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Topics – Covered This Week (Click to View)
FEDERAL ISSUES
GSE Regulatory Reform Legislation Introduced. On March 9, Rep. Barney Frank (D – Mass.), Chairman of the Financial Services Committee, introduced a bill (H.R. 1427) to create a new regulator with new powers, including the authority to set capital retention requirements, to oversee the government sponsored enterprises (GSEs – Fannie Mae and Freddie Mac) and the Federal Home Loan Banks. The bill, entitled the Federal Housing Finance Reform Act of 2007, would if enacted establish the Federal Housing Finance Agency, which would have the power to establish risk-based capital retention requirements “to ensure that the enterprises operate in a safe and sound manner.” Under the act, GSEs would also be required to submit new lending products to the agency for a 30-day public comment period and agency approval. The act would also establish an affordable housing fund. The bill was cosponsored by three other members, including two Republicans, of the Financial Services Committee to which it has been referred. For more information on H.R. 1427, see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.01427:.
Wal-Mart Withdraws ILC Application. Wal-Mart Stores, Inc. announced it has withdrawn its application to charter an Industrial Loan Company (ILC). Wal-Mart executives stated the withdrawal was due to the Federal Deposit Insurance Corporation’s (FDIC) recent extension of its freeze on ILC applications for insurance by “commercial companies” (reported in the February 2nd issue of InfoBytes). In an official statement responding to Wal-Mart’s announcement, FDIC Chairman Sheila Bair said “Wal-Mart made a wise choice.” For Wal-Mart’s press release, see http://www.walmartfacts.com/articles/4900.aspx.
Security Credit Freeze Bill Introduced in Senate. On March 7, Sen. Mark Pryor (D – Ark.) introduced a bill (S. 608) that, under federal law, would give consumers power to impose a “security freeze” on their credit report. S. 608, entitled the Consumer ID Protection and Security Act, would allow credit reporting agencies three days to request “proper identification” from a consumer requesting or lifting a credit freeze and three more days to implement the consumer's request upon receipt of such identification. Credit reporting agencies could not charge consumers more than $15 for a security freeze, unless a consumer has been notified they are a potential victim of identity theft, in which case fees are prohibited. The bill, in its current form, does not preempt any of the state credit freeze laws. For more information on S. 608, see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:s.00806:.
SEC Proposes Amendment to Broker-Dealer Financial Responsibility Rules. The SEC has requested comment on proposed amendments to the financial responsibility rules for broker-dealers to address concerns over the current requirements of net capital (Rule 15c3-1), consumer protection (Rule 15c3-3), books and records (Rule 17a-3 and 17a-4) and notification rules (17a-11) under the Securities and Exchange Act of 1934, Release No. 34-55431. The proposal includes amendments to the consumer protection rule respecting (i) proprietary accounts at another broker-dealer (PAB accounts), (ii) cash deposits at special reserve banks accounts, (iii) allocation of short positions, and (iv) treatment of free credit balances. The consumer protection amendments provide for a separate reserve computation for proprietary accounts of other domestic and foreign broker-dealers in addition to the reserve computation for “customer accounts.” The purpose is to mitigate contagion in the event of a failed broker-dealer with a large number of broker-dealer customers. The new rules are designed to protect and preserve customer property held at broker-dealers, while mitigating potential exposure of the fund administered by the Securities Investor Protection Corporation (SIPC) which makes advances to customers whose securities or cash are unable to be returned by a failed broker-dealer. The proposal also expands the definition of “qualified securities” to include unaffiliated money market funds and also permits the inclusion of futures and futures options on broad-based securities indices in portfolio margin accounts and gives customers Securities Investor Protection Act of 1970 (SIPA) protections. The amendments to the net capital rule requires broker-dealers to: (i) account for certain liabilities or treat certain capital contributions as liabilities, (ii) account for certain excess fidelity bond deductibles, (iii) if solvent, cease conducting a securities business and provide notice under the proposed amendment to Rule 17a-11, (iv) eliminate the qualification on Commission orders restricting withdrawals, advances, and unsecured loans to instances where recent withdrawals, advances or loans, in the aggregate, exceed thirty percent of the broker-dealer’s excess net capital, (v) make permanent the reduced net capital requirements under Appendix A for market makers, and (vi) lower the haircut for money market funds. Among the technical requirements proposed was a mandate that broker-dealer firms document risk management procedures. Comments should be received by March 18, 2007. For more information, view the release at http://www.sec.gov/rules/proposed/2007/34-55431.pdf.
Bill Introduced to Require Disclosure of Company IRS-Stated Earnings. On March 6, Rep. Paul Gillmor (R – Ohio) reintroduced a bill (H.R. 1341) to require publicly traded companies to disclose to shareholders exact income information disclosed annually to the Internal Revenue Service (IRS) for taxation. H.R. 1341, entitled the Honest Income Disclosure Act, is almost identical to H.R. 5469 of the 109th Congress, which was introduced by Rep. Gillmor in 2006 and failed to be voted out of committee. For more information on the current bill, see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.01341:.
COURTS
Class Certification Granted in FCRA Firm Offer Case. A federal district court in Illinois has certified a class of 8380 members in a Fair Credit Reporting Act (FCRA) “firm offer of credit” class action lawsuit. Larson v. Capital One Auto Finance, Inc., No. 06-C-1174 (N.D. Ill. Mar. 5, 2007). In this case the defendant, Capital One Auto Finance, sent direct-mail solicitations to Illinois consumers, notifying them that they had been pre-approved for automobile financing. The mailings stated to the consumers that the “pre-screened” offer was “based on information in your credit report indicating that you meet certain criteria.” The mailer also stated that the recipient was pre-approved for a loan of up to $25,000, provided that the recipient was at least 18 years old, earned at least $1500 a month, and did not have a pending bankruptcy. The class representative claimed that the defendants willfully violated the FCRA because they accessed the recipients’ credit reports without complying with the FCRA’s “firm offer of credit” exception. The defendants claimed that class certification was inappropriate since the named plaintiff did not read the mailing in its entirety, did not call to learn his pre-approval amount, and did not apply for financing. The court rejected these claims, stating, “[w]hether a proposed credit offer qualifies as a ‘firm offer of credit’ under the FCRA depends on the terms of the offer, not the circumstances or responses of the recipients.” For a copy of this opinion, please contact .
