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InfoBytes
CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS
Topics – Covered This Week (Click to View)
FEDERAL ISSUES
Senator Durbin Introduces Bill to Allow “Cram Down” of Mortgage Loans. Senator Durbin (D. IL) introduced (with the co-sponsorship of Senator Schumer (D. NY)) the Helping Families Save Their Homes in Bankruptcy Act (S. 2136), which would, if enacted into law, significantly change to how residential mortgages are treated in bankruptcy. Most significantly, the bill would allow bankruptcy courts to modify residential mortgage loans in Chapter 13 bankruptcies by restructuring the payments over, in essence, the remaining term of the loan. In addition, the bill would (i) subject servicing fees and costs on allowed mortgage loan claims to significant scrutiny, (ii) allow courts to hear certain consumer cases notwithstanding a mandatory arbitration provision, (iii) create a federal homestead right not to exceed $75,000 for bankruptcy debtors that are 55 years of age or older at the time that they file their petition, and (iv) disallow bankruptcy claims if the claim is subject to any remedy under any federal or state consumer protection law. For more information on the status of this bill, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:s.02136:.
Bill Introduced Permitting Mortgage Modification by Bankruptcy Courts. On September 20, Representative Brad Miller (D-N.C.) introduced the Emergency Home Ownership and Mortgage Equity Protection Act (H.R. 3609) which, if enacted, would allow judges presiding over Chapter 13 bankruptcy proceedings to modify a mortgage secured by the debtor’s principal residence. In addition, the bill would prohibit debt-holders from adding fees, costs, or charges to a debt which is secured by the debtor’s principal residence and covered under the Chapter 13 plan, unless the debt-holder provides timely notice about the fees, costs, or charges to the debtor and the bankruptcy trustee. The bill has been referred to the House Committee on the Judiciary. For more information, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.03609:.
Final Rules Adopted to Implement Bank “Broker” Provisions of the Gramm-Leach-Bliley Act. On September 24, the Securities and Exchange Commission (SEC) and the Federal Reserve Board (FRB) announced the adoption of final joint rules under Regulation R which will implement the “broker” exceptions for banks under Section 3(a)(4) of the Securities Exchange Act of 1934 as amended by the Gramm-Leach Bliley Act of 1999 (GLBA). The rules define terms used in these statutory exceptions and include certain related exemptions. The rules are intended, to among other things, to facilitate banks’ compliance with the ’34 Act and the GLBA. Banks are permitted time for transition, but must be in compliance upon the new rules becoming effective January 1, 2009. For a copy of the final rules, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20070924a1.pdf.
Dugan Suggests FRB Rulemaking for “Opt-Out” on Credit Card Rate Changes. On September 27, Comptroller of the Currency John Dugan gave a speech in which he urged the FRB to create rules under the Truth in Lending Act (TILA) and Federal Trade Commission Act (FTC Act) to provide credit card borrowers with an “opt-out” of any change in an account’s interest rate. In his speech before the Financial Services Roundtable, Dugan noted that a large portion of consumer complaints, 40% last year, in connection with national banks are related to credit card transactions. While Dugan admitted that national banks have “eliminated or significantly scaled back such practices as double-cycle billing and true universal default… it’s not enough.” Dugan said that rate changes due to changes in the borrower’s status unrelated to their payments on a specific account, such as a change in credit score, should not be allowed to justify a change in interest rate on that account. He also suggested that an opt-out of any interest rate increase should be available to borrowers, though issuers “would not be obliged to allow the consumer to make new charges on the card using the old rate.” Rather, by opting out the consumer would be able to keep the balance outstanding at the old rate to be paid off or rolled over to another account within a reasonable period. For text of Comptroller Dugan’s speech, please see http://www.occ.treas.gov/ftp/release/2007-104a.pdf.
OCC and Texas Banking Commission Sign Consumer Complaint MoU. On October 2, the Office of the Comptroller of the Currency (OCC) and the Texas Banking Commission signed a Memorandum of Understanding (MoU) to establish a process for sharing consumer complaints between the two agencies. According to the OCC, Texas is the twenty-eighth jurisdiction to announce a MoU with the OCC since the OCC and the Conference of State Bank Supervisors agreed to a template late last year (see the December 1, 2006 issue of InfoBytes). For the OCC press release, and a list of states that have signed MoU’s, please see http://www.occ.treas.gov/ftp/release/2007-69.htm.
STATE ISSUES
MA Regulator Loses Licensees SSNs. Between September 13 and 17, the Massachusetts Department of Professional Licensure, in response to public requests for records, sent out 28 CDs that accidentally contained the names, addresses, and Social Security Numbers (SSNs) of individuals licensed with the department. Some news reports place the number of individuals affected at 450,000. Twenty-six of the disks have now been recovered, and efforts are ongoing to obtain the rest. Information regarding the breach, and preventative steps to protect against identity theft can be found at the regulator’s website at http://www.mass.gov/?pageID=ocahomepage&L=1&L0=Home&sid=Eoca.
COURTS
Court Rejects Federal Preemption of State Law via OTS Opinion Letter. The U.S. District Court for the Southern District of Ohio in State Farm Bank, F.S.B. v. Reardon, 2007 U.S. Dist. Lexis 73304 (S.D. Ohio Sept. 28, 2007) held that the Office of Thrift Supervision (OTS) did not lawfully preempt an Ohio law requiring independent contractors (including exclusive independent contractors) working for a state licensed or exempt mortgage broker to obtain their own mortgage broker licenses. OTS Opinion Letter P-2004-7 advises that federal preemption of state licensing law with respect to employees of a thrift includes non-employee agents exclusively working for and under the supervision and control of the thrift. The court determined that while the OTS has the authority to preempt state law with respect to such non-employee agents acting on behalf of a thrift, the OTS did not properly follow the federal Administrative Procedures Act (APA) in attempting to do so. First, the court determined that the OTS chief counsel letter should not be granted Chevron deference because it constituted a new substantive rule, rather than a mere interpretation of an existing OTS regulation. The court reasoned that “[b]efore the letter from chief counsel of the Office of Thrift Supervision to State Farm Bank, the federal agency had never before expressly regulated, or excluded from state regulation, independent third-parties soliciting mortgage loans for a federal savings association. This rather dramatic change in the federal regulatory scheme came, not with a formal regulation issued after publication and public hearing, but through a letter signed by counsel, not the Director, who is the only person authorized under federal law to issue regulations.” The court further concluded that “[t]he Office of Thrift Supervision does not propose to issue federal licenses to mortgage brokers. Instead, a new category of mortgage brokers, not licensed by either the federal or state government, is envisioned by the agency’s new policy.” Second, the court held that even if the letter was merely interpretive, it still would not be entitled to deference because the new policy was inconsistent with current OTS regulations. In response to the OTS letter’s conclusion that third-party independent contractors are “’like’ an operating subsidiary and ‘equivalent of a department or division of the parent federal savings association,’” the court noted that “[f]ederal savings associations exercise direct control over operating subsidiaries, service companies and affiliates. The same is not true as to third-party agents.” The court also pointed out a provision in the contractual arrangement between State Farm and the agents providing “[t]he relationship between the Bank and Agent is that of a company and independent contractor, for all purposes. . . . Agent has full control of his/her daily activities, with the right to exercise independent judgment as to time, place, and manner of marketing and selling the Bank Products to customers and prospective customers, and otherwise carrying out the provisions of this Agreement.” Addressing essentially the same controversy, a federal court in Connecticut has recognized OTS Opinion Letter P-2004-7 not as an expansion, but an interpretation of the existing preemptive scope of federal law (State Farm Bank, F.S.B. v. Burke, 445 F.Supp.2d 2007 (2006), reported in the June 23, 2006 Issue of InfoBytes). For a copy of the State Farm Bank, F.S.B. v. Reardon opinion, e-mail .
