InfoBytes

CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

December 3, 2004

FEDERAL ISSUES

Board Releases Notice of Proposed Rulemaking on Open-End Credit Review. The Federal Reserve Board released a proposed rulemaking seeking comment on a variety of issues relating to the open-end credit rules of Regulation Z. In particular, the proposal seeks input on specific questions relating to the format of disclosures, the content of disclosures, and the substantive protections provided under the regulations. Additionally, the proposal invites comments identifying other pertinent issues for the Board to address when conducting its review of Regulation Z. The advance notice of proposed rulemaking can be found at: http://www.federalreserve.gov/BoardDocs/Press/bcreg/2004/20041203/

HUD Requests Comments on Proposed Home Equity Conversion Mortgage Rule. HUD has published a new proposed rulemaking relating to implementation of a statute that permits waiver of the collection of the single up-front mortgage premium from a home equity conversion mortgage (HECM) mortgagor. Currently, a mortgagor must pay an initial or up-front premium of two percent of the maximum claim amount, in addition to the monthly premiums thereafter. However, the current law permits the Secretary of HUD to waive the two percent premium provided the HECM proceeds are applied to payment of the premiums for a “qualified long term care insurance contract” (LTCI). The proposal seeks comment on several questions relating to this waiver program, including who would be covered by an LTCI contract, what the required features of an LTCI contract would be, what standards should govern an LTCI contract insurer and the lender, how the HECM proceeds should be addressed, how the program should handle defaults, and estimates on the likely demand for the program. For more information on this proposed rulemaking, please email

OTS Seeks Comment on CRA Definition of "Community Development”. The OTS is seeking comment on a proposed rule on whether to expand the definition of "community development" in order to enhance current rates of investment. The new definition would encourage all savings associations to increase their community development, lending, qualified investments, and community development services in rural areas and areas of major community disruptions such as those affected by natural disasters. In addition, the proposal seeks comment on providing additional flexibility in assigning CRA ratings that encourage large retail savings associations to focus their reinvestment activities in the communities they serve need, or, in the alternative, eliminate the investment test altogether. More information on the proposed rule can be found at http://www.ots.treas.gov/docs/7/73235.pdf.

OFHEO Announces Maximum 2005 Conforming Loan Limit. Effective January 1, 2005, the maximum conforming loan limit for single family mortgages purchased by Fannie Mae and Freddie Mac, after the customary rounding down to the nearest $50, can be no higher than $359,650 for one-unit properties. The conforming loan limit for larger properties, which are subject to the customary rounding, are as follows: two-unit mortgages are limited to $460,400; three-unit mortgages: $556,500; and four-unit mortgages: $691,600. The limit in statutorily designated high-cost areas (Alaska, Guam, Hawaii, and the U.S. Virgin Islands) will be 50 percent higher, for example, $539,475 for a one-unit single family mortgage. With respect to second mortgages, the limit will be $179,825 correlating to $269,725 in the designated high-cost areas. For more information on the announcement see: http://www.ofheo.gov/News.asp?FormMode=Release&ID=192.

STATE ISSUES

Maryland County Introduces New Predatory Lending Legislation. A new bill was introduced by the County Council of Montgomery County, Maryland that would expand the category of lending activities constituting discriminatory practices, apply the provisions to a broader range of lenders, and increase the amount of damages possible for violations. The legislation, Bill 36-04, would amend current law governing discrimination in lending to prohibit discrimination by “steering,” originating a predatory mortgage loan, or engaging in a practice described in the law as discriminatory without both a compelling business justification and without establishing that there is no less discriminatory method to advance the business justification. The legislation provided specific examples of steering violations, including discouraging a person from a particular mortgage loan with more favorable terms, directing a person to or away from a particular housing or mortgage loan product, program or service with more favorable terms, offering more limited mortgage loan opportunities or less favorable mortgage loan terms, or delaying a mortgage loan application or approval. The bill also lists factors that would indicate a predatory loan. These include: if the product is suitable for the borrower based on income and credit levels; if the product includes single premium credit insurance, excessive points or fees, prepayment penalties or a mandatory arbitration clause; or if the product does not provide a tangible net benefit to the borrower. Furthermore, the bill extends application of the antidiscrimination provisions beyond “lending institutions” to “persons” in order to cover lenders not currently covered, such as brokers or other individuals. Finally, the bill would expand the amount of damage award possible to include compensation for “financial losses resulting from the discriminatory act.” Text of the new bill can be found at: http://www.montgomerycountymd.gov/content/council/2004Bills/36-04.pdf.