Privacy Disclosure Violates FDCPA. A federal court in Illinois granted summary judgment to plaintiffs in a class action alleging Fair Debt Collection Practices Act (FDCPA) violations in a privacy notice. Hernandez v. Midland Credit Management, Inc., No. 04-C-7844 (N.D. Ill., opinion issued March 6, 2007). The defendant in Hernandez issued privacy notices along with its dunning letters. The notices stated that the defendant reserved the right to share nonpublic personal information about the debtor gathered in the course of debt collection with nonaffiliated third parties, unless the debtor affirmatively opted out in writing. Plaintiff brought suit, alleging that the privacy notices violated the FDCPA, 15 U.S.C. §§1692 et seq. In June 2006, the court certified a class of Illinois and Wisconsin residents who received a similar privacy notice. Ruling on the subsequent cross motions for summary judgment, the Court found that defendant’s privacy notice did indeed violate the FDCPA, which generally prohibits communications in connection with the collection of any debt between a debt collector and persons other than the debtor and certain parties such as attorneys of the debtor and the creditor. In so doing, the Court rejected defendant’s assertion that the issuance of the privacy notice had nothing to do with the collection of the debt, and instead was an effort to comply with the privacy disclosures mandated by the Gramm-Leach- Bliley Act (GLB), 15 U.S.C. §§6801 et seq. Whether or not the disclosure complied with the GLB, the Court found that its issuance in conjunction with the dunning letter sufficed to violate the FDCPA. The Court also denied defendant’s motion for summary judgment based on the bona fide error defense, reserving that issue for trial. For a copy of this opinion, please contact .
Federal District Court Rejects “Value” Test and Material Terms Requirement for FCRA Firm Offers. The U.S. District Court for the Southern District of New York held that a prescreened solicitation that stated that the consumer was “pre-qualified for a new home mortgage or for a refinance of [her] existing mortgage with loan amounts up to $417,000 or more,” and did not specify the terms of the offer, qualified as a “firm offer” under FCRA. Nasca v. J.P. Morgan Chase Bank, No. 06 Civ. 3472, 2007 WL 678407 (S.D.N.Y. Mar. 5, 2007). The court held that the lender had made a valid firm offer, noting that the statute specifically requires disclosure of any collateral requirements and stated that, [“b]ecause Congress explicitly required that creditors disclose that one specific credit term,” it would not imply that other credit terms must also be disclosed. The court also specifically rejected the holding in the U.S. Court of Appeals’ Cole v. U.S. Capital case that an offer that does not have “sufficient value” does not qualify as a firm offer, stating that that holding went beyond the statutory requirements for a valid firm offer. For a copy of this decision please contact .
Court Approves Insurance Adverse Action Settlement. The U.S. District Court for the District of Oregon approved a settlement in the FCRA insurance adverse action case of Rausch v. Hartford Financial Services Group, No. 01-CV-1529, 2007 WL 671334 (D. Or. Feb. 26, 2007). The case involves the same substantive question as two consolidated cases that are currently under consideration by the Supreme Court: Safeco Insurance Co. v. Burr, No. 06-84, and GEICO General Insurance Co. v. Edo, No. 06-100 – whether FCRA requires an insurance company to offer a consumer a higher rate than it would otherwise have offered if the information in the consumer’s credit report had been more favorable (for further discussion see the January 19th issue of InfoBytes). For a copy of this decision please contact .
Maryland Court of Appeals Holds that a Mortgagor's State Law Contract Claim Based on Mortgagee's Violation of FHA Loan Regulations is Impermissible Although Foreclosure Injunction May be Pursued. On March 13, 2007, the Maryland Court of Appeals held that the borrower mortgagor "may not advance, as an affirmative cause of action, a state law contract claim based on an asserted breach of the HUD regulations alluded to in his FHA form deed of trust, but may raise a violation of the regulations in pursuit of an injunction blocking foreclosure." Wells Fargo Home Mortgage, Inc. v. Neal, 2007 Md. Lexis 95 (Md. March 13, 2007). In arriving at this decision, the court reasoned that HUD regulations do not directly control the relationship between the mortgagor and the mortgagee but rather between HUD and the mortgagee and therefore do not provide a private right of action. Looking to a 1989 HUD statement of policy, the court did, however, determine that a violation of mandatory loss mitigation rules applicable to mortgagees does provide the mortgagor an affirmative defense to foreclosure within Maryland's "injunctive relief apparatus" for challenging foreclosures. As a consequence, the court concluded that the legal fiction that no default exists can be maintained until the mortgagee "complies with the statutory and regulatory imperatives to pursue loss mitigation prior to foreclosure." For a copy of this opinion, please contact .
Court Rejects ECOA, FCRA Claims Based on Higher Interest Rate at Closing Than in Good Faith Estimate. In a recent case, a federal district court in Michigan rejected a plaintiff's ECOA and FCRA claims against a mortgage company after the plaintiff defaulted on a loan whose interest rate, which was not locked in, ended up higher on the closing documents than the rates and payments quoted on the Good Faith Estimate. Yoder v. Waterfield Financial Corp., 2007 WL 614200, Case No. 05-cv-407 (W.D. Mich., Feb. 23, 2007). Plaintiffs claimed that the defendant violated ECOA by failing to provide an adverse action notice after the interest rate in the final loan documents were higher than those provided in the Good Faith Estimate. Surprisingly, the judge rejected the claim based on the reasoning that the Plaintiffs were not members of a class protected by ECOA, which should not affect a claim based on failure to provide an adverse action notice. The judge also rejected the FCRA claims, stating that the fact that a higher interest rate was charged at the time of closing than at the time of application, especially since the plaintiffs did not lock in the interest rate at the time of application, does not create an adverse action under FCRA. For a copy of the decision, please contact .
CDA Bars Suit Against Owner of Internet Message Board; Plaintiff Alleged Failure to Withdraw Defamatory Postings. On February 13, 2007, Judge Edmunds of the Eastern District of Michigan held that the Communications Decency Act of 1996 (CDA) provides immunity to internet service providers from liability for content provided by third parties. Eckert v. Microsoft Corporation, Case No. 06-11888 (E.D. Mich., order adopting the Report and Recommendation of the Magistrate Judge issued Feb. 13, 2007). The plaintiff in Eckert alleged that third parties posted defamatory statements about him on defendant’s message board, and sued defendant for allegedly failing to remove the actionable content despite requests to do so. The Court dismissed plaintiff’s claims, holding that – even assuming that the content constituted defamation – the defendant could not be held liable for the third party content. Noting a lack of Sixth Circuit precedent, but citing Craigslist and Zeran (most recently reported in the January 19th issue of InfoBytes), the Court held that Section 230(c) of the CDA immunizes service providers, like the defendant, against suits that seek to hold them liable as publishers of actionable third-party content. Quite simply, “lawsuits seeking to hold a service provider liable for its exercise of a publisher’s traditional editorial functions – such as deciding whether to publish, withdraw, postpone or alter content – are barred” (quoting Zeran). For a copy of any of these decisions, please contact .
