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CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS
Topics – Covered This Week (Click to View)
FEDERAL ISSUES
FRB Proposes Sweeping Mortgage Lending Rules. On December 19, the Federal Reserve Board (FRB) proposed expansive new regulations of the mortgage industry that, if made final, would be the most significant measures by a federal regulator thus far during the current subprime mortgage crisis. These rules would amend Regulation Z, which implements the Truth in Lending Act (TILA) and would be promulgated under powers granted by the Home Ownership and Equity Protection Act (HOEPA) to prohibit “unfair,” “deceptive,” and “abusive“ acts and practices. The rules would prohibit certain practices for all loans and impose increased restrictions on “higher-priced mortgage loans” which would be defined as (i) a first lien on a principal dwelling with an annual percentage rate (APR) at consummation three or more percentage points above the Treasury bill rate, or (ii) a subordinate lien with an APR at consummation five or more percentage points above the Treasury rate. The rules would also modify Regulation Z’s existing credit advertising rules to prohibit certain advertising practices. They would also require lenders to provide TILA disclosures within three days of application and prior to payment of most fees, for most residential mortgages -- not just the purchase-money mortgages that are subject to the current early-disclosure requirement.
In connection with higher-priced mortgages, the rules would (i) prohibit a “pattern and practice” of making loans without regard to the borrowers’ ability to pay, including the consumer’s verified current and “reasonably expected” income, current and reasonably expected obligations, employment, and other assets; (ii) extend the restrictions on prepayment penalties currently applicable for HOEPA loans (with points and fees eight percent above the Treasury rate) to apply to higher-priced mortgages and require that the prepayment penalty period end sixty days prior to the first rate reset; and (iii) require the use of escrows to pay property taxes and insurance for at least the first year of the loan, after which the lender could give the borrower the option of opting out of further use of the escrow.
In addition, the rules prohibit creditors, in connection with all consumer-purpose, closed-end loans secured by a principal dwelling, from paying yield-spread premiums (YSPs) or other compensation, unless the broker has entered into a written agreement with the consumer, setting out all of the broker’s compensation, before the consumer has paid any fee or submitted an application. The agreement would also have to include disclosures of information such as the potential conflict of interest created by the payment of compensation for delivering certain products to the lender. The rule would also prohibit, in all closed-end mortgage loans, (i) lenders and brokers from coercing, influencing, or otherwise encouraging appraisers to provide false appraisals; and (ii) servicers from failing to credit payments as of the day of receipt and failing to provide consumers with various disclosures upon request.
The rules propose guidance clarifying the “clear and conspicuous” standard for TILA disclosures, and altering disclosures to focus less on an introductory “teaser” rate, by, among other things, prohibiting the advertising of interest rates lower than the rate at which interest is accruing and revising TILA disclosures for open ended home loans, such as Home Equity Lines of Credit.
The rules also outline seven advertising practices the FRB would label deceptive or misleading under its HOEPA authority. These practices include (i) misleading uses of the term “fixed rate,” (ii) misleading comparisons between mortgages using the teaser payment or rate, (iii) representing a loan that is not FHA or VA insured as a “government-supported loan,” (iv) misleading use of the current lender’s name in a refinance solicitation, (v) misleading representations of a non-existent fiduciary or similar relationship, (vi) misleading claims of debt-elimination rather than debt restructuring, and (vii) foreign-language advertisements that provide relevant loan adjustment information only in English.
The new restrictions on loan terms and lending practices in the proposed rule, as well as the new advertising restrictions, are based on the Board’s authority under TILA Section 129(l)(2), 15 U.S.C. 1639(l)(2). Accordingly, consumers who bring timely actions against creditors for violations of these restrictions may be able to recover: (i) actual damages; (ii) statutory damages in an individual action of up to $2,000 or, in a class action, total statutory damages for the class of up to $500,000 or one percent of the creditor’s net worth, whichever is less; (iii) special statutory damages equal to the sum of all finance charges and fees paid by the consumer; and (iv) court costs and attorney fees. The proposed rule would not alter the general rules regarding assignee liability under TILA. Purchasers or assignees of loans meeting the existing HOEPA triggers otherwise known as “loans referred to in section 103(aa) of TILA” (APR 8% over comparable Treasury securities for 1st lien loans or points and fees over 8% of total loan amount) are subject to all claims and defenses with respect to that mortgage that the consumer could assert against the creditor, unless the purchaser or assignee demonstrates, by a preponderance of the evidence, that a reasonable person exercising ordinary due diligence, could not determine, based on the documentation required by this title, the itemization of the amount financed, and other disclosure of disbursements that the mortgage was a mortgage referred to in section 103(aa).
The new rules requiring advertising disclosures, such as the disclosures about rates or payments, would not create civil liability for creditors, assignees, or other persons, because those rules would be promulgated under the FRB’s general rulemaking authority in TILA Section 105(a). These proposed rules would, however, be subject to administrative enforcement by appropriate agencies. The new proposed rules in Proposed § 226.24(i), which would prohibit certain acts or practices in connection with closed-end advertisements for credit secured by a dwelling, would be promulgated under the FRB’s authority in TILA Section 129(l)(2), and TILA authorizes a civil action against a creditor who fails to comply with a rule adopted under authority of Section 129(l)(2). The Board notes, however, that it is not clear whether a consumer may bring an action against a creditor for violating an advertising restriction in proposed § 226.24(i) if the consumer has not obtained a mortgage loan from the creditor.
The proposal follows a lengthy deliberation process including hearings and congressional intervention (most recently reported in the December 14th issue of InfoBytes). Comments on the proposed rule are due within 90 days of its publication in the Federal Register. To view the proposed rule, please visit http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20071218a1.pdf.
President Signs Loan Modification Tax Relief Law. On December 20, President George Bush signed into law the “Mortgage Forgiveness Debt Relief Act” (H.R. 3648) which exempts taxpayers from income tax on up to $2 million in debt relief through modifications to mortgages on a “qualified principal residence.” This measure, which passed the House on October 4 and the Senate on December 14, was considered essential to modification initiatives such as HOPE Now, the voluntary lender initiative strongly supported by the Administration (reported in the December 7th issue of InfoBytes). The law also includes a test by which a cooperative housing corporation can qualify for the deduction, as well as unrelated items such as tax exemptions for firefighters and medical first responders. At the bill signing, President Bush called for prompt reconciliation of the House and Senate FHA reform bills (reported in the September 21 and December 14 issues of InfoBytes). Text of the law, as signed by the President, can be found at http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.3648.enr:.
FRB Issues Letter Addressing Third-Party Confidentiality Provisions. On December 13, the Federal Reserve Board (FRB) issued a supervisory letter (SR 07-19) addressing confidentiality provisions in agreements between banking organizations subject to FRB oversight and these supervised entities’ counterparties or other third parties. The letter emphasizes that it is “contrary to Federal Reserve regulation and policy for agreements to contain confidentiality provisions that (i) restrict the banking organization from providing information to Federal Reserve supervisory staff; (ii) require or permit, without the prior approval of the Federal Reserve, the banking organization to disclose to a counterparty that any information will be or was provided to Federal Reserve supervisory staff; or (iii) require or permit, without the prior approval of the Federal Reserve, the banking organization to inform a counterparty of a current or upcoming Federal Reserve examination or any nonpublic Federal Reserve supervisory initiative or action.” The letter notes that a standard confidentiality provision published by the Global Documentation Steering Committee in 2004 is consistent with these regulatory requirements when stating that “in the event that a supervisory authority with appropriate jurisdiction requests access to or delivery of confidential information from an organization, the organization may comply with such request and should give its counterparty written notice of such request only ‘if lawfully permitted to do so.’” For a full copy of this letter, please see http://www.federalreserve.gov/boarddocs/srletters/2007/SR0719.htm.
