Federal Issues

DOJ Reaches Proposed Settlement Resolving Lending Discrimination Allegations. On March 4, the U.S. Department of Justice (DOJ) announced a proposed settlement with two subsidiaries of American International Group Inc.—AIG Federal Savings Bank (FSB) and Wilmington Finance Inc. (WFI), an affiliated mortgage lending company—resolving allegations that the companies engaged in a pattern or practice of discrimination against African American borrowers. Specifically, the DOJ’s complaint, brought under the Fair Housing Act and Equal Credit Opportunity Act, alleged that African American borrowers nationwide were charged higher broker fees on wholesale loans than similarly-situated non-Hispanic white borrowers. Under the proposed settlement, which is subject to court approval, AIG FSB and WFI deny all allegations and will pay up to $6.1 million to African American borrowers who were charged higher broker fees than similarly-situated, non-minority borrowers, and will invest at least $1 million in consumer financial education efforts. The proposed settlement also requires the entities to develop and implement direct broker-fee monitoring programs and to provide employee training. The entities, which are no longer engaged in lending activities, will also be prohibited from discriminating on the basis of race or color should either re-enter the wholesale home lending business. The settlement marks a new theory of liability against lenders by holding them accountable for the conduct of third-party, independent mortgage brokers, who are neither employed by nor controlled by such lenders. It also raises concerns about discretionary pricing models, which may reveal questionable statistical patterns even where brokers may not have engaged in discriminatory conduct. There are several cases with allegations similar to the DOJ’s that are currently being litigated nationwide. For a copy of the press release, please click hereFor a copy of the proposed settlement, please see here.

Federal Reserve Board Issues Proposed Rule to Implement CARD Act Provisions. On March 3, the Federal Reserve Board (Board) released a proposed rule that would impose new obligations on issuers of credit cards relating to assessing penalty fees and raising interest rates (the Proposed Rule). The Proposed Rule is the latest in several stages of rules that implement provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), and would implement provisions of the CARD Act scheduled to go into effect on August 22, 2010. Among other things, the Proposed Rule would place limitations on penalty fees that a credit card issuer may assess on a cardholder. Specifically, the issuer may only charge a penalty fee if the fee represents a “reasonable proportion” of the costs incurred due to that type of violation. The Proposed Rule would require the issuer to re-evaluate such costs at least annually. Alternatively, an issuer could charge a penalty fee for a violation if the issuer has determined that the amount of the fee is “reasonably necessary” to deter that type of violation, using an “empirically derived, demonstrably and statistically sound model.” The Proposed Rule would also (i) prohibit the penalty fee from exceeding the dollar amount associated with the violation, (ii) prohibit imposing multiple fees based on a single transaction, (iii) require issuers that use risk-based pricing to increase the annual percentage rate on a card to periodically (i.e., at least every six months) consider changes in factors and, if appropriate, reduce the APR within 30 days, and (iv) require issuers to inform consumers of the reasons for their rate increases. Comments on the Proposed Rule are due 30 days after publication in the Federal Register. For a copy of the press release, please click hereFor a copy of the text of the Proposed Rule, please see here.

FTC Obtains Settlement with Debt Collector. On March 3, the Federal Trade Commission (FTC) announced an agreement with a nationwide debt collector and two of its officers to settle allegations that the company, among other things, tried to collect invalid debts and reported them to the credit reporting agencies without noting that consumers disputed them. In addition to imposing a $1.1 million civil penalty on the company, the settlement order, among other things, (i) bars the defendants from further violations, (ii) prohibits them from making unsupported statements to collect a debt or obtain information about a consumer, (iii) bars them from making claims that a debt is owed or about the amount, without a reasonable basis, and (iv) requires the defendants, when a debt is questionable or a consumer questions it, to either close the account and end collection efforts or investigate the dispute. For a copy of the press release, please see http://www.ftc.gov/opa/2010/03/creditcollect.shtm.

FTC Provides Notice of Intent to Request Public Comment on Holder Rule. On March 2, the Federal Trade Commission (FTC) announced that, as part of its systematic review of all FTC rules and guidance, it intends to request public comment on the Preservation of Consumers’ Claims and Defenses Rule, also known as the FTC Holder Rule (the Holder Rule). Under the Holder Rule, if a seller provides financing for the customer or refers the customer to a lender, the loan contract must include a notice that allows the consumer to assert claims or defenses against the lender or subsequent holder of the contract. The FTC specifically requests comment on (i) the economic impact of and continuing need for the Holder Rule, (ii) possible conflict between the Holder Rule and other laws or regulations, and (iii) the effect of any technological, economic, or other industry changes on the Holder Rule. For a copy of the notice, please see http://www.ftc.gov/os/2010/03/100302regulatoryreformschedule.pdf.

FHFA Extends Home Affordable Refinance Program. On March 1, the Federal Housing Finance Agency announced the extension of the Home Affordable Refinance Program (HARP), a refinancing program administered by Fannie Mae and Freddie Mac, to June 30, 2011. HARP was previously set to expire on June 11, 2010. For a copy of the press release, please click here.

FHA Extends Deadline for Loan Correspondents to Submit Audited Financial Statements. The Federal Housing Administration (FHA) is extending the deadline for the submission of audited financial statements for loan correspondents with a fiscal year end of December 31 that would ordinarily be required to renew their FHA approval by March 31, 2010. The new deadline is April 30, 2010. FHA notes that the submission deadline for the Annual Certification and renewal fee has not been changed. For more information, please contact infobytes@buckleysandler.com.

FTC Announces Senate Confirmation of New Commissioners. On March 4, the Federal Trade Commission (FTC) announced that the U.S. Senate has confirmed Julie Brill and Edith Ramirez as FTC Commissioners. The confirmations change the makeup of the FTC from 1 Democrat, 2 Republicans and 1 Independent to 3 Democrats and 2 Republicans. For a copy of the press release, please click here.

