(202) 349-8000
1250 24 th St NW · Suite 700 · Washington D.C. 20037
www.buckleykolar.com

InfoBytes

CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

November 3, 2006

FEDERAL ISSUES

Major Banks Create New System for Evaluating Information Security Controls. A new standardized system for financial institutions to assess information security controls has been created by BITS, a division of the Financial Services Roundtable. The "Shared Assessments Program," developed by a consortium of major banks and service providers, aims to reduce costs and time spent by financial institutions in verifying security controls and Agreed Upon Procedures. Though currently limited to major financial institutions such as Wachovia, Inc., Bear Stearns, Morgan Stanley, Goldman Sachs, Inc, Bank of America, J.P. Morgan Chase, Wells Fargo, Citigroup, Bank of New York, and U.S. Bancorp, the potential service providers that could benefit from the program extends to any company that retains customer information, including insurers and health service providers. For more information, please go to http://www.bitsinfo.org/about.html/.

FTC Settles Telemarketing Sales Rule Complaint. The Federal Trade Commission (FTC) settled charges against USA Home Loans Inc., a mortgage services company, and USA First Investment Group Inc., a telemarketing firm, as well as their principals, for violating the FTC's Telemarketing Sales Rule (TSR) by calling telephone numbers listed on the National Do Not Call Registry and by failing to pay required fees to access numbers that are not listed on the Registry. Upon the FTC’s request, the U.S. Department of Justice filed a complaint in federal court alleging that the two companies violated the TSR while marketing mortgage products and services, including originating and refinancing home loans. The settlement includes civil money penalties and permanent prohibitions against further TSR violations. For the full text of the complaint, please see http://www.ftc.gov/os/caselist/0423148/061031usahomeloanscmplt.pdf. For details of the settlement, please see http://www.ftc.gov/opa/2006/11/usahomeloans.htm.

Likely Bipartisan Calls for ILC Freeze Extension. According to reports, Rep. Barney Frank (D-MA) and Rep. Paul Gillmor (R-OH) are likely to call for an extension of the Federal Deposit Insurance Commission’s (FDIC) moratorium on Industrial Loan Company (ILC) applications for insurance scheduled to end January 31, 2007 (reported in the July 28th and August 18th issues of InfoBytes). Rep. Frank, ranking member on the House Financial Services Committee, and Rep. Gillmor have introduced legislation to limit ILC activities (H.B. 5746).

Agencies Assess Penalty Against Bank for Inadequate AML/BSA Compliance. On October 31, the FDIC, FinCen, and the New York State Banking Department announced the assessment of civil money penalties of $12 million against Israel Discount Bank of New York for lax compliance with federal and state anti-money laundering laws. In the published assessments, the agencies determined that the bank had violated the requirement to establish and implement an adequate anti-money laundering program under the Bank Secrecy Act and USA PATRIOT Act. The bank processed 181,000 third-party wire transfers, a “substantial amount” of which exhibited characteristics commonly associated with money laundering. But internal controls and risk management mechanisms at the bank were found by the agencies to be “inadequate to support the volume and types of funds transfers transactions conducted.” To read the FDIC press release, and view the published assessments, go to http://www.fdic.gov/news/news/press/2006/pr06098.html.

COURTS

Washington District Court Certifies Class in Suit Against NovaStar. On October 31, a Federal District Court granted class certification in a suit against NovaStar Mortgage, Inc. alleging violations of Washington’s Consumer Protection Act (CPA) for failing to disclose yield spread premiums on consumers’ loans. The plaintiffs claim violations of the CPA based on underlying breaches of Washington’s Consumer Loan Act (CLA), the Real Estate Settlement Procedures Act (RESPA), and the Truth in Lending Act (TiLA). The court found that the plaintiffs sufficiently allege both (i) a per se violation of the CPA in arguing that verbal disclosures are irrelevant and (ii) that NovaStar violated written disclosure requirements under CLA, RESPA, and TiLA. The court had dismissed a previous motion to certify a class in the case for having failed to meet the requirements of Federal Rule 23(a and b). For a copy of the order, or other items from this docket, please contact .

