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InfoBytes

CONSUMER FINANCE HEADLINES & DEADLINES FOR OUR CLIENTS AND FRIENDS

December 22 , 2006

FEDERAL ISSUES

Congress Passes U.S. SAFE WEB Act. On December 8, Congress passed S. 1608, the Undertaking Spam, Spyware, And Fraud Enforcement With Enforcers Beyond Borders Act of 2006, or the “US SAFE WEB Act of 2006.” The Act empowers the Federal Trade Commission (FTC) to share information and cooperate with foreign governments investigating or enforcing possible violations regarding fraudulent or deceptive commercial practices, even when such practices do not violate U.S. laws. The FTC is also empowered to hire foreign counsel and to cooperate with the Attorney General. The FTC’s powers have limited application to banks, savings and loan institutions, federal credit unions and common carriers. The bill now awaits President Bush’s signature. For more information, go to http://thomas.loc.gov/cgi-bin/query/z?c109:s.1608.enr:.

Congress Passes Anti-Pretexting Bill. On December 8, Congress passed H.R. 4709, the Telephone Records and Privacy Protection Act of 2006. The bill would create a new federal criminal offense for “pretexting,” defined to be intentionally obtaining confidential phone records information, selling or transferring such information, or purchasing or receiving such information (or attempting any of the preceding activities). The bill also contains enhanced penalties for those who engage in a pattern of repeated offenses. The bill now awaits President Bush’s signature. For more information, go to http://thomas.loc.gov/cgi-bin/query/z?c109:h.r.4709.enr:.

Congress Passes Veterans Affairs Bill with Data Security Provisions. On December 8, Congress passed S. 3421, the Veterans Benefits, Health Care and Information Technology Act of 2006. As a result of the Veterans Administration (VA) data security breach earlier this year (see the May 26th issue of InfoBytes for details), title IX of the bill contains significant data security requirements. These requirements include requiring the VA to implement policies and procedures to protect and monitor the security of its data. If data containing sensitive personal information is compromised, the VA must take several actions, including providing notification and credit monitoring services to affected individuals and notifying law enforcement officials, other agencies and congressional committees of the breach. The VA also must provide annual training to its employees, require VA vendors to implement data security measures and publish interim regulations regarding data security. The bill now awaits President Bush’s signature. For more information, go to http://thomas.loc.gov/cgi-bin/query/z?c109:s.3421.enr:.

HUD Announces Grace Period For Contract Employees Performing FHA Functions. On December 18, the Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2006-30 clarifying three requirements applicable to FHA-approved lenders set out in the recently revised Mortgagee Approval Handbook 4060.1 (reported in the August 25th issue of InfoBytes). The new guidance informs lenders that the provision requiring all “critical loan functions” for FHA-insured loans to be performed by full W-2 employees, rather than contract staff, will not be “monitored” until March 1, 2007. The guidance also states that HUD has “delayed” the requirement that all underwriting and processing centers be registered as branch offices, pending data system modifications at the department and will notify mortgagees when the situation changes. Moreover, HUD confirmed that non-FHA approved mortgage brokers can “participate in the origination of Home Equity Conversion Mortgages” and provides technical clarification on such transactions. Mortgagee Letter 2006-30, and all other official HUD documents, can be found at www.hudclips.org.

Prudential Settles with Spitzer over Allegations of Fraud and Anti-Competitive Practices. On December 12, New York Attorney General Elliot Spitzer announced a $19 million settlement with Prudential Insurance Company of America regarding alleged deceptive and anti-competitive practices. Attorney General Spitzer claimed that Prudential paid insurance brokers undisclosed compensation for encouraging the purchase of Prudential’s products. Under the “Assurance of Discontinuance” agreement, Prudential has vowed not to offer “producer compensation” to brokers. According to the settlement’s terms Prudential also admitted no liability “as to any issue of fact or law.” To view the agreement, see http://www.oag.state.ny.us/press/2006/dec/Prudential%20Assurance%20of%20Discontinuance.pdf.

