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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

FEDERAL ISSUES

HUD Issues Final Rule Regarding Disciplinary Actions Against HUD-Qualified Real Estate Brokers.  On November 7, the Department of Housing and Urban Development (HUD) issued a final rule regarding the basis and procedures for removing real estate brokers from HUD’s qualified selling broker list and for prohibiting brokers removed from the HUD-approved list from using HUD’s systems to participate in the sale of HUD-owned, single family properties.  The rule is similar to the current rules regarding the removal of FHA-qualified appraisers, consultants, and nonprofit organizations.  HUD states that the new rule “provides HUD a more expeditious disciplinary procedure for real estate brokers than the suspension and debarment procedures that would otherwise be applicable.”  The rule becomes effective on December 7, 2006.  The notice as published in the Federal Register can be found at http://a257.g.akamaitech.net/7/257/2422/01jan20061800/edocket.access.gpo.gov/2006/pdf/E6-18698.pdf. 

FinCEN Reports Rise in Suspected Mortgage Loan Fraud.  An assessment released by the Financial Crimes Enforcement Network (FinCEN) on November 3 reveals a rise in suspected mortgage loan fraud.  The assessment is based on the analysis of Suspicious Activity Reports (SARs) pertaining to mortgage loan fraud, which have increased 35% over the past year and 1,411% between 1997 and 2005.  The goal of the assessment was to identify patterns that may assist regulators, law enforcement and financial institutions offering mortgage products.  The assessment reveals that the SARs containing suspected mortgage loan fraud behavior frequently include other suspicious activities, such as false statements and identity theft.  The report also discusses areas in which depository institutions remain vulnerable to mortgage loan fraud and specific suspicious behaviors that were identified on the SARs.  The full assessment is available at www.fincen.gov/MortgageLoanFraud.pdf. 

Banking Agencies Publish Proposed Reporting Requirements That Require the Submission of Information on Negative Amortization Loans.  On October 31, the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (FRB), the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC) (together, the “Agencies”) published proposed revisions to the information required in Consolidated Reports of Condition and Income (Call Reports) and Thrift Financial Reports (TFRs).  The proposal includes a provision whereby banks must supply data to the Agencies regarding one-to-four-family residential mortgages with repayment terms that allow for negative amortization.  All banks holding these nontraditional mortgage products would be required to report the total amount of such loans.  Banks with a significant volume of these loans would be required to report additional information about them.  The proposed revisions would also revise and reduce the overall reporting requirements pertaining to deposit insurance assessments in both the Call Report and the TFR in order to simplify regulatory reporting.  The proposal is open for comment until January 2.  The notice as published in the Federal Register can be found on the Federal Financial Institutions Examination Council’s (FFIEC) website at http://www.fdic.gov/news/news/financial/2006/fil06095.html. 

FTC Announces Extension of Public Comment Period on Amendments to Telemarketing Sales Rule.  On November 3, the Federal Trade Commission (FTC) announced its approval of a rule extending the public comment period for a notice regarding amendments to the Telemarketing Sales Rule that was published in the Federal Register on October 4, 2006.  For more details on the proposed amendments, see the October 6th Issue of InfoBytes.  The comment period has been extended from November 6 to December 18.  The FTC press release is available at http://www.ftc.gov/opa/2006/11/fyi0671.htm. 

FDIC Approves New Risk-Based Premiums for Deposit Insurance for the purpose of Reversing Decline in Reserve Ratio and Provide for a More Stable System.  Last week, the FDIC adopted final regulations that implement the Federal Deposit Insurance Reform Act (“Reform Act”) passed by Congress earlier this year. Among the final regulations is a new rule on the risk-based assessment system that will enable the FDIC to more closely tie each bank's premiums to the risk it poses to the deposit insurance fund.  Under the new risk-based assessment system, the FDIC will evaluate each institution's risk based on three primary sources of information: (i) supervisory ratings for all insured institutions, (ii) financial ratios for most institutions, and (iii) long-term debt issuer ratings for large institutions that have them. The ability to differentiate on the basis of risk will improve incentives for effective risk management and will reduce the extent to which safer banks subsidize riskier ones.  In addition, the FDIC has new flexibility to manage the deposit insurance fund's reserve ratio within a range, which in turn will help prevent sharp swings in assessment rates that were possible under the design of the former system.  As part of the final rulemaking, the FDIC set the assessment rates that will take effect at the beginning of 2007. The new rates for nearly all of the industry will vary between five and seven cents for every $100 of domestic deposits.  As part of the Reform Act, Congress provided credits to institutions that paid high premiums in the past to bolster the FDIC's insurance reserves. As a result, the majority of banks will have assessment credits to initially offset all of their premiums in 2007.  To view the FDIC’s press release in its entirety, please see  http://www.fdic.gov/news/news/press/2006/pr06101.html. 

