Federal Issues

Treasury Unveils Public Private Partnership Investment Program. On March 23, the U.S. Department of the Treasury (Treasury) released details on the U.S. government’s Public Private Partnership Investment Program (PPIP). The PPIP seeks to restore liquidity to financial institutions by assisting these institutions with the sale of toxic real estate assets. The PPIP will operate through two subprograms, the Legacy Loans Program (LLP) and the Legacy Securities Program (LSP). Under the LLP, financial institutions, their primary regulators, and the Federal Deposit Insurance Corporation (FDIC), will designate pools of real estate loans to place on auction. If the selling financial institution accepts the purchase price established at auction, then the winning bidder can purchase the asset with government assistance. This assistance will be provided in two forms. First, the government, as a business partner, will contribute up to 50% of the equity required to make the purchase. Second, the government will provide the buyer with preferred financing by issuing debt guaranteed by the FDIC. The amount of financing available will be determined by the FDIC’s analysis of the asset pool, but under no circumstances can it exceed six times the equity contribution of the buyer. Likewise, under the LSP, the Treasury will co-invest/leverage funds with private capital providers to support the market for mortgage- and asset-backed securities originated prior to 2009 with a rating of AAA at origination. To implement the program, the Treasury will seek applications from asset managers interested in participating in the program. Accepted managers will then have an opportunity to raise private capital to target designated asset classes and will receive matching funds from the Treasury. Additionally, for fund structures that meet certain pre-established guidelines, asset managers can subscribe for senior debt from the Treasury in the amount of 50% of total equity capital of the fund. The Treasury will consider requests for senior debt for the fund in the amount of 100% of its total equity capital, subject to further restrictions. The FDIC is seeking public comment regarding the LLP; comments are due by April 10, 2009. For copies of documents related to the PPIP, including reports, summaries, applications and FAQs, please see http://www.treasury.gov/press/releases/tg65.htm.

Treasury Secretary Proposes Additional Authority to Regulate Systemically Significant Financial Institutions. On March 25, U.S. Department of the Treasury Secretary Timothy Geithner issued a draft of the “Resolution Authority for Systemically Significant Financial Companies Act of 2009” (the Act). The Act authorizes the U.S. government to regulate systemically significant financial institutions that are not currently subject to the resolution authority of the Federal Deposit Insurance Corporation (covered institutions). Significantly, the Act would grant the government resolution authority over covered institutions. Utilizing this authority, the government could put failing covered institutions into conservatorship or receivership or it could administer reorganizations or wind-downs. However, before the government could take such measures against a covered institution, the Treasury Secretary would need to establish that (i) the institution is in danger of insolvency, (ii) this insolvency would have “serious adverse effects” on economic conditions or financial stability, and (iii) action is necessary to avoid or to mitigate such effects. In addition to its resolution provisions, the Act would permit the government to (i) make loans to the financial institution, (ii) purchase obligations or assets, (iii) assume or guarantee liabilities, and (iv) purchase an equity interest in the institution. The Act would fund these provisions through a combination of mandatory appropriations, industry assessments, loan redemption payments, and equity sales. For a copy of the press release, please see http://www.ustreas.gov/press/releases/tg70.htm. For a copy of the Act, please see http://www.ustreas.gov/press/releases/reports/032509%20legislation.pdf.

Treasury Secretary Outlines Plans for Regulatory Reform. On March 26, the U.S. Department of the Treasury Secretary Timothy Geithner highlighted the steps necessary to achieve reform of the financial system in testimony delivered before Congress. According to Secretary Geithner, lawmakers should provide a comprehensive response to failures in the financial system by (i) addressing systemic risk, (ii) protecting consumers and investors, (iii) eliminating regulatory gaps, and (iv) fostering international coordination. To address systemic risk, Secretary Geithner advocated several major reforms. First, he advised Congress to create a single independent regulator with responsibility over systemically important firms and critical payment and settlements systems. Additionally, he proposed that firms subject to this new regulatory authority should have more stringent capital and risk management standards. Next, he recommended that Congress regulate the hedge fund industry by requiring hedge funds to register with the SEC and to report information necessary to assess whether the fund or fund family is so large or highly leveraged that it poses a threat to financial stability. Likewise, he advocated greater regulation of the derivatives market, calling for government supervision of the credit default swaps and OTC derivatives. He also encouraged Congress to prevent future runs on money market funds by strengthening the regulatory framework around such funds. Secretary Geithner will address the other three components of his proposed regulatory reform plan in future hearings. For a summary of the testimony, please click here.