Bank Has No Duty to Investigate Disputed Credit Item Until Notified of Dispute by Credit Bureau. The United States District Court for the Northern District of Texas held on February 27 that a plaintiff must show actual evidence that a bank has received notice from a consumer reporting agency that information the bank had furnished to the consumer reporting agency had been disputed in order to establish a cause of action under the Fair Credit Reporting Act (FCRA). Notley v. Sterling Bank, No. 3:06-CV-0536-G, 2007 WL 603411 (N.D.Tex. February 27, 2007). The consumers alleged that the bank violated FCRA by reporting incomplete and inaccurate information to a consumer reporting agency regarding the consumers’ performance on a home improvement loan. The Court held that the consumer must prove both that a furnisher of information received notice from a consumer reporting agency of a disputed credit item, and that it failed to investigate the dispute properly or to report the results of the investigation. It refused to consider circumstantial evidence offered by the consumers as to what might have occurred, holding that a plaintiff must present actual copies of the notices from the consumer reporting agency showing when the bank was notified. For more information, including a copy of the opinion, please contact .
STATE ISSUES
Minnesota Department of Commerce Announces Actions Against Title Insurance Affiliated Business Arrangements. On March 7, 2007, the Minnesota Department of Commerce announced settlements involving kickback schemes in which title insurance companies set up alleged sham affiliated businesses with real estate agents, mortgage originators and developers in order to get around state and federal laws prohibiting direct payments for referrals. With respect to the largest settlement, investigators identified 35 affiliated business arrangements between First American Title Insurance Co. and 600 referral partners that included real estate agents and brokers, mortgage originators, building contractors, land developers and others. Typically, the partnerships or limited liability companies were set up offering 80% ownership to referral partners while First American retained the remaining 20%. Allegedly, First American managed the companies without receiving any compensation for its services. First American set up offices, hired and trained employees and supervised employees to provide closing services. Referral partners and associates were encouraged to direct their customers to the affiliated businesses for such closing services in return for an annual dividend. Moreover, the title services of the JVs were not marketed to the general public or persons unrelated to the referral partners. The Department of Commerce and the U.S. Department of Housing and Urban Development (HUD) found that First American’s JVs were “not bona fide settlement service providers within the meaning of RESPA.” First American agreed to pay a civil penalty of $500,000 and to cease and desist from accepting new business through the JVs within 30 days. Actions were also announced against four other title insurance companies. In one, the Department of Commerce and HUD on March 5 found that Gibraltar Title’s web site indicated that Gibraltar was “an independent agency, unaffiliated with any lender, builder or real estate broker.” Instead, Gibraltar allegedly “paid things of value for the lender’s referral of business, and, in certain instances, [had] failed to disclose to their clients their affiliated business arrangements with lenders.” Gibraltar agreed to reimburse $100,000 to customers and pay a $10,000 civil penalty to the state of Minnesota. The Minnesota Department of Commerce indicated that it is working in coordination with the U.S. Department of Housing and Urban Development. For the official Department of Commerce press release, see http://www.state.mn.us/portal/mn/jsp/content.do?id=-536882793&subchannel=null&sc2=null&sc3=null&contentid=536913586 &contenttype=EDITORIAL&programid=536912012&agency=Commerce.
NY Attorney General Alleges Kickbacks from Student Lenders to Universities. On March 15, New York Attorney General Andrew Cuomo announced he had sent a letter to the presidents of more than 400 colleges and universities across the United States expressing concern that business relationships between many schools and many lenders may be “tainted by possible conflicts of interest.” Attorney General Cuomo’s office is currently engaged in an ongoing, nation-wide investigation into student lending practices. While the letter made no direct accusations, and were based on “preliminary findings,” they warned of common “financial arrangements and relationships between lenders and schools, such as revenue sharing and referral fees, [that are] troubling as a whole and burdened with a strong potential for conflicts of interest.” Some of the “problematic practices” the letter identified include (i) revenue sharing and referral fees, (ii) agreements between lenders and schools for services, benefits or payments in kind without disclosing the terms to potential borrowers (e.g., “preferred lender lists” where schools reap benefits for “steering” student loans to specific lenders), (iii) emoluments to a school by a lender to be included in a “preferred lender” list, (iv) establishment of a preferred lender list without disclosing to students the basis of lender selection, benefits of using preferred lenders, or relationships between preferred lenders, (v) failure to disclose that advertised repayment benefits may not continue if the loan is sold on the secondary market, and (vi) denials of, or impediments to, a student loan borrower’s choice of lender. The letter also informed recipients of an informational pamphlet to student borrowers available from the Attorney General’s Office to increase awareness of these practices. For the official press release, see http://www.oag.state.ny.us/press/2007/feb/feb01a_07.html.
Wyoming Enacts Data Security Breach Law. On March 1, the State of Wyoming enacted S.B. 53 which, among other things, (i) obligates institutions to inform consumers of a breach if “misuse of personal identifying information… has occurred or is reasonably likely to occur,” (ii) gives consumers power to implement a “security freeze” of their credit report for a fee, and (iii) requires that such freezes must be provided free of charge to consumers who are “victims of identity theft.” This law will become effective on July 1, 2007. For the full text of this bill, please contact .
New Century Trading Suspended, Cease and Desist Orders from States. On March 13, the New York Stock Exchange (NYSE) halted trading of New Century Financial Corporation, citing recent disclosures of the company’s of the liquidity position, and has started the process to have New Century delisted. In disclosures to the Securities and Exchange Commission (SEC) that same day, New Century revealed that it had received cease and desist orders from state regulators in Massachusetts, New Hampshire, New Jersey, and New York due to New Century’s inability to fund some loans closed in those states. The cease and desist orders direct New Century to, among other things, cease (i) violating certain state laws, (ii) accepting applications for mortgage loans, and (iii) paying bonuses or dividends to officers and shareholders. Some of the orders also direct New Century to (i) establish escrow accounts to hold fees relating to pending mortgage applications and (ii) transfer to other lenders outstanding and unfunded applications. The next day, March 14, an Ohio judge granted the Ohio Attorney General’s request for a temporary restraining order preventing New Century from operating in that state, over concerns about the company’s ability to fund loans. For further information, see the SEC’s EDGAR database at http://www.sec.gov/edgar/searchedgar/webusers.htm or contact .
MISCELLANY
Banco Delta Asia Cut Off From U.S. Financial System. On March 14, the U.S. Department of Treasury announced rulemaking to force U.S. financial institutions to sever ties to Banco Delta Asia (BDA). The finalized rule will take effect 30 days after its announcement, on April 13, at which point “U.S. financial institutions will be prohibited from opening or maintaining correspondent accounts for or on behalf of BDA. This action bars BDA from accessing the U.S. financial System, either directly or indirectly.” The Treasury Department had been engaged in the investigation of BDA since September 2005 when the Financial Crimes Enforcement Network (FinCEN) first raised concerns of BDA’s involvement in money laundering. The official Treasury Department Press Release on the finalized rule against Banco Delta Asia may be viewed at http://www.treas.gov/press/releases/hp315.htm. A copy of the rule can be found at the FinCEN website at http://www.fincen.gov/bda_final_rule.pdf.