Lawsuit Challenges Cook County Predatory Lending Database Program. On October 25, a complaint was filed in federal district court challenging Illinois’ Cook County predatory lending database program, created pursuant to HB 4050 (as reported in the July 21st, 2005 issue of InfoBytes). The plaintiffs, who include Chicago residents affected by the program, allege that enforcement of HB 4050 constitutes a denial of Fourteenth Amendment due process and equal protection because the law applies only to borrowers in certain designated zip codes in which most residents are African-American or Hispanic American. The complaint also alleges that the entry of personal information into the predatory lending database constitutes unreasonable search and seizure in violation of the Fourth Amendment. HB 4050, among other things, requires mortgage brokers and originators to pay for a potential borrower’s credit counseling if the state determines that the consumer should undergo such counseling, and requires that detailed information be submitted to the state’s database for monitoring. The predatory lending database program became effective September 1, 2006. For a copy of the complaint, contact .

Court Dismisses FCRA Claim for Failing to Investigate After Notice. A federal district court recently dismissed a Fair Credit Reporting Act (FCRA) claim for failing to investigate a dispute after notice, even though the defendants had actual notice of the dispute. Abdrabboh v. Capital One, No. 06-11762, 2006 WL 3004084 (E.D.Mich., Oct. 20, 2006). The plaintiff claimed that his credit report was damaged by allegedly incorrect entries relating to unpaid parking tickets issued by the defendants, the University of Toledo and some university employees. It was undisputed that the defendants received actual knowledge of the dispute from the plaintiff. The court noted that FCRA, in 15 U.S.C. § 1681s-2(b) requires “users” or “furnishers” of information to investigate disputed credit report entries. The court did not determine whether the university employees are “users” or “furnishers” of information. The court found, however, that the individual employees never received notice of the dispute from the credit reporting agency, and obligations under FCRA are triggered only by notice from a consumer reporting agency—actual notice from the consumer is insufficient. In dismissing the claim, the court also passed on the question of whether a private right of action exists for consumers for violations of 15 U.S.C. § 1681s-2(b). For a copy of the decision please contact .

“Click” Deemed Legally Binding Assent to Lengthy Contract. On October 16, the Southern District of New York upheld an arbitration clause in an electronic contract. Bar-Ayal v. Time Warner Cable Inc., 03 CV 9905 (KMW) (S.D.N.Y. Oct. 16, 2006). The plaintiff argued that it was not bound by the arbitration clause in Time Warner’s customer agreement because the clause was buried in a lengthy electronic contract. The court held that the plaintiff was bound by the contract because he had the opportunity to review it and had expressed his agreement to it. The fact that the plaintiff may not have actually read the agreement was not relevant. The court noted that the plaintiff was required to review agreements that could be displayed on 38 screens (or 9 written pages), was required to press an “Accept” button 8 times before he could finally agree to the service and begin a software installation process, and that the software at issue could not be installed unless the plaintiff had agreed to the contracts. The court found that the defendant’s software installation process provided persuasive evidence that the plaintiff had expressed agreement to the entire contract, including the arbitration clause, and was not swayed by plaintiff’s allegations that the defendant’s electronic presentation of the agreements did not provide the plaintiff with adequate notice of the agreement’s contents. With regard to the arbitration clause, the court found that there was no obligation to place “important” contractual clauses at the beginning of the agreement. Moreover, the court rejected plaintiff’s assertions that Time Warner should have made the arbitration clause more noticeable by providing it in a different font or color, and instead indicated that Time Warner had adequately displayed the arbitration clause in the same font as the remainder of the software agreement, and in capital letters. For a copy of this decision, please contact .