HUD Mortgagee Letter Addresses Appraising Requirements. On March 23, Assistant Secretary for Housing Brian D. Montgomery issued mortgagee letter 2009-09 to address appraisal reporting requirements applicable to properties securing an FHA-insured mortgage. According to the letter, FHA roster appraisers are required to complete the “Market Conditions Addendum” in connection with an appraisal that is performed on or after April 1, 2009 of any such property. The letter also sets forth guidance for performing appraisals of such properties that are located in declining markets. Among other requirements, the appraisal must include at least two comparable sales that closed within 90 days prior to the effective date of the appraisal or, when compliance with this requirement is not possible, provide a detailed explanation. In connection with this requirement, appraisers must, among other items, include the original list price, any revised list price, total days on the market, and an absorption rate analysis. Additionally, the letter provides that appraisers have a duty to ensure that data regarding market trends comes only from an impartial source, and that lenders are required to review the appraisal to verify that it is accurate and that it adequately supports the value conclusion. For a copy of the letter, please click here. For the “Market Condition Addendum,” please click here

HUD Mortgagee Letter Addresses Eligibility Requirements for Cash-Out Refinances, Temporarily Reduces Maximum LTV to 85%. On March 12, Assistant Secretary for Housing Brian D. Montgomery issued Mortgagee Letter 2009-08 to announce that the maximum limit on the loan-to-value of an FHA-insured cash-out refinance is being temporarily reduced. The new maximum limit, which takes effect on April 1, 2009, is 85% of the appraiser’s estimate of value. The letter also sets forth a number of underwriting and eligibility requirements applicable to cash-out refinances. Specifically, the letter provides that (i) to be eligible for the 85% maximum limit, the subject property must have been owned by the borrower as the borrower’s principal residence for twelve months or more from the application date, (ii) delinquent borrowers are ineligible for a cash-out refinance, (iii) a second appraisal is required if a cash-out refinance will exceed $417,000 and the subject property is in a declining area, (iv) a co-borrower or co-signer that does not occupy the subject property may not be added to the note so as to meet the credit underwriting guidelines applicable to the cash-out refinance, and (v) there does not need to be an existing mortgage on the subject property in order to finance the property as a cash-out refinance. For a copy of the letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-08ml.doc.

DOJ Alleges Telemarketing Sales Rule Violation. On March 25, the U.S. Department of Justice (DOJ), at the Federal Trade Commission’s request, filed suit alleging that a satellite television provider violated the Telemarketing Sales Rule (the Rule) by (i) calling consumers with numbers registered on the National Do Not Call Registry, and (ii) “assisting and supporting” its authorized dealers in telemarketing services via pre-recorded telemarketing messages (“robocalls”). The complaint also includes allegations by several state Attorneys General that the defendant violated the Telephone Consumer Protection Act and applicable state laws. The DOJ’s complaint seeks (i) a permanent injunction that would prohibit the defendant from violating the Rule, (ii) to require the defendant to monitor and enforce compliance with the Rule by its authorized dealers, (iii) to prohibit the defendant from “assisting and facilitating” future violations, and (iv) civil penalties. For a copy of the press release, please see http://www.ftc.gov/opa/2009/03/echostar.shtm. For a copy of the complaint, please see http://www.ftc.gov/os/caselist/0523167/090325echostarcmpt.pdf.

FTC Obtains Temporary Restraining Order Against Mortgage Loan Modification Service Companies. On March 19, a federal district court granted a temporary restraining order against two companies from falsely advertizing that they are part of the government-endorsed HOPE NOW Alliance mortgage assistance network. According to the Federal Trade Commission’s (FTC) complaint, the defendants advertised, marketed, and sold mortgage loan modification services to consumers via their websites. The defendants allegedly misrepresented that they could obtain mortgage loan modifications in “all or virtually all” cases and that they would refund advance “mitigation escrow fees” if they did not provide such services, or if the consumer was not satisfied with the provided services. For a copy of the court’s order, please click here. For a copy of the press release, please see here.

State Issues

Utah Enacts Financial Institutions Loan Originator Licensing Act. On March 20, Utah Governor Jon M. Huntsman, Jr. signed House Bill 286 (the Bill), which amends the Utah Consumer Credit Code, as well as mortgage lending and servicing provisions, to address the regulation of consumer and residential mortgage loans. The Bill establishes the Financial Institutions Loan Originator Licensing Act, which, among other things, creates loan originator licensing triggers, an application process, bonding requirements, education requirements, and a process for challenging information in the nationwide database. In addition, the Bill clarifies (i) the requirements for filing notifications, and (ii) provisions related to a lender, broker, or servicer of a mortgage loan. For the full text of the bill, please click here.

South Dakota to License Mortgage Lenders, Brokers and Loan Originators Via NMLS. On March 16, South Dakota Governor M. Michael Rounds signed House Bill 1060 (the Bill), which allows for the licensing of mortgage lenders, brokers, and loan originators through the Nationwide Mortgage Licensing System (NMLS) and provides standards for information sharing by the South Dakota Division of Banks. Among other things, the Bill provides the NMLS application procedures applicable to mortgage lenders, brokers, and loan originators. For the full text of the bill, please click here.