FIRM NEWS
On March 17th, Jerry Buckley led a panel on “RESPA Developments and Enforcement” at the Spring Meeting of the Consumer Financial Services Committee of the American Bar Association in Washington, D.C. HUD enforcement attorney Peter Race participated on Jerry’s panel.
Margo Tank will be participating in a web seminar entitled “Legal Requirements for E-Signatures: Will your electronic records stand up in court?” on March 21. The 60-minute presentation will address several frequently asked questions regarding the enforceability and reliability of electronic transactions and records. For more information, go to http://www.silanis.com/site/corporate/seminars.php?id=491.
On Thursday, April 19, John Kromer and Clinton Rockwell will be speaking on a Pratt Audio Conference Series regarding non-traditional mortgage loans and federal and state agency guidance.
GSE Regulatory Reform Legislation Introduced. On March 9, Rep. Barney Frank (D – Mass.), Chairman of the Financial Services Committee, introduced a bill (H.R. 1427) to create a new regulator with new powers, including the authority to set capital retention requirements, to oversee the government sponsored enterprises (GSEs – Fannie Mae and Freddie Mac) and the Federal Home Loan Banks. The bill, entitled the Federal Housing Finance Reform Act of 2007, would if enacted establish the Federal Housing Finance Agency, which would have the power to establish risk-based capital retention requirements “to ensure that the enterprises operate in a safe and sound manner.” Under the act, GSEs would also be required to submit new lending products to the new agency for a 30-day public comment period and agency approval. The act would also establish an affordable housing fund. The bill was cosponsored by three other members, including two Republicans, of the Financial Services Committee to which it has been referred. For more information on H.R. 1427, see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.01427:.
Minnesota Department of Commerce Announces Actions Against Title Insurance Affiliated Business Arrangements. On March 7, 2007, the Minnesota Department of Commerce announced settlements involving kickback schemes in which title insurance companies set up alleged sham affiliated businesses with real estate agents, mortgage originators and developers in order to get around state and federal laws prohibiting direct payments for referrals. With respect to the largest settlement, investigators identified 35 affiliated business arrangements between First American Title Insurance Co. and 600 referral partners that included real estate agents and brokers, mortgage originators, building contractors, land developers and others. Typically, the partnerships or limited liability companies were set up offering 80% ownership to referral partners while First American retained the remaining 20%. Allegedly, First American managed the companies without receiving any compensation for its services. First American set up offices, hired and trained employees and supervised employees to provide closing services. Referral partners and associates were encouraged to direct their customers to the affiliated businesses for such closing services in return for an annual dividend. Moreover, the title services of the JVs were not marketed to the general public or persons unrelated to the referral partners. The Department of Commerce and the U.S. Department of Housing and Urban Development (HUD) found that First American’s JVs were “not bona fide settlement service providers within the meaning of RESPA.” First American agreed to pay a civil penalty of $500,000 and to cease and desist from accepting new business through the JVs within 30 days. Actions were also announced against four other title insurance companies. In one, the Department of Commerce and HUD on March 5 found that Gibraltar Title’s web site indicated that Gibraltar was “an independent agency, unaffiliated with any lender, builder or real estate broker.” Instead, Gibraltar allegedly “paid things of value for the lender’s referral of business, and, in certain instances, [had] failed to disclose to their clients their affiliated business arrangements with lenders.” Gibraltar agreed to reimburse $100,000 to customers and pay a $10,000 civil penalty to the state of Minnesota. The Minnesota Department of Commerce indicated that it is working in coordination with the U.S. Department of Housing and Urban Development. For the official Department of Commerce press release, see http://www.state.mn.us/portal/mn/jsp/content.do?id=-536882793&subchannel=null&sc2=null&sc3=null&contentid=536913586 &contenttype=EDITORIAL&programid=536912012&agency=Commerce.
Federal District Court Rejects “Value” Test and Material Terms Requirement for FCRA Firm Offers. The U.S. District Court for the Southern District of New York held that a prescreened solicitation that stated that the consumer was “pre-qualified for a new home mortgage or for a refinance of [her] existing mortgage with loan amounts up to $417,000 or more,” and did not specify the terms of the offer, qualified as a “firm offer” under FCRA. Nasca v. J.P. Morgan Chase Bank, No. 06 Civ. 3472, 2007 WL 678407 (S.D.N.Y. Mar. 5, 2007). The court held that the lender had made a valid firm offer, noting that the statute specifically requires disclosure of any collateral requirements and stated that, [“b]ecause Congress explicitly required that creditors disclose that one specific credit term,” it would not imply that other credit terms must also be disclosed. The court also specifically rejected the holding in the U.S. Court of Appeals’ Cole v. U.S. Capital case that an offer that does not have “sufficient value” does not qualify as a firm offer, stating that that holding went beyond the statutory requirements for a valid firm offer. For a copy of this decision please contact .
Maryland Court of Appeals Holds that a Mortgagor's State Law Contract Claim Based on Mortgagee's Violation of FHA Loan Regulations is Impermissible Although Foreclosure Injunction May be Pursued. On March 13, 2007, the Maryland Court of Appeals held that the borrower mortgagor "may not advance, as an affirmative cause of action, a state law contract claim based on an asserted breach of the HUD regulations alluded to in his FHA form deed of trust, but may raise a violation of the regulations in pursuit of an injunction blocking foreclosure." Wells Fargo Home Mortgage, Inc. v. Neal, 2007 Md. Lexis 95 (Md. March 13, 2007). In arriving at this decision, the court reasoned that HUD regulations do not directly control the relationship between the mortgagor and the mortgagee but rather between HUD and the mortgagee and therefore do not provide a private right of action. Looking to a 1989 HUD statement of policy, the court did, however, determine that a violation of mandatory loss mitigation rules applicable to mortgagees does provide the mortgagor an affirmative defense to foreclosure within Maryland's "injunctive relief apparatus" for challenging foreclosures. As a consequence, the court concluded that the legal fiction that no default exists can be maintained until the mortgagee "complies with the statutory and regulatory imperatives to pursue loss mitigation prior to foreclosure." For a copy of this opinion, please contact .
New Century Trading Suspended, Cease and Desist Orders from States. On March 13, the New York Stock Exchange (NYSE) halted trading of New Century Financial Corporation, citing recent disclosures of the company’s of the liquidity position, and has started the process to have New Century delisted. In disclosures to the Securities and Exchange Commission (SEC) that same day, New Century revealed that it had received cease and desist orders from state regulators in Massachusetts, New Hampshire, New Jersey, and New York due to New Century’s inability to fund some loans closed in those states. The cease and desist orders direct New Century to, among other things, cease (i) violating certain state laws, (ii) accepting applications for mortgage loans, and (iii) paying bonuses or dividends to officers and shareholders. Some of the orders also direct New Century to (i) establish escrow accounts to hold fees relating to pending mortgage applications and (ii) transfer to other lenders outstanding and unfunded applications. The next day, March 14, an Ohio judge granted the Ohio Attorney General’s request for a temporary restraining order preventing New Century from operating in that state, over concerns about the company’s ability to fund loans. For further information, see the SEC’s EDGAR database at http://www.sec.gov/edgar/searchedgar/webusers.htm or contact .