Court Upholds “Willful” FCRA Claim Alleging Lender Failed to Investigate Dispute. A federal district court in Florida recently denied a lender’s motion to dismiss a consumer’s punitive damages claim in a Fair Credit Reporting Act (FCRA) lawsuit alleging, among other things, that the lender “willfully” failed to investigate credit information disputed by the consumer after it had received notice of the dispute from a credit reporting agency. Rambarran v. Bank of America Corp., No. 07-21798-CIV, 2007 WL 2774256 (S.D. Fla. Sept. 24, 2007). The lender argued that “willful” noncompliance required a showing of “‘conscious disregard’ of the consumer’s rights or ‘deliberate and purposeful’ noncompliance.” Relying on the Supreme Court’s recent decision in Safeco Insurance Co. v. Burr, the court ruled for the plaintiff, stating that the plaintiff had “sufficiently alleged that in confirming clearly erroneous information without a proper investigation, Defendant acted recklessly and with more than mere carelessness.” The court also ruled that the claim was not time-barred, explaining that the type of notice required to trigger a furnisher’s investigatory obligations under FCRA is notice by a credit reporting agency, not by the affected consumer. For a copy of the opinion, please contact .
No TILA Equitable Tolling Where Basis Is Same as Underlying TILA Violation. In a recent case, an Alabama federal district court concluded that equitable tolling of the statute of limitations in TILA should not be granted when the grounds cited for the basis of the equitable tolling are the same grounds for the violation of TILA. Williams v. Saxon Mortgage Services, Inc., 2007 U.S. Dist. LEXIS 72337, No. 06-0799 (S.D. Ala. Sept. 27, 2007). In this case, the plaintiffs obtained a home mortgage loan from the defendant lenders, but alleged over a year later that during the loan transaction the defendant lenders omitted certain fees from the required disclosures, resulting in an understated finance charge in violation of TILA. The plaintiffs also alleged that their loans qualified as high-rate mortgages because the total points and fees exceeded 8% of the loan amount, and that the defendant lenders violated the Home Ownership and Equity Protection Act (HOEPA) by failing to provide the required disclosures and by imposing pre-payment penalty and a due-on-demand clause. However, because they did not file their lawsuit within the one year statute of limitations, the plaintiffs claimed that the doctrine of equitable tolling should apply, and cited as support that the defendant lenders were in sole possession of the information and actively mislead the plaintiffs by providing fraudulent the HUD-1 statements used at closing. The defendant lenders argued that equitable tolling should not apply because the plaintiffs' basis for equitable tolling was the same basis used for the underlying TILA violation. The court agreed, citing a long line of cases that held that while equitable tolling certainly applies in TILA timeliness analysis, it does not apply where the conduct that gives rise to the TILA violation is the same conduct that is alleged as the fraudulent concealment justifying the equitable tolling of the one-year statute of limitations. Consequently, the court dismissed the plaintiff's related TILA and HOEPA claims as time-barred. For a copy of this decision, please contact .
District Court Reopens, Dismisses FCRA Firm Offer Case After Safeco. In a case that was stayed pending the U.S. Supreme Court’s decision in Safeco v. Burr, a district court has dismissed a plaintiff’s suit alleging willful violations of FCRA’s “firm offer of credit” provisions. Forrest v. J.P. Morgan Chase Bank, N.A., No. 06-C-298, 2007 WL 2773518 (E.D. Wis., Sept. 21, 2007). In this case, the plaintiff received mailings from Chase stating that she was “Pre-Qualified” for home equity loans. The plaintiff sued, alleging that Chase violated FCRA by willfully accessing her consumer credit report and sending her a "sham offer." The plaintiff claimed that the mailer was only a solicitation because it did not state a minimum amount of credit or a repayment term. The district court rejected these claims, relying mostly on the Seventh Circuit’s reasoning in Cole v. U.S. Capital (reported in the December 3, 2004 issue of InfoBytes). The district court emphasized that three factors must be analyzed in determining whether a mailing constitutes a firm offer: (i) whether it appears likely that the offer would be honored; (ii) whether the material terms of the offer are adequately disclosed; and (iii) whether the amount of credit being offered is minimal or subject to so many limitations that it is of little value. The court found that the mailing satisfied all three of these conditions. Further, the court applied the reasoning in Safeco to the plaintiff’s claims of willful violations. The court noted that Chase’s reading of the statute was not “objectively unreasonable,” and the allegation of willfulness was dismissed as well. For a copy of the opinion, please contact .
District Court Rules E-mail Can Document Contract under ESIGN. A district court recently applied the Seventh Circuit’s interpretation of the Electronic Signatures in Global and National Commerce Act (ESIGN), set forth in Cloud Corp. v. Hasbro, Inc., 314 F.3d 289, 295 (7th Cir. 2002), to the plaintiff’s breach of contract claim, holding that an e-mail could serve as adequate documentation of a Statute of Frauds claim to survive a motion to dismiss. Polyad Co. v. Indopco Inc., 2007 U.S. Dist. LEXIS 71925 (N.D. Ill. Sept. 25, 2007). The Statute of Frauds, as set forth in the Uniform Commercial Code § 2-201(1), states that a contract for the sale of goods for the price of $500 or more is not enforceable unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and is signed by the party against whom enforcement is sought. The defendants argued that the breach of contract claim should be dismissed because it failed to meet the Statute of Frauds writing and signing requirements. The plaintiff asserted that the e-mail confirming the existence of an oral agreement between the parties is sufficient to bar application of the Statute of Frauds. The district court agreed with the plaintiff and applied the Cloud holding which recognized that “ESIGN provides that in all transactions in or affecting interstate commerce, a contract or other record relating to the transaction shall not be denied legal effect merely because it is in electronic format.” The court district again cited the Cloud holding that “neither the common law nor the UCC requires a handwritten signature and the sender’s name on an e-mail satisfies the signature requirement of the statute of frauds. Therefore, an email with the sender’s name in it can suffice to take a written confirmation outside of the Statute of Frauds.” The plaintiff’s breach of contract claim was dismissed on grounds unrelated to ESIGN and the Statute of Frauds. For a copy of this opinion, please contact .
Use of Incorrect Model Notification Fails to Violate TILA. A federal district court recently held that the use of the FRB’s TILA model notification language for purchase money mortgages in connection with a plaintiff’s refinance mortgage transaction, instead of the model notification intended for refinances, did not violate TILA. Barrett v. Bank One, N.A. No. 03-34 2007 U.S. Dist. LEXIS 73411 (C.D. Ky. Sept. 27, 2007). Under TILA, the FRB prepares model forms to be used, among other things, to notify borrowers of their right to cancel the loan. The model notification for purchase money mortgage transactions and that for refinance transactions with the same lender are known as the H-8 and H-9 respectively. In this case, the defendant bank provided the plaintiff borrowers with the language used in the H-8 in connection with a refinance transaction. Arguing they were not notified of the “clear and conspicuous” right to cancel the loan, the plaintiffs sued for statutory damages and to rescind their loans. In granting summary judgment to the defendant, the court ruled that the plaintiffs had received “clear and conspicuous” notice, citing Mills v. Equicredit Corp., 172 Fed. Appx. 652 (6th Cir. 2006) (reported in the March 10, 2006 issue of InfoBytes). For a copy of this decision, please contact .
Arbitration Clause on Website Not Incorporated in Customer Agreement. A federal court in Michigan held that a statement in a customer invoice was not sufficient to incorporate by reference an arbitration agreement found on the Defendant’s website. Manasher v. NECC Telecom, No. 06-10749 (E.D. Mich., opinion filed Sept. 18, 2007). Manasher involved putative class action claims against the defendant, a telecommunications company, for allegedly charging fees plaintiffs did not agree to. The defendant moved to compel arbitration. According to the facts set forth in the opinion, the plaintiffs were contacted by a telemarketer and agreed to long distance phone service. After the service began, they received an invoice that included rate, fee and plan statements, as well as a “Disclosure and Liabilities” statement that read: “NECC’s Agreement ‘Disclosure and Liabilities’ can be found online at www.necc.us or you could request a copy by calling us at (800) 766 2642.” That agreement included an arbitration provision. The plaintiffs opposed the motion to compel arguing that the reference to the agreement was not sufficient to make it part of the contract between the parties. The court agreed, finding that the language in the invoice did not clearly show that the agreement was intended to be part of the contract between the parties, instead merely informing the reader of where to find the agreement. Accordingly, the court refused to enforce the arbitration provision and denied defendant’s motion. For a copy of this opinion, please contact .
