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  • House Passes Gramm-Leach-Bliley Privacy Disclosure Exemption

    Consumer Finance

    On March 12, the U.S. House of Representatives passed H.R. 749, a bill that would exempt from the Gramm-Leach-Bliley Act’s annual privacy policy notice requirements any financial institution that (i) provides nonpublic personal information only in accordance with specified requirements and (ii) has not changed its policies and practices with regard to disclosing nonpublic personal information from its most recent disclosure. The bill is identical to one passed by the House last year, H.R. 5817, but which the Senate never addressed. H.R. 749 now awaits consideration by the Senate.

    Bank Compliance Privacy/Cyber Risk & Data Security

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  • Massachusetts High Court Holds State Credit Card Law Intended to Protect against Invasion of Privacy, ZIP Codes Protected

    Fintech

    On March 11, the Massachusetts Supreme Judicial Court held that a credit card holder may bring an action for violation of a state law prohibiting businesses from requiring personal identification information as part of a credit card transaction, even in the absence of identity fraud. Tyler v. Michaels Stores, Inc., No. SJC-11145, 2013 WL 854097 (Mass. Mar. 11, 2013). The card holder moved the Massachusetts Supreme Judicial Court to certify three questions interpreting the statute after a case she brought against the retailer in federal court was dismissed. The U.S. District Court for the District of Massachusetts had held that a retailer’s collection of ZIP codes during a credit card transaction can constitute a violation of the credit card law, but that the card holder failed to allege actual harm. The Massachusetts Supreme Judicial Court agreed that a ZIP code amounts to personal information under the statute, and found that the law is “intended primarily” to protect card holders from invasion of privacy by merchants, not against credit card identity fraud. However, the court noted that the statute did not contain an express limitation barring card holders who were not the victim of fraud. On a third question, the court held that the term "credit card transaction form" refers equally to electronic and paper transaction forms.

    Privacy/Cyber Risk & Data Security

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  • CFPB To Hold Field Hearing on Consumer Complaints

    Consumer Finance

    On March 11, the CFPB announced a field hearing about its Consumer Complaint Database, to be held in Des Moines, IA on March 28, 2013. The CFPB has not yet announced witnesses but has stated the event will feature remarks from CFPB Director Richard Cordray, as well as testimony from consumer groups, industry representatives, and members of the public. The CFPB currently accepts complaints regarding credit cards, mortgages, bank accounts and services, auto/consumer loans, student loans, and consumer reporting, but so far has only published the credit card complaints in the public database. In the past, the CFPB has made policy announcements in connection with field hearings. Accordingly, the CFPB may announce that it is making additional types of complaints publicly available, or that it will accept complaints regarding an additional product or service.

    CFPB Consumer Complaints

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  • FTC Issues Report on Mobile Payment Consumer Protections

    Fintech

    On March 8, the FTC released a report on mobile payments by consumers. The report, based on a FTC workshop held in April 2012, focuses on financial, security, and privacy consumer protections. The FTC encourages companies to develop clear dispute resolution policies to address customer claims of fraudulent mobile payments or unauthorized charges. The report highlights “special concerns” with mobile carrier billings, in which mobile carriers place charges on phone bills on behalf of third-parties, based on the FTC’s concern that there are no federal statutory protections governing consumer disputes about fraudulent or unauthorized charges placed on mobile carrier bills. The FTC also encourages industry-wide adoption of strong security measures and suggests ways sensitive financial information can be kept secure during the mobile payment process, including end-to-end encryption. The report highlights the need for mobile payment companies to practice “privacy by design,” incorporating strong privacy practices, consumer choice, and transparency into their products from the outset. Finally, the report notes privacy issues arising from the consolidation of consumers’ personal information in the mobile payment process.

    FTC Mobile Payment Systems Privacy/Cyber Risk & Data Security

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  • Senator Seeks DOJ Investigation of Default Servicing Practices

    Lending

    On March 8, Senator Ron Wyden (D-OR) released a letter to Attorney General Eric Holder advising the DOJ about claims made to the Senator’s office by a “long-time professional in the mortgage industry” that banks and mortgage servicers have engaged in a “systematic effort” to double bill borrowers for certain foreclosure-related fees. The letter identifies a major default service provider with whom other banks and servicers allegedly have been complicit in establishing a fraudulent fee structure that increased foreclosure rates and led directly to other servicing problems, including robosigning. Senator Wyden offers that in addition to being potentially fraudulent, the practices described may violate the False Claims Act. The letter explains that Fannie Mae and Freddie Mac, which currently operate under government conservatorship, are improperly being asked to pay fees that the servicers also are passing on to borrowers. The letter, a copy of which also was sent to the federal housing and banking agencies, seeks a DOJ investigation into these allegations, or a report from the DOJ about any investigation conducted to date. The Senator also (i) seeks guidance from the DOJ about actions Congress can take with regard to foreclosure billing transparency, including a “RESPA-like policy,” (ii) asks whether Fannie Mae’s and Freddie Mac’s policies regarding certain of the fees at issue should be implemented industry-wide, and (iii) requests an investigation of competition in the title industry and alleged pricing and market manipulation practices.