Court Rejects ECOA, FCRA Claims Based on Higher Interest Rate at Closing Than in Good Faith Estimate. In a recent case, a federal district court in Michigan rejected a plaintiff's ECOA and FCRA claims against a mortgage company after the plaintiff defaulted on a loan whose interest rate, which was not locked in, ended up higher on the closing documents than the rates and payments quoted on the Good Faith Estimate. Yoder v. Waterfield Financial Corp., 2007 WL 614200, Case No. 05-cv-407 (W.D. Mich., Feb. 23, 2007). Plaintiffs claimed that the defendant violated ECOA by failing to provide an adverse action notice after the interest rate in the final loan documents were higher than those provided in the Good Faith Estimate. Surprisingly, the judge rejected the claim based on the reasoning that the Plaintiffs were not members of a class protected by ECOA, which should not affect a claim based on failure to provide an adverse action notice. The judge also rejected the FCRA claims, stating that the fact that a higher interest rate was charged at the time of closing than at the time of application, especially since the plaintiffs did not lock in the interest rate at the time of application, does not create an adverse action under FCRA. For a copy of the decision, please contact .
Bank Has No Duty to Investigate Disputed Credit Item Until Notified of Dispute by Credit Bureau. The United States District Court for the Northern District of Texas held on February 27 that a plaintiff must show actual evidence that a bank has received notice from a consumer reporting agency that information the bank had furnished to the consumer reporting agency had been disputed in order to establish a cause of action under the Fair Credit Reporting Act (FCRA) Notley v. Sterling Bank, No. 3:06-CV-0536-G, 2007 WL 603411 (N.D.Tex. February 27, 2007). The consumers alleged that the bank violated FCRA by reporting incomplete and inaccurate information to a consumer reporting agency regarding the consumers’ performance on a home improvement loan. The Court held that the consumer must prove both that a furnisher of information received notice from a consumer reporting agency of a disputed credit item, and that it failed to investigate the dispute properly or to report the results of the investigation. It refused to consider circumstantial evidence offered by the consumers as to what might have occurred, holding that a plaintiff must present actual copies of the notices from the consumer reporting agency showing when the bank was notified. For more information, including a copy of the opinion, please contact .
Wal-Mart Withdraws ILC Application. Wal-Mart Stores, Inc. announced it has withdrawn its application to charter an Industrial Loan Company (ILC). Wal-Mart executives stated the withdrawal was due to the Federal Deposit Insurance Corporation’s (FDIC) recent extension of its freeze on ILC applications for insurance by “commercial companies” (reported in the February 2nd issue of InfoBytes). In an official statement responding to Wal-Mart’s announcement, FDIC Chairman Sheila Bair said “Wal-Mart made a wise choice.” For Wal-Mart’s press release, see http://www.walmartfacts.com/articles/4900.aspx.
Bank Has No Duty to Investigate Disputed Credit Item Until Notified of Dispute by Credit Bureau. The United States District Court for the Northern District of Texas held on February 27 that a plaintiff must show actual evidence that a bank has received notice from a consumer reporting agency that information the bank had furnished to the consumer reporting agency had been disputed in order to establish a cause of action under the Fair Credit Reporting Act (FCRA). Notley v. Sterling Bank, No. 3:06-CV-0536-G, 2007 WL 603411 (N.D.Tex. February 27, 2007). The consumers alleged that the bank violated FCRA by reporting incomplete and inaccurate information to a consumer reporting agency regarding the consumers’ performance on a home improvement loan. The Court held that the consumer must prove both that a furnisher of information received notice from a consumer reporting agency of a disputed credit item, and that it failed to investigate the dispute properly or to report the results of the investigation. It refused to consider circumstantial evidence offered by the consumers as to what might have occurred, holding that a plaintiff must present actual copies of the notices from the consumer reporting agency showing when the bank was notified. For more information, including a copy of the opinion, please contact .
Banco Delta Asia Cut Off From U.S. Financial System. On March 14, the U.S. Department of Treasury announced rulemaking to force U.S. financial institutions to sever ties to Banco Delta Asia (BDA). The finalized rule will take effect 30 days after its announcement, on April 13, at which point “U.S. financial institutions will be prohibited from opening or maintaining correspondent accounts for or on behalf of BDA. This action bars BDA from accessing the U.S. financial System, either directly or indirectly.” The Treasury Department had been engaged in the investigation of BDA since September 2005 when the Financial Crimes Enforcement Network (FinCEN) first raised concerns of BDA’s involvement in money laundering. The official Treasury Department Press Release on the finalized rule against Banco Delta Asia may be viewed at http://www.treas.gov/press/releases/hp315.htm. A copy of the rule can be found at the FinCEN website at http://www.fincen.gov/bda_final_rule.pdf.
NY Attorney General Alleges Kickbacks from Student Lenders to Universities. On March 15, New York Attorney General Andrew Cuomo announced he had sent a letter to the presidents of more than 400 colleges and universities across the United States expressing concern that business relationships between many schools and many lenders may be “tainted by possible conflicts of interest.” Attorney General Cuomo’s office is currently engaged in an ongoing, nation-wide investigation into student lending practices. While the letter made no direct accusations, and were based on “preliminary findings,” they warned of common “financial arrangements and relationships between lenders and schools, such as revenue sharing and referral fees, [that are] troubling as a whole and burdened with a strong potential for conflicts of interest.” Some of the “problematic practices” the letter identified include (i) revenue sharing and referral fees, (ii) agreements between lenders and schools for services, benefits or payments in kind without disclosing the terms to potential borrowers (e.g., “preferred lender lists” where schools reap benefits for “steering” student loans to specific lenders), (iii) emoluments to a school by a lender to be included in a “preferred lender” list, (iv) establishment of a preferred lender list without disclosing to students the basis of lender selection, benefits of using preferred lenders, or relationships between preferred lenders, (v) failure to disclose that advertised repayment benefits may not continue if the loan is sold on the secondary market, and (vi) denials of, or impediments to, a student loan borrower’s choice of lender. The letter also informed recipients of an informational pamphlet to student borrowers available from the Attorney General’s Office to increase awareness of these practices. For the official press release, see http://www.oag.state.ny.us/press/2007/feb/feb01a_07.html.