FDCPA Class Certified Against Debt Collector Failing to Check Bankruptcy Records. A federal court recently certified a class in an action against Arrow Financial Services, LLC (Arrow), alleging that Arrow violated the Fair Debt Collection Practices Act (FDCPA) by seeking to collect debts that had been discharged in bankruptcy. Lau v. Arrow Financial Services, LLC, No. 06 C 3141, 2007 U.S. Dist. LEXIS 73136 (N.D. Ill. September 28, 2007). The magistrate recommended that the District Court grant the plaintiff’s amended motion for certification of a class and a subclass. The court adopted the magistrate’s recommendation and granted the plaintiff’s motion. The plaintiff filed for bankruptcy in 1993. In 1997, the bankruptcy court discharged the plaintiff’s debts, including the amount he owed on his credit card with Parisian, a department store chain. In 2005, Arrow purchased a portfolio of allegedly delinquent Parisian accounts, including the plaintiff’s account. Arrow engaged a risk analysis company to identify which accounts were uncollectible because of the death or bankruptcy of the debtor, but Arrow instructed the company to review the accounts for only the previous 10 years. As a result, older accounts, including the plaintiff’s, were not identified as uncollectible. In March 2006, Arrow sent plaintiff a collection letter demanding payment of the account. Five days later, plaintiff called Arrow and informed the debt collector that his debt had been discharged in bankruptcy. The collector then demanded that plaintiff provide proof of the bankruptcy. Plaintiff brought the action against Arrow claiming that Arrow violated § 1692(e) and (g) of the FDCPA by, among other things, attempting to collect a debt that was not owed and demanding proof of bankruptcy from plaintiff when he called to dispute the debt. The plaintiff sought to have a class certified that included “all persons in the United States from whom, during the period June 8, 2005 to present, Arrow attempted to collect a delinquent consumer debt originally owed to Parisian but later discharged in bankruptcy via the same collection letter it sent plaintiff.” The subclass includes “all persons in the class who notified Arrow within the thirty-day validation period that their accounts were discharged in bankruptcy and from whom Arrow demanded proof of the bankruptcy.” In granting certification, the court found that the class and subclass definitions were sufficient and met the standards of Rule 23(a). For a copy of this opinion, please contact .
ECOA and OH Consumer Protection Claims Class Certified in Case Brought Under. The Federal District Court for Southern District of Ohio recently granted class certification in a case brought by borrowers alleging violations of the Equal Credit Opportunity Act (ECOA) and the Ohio Consumer Sales Practices Act (OCSPA), against Dominion Homes Financial Services Ltd. (DHFS) and National City Mortgage (NCM). Beard v. Dominion Homes Fin. Servs., No. 2:06-cv-00137, 2007 U.S. Dist. LEXIS 71469 (S.D. Ohio Sept. 26, 2007). The plaintiffs alleged that they, and the putative class members, applied for an FHA mortgage loan, were notified of their approval for such a loan, and in reliance on this information, closed on their home and purported FHA loan only to find out later that the mortgage was not FHA approved. They alleged that DHFS and NCM misrepresented that their loans qualified as FHA loans when they, in fact, did not, resulting in loss of the ability to sell their home to a FHA or VA eligible buyer, and loss of the interior and exterior benefits of construction necessary to pass FHA standards. The court certified a class defined as follows: “All persons who on or after September 14, 2002 applied to defendant Dominion Homes Financial Services, LLC for an FHA mortgage to purchase a home in the Village at Polaris Park; received notice from defendant National City Mortgage approving the application for an FHA loan, subsequently closed and signed documents with defendant Dominion Homes Financial Services, LLC which referenced an FHA loan and/or an FHA identifying case number, only to later discover their mortgage was not FHA eligible.” Please contact for a copy of this decision.
New Ethics Rule Regarding Metadata for D.C. Lawyers. In a recent opinion, the District of Columbia’s ethics board advised that lawyers may not review “metadata” in electronic documents sent by an adversary when the lawyer has actual knowledge the metadata was sent inadvertently. District of Columbia Legal Ethics Comm., Op. 341, 9/07. In the absence of actual knowledge the metadata was sent inadvertently, a lawyer is free to examine it. When outlining its opinion, the board also drew a distinction between documents provided outside discovery and those compelled by subpoena. Outside discovery, the sending lawyer has an obligation to avoid sending documents that inadvertently contain confidential information in the metadata. For the receiving lawyer, the committee advised that wrongfully mining electronic documents violates rules banning dishonest conduct. In contrast, when an electronic document is sent under subpoena lawyers may generally assume that any metadata was provided on purpose. Though even in this context, a lawyer with actual knowledge that the metadata was sent inadvertently must contact the sending lawyer to determine whether the disclosure was unintentional. In either context, lawyers are free to take necessary steps to preserve any claim challenging privilege. For a full copy of this opinion, please go to http://www.dcbar.org/for_lawyers/ethics/legal_ethics/opinions/opinion341.cfm.
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. 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.
FIRM NEWS
Margo Tank, Lane Macalester and Judy VanDusen will be speaking at the ARMA International Annual Conference being held from October 7 - 10 in Baltimore. They will appear on a panel entitled "Emerging Electronic Record Standards in Financial Services." The panel will review legal considerations and strategies for implementing effective electronic record management policies and procedures. For more information, or to register, please see http://www.arma.org/conference/2007/expo/exposchedule.cfm.
Andrea Lee Negroni will moderate a panel on outsourcing mortgage operations to India on October 15, 2007 at the MBA’s 94th Annual Convention (Hynes Convention Center, Third Floor, Boston MA). Panelists include representatives from First Indian Corporation, Adventity/ Profolio Home Mortgage, Mortgage Dynamics, CitiMortgage and Infosys Technology. An international reception will follow the evening of October 15. For the full schedule of events and details on this presentation, see http://events.mortgagebankers.org/94th_annual/sessions/default.aspx#INFO.
Margo Tank will also be speaking on a panel titled Electronic Signatures and Private Education Loans at the National Council of Higher Education Loan Programs (NCHELP) Fall Training Conference. The Fall Training Conference will be held November 4 - 7, 2007 in Atlanta, Georgia. To learn more or register, please see http://www.nchelp.org/conferences/event_detail.cfm?id=124.
Jeff Naimon will be speaking at the ACI’s conference on Responsible Mortgage Lending in Las Vegas, November 14-16. Mr. Naimon will be presenting a workshop entitled “Mortgage Regulation Primer: Rules, Restrictions and Requirements for State Regulated and Federally Chartered Mortgage Lenders.” For more information about the conference, or to register, please see https://webserv.c5groupinc.com/www_secure/conf_details.php?conf=4850&view=ovrv.
Jeremiah Buckley spoke at the 11th Annual CRA & Fair Lending Colloquium in San Diego on October 3rd. Mr. Buckley spoke on a panel entitled “Best Practices in Identifying & Preventing Mortgage Fraud,” and discussed several issues central to avoiding fraudulent mortgages, including identifying such practices as (i) mortgage flipping, (ii) inflated appraisals, (iii) equity skimming, and (iv) foreclosure schemes. For more information, please see http://www.cracolloquium.com/.
