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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

Web Seminar – Defending Fair Lending Allegations

Friday, December 8th at 12 PM EST (9:00 AM PST)

Buckley Kolar has learned that numerous HUD complaints may be filed in the next several weeks against mortgage lenders based on alleged redlining for certain categories of housing stock.  A free 45-minute web-based seminar hosted by Buckley Kolar will address these possible allegations, as well as possible defenses.  In addition, other fair lending enforcement actions being planned by the federal banking agencies will be discussed. The webinar will be moderated by Ann Schnare, the Managing Director and Chief Economist of Corporate Risk Advisors LLC, a financial services consulting firm. The speakers for this webinar will be Joseph Lynyak, a partner at Buckley Kolar, and Dr. Timothy Savage, a Principal at ERS Group, an economic consulting firm specializing in fair lending analysis.  To register for the seminar, please go to http://showvisuals.mshow.com/findshow.aspx?usertype=0&cobrand=128&shownumber=314445.

COURTS

Montgomery County Ordinance Declared Unconstitutional.  On November 30, Judge D. Mason of the Circuit Court for Montgomery County issued an opinion in the case of American Financial Services Association v. Montgomery County, MD ruling the controversial county ordinance on discriminatory lending (Ordinance 36-04) unconstitutional and thus null and void.  The ordinance was already under a preliminary injunction (as reported in the March 7th InfoBytes Special Alert) imposed by Judge Mason until the matter could be “finally resolved on its merits.”  After oral arguments on the case held July 6, 2006, the Court took the case under advisement, and ordered the injunction to remain in effect in Montgomery County until its final ruling. 

On Wednesday, Judge Mason issued an injunction that permanently enjoins the County from enforcing the ordinance.  In his final opinion, Judge Mason found that the effect of the ordinance reached far beyond the boundaries of Montgomery County.  Specifically he acknowledged that in today’s mortgage industry (i) mortgage loans are often provided by persons or organizations far removed from the location where the loan is placed, (ii) prior to the time that the loan documents are finally signed, it is entirely possible, if not probable, that the borrower and lender have never met, (iii) brokers operate statewide across county boundaries, and (iv) the ultimate source of funds for many of these loans is Wall Street.  Judge Mason noted that Charter Home Rule counties, like Montgomery County, are granted limited rights of self determination, including the authority to enact only "local" laws and not “general” (or extraterritorial) laws.  Therefore, Montgomery County had no authority to enact Ordinance 36-04.  In addition to the extraterritorial effect, the Court also found that the ordinance concerns matters that are of significant interest to the citizens of the entire State by affording injunctive relief and non-economic damages of up to $500,000, remedies traditionally reserved to the Legislature and the courts to create.  For all these reasons, Ordinance 36-04 was ruled not to be a local law and is therefore unconstitutional.  For a copy of the final opinion see http://www.buckleykolar.com/firm/documents/ montgomerycountypredatorylendingordinancecourtpapers.pdf.

Oral Arguments Heard in Wachovia v. Watters.  On November 29, the Supreme Court of the United States heard oral arguments in the matter of Wachovia Bank, N.A. v. Watters, No. 05-1342, a closely watched case concerning national bank preemption of state laws.  See the October 6th edition of InfoBytes for more details of the case.  Justice Thomas recused himself, as he has in past cases involving Wachovia, opening the possibility of a four-four decision which would then be settled in favor of the lower court opinions.  A transcript of the oral arguments can be found at http://www.supremecourtus.gov/oral_arguments/argument_transcripts/05-1342.pdf.

Ohio Supreme Court Invalidates Cleveland Predatory Lending Ordinances. In a 5-2 decision, the Supreme Court of Ohio struck down three local ordinances adopted by the City of Cleveland that prohibited various “predatory” lending practices. Am. Fin. Servs. Assn. v. Cleveland, 2006 WL 3350732 (Ohio, Nov. 20, 2006). The court found the ordinances unconstitutional, holding that the ordinances violated the “home rule” provision in the Ohio Constitution, which precludes localities from adopting regulations in conflict with state laws. The majority opinion found that the state lending statutes were intended to create a uniform, statewide regulatory scheme, and that “Cleveland has undertaken to regulate the making of a loan authorized by the General Assembly.” The ordinances were more stringent than state statutes in regard to interest rate thresholds, mandated consumer counseling, and payments to home improvement contractors. In a concurring opinion, one justice suggested that the ordinances should be struck down on state preemption grounds, not on an analysis of conflict of laws. A full text of the opinion is available at http://www.supremecourtofohio.gov/rod/newpdf/0/2006/2006-Ohio-6043.pdf.  