New York Attorney General Announces Settlement to Stop Aggressive Debt Collection Practices. New York Attorney General Eliot Spitzer on October 5, 2004 announced a settlement with an upstate New York furniture store under which the store would cease certain financing and debt collection practices towards military personnel. The store required soldiers to sign “confessions of judgment,” admitting that they failed to stay current with their payment even before they began making payments. The store made financing agreements that were illegal under federal and state law, where the store could garnish wages with large interest charges after one late payment. The settlement required the store to cease these practices and make refunds of wrongly garnished wages. The press release can be accessed at: http://www.oag.state.ny.us/press/2004/oct/oct5b_04.html.

COURTS

Supreme Court Clarifies TILA Liability Caps. On November 30, the U.S. Supreme Court overturned the decision of the 4th Circuit Court of Appeals in the case of Koons Buick Pontiac GMC, Inc. v. Nigh, in which the 4th Circuit had upheld a trial court's award of $24,192.80 for a Truth In Lending Act violation in an automobile installment sales contract. The Supreme Court ruled 8-1 that, in its most recent amendments to the civil liability provisions of TILA, found at 15 USC 1640(a)(2)(A), Congress had intended to cap liability for violations in connection with all transactions other than closed-end real estate-secured transactions at $1000, despite superficial appearances to the contrary in the language of the provision. Koons Buick Pontiac GMC, Inc. v. Nigh, __S.Ct.__, 2004 WL 2707418 (Nov. 30, 2004). See http://www.supremecourtus.gov/opinions/04slipopinion.html

JAMS Renounces Class Action Preclusion Clauses. JAMS issued a Policy Statement adopting the position that it will not enforce clauses restricting the right of a consumer to be a member of a class action arbitration or to initiate a class action arbitration. The policy also outlined its stance on handling cases in which a company includes a class action preclusion clause in an arbitration clause that meets JAMS Minimum Standards of Fairness. If the arbitration is an individual arbitration filed by a consumer imposing the clause, then JAMS will take the individual case only if the plaintiff waives the inclusion of the clause. If the case is an individual case referred from a court after the plaintiff has filed a law suit and the defendant has requested removal, JAMS will take the case only if the plaintiff has waived or the court has stricken the clause. Finally, in a class action arbitration filed at JAMS that includes a class action preclusion clause, JAMS will accept the case and not enforce the clause. More information is available at: http://www.jamsadr.com/Images/PDF/2005-03-10-ClassActionPrecPolicyWD.doc.

Seventh Circuit Holds That a FCRA “Firm Offer” Must Have Economic Value. The decision addresses the definition of a “firm offer” (the basis for lenders’ access to credit reports in credit solicitations) and the meaning of “clear and conspicuous” in FCRA. The federal court of appeals reversed a district court decision dismissing the consumer’s complaint. The consumer had alleged that a “guaranteed credit line” of at least $300 offered in the dealer’s solicitation did not meet the FCRA “firm offer” requirement because it was a “sham.” The court held that the pleadings reasonably supported a claim that the dealer did not meet the “firm offer” requirement because (1) the solicitation was ambiguous on whether the offer would be honored; (2) the small credit line, restricted to purchase of a vehicle, “raises a question of whether the offer has value to the consumer,” and (3) the fact that several material terms, such as the repayment period and compounding method, were missing from the offer, made it impossible for the court to determine whether it had economic value. The court also held that the prescreening disclosures required by FCRA were not “clear and conspicuous,” as required by FCRA, when they were not emphasized or set off from the surrounding text and in fact were printed in a size of type that can barely be read with the naked eye. Cole v. U.S. Capital, Inc., __F.3d__, No. 03-3331, 2004 WL 2633296 (7th Cir. Nov. 19, 2004). To obtain a copy of the decision, please email

Federal Court Strikes Down Change in Credit Card Terms Agreement. In Stone v. Golden Wexler & Sarnese, P.C., the U.S. District Court for the Eastern District of New York held that a credit card agreement’s change-in-terms provision did not authorize a credit card issuer to impose an arbitration clause. The court noted the existence of competing authority regarding the scope of change-in-terms clauses. However, because the clause listed certain types of terms that might change, but failed to list the possibility that dispute resolution mechanisms might be revised, the court determined that the credit card issuer lacked the authority to impose an arbitration clause, in the absence of circumstances that demonstrated the consumer’s consent to the change. Moreover, the court intimated that a broadly worded change in terms clause may not be upheld. Stone v. Golden Wexler & Sarnese, P.C., et al., No. 03CV1136RJDJMA, 2004 U.S. Dist. LEXIS 20631 (E.D.N.Y. Sept. 30, 2004). To obtain a copy of the decision, please email .