NCUA Issues Final Rule on the Conversion of Credit Unions to Mutual Savings Banks. Effective January 22, 2007, the National Credit Union Administration (NCUA) issued final revisions to its rules regarding the conversion of insured credit unions to mutual savings banks or mutual savings associations. A federally insured credit union may convert to a mutual savings bank or savings association in mutual form pursuant to the Federal Credit Union Act and NCUA regulations. The final rule improves the information available to members and the board of directors as they consider a possible conversion. The final rule includes revised disclosures, revised voting procedures, procedures to facilitate communications among members, and procedures for members to provide their comments to directors before the credit union board votes on a conversion plan. To view the final rule in its entirety, please see http://www.ncua.gov/RegulationsOpinionsLaws/RecentFinalRegs/F-708a.pdf.

NCUA Rule Expands Investment Authority of Federal Credit Unions. The NCUA published a final rule permitting federal credit unions (FCUs) to enter into investment repurchase transactions where the instrument purchased under an agreement to resell consists of first-lien mortgage notes evidenced by participation certificates or trust receipts. The final rule permits FCUs to purchase mortgage notes, but only when the purchases are part of an investment repurchase transaction and only if several conditions to address safety and soundness concerns are met, including (i) a 25% credit concentration limit, (ii) a required minimum credit rating, (iii) an independent assessment of market value, (iv) a maximum transaction term, (v) custodial requirements and (vi) the interests purchased must be undivided. The full text of the final rule is available at http://www.ncua.gov/RegulationsOpinionsLaws/RecentFinalRegs/F-703.pdf.

FTC Announces Extension of Grace Period for Prerecorded Telemarketing. On December 18, the FTC announced that it will extend its moratorium on enforcement actions against telemarketers and sellers using prerecorded messages under the Telemarketing Sales Rule (TSR). The initial TSR enforcement delay was announced last October (see the October 6th issue of InfoBytes for details). The extended delay is to remain in effect until further rulemaking. To view the press release and the text of the Federal Register entry, go to http://www.ftc.gov/opa/2006/12/fyi0682.htm.

COURTS

Claim Arising from Origination Fee Paid out of Loan Proceeds Accrues at Closing. In Shepard v. Ocwen Federal Bank, FSB et al., No. 476A05 (N.C. Dec. 20, 2006), the Supreme Court of North Carolina held that a cause of action arising from origination fees accrues at the closing, even if the fees were paid out of loan proceeds. In Shepard, nearly five years after paying a loan origination fee out of their loan proceeds, plaintiffs sued, claiming that the fee violated state usury and unfair and deceptive acts and practices laws. The Supreme Court of North Carolina affirmed the dismissal of the claims due to filing beyond the statute of limitations which, for usury claims in North Carolina, expires after two years. Plaintiffs argued that, because they paid the fee out of their loan proceeds, the fee was effectively “rolled into” their loan and a portion of the fee is paid with each payment over the life of the loan, continually advancing the accrual of the statute of limitations. The majority of the Court disagreed, however, stating that the origination fee was earned and paid at closing, no matter the method plaintiffs used to pay it. Plaintiffs’ unfair and deceptive acts and practices claim, which is subject to a four year statute of limitations, was derivative of their usury claim and likewise time-barred because the cause of action accrued at the date of closing – more than four years before. To view this opinion, see http://www.aoc.state.nc.us/www/public/sc/opinions/2006/476-05-1.htm.

Out-of-State Trust not Subject to Jurisdiction of North Carolina Courts. In another 4-3 decision, Skinner v. Preferred Credit et al., No. 525A05 (N.C. Dec. 20, 2006), the North Carolina Supreme Court held that North Carolina courts lack personal jurisdiction over a non-resident trust whose only connections to the state involved holding mortgage loans secured by deeds of trust on North Carolina property. The claims asserted by the Skinner plaintiffs are the same as those raised in Shepard, although for reasons that are unexplained the Skinner plaintiffs did not serve process on the originator of their loan. Thus, the only named defendant at the time of the Skinner appeal was the trust created by the pooling agreement (the “Trust”). The Court, in a split 4-3 decision, held that the Trust was merely a “passive depository” of the loans not subject to personal jurisdiction under North Carolina’s long arm statute or principles of due process.