Massachusetts Attorney General Obtains Restraining Order Against Foreclosure Prevention Company. On March 25, Massachusetts Attorney General Martha Coakley obtained a temporary restraining order against Express Modifications, Inc., a foreclosure relief company, following allegations that the company violated the Massachusetts Consumer Protection Act by (i) falsely advertising that the company would provide the homeowner with the services of an attorney and (ii) guarantying loan modifications to prevent foreclosure. The company also allegedly collected advance fees, in violation of 2007 Massachusetts Attorney General regulations. The temporary restraining order prohibits the company from (i) offering foreclosure-related services to Massachusetts homeowners, (ii) taking advance fees for its services, and (iii) publishing any false, deceptive, or misleading advertisements concerning its ability to offer loan modifications. For a copy of the press release, please click here.

Courts

Ninth Circuit Holds TILA Requires Contemporaneous Notice of Rate Increase Due to Default. On March 16, the U.S. Court of Appeals for the Ninth Circuit held that the Truth in Lending Act (TILA) requires a creditor to provide contemporaneous notice of discretionary interest rate increases that occur as a result of borrower default. McCoy v. Chase Manhattan Bank, USA, N.A., No. 06-56278, 2009 WL 65054 (9th Cir. Mar. 16, 2009). In McCoy, the plaintiff alleged that the defendant bank increased his credit card interest rate retroactively to the beginning of his payment cycle as a result of a late payment. The plaintiff alleged that this increase violated TILA and Delaware law (the relevant home-state law of the defendant bank) because the bank did not give notice of this increase until the next periodic statement, which was sent after the increase had taken effect. The district court dismissed the complaint, finding that the card agreement disclosed the highest rate possible, and that no additional notice was required. The Ninth Circuit reversed, finding that TILA, as interpreted by the Federal Reserve Board, requires notice when the cardholder’s interest rate increases because of default, and that the notice must be made at the same time as the increase. The Ninth Circuit also reversed the district court’s dismissal of the plaintiff’s state-law unconscionability claim, but it upheld the dismissal of the plaintiff’s state-law consumer fraud claim. For a copy of the opinion, please click here.

Eighth Circuit Holds Borrower “Confirmation” to Not Rescind Refinance Loan Violates TILA. On March 20, the U.S. Court of Appeals for the Eighth Circuit held that a “Confirmation” statement signed at closing by a borrower agreeing not to rescind a refinance loan violates the Truth in Lending Act (TILA). Rand Corp. v. Moua, No. 07-2544, 2009 WL 723267 (8th Cir. Mar. 20, 2009). In this case, the borrowers’ home was in foreclosure, so the borrowers chose to refinance their existing mortgage loan and intended to exercise their redemption rights prior to a sheriff’s sale to retain the property. At the closing, the lender provided the borrowers with a statement notifying them of their three-day rescission right under TILA. Simultaneously, the lender provided a separate disclosure requiring the borrowers to confirm that they were not canceling the loan by signing a “Confirmation” section stating “[m]ore than 3 business days have elapsed since the date of the new transaction.” The “Confirmation” section further provided that, by signing it, the borrowers “certified[ied] that the new transaction ha[d] not been rescinded”—the borrowers signed. After the closing, the borrowers learned that the new payments were much higher than the previous payments, and therefore wanted to cancel the new loan. The court held that the lender failed to provide borrowers with the clear and conspicuous notice of TILA’s three-day post transaction right to cancel, thus extending this three day right to three years. The court stated “[r]equiring borrowers to sign statements which are contradictory and demonstrably false is a paradigm for confusion ... [t]he average borrower would be confused when instructed to certify a falsehood, and as to the effect of the falsehood.” For a copy of the opinion, please click here.

Seventh Circuit Upholds TILA Decision Denying Mortgage Rescission for “Minor” Finance Charge Inaccuracy. On March 20, the U.S. Court of Appeals for the Seventh Circuit held that an incorrect finance charge that does not exceed the Truth in Lending Act’s (TILA) tolerance for accuracy does not entitle a borrower to rescind the loan contract. McCutcheon v. America’s Servicing Company, No. 07-3521, 2009 WL 723601 (3rd Cir. Mar. 20, 2009). In McCutcheon, the plaintiff alleged, among other things, that the defendants violated TILA by overcharging for title insurance, entitling him to rescind the loan. The district court determined that the defendant violated TILA by overcharging the plaintiff for title insurance by an amount of $668. Notwithstanding, the district court held that, because the excess $668 fee did not exceed TILA’s statutory tolerance for “minor” violations, the plaintiff could not rescind the mortgage. Therefore, it awarded the plaintiff only statutory damages and reasonable attorney fees. The plaintiff contended that the defendant lender’s charging error was large enough to allow him to rescind the mortgage because the full title insurance fee, not just the excess, should count as a charge levied in violation of TILA. The Seventh Circuit concluded that this is an impermissible reading. The court reasoned that such an application of TILA would be inconsistent with the language of the statute, which bases the tolerance calculation on whether the amount disclosed as a finance charge does not vary from the actual finance charge by more than the specified amount. Moreover, the court reasoned that counting an entire fee as a violation of TILA, when only part of the charge is not bona fide, would lead to absurdly inconsistent results. The remedies available to the plaintiff would depend, not on the size of an overcharge, but, rather, on the size of the legitimate fee. As such, the court upheld the district court’s decision. For a copy of the opinion, please click here.