Elimination of Entire Repayment Obligation Not Justified When Lender Cannot Discern If Proper Rescission Notice Was Received. The United States Bankruptcy Court for the Eastern District of Pennsylvania denied a claim on reconsideration that because the lender failed to honor the debtor’s valid notice of rescission, the entire repayment obligation should be eliminated. In the initial action, the court held that the Debtor was entitled to rescind the loan because she did not receive the proper disclosure of her right to rescind the transaction in violation of the Truth in Lending Act and the Florida Home Improvement Finance Act. The debtor’s motion for reconsideration requested that the entire repayment obligation be eliminated due to the failure to honor the original notice after she offered a valid rescission notice. The Court held that although courts have discretion to relieve a debtor from their repayment obligation, in this case the lender could not tell from the loan documentation that the debtor did not receive proper notice of her right to rescind. Therefore, elimination of the entire obligation was unjustified. Bell v. Parkway Mortgage, Inc., Bankr. No. 01-14420 KJC, Adv. No. 01-392 KJC, 2004 Bankr. LEXIS 1322 (Bankr. E.D. Pa. Sept. 9, 2004). To obtain a copy of the decision, please email .

Title Insurance Charge Within Tolerance Level of TILA Not A Violation. In Wade v. New Century Mortgage Corp., a homeowner claimed that the mortgage company violated the Truth in Lending Act by overstating the title insurance charge, asking for rescission of her loan. The United States District Court for the Northern District of Illinois, Eastern Division, dismissed the claim, finding that the charge fell well below the permissible “tolerance level” provided in TILA. 12 C.F.R. 226.23(g) allows a tolerance of one-half of 1 percent for accuracy of the finance charge. In this case, the Court stated that the actual charge of $614, minus the amount the homeowner claimed she could have acquired, resulted in an “overcharge” of $114, well within the permissible tolerance threshold. Wade v. New Century Mortgage Corp., No. 03 C 7401, 2004 U.S. Dist. LEXIS 19713 (N.D. Ill. Sept. 30, 2004). To obtain a copy of the decision, please email .

MISCELLANY

Nationwide Credit Bureaus Begin Providing Free Credit Reports. As required by the Fair and Accurate Credit Transactions Act of 2003 and an implementing FTC rule, the three nationwide consumer reporting agencies on December 1 began providing free credit file disclosures to consumers in 13 western states, including California. The reports are available through http://www.annualcreditreport.com by calling 1-877-322-8228 toll-free, or by mail. Availability of the free reports will be phased-in regionally, with nationwide availability by September 1 , 2005. See http://www.ftc.gov/opa/2004/11/041130freecreditrpts.htm (Press Release) http://www.ftc.gov/bcp/conline/edcams/credit/ycr_free_reports.htm (FTC consumer site); 69 Fed. Reg. 35468 (June 24, 2004) (FTC regulation), available at http://www.ftc.gov/os/2004/06/040624factafreeannualfrn.pdf. Treasury Secretary John Snow hailed improved access to reports as "a critical tool for consumers in the fight against financial fraud." http://www.treas.gov/press/releases/js2121.htm.

Recently Disclosed Information Security Breach is Reminder that Canada Has Strict Privacy Laws. On November 26, the Privacy Commissioner of Canada announced an investigation into possible breaches of client confidentiality by Canadian Imperial Bank of Commerce. According to press reports, faxes containing confidential information pertaining to CIBC customers had been sent sporadically to the same West Virginia business for more than three years, even though the business's owner notified CIBC of its error as soon as the faxes began arriving. This story can serve as a reminder that Canada has both federal and provincial consumer privacy protection statutes, and unlike the United States it has a federal privacy ombudsman with strong enforcement powers. As a measure of the seriousness with which Canadian institutions regard the Privacy Commissioner, on the day that the investigation was announced, CIBC disclosed that it would suspend all faxes from its entire network of +/- 1200 branches, and rely entirely on courier services for inter-branch communications, until it could figure out what had gone wrong and make sure it didn't happen again. For additional information on Canadian federal and provincial privacy regulation, see http://www.privcom.gc.ca/ (Office of the Privacy Commissioner of Canada).

Senate Confirms FTC Chairman Majoras and Commissioner Leibowitz. The Senate voted unanimously to confirm Deborah Platt Majoras and Jon Leibowitz on November 21, 2004. They had been serving under recess appointments. Majoras was confirmed to fill the unexpired seven year term that began September 2 6, 2001, while Leibowitz was confirmed to serve the seven year term beginning on September 26, 2003. See http://www.ftc.gov/opa/2004/11/dpmconf.htm.

© Buckley Kolar, LLP 2004. 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.