The Majority held that the Trust was not subject to personal jurisdiction in North Carolina under principles of Due Process because it did not possess sufficient minimum contacts with the state. Although the borrowers argued that the Trust had sufficient contacts with North Carolina because the loans were originated there, the Trust was assigned the North Carolina deeds of trust, and the Trust ultimately received the benefit of North Carolina borrowers’ payments on the loans, the Court disagreed with each of these arguments. First, the Court held that the Trust had nothing to do with the origination of the loans. Indeed, the Trust was created outside of the state after the loans were originated. Moreover, out of the more than 3,500 loans from 37 states bundled to the Trust, only about 3% were North Carolina loans. Second, the assignment of the Deeds of Trust – arguably the only “direct” contact between the Trust and North Carolina – did not create sufficient contacts because the Trust received only a “beneficial interest” in the loans, as opposed to an equitable or legal interest in the property itself. Finally, the loan payments did not create minimum contacts with the Trust because they were made to a third party servicer, which was not even a party to the lawsuit.

In a vigorous dissent joined by two other Justices, Justice Timmons-Goodson would have found the Trust subject to personal jurisdiction based on, among other things, the fact that it was the beneficiary of loans secured by property located in North Carolina. According to the dissent, “the majority’s decision effectively undermines the right of unwitting victims of predatory lending practices in the second mortgage industry to sue the holders of their second mortgage loans in courts in this state.” For a copy of this opinion, see http://www.aoc.state.nc.us/www/public/sc/opinions/2006/525-05-1.htm.

Ohio Supreme Court Invalidates Toledo Predatory Lending Ordinances. On December 20, the Ohio Supreme Court struck down the City of Toledo’s predatory lending ordinances (Ordinances 271-03, 765-03, and 291-02) on the authority of its recent decision in AFSA v. Cleveland. Am. Financial Servs. Assn. v. Toledo, Nos. 2005-1240, 2005-1241 (Ohio Dec. 20, 2006). As reported in the December 1st issue of InfoBytes, in AFSA v. Cleveland the court invalidated three local ordinances adopted by the City of Cleveland that prohibited various “predatory” lending practices. The court found the Cleveland 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.” In AFSA v. Toledo, the Ohio Supreme Court reinstated the judgment of the trial court, which concluded that Ohio’s state predatory lending law (H.B. 386) preempted the Toledo ordinances. To view this opinion, see http://www.sconet.state.oh.us/rod/newpdf/0/2006/2006-ohio-6569.pdf.

NY Court Rules that County Recorders Must Record MERS Mortgages. In a unanimous decision issued on December 19, the New York Court of Appeals upheld the Mortgage Electronic Registration Systems, Inc. (MERS) registry system and ruled that county clerks must accept MERS mortgages, assignments and discharges of mortgages when they are presented for recording. MERS is an electronic mortgage document registry system that processes and tracks ownership and transfers of mortgages. When making a mortgage loan, a lender who is a member of MERS names MERS as its nominee or mortgagee of record in its mortgage documents. Transfers (or assignments) of beneficial ownership or servicing rights in the mortgages may be made among members of MERS without publicly recording the assignments. Such assignments are tracked electronically in the MERS system. This case came about when the Suffolk County Clerk refused to record and index MERS mortgages, and MERS brought an action against the Clerk. The Court of Appeals affirmed the lower court's ruling, finding that MERS mortgages, assignments and discharges constitute proper conveyances under the New York Real Property Law, and that the Suffolk County Clerk must therefore record such documents. For a copy of this decision, see http://www.courts.state.ny.us/ctapps/decisions/dec06/179opn06.pdf.