FDIC Establishes Advisory Committee on Economic Inclusion.  On November 2, the FDIC Board of Directors approved the establishment of the Advisory Committee on Economic Inclusion to advise the FDIC on expanding banking services to underserved segments of the market.  To this end, the Committee may analyze retail financial services, such as savings accounts, check cashing, short-term loans and similar services that promote financial stability and asset accumulation.  The Committee membership includes representatives from financial institutions, community groups, public advocacy organizations, government and other organizations impacted by banking practices.  The FDIC press release is available at http://www.fdic.gov/news/news/press/2006/pr06100.html. 

OTS Implements new NPV Model.  The OTS announced on November 6 that it will begin using an enhanced Net Portfolio Value (NPV) model for the September 2006 financial reporting cycle.  The NPV measures the interest rate exposure of individual thrift institutions and is widely used by the industry and the OTS.  The new model reportedly expands the OTS’s off-site monitoring capability as well as the efficiency of on-site examinations.  The enhanced NPV will also reportedly provide regulated institutions with greater transparency and accessibility, expanded interest rate risk reports, and greater accuracy in pricing routines for single-family mortgages and financial derivatives.  For more information see http://www.ots.treas.gov/docs/7/776050.html.

COURTS

Courts Diverge in “Firm Offers of Credit” under FCRA.  In a series of recent cases, federal trial courts in Illinois have reached divergent results in interpreting the “firm offer” requirement for prescreened credit offers.

Federal District Court for Eastern District of Missouri Upholds One “Firm Offer” While Rejecting Another.  In the first case, the U.S. District Court for the Eastern District of Missouri held that a creditor who sent a mailing that did not specify the interest rate or any other specific terms of the proposed loan still had made a “firm offer of credit” under the Fair Credit Reporting Act (FCRA). Poehl v. Countrywide Home Loans, Inc., No. 4:06CV928 CDP (E.D. Mo. Nov. 1, 2006). In this case, a plaintiff received an unsolicited flyer stating that he had been pre-selected for a $92,500 loan, based on information contained in his credit report that the defendant had accessed. The plaintiff claimed that the lender had not made a “firm offer,” and, therefore had no permissible purpose to obtain a prescreened credit report. The court, applying the “value” standard of Cole v. U. S. Capital, Inc., 389 F.3d 719 (7th Cir. 2004), granted the defendant’s motion to dismiss, finding that “so long as there is some value to the consumer so that the offer is not a sham or mere solicitation,” even a vague offer could be a “firm offer of credit.”

In a similar case, however, the same judge turned down a lender’s motion to dismiss, finding that the defendant’s prescreened mailing said little more than that the plaintiff had been preapproved to apply for a loan. Klutho v. Home Loan Center, Inc., No. 4:06CV1212 CDP (E.D. Mo. Nov. 1, 2006). In this case, the plaintiff received a mailing from a mortgage lender that the court found was indistinguishable from a sales pitch with no value. The plaintiff claimed that this mailing was not a “firm offer,” as required by FCRA. The court noted that when “the mailing is evaluated objectively and its entirety, it provides no basis for a consumer to regard it as an offer having any value, and there is nothing to distinguish it from any other unsolicited advertisement.”

Northern District of Illinois Requires Initial Mailing to Contain Specific Terms of the Offer.  In another FCRA case, the U.S. District Court for the Northern District of Illinois granted summary judgment to a consumer who received a prescreened solicitation. Murray v. IndyMac, F.S.B., No. 04 C 7669 (N.D. Ill. Nov. 7, 2006).  In this case, the mailing did not contain the terms of the loan, the interest rate, the repayment schedule, or the credit available. The defendant claimed that it disclosed all of the relevant terms during the course of the entire loan transaction. The plaintiff also succeeded in its motion for summary judgment on the grounds that the lender did not make clear and conspicuous disclosures, as required under FCRA. The court did not grant summary judgment to the plaintiff on his claim that the lender willfully violated FCRA – triggering statutory damages of $100-$1000 per violation.  The court noted that the solicitation was mailed before the Cole decision provided additional guidance on the “firm offer” requirement.  The court also denied summary judgment to the lender, stating that the willfulness issue is a fact question that can only be decided at trial.