Congress Passes Resolutions to Make Do-Not-Call List Permanent. The House and Senate recently independently passed resolutions entitled the “Do-Not-Call Improvement Act” (H.R. 3541 and S. 2096) that would extend the effective period of registration on the Do Not Call (DNC) registry. On December 11, the U.S. House of Representatives passed by voice vote the “Do-Not-Call Improvement Act” (H.R. 3541) removing the DNC registry’s five-year re-registration requirement. The resolution also requires the Federal Trade Commission (FTC), the agency responsible for maintaining the registry, to “periodically” check numbers on the registry to determine if the numbers are invalid or have been reassigned. On December 17, the Senate passed a distinct resolution making the same changes to the DNC registry as its House counterpart by means of different language. The FTC recently announced it would not remove names from the DNC registry “pending final Congressional or agency action” (reported in the October 26th issue of InfoBytes). For more information about these resolutions, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.03541:; http://thomas.loc.gov/cgi-bin/bdquery/z?d110:s.2096:.
OTS Releases Final Holding Company Rating Rules. On December 30, the Office of Thrift Supervision (OTS) published a final rule altering its Savings and Loan Holding Company (SLHC) “CORE” rating system, adopting with “minor clarifications” rules proposed in the spring (reported in the April 13th issue of InfoBytes). The existing CORE (standing for capital, organizational structure, relationship, and earnings) rating system will be modified to use a five-point numeric rating scale similar to those used for thrifts and by other agencies. Also, the “relationship” prong will become “risk management” and focus on (i) board and senior management oversight and responsiveness to risk profile changes, (ii) accounting and risk disclosure policies, procedures, and limits, (iii) risk monitoring and management information systems, and (iv) the scope, effectiveness, and independence of internal controls. The rule will be applied to all SLHC examinations beginning on or after January 1, 2008. For a copy of the rule as published, please see http://www.ots.treas.gov/docs/7/73377.pdf.
FDIC Proposes Rules to Manage Large Bank Defaults. On December 19, the Board of the Federal Deposit Insurance Corporation (FDIC) approved proposed rules to revise the process by which insurance claims on deposit accounts in a defaulted bank are managed for the stated reason of adapting to a more “complicated” and “concentrated” banking industry. In addition to addressing several technical aspects of assessing the insured benefits for all banks, the rules also define special provisions for determining “large-bank deposit insurance.” Under the proposed rules, an FDIC-insured institution with at least $2 billion in domestic deposits and either (i) 250,000 deposit accounts or (ii) $20 billion in total assets would be considered a “covered institution.” In the event of a default, a covered institution would be required to (i) allow the FDIC to impose automatic holds on large accounts in any percentage specified by the FDIC, (ii) provide account information to the FDIC in a standardized format, and (iii) allow the FDIC to automatically remove holds and post insurance determinations. Among the stated reasons for the proposed rule, the FDIC noted that the proposed process would ease aggregation of multiple deposits with a single owner and improve access to funds during a default. Comments are due within 90 days of the proposal’s publication in the Federal Register. The proposed rules can be found at http://www.fdic.gov/news/board/07Dec19_NPRClaims.pdf.
STATE ISSUES
Massachusetts Implements Final Mortgage Lending Regulations. Massachusetts Attorney General Martha Coakley has filed final, revised mortgage broker and lender regulations, that become effective on January 2, 2008. The regulations were scheduled to become effective on November 15, but the effective date was pushed back due to industry concerns (see the October 19th and November 16th issues of InfoBytes). The final regulations have been amended from the previous version. The final rules no longer require broker and lender-specific disclosure forms and now allow “no income” loan products without requiring the borrower to sign a statement of income. The other provisions of the rules include (i) requiring a reasonable assessment of the borrower’s ability to repay, (ii) prohibiting “steering” to a less favorable loan in order to increase the broker’s compensation, (iii) prohibiting price gouging or discriminating against borrowers with similar credit profiles, and (iv) restricting the use of stated income loans. The rules also do not ban yield spread premiums (YSP), although any YSP must not conflict with the borrower’s interest and must be fully disclosed. The rules apply to loan applications received after January 2, 2008, not to loan applications “in the pipeline” at that point. According to Attorney General Coakley, these rules “prevent serious abuses while posing a minimal burden on responsible lenders and brokers.” More information is available through the attorney general’s website at http://www.mass.gov/?pageID=cagohomepage&L=1&L0=Home&sid=Cago.
NYSBD Issues Loan Originator Rules. On December 19, the New York State Banking Department (NYSBD) issued rules implementing that state’s new mortgage loan originator licensing statute (NY CLS Bank Article § 599-a et seq.) which goes into effect on January 1, 2008. Under the rules, originators who have not worked previously in New York will be required to apply for approval prior to April 1, 2008, but originators employed by or affiliated with a New York banker or broker prior to 2008 are not required to file an application until July 1, 2008. The authorization process will utilize the Nationwide Mortgage Licensing System (NMLS) which becomes operational on January 2, 2008 (most recently reported in the November 16th issue of InfoBytes). Applicants will also be required to submit fingerprints, credit histories, and documentation of their financial and criminal history disclosures. The NYSBD press release can be found at http://www.banking.state.ny.us/pr071219.htm. The rules implementing the loan originator licensure statute can be found at http://www.banking.state.ny.us/legal/rgmb420.htm.
NYSBD and Spitzer Working on New Anti-Predatory Lending Measures. On December 13, the New York Superintendent of Banks, Richard Neiman, testified before the New York Senate Committee on Banks that the New York State Banking Department is considering “sweeping” anti-predatory lending reform legislation with the support of Governor Elliot Spitzer. Superintendent Neiman said that the goal is a “consensus legislative proposal” that would “at a minimum” include (i) a “more in-depth evaluation” of a borrower’s ability to repay, (ii) prohibit certain loan practices, (iii) “clarify” mortgage brokers’ duties to borrowers, and (iv) broaden the state’s enforcement powers. For text of the Superintendent’s remarks, please see http://www.banking.state.ny.us/sp071213.htm.
COURTS
Federal Preemption No Defense to Misrepresentation Claims. A federal court in California rejected a national bank’s argument that claims alleging it misrepresented how certain loan payments would be applied were preempted by the National Bank Act (NBA). The complaint in Jefferson v. Chase Home Finance, No. C 06-6510 (N.D. Ca., opinion issued Dec. 14, 2007), arose from a dispute about the application of additional monthly loan payments. The consumer plaintiff alleged that each month he made a separate automatic prepayment on his loan, the amount of which Chase allegedly represented would be applied to pay the loan’s principal. Instead, this amount was placed in a suspense account. The plaintiff sued, alleging that Chase misrepresented how these payments would be applied, setting forth various state statutory and common law claims on behalf of a class of like borrowers. On summary judgment, Chase argued, among other defenses, that plaintiff’s claims were preempted by the NBA and its attendant OCC regulations. The court disagreed, finding that, rather than challenging the manner in which payments were applied – a claim that would be preempted – the complaint challenged the manner in which payments were represented. The court reasoned that, in this case, allowing a consumer to enforce state laws prohibiting misrepresentation would not interfere with Chase’s banking operations or impair its ability to engage in real estate lending, and therefore refused to grant the defendant’s summary judgment motion. For a copy of this opinion, please contact .