Another Court Holds Private Right to Sue for FCRA Notice Violations Repealed.  On November 20, the U.S. District Court for the Southern District of Texas joined almost all of the courts that have considered the issue in holding that the Fair and Accurate Credit Transactions Act of 2003 (FACTA) repealed the private right of action for violations of Section 615 of the Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681m.  Section 615 includes most of FCRA’s notice requirements, such as adverse action and the requirement to provide certain notices in a prescreened solicitation.  The court in Villagran v. Central Ford, Inc., Civ. No. H-05-2685, 2006 WL 3371546 (S.D. Tex. Nov. 20, 2006), cited 15 cases that have held that FACTA repealed the private right to enforce Section 615.  At the same time, the court scheduled a hearing on class certification on the consumer’s claim that the dealer’s solicitation–which did not discuss any terms of the credit offer–was not a “firm offer.”  For a copy of this decision, contact .

Federal Court Holds CAFA Appellate Review Applies Only to CAFA Removals.  On November 22, the United States Court of Appeals for the Eighth Circuit in Saab v. Home Depot U.S.A., Inc. held that a provision of the Class Action Fairness Act (CAFA) allowing appellate review of remand orders (28 U.S.C. § 1453(c)(1)) does not apply to removals based on diversity jurisdiction (as opposed to removals under CAFA’s provisions).  In so holding, the Eighth Circuit agreed with a previous holding of the Fifth Circuit.  A copy of the opinion is available at http://www.ca8.uscourts.gov/opndir/06/11/068014P.pdf. 

Connecticut Federal Court Refuses to Stay Case Pending Arbitration to Resolve Alleged Identity Theft.  In this case, Columbia Credit Services, a debt collector, previously pursued collection of the debt in arbitration, relying on an arbitration agreement between the cardholder and card issuer.  The arbitrator in that case ruled in favor of the debt collector and awarded it the value of the outstanding debt.  Plaintiff, arguing that she was the victim of identity theft, subsequently sued Columbia under the FDCPA, FCRA and Connecticut’s Unfair Trade Practices Act, alleging that defendant had engaged in unauthorized collection efforts.  Boran v. Columbia Credit Services, Inc., Case No. 3:06-CV-806-CFD-TPS (D. Conn.).  Defendant moved to compel arbitration, relying on the same arbitration agreement through which it successfully had pursued collection.  The motion was denied, however, because the Court held that defendant did not provide sufficient evidence showing that plaintiff agreed to arbitrate – a necessary element to grant a stay pending arbitration.  Indeed, evidence presented by plaintiff – namely, a warrant for the arrest of her son’s girlfriend for the fraudulent opening of the account in question – placed the agreement itself in question.  Accordingly, the Court ordered a jury trial on the threshold issue of whether the plaintiff actually signed the original credit card application.  For a copy of this decision, please contact .

Under FCRA, Credit Reporting Agency’s Procedures not Reasonable as a Matter of Law Where Agency Relied Solely on Creditors to Update Accounts of Consumers Whose Debts Were Discharged in Bankruptcy.  On October 13, a federal district court in California refused to dismiss a class action lawsuit brought by consumers alleging, among other things, that TransUnion violated the Fair Credit Reporting Act (FCRA) by employing credit reporting practices that inaccurately indicated their bankruptcy-discharged debts were “due and owing.”  According to the plaintiffs, TransUnion relied solely on consumers’ creditors to voluntarily update the status of accounts belonging to consumers who received Chapter 7 discharge orders, and, although TransUnion obtained every discharge order issued in Chapter 7 proceedings through the electronic PACER court reporting service, it did not utilize this resource to determine which debts had been discharged.  TransUnion moved to dismiss the complaint, arguing that FCRA does not expressly require credit reporting agencies to describe the legal implications of a bankruptcy discharge order on a credit report.  The court, however, refused to find that TransUnion’s procedures were reasonable as a matter of law, holding that nothing in FCRA suggests that there is an exception to a credit reporting agency’s standard obligation to employ reasonable procedures to ensure maximum possible accuracy for bankruptcy-related information.  Although this litigation is at an early stage, if the plaintiffs ultimately prevail, the case will likely have a significant impact on credit reporting procedures.  See White v. TransUnion, No. CV 05 1073 DOC (MLGX), 2006 WL 3354136 (C.D. Cal. Oct. 13, 2006).  For a copy of the opinion, please contact .                    