Courts

Seventh Circuit Rejects Cramdown Attempt; Holds PMSI Includes Negative Equity. On March 1, the U.S. Court of Appeals for the Seventh Circuit affirmed a decision from the Bankruptcy Court for the Northern District of Illinois that held that an auto loan creditor’s purchase-money security interest (PMSI) included the financing of negative equity from a trade-in vehicle, and thus rejected the debtor’s attempt to "cramdown" his claim. In re Howard, No. 09-3181, 2010 WL 680974 (7th Cir. Mar. 1, 2010). In this case, the debtor traded in a vehicle in which he held "negative equity" (i.e., the amount owed on the trade-in vehicle exceeded the value of that vehicle) in conjunction with financing a new vehicle purchase. The amount financed to purchase the new vehicle included the "negative equity" from the trade-in vehicle. Several months after purchasing the new vehicle, the debtor filed for Chapter 13 bankruptcy protection. The debtor sought to "cramdown" his Chapter 13 plan by bifurcating the creditor’s claim into (i) a secured portion, and (ii) an unsecured portion (the negative equity from the trade-in vehicle), and the creditor objected to this proposed treatment of its security interest. The bankruptcy judge sustained the creditor’s objection, relying on the "hanging paragraph" of Section 1325(a) of the U.S. Bankruptcy Code, which excludes certain bankruptcy claims from "cramdown" when the creditor has a PMSI. On appeal, the Seventh Circuit relied on the Illinois Motor Vehicle Retail Installment Sales Act’s language indicating that negative equity is part of the “deferred payment price,” and the Illinois Uniform Commercial Code’s definition of PMSI to “join the other courts in ruling that negative equity can be part of a [PMSI] and if thus secured is not subject to the cramdown power of the bankruptcy judge in a Chapter 13 bankruptcy.” The opinion, authored by Judge Posner, noted that, although the statutory language did not necessarily require this finding, including negative equity in the PMSI “may be essential to the flourishing of the important market that consists of the sale of cars on credit” and “Article 9 does not seek to discourage credit transactions.” For a copy of the opinion, please click here.

California Federal Court Dismisses TILA, RESPA Claims. On February 11, the U.S. District Court for the Eastern District of California dismissed a suit alleging violation of various federal and state laws, including the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). Flores v. GMAC Mortgage LLC, No. 2:09-cv-01216, 2010 WL 582115 (E.D.Cal. Feb. 11, 2010). In Flores, the plaintiff borrowers claimed that, among other things, (i) their lender violated TILA by not providing them with two copies of their “Notice of Right to Cancel” at loan consummation, triggering a right of rescission on their loan, and (ii) their servicer violated RESPA by not responding to a qualified written request (QWR) they sent disputing the validity of the loan due to the disclosure deficiencies. Prior to bringing the claims in this case, the borrowers initiated a voluntary bankruptcy proceeding, but failed to list the contingent right of rescission under TILA as one of their assets in the bankruptcy, as required by the Bankruptcy Code. The court dismissed with prejudice the TILA claim under the doctrine of judicial estoppel, finding that the borrowers’ rescission claim was clearly inconsistent with their claims in bankruptcy. The court reasoned that the borrowers knew of the potential claim during the pendency of their bankruptcy, but failed to amend their schedules or disclosure statements to identify the cause of action as a contingent asset. The court also dismissed with prejudice the plaintiff borrowers’ RESPA claim. The court noted that the loan servicer had no duty to respond to the letter because it does not (i) relate to the servicing of the loan, and (ii) contain a statement of the reasons the borrowers believe the loan account was in error, as required by RESPA. For a copy of the opinion, please click here.

Alabama Federal Court Dismisses FCRA Claim. On February 17, the U.S. District Court for the Southern District of Alabama ruled that, in order for a plaintiff to prove damages against a credit reporting agency (CRA), in connection with a Fair Credit Reporting Act (FCRA) claim, the plaintiff must provide sufficient evidence to show that the defendant CRA delivered or provided an inaccurate consumer credit report to a third party, and that the inaccurate report was the causal factor in the denial of credit to the plaintiff. Pettway v. Equifax Information Services, LLC, No. 08-0618, 2010 WL 653708 (S.D. Ala. Feb. 17, 2010). In Pettway, the plaintiff consumer alleged that the defendant CRAs, Equifax and Experian, failed to perform a reasonable investigation into her credit file after she disputed the accuracy of her credit reports. She further alleged that these failures damaged her, because she was subsequently denied credit based on these reports. On motion for summary judgment, the CRAs argued, among other things, that the plaintiff failed to present any evidence to support her damages claim. The court agreed, noting that the consumer had failed to provide a copy of any credit report issued by the CRAs to a creditor or lender. Consequently, the court concluded that the consumer had not produced sufficient evidence to create a genuine issue of material fact that inaccurate information was reported by the CRAs, or that any consumer report provided by the CRAs was a causal factor in the denial of credit, and as a result, the court granted the CRAs’ motion for summary judgment. For a copy of the opinion, please click here.

Illinois Federal Court Certifies Class Alleging Violations of FACTA. On February 22, the U.S. District Court for the Northern District of Illinois certified a class of consumers in a Fair and Accurate Transactions Act (FACTA) truncation case. Miller-Huggins v. Mario’s Butcher Shop, Inc., No. 09C-3774, 2010 WL 658863 (N.D. Ill. Feb. 10, 2010). In this action, the plaintiff alleged that the defendant printed receipts that displayed (i) the expiration date of the consumer’s credit or debit card, and/or (ii) more than the last five digits of the consumer’s credit card or debit card number. The court declined to certify a class of consumers whose credit card number was printed on a receipt, finding that numerosity was lacking, but certified the class as to consumers who received a receipt printed with the expiration date of their credit or debit card on the grounds that the plaintiff had satisfied Federal Rule of Civil Procedure 23 requirements. The court rejected the defendant’s argument that a conflict exists between the plaintiff, who is seeking only statutory damages, and potential class members, who may wish to seek actual damages that exceed possible statutory damages. For a copy of the opinion, please click here.