Indiana Federal Court Finds the FDCPA Does Not Require Debtors to Dispute a Debt in Writing. On March 17, the U.S. District Court for the Northern District of Indiana held that a debt collector violates the Fair Debt Collection Practices Act (FDCPA) when it requires debtors to dispute their debts in writing. Campbell v. Hall, 2:06-CV-127, 2009 WL 701922 (N.D.Ind. Mar. 17, 2009). In Campbell, the defendant debt collector sent letters to the debtor plaintiffs demanding that plaintiffs provide written notification within 30 days if they wanted to dispute the debt. The plaintiffs argued that the letters violated § 1692g(a)(3) of the FDCPA because the FDCPA does not require debtors to dispute the validity of their debts in writing. Considering the plaintiffs’ argument, the court noted a circuit split in the Third and Ninth Circuits regarding this issue. Ultimately, the court in Campbell sided with the Ninth Circuit’s analysis that the plain meaning of the statute did not contain a writing requirement based on prior Seventh Circuit precedent that encouraged courts to apply a plain meaning rule. Therefore, the court held generally that a debt collector violates § 1692g(a) of the FDCPA when it requires debtors to dispute their debts in writing. However, the court withheld judgment with respect to the defendant, because it found that the defendant may be able to employ FDCPA’s bona fide error defense, provided that it could offer sufficient evidence that it had adequate procedures in place to avoid the mistake. For a copy of the opinion, please click here

Firm News

Margo Tank and Jerry Buckley were named in the Mortgage Banking Magazine March Technology issue as “e-Mortgage All-Stars.” The Magazine’s annual eMortgage All-Stars list honors a group of mortgage industry leaders who are pioneering the use of electronic records and signatures in the mortgage industry.

Colgate Selden participated in a webinar sponsored by the National Association of Federal Credit Unions regarding the RESPA Reform Rule on March 4. Mr. Selden’s presentation was entitled “Real Estate Settlement Overhaul: Complying with RESPA Reform.”

Joe Kolar gave speech on RESPA at the Old Republic National Title Insurance Company 2009 Annual Seminar in Columbus, Ohio on March 10.

Margo Tank spoke at the MBA Technology in Mortgage Banking Conference/Expo March 15-18 in Las Vegas, NV on eMortgage legal and risk managements issues.

Andy Sandler spoke at the Securities Industry & Financial Markets Association’s Annual Seminar in Phoenix, Arizona on March 24 - 28.

Mortgages

HUD Mortgagee Letter Addresses Appraising Requirements. On March 23, Assistant Secretary for Housing Brian D. Montgomery issued mortgagee letter 2009-09 to address appraisal reporting requirements applicable to properties securing an FHA-insured mortgage. According to the letter, FHA roster appraisers are required to complete the “Market Conditions Addendum” in connection with an appraisal that is performed on or after April 1, 2009 of any such property. The letter also sets forth guidance for performing appraisals of such properties that are located in declining markets. Among other requirements, the appraisal must include at least two comparable sales that closed within 90 days prior to the effective date of the appraisal or, when compliance with this requirement is not possible, provide a detailed explanation. In connection with this requirement, appraisers must, among other items, include the original list price, any revised list price, total days on the market, and an absorption rate analysis. Additionally, the letter provides that appraisers have a duty to ensure that data regarding market trends comes only from an impartial source, and that lenders are required to review the appraisal to verify that it is accurate and that it adequately supports the value conclusion. For a copy of the letter, please click hereFor the “Market Condition Addendum,” please click here

HUD Mortgagee Letter Addresses Eligibility Requirements for Cash-Out Refinances, Temporarily Reduces Maximum LTV to 85%. On March 12, Assistant Secretary for Housing Brian D. Montgomery issued Mortgagee Letter 2009-08 to announce that the maximum limit on the loan-to-value of an FHA-insured cash-out refinance is being temporarily reduced. The new maximum limit, which takes effect on April 1, 2009, is 85% of the appraiser’s estimate of value. The letter also sets forth a number of underwriting and eligibility requirements applicable to cash-out refinances. Specifically, the letter provides that (i) to be eligible for the 85% maximum limit, the subject property must have been owned by the borrower as the borrower’s principal residence for twelve months or more from the application date, (ii) delinquent borrowers are ineligible for a cash-out refinance, (iii) a second appraisal is required if a cash-out refinance will exceed $417,000 and the subject property is in a declining area, (iv) a co-borrower or co-signer that does not occupy the subject property may not be added to the note so as to meet the credit underwriting guidelines applicable to the cash-out refinance, and (v) there does not need to be an existing mortgage on the subject property in order to finance the property as a cash-out refinance. For a copy of the letter, please see http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-08ml.doc.