Court Rejects Federal Preemption of State Law via OTS Opinion Letter. The U.S. District Court for the Southern District of Ohio in State Farm Bank, F.S.B. v. Reardon, 2007 U.S. Dist. Lexis 73304 (S.D. Ohio Sept. 28, 2007) held that the Office of Thrift Supervision (OTS) did not lawfully preempt an Ohio law requiring independent contractors (including exclusive independent contractors) working for a state licensed or exempt mortgage broker to obtain their own mortgage broker licenses. OTS Opinion Letter P-2004-7 advises that federal preemption of state licensing law with respect to employees of a thrift includes non-employee agents exclusively working for and under the supervision and control of the thrift. The court determined that while the OTS has the authority to preempt state law with respect to such non-employee agents acting on behalf of a thrift, the OTS did not properly follow the federal Administrative Procedures Act (APA) in attempting to do so. First, the court determined that the OTS chief counsel letter should not be granted Chevron deference because it constituted a new substantive rule, rather than a mere interpretation of an existing OTS regulation. The court reasoned that “[b]efore the letter from chief counsel of the Office of Thrift Supervision to State Farm Bank, the federal agency had never before expressly regulated, or excluded from state regulation, independent third-parties soliciting mortgage loans for a federal savings association. This rather dramatic change in the federal regulatory scheme came, not with a formal regulation issued after publication and public hearing, but through a letter signed by counsel, not the Director, who is the only person authorized under federal law to issue regulations.” The court further concluded that “[t]he Office of Thrift Supervision does not propose to issue federal licenses to mortgage brokers. Instead, a new category of mortgage brokers, not licensed by either the federal or state government, is envisioned by the agency’s new policy.” Second, the court held that even if the letter was merely interpretive, it still would not be entitled to deference because the new policy was inconsistent with current OTS regulations. In response to the OTS letter’s conclusion that third-party independent contractors are “’like’ an operating subsidiary and ‘equivalent of a department or division of the parent federal savings association,’” the court noted that “[f]ederal savings associations exercise direct control over operating subsidiaries, service companies and affiliates. The same is not true as to third-party agents.” The court also pointed out a provision in the contractual arrangement between State Farm and the agents providing “[t]he relationship between the Bank and Agent is that of a company and independent contractor, for all purposes. . . . Agent has full control of his/her daily activities, with the right to exercise independent judgment as to time, place, and manner of marketing and selling the Bank Products to customers and prospective customers, and otherwise carrying out the provisions of this Agreement.” Addressing essentially the same controversy, a federal court in Connecticut has recognized OTS Opinion Letter P-2004-7 not as an expansion, but an interpretation of the existing preemptive scope of federal law (State Farm Bank, F.S.B. v. Burke, 445 F.Supp.2d 2007 (2006), reported in the June 23, 2006 Issue of InfoBytes). For a copy of the State Farm Bank, F.S.B. v. Reardon opinion, e-mail .
No TILA Equitable Tolling Where Basis Is Same as Underlying TILA Violation. In a recent case, an Alabama federal district court concluded that equitable tolling of the statute of limitations in TILA should not be granted when the grounds cited for the basis of the equitable tolling are the same grounds for the violation of TILA. Williams v. Saxon Mortgage Services, Inc., 2007 U.S. Dist. LEXIS 72337, No. 06-0799 (S.D. Ala. Sept. 27, 2007). In this case, the plaintiffs obtained a home mortgage loan from the defendant lenders, but alleged over a year later that during the loan transaction the defendant lenders omitted certain fees from the required disclosures, resulting in an understated finance charge in violation of TILA. The plaintiffs also alleged that their loans qualified as high-rate mortgages because the total points and fees exceeded 8% of the loan amount, and that the defendant lenders violated the Home Ownership and Equity Protection Act (HOEPA) by failing to provide the required disclosures and by imposing pre-payment penalty and a due-on-demand clause. However, because they did not file their lawsuit within the one year statute of limitations, the plaintiffs claimed that the doctrine of equitable tolling should apply, and cited as support that the defendant lenders were in sole possession of the information and actively mislead the plaintiffs by providing fraudulent the HUD-1 statements used at closing. The defendant lenders argued that equitable tolling should not apply because the plaintiffs' basis for equitable tolling was the same basis used for the underlying TILA violation. The court agreed, citing a long line of cases that held that while equitable tolling certainly applies in TILA timeliness analysis, it does not apply where the conduct that gives rise to the TILA violation is the same conduct that is alleged as the fraudulent concealment justifying the equitable tolling of the one-year statute of limitations. Consequently, the court dismissed the plaintiff's related TILA and HOEPA claims as time-barred. For a copy of this decision, please contact .
Senator Durbin Introduces Bill to Allow “Cram Down” of Mortgage Loans. Senator Durbin (D. IL) introduced (with the co-sponsorship of Senator Schumer (D. NY)) the Helping Families Save Their Homes in Bankruptcy Act (S. 2136), which would, if enacted into law, significantly change to how residential mortgages are treated in bankruptcy. Most significantly, the bill would allow bankruptcy courts to modify residential mortgage loans in Chapter 13 bankruptcies by restructuring the payments over, in essence, the remaining term of the loan. In addition, the bill would (i) subject servicing fees and costs on allowed mortgage loan claims to significant scrutiny, (ii) allow courts to hear certain consumer cases notwithstanding a mandatory arbitration provision, (iii) create a federal homestead right not to exceed $75,000 for bankruptcy debtors that are 55 years of age or older at the time that they file their petition, and (iv) disallow bankruptcy claims if the claim is subject to any remedy under any federal or state consumer protection law. For more information on the status of this bill, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:s.02136:.
Bill Introduced Permitting Mortgage Modification by Bankruptcy Courts. On September 20, Representative Brad Miller (D-N.C.) introduced the Emergency Home Ownership and Mortgage Equity Protection Act (H.R. 3609) which, if enacted, would allow judges presiding over Chapter 13 bankruptcy proceedings to modify a mortgage secured by the debtor’s principal residence. In addition, the bill would prohibit debt-holders from adding fees, costs, or charges to a debt which is secured by the debtor’s principal residence and covered under the Chapter 13 plan, unless the debt-holder provides timely notice about the fees, costs, or charges to the debtor and the bankruptcy trustee. The bill has been referred to the House Committee on the Judiciary. For more information, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.03609:.
Use of Incorrect Model Notification Fails to Violate TILA. A federal district court recently held that the use of the FRB’s TILA model notification language for purchase money mortgages in connection with a plaintiff’s refinance mortgage transaction, instead of the model notification intended for refinances, did not violate TILA. Barrett v. Bank One, N.A. No. 03-34 2007 U.S. Dist. LEXIS 73411 (C.D. Ky. Sept. 27, 2007). Under TILA, the FRB prepares model forms to be used, among other things, to notify borrowers of their right to cancel the loan. The model notification for purchase money mortgage transactions and that for refinance transactions with the same lender are known as the H-8 and H-9 respectively. In this case, the defendant bank provided the plaintiff borrowers with the language used in the H-8 in connection with a refinance transaction. Arguing they were not notified of the “clear and conspicuous” right to cancel the loan, the plaintiffs sued for statutory damages and to rescind their loans. In granting summary judgment to the defendant, the court ruled that the plaintiffs had received “clear and conspicuous” notice, citing Mills v. Equicredit Corp., 172 Fed. Appx. 652 (6th Cir. 2006) (reported in the March 10, 2006 issue of InfoBytes). For a copy of this decision, please contact .
ECOA and OH Consumer Protection Claims Class Certified in Case Brought Under. The Federal District Court for Southern District of Ohio recently granted class certification in a case brought by borrowers alleging violations of the Equal Credit Opportunity Act (ECOA) and the Ohio Consumer Sales Practices Act (OCSPA), against Dominion Homes Financial Services Ltd. (DHFS) and National City Mortgage (NCM). Beard v. Dominion Homes Fin. Servs., No. 2:06-cv-00137, 2007 U.S. Dist. LEXIS 71469 (S.D. Ohio Sept. 26, 2007). The plaintiffs alleged that they, and the putative class members, applied for an FHA mortgage loan, were notified of their approval for such a loan, and in reliance on this information, closed on their home and purported FHA loan only to find out later that the mortgage was not FHA approved. They alleged that DHFS and NCM misrepresented that their loans qualified as FHA loans when they, in fact, did not, resulting in loss of the ability to sell their home to a FHA or VA eligible buyer, and loss of the interior and exterior benefits of construction necessary to pass FHA standards. The court certified a class defined as follows: “All persons who on or after September 14, 2002 applied to defendant Dominion Homes Financial Services, LLC for an FHA mortgage to purchase a home in the Village at Polaris Park; received notice from defendant National City Mortgage approving the application for an FHA loan, subsequently closed and signed documents with defendant Dominion Homes Financial Services, LLC which referenced an FHA loan and/or an FHA identifying case number, only to later discover their mortgage was not FHA eligible.” Please contact for a copy of this decision.