Vague Promotional Letter Is Not “Firm Offer” under FCRA. A federal district court in Missouri denied a lender’s motion to dismiss a lawsuit alleging that the lender violated the Fair Credit Reporting Act’s (FCRA) firm-offer requirement for prescreened credit solicitations. Klutho v. Fourth Fleet Fin., Inc., No. 4:07CV1065 CDP, 2007 WL 4333194 (E.D. Mo. Dec. 7, 2007). The lender had sent the consumer a prescreened offer to refinance her auto lease. This mailer contained a statement that the consumer had been approved for “the best loan at the best possible rate,” and did not include a minimum loan amount or interest rates. Relying on the Seventh Circuit’s decision in Cole v. U.S. Capital, Inc. and cases interpreting Cole, the court determined that, “[w]hen the letter is evaluated objectively and in 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.” Therefore, the court concluded that the plaintiff had stated a claim for a violation of FCRA. The court also ruled that proof of actual damages was not a requirement for recovery under FCRA. For a copy of the opinion, please contact .
FTC Publicity Used to Evidence Willfulness in FCRA Truncation Claim. A federal court recently ruled that the willful violation of the Fair and Accurate Credit Transactions Act (FACTA) amendment to FCRA, which requires redaction of information on credit card receipts, was sufficiently alleged to survive a motion to dismiss by citing, among other things, that the FTC had issued a business alert regarding FACTA’s requirements. Ehrheart v. Verizon Wireless, No. 07-1165, 2007 WL 4377681 (W.D. Pa. Dec. 11, 2007). In this case, a consumer brought suit against Verizon alleging a failure to adequately redact credit card information on a receipt as required by FACTA. The defendant moved to dismiss, arguing that the consumer only alleged willful violations, which carry statutory damages of $100 to $1000, and that any violations were at most negligent. The court disagreed, citing the complaint’s allegations that (i) the FTC had taken steps to inform the business of FACTA requirements, (ii) Visa, with whom Verizon contracted, had issued a manual informing the business of the law, (iii) Verizon’s peers and competitors had complied with the requirement, and (iv) Verizon had had three years to comply by the time of the alleged violation. Therefore, the court found that the claim “plausibly alleged” in the complaint. Separately, the FTC on December 14 issued an additional press release entitled “FTC Reminds Businesses: Don’t Print Full Credit and Debit Card Numbers on Customers’ Purchase Receipts.” For a copy of the decision in Ehrheart, please contact .
MISCELLANY
FTC Identity Theft Workshop Panelists Say that Limiting the Uses of SSNs is Critical. On December 11, the FTC held a workshop titled, “Security in Numbers: SSNs and ID Theft,” at which a panel of scholars in the area of identity theft agreed that limits on SSN uses must be instated before identity security improvements are possible. In April, the President’s Identity Theft Task Force issued a report similarly focusing on restricting access to SSNs. However, some panelists at the December 11 workshop criticized this report for making only broad statements about the need to identify how SSNs are used in the private sector and the need to hold workshops on the uses of SSNs. The panelists agreed that the single most troubling current use of SSNs is having them serve as the single authenticators for individuals before granting them credit. SSN “single authentication” occurs when the SSN itself is the sole basis for both identification and authentication of a person. The FTC will use the panelists’ comments and recommendations, along with public comments submitted before the conference, to craft a set of recommendations for the President on the issue of SSN use. The FTC hopes to deliver such recommendations in early 2008. For text and video from this conference, please see http://www.ftc.gov/bcp/workshops/ssn/index.shtml.
FDIC Publishes Article on Reviewing HMDA “Outliers.” The FDIC recently published an article entitled “HMDA Data: Identifying and Analyzing Outliers” about examining Home Mortgage Disclosure Act (HMDA) data to “evaluate fair lending concerns.” The article, published in the winter edition of the FDIC’s Supervisory Insights letter, discusses the steps the FDIC has taken to determine if it is necessary to refer concerns to the Department of Justice. The article also discusses what steps it takes after using statistical analysis HMDA data to identify (i) disparities between the average annual percentage rates for members of a protected class relative to unprotected classes, (ii) incidence of higher priced mortgages for protected classes, and (iii) a high incidence of HOEPA loans for protected classes. To view this article, please visit http://www.fdic.gov/regulations/examinations/supervisory/insights/siwin07/article04_HMDA.html.
FTC Comments on UDAP Rule Proposed by OTS. On December 12, the Federal Trade Commission (FTC) filed a staff comment on the Office of Thrift Supervision’s (OTS) proposed rule that would expand its regulation of unfair and deceptive practices, as covered in the August 3rd issue of InfoBytes. The FTC urged the OTS to adopt the FTC interpretations of the FTC Act. In support of its position, the FTC stated that its rules defining “unfairness” have had significant impact on the financial services industry, particularly regarding the holder in due course rule, credit practices, and telemarketing sales. The FTC also cited its experience in bringing law enforcement actions, as well as its familiarity with deceptive practices in the financial services industry, ranging from mortgage lending to credit cards. For a full copy of these comments, please see http://www.ftc.gov/os/2007/12/P084800anpr.pdf.
FIRM NEWS
Jon Jerison and Kirk Jensen gave an A.S. Pratt audio conference on “Lessons for All Mortgage Lenders: Recovering from the Fallout from the Subprime Lending Crisis,” on Tuesday, December 18. For more information, see http://aspratt.com/store/20B.php.
FRB Proposes Sweeping Mortgage Lending Rules. On December 19, the Federal Reserve Board (FRB) proposed expansive new regulations of the mortgage industry that, if made final, would be the most significant measures by a federal regulator thus far during the current subprime mortgage crisis. These rules would amend Regulation Z, which implements the Truth in Lending Act (TILA) and would be promulgated under powers granted by the Home Ownership and Equity Protection Act (HOEPA) to prohibit “unfair,” “deceptive,” and “abusive“ acts and practices. The rules would prohibit certain practices for all loans and impose increased restrictions on “higher-priced mortgage loans” which would be defined as (i) a first lien on a principal dwelling with an annual percentage rate (APR) at consummation three or more percentage points above the Treasury bill rate, or (ii) a subordinate lien with an APR at consummation five or more percentage points above the Treasury rate. The rules would also modify Regulation Z’s existing credit advertising rules to prohibit certain advertising practices. They would also require lenders to provide TILA disclosures within three days of application and prior to payment of most fees, for most residential mortgages -- not just the purchase-money mortgages that are subject to the current early-disclosure requirement.
In connection with higher-priced mortgages, the rules would (i) prohibit a “pattern and practice” of making loans without regard to the borrowers’ ability to pay, including the consumer’s verified current and “reasonably expected” income, current and reasonably expected obligations, employment, and other assets; (ii) extend the restrictions on prepayment penalties currently applicable for HOEPA loans (with points and fees eight percent above the Treasury rate) to apply to higher-priced mortgages and require that the prepayment penalty period end sixty days prior to the first rate reset; and (iii) require the use of escrows to pay property taxes and insurance for at least the first year of the loan, after which the lender could give the borrower the option of opting out of further use of the escrow.