FTC Obtains Temporary Restraining Order Against Mortgage Loan Modification Service Companies. On March 19, a federal district court granted a temporary restraining order against two companies from falsely advertizing that they are part of the government-endorsed HOPE NOW Alliance mortgage assistance network. According to the Federal Trade Commission’s (FTC) complaint, the defendants advertised, marketed, and sold mortgage loan modification services to consumers via their websites. The defendants allegedly misrepresented that they could obtain mortgage loan modifications in “all or virtually all” cases and that they would refund advance “mitigation escrow fees” if they did not provide such services, or if the consumer was not satisfied with the provided services. For a copy of the court’s order, please click hereFor a copy of the press release, please see here.

Utah Enacts Financial Institutions Loan Originator Licensing Act. On March 20, Utah Governor Jon M. Huntsman, Jr. signed House Bill 286 (the Bill), which amends the Utah Consumer Credit Code, as well as mortgage lending and servicing provisions, to address the regulation of consumer and residential mortgage loans. The Bill establishes the Financial Institutions Loan Originator Licensing Act, which, among other things, creates loan originator licensing triggers, an application process, bonding requirements, education requirements, and a process for challenging information in the nationwide database. In addition, the Bill clarifies (i) the requirements for filing notifications, and (ii) provisions related to a lender, broker, or servicer of a mortgage loan. For the full text of the bill, please click here.

South Dakota to License Mortgage Lenders, Brokers and Loan Originators Via NMLS. On March 16, South Dakota Governor M. Michael Rounds signed House Bill 1060 (the Bill), which allows for the licensing of mortgage lenders, brokers, and loan originators through the Nationwide Mortgage Licensing System (NMLS) and provides standards for information sharing by the South Dakota Division of Banks. Among other things, the Bill provides the NMLS application procedures applicable to mortgage lenders, brokers, and loan originators. For the full text of the bill, please click here.

Massachusetts Attorney General Obtains Restraining Order Against Foreclosure Prevention Company. On March 25, Massachusetts Attorney General Martha Coakley obtained a temporary restraining order against Express Modifications, Inc., a foreclosure relief company, following allegations that the company violated the Massachusetts Consumer Protection Act by (i) falsely advertising that the company would provide the homeowner with the services of an attorney and (ii) guarantying loan modifications to prevent foreclosure. The company also allegedly collected advance fees, in violation of 2007 Massachusetts Attorney General regulations. The temporary restraining order prohibits the company from (i) offering foreclosure-related services to Massachusetts homeowners, (ii) taking advance fees for its services, and (iii) publishing any false, deceptive, or misleading advertisements concerning its ability to offer loan modifications. For a copy of the press release, please click here.

Eighth Circuit Holds Borrower “Confirmation” to Not Rescind Refinance Loan Violates TILA. On March 20, the U.S. Court of Appeals for the Eighth Circuit held that a “Confirmation” statement signed at closing by a borrower agreeing not to rescind a refinance loan violates the Truth in Lending Act (TILA). Rand Corp. v. Moua, No. 07-2544, 2009 WL 723267 (8th Cir. Mar. 20, 2009). In this case, the borrowers’ home was in foreclosure, so the borrowers chose to refinance their existing mortgage loan and intended to exercise their redemption rights prior to a sheriff’s sale to retain the property. At the closing, the lender provided the borrowers with a statement notifying them of their three-day rescission right under TILA. Simultaneously, the lender provided a separate disclosure requiring the borrowers to confirm that they were not canceling the loan by signing a “Confirmation” section stating “[m]ore than 3 business days have elapsed since the date of the new transaction.” The “Confirmation” section further provided that, by signing it, the borrowers “certified[ied] that the new transaction ha[d] not been rescinded”—the borrowers signed. After the closing, the borrowers learned that the new payments were much higher than the previous payments, and therefore wanted to cancel the new loan. The court held that the lender failed to provide borrowers with the clear and conspicuous notice of TILA’s three-day post transaction right to cancel, thus extending this three day right to three years. The court stated “[r]equiring borrowers to sign statements which are contradictory and demonstrably false is a paradigm for confusion ... [t]he average borrower would be confused when instructed to certify a falsehood, and as to the effect of the falsehood.” For a copy of the opinion, please click here.

Seventh Circuit Upholds TILA Decision Denying Mortgage Rescission for “Minor” Finance Charge Inaccuracy. On March 20, the U.S. Court of Appeals for the Seventh Circuit held that an incorrect finance charge that does not exceed the Truth in Lending Act’s (TILA) tolerance for accuracy does not entitle a borrower to rescind the loan contract. McCutcheon v. America’s Servicing Company, No. 07-3521, 2009 WL 723601 (3rd Cir. Mar. 20, 2009). In McCutcheon, the plaintiff alleged, among other things, that the defendants violated TILA by overcharging for title insurance, entitling him to rescind the loan. The district court determined that the defendant violated TILA by overcharging the plaintiff for title insurance by an amount of $668. Notwithstanding, the district court held that, because the excess $668 fee did not exceed TILA’s statutory tolerance for “minor” violations, the plaintiff could not rescind the mortgage. Therefore, it awarded the plaintiff only statutory damages and reasonable attorney fees. The plaintiff contended that the defendant lender’s charging error was large enough to allow him to rescind the mortgage because the full title insurance fee, not just the excess, should count as a charge levied in violation of TILA. The Seventh Circuit concluded that this is an impermissible reading. The court reasoned that such an application of TILA would be inconsistent with the language of the statute, which bases the tolerance calculation on whether the amount disclosed as a finance charge does not vary from the actual finance charge by more than the specified amount. Moreover, the court reasoned that counting an entire fee as a violation of TILA, when only part of the charge is not bona fide, would lead to absurdly inconsistent results. The remedies available to the plaintiff would depend, not on the size of an overcharge, but, rather, on the size of the legitimate fee. As such, the court upheld the district court’s decision. For a copy of the opinion, please click here.

