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Sixth Circuit Holds Computer Hacking Losses Covered by Insurance
Last month, the U.S. Court of Appeals for the Sixth Circuit affirmed a district court holding that the computer fraud rider to a retailer’s Crime Policy covered losses resulting from the theft of customers’ financial information by computer hackers. Retail Ventures, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., No 10-4576/4608, 2012 WL 3608432 (6th Cir. Aug. 23, 2012). The retailer incurred millions of dollars in expenses and attorney fees related to a data breach in which computer hackers stole customers’ credit card and bank account information. The retailer submitted a claim for the losses under the computer fraud rider to its Blanket Crime Policy, which the insurer denied because the policy excluded third-party theft of “proprietary” or “confidential information.” The retailer filed suit and prevailed on summary judgment. On appeal, the court upheld the district court’s application of a proximate cause standard to determine that the losses were covered as losses sustained as a direct result of the theft. The court also rejected the insurer’s argument that the losses were excluded as losses of “proprietary or confidential information” because the retailer did not “own or hold single or sole right” to the stolen information and the information did not relate to the manner in which the business operated.
Second Circuit Applies "Least Sophisticated Consumer" Test In Student Loan Debt Collection Case
On August 30, the U.S. Court of Appeals for the Second Circuit held that a debt collector’s representation to a debtor that her student loans were “ineligible” for bankruptcy discharge is a “false, misleading, or deceptive” debt collection practice in violation of the FDCPA. Easterling v. Collecto, Inc., No. 11-3209, 2012 WL 3734389 (2nd Cir. Aug. 30, 2012). The debt collector sent a collection letter to the debtor with a notice that the account was ineligible for bankruptcy discharge. The debtor sued the collector on her own behalf and on behalf of nearly 200 borrowers who also received such notices. The district court granted summary judgment in favor of the debt collector, concluding that because the debtor had previously filed for bankruptcy without seeking to discharge her student loan debt, and because student loan debt is presumptively non-dischargeable, her debt was, in fact, not eligible to be discharged. The appeals court disagreed and held that the district court erred in focusing on the borrower’s circumstances instead of applying the “least sophisticated consumer” standard. In applying that standard on appeal, the court reasoned that while the bar for bankruptcy discharge is high, it is not impossible and the “least sophisticated consumer” might not seek the advice of counsel for pursuing discharge through bankruptcy after receiving the debt collector’s inaccurate notice. The court held that the debt collector’s notice did violate the FDCPA and reversed and remanded the case for further proceedings.
CFPB Corrects Student Loan Report
On August 29, the CFPB released an updated and corrected report on private student loans. Although the updated report provides the same findings and recommendations as the original report, the revised report attempts to address concerns about some of the study’s methodologies. The CFPB’s summary of updates states that the new report includes revised methodologies for determining the extent to which private student loan borrowers exhausted their Federal Stafford Loan options before taking on a private student loan and the extent to which private student loans were originated without certification of borrower need by the institution of higher education. Specifically, the revised report provides updated results showing a higher percentage of students who took out a private loan without exhausting the individual Stafford maximum, and a higher level of school certification of private loans.
CFPB Announces Senior Staff Changes
On August 28, the CFPB announced several changes to its senior staff, including the departure of Leonard Chanin who has supervised all of the CFPB’s rulemakings as the Assistant Director for Regulations. Replacing Mr. Chanin on an acting basis is Kelly Thompson Cochran. Ms. Cochran previously served as Deputy Assistant Director, overseeing development of the CFPB’s mortgage and remittance rules. Ms. Cochran has been with the CFPB since its creation as an office within the U.S. Treasury and prior to that was a lawyer in private practice. The CFPB also announced the appointment of Chris Lipsett as Senior Counsel in the Office of the Director, Stephen Van Meter as Deputy General Counsel, and Delicia Reynolds Hand as Staff Director for the Consumer Advisory Board and Councils.
