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Topics – Covered This Week (Click to View)
FEDERAL ISSUES
Senate Banking Committee Hears Testimony on Mortgage Market. On March 22, the Senate Banking Committee held a hearing entitled “Mortgage Market Turmoil: Causes and Consequences.” The panel included representatives from the federal banking agencies (OCC, OTS, FDIC, and Federal Reserve), as well as high ranking executives from several prominent lenders. In his opening remarks, committee Chairman Chris Dodd (D – Conn.) said that “the checks and balances that we are told exist in the marketplace, and the oversight that the regulators are supposed to exercise, have been absent until recently.” For the text of Dodd’s remarks, the prepared speeches of the regulators, and a video record of the hearing, please see http://banking.senate.gov/index.cfm?Fuseaction=Hearings.Detail&HearingID=254.
Federal Agencies Seek Public Comment on Model Privacy Notice. On March 21, the federal agencies charged with enforcing the privacy provisions of the Gramm-Leach-Bliley Act (GLB Act) (the Federal Reserve System, the CFTC, the FDIC, the FTC, the NCUA, the OCC, the OTS, and the SEC) released a notice of proposed rule making (NPR) requesting comment on a model privacy form that financial institutions would be able to use for the privacy notices required by the GLB Act to be given to consumers. The NPR proposes that a financial institution that chooses to use the model form would satisfy the disclosure requirements for the notices and thus take advantage of a "safe harbor." While financial institutions would not be required to use the model form, the NPR proposes to remove the current safe harbor for use of the sample clauses currently included in some of the agencies' privacy rules. The Financial Services Regulatory Relief Act of 2006 amended the GLB Act to require the agencies to propose a model form that is succinct and comprehensible to consumers, allows consumers to easily compare privacy practices of financial institutions, and uses easily readable type font. Written comments on the proposed rule amendments may be submitted within 60 days after publication in the Federal Register, which is expected in late March. For the joint press release, including a copy of the NPR, see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070321/.
OTS Publishes Final CRA Rule. On March 19, the Office of Thrift Supervision (OTS) published a final rule amending regulations implementing the Community Reinvestment Act (CRA) to bring them more into alignment with those of other banking regulators. Aside from a minor technical adjustment, the rule is identical to that proposed last November (see the December 1, 2006 issue of InfoBytes). The rule is effective July 1, 2007. For the official press release and a copy of the rule, see http://www.ots.treas.gov/docs/7/777016.html.
OTS Revises Examination Handbook for One- to Four-Family Mortgage Lending. On March 21, the Office of Thrift Supervision (OTS) released a revised Examination Handbook Section 212, One- to Four-Family Residential Real Estate Lending, to, among other things, incorporate recent interagency guidance on nontraditional mortgages (reported in the September 29, 2006 issue of InfoBytes). The revised version also specifies that borrowers of teaser rate, nontraditional, and subprime mortgages must qualify for a loan at the fully indexed amortizing interest rate. For a summary and text of the new handbook, see http://www.ots.treas.gov/docs/7/74830.pdf.
STATE ISSUES
IL Predatory Lending Database Revival Proposed. On March 21, Illinois Governor Rod Blagojevich announced proposed new rules for the Illinois Predatory Lending Database Pilot Program, or HB 4050. Earlier this year, Governor Blagojevich halted this program, by directing the “pilot area” be designated to be no area at all, over concerns it would drive lenders out of the test area and harm borrowers (see the January 26th issue of InfoBytes). The new proposals would make the “pilot area” the whole of Cook County. The new rules, among other things, (i) require counseling only for first time homebuyers seeking mortgages with certain nontraditional components or low documentation, (ii) require counseling for refinancing borrowers seeking mortgages with certain nontraditional qualities, and (iii) removes all reference to FICO scores from the counseling criteria. The regulating agency, the Department of Financial & Professional Regulation, has announced a 45-day period to file comments and/or request a public hearing. For more information, and a copy of the proposed rules, see http://www.idfpr.com/newsrls/HB4050Update.htm.
Virginia Passes Law for Electronic Notarization. On March 15, 2007, Virginia’s governor signed HB 2058, which amends Virginia’s notarization statutes to allow electronic notarization. Under this statute, electronic notaries must be registered with the Secretary of the Commonwealth and the notary must inform the Secretary of the technology being used to create electronic notarizations. The statute does not explicitly mandate the use of a specific technology, but does require that the electronic notarization be in a format that invalidates the certificate of notarization if the underlying document is improperly modified. To view the statute, please go to http://leg1.state.va.us/cgi-bin/legp504.exe?071+ful+CHAP0269.