    Foreclosure Mortgage Servicing DOJ U.S. Senate

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  • State Law Update: Two Nebraska Bills Amend Lender Licensing Rules

    Consumer Finance

    On March 7, Nebraska enacted two bills intended to amend and clarify requirements for installment loan brokers, payday lenders, mortgage bankers, and mortgage loan originators (MLOs). The first, LB 279, makes nonsubstantive clarifications to the definition of a “loan broker” and narrows the exemption for accountants to certified public accountants only. The bill also authorizes the Nebraska Department of Banking and Finance to share examination reports and other confidential information with the CFPB and other state regulators. The second, LB 290, removes many mortgage licensing requirements previously applicable to individuals and separately identifies MLO duties. Those duties include providing notification to the Department (i) within 10 days of events such as bankruptcy, criminal indictments, and suspension/revocation proceedings; and (ii) within 30 days of certain changes, including changes of employer and address. The bill also allows firms to electronically submit certain required reports and provides that the 120-day period for calculating abandonment of a license application runs from the date the Department sends the applicant electronic notice of  deficient items. By state rule, both bills take effect three months after the end of the state’s legislative session, which scheduled to conclude May 30, 2013.

    Payday Lending Mortgage Licensing Installment Loans

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  • Texas Appeals Court Affirms Holding that Certain Emails Read Together Can Be Construed as One Contract

    Fintech

    On March 7, the Texas Court of Appeals of the Thirteenth District affirmed a trial court’s holding that the essential terms of an option contract for the purchase of real estate were present when three e-mail messages exchanged by the parties were read together. Dittman v. Cerone, No. 13-11-00196-CV, 2013 WL 865423 (Mar. 7, 2013). The defendant sued for specific performance pursuant to the terms of the three emails, and the trial court ultimately concluded that the e-mails constituted a valid option contract and ordered the plaintiffs to convey the property. The Texas Court of Appeals affirmed the trial court’s holding that the option contract complied with the statute of frauds because (i) the emails construed together provided the essential terms of the contract, (ii) the property was sufficiently identified and confirmed by extrinsic evidence, (iii) the parties’ actions evidenced an intent to conduct certain business electronically, and (iv) the real estate broker had authority to act for the sellers.

    Electronic Signatures

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  • Federal Court Holds Litigation Privilege Bars SCRA Claim Based on Inaccurate Military Affidavit

    Lending

    Recently, the U.S. District Court for the Central District of California barred a claim for violation of Section 521 of the Servicemembers Civil Relief Act (SCRA) by holding that California’s litigation privilege applies to military affidavits. William v. U.S. Bank Nat’l Assoc., No. 12-748, 2013 WL 571844 (C.D. Cal. Feb 13, 2013). While the plaintiff was serving overseas, the defendants filed an inaccurate affidavit stating that the plaintiff was not on active military duty, and on that basis obtained a default judgment of unlawful detainer against the plaintiff. After returning from military service, the plaintiff sued the defendants for violating the SCRA by fling an inaccurate military affidavit. The court held that California’s litigation privilege, which protects communications made in the course of litigation, applied to the military affidavit and thus barred the plaintiff’s claim based on the accuracy of that affidavit. Although the borrower could—and successfully did—move to set aside the default judgment, the litigation privileged barred this secondary suit. The court also held that federal law did not preclude the state-law litigation privilege because the alleged violations occurred prior to enactment of a private right of action under the SCRA.

    Servicemembers

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  • California Federal Court First to Outline Factors Governing FIRREA Civil Penalty Awards

    Courts

    On March 6, the U.S. District Court for the Central District of California identified for the first time factors for courts to consider when assessing a civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). United States v. Menendez, No. CV 11-06313, 2013 WL 828926 (C.D. Cal. Mar. 6, 2013). The DOJ sued a real estate broker, alleging he committed bank fraud when he submitted a false certification on behalf of a homeowner to HUD in connection with the homeowner’s short sale. The DOJ claimed the certification was false because it represented that there were no hidden terms or special understandings with the buyer of the property, when in fact the broker himself, through a company he controlled, also was the buyer of the property and intended to immediately resell the property for a profit of nearly $40,000. Drawing upon principles applied by courts in other civil penalty contexts, the court considered eight factors to assess the civil penalty under FIRREA: (i) the good or bad faith of the defendant and the degree of scienter; (ii) the injury to the public and loss to other persons; (iii) the egregiousness of the violation; (iv) the isolated or repeated nature of the violation; (v) the defendant’s financial condition and ability to pay; (vi) the criminal fine that could be levied for the conduct; (vii) the amount of the defendant’s profit from the fraud; and (viii) the penalty range available under FIRREA.