Class Certification Granted in FCRA Firm Offer Case. A federal district court in Illinois has certified a class of 8380 members in a Fair Credit Reporting Act (FCRA) “firm offer of credit” class action lawsuit. Larson v. Capital One Auto Finance, Inc., No. 06-C-1174 (N.D. Ill. Mar. 5, 2007). In this case the defendant, Capital One Auto Finance, sent direct-mail solicitations to Illinois consumers, notifying them that they had been pre-approved for automobile financing. The mailings stated to the consumers that the “pre-screened” offer was “based on information in your credit report indicating that you meet certain criteria.” The mailer also stated that the recipient was pre-approved for a loan of up to $25,000, provided that the recipient was at least 18 years old, earned at least $1500 a month, and did not have a pending bankruptcy. The class representative claimed that the defendants willfully violated the FCRA because they accessed the recipients’ credit reports without complying with the FCRA’s “firm offer of credit” exception. The defendants claimed that class certification was inappropriate since the named plaintiff did not read the mailing in its entirety, did not call to learn his pre-approval amount, and did not apply for financing. The court rejected these claims, stating, “[w]hether a proposed credit offer qualifies as a ‘firm offer of credit’ under the FCRA depends on the terms of the offer, not the circumstances or responses of the recipients.” For a copy of this opinion, please contact .
Class Certification Granted in FCRA Firm Offer Case. A federal district court in Illinois has certified a class of 8380 members in a Fair Credit Reporting Act (FCRA) “firm offer of credit” class action lawsuit. Larson v. Capital One Auto Finance, Inc., No. 06-C-1174 (N.D. Ill. Mar. 5, 2007). In this case the defendant, Capital One Auto Finance, sent direct-mail solicitations to Illinois consumers, notifying them that they had been pre-approved for automobile financing. The mailings stated to the consumers that the “pre-screened” offer was “based on information in your credit report indicating that you meet certain criteria.” The mailer also stated that the recipient was pre-approved for a loan of up to $25,000, provided that the recipient was at least 18 years old, earned at least $1500 a month, and did not have a pending bankruptcy. The class representative claimed that the defendants willfully violated the FCRA because they accessed the recipients’ credit reports without complying with the FCRA’s “firm offer of credit” exception. The defendants claimed that class certification was inappropriate since the named plaintiff did not read the mailing in its entirety, did not call to learn his pre-approval amount, and did not apply for financing. The court rejected these claims, stating, “[w]hether a proposed credit offer qualifies as a ‘firm offer of credit’ under the FCRA depends on the terms of the offer, not the circumstances or responses of the recipients.” For a copy of this opinion, please contact .
Privacy Disclosure Violates FDCPA. A federal court in Illinois granted summary judgment to plaintiffs in a class action alleging Fair Debt Collection Practices Act (FDCPA) violations in a privacy notice. Hernandez v. Midland Credit Management, Inc., No. 04-C-7844 (N.D. Ill., opinion issued March 6, 2007). The defendant in Hernandez issued privacy notices along with its dunning letters. The notices stated that the defendant reserved the right to share nonpublic personal information about the debtor gathered in the course of debt collection with nonaffiliated third parties, unless the debtor affirmatively opted out in writing. Plaintiff brought suit, alleging that the privacy notices violated the FDCPA, 15 U.S.C. §§1692 et seq. In June 2006, the court certified a class of Illinois and Wisconsin residents who received a similar privacy notice. Ruling on the subsequent cross motions for summary judgment, the Court found that defendant’s privacy notice did indeed violate the FDCPA, which generally prohibits communications in connection with the collection of any debt between a debt collector and persons other than the debtor and certain parties such as attorneys of the debtor and the creditor. In so doing, the Court rejected defendant’s assertion that the issuance of the privacy notice had nothing to do with the collection of the debt, and instead was an effort to comply with the privacy disclosures mandated by the Gramm-Leach- Bliley Act (GLB), 15 U.S.C. §§6801 et seq. Whether or not the disclosure complied with the GLB, the Court found that its issuance in conjunction with the dunning letter sufficed to violate the FDCPA. The Court also denied defendant’s motion for summary judgment based on the bona fide error defense, reserving that issue for trial. For a copy of this opinion, please contact .
Federal District Court Rejects “Value” Test and Material Terms Requirement for FCRA Firm Offers. The U.S. District Court for the Southern District of New York held that a prescreened solicitation that stated that the consumer was “pre-qualified for a new home mortgage or for a refinance of [her] existing mortgage with loan amounts up to $417,000 or more,” and did not specify the terms of the offer, qualified as a “firm offer” under FCRA. Nasca v. J.P. Morgan Chase Bank, No. 06 Civ. 3472, 2007 WL 678407 (S.D.N.Y. Mar. 5, 2007). The court held that the lender had made a valid firm offer, noting that the statute specifically requires disclosure of any collateral requirements and stated that, [“b]ecause Congress explicitly required that creditors disclose that one specific credit term,” it would not imply that other credit terms must also be disclosed. The court also specifically rejected the holding in the U.S. Court of Appeals’ Cole v. U.S. Capital case that an offer that does not have “sufficient value” does not qualify as a firm offer, stating that that holding went beyond the statutory requirements for a valid firm offer. For a copy of this decision please contact .
Court Approves Insurance Adverse Action Settlement. The U.S. District Court for the District of Oregon approved a settlement in the FCRA insurance adverse action case of Rausch v. Hartford Financial Services Group, No. 01-CV-1529, 2007 WL 671334 (D. Or. Feb. 26, 2007). The case involves the same substantive question as two consolidated cases that are currently under consideration by the Supreme Court: Safeco Insurance Co. v. Burr, No. 06-84, and GEICO General Insurance Co. v. Edo, No. 06-100 – whether FCRA requires an insurance company to offer a consumer a higher rate than it would otherwise have offered if the information in the consumer’s credit report had been more favorable (for further discussion see the January 19th issue of InfoBytes). For a copy of this decision please contact .
Maryland Court of Appeals Holds that a Mortgagor's State Law Contract Claim Based on Mortgagee's Violation of FHA Loan Regulations is Impermissible Although Foreclosure Injunction May be Pursued. On March 13, 2007, the Maryland Court of Appeals held that the borrower mortgagor "may not advance, as an affirmative cause of action, a state law contract claim based on an asserted breach of the HUD regulations alluded to in his FHA form deed of trust, but may raise a violation of the regulations in pursuit of an injunction blocking foreclosure." Wells Fargo Home Mortgage, Inc. v. Neal, 2007 Md. Lexis 95 (Md. March 13, 2007). In arriving at this decision, the court reasoned that HUD regulations do not directly control the relationship between the mortgagor and the mortgagee but rather between HUD and the mortgagee and therefore do not provide a private right of action. Looking to a 1989 HUD statement of policy, the court did, however, determine that a violation of mandatory loss mitigation rules applicable to mortgagees does provide the mortgagor an affirmative defense to foreclosure within Maryland's "injunctive relief apparatus" for challenging foreclosures. As a consequence, the court concluded that the legal fiction that no default exists can be maintained until the mortgagee "complies with the statutory and regulatory imperatives to pursue loss mitigation prior to foreclosure." For a copy of this opinion, please contact .