In addition, the rules prohibit creditors, in connection with all consumer-purpose, closed-end loans secured by a principal dwelling, from paying yield-spread premiums (YSPs) or other compensation, unless the broker has entered into a written agreement with the consumer, setting out all of the broker’s compensation, before the consumer has paid any fee or submitted an application. The agreement would also have to include disclosures of information such as the potential conflict of interest created by the payment of compensation for delivering certain products to the lender. The rule would also prohibit, in all closed-end mortgage loans, (i) lenders and brokers from coercing, influencing, or otherwise encouraging appraisers to provide false appraisals; and (ii) servicers from failing to credit payments as of the day of receipt and failing to provide consumers with various disclosures upon request.
The rules propose guidance clarifying the “clear and conspicuous” standard for TILA disclosures, and altering disclosures to focus less on an introductory “teaser” rate, by, among other things, prohibiting the advertising of interest rates lower than the rate at which interest is accruing and revising TILA disclosures for open ended home loans, such as Home Equity Lines of Credit.
The rules also outline seven advertising practices the FRB would label deceptive or misleading under its HOEPA authority. These practices include (i) misleading uses of the term “fixed rate,” (ii) misleading comparisons between mortgages using the teaser payment or rate, (iii) representing a loan that is not FHA or VA insured as a “government-supported loan,” (iv) misleading use of the current lender’s name in a refinance solicitation, (v) misleading representations of a non-existent fiduciary or similar relationship, (vi) misleading claims of debt-elimination rather than debt restructuring, and (vii) foreign-language advertisements that provide relevant loan adjustment information only in English.
The new restrictions on loan terms and lending practices in the proposed rule, as well as the new advertising restrictions, are based on the Board’s authority under TILA Section 129(l)(2), 15 U.S.C. 1639(l)(2). Accordingly, consumers who bring timely actions against creditors for violations of these restrictions may be able to recover: (i) actual damages; (ii) statutory damages in an individual action of up to $2,000 or, in a class action, total statutory damages for the class of up to $500,000 or one percent of the creditor’s net worth, whichever is less; (iii) special statutory damages equal to the sum of all finance charges and fees paid by the consumer; and (iv) court costs and attorney fees. The proposed rule would not alter the general rules regarding assignee liability under TILA. Purchasers or assignees of loans meeting the existing HOEPA triggers otherwise known as “loans referred to in section 103(aa) of TILA” (APR 8% over comparable Treasury securities for 1st lien loans or points and fees over 8% of total loan amount) are subject to all claims and defenses with respect to that mortgage that the consumer could assert against the creditor, unless the purchaser or assignee demonstrates, by a preponderance of the evidence, that a reasonable person exercising ordinary due diligence, could not determine, based on the documentation required by this title, the itemization of the amount financed, and other disclosure of disbursements that the mortgage was a mortgage referred to in section 103(aa).
The new rules requiring advertising disclosures, such as the disclosures about rates or payments, would not create civil liability for creditors, assignees, or other persons, because those rules would be promulgated under the FRB’s general rulemaking authority in TILA Section 105(a). These proposed rules would, however, be subject to administrative enforcement by appropriate agencies. The new proposed rules in Proposed § 226.24(i), which would prohibit certain acts or practices in connection with closed-end advertisements for credit secured by a dwelling, would be promulgated under the FRB’s authority in TILA Section 129(l)(2), and TILA authorizes a civil action against a creditor who fails to comply with a rule adopted under authority of Section 129(l)(2). The Board notes, however, that it is not clear whether a consumer may bring an action against a creditor for violating an advertising restriction in proposed § 226.24(i) if the consumer has not obtained a mortgage loan from the creditor.
The proposal follows a lengthy deliberation process including hearings and congressional intervention (most recently reported in the December 14th issue of InfoBytes). Comments on the proposed rule are due within 90 days of its publication in the Federal Register. To view the proposed rule, please visit http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20071218a1.pdf.
President Signs Loan Modification Tax Relief Law. On December 20, President George Bush signed into law the “Mortgage Forgiveness Debt Relief Act” (H.R. 3648) which exempts taxpayers from income tax on up to $2 million in debt relief through modifications to mortgages on a “qualified principal residence.” This measure, which passed the House on October 4 and the Senate on December 14, was considered essential to modification initiatives such as HOPE Now, the voluntary lender initiative strongly supported by the Administration (reported in the December 7th issue of InfoBytes). The law also includes a test by which a cooperative housing corporation can qualify for the deduction, as well as unrelated items such as tax exemptions for firefighters and medical first responders. At the bill signing, President Bush called for prompt reconciliation of the House and Senate FHA reform bills (reported in the September 21 and December 14 issues of InfoBytes). Text of the law, as signed by the President, can be found at http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.3648.enr:.
Massachusetts Implements Final Mortgage Lending Regulations. Massachusetts Attorney General Martha Coakley has filed final, revised mortgage broker and lender regulations, that become effective on January 2, 2008. The regulations were scheduled to become effective on November 15, but the effective date was pushed back due to industry concerns (see the October 19th and November 16th issues of InfoBytes). The final regulations have been amended from the previous version. The final rules no longer require broker and lender-specific disclosure forms and now allow “no income” loan products without requiring the borrower to sign a statement of income. The other provisions of the rules include (i) requiring a reasonable assessment of the borrower’s ability to repay, (ii) prohibiting “steering” to a less favorable loan in order to increase the broker’s compensation, (iii) prohibiting price gouging or discriminating against borrowers with similar credit profiles, and (iv) restricting the use of stated income loans. The rules also do not ban yield spread premiums (YSP), although any YSP must not conflict with the borrower’s interest and must be fully disclosed. The rules apply to loan applications received after January 2, 2008, not to loan applications “in the pipeline” at that point. According to Attorney General Coakley, these rules “prevent serious abuses while posing a minimal burden on responsible lenders and brokers.” More information is available through the attorney general’s website at http://www.mass.gov/?pageID=cagohomepage&L=1&L0=Home&sid=Cago.
NYSBD Issues Loan Originator Rules. On December 19, the New York State Banking Department (NYSBD) issued rules implementing that state’s new mortgage loan originator licensing statute (NY CLS Bank Article § 599-a et seq.) which goes into effect on January 1, 2008. Under the rules, originators who have not worked previously in New York will be required to apply for approval prior to April 1, 2008, but originators employed by or affiliated with a New York banker or broker prior to 2008 are not required to file an application until July 1, 2008. The authorization process will utilize the Nationwide Mortgage Licensing System (NMLS) which becomes operational on January 2, 2008 (most recently reported in the November 16th issue of InfoBytes). Applicants will also be required to submit fingerprints, credit histories, and documentation of their financial and criminal history disclosures. The NYSBD press release can be found at http://www.banking.state.ny.us/pr071219.htm. The rules implementing the loan originator licensure statute can be found at http://www.banking.state.ny.us/legal/rgmb420.htm.