Northern District of Illinois Certifies Class in “Firm Offer” Case.  Finally, in Kudlicki v. Capital One Auto Finance, Inc., No. 06 C 1918, 2006 WL 3210492 (N.D. Ill. Nov. 2, 2006), the U.S. District Court for the Northern District of Illinois certified a class consisting of all consumers who received a mailing from an automobile finance company that stated that the consumers were qualified for a motor vehicle loan of up to $25,000 to purchase a vehicle from a dealer that is also a defendant, other than those who accepted credit from the lender.  While the court did not reach the merits of the consumer’s “firm offer” claim, it did cite Murray v. GMAC Mortgage Corp., 434 F.3d 948 (7th Cir.2006), for the proposition that class certification is appropriate in a “firm offer” case because compliance can be determined by examining the “four corners” of the “offer,” which the court interpreted as the initial mailing.

For copies of the opinions, please contact Buckley Kolar at . 

Class Certification Denied in RESPA Section 8 Case.  On October 11, Judge Terrence Kern of the U.S. District Court for the Northern District of Oklahoma issued an order denying class certification in Bohne v. Closings of Tulsa, LLC, Case No. 05-CV-0197 (N.D. Okl.).  Bohne plaintiffs alleged that defendants violated Section 8 of the Real Estate Settlement Procedures Act (RESPA) by using sham companies to distribute affiliated title companies’ profits to real estate agents and homebuilders in exchange for steering customers to the title companies.  In denying class certification, Judge Kern found that the case posed too many individualized inquiries to be adjudicated on a class-wide basis.  As an initial matter, plaintiffs’ claims were not typical because they were subject to unique defenses that could become the focus of the litigation.  For example, many plaintiffs used different services resulting in different fees; some of the plaintiffs had signed releases; others were sellers, not buyers; and others did not use the allegedly affiliated brokers. Judge Kern also found that the named plaintiffs were not adequate representatives of the class because they did not possess sufficient understanding of the factual or legal issues presented in the case itself, and often did not appreciate their duties as class representatives, raising concerns that the litigation was driven by the plaintiffs’ lawyers.  Moreover, each transaction would have to be analyzed by the Court to determine whether the fees provided were reasonably related to the various services provided – the RESPA §8(b) standard.  Judge Kern also noted that the court would have to calculate separate damages for each class member.  For a copy of the decision, please contact Buckley Kolar. 

Second Circuit Upholds Dismissal of Antitrust Suit Against MasterCard.  The Second Circuit Court of Appeals upheld a decision from the Eastern District of New York dismissing a complaint against MasterCard that asserted antitrust violations for several of its practices, among them its "Competitive Programs Policy" (CPP) and chargeback policies.  Paycom Billing Services, Inc. v. MasterCard Int'l, Inc., 2006 U.S. App. LEXIS 26820, No. 05-1845 (2nd Cir. 2006).  Under its CPP, MasterCard prevents member banks from participating as acquiring or issuing banks for any competing payment-card network other than Visa.  Paycom, a merchant that sells access to password-restricted websites and that accepts credit cards, including MasterCard, for payment, alleged that the CPP causes it harm under antitrust laws because it forecloses competition in the market for card network services and reduces the number of payment options available to it as a merchant.  This allows MasterCard to charge higher interchange fees, higher chargeback fees, and other more burdensome terms than it would otherwise be able to impose.  The court rejected this argument, finding that Paycom is not an "efficient enforcer" under antitrust law and therefore lacks standing to seek damages.  The court cited that any injuries claimed by Paycom would be indirect because (i) the direct injuries would affect card-network providers other than Visa and MasterCard (such as Discover or American Express), (ii) the losses Paycom claims are highly speculative, and (iii) identifying damages and apportioning them among victims would be extremely difficult and speculative.  The court also rejected Paycom’s antitrust claims challenging MasterCard's chargeback system and its Cross-Border Acquiring rules.  For a copy of the decision, please contact Buckley Kolar. 

UnumProvident Will Pay $17.4 Million to Settle Spitzer Investigation Into Broker Compensation Practices.  On November 1, New York Attorney General Eliot Spitzer announced a settlement agreement with UnumProvident in connection with an investigation of the insurance company’s compensation of insurance brokers and consultants.  According to the New York Attorney General’s website, UnumProvident “will become the first life and disability carrier to agree not to pay contingent commissions on all group insurance products and to provide full disclosure of broker compensation to employers and other organizations that purchase its products on behalf of their employees or members.”  UnumProvident allegedly utilized various undisclosed contingent compensation programs, which, among other things, involved paying brokers for purported services—such as “marketing” of the insurer’s products, and the provision of “market intelligence”—and then passing on their costs to employers and employees through insurance premiums.  As part of the settlement, UnumProvident will pay $15.5 million in policyholder restitution and a $1.9 million civil penalty.  For more information, see http://www.oag.state.ny.us/press/2006/nov/nov01a_06.html.  A copy of the settlement agreement can be viewed at http://www.oag.state.ny.us/press/2006/nov/Unum%20Assurance%20of%20Discontinuance.pdf. 