Alabama Federal Court Denies Class Certification in FACTA Truncation Case. On January 29, the U.S. District Court for the Northern District of Alabama denied class certification in a Fair and Accurate Credit Transactions Act (FACTA) truncation case. Grimes v. Rave Motion Pictures Birmingham, L.L.C., No. 07-AR-1397-S, 2010 WL 547528 (N.D. Ala. Jan. 29, 2010). In Grimes, the plaintiff alleged that the defendant movie theater, Rave Motion Pictures (Rave), issued credit card receipts containing more than the last 5 digits of her credit card number, in violation of FACTA. The court initially granted Rave’s summary judgment motion challenging FACTA’s constitutionality, but the Eleventh Circuit reversed and remanded the case for a determination of whether class treatment was appropriate. On remand, the court found that the plaintiff failed to show that the proposed class was objectively ascertainable and did not satisfy the requirements of Rule 23(a) and (b). With respect to the ascertainability requirement, the court reasoned that class certification “would require the court to examine the receipts of self-identified members,” which “would not only be a task beyond the court’s logistical capacity, but would constitute a prohibited merits based analysis.” For a copy of the opinion, please click here.

New York Federal Court Holds Forum Selection Clause Enforceable. On February 17, the U.S. District Court for the Eastern District of New York held that a forum selection clause included in a click-to-agree web contract was enforceable, after finding, among other things, that enforcement of the clause would not be unreasonable or unjust and that the plaintiff’s testimony that he inadvertently checked the box agreeing to the terms and conditions of the contract was “not credible.” Scherillo v. Dun & Bradstreet, Inc., No. 09-cv-1557, 2010 WL 537805 (E.D.N.Y. Feb. 17, 2010). In Scherillo, the plaintiff sued the defendant for gross negligence and negligent misrepresentation in connection with the preparation of a financial report purchased via the defendant’s website. Citing a forum selection clause included in the scroll box of binding terms and conditions on its website, the defendant moved to transfer the litigation from New York federal court to New Jersey federal court. In granting the defendant’s motion to transfer, the court gave significant weight to the presence and reasonableness of the forum selection clause, in addition to other discretionary factors. The plaintiff opposed the motion on grounds that the clause was unenforceable because he did not read or assent to the terms and conditions of the contract containing the clause. But the court rejected this argument, holding that a contract signatory ”is presumed to have read, understood and agreed to be bound by all terms . . . in the documents he or she signed.” The court also was not persuaded by the plaintiff’s expert testimony that he may have inadvertently checked the terms and conditions box by accidentally stroking the space bar. The court pointed out that the plaintiff still had to select a button marked “register” in order to purchase the financial report, and that, in doing so, he would have noticed that the terms and conditions box had been selected, as it was located immediately above the “register” button. For a copy of the opinion, please click here.

Firm News

David Baris will speak regarding bank director liability at the NACD/AABD Bank Director Workshop on April 14.

Clint Rockwell was recently appointed to a three-year term of membership to the Business Law Section of the State Bar of California’s Consumer Financial Services Committee.

David Baris was extensively quoted in a recent article for SNL Financial. In the article, David discussed the financial difficulties facing community banks, as well as his future predictions on the role that private equity firms and other nontraditional bank investors may play in the financial services industry. For a copy of the article, please see http://www.snl.com/InteractiveX/article.aspx?CDID=A-10783252-12084.

John Kromer was a participant in a panel entitled "Federal Registration of Mortgage Loan Originators and NMLS" on February 10 at the 2010 NMLS User Conference in San Diego, CA.

Andrew Sandler recently spoke at ZC Sterling’s President’s Advisory Board in Palm Springs, CA, delivering a presentation regarding Industry Updates.

Christopher Witeck was a participant on a panel regarding “What’s up with Ginnie Mae?” at the NRMLA Roadshow in Atlanta, GA on February 25.

Sara Emley spoke at the Investment Adviser Association/ACA Insight 2010 Adviser Compliance Forum on February 25 in Arlington, VA. Her topic was “Current Hot Topics for Managers with Individual Clients.”

Joe Kolar and Jonathan Cannon presented at the Lenders One conference in Orlando, FL on March 2 regarding RESPA compliance.

Mortgages

FHFA Extends Home Affordable Refinance Program. On March 1, the Federal Housing Finance Agency announced the extension of the Home Affordable Refinance Program (HARP), a refinancing program administered by Fannie Mae and Freddie Mac, to June 30, 2011. HARP was previously set to expire on June 11, 2010. For a copy of the press release, please click here.

FHA Extends Deadline for Loan Correspondents to Submit Audited Financial Statements. The Federal Housing Administration (FHA) is extending the deadline for the submission of audited financial statements for loan correspondents with a fiscal year end of December 31 that would ordinarily be required to renew their FHA approval by March 31, 2010. The new deadline is April 30, 2010. FHA notes that the submission deadline for the Annual Certification and renewal fee has not been changed. For more information, please contact infobytes@buckleysandler.com.

California Federal Court Dismisses TILA, RESPA Claims. On February 11, the U.S. District Court for the Eastern District of California dismissed a suit alleging violation of various federal and state laws, including the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). Flores v. GMAC Mortgage LLC, No. 2:09-cv-01216, 2010 WL 582115 (E.D.Cal. Feb. 11, 2010). In Flores, the plaintiff borrowers claimed that, among other things, (i) their lender violated TILA by not providing them with two copies of their “Notice of Right to Cancel” at loan consummation, triggering a right of rescission on their loan, and (ii) their servicer violated RESPA by not responding to a qualified written request (QWR) they sent disputing the validity of the loan due to the disclosure deficiencies. Prior to bringing the claims in this case, the borrowers initiated a voluntary bankruptcy proceeding, but failed to list the contingent right of rescission under TILA as one of their assets in the bankruptcy, as required by the Bankruptcy Code. The court dismissed with prejudice the TILA claim under the doctrine of judicial estoppel, finding that the borrowers’ rescission claim was clearly inconsistent with their claims in bankruptcy. The court reasoned that the borrowers knew of the potential claim during the pendency of their bankruptcy, but failed to amend their schedules or disclosure statements to identify the cause of action as a contingent asset. The court also dismissed with prejudice the plaintiff borrowers’ RESPA claim. The court noted that the loan servicer had no duty to respond to the letter because it does not (i) relate to the servicing of the loan, and (ii) contain a statement of the reasons the borrowers believe the loan account was in error, as required by RESPA.  For a copy of the opinion, please click here.