NYSBD and Spitzer Working on New Anti-Predatory Lending Measures. On December 13, the New York Superintendent of Banks, Richard Neiman, testified before the New York Senate Committee on Banks that the New York State Banking Department is considering “sweeping” anti-predatory lending reform legislation with the support of Governor Elliot Spitzer. Superintendent Neiman said that the goal is a “consensus legislative proposal” that would “at a minimum” include (i) a “more in-depth evaluation” of a borrower’s ability to repay, (ii) prohibit certain loan practices, (iii) “clarify” mortgage brokers’ duties to borrowers, and (iv) broaden the state’s enforcement powers. For text of the Superintendent’s remarks, please see http://www.banking.state.ny.us/sp071213.htm.
FDIC Publishes Article on Reviewing HMDA “Outliers.” The FDIC recently published an article entitled “HMDA Data: Identifying and Analyzing Outliers” about examining Home Mortgage Disclosure Act (HMDA) data to “evaluate fair lending concerns.” The article, published in the winter edition of the FDIC’s Supervisory Insights letter, discusses the steps the FDIC has taken to determine if it is necessary to refer concerns to the Department of Justice. The article also discusses what steps it takes after using statistical analysis HMDA data to identify (i) disparities between the average annual percentage rates for members of a protected class relative to unprotected classes, (ii) incidence of higher priced mortgages for protected classes, and (iii) a high incidence of HOEPA loans for protected classes. To view this article, please visit http://www.fdic.gov/regulations/examinations/supervisory/insights/siwin07/article04_HMDA.html.
FRB Proposes Sweeping Mortgage Lending Rules. On December 19, the Federal Reserve Board (FRB) proposed expansive new regulations of the mortgage industry that, if made final, would be the most significant measures by a federal regulator thus far during the current subprime mortgage crisis. These rules would amend Regulation Z, which implements the Truth in Lending Act (TILA) and would be promulgated under powers granted by the Home Ownership and Equity Protection Act (HOEPA) to prohibit “unfair,” “deceptive,” and “abusive“ acts and practices. The rules would prohibit certain practices for all loans and impose increased restrictions on “higher-priced mortgage loans” which would be defined as (i) a first lien on a principal dwelling with an annual percentage rate (APR) at consummation three or more percentage points above the Treasury bill rate, or (ii) a subordinate lien with an APR at consummation five or more percentage points above the Treasury rate. The rules would also modify Regulation Z’s existing credit advertising rules to prohibit certain advertising practices. They would also require lenders to provide TILA disclosures within three days of application and prior to payment of most fees, for most residential mortgages -- not just the purchase-money mortgages that are subject to the current early-disclosure requirement.
In connection with higher-priced mortgages, the rules would (i) prohibit a “pattern and practice” of making loans without regard to the borrowers’ ability to pay, including the consumer’s verified current and “reasonably expected” income, current and reasonably expected obligations, employment, and other assets; (ii) extend the restrictions on prepayment penalties currently applicable for HOEPA loans (with points and fees eight percent above the Treasury rate) to apply to higher-priced mortgages and require that the prepayment penalty period end sixty days prior to the first rate reset; and (iii) require the use of escrows to pay property taxes and insurance for at least the first year of the loan, after which the lender could give the borrower the option of opting out of further use of the escrow.
In addition, the rules prohibit creditors, in connection with all consumer-purpose, closed-end loans secured by a principal dwelling, from paying yield-spread premiums (YSPs) or other compensation, unless the broker has entered into a written agreement with the consumer, setting out all of the broker’s compensation, before the consumer has paid any fee or submitted an application. The agreement would also have to include disclosures of information such as the potential conflict of interest created by the payment of compensation for delivering certain products to the lender. The rule would also prohibit, in all closed-end mortgage loans, (i) lenders and brokers from coercing, influencing, or otherwise encouraging appraisers to provide false appraisals; and (ii) servicers from failing to credit payments as of the day of receipt and failing to provide consumers with various disclosures upon request.
The rules propose guidance clarifying the “clear and conspicuous” standard for TILA disclosures, and altering disclosures to focus less on an introductory “teaser” rate, by, among other things, prohibiting the advertising of interest rates lower than the rate at which interest is accruing and revising TILA disclosures for open ended home loans, such as Home Equity Lines of Credit.
The rules also outline seven advertising practices the FRB would label deceptive or misleading under its HOEPA authority. These practices include (i) misleading uses of the term “fixed rate,” (ii) misleading comparisons between mortgages using the teaser payment or rate, (iii) representing a loan that is not FHA or VA insured as a “government-supported loan,” (iv) misleading use of the current lender’s name in a refinance solicitation, (v) misleading representations of a non-existent fiduciary or similar relationship, (vi) misleading claims of debt-elimination rather than debt restructuring, and (vii) foreign-language advertisements that provide relevant loan adjustment information only in English.
The new restrictions on loan terms and lending practices in the proposed rule, as well as the new advertising restrictions, are based on the Board’s authority under TILA Section 129(l)(2), 15 U.S.C. 1639(l)(2). Accordingly, consumers who bring timely actions against creditors for violations of these restrictions may be able to recover: (i) actual damages; (ii) statutory damages in an individual action of up to $2,000 or, in a class action, total statutory damages for the class of up to $500,000 or one percent of the creditor’s net worth, whichever is less; (iii) special statutory damages equal to the sum of all finance charges and fees paid by the consumer; and (iv) court costs and attorney fees. The proposed rule would not alter the general rules regarding assignee liability under TILA. Purchasers or assignees of loans meeting the existing HOEPA triggers otherwise known as “loans referred to in section 103(aa) of TILA” (APR 8% over comparable Treasury securities for 1st lien loans or points and fees over 8% of total loan amount) are subject to all claims and defenses with respect to that mortgage that the consumer could assert against the creditor, unless the purchaser or assignee demonstrates, by a preponderance of the evidence, that a reasonable person exercising ordinary due diligence, could not determine, based on the documentation required by this title, the itemization of the amount financed, and other disclosure of disbursements that the mortgage was a mortgage referred to in section 103(aa).
The new rules requiring advertising disclosures, such as the disclosures about rates or payments, would not create civil liability for creditors, assignees, or other persons, because those rules would be promulgated under the FRB’s general rulemaking authority in TILA Section 105(a). These proposed rules would, however, be subject to administrative enforcement by appropriate agencies. The new proposed rules in Proposed § 226.24(i), which would prohibit certain acts or practices in connection with closed-end advertisements for credit secured by a dwelling, would be promulgated under the FRB’s authority in TILA Section 129(l)(2), and TILA authorizes a civil action against a creditor who fails to comply with a rule adopted under authority of Section 129(l)(2). The Board notes, however, that it is not clear whether a consumer may bring an action against a creditor for violating an advertising restriction in proposed § 226.24(i) if the consumer has not obtained a mortgage loan from the creditor.
The proposal follows a lengthy deliberation process including hearings and congressional intervention (most recently reported in the December 14th issue of InfoBytes). Comments on the proposed rule are due within 90 days of its publication in the Federal Register. To view the proposed rule, please visit http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20071218a1.pdf.