Banking

Treasury Unveils Public Private Partnership Investment Program. On March 23, the U.S. Department of the Treasury (Treasury) released details on the U.S. government’s Public Private Partnership Investment Program (PPIP). The PPIP seeks to restore liquidity to financial institutions by assisting these institutions with the sale of toxic real estate assets. The PPIP will operate through two subprograms, the Legacy Loans Program (LLP) and the Legacy Securities Program (LSP). Under the LLP, financial institutions, their primary regulators, and the Federal Deposit Insurance Corporation (FDIC), will designate pools of real estate loans to place on auction. If the selling financial institution accepts the purchase price established at auction, then the winning bidder can purchase the asset with government assistance. This assistance will be provided in two forms. First, the government, as a business partner, will contribute up to 50% of the equity required to make the purchase. Second, the government will provide the buyer with preferred financing by issuing debt guaranteed by the FDIC. The amount of financing available will be determined by the FDIC’s analysis of the asset pool, but under no circumstances can it exceed six times the equity contribution of the buyer. Likewise, under the LSP, the Treasury will co-invest/leverage funds with private capital providers to support the market for mortgage- and asset-backed securities originated prior to 2009 with a rating of AAA at origination. To implement the program, the Treasury will seek applications from asset managers interested in participating in the program. Accepted managers will then have an opportunity to raise private capital to target designated asset classes and will receive matching funds from the Treasury. Additionally, for fund structures that meet certain pre-established guidelines, asset managers can subscribe for senior debt from the Treasury in the amount of 50% of total equity capital of the fund. The Treasury will consider requests for senior debt for the fund in the amount of 100% of its total equity capital, subject to further restrictions. The FDIC is seeking public comment regarding the LLP; comments are due by April 10, 2009. For copies of documents related to the PPIP, including reports, summaries, applications and FAQs, please see http://www.treasury.gov/press/releases/tg65.htm.

Treasury Secretary Proposes Additional Authority to Regulate Systemically Significant Financial Institutions. On March 25, U.S. Department of the Treasury Secretary Timothy Geithner issued a draft of the “Resolution Authority for Systemically Significant Financial Companies Act of 2009” (the Act). The Act authorizes the U.S. government to regulate systemically significant financial institutions that are not currently subject to the resolution authority of the Federal Deposit Insurance Corporation (covered institutions). Significantly, the Act would grant the government resolution authority over covered institutions. Utilizing this authority, the government could put failing covered institutions into conservatorship or receivership or it could administer reorganizations or wind-downs. However, before the government could take such measures against a covered institution, the Treasury Secretary would need to establish that (i) the institution is in danger of insolvency, (ii) this insolvency would have “serious adverse effects” on economic conditions or financial stability, and (iii) action is necessary to avoid or to mitigate such effects. In addition to its resolution provisions, the Act would permit the government to (i) make loans to the financial institution, (ii) purchase obligations or assets, (iii) assume or guarantee liabilities, and (iv) purchase an equity interest in the institution. The Act would fund these provisions through a combination of mandatory appropriations, industry assessments, loan redemption payments, and equity sales. For a copy of the press release, please see http://www.ustreas.gov/press/releases/tg70.htm. For a copy of the Act, please see http://www.ustreas.gov/press/releases/reports/032509%20legislation.pdf.

Treasury Secretary Outlines Plans for Regulatory Reform. On March 26, the U.S. Department of the Treasury Secretary Timothy Geithner highlighted the steps necessary to achieve reform of the financial system in testimony delivered before Congress. According to Secretary Geithner, lawmakers should provide a comprehensive response to failures in the financial system by (i) addressing systemic risk, (ii) protecting consumers and investors, (iii) eliminating regulatory gaps, and (iv) fostering international coordination. To address systemic risk, Secretary Geithner advocated several major reforms. First, he advised Congress to create a single independent regulator with responsibility over systemically important firms and critical payment and settlements systems. Additionally, he proposed that firms subject to this new regulatory authority should have more stringent capital and risk management standards. Next, he recommended that Congress regulate the hedge fund industry by requiring hedge funds to register with the SEC and to report information necessary to assess whether the fund or fund family is so large or highly leveraged that it poses a threat to financial stability. Likewise, he advocated greater regulation of the derivatives market, calling for government supervision of the credit default swaps and OTC derivatives. He also encouraged Congress to prevent future runs on money market funds by strengthening the regulatory framework around such funds. Secretary Geithner will address the other three components of his proposed regulatory reform plan in future hearings. For a summary of the testimony, please click here.