Banking

DOJ Reaches Proposed Settlement Resolving Lending Discrimination Allegations. On March 4, the U.S. Department of Justice (DOJ) announced a proposed settlement with two subsidiaries of American International Group Inc.—AIG Federal Savings Bank (FSB) and Wilmington Finance Inc. (WFI), an affiliated mortgage lending company—resolving allegations that the companies engaged in a pattern or practice of discrimination against African American borrowers. Specifically, the DOJ’s complaint, brought under the Fair Housing Act and Equal Credit Opportunity Act, alleged that African American borrowers nationwide were charged higher broker fees on wholesale loans than similarly-situated non-Hispanic white borrowers. Under the proposed settlement, which is subject to court approval, AIG FSB and WFI deny all allegations and will pay up to $6.1 million to African American borrowers who were charged higher broker fees than similarly-situated, non-minority borrowers, and will invest at least $1 million in consumer financial education efforts. The proposed settlement also requires the entities to develop and implement direct broker-fee monitoring programs and to provide employee training. The entities, which are no longer engaged in lending activities, will also be prohibited from discriminating on the basis of race or color should either re-enter the wholesale home lending business. The settlement marks a new theory of liability against lenders by holding them accountable for the conduct of third-party, independent mortgage brokers, who are neither employed by nor controlled by such lenders. It also raises concerns about discretionary pricing models, which may reveal questionable statistical patterns even where brokers may not have engaged in discriminatory conduct. There are several cases with allegations similar to the DOJ’s that are currently being litigated nationwide. For a copy of the press release, please click hereFor a copy of the proposed settlement, please see here.

Consumer Finance

DOJ Reaches Proposed Settlement Resolving Lending Discrimination Allegations. On March 4, the U.S. Department of Justice (DOJ) announced a proposed settlement with two subsidiaries of American International Group Inc.—AIG Federal Savings Bank (FSB) and Wilmington Finance Inc. (WFI), an affiliated mortgage lending company—resolving allegations that the companies engaged in a pattern or practice of discrimination against African American borrowers. Specifically, the DOJ’s complaint, brought under the Fair Housing Act and Equal Credit Opportunity Act, alleged that African American borrowers nationwide were charged higher broker fees on wholesale loans than similarly-situated non-Hispanic white borrowers. Under the proposed settlement, which is subject to court approval, AIG FSB and WFI deny all allegations and will pay up to $6.1 million to African American borrowers who were charged higher broker fees than similarly-situated, non-minority borrowers, and will invest at least $1 million in consumer financial education efforts. The proposed settlement also requires the entities to develop and implement direct broker-fee monitoring programs and to provide employee training. The entities, which are no longer engaged in lending activities, will also be prohibited from discriminating on the basis of race or color should either re-enter the wholesale home lending business. The settlement marks a new theory of liability against lenders by holding them accountable for the conduct of third-party, independent mortgage brokers, who are neither employed by nor controlled by such lenders. It also raises concerns about discretionary pricing models, which may reveal questionable statistical patterns even where brokers may not have engaged in discriminatory conduct. There are several cases with allegations similar to the DOJ’s that are currently being litigated nationwide. For a copy of the press release, please click hereFor a copy of the proposed settlement, please see here.

FTC Obtains Settlement with Debt Collector. On March 3, the Federal Trade Commission (FTC) announced an agreement with a nationwide debt collector and two of its officers to settle allegations that the company, among other things, tried to collect invalid debts and reported them to the credit reporting agencies without noting that consumers disputed them. In addition to imposing a $1.1 million civil penalty on the company, the settlement order, among other things, (i) bars the defendants from further violations, (ii) prohibits them from making unsupported statements to collect a debt or obtain information about a consumer, (iii) bars them from making claims that a debt is owed or about the amount, without a reasonable basis, and (iv) requires the defendants, when a debt is questionable or a consumer questions it, to either close the account and end collection efforts or investigate the dispute. For a copy of the press release, please see http://www.ftc.gov/opa/2010/03/creditcollect.shtm.

FTC Provides Notice of Intent to Request Public Comment on Holder Rule. On March 2, the Federal Trade Commission (FTC) announced that, as part of its systematic review of all FTC rules and guidance, it intends to request public comment on the Preservation of Consumers’ Claims and Defenses Rule, also known as the FTC Holder Rule (the Holder Rule). Under the Holder Rule, if a seller provides financing for the customer or refers the customer to a lender, the loan contract must include a notice that allows the consumer to assert claims or defenses against the lender or subsequent holder of the contract. The FTC specifically requests comment on (i) the economic impact of and continuing need for the Holder Rule, (ii) possible conflict between the Holder Rule and other laws or regulations, and (iii) the effect of any technological, economic, or other industry changes on the Holder Rule. For a copy of the notice, please see http://www.ftc.gov/os/2010/03/100302regulatoryreformschedule.pdf.

FTC Announces Senate Confirmation of New Commissioners. On March 4, the Federal Trade Commission (FTC) announced that the U.S. Senate has confirmed Julie Brill and Edith Ramirez as FTC Commissioners. The confirmations change the makeup of the FTC from 1 Democrat, 2 Republicans and 1 Independent to 3 Democrats and 2 Republicans. For a copy of the press release, please click here.

Seventh Circuit Rejects Cramdown Attempt; Holds PMSI Includes Negative Equity. On March 1, the U.S. Court of Appeals for the Seventh Circuit affirmed a decision from the Bankruptcy Court for the Northern District of Illinois that held that an auto loan creditor’s purchase-money security interest (PMSI) included the financing of negative equity from a trade-in vehicle, and thus rejected the debtor’s attempt to "cramdown" his claim. In re Howard, No. 09-3181, 2010 WL 680974 (7th Cir. Mar. 1, 2010). In this case, the debtor traded in a vehicle in which he held "negative equity" (i.e., the amount owed on the trade-in vehicle exceeded the value of that vehicle) in conjunction with financing a new vehicle purchase. The amount financed to purchase the new vehicle included the "negative equity" from the trade-in vehicle. Several months after purchasing the new vehicle, the debtor filed for Chapter 13 bankruptcy protection. The debtor sought to "cramdown" his Chapter 13 plan by bifurcating the creditor’s claim into (i) a secured portion, and (ii) an unsecured portion (the negative equity from the trade-in vehicle), and the creditor objected to this proposed treatment of its security interest. The bankruptcy judge sustained the creditor’s objection, relying on the "hanging paragraph" of Section 1325(a) of the U.S. Bankruptcy Code, which excludes certain bankruptcy claims from "cramdown" when the creditor has a PMSI. On appeal, the Seventh Circuit relied on the Illinois Motor Vehicle Retail Installment Sales Act’s language indicating that negative equity is part of the “deferred payment price,” and the Illinois Uniform Commercial Code’s definition of PMSI to “join the other courts in ruling that negative equity can be part of a [PMSI] and if thus secured is not subject to the cramdown power of the bankruptcy judge in a Chapter 13 bankruptcy.” The opinion, authored by Judge Posner, noted that, although the statutory language did not necessarily require this finding, including negative equity in the PMSI “may be essential to the flourishing of the important market that consists of the sale of cars on credit” and “Article 9 does not seek to discourage credit transactions.” For a copy of the opinion, please click here.

