (2) intent to discriminate on the basis of race by the defendant; and (3) discrimination concerning one or more of the activities enumerated in the statute, which includes the right to make and enforce contracts.”). The plaintiffs also alleged that the defendants were liable under Delaware law for tortious interference with contractual relations, breach of contract, and breach of the covenant of good faith and fair dealing. The court did grant the defendants’ motion to dismiss with respect to the breach of contract and tortious interference with contractual relations claims, but found that the plaintiffs had stated a claim for breach of the implied covenant of good faith and fair dealing sufficient to withstand the defendants’ motion to dismiss. Please contact for a copy of this decision.
FACTA Credit Card Truncation Found to Apply to Electronic Receipts. In a recent case, a California federal district court rejected the argument that a statutory prohibition against printing the expiration dates of credit or debit cards on receipts does not include electronic transmissions of receipts.Vasquez-Torres v. Stubhub, Inc., No. 07-1328, 2007 U.S. Dist. LEXIS 63719 (C.D. Cal., Jul. 2, 2007). In this case, after completing online transactions, the merchant sent the consumer electronically printed receipts that included the expiration date of the card used. The plaintiff claimed that this violated a provision of the Fair and Accurate Transactions Act of 2003 (FACTA) that prohibits any person "that accepts credit cards or debit cards for the transaction of business" from printing the expiration date of the card "upon any receipt provided to the cardholder at the point of the sale or transaction." The merchant argued that because it only provided electronic transmissions that included the information, it did not "print" the receipt. The court disagreed and denied the motion to dismiss, stating that the common definition of "print" includes anything that makes an impression, which does include an image on a computer screen. The court also stated that Congress, in enacting this provision, likely "intended to prevent identity theft in all its forms," which would include information transmitted electronically. For a copy of this decision, please contact .
FACTA Credit Card Truncation Found to Apply to Electronic Receipts. In a recent case, a California federal district court rejected the argument that a statutory prohibition against printing the expiration dates of credit or debit cards on receipts does not include electronic transmissions of receipts.Vasquez-Torres v. Stubhub, Inc., No. 07-1328, 2007 U.S. Dist. LEXIS 63719 (C.D. Cal., Jul. 2, 2007). In this case, after completing online transactions, the merchant sent the consumer electronically printed receipts that included the expiration date of the card used. The plaintiff claimed that this violated a provision of the Fair and Accurate Transactions Act of 2003 (FACTA) that prohibits any person "that accepts credit cards or debit cards for the transaction of business" from printing the expiration date of the card "upon any receipt provided to the cardholder at the point of the sale or transaction." The merchant argued that because it only provided electronic transmissions that included the information, it did not "print" the receipt. The court disagreed and denied the motion to dismiss, stating that the common definition of "print" includes anything that makes an impression, which does include an image on a computer screen. The court also stated that Congress, in enacting this provision, likely "intended to prevent identity theft in all its forms," which would include information transmitted electronically. For a copy of this decision, please contact .
ESRA to Hold Conference on E-Signatures. The Electronic Signatures & Records Association (ESRA) will hold a conference entitled “Getting E-Signatures Right: Key Business, Technology, and Legal Developments” on November 13-14, 2007 in Washington, DC. Some of the conference topics include (i) success of the ESIGN Act, (ii) long term retention of electronically signed records, (iii) various industry sector case studies and (iv) key trends. Congressman Jay Inslee (D – WA) will be among the speakers, as well as Jeremiah Buckley and Margo Tank of Buckley Kolar, LLP. To learn more about the conference go to http://www.esignrecords.org/events/ESRA-announcement081507.pdf.
FACTA Credit Card Truncation Found to Apply to Electronic Receipts. In a recent case, a California federal district court rejected the argument that a statutory prohibition against printing the expiration dates of credit or debit cards on receipts does not include electronic transmissions of receipts.Vasquez-Torres v. Stubhub, Inc., No. 07-1328, 2007 U.S. Dist. LEXIS 63719 (C.D. Cal., Jul. 2, 2007). In this case, after completing online transactions, the merchant sent the consumer electronically printed receipts that included the expiration date of the card used. The plaintiff claimed that this violated a provision of the Fair and Accurate Transactions Act of 2003 (FACTA) that prohibits any person "that accepts credit cards or debit cards for the transaction of business" from printing the expiration date of the card "upon any receipt provided to the cardholder at the point of the sale or transaction." The merchant argued that because it only provided electronic transmissions that included the information, it did not "print" the receipt. The court disagreed and denied the motion to dismiss, stating that the common definition of "print" includes anything that makes an impression, which does include an image on a computer screen. The court also stated that Congress, in enacting this provision, likely "intended to prevent identity theft in all its forms," which would include information transmitted electronically. For a copy of this decision, please contact .
District Court: National Bank Usury Preemption Follows Assigned Credit-Card Accounts. On August 30, a federal district court dismissed a borrower’s Fair Debt Collection Practices Act (FDCPA) claim, accusing a non-bank debt purchaser of collecting usurious interest, reasoning that the debt was originated by a national bank and therefore enjoys National Bank Act (NBA) usury preemption. Munoz v. Pipestone Financial, LLC, No. 04-4142, 2007 U.S. Dist. LEXIS 64314 (D. Minn. August 30, 2007). The plaintiff opened a credit-card account from First USA Bank, a Delaware-based national bank, which after closing the account sold the debt to Pipestone. Pipestone then took legal action to collect the balance of the account, to which it continued to add interest accruing at a rate greater than permitted by relevant state usury law. The plaintiff alleged that this was a violation of the FDCPA’s prohibition against collecting or attempting to collect a fee that is not authorized by applicable law or by the loan agreement. The court held, however, that First USA’s preemption of state usury law under the NBA followed the loan through assignment. In dismissing this count of the plaintiff’s claim, the court quoted Phipps v. FDIC, 417 F.3d, (8th Cir. 2005), stating “courts must look at the originating entity… not the assigning entity… in determining whether the NBA applies.” On the second count of the borrower’s complaint, which alleged that Pipestone and the law firm hired to pursue the debt in court had attempted to collect legal fees that violated the FDCPA, the court granted summary judgment to the plaintiff. The borrower signed an initial credit card agreement consenting to pay “expenses actually incurred” and “reasonable [attorney] fees” in connection collecting the debt. However, the court found that by agreeing to pay a percentage of money collected from their borrower to their attorneys, Pipestone could not additionally demand legal fees at the outset of the legal action as they had not been “actually incurred.” For a copy of this opinion, please contact .
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