Consumer Finance

DOJ Alleges Telemarketing Sales Rule Violation. On March 25, the U.S. Department of Justice (DOJ), at the Federal Trade Commission’s request, filed suit alleging that a satellite television provider violated the Telemarketing Sales Rule (the Rule) by (i) calling consumers with numbers registered on the National Do Not Call Registry, and (ii) “assisting and supporting” its authorized dealers in telemarketing services via pre-recorded telemarketing messages (“robocalls”). The complaint also includes allegations by several state Attorneys General that the defendant violated the Telephone Consumer Protection Act and applicable state laws. The DOJ’s complaint seeks (i) a permanent injunction that would prohibit the defendant from violating the Rule, (ii) to require the defendant to monitor and enforce compliance with the Rule by its authorized dealers, (iii) to prohibit the defendant from “assisting and facilitating” future violations, and (iv) civil penalties. For a copy of the press release, please see http://www.ftc.gov/opa/2009/03/echostar.shtm. For a copy of the complaint, please see http://www.ftc.gov/os/caselist/0523167/090325echostarcmpt.pdf.

Indiana Federal Court Finds the FDCPA Does Not Require Debtors to Dispute a Debt in Writing. On March 17, the U.S. District Court for the Northern District of Indiana held that a debt collector violates the Fair Debt Collection Practices Act (FDCPA) when it requires debtors to dispute their debts in writing. Campbell v. Hall, 2:06-CV-127, 2009 WL 701922 (N.D.Ind. Mar. 17, 2009). In Campbell, the defendant debt collector sent letters to the debtor plaintiffs demanding that plaintiffs provide written notification within 30 days if they wanted to dispute the debt. The plaintiffs argued that the letters violated § 1692g(a)(3) of the FDCPA because the FDCPA does not require debtors to dispute the validity of their debts in writing. Considering the plaintiffs’ argument, the court noted a circuit split in the Third and Ninth Circuits regarding this issue. Ultimately, the court in Campbell sided with the Ninth Circuit’s analysis that the plain meaning of the statute did not contain a writing requirement based on prior Seventh Circuit precedent that encouraged courts to apply a plain meaning rule. Therefore, the court held generally that a debt collector violates § 1692g(a) of the FDCPA when it requires debtors to dispute their debts in writing. However, the court withheld judgment with respect to the defendant, because it found that the defendant may be able to employ FDCPA’s bona fide error defense, provided that it could offer sufficient evidence that it had adequate procedures in place to avoid the mistake. For a copy of the opinion, please click here

Litigation

Ninth Circuit Holds TILA Requires Contemporaneous Notice of Rate Increase Due to Default. On March 16, the U.S. Court of Appeals for the Ninth Circuit held that the Truth in Lending Act (TILA) requires a creditor to provide contemporaneous notice of discretionary interest rate increases that occur as a result of borrower default. McCoy v. Chase Manhattan Bank, USA, N.A., No. 06-56278, 2009 WL 65054 (9th Cir. Mar. 16, 2009). In McCoy, the plaintiff alleged that the defendant bank increased his credit card interest rate retroactively to the beginning of his payment cycle as a result of a late payment. The plaintiff alleged that this increase violated TILA and Delaware law (the relevant home-state law of the defendant bank) because the bank did not give notice of this increase until the next periodic statement, which was sent after the increase had taken effect. The district court dismissed the complaint, finding that the card agreement disclosed the highest rate possible, and that no additional notice was required. The Ninth Circuit reversed, finding that TILA, as interpreted by the Federal Reserve Board, requires notice when the cardholder’s interest rate increases because of default, and that the notice must be made at the same time as the increase. The Ninth Circuit also reversed the district court’s dismissal of the plaintiff’s state-law unconscionability claim, but it upheld the dismissal of the plaintiff’s state-law consumer fraud claim. For a copy of the opinion, please click here.

Eighth Circuit Holds Borrower “Confirmation” to Not Rescind Refinance Loan Violates TILA. On March 20, the U.S. Court of Appeals for the Eighth Circuit held that a “Confirmation” statement signed at closing by a borrower agreeing not to rescind a refinance loan violates the Truth in Lending Act (TILA). Rand Corp. v. Moua, No. 07-2544, 2009 WL 723267 (8th Cir. Mar. 20, 2009). In this case, the borrowers’ home was in foreclosure, so the borrowers chose to refinance their existing mortgage loan and intended to exercise their redemption rights prior to a sheriff’s sale to retain the property. At the closing, the lender provided the borrowers with a statement notifying them of their three-day rescission right under TILA. Simultaneously, the lender provided a separate disclosure requiring the borrowers to confirm that they were not canceling the loan by signing a “Confirmation” section stating “[m]ore than 3 business days have elapsed since the date of the new transaction.” The “Confirmation” section further provided that, by signing it, the borrowers “certified[ied] that the new transaction ha[d] not been rescinded”—the borrowers signed. After the closing, the borrowers learned that the new payments were much higher than the previous payments, and therefore wanted to cancel the new loan. The court held that the lender failed to provide borrowers with the clear and conspicuous notice of TILA’s three-day post transaction right to cancel, thus extending this three day right to three years. The court stated “[r]equiring borrowers to sign statements which are contradictory and demonstrably false is a paradigm for confusion ... [t]he average borrower would be confused when instructed to certify a falsehood, and as to the effect of the falsehood.” For a copy of the opinion, please click here.