DOJ Reaches Proposed Settlement Resolving Lending Discrimination Allegations. On March 4, the U.S. Department of Justice (DOJ) announced a proposed settlement with two subsidiaries of American International Group Inc.—AIG Federal Savings Bank (FSB) and Wilmington Finance Inc. (WFI), an affiliated mortgage lending company—resolving allegations that the companies engaged in a pattern or practice of discrimination against African American borrowers. Specifically, the DOJ’s complaint, brought under the Fair Housing Act and Equal Credit Opportunity Act, alleged that African American borrowers nationwide were charged higher broker fees on wholesale loans than similarly-situated non-Hispanic white borrowers. Under the proposed settlement, which is subject to court approval, AIG FSB and WFI deny all allegations and will pay up to $6.1 million to African American borrowers who were charged higher broker fees than similarly-situated, non-minority borrowers, and will invest at least $1 million in consumer financial education efforts. The proposed settlement also requires the entities to develop and implement direct broker-fee monitoring programs and to provide employee training. The entities, which are no longer engaged in lending activities, will also be prohibited from discriminating on the basis of race or color should either re-enter the wholesale home lending business. The settlement marks a new theory of liability against lenders by holding them accountable for the conduct of third-party, independent mortgage brokers, who are neither employed by nor controlled by such lenders. It also raises concerns about discretionary pricing models, which may reveal questionable statistical patterns even where brokers may not have engaged in discriminatory conduct. There are several cases with allegations similar to the DOJ’s that are currently being litigated nationwide. For a copy of the press release, please see http://www.justice.gov/opa/pr/2010/March/10-crt-226.html. For a copy of the proposed settlement, please see http://www.justice.gov/crt/housing/documents/aigproposesettle.pdf.

FTC Obtains Settlement with Debt Collector. On March 3, the Federal Trade Commission (FTC) announced an agreement with a nationwide debt collector and two of its officers to settle allegations that the company, among other things, tried to collect invalid debts and reported them to the credit reporting agencies without noting that consumers disputed them. In addition to imposing a $1.1 million civil penalty on the company, the settlement order, among other things, (i) bars the defendants from further violations, (ii) prohibits them from making unsupported statements to collect a debt or obtain information about a consumer, (iii) bars them from making claims that a debt is owed or about the amount, without a reasonable basis, and (iv) requires the defendants, when a debt is questionable or a consumer questions it, to either close the account and end collection efforts or investigate the dispute. For a copy of the press release, please see http://www.ftc.gov/opa/2010/03/creditcollect.shtm.

FTC Provides Notice of Intent to Request Public Comment on Holder Rule. On March 2, the Federal Trade Commission (FTC) announced that, as part of its systematic review of all FTC rules and guidance, it intends to request public comment on the Preservation of Consumers’ Claims and Defenses Rule, also known as the FTC Holder Rule (the Holder Rule). Under the Holder Rule, if a seller provides financing for the customer or refers the customer to a lender, the loan contract must include a notice that allows the consumer to assert claims or defenses against the lender or subsequent holder of the contract. The FTC specifically requests comment on (i) the economic impact of and continuing need for the Holder Rule, (ii) possible conflict between the Holder Rule and other laws or regulations, and (iii) the effect of any technological, economic, or other industry changes on the Holder Rule. For a copy of the notice, please seehttp://www.ftc.gov/os/2010/03/100302regulatoryreformschedule.pdf.

FTC Announces Senate Confirmation of New Commissioners. On March 4, the Federal Trade Commission (FTC) announced that the U.S. Senate has confirmed Julie Brill and Edith Ramirez as FTC Commissioners. The confirmations change the makeup of the FTC from 1 Democrat, 2 Republicans and 1 Independent to 3 Democrats and 2 Republicans. For a copy of the press release, please see http://www.ftc.gov/opa/2010/03/commissioners.shtm.

Seventh Circuit Rejects Cramdown Attempt; Holds PMSI Includes Negative Equity. On March 1, the U.S. Court of Appeals for the Seventh Circuit affirmed a decision from the Bankruptcy Court for the Northern District of Illinois that held that an auto loan creditor’s purchase-money security interest (PMSI) included the financing of negative equity from a trade-in vehicle, and thus rejected the debtor’s attempt to "cramdown" his claim. In re Howard, No. 09-3181, 2010 WL 680974 (7th Cir. Mar. 1, 2010). In this case, the debtor traded in a vehicle in which he held "negative equity" (i.e., the amount owed on the trade-in vehicle exceeded the value of that vehicle) in conjunction with financing a new vehicle purchase. The amount financed to purchase the new vehicle included the "negative equity" from the trade-in vehicle. Several months after purchasing the new vehicle, the debtor filed for Chapter 13 bankruptcy protection. The debtor sought to "cramdown" his Chapter 13 plan by bifurcating the creditor’s claim into (i) a secured portion, and (ii) an unsecured portion (the negative equity from the trade-in vehicle), and the creditor objected to this proposed treatment of its security interest. The bankruptcy judge sustained the creditor’s objection, relying on the "hanging paragraph" of Section 1325(a) of the U.S. Bankruptcy Code, which excludes certain bankruptcy claims from "cramdown" when the creditor has a PMSI. On appeal, the Seventh Circuit relied on the Illinois Motor Vehicle Retail Installment Sales Act’s language indicating that negative equity is part of the “deferred payment price,” and the Illinois Uniform Commercial Code’s definition of PMSI to “join the other courts in ruling that negative equity can be part of a [PMSI] and if thus secured is not subject to the cramdown power of the bankruptcy judge in a Chapter 13 bankruptcy.” The opinion, authored by Judge Posner, noted that, although the statutory language did not necessarily require this finding, including negative equity in the PMSI “may be essential to the flourishing of the important market that consists of the sale of cars on credit” and “Article 9 does not seek to discourage credit transactions.” For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=showbr&shofile=09-3181_002.pdf.