California Appellate Court Reverses Decision Against Bank For Setting Off Funds for Overdrafts and Overdraft Fees.  On November 20, a California appellate court reversed a trial court ruling that a bank acted illegally when it applied direct-deposit funds from Social Security and other public benefit payments to cover debits charged on the same bank account for account overdrafts and overdraft fees.  In making its ruling, the lower court relied extensively on Kruger v. Wells Fargo Bank, 521 P.2d 441 (Cal. 1974), which held that a bank may not use its account holder’s public benefit payments to recover on the account holder’s other legal obligations owed to the bank.  The appellate court reversed, ruling that the trial court erred in extending the Kruger case to the facts at bar.  According to the appellate court, the key factual difference was that in Kruger the bank was setting off public assistance payments from a deposit account to cover delinquent debts from a separate credit card account with the bank, whereas here the bank was making the necessary account adjustments to the same deposit account.  The appellate court noted that both common law and legislation enacted since Kruger supports the distinction.  Miller v. Bank of America, 2006 Cal. App. LEXIS 1815, No. A110137 (Cal. Ct. App. 2006).  For a copy of this decision, please contact .

Credit Card Firm Told to Produce Data as Court Rejects Defense Based on GLB.  On November 16, the Mississippi Supreme Court ordered the credit card division of Capital One to turn over the names and addresses of cardholders in a lawsuit brought by a credit card customer.  In doing so, the court rejected Capital One’s claims that disclosure of the information was barred by the privacy provisions in the Gramm-Leach-Bliley Act (GLB) because the cardholders had not been given a privacy notice including the opportunity to opt-out of information sharing.  The court noted that an exception to GLB allows information to be provided “to respond to judicial process.”  See 15 U.S.C. § 6802(e)(8).  The court held that “judicial process” includes civil discovery in a private lawsuit, noting with approval an amicus brief submitted by the Mississippi Trial Lawyers Association that argued that a holding that the exception does not cover civil discovery would make it impossible to enforce statutes such as the Equal Credit Opportunity Act, Fair Housing Act, and Racketeer Influenced and Corrupt Organizations Act (RICO).  See Capital One Services Inc. v. Page, No. 2005-IA-00153-SCT, – So.2d –, 2006 WL 3317029, 2006 Miss. LEXIS 651 (Miss. Nov. 16, 2006).  For a copy of this decision, please contact .

Court Strikes Down Presidential Authority Pertaining to Treasury Department Anti-Money Laundering Effort.  Last week the U.S. District Court for the Central District of California held that the President’s authority to designate persons and entities as specially designated global terrorists (SDGT), which forms part of the basis of the Office of Foreign Assets Control’s (OFAC) list of specially-designated nationals (SDN List), is unconstitutionally vague.  Humanitarian Law Project v. U.S. Dept. of Treasury, CV 05-8047 ABC (RMCx) (Nov. 21, 2006).  The court determined that the President’s authority to designate SDGTs was impermissibly vague because there were insufficient criteria for designating a person or entity as a SDGT and no process for challenging any such designation.  In contrast, the court upheld the Treasury Department’s SDGT designation process, which also is integral to the OFAC process and SDN List.  Please contact for a copy of the decision.

FEDERAL ISSUES

Electronic Discovery Amendments Effective December 1.   New electronic discovery amendments to the Federal Rules of Civil Procedure (FRCP), approved last April by the U.S. Supreme Court, go into effect  today .  The most significant change in federal civil litigation discovery in decades, the new rules  concern the discovery of "electronically stored information, " which will include information stored on computer hard drives, databases, email servers, voicemail systems, Blackberries, PDAs, or any other electronic medium. For more information, see the InfoBytes Special Alert on this development to follow today.