Seventh Circuit Upholds TILA Decision Denying Mortgage Rescission for “Minor” Finance Charge Inaccuracy. On March 20, the U.S. Court of Appeals for the Seventh Circuit held that an incorrect finance charge that does not exceed the Truth in Lending Act’s (TILA) tolerance for accuracy does not entitle a borrower to rescind the loan contract. McCutcheon v. America’s Servicing Company, No. 07-3521, 2009 WL 723601 (3rd Cir. Mar. 20, 2009). In McCutcheon, the plaintiff alleged, among other things, that the defendants violated TILA by overcharging for title insurance, entitling him to rescind the loan. The district court determined that the defendant violated TILA by overcharging the plaintiff for title insurance by an amount of $668. Notwithstanding, the district court held that, because the excess $668 fee did not exceed TILA’s statutory tolerance for “minor” violations, the plaintiff could not rescind the mortgage. Therefore, it awarded the plaintiff only statutory damages and reasonable attorney fees. The plaintiff contended that the defendant lender’s charging error was large enough to allow him to rescind the mortgage because the full title insurance fee, not just the excess, should count as a charge levied in violation of TILA. The Seventh Circuit concluded that this is an impermissible reading. The court reasoned that such an application of TILA would be inconsistent with the language of the statute, which bases the tolerance calculation on whether the amount disclosed as a finance charge does not vary from the actual finance charge by more than the specified amount. Moreover, the court reasoned that counting an entire fee as a violation of TILA, when only part of the charge is not bona fide, would lead to absurdly inconsistent results. The remedies available to the plaintiff would depend, not on the size of an overcharge, but, rather, on the size of the legitimate fee. As such, the court upheld the district court’s decision. For a copy of the opinion, please click here.

Indiana Federal Court Finds the FDCPA Does Not Require Debtors to Dispute a Debt in Writing. On March 17, the U.S. District Court for the Northern District of Indiana held that a debt collector violates the Fair Debt Collection Practices Act (FDCPA) when it requires debtors to dispute their debts in writing. Campbell v. Hall, 2:06-CV-127, 2009 WL 701922 (N.D.Ind. Mar. 17, 2009). In Campbell, the defendant debt collector sent letters to the debtor plaintiffs demanding that plaintiffs provide written notification within 30 days if they wanted to dispute the debt. The plaintiffs argued that the letters violated § 1692g(a)(3) of the FDCPA because the FDCPA does not require debtors to dispute the validity of their debts in writing. Considering the plaintiffs’ argument, the court noted a circuit split in the Third and Ninth Circuits regarding this issue. Ultimately, the court in Campbell sided with the Ninth Circuit’s analysis that the plain meaning of the statute did not contain a writing requirement based on prior Seventh Circuit precedent that encouraged courts to apply a plain meaning rule. Therefore, the court held generally that a debt collector violates § 1692g(a) of the FDCPA when it requires debtors to dispute their debts in writing. However, the court withheld judgment with respect to the defendant, because it found that the defendant may be able to employ FDCPA’s bona fide error defense, provided that it could offer sufficient evidence that it had adequate procedures in place to avoid the mistake. For a copy of the opinion, please click here.  

Credit Cards

Ninth Circuit Holds TILA Requires Contemporaneous Notice of Rate Increase Due to Default. On March 16, the U.S. Court of Appeals for the Ninth Circuit held that the Truth in Lending Act (TILA) requires a creditor to provide contemporaneous notice of discretionary interest rate increases that occur as a result of borrower default. McCoy v. Chase Manhattan Bank, USA, N.A., No. 06-56278, 2009 WL 65054 (9th Cir. Mar. 16, 2009). In McCoy, the plaintiff alleged that the defendant bank increased his credit card interest rate retroactively to the beginning of his payment cycle as a result of a late payment. The plaintiff alleged that this increase violated TILA and Delaware law (the relevant home-state law of the defendant bank) because the bank did not give notice of this increase until the next periodic statement, which was sent after the increase had taken effect. The district court dismissed the complaint, finding that the card agreement disclosed the highest rate possible, and that no additional notice was required. The Ninth Circuit reversed, finding that TILA, as interpreted by the Federal Reserve Board, requires notice when the cardholder’s interest rate increases because of default, and that the notice must be made at the same time as the increase. The Ninth Circuit also reversed the district court’s dismissal of the plaintiff’s state-law unconscionability claim, but it upheld the dismissal of the plaintiff’s state-law consumer fraud claim. For a copy of the opinion, please click here.