Federal Preemption No Defense to Misrepresentation Claims. A federal court in California rejected a national bank’s argument that claims alleging it misrepresented how certain loan payments would be applied were preempted by the National Bank Act (NBA). The complaint in Jefferson v. Chase Home Finance, No. C 06-6510 (N.D. Ca., opinion issued Dec. 14, 2007), arose from a dispute about the application of additional monthly loan payments. The consumer plaintiff alleged that each month he made a separate automatic prepayment on his loan, the amount of which Chase allegedly represented would be applied to pay the loan’s principal. Instead, this amount was placed in a suspense account. The plaintiff sued, alleging that Chase misrepresented how these payments would be applied, setting forth various state statutory and common law claims on behalf of a class of like borrowers. On summary judgment, Chase argued, among other defenses, that plaintiff’s claims were preempted by the NBA and its attendant OCC regulations. The court disagreed, finding that, rather than challenging the manner in which payments were applied – a claim that would be preempted – the complaint challenged the manner in which payments were represented. The court reasoned that, in this case, allowing a consumer to enforce state laws prohibiting misrepresentation would not interfere with Chase’s banking operations or impair its ability to engage in real estate lending, and therefore refused to grant the defendant’s summary judgment motion. For a copy of this opinion, please contact .
FRB Issues Letter Addressing Third-Party Confidentiality Provisions. On December 13, the Federal Reserve Board (FRB) issued a supervisory letter (SR 07-19) addressing confidentiality provisions in agreements between banking organizations subject to FRB oversight and these supervised entities’ counterparties or other third parties. The letter emphasizes that it is “contrary to Federal Reserve regulation and policy for agreements to contain confidentiality provisions that (i) restrict the banking organization from providing information to Federal Reserve supervisory staff; (ii) require or permit, without the prior approval of the Federal Reserve, the banking organization to disclose to a counterparty that any information will be or was provided to Federal Reserve supervisory staff; or (iii) require or permit, without the prior approval of the Federal Reserve, the banking organization to inform a counterparty of a current or upcoming Federal Reserve examination or any nonpublic Federal Reserve supervisory initiative or action.” The letter notes that a standard confidentiality provision published by the Global Documentation Steering Committee in 2004 is consistent with these regulatory requirements when stating that “in the event that a supervisory authority with appropriate jurisdiction requests access to or delivery of confidential information from an organization, the organization may comply with such request and should give its counterparty written notice of such request only ‘if lawfully permitted to do so.’” For a full copy of this letter, please see http://www.federalreserve.gov/boarddocs/srletters/2007/SR0719.htm.
OTS Releases Final Holding Company Rating Rules. On December 30, the Office of Thrift Supervision (OTS) published a final rule altering its Savings and Loan Holding Company (SLHC) “CORE” rating system, adopting with “minor clarifications” rules proposed in the spring (reported in the April 13th issue of InfoBytes). The existing CORE (standing for capital, organizational structure, relationship, and earnings) rating system will be modified to use a five-point numeric rating scale similar to those used for thrifts and by other agencies. Also, the “relationship” prong will become “risk management” and focus on (i) board and senior management oversight and responsiveness to risk profile changes, (ii) accounting and risk disclosure policies, procedures, and limits, (iii) risk monitoring and management information systems, and (iv) the scope, effectiveness, and independence of internal controls. The rule will be applied to all SLHC examinations beginning on or after January 1, 2008. For a copy of the rule as published, please see http://www.ots.treas.gov/docs/7/73377.pdf.
FDIC Proposes Rules to Manage Large Bank Defaults. On December 19, the Board of the Federal Deposit Insurance Corporation (FDIC) approved proposed rules to revise the process by which insurance claims on deposit accounts in a defaulted bank are managed for the stated reason of adapting to a more “complicated” and “concentrated” banking industry. In addition to addressing several technical aspects of assessing the insured benefits for all banks, the rules also define special provisions for determining “large-bank deposit insurance.” Under the proposed rules, an FDIC-insured institution with at least $2 billion in domestic deposits and either (i) 250,000 deposit accounts or (ii) $20 billion in total assets would be considered a “covered institution.” In the event of a default, a covered institution would be required to (i) allow the FDIC to impose automatic holds on large accounts in any percentage specified by the FDIC, (ii) provide account information to the FDIC in a standardized format, and (iii) allow the FDIC to automatically remove holds and post insurance determinations. Among the stated reasons for the proposed rule, the FDIC noted that the proposed process would ease aggregation of multiple deposits with a single owner and improve access to funds during a default. Comments are due within 90 days of the proposal’s publication in the Federal Register. The proposed rules can be found at http://www.fdic.gov/news/board/07Dec19_NPRClaims.pdf.
FTC Comments on UDAP Rule Proposed by OTS. On December 12, the Federal Trade Commission (FTC) filed a staff comment on the Office of Thrift Supervision’s (OTS) proposed rule that would expand its regulation of unfair and deceptive practices, as covered in the August 3rd issue of InfoBytes. The FTC urged the OTS to adopt the FTC interpretations of the FTC Act. In support of its position, the FTC stated that its rules defining “unfairness” have had significant impact on the financial services industry, particularly regarding the holder in due course rule, credit practices, and telemarketing sales. The FTC also cited its experience in bringing law enforcement actions, as well as its familiarity with deceptive practices in the financial services industry, ranging from mortgage lending to credit cards. For a full copy of these comments, please see http://www.ftc.gov/os/2007/12/P084800anpr.pdf.
Vague Promotional Letter Is Not “Firm Offer” under FCRA. A federal district court in Missouri denied a lender’s motion to dismiss a lawsuit alleging that the lender violated the Fair Credit Reporting Act’s (FCRA) firm-offer requirement for prescreened credit solicitations. Klutho v. Fourth Fleet Fin., Inc., No. 4:07CV1065 CDP, 2007 WL 4333194 (E.D. Mo. Dec. 7, 2007). The lender had sent the consumer a prescreened offer to refinance her auto lease. This mailer contained a statement that the consumer had been approved for “the best loan at the best possible rate,” and did not include a minimum loan amount or interest rates. Relying on the Seventh Circuit’s decision in Cole v. U.S. Capital, Inc. and cases interpreting Cole, the court determined that, “[w]hen the letter is evaluated objectively and in 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.” Therefore, the court concluded that the plaintiff had stated a claim for a violation of FCRA. The court also ruled that proof of actual damages was not a requirement for recovery under FCRA. For a copy of the opinion, please contact .
FTC Publicity Used to Evidence Willfulness in FCRA Truncation Claim. A federal court recently ruled that the willful violation of the Fair and Accurate Credit Transactions Act (FACTA) amendment to FCRA, which requires redaction of information on credit card receipts, was sufficiently alleged to survive a motion to dismiss by citing, among other things, that the FTC had issued a business alert regarding FACTA’s requirements. Ehrheart v. Verizon Wireless, No. 07-1165, 2007 WL 4377681 (W.D. Pa. Dec. 11, 2007). In this case, a consumer brought suit against Verizon alleging a failure to adequately redact credit card information on a receipt as required by FACTA. The defendant moved to dismiss, arguing that the consumer only alleged willful violations, which carry statutory damages of $100 to $1000, and that any violations were at most negligent. The court disagreed, citing the complaint’s allegations that (i) the FTC had taken steps to inform the business of FACTA requirements, (ii) Visa, with whom Verizon contracted, had issued a manual informing the business of the law, (iii) Verizon’s peers and competitors had complied with the requirement, and (iv) Verizon had had three years to comply by the time of the alleged violation. Therefore, the court found that the claim “plausibly alleged” in the complaint. Separately, the FTC on December 14 issued an additional press release entitled “FTC Reminds Businesses: Don’t Print Full Credit and Debit Card Numbers on Customers’ Purchase Receipts.” For a copy of the decision in Ehrheart, please contact .