Court Rejects ECOA, FCRA Claims Based on Higher Interest Rate at Closing Than in Good Faith Estimate. In a recent case, a federal district court in Michigan rejected a plaintiff's ECOA and FCRA claims against a mortgage company after the plaintiff defaulted on a loan whose interest rate, which was not locked in, ended up higher on the closing documents than the rates and payments quoted on the Good Faith Estimate. Yoder v. Waterfield Financial Corp., 2007 WL 614200, Case No. 05-cv-407 (W.D. Mich., Feb. 23, 2007). Plaintiffs claimed that the defendant violated ECOA by failing to provide an adverse action notice after the interest rate in the final loan documents were higher than those provided in the Good Faith Estimate. Surprisingly, the judge rejected the claim based on the reasoning that the Plaintiffs were not members of a class protected by ECOA, which should not affect a claim based on failure to provide an adverse action notice. The judge also rejected the FCRA claims, stating that the fact that a higher interest rate was charged at the time of closing than at the time of application, especially since the plaintiffs did not lock in the interest rate at the time of application, does not create an adverse action under FCRA. For a copy of the decision, please contact .
CDA Bars Suit Against Owner of Internet Message Board; Plaintiff Alleged Failure to Withdraw Defamatory Postings. On February 13, 2007, Judge Edmunds of the Eastern District of Michigan held that the Communications Decency Act of 1996 (CDA) provides immunity to internet service providers from liability for content provided by third parties. Eckert v. Microsoft Corporation, Case No. 06-11888 (E.D. Mich., order adopting the Report and Recommendation of the Magistrate Judge issued Feb. 13, 2007). The plaintiff in Eckert alleged that third parties posted defamatory statements about him on defendant’s message board, and sued defendant for allegedly failing to remove the actionable content despite requests to do so. The Court dismissed plaintiff’s claims, holding that – even assuming that the content constituted defamation – the defendant could not be held liable for the third party content. Noting a lack of Sixth Circuit precedent, but citing Craigslist and Zeran (most recently reported in the January 19th issue of InfoBytes), the Court held that Section 230(c) of the CDA immunizes service providers, like the defendant, against suits that seek to hold them liable as publishers of actionable third-party content. Quite simply, “lawsuits seeking to hold a service provider liable for its exercise of a publisher’s traditional editorial functions – such as deciding whether to publish, withdraw, postpone or alter content – are barred” (quoting Zeran). For a copy of any of these decisions, please contact .
Bank Has No Duty to Investigate Disputed Credit Item Until Notified of Dispute by Credit Bureau. The United States District Court for the Northern District of Texas held on February 27 that a plaintiff must show actual evidence that a bank has received notice from a consumer reporting agency that information the bank had furnished to the consumer reporting agency had been disputed in order to establish a cause of action under the Fair Credit Reporting Act (FCRA). Notley v. Sterling Bank, No. 3:06-CV-0536-G, 2007 WL 603411 (N.D.Tex. February 27, 2007). The consumers alleged that the bank violated FCRA by reporting incomplete and inaccurate information to a consumer reporting agency regarding the consumers’ performance on a home improvement loan. The Court held that the consumer must prove both that a furnisher of information received notice from a consumer reporting agency of a disputed credit item, and that it failed to investigate the dispute properly or to report the results of the investigation. It refused to consider circumstantial evidence offered by the consumers as to what might have occurred, holding that a plaintiff must present actual copies of the notices from the consumer reporting agency showing when the bank was notified. For more information, including a copy of the opinion, please contact .
SEC Proposes Amendment to Broker-Dealer Financial Responsibility Rules. The SEC has requested comment on proposed amendments to the financial responsibility rules for broker-dealers to address concerns over the current requirements of net capital (Rule 15c3-1), consumer protection (Rule 15c3-3), books and records (Rule 17a-3 and 17a-4) and notification rules (17a-11) under the Securities and Exchange Act of 1934, Release No. 34-55431. The proposal includes amendments to the consumer protection rule respecting (i) proprietary accounts at another broker-dealer (PAB accounts), (ii) cash deposits at special reserve banks accounts, (iii) allocation of short positions, and (iv) treatment of free credit balances. The consumer protection amendments provide for a separate reserve computation for proprietary accounts of other domestic and foreign broker-dealers in addition to the reserve computation for “customer accounts.” The purpose is to mitigate contagion in the event of a failed broker-dealer with a large number of broker-dealer customers. The new rules are designed to protect and preserve customer property held at broker-dealers, while mitigating potential exposure of the fund administered by the Securities Investor Protection Corporation (SIPC) which makes advances to customers whose securities or cash are unable to be returned by a failed broker-dealer. The proposal also expands the definition of “qualified securities” to include unaffiliated money market funds and also permits the inclusion of futures and futures options on broad-based securities indices in portfolio margin accounts and gives customers Securities Investor Protection Act of 1970 (SIPA) protections. The amendments to the net capital rule requires broker-dealers to: (i) account for certain liabilities or treat certain capital contributions as liabilities, (ii) account for certain excess fidelity bond deductibles, (iii) if solvent, cease conducting a securities business and provide notice under the proposed amendment to Rule 17a-11, (iv) eliminate the qualification on Commission orders restricting withdrawals, advances, and unsecured loans to instances where recent withdrawals, advances or loans, in the aggregate, exceed thirty percent of the broker-dealer’s excess net capital, (v) make permanent the reduced net capital requirements under Appendix A for market makers, and (vi) lower the haircut for money market funds. Among the technical requirements proposed was a mandate that broker-dealer firms document risk management procedures. Comments should be received by March 18, 2007. For more information, view the release at http://www.sec.gov/rules/proposed/2007/34-55431.pdf.
Bill Introduced to Require Disclosure of Company IRS-Stated Earnings. On March 6, Rep. Paul Gillmor (R – Ohio) reintroduced a bill (H.R. 1341) to require publicly traded companies to disclose to shareholders exact income information disclosed annually to the Internal Revenue Service (IRS) for taxation. H.R. 1341, entitled the Honest Income Disclosure Act, is almost identical to H.R. 5469 of the 109th Congress, which was introduced by Rep. Gillmor in 2006 and failed to be voted out of committee. For more information on the current bill, see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.01341:.