    In this case, the court found that the first three weighed in favor of a substantial civil penalty: (i) the broker acted with intent to defraud; (ii) HUD suffered a loss; and (iii) the broker’s bank fraud was egregious. The court found that the next two factors favored the broker: (iv) the admissible evidence reflected only a single instance of bank fraud, and (v) the broker recently received a discharge from bankruptcy court and had limited ability to pay. Finally, the court found that the civil penalty requested by the government — nearly $1.1 million — was excessive, considering that (vi) the amount of the criminal penalty for bank fraud was capped at $1 million, and the likely fine under the sentencing guidelines would have been “in the $20-30,000 range;” (vii) the broker’s profit was only approximately $40,000; and (viii) FIRREA precluded a penalty in excess of $1 million when the gain or loss was less than $1 million, as it was in this case. The court awarded a civil penalty of $40,000, an amount proportionate to the broker’s profit.

    Civil Fraud Actions False Claims Act / FIRREA

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  • FTC Updates Guidance for Mobile and Internet Advertising Disclosures

    Fintech

    Yesterday, the FTC released guidance for mobile and other online advertisers. The new guidance, “.com Disclosures: How to Make Effective Disclosures in Digital Advertising,” adapts and expands prior FTC guidance to account for a decade’s worth of additional experience with online marketing practices, consumers’ increasing use of smartphones, and merchants’ increasing use of social media marketing.

    The new guidance highlights several key considerations for businesses as they develop advertisements for online and mobile media:

    • The same consumer protection laws – e.g. UDAP – that apply to commercial activities in other media apply online and in the mobile marketplace.
    • Limitations and qualifying information should be incorporated into any underlying claim, rather than provided as a separate disclosure qualifying the claim.
    • Marketing materials that may be viewed on a variety of platforms, including handheld devices, should be designed so that required disclosures are effectively delivered on all of the platforms.
    • Required disclosures must be clear and conspicuous, as determined by numerous factors.
    • If a disclosure is necessary to prevent an advertisement from being deceptive, unfair, or otherwise violative of a FTC rule, and it is not possible to make the disclosure clearly and conspicuously, then that ad should not be disseminated.

    To meet the clear and conspicuous standard, the FTC reminds advertisers that, generally, a disclosure should be placed as close as possible to the trigger claim, and that they should take account of the devices and platforms consumers may use to view the advertisement and disclosure. The FTC offers other specific guidance, with corresponding examples, for complying with the clear and conspicuous standard in online and mobile advertisements:

    • When a space-constrained ad requires a disclosure, incorporate the disclosure into the ad whenever possible. When it is not possible it may be acceptable to make the disclosure clearly and conspicuously on the page to which the ad links.
    • Hyperlinks used to lead to a disclosure should (i) be obvious, (ii) be labeled appropriately to convey the importance and relevance of the information it leads to, and consistently formatted, (iii) be placed as close as possible to the relevant information it qualifies, (iv) take consumers directly to the disclosure on the click-through page, and (v) be monitored for effectiveness and changed, if necessary.
    • Avoid requiring consumers to “scroll” in order to find a disclosure, or, when necessary, use text or visual cues to encourage consumers to scroll to view the disclosure.
    • Determine screen placement based on empirical research about where consumers do and do not look.
    • Recognize and respond to any technological limitations or unique characteristics of a communication method.
    • Display disclosures before consumers make a decision to buy, and consider repeating disclosures before a purchase is finalized.
    • Repeat disclosures, as needed, on lengthy websites and in connection with repeated claims.
    • For products intended or able to be purchased from “brick and mortar” stores or from online retailers other than the advertiser itself, the disclosure should be presented in the ad itself.
    • Prominently display disclosures, based on an evaluation of the size, color, and graphic treatment of the disclosure in relation to other parts of the webpage. Do not relegate disclosures to “terms of use” and similar contractual agreements.
    • Review the entire ad to assess whether the disclosure is effective in light of other elements that might distract consumers’ attention from the disclosure.
    • Use audio disclosures when making audio claims, and present them in a volume and cadence so that consumers can hear and understand them.
    • Display visual disclosures for a duration sufficient for consumers to notice, read, and understand them.
    • Use plain language and syntax so that consumers understand the disclosures.

    The updated guidance, and especially the FTC’s emphasis on the ability of marketing materials to effectively deliver disclosures across multiple platforms, should lead businesses with online marketing programs to carefully review and re-assess their marketing materials and methods of presentation.

    Fraud FTC Disclosures

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