Court Rejects Federal Preemption of State Law via OTS Opinion Letter. The U.S. District Court for the Southern District of Ohio in State Farm Bank, F.S.B. v. Reardon, 2007 U.S. Dist. Lexis 73304 (S.D. Ohio Sept. 28, 2007) held that the Office of Thrift Supervision (OTS) did not lawfully preempt an Ohio law requiring independent contractors (including exclusive independent contractors) working for a state licensed or exempt mortgage broker to obtain their own mortgage broker licenses. OTS Opinion Letter P-2004-7 advises that federal preemption of state licensing law with respect to employees of a thrift includes non-employee agents exclusively working for and under the supervision and control of the thrift. The court determined that while the OTS has the authority to preempt state law with respect to such non-employee agents acting on behalf of a thrift, the OTS did not properly follow the federal Administrative Procedures Act (APA) in attempting to do so. First, the court determined that the OTS chief counsel letter should not be granted Chevron deference because it constituted a new substantive rule, rather than a mere interpretation of an existing OTS regulation. The court reasoned that “[b]efore the letter from chief counsel of the Office of Thrift Supervision to State Farm Bank, the federal agency had never before expressly regulated, or excluded from state regulation, independent third-parties soliciting mortgage loans for a federal savings association. This rather dramatic change in the federal regulatory scheme came, not with a formal regulation issued after publication and public hearing, but through a letter signed by counsel, not the Director, who is the only person authorized under federal law to issue regulations.” The court further concluded that “[t]he Office of Thrift Supervision does not propose to issue federal licenses to mortgage brokers. Instead, a new category of mortgage brokers, not licensed by either the federal or state government, is envisioned by the agency’s new policy.” Second, the court held that even if the letter was merely interpretive, it still would not be entitled to deference because the new policy was inconsistent with current OTS regulations. In response to the OTS letter’s conclusion that third-party independent contractors are “’like’ an operating subsidiary and ‘equivalent of a department or division of the parent federal savings association,’” the court noted that “[f]ederal savings associations exercise direct control over operating subsidiaries, service companies and affiliates. The same is not true as to third-party agents.” The court also pointed out a provision in the contractual arrangement between State Farm and the agents providing “[t]he relationship between the Bank and Agent is that of a company and independent contractor, for all purposes. . . . Agent has full control of his/her daily activities, with the right to exercise independent judgment as to time, place, and manner of marketing and selling the Bank Products to customers and prospective customers, and otherwise carrying out the provisions of this Agreement.” Addressing essentially the same controversy, a federal court in Connecticut has recognized OTS Opinion Letter P-2004-7 not as an expansion, but an interpretation of the existing preemptive scope of federal law (State Farm Bank, F.S.B. v. Burke, 445 F.Supp.2d 2007 (2006), reported in the June 23, 2006 Issue of InfoBytes). For a copy of the State Farm Bank, F.S.B. v. Reardon opinion, e-mail .
Court Upholds “Willful” FCRA Claim Alleging Lender Failed to Investigate Dispute. A federal district court in Florida recently denied a lender’s motion to dismiss a consumer’s punitive damages claim in a Fair Credit Reporting Act (FCRA) lawsuit alleging, among other things, that the lender “willfully” failed to investigate credit information disputed by the consumer after it had received notice of the dispute from a credit reporting agency. Rambarran v. Bank of America Corp., No. 07-21798-CIV, 2007 WL 2774256 (S.D. Fla. Sept. 24, 2007). The lender argued that “willful” noncompliance required a showing of “‘conscious disregard’ of the consumer’s rights or ‘deliberate and purposeful’ noncompliance.” Relying on the Supreme Court’s recent decision in Safeco Insurance Co. v. Burr, the court ruled for the plaintiff, stating that the plaintiff had “sufficiently alleged that in confirming clearly erroneous information without a proper investigation, Defendant acted recklessly and with more than mere carelessness.” The court also ruled that the claim was not time-barred, explaining that the type of notice required to trigger a furnisher’s investigatory obligations under FCRA is notice by a credit reporting agency, not by the affected consumer. For a copy of the opinion, please contact .
District Court Reopens, Dismisses FCRA Firm Offer Case After Safeco. In a case that was stayed pending the U.S. Supreme Court’s decision in Safeco v. Burr, a district court has dismissed a plaintiff’s suit alleging willful violations of FCRA’s “firm offer of credit” provisions. Forrest v. J.P. Morgan Chase Bank, N.A., No. 06-C-298, 2007 WL 2773518 (E.D. Wis., Sept. 21, 2007). In this case, the plaintiff received mailings from Chase stating that she was “Pre-Qualified” for home equity loans. The plaintiff sued, alleging that Chase violated FCRA by willfully accessing her consumer credit report and sending her a "sham offer." The plaintiff claimed that the mailer was only a solicitation because it did not state a minimum amount of credit or a repayment term. The district court rejected these claims, relying mostly on the Seventh Circuit’s reasoning in Cole v. U.S. Capital (reported in the December 3, 2004 issue of InfoBytes). The district court emphasized that three factors must be analyzed in determining whether a mailing constitutes a firm offer: (i) whether it appears likely that the offer would be honored; (ii) whether the material terms of the offer are adequately disclosed; and (iii) whether the amount of credit being offered is minimal or subject to so many limitations that it is of little value. The court found that the mailing satisfied all three of these conditions. Further, the court applied the reasoning in Safeco to the plaintiff’s claims of willful violations. The court noted that Chase’s reading of the statute was not “objectively unreasonable,” and the allegation of willfulness was dismissed as well. For a copy of the opinion, please contact .
OCC and Texas Banking Commission Sign Consumer Complaint MoU. On October 2, the Office of the Comptroller of the Currency (OCC) and the Texas Banking Commission signed a Memorandum of Understanding (MoU) to establish a process for sharing consumer complaints between the two agencies. According to the OCC, Texas is the twenty-eighth jurisdiction to announce a MoU with the OCC since the OCC and the Conference of State Bank Supervisors agreed to a template late last year (see the December 1, 2006 issue of InfoBytes). For the OCC press release, and a list of states that have signed MoU’s, please see http://www.occ.treas.gov/ftp/release/2007-69.htm.
FDCPA Class Certified Against Debt Collector Failing to Check Bankruptcy Records. A federal court recently certified a class in an action against Arrow Financial Services, LLC (Arrow), alleging that Arrow violated the Fair Debt Collection Practices Act (FDCPA) by seeking to collect debts that had been discharged in bankruptcy. Lau v. Arrow Financial Services, LLC, No. 06 C 3141, 2007 U.S. Dist. LEXIS 73136 (N.D. Ill. September 28, 2007). The magistrate recommended that the District Court grant the plaintiff’s amended motion for certification of a class and a subclass. The court adopted the magistrate’s recommendation and granted the plaintiff’s motion. The plaintiff filed for bankruptcy in 1993. In 1997, the bankruptcy court discharged the plaintiff’s debts, including the amount he owed on his credit card with Parisian, a department store chain. In 2005, Arrow purchased a portfolio of allegedly delinquent Parisian accounts, including the plaintiff’s account. Arrow engaged a risk analysis company to identify which accounts were uncollectible because of the death or bankruptcy of the debtor, but Arrow instructed the company to review the accounts for only the previous 10 years. As a result, older accounts, including the plaintiff’s, were not identified as uncollectible. In March 2006, Arrow sent plaintiff a collection letter demanding payment of the account. Five days later, plaintiff called Arrow and informed the debt collector that his debt had been discharged in bankruptcy. The collector then demanded that plaintiff provide proof of the bankruptcy. Plaintiff brought the action against Arrow claiming that Arrow violated § 1692(e) and (g) of the FDCPA by, among other things, attempting to collect a debt that was not owed and demanding proof of bankruptcy from plaintiff when he called to dispute the debt. The plaintiff sought to have a class certified that included “all persons in the United States from whom, during the period June 8, 2005 to present, Arrow attempted to collect a delinquent consumer debt originally owed to Parisian but later discharged in bankruptcy via the same collection letter it sent plaintiff.” The subclass includes “all persons in the class who notified Arrow within the thirty-day validation period that their accounts were discharged in bankruptcy and from whom Arrow demanded proof of the bankruptcy.” In granting certification, the court found that the class and subclass definitions were sufficient and met the standards of Rule 23(a). For a copy of this opinion, please contact .