Deletion of Emails Nets Sanction of Adverse Inference Instructions. In the copyright litigation against music file-sharing company Napster (In re Napster Inc. Copyright Litigation, N.D. Cal. No. 00-1369), Hummer Winblad, an investor of Napster, was assessed sanctions for failure to prevent deletion of emails related to Napster after (i) the company was aware of litigation against Napster and (ii) it became probable that additional litigation would include Hummer. Based in part on an email from Hummer that essentially urged employees to delete emails immediately (although Hummer claimed that the instruction reflected long-standing document retention policy and had nothing to do with the Napster litigation), the court ruled that while default judgment was inappropriate because the actions did not constitute a "pattern of deliberately deceptive litigation practices" that would prevent resolution of the lawsuit, adverse inference instructions at trial were appropriate because Hummer's actions amounted to gross negligence, if not willfulness to destroy discoverable evidence. Furthermore, the court held that monetary sanctions and attorneys fees were also warranted. Please contact for a copy of the decision.

Delaware Court Rejects Fund’s Section 220 Bid For Access To Company’s Books & Records. Polygon Global Opportunities Master Fund, an arbitrage fund, was denied by the Delaware Chancery Court an opportunity to inspect the records of West Corp., an entity in which it owned stock. The Chancery Court rejected Polygon’s demand under 8 Del. C. § 220, which affords a stockholder the statutory right to inspect books and records, sought by Polygon to more accurately judge the value of its shares of West, which had announced an intention to go private, and examine possible mismanagement prior to Polygon’s acquisition of West stock. In doing so, the Court distinguished between public companies and private companies subject to this statutory provision on the basis that West was a public company, and therefore any information necessary to Polygon was available in public filings. In addition, the Court declined to allow Polygon to condemn conduct by West’s management which occurred prior to Polygon’s purchase of stock in that company, notwithstanding a proper motive to value their shares since the issue was not related to the purported mismanagement. Polygon Global Opportunities Master Fund v. West Corp., Del. Ch., No. 2313-N (10/12/06). For more information see http://courts.delaware.gov/opinions/(eb5c13u1xbiya0553h5pfjrg)/download.aspx?ID=83230.

Oral Argument in SSB Direct Deposit Class Action Appeal. According to reports, on October 25, oral arguments were heard in the California Court of Appeal in an appeal arising from a jury award of $284 million to a class of 1.3 million Bank of America customers who had Social Security Benefit (SSB) payments directly deposited to their accounts. Miller v. Bank of America, Appeal No. A110137 (Cal Ct. App.). The jury in the trial court had found that the bank had violated California Section 17200 when it allegedly withdrew overdraft fees from those class members' accounts. In so finding, the trial court rejected the bank's argument that the California law is preempted by the National Bank Act, which governs a national bank's treatment of customer's accounts and deposits. Bank of America argued before the Court of Appeal that OCC regulations interpreting the National Bank Act contain their own prohibition against using certain public benefit checks that are directly deposited for satisfying judgments. After hearing argument, the Court of Appeals took the case under advisement, and a decision is expected to be issue within 90 days.

HUD Charges Insurance Company With FHA Violations. On October 26, the Department of Housing and Urban Development (HUD) announced that it has charged an insurance company and five of its agencies with violations of the Fair Housing Act. After investigation, HUD found that the company and its agents were providing inferior home insurance products and policies to homeowners in predominantly African-American neighborhoods as opposed to homeowners in predominantly white neighborhoods for similar homes. There is a maximum civil money penalty of $11,000 for each violation in addition to actual damages for each complainant and attorneys’ fees. To see the HUD press release, see http://www.hud.gov/news/release.cfm?content=pr06-142.cfm.