FRB Proposes Sweeping Mortgage Lending Rules. On December 19, the Federal Reserve Board (FRB) proposed expansive new regulations of the mortgage industry that, if made final, would be the most significant measures by a federal regulator thus far during the current subprime mortgage crisis. These rules would amend Regulation Z, which implements the Truth in Lending Act (TILA) and would be promulgated under powers granted by the Home Ownership and Equity Protection Act (HOEPA) to prohibit “unfair,” “deceptive,” and “abusive“ acts and practices. The rules would prohibit certain practices for all loans and impose increased restrictions on “higher-priced mortgage loans” which would be defined as (i) a first lien on a principal dwelling with an annual percentage rate (APR) at consummation three or more percentage points above the Treasury bill rate, or (ii) a subordinate lien with an APR at consummation five or more percentage points above the Treasury rate. The rules would also modify Regulation Z’s existing credit advertising rules to prohibit certain advertising practices. They would also require lenders to provide TILA disclosures within three days of application and prior to payment of most fees, for most residential mortgages -- not just the purchase-money mortgages that are subject to the current early-disclosure requirement.
In connection with higher-priced mortgages, the rules would (i) prohibit a “pattern and practice” of making loans without regard to the borrowers’ ability to pay, including the consumer’s verified current and “reasonably expected” income, current and reasonably expected obligations, employment, and other assets; (ii) extend the restrictions on prepayment penalties currently applicable for HOEPA loans (with points and fees eight percent above the Treasury rate) to apply to higher-priced mortgages and require that the prepayment penalty period end sixty days prior to the first rate reset; and (iii) require the use of escrows to pay property taxes and insurance for at least the first year of the loan, after which the lender could give the borrower the option of opting out of further use of the escrow.
In addition, the rules prohibit creditors, in connection with all consumer-purpose, closed-end loans secured by a principal dwelling, from paying yield-spread premiums (YSPs) or other compensation, unless the broker has entered into a written agreement with the consumer, setting out all of the broker’s compensation, before the consumer has paid any fee or submitted an application. The agreement would also have to include disclosures of information such as the potential conflict of interest created by the payment of compensation for delivering certain products to the lender. The rule would also prohibit, in all closed-end mortgage loans, (i) lenders and brokers from coercing, influencing, or otherwise encouraging appraisers to provide false appraisals; and (ii) servicers from failing to credit payments as of the day of receipt and failing to provide consumers with various disclosures upon request.
The rules propose guidance clarifying the “clear and conspicuous” standard for TILA disclosures, and altering disclosures to focus less on an introductory “teaser” rate, by, among other things, prohibiting the advertising of interest rates lower than the rate at which interest is accruing and revising TILA disclosures for open ended home loans, such as Home Equity Lines of Credit.
The rules also outline seven advertising practices the FRB would label deceptive or misleading under its HOEPA authority. These practices include (i) misleading uses of the term “fixed rate,” (ii) misleading comparisons between mortgages using the teaser payment or rate, (iii) representing a loan that is not FHA or VA insured as a “government-supported loan,” (iv) misleading use of the current lender’s name in a refinance solicitation, (v) misleading representations of a non-existent fiduciary or similar relationship, (vi) misleading claims of debt-elimination rather than debt restructuring, and (vii) foreign-language advertisements that provide relevant loan adjustment information only in English.
The new restrictions on loan terms and lending practices in the proposed rule, as well as the new advertising restrictions, are based on the Board’s authority under TILA Section 129(l)(2), 15 U.S.C. 1639(l)(2). Accordingly, consumers who bring timely actions against creditors for violations of these restrictions may be able to recover: (i) actual damages; (ii) statutory damages in an individual action of up to $2,000 or, in a class action, total statutory damages for the class of up to $500,000 or one percent of the creditor’s net worth, whichever is less; (iii) special statutory damages equal to the sum of all finance charges and fees paid by the consumer; and (iv) court costs and attorney fees. The proposed rule would not alter the general rules regarding assignee liability under TILA. Purchasers or assignees of loans meeting the existing HOEPA triggers otherwise known as “loans referred to in section 103(aa) of TILA” (APR 8% over comparable Treasury securities for 1st lien loans or points and fees over 8% of total loan amount) are subject to all claims and defenses with respect to that mortgage that the consumer could assert against the creditor, unless the purchaser or assignee demonstrates, by a preponderance of the evidence, that a reasonable person exercising ordinary due diligence, could not determine, based on the documentation required by this title, the itemization of the amount financed, and other disclosure of disbursements that the mortgage was a mortgage referred to in section 103(aa).
The new rules requiring advertising disclosures, such as the disclosures about rates or payments, would not create civil liability for creditors, assignees, or other persons, because those rules would be promulgated under the FRB’s general rulemaking authority in TILA Section 105(a). These proposed rules would, however, be subject to administrative enforcement by appropriate agencies. The new proposed rules in Proposed § 226.24(i), which would prohibit certain acts or practices in connection with closed-end advertisements for credit secured by a dwelling, would be promulgated under the FRB’s authority in TILA Section 129(l)(2), and TILA authorizes a civil action against a creditor who fails to comply with a rule adopted under authority of Section 129(l)(2). The Board notes, however, that it is not clear whether a consumer may bring an action against a creditor for violating an advertising restriction in proposed § 226.24(i) if the consumer has not obtained a mortgage loan from the creditor.
The proposal follows a lengthy deliberation process including hearings and congressional intervention (most recently reported in the December 14th issue of InfoBytes). Comments on the proposed rule are due within 90 days of its publication in the Federal Register. To view the proposed rule, please visit http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20071218a1.pdf.
Federal Preemption No Defense to Misrepresentation Claims. A federal court in California rejected a national bank’s argument that claims alleging it misrepresented how certain loan payments would be applied were preempted by the National Bank Act (NBA). The complaint in Jefferson v. Chase Home Finance, No. C 06-6510 (N.D. Ca., opinion issued Dec. 14, 2007), arose from a dispute about the application of additional monthly loan payments. The consumer plaintiff alleged that each month he made a separate automatic prepayment on his loan, the amount of which Chase allegedly represented would be applied to pay the loan’s principal. Instead, this amount was placed in a suspense account. The plaintiff sued, alleging that Chase misrepresented how these payments would be applied, setting forth various state statutory and common law claims on behalf of a class of like borrowers. On summary judgment, Chase argued, among other defenses, that plaintiff’s claims were preempted by the NBA and its attendant OCC regulations. The court disagreed, finding that, rather than challenging the manner in which payments were applied – a claim that would be preempted – the complaint challenged the manner in which payments were represented. The court reasoned that, in this case, allowing a consumer to enforce state laws prohibiting misrepresentation would not interfere with Chase’s banking operations or impair its ability to engage in real estate lending, and therefore refused to grant the defendant’s summary judgment motion. For a copy of this opinion, please contact .
Vague Promotional Letter Is Not “Firm Offer” under FCRA. A federal district court in Missouri denied a lender’s motion to dismiss a lawsuit alleging that the lender violated the Fair Credit Reporting Act’s (FCRA) firm-offer requirement for prescreened credit solicitations. Klutho v. Fourth Fleet Fin., Inc., No. 4:07CV1065 CDP, 2007 WL 4333194 (E.D. Mo. Dec. 7, 2007). The lender had sent the consumer a prescreened offer to refinance her auto lease. This mailer contained a statement that the consumer had been approved for “the best loan at the best possible rate,” and did not include a minimum loan amount or interest rates. Relying on the Seventh Circuit’s decision in Cole v. U.S. Capital, Inc. and cases interpreting Cole, the court determined that, “[w]hen the letter is evaluated objectively and in 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.” Therefore, the court concluded that the plaintiff had stated a claim for a violation of FCRA. The court also ruled that proof of actual damages was not a requirement for recovery under FCRA. For a copy of the opinion, please contact .