Final Rules Adopted to Implement Bank “Broker” Provisions of the Gramm-Leach-Bliley Act. On September 24, the Securities and Exchange Commission (SEC) and the Federal Reserve Board (FRB) announced the adoption of final joint rules under Regulation R which will implement the “broker” exceptions for banks under Section 3(a)(4) of the Securities Exchange Act of 1934 as amended by the Gramm-Leach Bliley Act of 1999 (GLBA). The rules define terms used in these statutory exceptions and include certain related exemptions. The rules are intended, to among other things, to facilitate banks’ compliance with the ’34 Act and the GLBA. Banks are permitted time for transition, but must be in compliance upon the new rules becoming effective January 1, 2009. For a copy of the final rules, please see http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20070924a1.pdf.
Court Rejects Federal Preemption of State Law via OTS Opinion Letter. The U.S. District Court for the Southern District of Ohio in State Farm Bank, F.S.B. v. Reardon, 2007 U.S. Dist. Lexis 73304 (S.D. Ohio Sept. 28, 2007) held that the Office of Thrift Supervision (OTS) did not lawfully preempt an Ohio law requiring independent contractors (including exclusive independent contractors) working for a state licensed or exempt mortgage broker to obtain their own mortgage broker licenses. OTS Opinion Letter P-2004-7 advises that federal preemption of state licensing law with respect to employees of a thrift includes non-employee agents exclusively working for and under the supervision and control of the thrift. The court determined that while the OTS has the authority to preempt state law with respect to such non-employee agents acting on behalf of a thrift, the OTS did not properly follow the federal Administrative Procedures Act (APA) in attempting to do so. First, the court determined that the OTS chief counsel letter should not be granted Chevron deference because it constituted a new substantive rule, rather than a mere interpretation of an existing OTS regulation. The court reasoned that “[b]efore the letter from chief counsel of the Office of Thrift Supervision to State Farm Bank, the federal agency had never before expressly regulated, or excluded from state regulation, independent third-parties soliciting mortgage loans for a federal savings association. This rather dramatic change in the federal regulatory scheme came, not with a formal regulation issued after publication and public hearing, but through a letter signed by counsel, not the Director, who is the only person authorized under federal law to issue regulations.” The court further concluded that “[t]he Office of Thrift Supervision does not propose to issue federal licenses to mortgage brokers. Instead, a new category of mortgage brokers, not licensed by either the federal or state government, is envisioned by the agency’s new policy.” Second, the court held that even if the letter was merely interpretive, it still would not be entitled to deference because the new policy was inconsistent with current OTS regulations. In response to the OTS letter’s conclusion that third-party independent contractors are “’like’ an operating subsidiary and ‘equivalent of a department or division of the parent federal savings association,’” the court noted that “[f]ederal savings associations exercise direct control over operating subsidiaries, service companies and affiliates. The same is not true as to third-party agents.” The court also pointed out a provision in the contractual arrangement between State Farm and the agents providing “[t]he relationship between the Bank and Agent is that of a company and independent contractor, for all purposes. . . . Agent has full control of his/her daily activities, with the right to exercise independent judgment as to time, place, and manner of marketing and selling the Bank Products to customers and prospective customers, and otherwise carrying out the provisions of this Agreement.” Addressing essentially the same controversy, a federal court in Connecticut has recognized OTS Opinion Letter P-2004-7 not as an expansion, but an interpretation of the existing preemptive scope of federal law (State Farm Bank, F.S.B. v. Burke, 445 F.Supp.2d 2007 (2006), reported in the June 23, 2006 Issue of InfoBytes). For a copy of the State Farm Bank, F.S.B. v. Reardon opinion, e-mail .
Court Upholds “Willful” FCRA Claim Alleging Lender Failed to Investigate Dispute. A federal district court in Florida recently denied a lender’s motion to dismiss a consumer’s punitive damages claim in a Fair Credit Reporting Act (FCRA) lawsuit alleging, among other things, that the lender “willfully” failed to investigate credit information disputed by the consumer after it had received notice of the dispute from a credit reporting agency. Rambarran v. Bank of America Corp., No. 07-21798-CIV, 2007 WL 2774256 (S.D. Fla. Sept. 24, 2007). The lender argued that “willful” noncompliance required a showing of “‘conscious disregard’ of the consumer’s rights or ‘deliberate and purposeful’ noncompliance.” Relying on the Supreme Court’s recent decision in Safeco Insurance Co. v. Burr, the court ruled for the plaintiff, stating that the plaintiff had “sufficiently alleged that in confirming clearly erroneous information without a proper investigation, Defendant acted recklessly and with more than mere carelessness.” The court also ruled that the claim was not time-barred, explaining that the type of notice required to trigger a furnisher’s investigatory obligations under FCRA is notice by a credit reporting agency, not by the affected consumer. For a copy of the opinion, please contact .
No TILA Equitable Tolling Where Basis Is Same as Underlying TILA Violation. In a recent case, an Alabama federal district court concluded that equitable tolling of the statute of limitations in TILA should not be granted when the grounds cited for the basis of the equitable tolling are the same grounds for the violation of TILA. Williams v. Saxon Mortgage Services, Inc., 2007 U.S. Dist. LEXIS 72337, No. 06-0799 (S.D. Ala. Sept. 27, 2007). In this case, the plaintiffs obtained a home mortgage loan from Saxon, but alleged over a year later that during the loan transaction Saxon omitted certain fees from the required disclosures, resulting in an understated finance charge in violation of TILA. The plaintiffs also alleged that their loans qualified as high-rate mortgages because the total points and fees exceeded 8% of the loan amount, and that the defendant lenders violated the Home Ownership and Equity Protection Act (HOEPA) by failing to provide the required disclosures and by imposing pre-payment penalty and a due-on-demand clause. However, because they did not file their lawsuit within the one year statute of limitations, the plaintiffs claimed that the doctrine of equitable tolling should apply, and cited as support that the defendant lenders were in sole possession of the information and actively mislead the plaintiffs by providing fraudulent the HUD-1 statements used at closing. The defendant lenders argued that equitable tolling should not apply because the plaintiffs' basis for equitable tolling was the same basis used for the underlying TILA violation. The court agreed, citing a long line of cases that held that while equitable tolling certainly applies in TILA timeliness analysis, it does not apply where the conduct that gives rise to the TILA violation is the same conduct that is alleged as the fraudulent concealment supporting the equitable tolling of the one-year statute of limitations. Consequently, the court dismissed the plaintiff's related TILA and HOEPA claims as time-barred. For a copy of this decision, please contact .