Arbitration Provision Precluding Class Adjudication, Unconscionable. In Thibodeau v. Comcast Corporation et al., Appeal Nos. 2176, 2177 EDA 2005 (Pa. Super. Ct. Dec. 1, 2006), the Pennsylvania Superior Court affirmed the trial court’s denial of Comcast’s petition to compel arbitration, finding the arbitration provision unconscionable. The provision, contained in a customer agreement issued to new customers obtained via Comcast’s acquisition of AT&T Broadband, required arbitration of disputes and prohibited class and consolidated claims. Plaintiff, who was challenging fees associated with cable box and remote rentals, sued on behalf of a putative class of customers. Comcast moved to compel arbitration, but the trial court denied the motion holding that the arbitration provision was unconscionable because it was contained in a contract of adhesion that unfairly favored Comcast, the drafting party. The appellate panel agreed. According to the Court, the preclusion of all class actions, whether by civil or arbitrated adjudication, was unfair because it “effectively immunized [Comcast] from redress of grievances.” By saddling customers with the “high cost of arbitration” combined with “minimal potential value of individual damages,” the arbitration provision eliminated the customer’s “only effective remedy,” and therefore would not be enforced. A copy of the Thibodeau decision can be found at http://www.superior.court.state.pa.us/opinions/A23008_06.PDF.

New Prosecutor Guidelines Announced To Address Thompson Memo Criticism. On December 12, U.S. Deputy Attorney General Paul J. McNulty announced new guidelines for federal government prosecutors pursuing corporate investigations. The new guidelines - contained in the "McNulty Memo" - address when and how prosecutors may seek the waiver of privilege and investigative facts from corporate counsel, and prohibit prosecutors from considering either a refusal to waive privilege or the advancement of attorneys’ fees to employees as a lack of cooperation in making a charging decision. The new guidelines replace previous guidance contained in the Thompson Memo, which was criticized for obstructing access to counsel and requiring blanket waivers as a prerequisite to cooperation with the government. (For more information on the Thompson Memo, see the June 30th and the September 15th editions of InfoBytes.) Government prosecutors now must receive formal approval from the Deputy Attorney General before requesting the waiver of attorney-client communications, and such approval is conditioned on a showing of a “legitimate need” for the information sought. Prosecutors may not consider a refusal to waive attorney-client communications negatively when deciding whether and how to charge a corporation. Of course, the new guidelines do not preclude prosecutors from viewing favorably an agreement to waive attorney-client communications in making charging decisions. Prosecutors must follow a similar procedure when seeking internal investigative facts from corporate counsel. The McNulty Memo guidelines also prohibit prosecutors from taking into account whether a corporation advances attorneys’ fees to its employees when making a charging decision unless the “totality of the circumstances” suggests that the payment of attorneys’ fees was intended to impede the government investigation. To view a copy of the McNulty Memorandum outlining these new guidelines, see http://www.usdoj.gov/dag/speech/2006/mcnulty_memo.pdf.

CAN-SPAM Claims Not Subject to Fraud’s Heightened Pleading Requirement. Judge John C. Coughenour of the Western District of Washington refused to require CAN-SPAM Act claims to plead the elements with particularity. Gordon v. Virtumundo, Inc., No. 06-cv-204-JCC (W.D. Wash. Dec. 8, 2006). The Gordon complaint alleged that the defendants, online marketing service providers, transmitted commercial e-mails to the plaintiffs that violated several CAN-SPAM Act and state law requirements. The defendants moved for dismissal, arguing that the CAN-SPAM claims were based in fraud, and therefore must be pled with particularity to satisfy the heightened fraud standard required by the Federal Rules of Civil Procedure. The Court disagreed and refused to dismiss plaintiffs’ CAN-SPAM claims, stating that the alleged CAN-SPAM violations did not constitute claims of fraud, and therefore did not require the plaintiff to meet the Federal Rules of Civil Procedures’ heightened pleading requirements. Please contact for a copy of the court’s decision.