State Regulators Urge Passage of CFPB Privilege Legislation
On August 23, the American Association of Residential Mortgage Regulators, the Conference of State Bank Supervisors, and other state financial regulators sent a letter to Representatives Jim Renacci (R-OH) and Ed Perlmutter (D-CO) in support of H.R. 6125. The recently introduced legislation seeks to amend the Federal Deposit Insurance Act to ensure that information submitted by banks and nonbanks to the CFPB is treated as privileged and confidential information. The state regulators argue that the bill will allow state and federal regulators to share information to facilitate better collaboration and will support use of the Nationwide Mortgage Licensing System and Registry. The letter adds that other federal legislation to address the confidentiality of information submitted to the CFPB does not go far enough to support federal-state coordination.
State Law Update: Illinois Amends Consumer Installment and Payday Loan Acts
On August 20, Illinois enacted House Bill 3935, which amends the state’s Consumer Installment Loan Act and Payday Loan Act to clarify that loans made by unlicensed lenders are considered null and void and that unlicensed lenders have no right to collect on such loans. The amendments take effect on January 1, 2013.
Federal Court Declines to Enjoin AG Prosecution of Claims Subject to Class Settlement
On August 22, the U.S. District Court for the Middle District of Florida denied a major bank’s motion to enjoin prosecution by two state attorneys general of claims related to the bank’s credit card payment protection products. Spinelli v. Capital One Bank, USA, No. 08-cv-00132, 2012 WL 3609028 (M.D. Fla. Aug. 22, 2012). In 2010 the bank entered a global class action settlement to release certain claims regarding payment protection, including those by all natural persons who have or had credit card accounts with the bank and who were charged for payment protection during a defined time period. After the Attorneys General of Hawaii and Mississippi (the state AGs) filed cases earlier this year regarding the same products, the bank petitioned the court that approved the class settlement to enjoin the state AGs, as well as any other person or entity with knowledge of the class settlement, from prosecuting similar claims against the bank. The bank argued that the state AG actions were brought on behalf of citizens who were bank customers released as part of the class settlement. The court held that a state’s sovereign interests cannot be compromised by a private settlement, the AGs were not bound by the class settlement, and an injunction would violate due process. The court also held that it no longer retained jurisdiction over the matter and that the courts hearing the state AG claims must decide whether the claims can properly proceed.
OCC Proposes Stress Test Reporting Requirements for Large Banks
On August 16, the OCC published a notice that describes the reports and information the OCC proposes to collect to implement the Dodd-Frank Act’s annual stress tests for banks with consolidated assets of $50 billion or more. The information that the OCC proposes to collect includes documentation regarding income statements, balance sheets, capital statements, retail projections, securities, trading risk, counterparty credit risk, operational risk, and pre-provision net revenue. The OCC proposed rules to implement the stress tests earlier this year. A separate notice regarding reports for institutions with consolidated assets between $10 billion and $50 billion will be published at a later date. The OCC is accepting comments on the instant notice through October 15, 2012.
State Law Update: Illinois Enacts Servicemember Protections
On August 9, Illinois enacted SB 3287, a bill to expand and create various new protections for servicemembers. The bill clarifies the scope of coverage of servicemember protections by amending the definition of “military service” to include any full-time training or duty, no matter how described and no matter which state, federal, or other authority ordered the service. The bill provides new relief for covered servicemembers with regard to (i) default judgments, (ii) mortgage foreclosures, and (iii) installment sales contracts. For example, the bill provides that any mortgagor who is a covered servicemember, or a family member who resides with a covered servicemember, may seek a stay of foreclosure proceedings and an adjustment of the monthly payment obligation for ninety days after the servicemember returns from service. Similarly, a covered servicemember may seek a stay of any repossession of goods subject to an installment sales contract and an adjustment of the obligation. Other protections added or expanded by the bill relate to (i) limitations on interest rates, (ii) termination of motor vehicle and property leases, (iii) cellular phone and long distance contracts, and (iv) utility services. These changes take effect on January 1, 2013.
OCC Chief Counsel Announces Retirement
On August 13, OCC Chief Counsel Julie Williams announced her departure from her current position effective September 30, 2012 and her retirement from federal service at the end of 2012. Ms. Williams has been with the OCC for eighteen years and twice served as acting Comptroller. While the agency conducts its search for a permanent replacement for Ms. Williams, Deputy Chief Counsel Daniel Stipano will serve as acting Chief Counsel from October 1, 2012 to December 31, 2012 and Deputy Chief Counsel Karen Solomon will serve from January 1, 2013 through March 31, 2013.