OTS Announces CRA Proposed Rulemaking.  On November 24, the Office of Thrift Supervision (OTS) published in the Federal Register a notice of proposed rulemaking seeking comment on whether the OTS should revise its Community Reinvestment Act (CRA) rule to align it with the CRA rules of the other federal banking agencies.  In its press release on the proposed rulemaking, the OTS noted that a consistent CRA standard applied to the banking and thrift industries will facilitate objective evaluations of CRA performance; ensure accurate assessments of banks and thrifts that operate in the same market; and permit the public to make reasonable comparisons of bank and thrift CRA performance.  The comment period is open for 60 days from the date of publication in the Federal Register.  A copy of the announcement may be obtained at http://www.ots.treas.gov/docs/7/776054.html.

OCC and CSBS Agree to Share Consumer Complaint Information.  On November 20, the Office of the Comptroller of the Currency (OCC) and the Conference of State Bank Supervisors (CSBS) announced they had reached agreement on procedures to share consumer complaint information.  The agreement included a model Memorandum of Understanding (MOU) that could be executed by state banking regulators and the OCC on a state-by-state basis.  OCC and CSBS officials expressed hope that it would help misdirected complaints reach the appropriate regulatory agency.   On November 30, the New York State Banking Department (NYSBD) became the first state regulator to execute an MOU based on the new model with the OCC.  To read the press release regarding the OCC-CSBS agreement, see http://www.occ.gov/toolkit/newsrelease.aspx?JNR=1&Doc=D39TFJ65.xml.  To read the press release regarding the OCC-NYSBD memorandum, see http://www.occ.treas.gov/ftp/release/2006-128.htm.

FRB Approves Final Rule Revising Regulation E.  On November 27, the Federal Reserve Board (FRB) announced a final rule amending Regulation E, which implements the Electronic Fund Transfer Act.  The final rule clarifies the consumer authorization requirements for collection of fees on returned checks and other unpaid items.  The rule also contains further provisions regarding the consumer’s authorization and and the content of notices to be given to the consumer.  The effective date of much of the rule is January 1, 2007, however certain requirements regarding the consumer notification do not go into effect until January 1, 2008.  To view the official FRB press release, and text of the final as well as proposed rule, see http://www.federalreserve.gov/boarddocs/press/bcreg/2006/20061127/default.htm.

FDIC Promulgates Final Rule Regarding Deposit Insurance Assessments.  On November 30, the Federal Deposit Insurance Corporation announced a final rule revising the method by which deposit insurance is assessed.  Among the many changes are several designed to make assessments more responsive to changes in an institution’s risk profile.  The rule goes into effect on January 1, 2007.  To read the official press release, see http://www.fdic.gov/news/news/financial/2006/fil06102.html.

STATE ISSUES

Hawaii and Connecticut Adopt Non-Traditional Mortgage Guidance.  The Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) recently implemented proposed guidance on nontraditional mortgages similar to that earlier enacted by the federal banking agencies (see the September 29th and November 17th issues of InfoBytes for more details).  On November 15, the Hawaii Department of Commerce and Consumer Affairs' Division of Financial Institutions and Professional and Vocational Licensing Division adopted the CSBS and AARMR guidance as "best practices" rules.  The guidance now applies to "state-licensed mortgage brokers and mortgage lenders."  For more information, see http://www.hawaii.gov/dcca/areas/dfi/main/press_releases/ DCAA%20Issues%20Best%20Practices%20for%20Nontraditional%20Mortgage%20Products.pdf.

On November 16, the Connecticut Department of Banking adopted the CSBS and AARMR guidance in its entirety.  According to the Department's press release, the guidance now applies to "state-licensed mortgage brokers and companies."  For more information, see http://www.ct.gov/dob/cwp/view.asp?a=2245&q=328174.

FIRM NEWS

Joe Kolar will be moderating a “General Counsel” panel on issues of concern to the chief legal officers of major lenders at the ABA Consumer Financial Services Committee meeting in Dana Point, California on January 8, 2007.

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. 

Margo Tank was quoted in the November 21 issue of the MBA NewsLink, a publication of the Mortgage Bankers Association, in an article entitled “Regulatory Requirements Offer Legal, Technological Challenges.”  Ms. Tank discussed compliance issues in electronic mortgage finance transactions.

Jerry Buckley was quoted in the December 1 issue of the American Banker in an article entitled “Why Some See ‘Suitability’ as Next Battle for Home Lenders.”  Mr. Buckley discussed the new burdens that face mortgage finance companies under new state legislation requiring greater examination and evaluation by lenders of borrowers’ ability to repay loans.

 

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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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