Password Protection of Website Does Not Confer Personal Jurisdiction.  According to a recent decision of the U.S. District Court for the Eastern District of New York, the fact that an interactive website is accessible only to existing customers with a password is not sufficient to confer general personal jurisdiction over a party.  C.B.C. Wood Products Inc. v. LMD Integrated Logistics Serv. Inc., No. 06-2673 (E.D.N.Y., Oct. 7, 2006).  In sustaining the defendant’s motion to dismiss for lack of personal jurisdiction, the court held that the fact that a foreign corporation has a website accessible in New York is insufficient to establish personal jurisdiction over that corporation.  The court also considered whether the defendant’s various offline contacts with the state of New York, including telephone calls and the mailing of invoices to the plaintiff located in that forum, were sufficient to support specific jurisdiction; the court ultimately held that they were not.  To request a copy of this decision, please contact Buckley Kolar.  

“Shrinkwrap” License Terms May Not Be Enforceable If Contract Already Formed.  On October 27, the Kansas Supreme Court determined that “shrinkwrap” license terms may not be enforceable if the parties had previously entered a valid contract for the sale of the software and that contract did not incorporate the shrinkwrap license terms.  Wachter Mgmt. Co. v. Dexter & Chaney, Inc., No. 95,102 (Kan. Oct. 27, 2006).  In this case, the parties conducted “detailed negotiations” before entering into a contract for Dexter’s accounting software and related support services.  The court found that the contract did not reference or incorporate the terms of a shrinkwrap license that was bundled with the software media when the agreement was shipped.  Although other courts have upheld shrinkwrap licenses in other contexts, the court determined that the shrinkwrap license was an unenforceable attempt by Dexter to unilaterally modify the terms of the previously-entered contract.  Accordingly, the court refused to honor the shrinkwrap license’s terms—particularly the jurisdiction and venue clause that would have required Wachter to sue Dexter in Dexter’s home state.  The dissent reached a different conclusion, based upon its belief that Dexter’s original offer included the shrinkwrap license’s terms and conditions by reference. To obtain a copy of the decision, please go to http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=ks&vol=supct/2006/20061027/&invol=95102. 

STATE ISSUES

Illinois Cracks Down on Unlicensed Loan Originators.  On November 3, Illinois Governor Blagojevich released the results of the Illinois Department of Financial and Professional Regulations’ review of mortgage licenses in the Chicago Metropolitan area.  The Department’s unannounced inspections, which began last March, have revealed several residential mortgage firms enlisting the assistance of unlicensed loan originators to process home loans.  Such violations subject a licensed residential mortgage lender to fines of $2,500 for the first unlicensed loan originator and $500 for each additional unlicensed loan originator.  Further, individuals working as unlicensed loan originators are subject to fines of $950 and a permanent notation on their file should they decide to register in the future.  To view the full text of the press release, please see http://www.illinois.gov/PressReleases/ShowPressRelease.cfm?SubjectID=3&RecNum=5496. 

MISCELLANY

The Financial Action Task Force Issues Report on New Payment Technologies and Effect on Money Laundering and Terrorist Financing Activity.  A study released by the Financial Action Task Force (FATF), a task force established by the G-7 Summit in1989, explores the potential impact of new payment technologies on money laundering and terrorist financing activity.  The study focuses on prepaid cards, mobile payments, web-based payment systems and digital precious metals—examining adoption of these technologies and potential money laundering and terrorist financing risks that they present and whether such vulnerabilities are addressed by existing FATF guidance.  The report indicates that these payment systems are especially vulnerable to money laundering and terrorist financing activity when supplied by an offshore provider.  The report is available from the FATF website at http://www.fatf-gafi.org/document/17/0,2340,en_32250379_32237217_37627409_1_1_1_1,00.html.

FIRM NEWS

Margo Tank and Joe Lynyak will be speaking at the MBA’s Legal Issues in Mortgage Technology Conference being held November 15–17 at the Arizona Biltmore Hotel in 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 November 17 at ACI's predatory lending conference in Las Vegas, Nevada.

Jeff Naimon will be speaking on a panel entitled "Compliance, Due Diligence & Quality Assurance" at the SourceMedia Secondary Market Conference in New York City on December 6.  For more information about this conference and to register, please visit http://www.sourcemediaconferences.com/conferences/SMC06/index.html. 

 

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© 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.

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