Court Approves Insurance Adverse Action Settlement. The U.S. District Court for the District of Oregon approved a settlement in the FCRA insurance adverse action case of Rausch v. Hartford Financial Services Group, No. 01-CV-1529, 2007 WL 671334 (D. Or. Feb. 26, 2007). The case involves the same substantive question as two consolidated cases that are currently under consideration by the Supreme Court: Safeco Insurance Co. v. Burr, No. 06-84, and GEICO General Insurance Co. v. Edo, No. 06-100 – whether FCRA requires an insurance company to offer a consumer a higher rate than it would otherwise have offered if the information in the consumer’s credit report had been more favorable (for further discussion see the January 19th issue of InfoBytes). For a copy of this decision please contact .
Minnesota Department of Commerce Announces Actions Against Title Insurance Affiliated Business Arrangements. On March 7, 2007, the Minnesota Department of Commerce announced settlements involving kickback schemes in which title insurance companies set up alleged sham affiliated businesses with real estate agents, mortgage originators and developers in order to get around state and federal laws prohibiting direct payments for referrals. With respect to the largest settlement, investigators identified 35 affiliated business arrangements between First American Title Insurance Co. and 600 referral partners that included real estate agents and brokers, mortgage originators, building contractors, land developers and others. Typically, the partnerships or limited liability companies were set up offering 80% ownership to referral partners while First American retained the remaining 20%. Allegedly, First American managed the companies without receiving any compensation for its services. First American set up offices, hired and trained employees and supervised employees to provide closing services. Referral partners and associates were encouraged to direct their customers to the affiliated businesses for such closing services in return for an annual dividend. Moreover, the title services of the JVs were not marketed to the general public or persons unrelated to the referral partners. The Department of Commerce and the U.S. Department of Housing and Urban Development (HUD) found that First American’s JVs were “not bona fide settlement service providers within the meaning of RESPA.” First American agreed to pay a civil penalty of $500,000 and to cease and desist from accepting new business through the JVs within 30 days. Actions were also announced against four other title insurance companies. In one, the Department of Commerce and HUD on March 5 found that Gibraltar Title’s web site indicated that Gibraltar was “an independent agency, unaffiliated with any lender, builder or real estate broker.” Instead, Gibraltar allegedly “paid things of value for the lender’s referral of business, and, in certain instances, [had] failed to disclose to their clients their affiliated business arrangements with lenders.” Gibraltar agreed to reimburse $100,000 to customers and pay a $10,000 civil penalty to the state of Minnesota. The Minnesota Department of Commerce indicated that it is working in coordination with the U.S. Department of Housing and Urban Development. For the official Department of Commerce press release, see http://www.state.mn.us/portal/mn/jsp/content.do?id=-536882793&subchannel=null&sc2=null&sc3=null&contentid=536913586 &contenttype=EDITORIAL&programid=536912012&agency=Commerce.
CDA Bars Suit Against Owner of Internet Message Board; Plaintiff Alleged Failure to Withdraw Defamatory Postings. On February 13, 2007, Judge Edmunds of the Eastern District of Michigan held that the Communications Decency Act of 1996 (CDA) provides immunity to internet service providers from liability for content provided by third parties. Eckert v. Microsoft Corporation, Case No. 06-11888 (E.D. Mich., order adopting the Report and Recommendation of the Magistrate Judge issued Feb. 13, 2007). The plaintiff in Eckert alleged that third parties posted defamatory statements about him on defendant’s message board, and sued defendant for allegedly failing to remove the actionable content despite requests to do so. The Court dismissed plaintiff’s claims, holding that – even assuming that the content constituted defamation – the defendant could not be held liable for the third party content. Noting a lack of Sixth Circuit precedent, but citing Craigslist and Zeran (most recently reported in the January 19th issue of InfoBytes), the Court held that Section 230(c) of the CDA immunizes service providers, like the defendant, against suits that seek to hold them liable as publishers of actionable third-party content. Quite simply, “lawsuits seeking to hold a service provider liable for its exercise of a publisher’s traditional editorial functions – such as deciding whether to publish, withdraw, postpone or alter content – are barred” (quoting Zeran). For a copy of any of these decisions, please contact .
Security Credit Freeze Bill Introduced in Senate. On March 7, Sen. Mark Pryor (D – Ark.) introduced a bill (S. 608) that, under federal law, would give consumers power to impose a “security freeze” on their credit report. S. 608, entitled the Consumer ID Protection and Security Act, would allow credit reporting agencies three days to request “proper identification” from a consumer requesting or lifting a credit freeze and three more days to implement the consumer's request upon receipt of such identification. Credit reporting agencies could not charge consumers more than $15 for a security freeze, unless a consumer has been notified they are a potential victim of identity theft, in which case fees are prohibited. The bill, in its current form, does not preempt any of the state credit freeze laws. For more information on S. 608, see http://thomas.loc.gov/cgi-bin/bdquery/z?d110:s.00806:.
Wyoming Enacts Data Security Breach Law. On March 1, the State of Wyoming enacted S.B. 53 which, among other things, (i) obligates institutions to inform consumers of a breach if “misuse of personal identifying information… has occurred or is reasonably likely to occur,” (ii) gives consumers power to implement a “security freeze” of their credit report for a fee, and (iii) requires that such freezes must be provided free of charge to consumers who are “victims of identity theft.” This law will become effective on July 1, 2007. For the full text of this bill, please contact .
Privacy Disclosure Violates FDCPA. A federal court in Illinois granted summary judgment to plaintiffs in a class action alleging Fair Debt Collection Practices Act (FDCPA) violations in a privacy notice. Hernandez v. Midland Credit Management, Inc., No. 04-C-7844 (N.D. Ill., opinion issued March 6, 2007). The defendant in Hernandez issued privacy notices along with its dunning letters. The notices stated that the defendant reserved the right to share nonpublic personal information about the debtor gathered in the course of debt collection with nonaffiliated third parties, unless the debtor affirmatively opted out in writing. Plaintiff brought suit, alleging that the privacy notices violated the FDCPA, 15 U.S.C. §§1692 et seq. In June 2006, the court certified a class of Illinois and Wisconsin residents who received a similar privacy notice. Ruling on the subsequent cross motions for summary judgment, the Court found that defendant’s privacy notice did indeed violate the FDCPA, which generally prohibits communications in connection with the collection of any debt between a debt collector and persons other than the debtor and certain parties such as attorneys of the debtor and the creditor. In so doing, the Court rejected defendant’s assertion that the issuance of the privacy notice had nothing to do with the collection of the debt, and instead was an effort to comply with the privacy disclosures mandated by the Gramm-Leach- Bliley Act (GLB), 15 U.S.C. §§6801 et seq. Whether or not the disclosure complied with the GLB, the Court found that its issuance in conjunction with the dunning letter sufficed to violate the FDCPA. The Court also denied defendant’s motion for summary judgment based on the bona fide error defense, reserving that issue for trial. For a copy of this opinion, please contact .
© Buckley Kolar, LLP 2005. INFOBYTES is not intended as legal advice to any person or firm. It is provided as a client service and information contained herein is drawn from various public sources, including other publications.