U.S. District Court of New Jersey Imposes Harsh Sanctions for Discovery Violations. In a December 6 court order, the U.S. District Court for the District of New Jersey imposed harsh sanctions on Health Net, Inc. for failure to meet discovery obligations. In this case, Zev and Linda Wachtel sued their health insurance providers under ERISA, 29 U.S.C. § 1001 et. seq. for breach of fiduciary duty and other wrongs connected to the way in which Health Net reimburses out-of-network claims. The Court found that Health Net had a "lengthy pattern of repeated and gross non-compliance with discovery" and imposed sanctions pursuant to Rule 37 of the Federal Rules of Civil Procedure. The Court found that Health Net was "obstructionist" in its approach to discovery due to lack of candor to the court, failing to meet obligations with respect to email preservation and conducting complete searches of email servers, and failing to be adequately responsive to document production requests, among other discovery violations. Among the sanctions imposed, the Court ordered that a Special Master be used to monitor discovery compliance and ensure that Health Net produces all of the required documents. Please contact for a copy of this decision.

STATE ISSUES

Ohio Predatory Lending Rules Effective January 5, 2006. A staff member of the Ohio Attorney General’s office stated that the regulations implementing the Ohio Homebuyers Protection Act (S.B. 185) will become effective on January 5, 2007. The law itself goes into effect on January 1, 2007. To see the press release of the Attorney General’s Office, go to http://www.ag.state.oh.us/press/06/12/pr061211.asp.

Ohio Adopts a Cap on Damages for Violations of Predatory Lending Law. On December 14, the legislature passed S.B. 117, which generally caps “non-economic damages” in lawsuits under the Ohio Consumer Sales Practices Act (CSPA), which includes the predatory-lending provisions added by S.B. 185. The bill now awaits the Governor’s signature. The new legislation was passed in response to an Ohio Supreme Court decision, Whitaker v. M.T. Automotive, Inc., 855 N.E. 2d 825 (Ohio Nov. 8, 2006), which interpreted the CSPA as permitting unlimited non-economic damages such as damages for pain and suffering or emotional distress and punitive damages. Under S.B. 117, the general limit on non-economic damages for violations of the CSPA is $5,000. In addition, the plaintiff is allowed three times his or her economic damages for violations of any of the provisions in the CSPA that prohibit unfair, deceptive, or unconscionable practices, if (1) the practice violates the Attorney General’s regulations; or (2) the violation was committed after an Ohio state court determined that the practice violated one of the CSPA provisions and the decision has been filed with the Attorney General. The bill is available at http://www.legislature.state.oh.us/bills.cfm?ID=126_SB_117. A copy of the Whitaker v. M.T. Automotive decision is available at http://www.sconet.state.oh.us/rod/newpdf/0/2006/2006-ohio-5481.pdf.

MISCELLANY

NASD Charges Company on Recordkeeping Issues. On December 19, the National Association of Securities Dealers (NASD) announced charges against Morgan Stanley DW, Inc. (MSDW) for failing to provide e-mails in connection with arbitration proceedings and regulatory actions, as well as for violating recordkeeping requirements for email retention. MSDW has argued that certain emails were destroyed in the September 11th terrorist attacks, but the NASD claims that these records were preserved on backup tapes and on individuals’ computers, and that MSDW failed to prevent these records from being overwritten and destroyed. To view the official NASD press release, see http://www.nasd.com/PressRoom/NewsReleases/2006NewsReleases/NASDW_018116. For additional information on records management issues, see http://www.buckleykolar.com/practice/records_management.php.

Federal Agencies Allow Joint Filing of SARs. On December 21, the Financial Crimes Enforcement Network (FinCEN) and the federal banking agencies (FRB, OCC, OTS, FDIC, and NCUA) issued final guidance on the filing of joint Suspicious Activity Reports (SARs). The agencies hope the joint filings will reduce the duplicate reports of suspicious transactions. While presently available in their final form, the depository institution joint filings should not be used until June 30, 2007, and will not become mandatory until six months later. FinCEN also announced revisions to several other SAR forms to simplify reporting. To view the official press release, see http://www.fincen.gov/PRNewSARFormat122106.html.