District Court Reopens, Dismisses FCRA Firm Offer Case After Safeco. In a case that was stayed pending the U.S. Supreme Court’s decision in Safeco v. Burr, a district court has dismissed a plaintiff’s suit alleging willful violations of FCRA’s “firm offer of credit” provisions. Forrest v. J.P. Morgan Chase Bank, N.A., No. 06-C-298, 2007 WL 2773518 (E.D. Wis., Sept. 21, 2007). In this case, the plaintiff received mailings from Chase stating that she was “Pre-Qualified” for home equity loans. The plaintiff sued, alleging that Chase violated FCRA by willfully accessing her consumer credit report and sending her a "sham offer." The plaintiff claimed that the mailer was only a solicitation because it did not state a minimum amount of credit or a repayment term. The district court rejected these claims, relying mostly on the Seventh Circuit’s reasoning in Cole v. U.S. Capital (reported in the December 3, 2004 issue of InfoBytes). The district court emphasized that three factors must be analyzed in determining whether a mailing constitutes a firm offer: (i) whether it appears likely that the offer would be honored; (ii) whether the material terms of the offer are adequately disclosed; and (iii) whether the amount of credit being offered is minimal or subject to so many limitations that it is of little value. The court found that the mailing satisfied all three of these conditions. Further, the court applied the reasoning in Safeco to the plaintiff’s claims of willful violations. The court noted that Chase’s reading of the statute was not “objectively unreasonable,” and the allegation of willfulness was dismissed as well. For a copy of the opinion, please contact .
District Court Rules E-mail Can Document Contract under ESIGN. A district court recently applied the Seventh Circuit’s interpretation of the Electronic Signatures in Global and National Commerce Act (ESIGN), set forth in Cloud Corp. v. Hasbro, Inc., 314 F.3d 289, 295 (7th Cir. 2002), to the plaintiff’s breach of contract claim, holding that an e-mail could serve as adequate documentation of a Statute of Frauds claim to survive a motion to dismiss. Polyad Co. v. Indopco Inc., 2007 U.S. Dist. LEXIS 71925 (N.D. Ill. Sept. 25, 2007). The Statute of Frauds, as set forth in the Uniform Commercial Code § 2-201(1), states that a contract for the sale of goods for the price of $500 or more is not enforceable unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and is signed by the party against whom enforcement is sought. The defendants argued that the breach of contract claim should be dismissed because it failed to meet the Statute of Frauds writing and signing requirements. The plaintiff asserted that the e-mail confirming the existence of an oral agreement between the parties is sufficient to bar application of the Statute of Frauds. The district court agreed with the plaintiff and applied the Cloud holding which recognized that “ESIGN provides that in all transactions in or affecting interstate commerce, a contract or other record relating to the transaction shall not be denied legal effect merely because it is in electronic format.” The court district again cited the Cloud holding that “neither the common law nor the UCC requires a handwritten signature and the sender’s name on an e-mail satisfies the signature requirement of the statute of frauds. Therefore, an email with the sender’s name in it can suffice to take a written confirmation outside of the Statute of Frauds.” The plaintiff’s breach of contract claim was dismissed on grounds unrelated to ESIGN and the Statute of Frauds. For a copy of this opinion, please contact .
Use of Incorrect Model Notification Fails to Violate TILA. A federal district court recently held that the use of the FRB’s TILA model notification language for purchase money mortgages in connection with a plaintiff’s refinance mortgage transaction, instead of the model notification intended for refinances, did not violate TILA. Barrett v. Bank One, N.A. No. 03-34 2007 U.S. Dist. LEXIS 73411 (C.D. Ky. Sept. 27, 2007). Under TILA, the FRB prepares model forms to be used, among other things, to notify borrowers of their right to cancel the loan. The model notification for purchase money mortgage transactions and that for refinance transactions with the same lender are known as the H-8 and H-9 respectively. In this case, the defendant bank provided the plaintiff borrowers with the language used in the H-8 in connection with a refinance transaction. Arguing they were not notified of the “clear and conspicuous” right to cancel the loan, the plaintiffs sued for statutory damages and to rescind their loans. In granting summary judgment to the defendant, the court ruled that the plaintiffs had received “clear and conspicuous” notice, citing Mills v. Equicredit Corp., 172 Fed. Appx. 652 (6th Cir. 2006) (reported in the March 10, 2006 issue of InfoBytes). For a copy of this decision, please contact .
Arbitration Clause on Website Not Incorporated in Customer Agreement. A federal court in Michigan held that a statement in a customer invoice was not sufficient to incorporate by reference an arbitration agreement found on the Defendant’s website. Manasher v. NECC Telecom, No. 06-10749 (E.D. Mich., opinion filed Sept. 18, 2007). Manasher involved putative class action claims against the defendant, a telecommunications company, for allegedly charging fees plaintiffs did not agree to. The defendant moved to compel arbitration. According to the facts set forth in the opinion, the plaintiffs were contacted by a telemarketer and agreed to long distance phone service. After the service began, they received an invoice that included rate, fee and plan statements, as well as a “Disclosure and Liabilities” statement that read: “NECC’s Agreement ‘Disclosure and Liabilities’ can be found online at www.necc.us or you could request a copy by calling us at (800) 766 2642.” That agreement included an arbitration provision. The plaintiffs opposed the motion to compel arguing that the reference to the agreement was not sufficient to make it part of the contract between the parties. The court agreed, finding that the language in the invoice did not clearly show that the agreement was intended to be part of the contract between the parties, instead merely informing the reader of where to find the agreement. Accordingly, the court refused to enforce the arbitration provision and denied defendant’s motion. For a copy of this opinion, please contact .
FDCPA Class Certified Against Debt Collector Failing to Check Bankruptcy Records. A federal court recently certified a class in an action against Arrow Financial Services, LLC (Arrow), alleging that Arrow violated the Fair Debt Collection Practices Act (FDCPA) by seeking to collect debts that had been discharged in bankruptcy. Lau v. Arrow Financial Services, LLC, No. 06 C 3141, 2007 U.S. Dist. LEXIS 73136 (N.D. Ill. September 28, 2007). The magistrate recommended that the District Court grant the plaintiff’s amended motion for certification of a class and a subclass. The court adopted the magistrate’s recommendation and granted the plaintiff’s motion. The plaintiff filed for bankruptcy in 1993. In 1997, the bankruptcy court discharged the plaintiff’s debts, including the amount he owed on his credit card with Parisian, a department store chain. In 2005, Arrow purchased a portfolio of allegedly delinquent Parisian accounts, including the plaintiff’s account. Arrow engaged a risk analysis company to identify which accounts were uncollectible because of the death or bankruptcy of the debtor, but Arrow instructed the company to review the accounts for only the previous 10 years. As a result, older accounts, including the plaintiff’s, were not identified as uncollectible. In March 2006, Arrow sent plaintiff a collection letter demanding payment of the account. Five days later, plaintiff called Arrow and informed the debt collector that his debt had been discharged in bankruptcy. The collector then demanded that plaintiff provide proof of the bankruptcy. Plaintiff brought the action against Arrow claiming that Arrow violated § 1692(e) and (g) of the FDCPA by, among other things, attempting to collect a debt that was not owed and demanding proof of bankruptcy from plaintiff when he called to dispute the debt. The plaintiff sought to have a class certified that included “all persons in the United States from whom, during the period June 8, 2005 to present, Arrow attempted to collect a delinquent consumer debt originally owed to Parisian but later discharged in bankruptcy via the same collection letter it sent plaintiff.” The subclass includes “all persons in the class who notified Arrow within the thirty-day validation period that their accounts were discharged in bankruptcy and from whom Arrow demanded proof of the bankruptcy.” In granting certification, the court found that the class and subclass definitions were sufficient and met the standards of Rule 23(a). For a copy of this opinion, please contact .