FTC Publicity Used to Evidence Willfulness in FCRA Truncation Claim. A federal court recently ruled that the willful violation of the Fair and Accurate Credit Transactions Act (FACTA) amendment to FCRA, which requires redaction of information on credit card receipts, was sufficiently alleged to survive a motion to dismiss by citing, among other things, that the FTC had issued a business alert regarding FACTA’s requirements. Ehrheart v. Verizon Wireless, No. 07-1165, 2007 WL 4377681 (W.D. Pa. Dec. 11, 2007). In this case, a consumer brought suit against Verizon alleging a failure to adequately redact credit card information on a receipt as required by FACTA. The defendant moved to dismiss, arguing that the consumer only alleged willful violations, which carry statutory damages of $100 to $1000, and that any violations were at most negligent. The court disagreed, citing the complaint’s allegations that (i) the FTC had taken steps to inform the business of FACTA requirements, (ii) Visa, with whom Verizon contracted, had issued a manual informing the business of the law, (iii) Verizon’s peers and competitors had complied with the requirement, and (iv) Verizon had had three years to comply by the time of the alleged violation. Therefore, the court found that the claim “plausibly alleged” in the complaint. Separately, the FTC on December 14 issued an additional press release entitled “FTC Reminds Businesses: Don’t Print Full Credit and Debit Card Numbers on Customers’ Purchase Receipts.” For a copy of the decision in Ehrheart, please contact .
FTC Identity Theft Workshop Panelists Say that Limiting the Uses of SSNs is Critical. On December 11, the FTC held a workshop titled, “Security in Numbers: SSNs and ID Theft,” at which a panel of scholars in the area of identity theft agreed that limits on SSN uses must be instated before identity security improvements are possible. In April, the President’s Identity Theft Task Force issued a report similarly focusing on restricting access to SSNs. However, some panelists at the December 11 workshop criticized this report for making only broad statements about the need to identify how SSNs are used in the private sector and the need to hold workshops on the uses of SSNs. The panelists agreed that the single most troubling current use of SSNs is having them serve as the single authenticators for individuals before granting them credit. SSN “single authentication” occurs when the SSN itself is the sole basis for both identification and authentication of a person. The FTC will use the panelists’ comments and recommendations, along with public comments submitted before the conference, to craft a set of recommendations for the President on the issue of SSN use. The FTC hopes to deliver such recommendations in early 2008. For text and video from this conference, please see http://www.ftc.gov/bcp/workshops/ssn/index.shtml.
Congress Passes Resolutions to Make Do-Not-Call List Permanent. The House and Senate recently independently passed resolutions entitled the “Do-Not-Call Improvement Act” (H.R. 3541 and S. 2096) that would extend the effective period of registration on the Do Not Call (DNC) registry. On December 11, the U.S. House of Representatives passed by voice vote the “Do-Not-Call Improvement Act” (H.R. 3541) removing the DNC registry’s five-year re-registration requirement. The resolution also requires the Federal Trade Commission (FTC), the agency responsible for maintaining the registry, to “periodically” check numbers on the registry to determine if the numbers are invalid or have been reassigned. On December 17, the Senate passed a distinct resolution making the same changes to the DNC registry as its House counterpart by means of different language. The FTC recently announced it would not remove names from the DNC registry “pending final Congressional or agency action” (reported in the October 26th issue of InfoBytes). For more information about these resolutions, please see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.03541:; http://thomas.loc.gov/cgi-bin/bdquery/z?d110:s.2096:.
Vague Promotional Letter Is Not “Firm Offer” under FCRA. A federal district court in Missouri denied a lender’s motion to dismiss a lawsuit alleging that the lender violated the Fair Credit Reporting Act’s (FCRA) firm-offer requirement for prescreened credit solicitations. Klutho v. Fourth Fleet Fin., Inc., No. 4:07CV1065 CDP, 2007 WL 4333194 (E.D. Mo. Dec. 7, 2007). The lender had sent the consumer a prescreened offer to refinance her auto lease. This mailer contained a statement that the consumer had been approved for “the best loan at the best possible rate,” and did not include a minimum loan amount or interest rates. Relying on the Seventh Circuit’s decision in Cole v. U.S. Capital, Inc. and cases interpreting Cole, the court determined that, “[w]hen the letter is evaluated objectively and in 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.” Therefore, the court concluded that the plaintiff had stated a claim for a violation of FCRA. The court also ruled that proof of actual damages was not a requirement for recovery under FCRA. For a copy of the opinion, please contact .
FTC Publicity Used to Evidence Willfulness in FCRA Truncation Claim. A federal court recently ruled that the willful violation of the Fair and Accurate Credit Transactions Act (FACTA) amendment to FCRA, which requires redaction of information on credit card receipts, was sufficiently alleged to survive a motion to dismiss by citing, among other things, that the FTC had issued a business alert regarding FACTA’s requirements. Ehrheart v. Verizon Wireless, No. 07-1165, 2007 WL 4377681 (W.D. Pa. Dec. 11, 2007). In this case, a consumer brought suit against Verizon alleging a failure to adequately redact credit card information on a receipt as required by FACTA. The defendant moved to dismiss, arguing that the consumer only alleged willful violations, which carry statutory damages of $100 to $1000, and that any violations were at most negligent. The court disagreed, citing the complaint’s allegations that (i) the FTC had taken steps to inform the business of FACTA requirements, (ii) Visa, with whom Verizon contracted, had issued a manual informing the business of the law, (iii) Verizon’s peers and competitors had complied with the requirement, and (iv) Verizon had had three years to comply by the time of the alleged violation. Therefore, the court found that the claim “plausibly alleged” in the complaint. Separately, the FTC on December 14 issued an additional press release entitled “FTC Reminds Businesses: Don’t Print Full Credit and Debit Card Numbers on Customers’ Purchase Receipts.” For a copy of the decision in Ehrheart, please contact .
FTC Identity Theft Workshop Panelists Say that Limiting the Uses of SSNs is Critical. On December 11, the FTC held a workshop titled, “Security in Numbers: SSNs and ID Theft,” at which a panel of scholars in the area of identity theft agreed that limits on SSN uses must be instated before identity security improvements are possible. In April, the President’s Identity Theft Task Force issued a report similarly focusing on restricting access to SSNs. However, some panelists at the December 11 workshop criticized this report for making only broad statements about the need to identify how SSNs are used in the private sector and the need to hold workshops on the uses of SSNs. The panelists agreed that the single most troubling current use of SSNs is having them serve as the single authenticators for individuals before granting them credit. SSN “single authentication” occurs when the SSN itself is the sole basis for both identification and authentication of a person. The FTC will use the panelists’ comments and recommendations, along with public comments submitted before the conference, to craft a set of recommendations for the President on the issue of SSN use. The FTC hopes to deliver such recommendations in early 2008. For text and video from this conference, please see http://www.ftc.gov/bcp/workshops/ssn/index.shtml.
© Buckley Kolar, LLP 2005. 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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