Litigation

Seventh Circuit Rejects Cramdown Attempt; Holds PMSI Includes Negative Equity. On March 1, the U.S. Court of Appeals for the Seventh Circuit affirmed a decision from the Bankruptcy Court for the Northern District of Illinois that held that an auto loan creditor’s purchase-money security interest (PMSI) included the financing of negative equity from a trade-in vehicle, and thus rejected the debtor’s attempt to "cramdown" his claim. In re Howard, No. 09-3181, 2010 WL 680974 (7th Cir. Mar. 1, 2010). In this case, the debtor traded in a vehicle in which he held "negative equity" (i.e., the amount owed on the trade-in vehicle exceeded the value of that vehicle) in conjunction with financing a new vehicle purchase. The amount financed to purchase the new vehicle included the "negative equity" from the trade-in vehicle. Several months after purchasing the new vehicle, the debtor filed for Chapter 13 bankruptcy protection. The debtor sought to "cramdown" his Chapter 13 plan by bifurcating the creditor’s claim into (i) a secured portion, and (ii) an unsecured portion (the negative equity from the trade-in vehicle), and the creditor objected to this proposed treatment of its security interest. The bankruptcy judge sustained the creditor’s objection, relying on the "hanging paragraph" of Section 1325(a) of the U.S. Bankruptcy Code, which excludes certain bankruptcy claims from "cramdown" when the creditor has a PMSI. On appeal, the Seventh Circuit relied on the Illinois Motor Vehicle Retail Installment Sales Act’s language indicating that negative equity is part of the “deferred payment price,” and the Illinois Uniform Commercial Code’s definition of PMSI to “join the other courts in ruling that negative equity can be part of a [PMSI] and if thus secured is not subject to the cramdown power of the bankruptcy judge in a Chapter 13 bankruptcy.” The opinion, authored by Judge Posner, noted that, although the statutory language did not necessarily require this finding, including negative equity in the PMSI “may be essential to the flourishing of the important market that consists of the sale of cars on credit” and “Article 9 does not seek to discourage credit transactions.” For a copy of the opinion, please click here.

California Federal Court Dismisses TILA, RESPA Claims. On February 11, the U.S. District Court for the Eastern District of California dismissed a suit alleging violation of various federal and state laws, including the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). Flores v. GMAC Mortgage LLC, No. 2:09-cv-01216, 2010 WL 582115 (E.D.Cal. Feb. 11, 2010). In Flores, the plaintiff borrowers claimed that, among other things, (i) their lender violated TILA by not providing them with two copies of their “Notice of Right to Cancel” at loan consummation, triggering a right of rescission on their loan, and (ii) their servicer violated RESPA by not responding to a qualified written request (QWR) they sent disputing the validity of the loan due to the disclosure deficiencies. Prior to bringing the claims in this case, the borrowers initiated a voluntary bankruptcy proceeding, but failed to list the contingent right of rescission under TILA as one of their assets in the bankruptcy, as required by the Bankruptcy Code. The court dismissed with prejudice the TILA claim under the doctrine of judicial estoppel, finding that the borrowers’ rescission claim was clearly inconsistent with their claims in bankruptcy. The court reasoned that the borrowers knew of the potential claim during the pendency of their bankruptcy, but failed to amend their schedules or disclosure statements to identify the cause of action as a contingent asset. The court also dismissed with prejudice the plaintiff borrowers’ RESPA claim. The court noted that the loan servicer had no duty to respond to the letter because it does not (i) relate to the servicing of the loan, and (ii) contain a statement of the reasons the borrowers believe the loan account was in error, as required by RESPA.  For a copy of the opinion, please click here.

Alabama Federal Court Dismisses FCRA Claim. On February 17, the U.S. District Court for the Southern District of Alabama ruled that, in order for a plaintiff to prove damages against a credit reporting agency (CRA), in connection with a Fair Credit Reporting Act (FCRA) claim, the plaintiff must provide sufficient evidence to show that the defendant CRA delivered or provided an inaccurate consumer credit report to a third party, and that the inaccurate report was the causal factor in the denial of credit to the plaintiff. Pettway v. Equifax Information Services, LLC, No. 08-0618, 2010 WL 653708 (S.D. Ala. Feb. 17, 2010). In Pettway, the plaintiff consumer alleged that the defendant CRAs, Equifax and Experian, failed to perform a reasonable investigation into her credit file after she disputed the accuracy of her credit reports. She further alleged that these failures damaged her, because she was subsequently denied credit based on these reports. On motion for summary judgment, the CRAs argued, among other things, that the plaintiff failed to present any evidence to support her damages claim. The court agreed, noting that the consumer had failed to provide a copy of any credit report issued by the CRAs to a creditor or lender. Consequently, the court concluded that the consumer had not produced sufficient evidence to create a genuine issue of material fact that inaccurate information was reported by the CRAs, or that any consumer report provided by the CRAs was a causal factor in the denial of credit, and as a result, the court granted the CRAs’ motion for summary judgment. For a copy of the opinion, please click here.