ECOA and OH Consumer Protection Claims Class Certified in Case Brought Under. The Federal District Court for Southern District of Ohio recently granted class certification in a case brought by borrowers alleging violations of the Equal Credit Opportunity Act (ECOA) and the Ohio Consumer Sales Practices Act (OCSPA), against Dominion Homes Financial Services Ltd. (DHFS) and National City Mortgage (NCM). Beard v. Dominion Homes Fin. Servs., No. 2:06-cv-00137, 2007 U.S. Dist. LEXIS 71469 (S.D. Ohio Sept. 26, 2007). The plaintiffs alleged that they, and the putative class members, applied for an FHA mortgage loan, were notified of their approval for such a loan, and in reliance on this information, closed on their home and purported FHA loan only to find out later that the mortgage was not FHA approved. They alleged that DHFS and NCM misrepresented that their loans qualified as FHA loans when they, in fact, did not, resulting in loss of the ability to sell their home to a FHA or VA eligible buyer, and loss of the interior and exterior benefits of construction necessary to pass FHA standards. The court certified a class defined as follows: “All persons who on or after September 14, 2002 applied to defendant Dominion Homes Financial Services, LLC for an FHA mortgage to purchase a home in the Village at Polaris Park; received notice from defendant National City Mortgage approving the application for an FHA loan, subsequently closed and signed documents with defendant Dominion Homes Financial Services, LLC which referenced an FHA loan and/or an FHA identifying case number, only to later discover their mortgage was not FHA eligible.” Please contact for a copy of this decision.
New Ethics Rule Regarding Metadata for D.C. Lawyers. In a recent opinion, the District of Columbia’s ethics board advised that lawyers may not review “metadata” in electronic documents sent by an adversary when the lawyer has actual knowledge the metadata was sent inadvertently. District of Columbia Legal Ethics Comm., Op. 341, 9/07. In the absence of actual knowledge the metadata was sent inadvertently, a lawyer is free to examine it. When outlining its opinion, the board also drew a distinction between documents provided outside discovery and those compelled by subpoena. Outside discovery, the sending lawyer has an obligation to avoid sending documents that inadvertently contain confidential information in the metadata. For the receiving lawyer, the committee advised that wrongfully mining electronic documents violates rules banning dishonest conduct. In contrast, when an electronic document is sent under subpoena lawyers may generally assume that any metadata was provided on purpose. Though even in this context, a lawyer with actual knowledge that the metadata was sent inadvertently must contact the sending lawyer to determine whether the disclosure was unintentional. In either context, lawyers are free to take necessary steps to preserve any claim challenging privilege. For a full copy of this opinion, please go to http://www.dcbar.org/for_lawyers/ethics/legal_ethics/opinions/opinion341.cfm.
District Court Rules E-mail Can Document Contract under ESIGN. A district court recently applied the Seventh Circuit’s interpretation of the Electronic Signatures in Global and National Commerce Act (ESIGN), set forth in Cloud Corp. v. Hasbro, Inc., 314 F.3d 289, 295 (7th Cir. 2002), to the plaintiff’s breach of contract claim, holding that an e-mail could serve as adequate documentation of a Statute of Frauds claim to survive a motion to dismiss. Polyad Co. v. Indopco Inc., 2007 U.S. Dist. LEXIS 71925 (N.D. Ill. Sept. 25, 2007). The Statute of Frauds, as set forth in the Uniform Commercial Code § 2-201(1), states that a contract for the sale of goods for the price of $500 or more is not enforceable unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and is signed by the party against whom enforcement is sought. The defendants argued that the breach of contract claim should be dismissed because it failed to meet the Statute of Frauds writing and signing requirements. The plaintiff asserted that the e-mail confirming the existence of an oral agreement between the parties is sufficient to bar application of the Statute of Frauds. The district court agreed with the plaintiff and applied the Cloud holding which recognized that “ESIGN provides that in all transactions in or affecting interstate commerce, a contract or other record relating to the transaction shall not be denied legal effect merely because it is in electronic format.” The court district again cited the Cloud holding that “neither the common law nor the UCC requires a handwritten signature and the sender’s name on an e-mail satisfies the signature requirement of the statute of frauds. Therefore, an email with the sender’s name in it can suffice to take a written confirmation outside of the Statute of Frauds.” The plaintiff’s breach of contract claim was dismissed on grounds unrelated to ESIGN and the Statute of Frauds. For a copy of this opinion, please contact .
Arbitration Clause on Website Not Incorporated in Customer Agreement. A federal court in Michigan held that a statement in a customer invoice was not sufficient to incorporate by reference an arbitration agreement found on the Defendant’s website. Manasher v. NECC Telecom, No. 06-10749 (E.D. Mich., opinion filed Sept. 18, 2007). Manasher involved putative class action claims against the defendant, a telecommunications company, for allegedly charging fees plaintiffs did not agree to. The defendant moved to compel arbitration. According to the facts set forth in the opinion, the plaintiffs were contacted by a telemarketer and agreed to long distance phone service. After the service began, they received an invoice that included rate, fee and plan statements, as well as a “Disclosure and Liabilities” statement that read: “NECC’s Agreement ‘Disclosure and Liabilities’ can be found online at www.necc.us or you could request a copy by calling us at (800) 766 2642.” That agreement included an arbitration provision. The plaintiffs opposed the motion to compel arguing that the reference to the agreement was not sufficient to make it part of the contract between the parties. The court agreed, finding that the language in the invoice did not clearly show that the agreement was intended to be part of the contract between the parties, instead merely informing the reader of where to find the agreement. Accordingly, the court refused to enforce the arbitration provision and denied defendant’s motion. For a copy of this opinion, 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. 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.
New Ethics Rule Regarding Metadata for D.C. Lawyers. In a recent opinion, the District of Columbia’s ethics board advised that lawyers may not review “metadata” in electronic documents sent by an adversary when the lawyer has actual knowledge the metadata was sent inadvertently. District of Columbia Legal Ethics Comm., Op. 341, 9/07. In the absence of actual knowledge the metadata was sent inadvertently, a lawyer is free to examine it. When outlining its opinion, the board also drew a distinction between documents provided outside discovery and those compelled by subpoena. Outside discovery, the sending lawyer has an obligation to avoid sending documents that inadvertently contain confidential information in the metadata. For the receiving lawyer, the committee advised that wrongfully mining electronic documents violates rules banning dishonest conduct. In contrast, when an electronic document is sent under subpoena lawyers may generally assume that any metadata was provided on purpose. Though even in this context, a lawyer with actual knowledge that the metadata was sent inadvertently must contact the sending lawyer to determine whether the disclosure was unintentional. In either context, lawyers are free to take necessary steps to preserve any claim challenging privilege. For a full copy of this opinion, please go to http://www.dcbar.org/for_lawyers/ethics/legal_ethics/opinions/opinion341.cfm.
MA Regulator Loses Licensees SSNs. Between September 13 and 17, the Massachusetts Department of Professional Licensure, in response to public requests for records, sent out 28 CDs that accidentally contained the names, addresses, and Social Security Numbers (SSNs) of individuals licensed with the department. Some news reports place the number of individuals affected at 450,000. Twenty-six of the disks have now been recovered, and efforts are ongoing to obtain the rest. Information regarding the breach, and preventative steps to protect against identity theft can be found at the regulator’s website at http://www.mass.gov/?pageID=ocahomepage&L=1&L0=Home&sid=Eoca.
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. 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.
Dugan Suggests FRB Rulemaking for “Opt-Out” on Credit Card Rate Changes. On September 27, Comptroller of the Currency John Dugan gave a speech in which he urged the FRB to create rules under the Truth in Lending Act (TILA) and Federal Trade Commission Act (FTC Act) to provide credit card borrowers with an “opt-out” of any change in an account’s interest rate. In his speech before the Financial Services Roundtable, Dugan noted that a large portion of consumer complaints, 40% last year, in connection with national banks are related to credit card transactions. While Dugan admitted that national banks have “eliminated or significantly scaled back such practices as double-cycle billing and true universal default… it’s not enough.” Dugan said that rate changes due to changes in the borrower’s status unrelated to their payments on a specific account, such as a change in credit score, should not be allowed to justify a change in interest rate on that account. He also suggested that an opt-out of any interest rate increase should be available to borrowers, though issuers “would not be obliged to allow the consumer to make new charges on the card using the old rate.” Rather, by opting out the consumer would be able to keep the balance outstanding at the old rate to be paid off or rolled over to another account within a reasonable period. For text of Comptroller Dugan’s speech, please see http://www.occ.treas.gov/ftp/release/2007-104a.pdf.
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