FinCEN and SEC Agree to Share Information. On December 21, and the Securities and Exchange Commission (SEC) announced an agreement to provide the FinCEN with information regarding the SEC’s and the self-regulatory organizations’ anti-money laundering examination and enforcement activities related to the Bank Secrecy Act. Under the agreement, FinCEN will provide “assistance and analytical reports” to the SEC. To read the official FinCEN press release, see http://www.fincen.gov/new_release_info_sharing_agreement.html.

BSA Enforcement Action Issued. On December 18, the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), and the New York State Banking Department (NYSBD) announced separate but concerted actions against The Bank of Tokyo-Mitsubishi UFJ, Ltd, (the “Bank”), and some of its U.S. operations. An “Order to Cease and Desist” was issued by the FDIC and NYSBD against the Bank’s New York state-chartered banking subsidiary, for failure to implement adequate Bank Secrecy Act (BSA) and anti-money laundering compliance programs. In addition, the FRB executed a written agreement with the Mitsubishi UFJ Financial Group, Inc., the Bank, and the Bank’s New York branch location, addressing BSA anti-money laundering compliance policies and procedures at the Bank’s New York branch. Copies of the Order and Written Agreement can be found at the following sites http://www.federalreserve.gov/boarddocs/press/enforcement/2006/20061218/attachment1.pdf and http://www.federalreserve.gov/boarddocs/press/enforcement/2006/20061218/attachment2.pdf.

GAO Report Calls for More Coordination between FinCEN and the IRS on AML Efforts. On December 15, the Government Accounting Office (GAO) released a report on Anti-Money Laundering (AML) and BSA regulatory oversight. The report concluded that the Internal Revenue Service (IRS) is struggling with its efforts to identify and oversee non-bank financial institutions, and that FinCEN’s long-term plan to assume the IRS’s responsibilities in this area has not been well coordinated. To read the report in full, go to http://www.gao.gov/new.items/d07212.pdf.

OCC Releases Amendments to FCRA Examination Procedures. On December 21, the Office of the Comptroller of the Currency (OCC) announced its adoption of amendments to Fair Credit Reporting Act (FCRA) examination procedures approved last April by the Federal Financial Institution Examination Council (FFIEC). The new amendments address the medical information requirements of FCRA, and are to be used until they are incorporated into the next edition of the OCC’s examination handbook. To view the press release, see http://www.occ.treas.gov/ftp/bulletin/2006-49.html.

OFHEO Files Suit Against Former Fannie Mae Executives. On December 18, the Office of Federal Housing Enterprise Oversight (OFHEO) announced it was filing “101 claims of relief” against former Fannie Mae executives Franklin Raines, J. Timothy Howard and Leanne Spencer. The claims involving misconduct that took place between 1998 and 2004 seek as much as $115 million and include earnings manipulation, misleading disclosures, and failure to correct defective internal control policies. Hearings will be before an Administrative Law Judge, who will make recommendations to the director of OFHEO. According to the Washington Post, attorneys for Mr. Raines are seeking to move the case to federal court. A copy of the press release and notice of charges may be found at http://www.ofheo.gov/media/pdf/RainesNOC121806.pdf.

FTC Workshop on Negative Option Marketing Next Month. The FTC will hold a workshop on negative option marketing on January 25, 2007, in Washington, DC. The term “negative option marketing” refers to sales arrangements in which a consumer’s inaction is construed as consent to purchase. The workshop will discuss, among other things, applicable standards for making negative option offers and constructing suitable disclosures for such offers. To find out more, see http://www.ftc.gov/opa/2006/12/negativeoption.htm.

FRB Settles Two Flood-Insurance Related Enforcement Actions. On December 21, the FRB issued Orders of Assessment against two banks for alleged violations of the National Flood Insurance Act. Planters Bank & Trust Company and Oregon Pacific Bank have agreed to pay civil money penalties of $6750 and $4950 respectively, though neither have admitted any wrongdoing in the settlements. To view the FRB press releases see http://www.federalreserve.gov/boarddocs/press/enforcement/2006/200612212/default.htm and http://www.federalreserve.gov/boarddocs/press/enforcement/2006/200612213/default.htm.

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