Illinois Federal Court Certifies Class Alleging Violations of FACTA. On February 22, the U.S. District Court for the Northern District of Illinois certified a class of consumers in a Fair and Accurate Transactions Act (FACTA) truncation case. Miller-Huggins v. Mario’s Butcher Shop, Inc., No. 09C-3774, 2010 WL 658863 (N.D. Ill. Feb. 10, 2010). In this action, the plaintiff alleged that the defendant printed receipts that displayed (i) the expiration date of the consumer’s credit or debit card, and/or (ii) more than the last five digits of the consumer’s credit card or debit card number. The court declined to certify a class of consumers whose credit card number was printed on a receipt, finding that numerosity was lacking, but certified the class as to consumers who received a receipt printed with the expiration date of their credit or debit card on the grounds that the plaintiff had satisfied Federal Rule of Civil Procedure 23 requirements. The court rejected the defendant’s argument that a conflict exists between the plaintiff, who is seeking only statutory damages, and potential class members, who may wish to seek actual damages that exceed possible statutory damages. For a copy of the opinion, please click here.

Alabama Federal Court Denies Class Certification in FACTA Truncation Case. On January 29, the U.S. District Court for the Northern District of Alabama denied class certification in a Fair and Accurate Credit Transactions Act (FACTA) truncation case. Grimes v. Rave Motion Pictures Birmingham, L.L.C., No. 07-AR-1397-S, 2010 WL 547528 (N.D. Ala. Jan. 29, 2010). In Grimes, the plaintiff alleged that the defendant movie theater, Rave Motion Pictures (Rave), issued credit card receipts containing more than the last 5 digits of her credit card number, in violation of FACTA. The court initially granted Rave’s summary judgment motion challenging FACTA’s constitutionality, but the Eleventh Circuit reversed and remanded the case for a determination of whether class treatment was appropriate. On remand, the court found that the plaintiff failed to show that the proposed class was objectively ascertainable and did not satisfy the requirements of Rule 23(a) and (b). With respect to the ascertainability requirement, the court reasoned that class certification “would require the court to examine the receipts of self-identified members,” which “would not only be a task beyond the court’s logistical capacity, but would constitute a prohibited merits based analysis.” For a copy of the opinion, please click here.

New York Federal Court Holds Forum Selection Clause Enforceable. On February 17, the U.S. District Court for the Eastern District of New York held that a forum selection clause included in a click-to-agree web contract was enforceable, after finding, among other things, that enforcement of the clause would not be unreasonable or unjust and that the plaintiff’s testimony that he inadvertently checked the box agreeing to the terms and conditions of the contract was “not credible.” Scherillo v. Dun & Bradstreet, Inc., No. 09-cv-1557, 2010 WL 537805 (E.D.N.Y. Feb. 17, 2010). In Scherillo, the plaintiff sued the defendant for gross negligence and negligent misrepresentation in connection with the preparation of a financial report purchased via the defendant’s website. Citing a forum selection clause included in the scroll box of binding terms and conditions on its website, the defendant moved to transfer the litigation from New York federal court to New Jersey federal court. In granting the defendant’s motion to transfer, the court gave significant weight to the presence and reasonableness of the forum selection clause, in addition to other discretionary factors. The plaintiff opposed the motion on grounds that the clause was unenforceable because he did not read or assent to the terms and conditions of the contract containing the clause. But the court rejected this argument, holding that a contract signatory ”is presumed to have read, understood and agreed to be bound by all terms . . . in the documents he or she signed.” The court also was not persuaded by the plaintiff’s expert testimony that he may have inadvertently checked the terms and conditions box by accidentally stroking the space bar. The court pointed out that the plaintiff still had to select a button marked “register” in order to purchase the financial report, and that, in doing so, he would have noticed that the terms and conditions box had been selected, as it was located immediately above the “register” button. For a copy of the opinion, please click here.

E-Financial Services

New York Federal Court Holds Forum Selection Clause Enforceable. On February 17, the U.S. District Court for the Eastern District of New York held that a forum selection clause included in a click-to-agree web contract was enforceable, after finding, among other things, that enforcement of the clause would not be unreasonable or unjust and that the plaintiff’s testimony that he inadvertently checked the box agreeing to the terms and conditions of the contract was “not credible.” Scherillo v. Dun & Bradstreet, Inc., No. 09-cv-1557, 2010 WL 537805 (E.D.N.Y. Feb. 17, 2010). In Scherillo, the plaintiff sued the defendant for gross negligence and negligent misrepresentation in connection with the preparation of a financial report purchased via the defendant’s website. Citing a forum selection clause included in the scroll box of binding terms and conditions on its website, the defendant moved to transfer the litigation from New York federal court to New Jersey federal court. In granting the defendant’s motion to transfer, the court gave significant weight to the presence and reasonableness of the forum selection clause, in addition to other discretionary factors. The plaintiff opposed the motion on grounds that the clause was unenforceable because he did not read or assent to the terms and conditions of the contract containing the clause. But the court rejected this argument, holding that a contract signatory ”is presumed to have read, understood and agreed to be bound by all terms . . . in the documents he or she signed.” The court also was not persuaded by the plaintiff’s expert testimony that he may have inadvertently checked the terms and conditions box by accidentally stroking the space bar. The court pointed out that the plaintiff still had to select a button marked “register” in order to purchase the financial report, and that, in doing so, he would have noticed that the terms and conditions box had been selected, as it was located immediately above the “register” button. For a copy of the opinion, please click here.

Privacy/Data Security

Alabama Federal Court Dismisses FCRA Claim. On February 17, the U.S. District Court for the Southern District of Alabama ruled that, in order for a plaintiff to prove damages against a credit reporting agency (CRA), in connection with a Fair Credit Reporting Act (FCRA) claim, the plaintiff must provide sufficient evidence to show that the defendant CRA delivered or provided an inaccurate consumer credit report to a third party, and that the inaccurate report was the causal factor in the denial of credit to the plaintiff. Pettway v. Equifax Information Services, LLC, No. 08-0618, 2010 WL 653708 (S.D. Ala. Feb. 17, 2010). In Pettway, the plaintiff consumer alleged that the defendant CRAs, Equifax and Experian, failed to perform a reasonable investigation into her credit file after she disputed the accuracy of her credit reports. She further alleged that these failures damaged her, because she was subsequently denied credit based on these reports. On motion for summary judgment, the CRAs argued, among other things, that the plaintiff failed to present any evidence to support her damages claim. The court agreed, noting that the consumer had failed to provide a copy of any credit report issued by the CRAs to a creditor or lender. Consequently, the court concluded that the consumer had not produced sufficient evidence to create a genuine issue of material fact that inaccurate information was reported by the CRAs, or that any consumer report provided by the CRAs was a causal factor in the denial of credit, and as a result, the court granted the CRAs’ motion for summary judgment. For a copy of the opinion, please click here.