STATE ISSUES

Delaware Requires Attorney Involvement for the Disbursement of Real Estate Loan Proceeds. On September 22, the Delaware Supreme Court approved a Report of the Board of Professional Responsibility requiring the participation of Delaware attorneys in the disbursement phase of a residential real estate transaction. In the Matter of the Bar of the Supreme Court of the State of Delaware, Case No. 313, 2006 (D.E. Sept. 22, 2006). In this Report, the Board considered whether it is a breach of professional responsibility for a Delaware attorney involved in a real estate settlement to permit a non-attorney to be responsible for the disbursement of the settlement funds. The Board concluded that by allowing the non-attorney party to supervise the disbursement phase of a residential real estate closing, the attorney violated certain provisions of the Delaware Lawyer’s Rules of Professional Conduct. In the instant case, upon approving the Board’s Report, the court directed the Board to file a redacted version of the Report, thereby making this ruling public. A similar ruling in South Carolina was reported in last week’s issue of InfoBytes. Please contact for a copy of the decision.

Utah Restricts Real Estate Activities of Mortgage Professionals. Effective October 11, the Division of Real Estate of the Utah Department of Commerce expanded the list of "unprofessional conduct" under the Mortgage Practices Act. Section 61-2c-301(1)(k) of the act prohibits individuals or entities transacting the business of residential mortgage loans in Utah from engaging in such unprofessional conduct. "Unprofessional conduct" now includes engaging in certain activities, "unless acting as a real estate licensee and not as a mortgage licensee," such as (i) assisting a buyer or seller of real estate to determine the offering or sales price of real estate, (ii) representing or assisting a buyer or seller of real estate in negotiations regarding a possible sale of real estate, (iii) advertising the sale of real estate, and (iv) performing other acts that require a real estate license. For a copy of the Division's expanded Residential Mortgage Administrative Rules, see http://realestate.utah.gov/Rules/Mortgage/mtg_rules_10-06.pdf; the relevant rule is R163-205-1.

MISCELLANY

FASB Proposes Mortgage Exception for Rules on Derivatives Accounting. On October 25, the Financial Accounting Standards Board voted to propose an exception to derivatives accounting rules for particular asset backed securities including mortgage-backed securities created from pools of loans containing embedded call features. The exception addresses the issue of when the embedded derivative is required to be separately accounted for in accordance with Statement 133. Generally, the exception would only be for securitized interests that contain an embedded derivative tied to the prepayment risk of the underlying prepayable financial assets. More information may be obtained at http://www.fasb.org/board_handouts/10-25-06.pdf. Project updates on this exception may be found at http://www.fasb.org/project/st155_implementation_issues.shtml#decisions.

FDIC Creates New Unit to Supervise “Complex” Institutions. On October 30, the Federal Deposit Insurance Corporation (FDIC) named John Lane as Deputy Director for Complex Financial Institutions, head of a newly created unit dedicated to large, complex financial institutions. Lane was previously Deputy Director for Risk Management. The restructuring will be overseen by newly appointed Sandra Thompson, Director of the Division of Supervision and Consumer Protection. In addition, the FDIC announced Christopher Spoth’s appointment as Senior Deputy Director, Supervisory Examinations. To view the press release, see http://www.fdic.gov/news/news/press/2006/pr06097.html.

FIRM NEWS

Margo Tank and Joe Lynyak will be speaking at the MBA’s Legal Issues in Mortgage Technology Conference, November 15–17, 2006, at the Arizona Biltmore Hotel, Phoenix, AZ. Ms. Tank’s panel topics will include the basic legal requirements for electronic mortgage origination and lending. Mr. Lynyak will be speaking on issues in fair lending.

Mr. Lynyak is also speaking on HMDA and discrimination on Friday, November 17th, at ACI's predatory lending conference in Las Vegas, Nevada.

© Buckley Kolar, LLP 2006. INFOBYTES is not intended as legal advice to any person or firm. It is provided as a client service and information contained herein is drawn from various public sources, including other publications.

We welcome reader comments and suggestions regarding issues or items of interest to be covered in future editions of InfoBytes. Email:

For back issues of INFOBYTES (or other Buckley Kolar LLP publications), visit http://www.buckleykolar.com/publications.