Illinois Federal Court Certifies Class Alleging Violations of FACTA. On February 22, the U.S. District Court for the Northern District of Illinois certified a class of consumers in a Fair and Accurate Transactions Act (FACTA) truncation case. Miller-Huggins v. Mario’s Butcher Shop, Inc., No. 09C-3774, 2010 WL 658863 (N.D. Ill. Feb. 10, 2010). In this action, the plaintiff alleged that the defendant printed receipts that displayed (i) the expiration date of the consumer’s credit or debit card, and/or (ii) more than the last five digits of the consumer’s credit card or debit card number. The court declined to certify a class of consumers whose credit card number was printed on a receipt, finding that numerosity was lacking, but certified the class as to consumers who received a receipt printed with the expiration date of their credit or debit card on the grounds that the plaintiff had satisfied Federal Rule of Civil Procedure 23 requirements. The court rejected the defendant’s argument that a conflict exists between the plaintiff, who is seeking only statutory damages, and potential class members, who may wish to seek actual damages that exceed possible statutory damages. For a copy of the opinion, please click here.

Alabama Federal Court Denies Class Certification in FACTA Truncation Case. On January 29, the U.S. District Court for the Northern District of Alabama denied class certification in a Fair and Accurate Credit Transactions Act (FACTA) truncation case. Grimes v. Rave Motion Pictures Birmingham, L.L.C., No. 07-AR-1397-S, 2010 WL 547528 (N.D. Ala. Jan. 29, 2010). In Grimes, the plaintiff alleged that the defendant movie theater, Rave Motion Pictures (Rave), issued credit card receipts containing more than the last 5 digits of her credit card number, in violation of FACTA. The court initially granted Rave’s summary judgment motion challenging FACTA’s constitutionality, but the Eleventh Circuit reversed and remanded the case for a determination of whether class treatment was appropriate. On remand, the court found that the plaintiff failed to show that the proposed class was objectively ascertainable and did not satisfy the requirements of Rule 23(a) and (b). With respect to the ascertainability requirement, the court reasoned that class certification “would require the court to examine the receipts of self-identified members,” which “would not only be a task beyond the court’s logistical capacity, but would constitute a prohibited merits based analysis.” For a copy of the opinion, please click here.

Credit Cards

Federal Reserve Board Issues Proposed Rule to Implement CARD Act Provisions. On March 3, the Federal Reserve Board (Board) released a proposed rule that would impose new obligations on issuers of credit cards relating to assessing penalty fees and raising interest rates (the Proposed Rule). The Proposed Rule is the latest in several stages of rules that implement provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), and would implement provisions of the CARD Act scheduled to go into effect on August 22, 2010. Among other things, the Proposed Rule would place limitations on penalty fees that a credit card issuer may assess on a cardholder. Specifically, the issuer may only charge a penalty fee if the fee represents a “reasonable proportion” of the costs incurred due to that type of violation. The Proposed Rule would require the issuer to re-evaluate such costs at least annually. Alternatively, an issuer could charge a penalty fee for a violation if the issuer has determined that the amount of the fee is “reasonably necessary” to deter that type of violation, using an “empirically derived, demonstrably and statistically sound model.” The Proposed Rule would also (i) prohibit the penalty fee from exceeding the dollar amount associated with the violation, (ii) prohibit imposing multiple fees based on a single transaction, (iii) require issuers that use risk-based pricing to increase the annual percentage rate on a card to periodically (i.e., at least every six months) consider changes in factors and, if appropriate, reduce the APR within 30 days, and (iv) require issuers to inform consumers of the reasons for their rate increases. Comments on the Proposed Rule are due 30 days after publication in the Federal Register. For a copy of the press release, please click hereFor a copy of the text of the Proposed Rule, please see here.

Illinois Federal Court Certifies Class Alleging Violations of FACTA. On February 22, the U.S. District Court for the Northern District of Illinois certified a class of consumers in a Fair and Accurate Transactions Act (FACTA) truncation case. Miller-Huggins v. Mario’s Butcher Shop, Inc., No. 09C-3774, 2010 WL 658863 (N.D. Ill. Feb. 10, 2010). In this action, the plaintiff alleged that the defendant printed receipts that displayed (i) the expiration date of the consumer’s credit or debit card, and/or (ii) more than the last five digits of the consumer’s credit card or debit card number. The court declined to certify a class of consumers whose credit card number was printed on a receipt, finding that numerosity was lacking, but certified the class as to consumers who received a receipt printed with the expiration date of their credit or debit card on the grounds that the plaintiff had satisfied Federal Rule of Civil Procedure 23 requirements. The court rejected the defendant’s argument that a conflict exists between the plaintiff, who is seeking only statutory damages, and potential class members, who may wish to seek actual damages that exceed possible statutory damages. For a copy of the opinion, please click here.

Alabama Federal Court Denies Class Certification in FACTA Truncation Case. On January 29, the U.S. District Court for the Northern District of Alabama denied class certification in a Fair and Accurate Credit Transactions Act (FACTA) truncation case. Grimes v. Rave Motion Pictures Birmingham, L.L.C., No. 07-AR-1397-S, 2010 WL 547528 (N.D. Ala. Jan. 29, 2010). In Grimes, the plaintiff alleged that the defendant movie theater, Rave Motion Pictures (Rave), issued credit card receipts containing more than the last 5 digits of her credit card number, in violation of FACTA. The court initially granted Rave’s summary judgment motion challenging FACTA’s constitutionality, but the Eleventh Circuit reversed and remanded the case for a determination of whether class treatment was appropriate. On remand, the court found that the plaintiff failed to show that the proposed class was objectively ascertainable and did not satisfy the requirements of Rule 23(a) and (b). With respect to the ascertainability requirement, the court reasoned that class certification “would require the court to examine the receipts of self-identified members,” which “would not only be a task beyond the court’s logistical capacity, but would constitute a prohibited merits based analysis.” For a copy of the opinion, please click here.