COURTS
Advertiser Can be Liable for the Actions of Parties Promoting its Product or Service. A federal court recently determined that the CAN-SPAM Act does not make an advertiser strictly liable for the violations of entities it hires to promote its product or service; however, an advertiser can be liable for the promoter’s activities if the advertiser exerts sufficient control over the promoter. United States v. Cyberheat, Inc., CV-05-457-TUC-DCB (D. Ariz. Mar. 2, 2007). In Cyberheat, the U.S. Department of Justice (DOJ) argued that the defendant was liable for the actions of its “affiliates,” who were paid by the defendant to promote its website. The affiliates’ promotional activities allegedly included violations of the CAN-SPAM Act. DOJ argued that the defendant was liable for the affiliates’ activities because it “procured” the transmission of e-mails that violated the CAN-SPAM Act by paying the affiliates for their activities. The defendant, however, argued that it was not liable for the affiliates’ activities because it “did not permit or condone the illegal activity.” On a summary judgment motion, the court determined that the CAN-SPAM did not impose “strict liability” on the defendant for the acts of its affiliates. Nevertheless, the court noted that “based on the duty imposed by this Act, if [defendant] is not a direct violator of the Statute, it may be vicariously liable for the foreseeable violations of its affiliates” if the facts show that the affiliates were acting as the agent of the advertiser, rather than as an independent contractor. Such an inquiry is a question of fact, however, and therefore is inappropriate for summary judgment. Clients may wish to examine their online advertising contracts and online advertising initiatives to ensure continued compliance with CAN-SPAM. Please contact for a copy of the decision.
7th Circuit Finds Debt Collector’s Error Detection Process Reasonable Even If Not State-of-the-Art. The Seventh Circuit recently ruled that a debt collector’s error detection procedures are reasonable, even though the procedures do not utilize the most current technological developments. Ross v. RJM Acquisitions Funding LLC, No. 06-2059 (6th Cir. Mar. 13, 2007). In this case, the defendant debt collector attempted to recover a debt that had been discharged when the plaintiff had emerged from bankruptcy. The plaintiff alleged a violation of the Fair Debt Collection Practices Act (FDCPA), in that the defendant had made a false claim for a debt not owed by the plaintiff. The plaintiff claimed that the defendant’s error detection procedures were inadequate, since they did not utilize the most up-to-date technological advances. Specifically, the error detection process failed to discover that “Delisa Ross,” the name used on the bankruptcy petition, and “Lisa Ross,” the name under which the plaintiff incurred the debt in question and under which the defendant attempted to collect, belonged to the same person. The court, in an opinion written by Judge Richard Posner, rejected this claim, noting that the FDCPA provides a complete defense if a debt collector’s procedures are “reasonable.” The court said, “The word ‘reasonable’ in the Fair Debt Collection Practices Act defense cannot be equated to ‘state of the art,’ which is to say, at the technological frontier.” Moreover, the court noted that plaintiff was at fault since she failed to disclose in her bankruptcy proceedings that she had incurred debt under the name “Lisa Ross.” For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?caseno=06-2059&submit=showdkt&yr=06&num=2059.
Kmart Settles Gift Card Complaint from FTC. On March 12, the Federal Trade Commission (FTC) announced a settlement with Kmart Corporation over that company’s gift card program. The FTC’s complaint alleged that Kmart failed to adequately disclose to consumers a “dormancy fee” for card inactivity and misrepresented that the card would never expire. The settlement requires Kmart to clearly display effective expiration dates and fees on gift cards going forward, and outlines a process by which consumers can recover any “dormancy fees” charged in the past. The text of the settlement specifically states that it “does not constitute an admission… that the law has been violated” by Kmart Corporation. For the official press release, the complaint, and the settlement, please see http://www.ftc.gov/opa/2007/03/kmart.htm.
$1.58 Billion Verdict Against Morgan Stanley Overturned for Failure of Coleman Holdings to Show Actual Damages. On March 21, 2007, the Florida District Court of Appeal for the Fourth District overturned a decision in favor of Coleman Holdings Inc. against Morgan Stanley & Co., Inc. for conspiracy and aiding and abetting fraud in connection with the merger between The Coleman Company, Inc. and Sunbeam, Inc. Morgan Stanley & Co., Incorporated v. Coleman (Parent) Holdings, Inc., No. 4D05-2606 (Fl. Ct. App. March 21, 2007). Morgan Stanley, Sunbeam's investment banker, was found to have helped Sunbeam in carrying out a fraudulent scheme to inflate the price of Sunbeam stock until after the merger, and a jury accordingly awarded a $1.58 billion judgment against Morgan Stanley ($604M compensatory and $850M punitive damages). In this recent decision by the Florida appeals court, Judge Carole Taylor found that Coleman Holdings had failed to show any “legally cognizable damage'' stemming from the alleged fraud and that because "there was no proof presented at trial on the correct measure of damages, the trial court should have granted Morgan Stanley's motion for directed verdict." The final judgment for compensatory damages was reversed and remanded because Coleman had failed to meet its burden of proving the actual, "fraud-free" value of the Sunbeam stock on the date of the transaction and, instead, had measured damages based on the stock's value years after the transaction. The punitive damages were similarly reversed because the Court held that to prevail in an action for fraud, a plaintiff must prove its actual loss or injury from acting in reliance on the false representation. Since the Court found no damage to have been shown, punitive damages could not be awarded. The Court explained further that even if Coleman had established some unquantified damage (which could support a nominal damage award), this would not have been enough to justify punitive damages in a fraud case. The Court importantly explained that "[a]lthough the Florida Supreme Court’s recent Engle opinion does state that 'an award of compensatory damages is not a prerequisite to a finding of entitlement to punitive damages,' [the Court] read[s] the opinion as addressing the order of proof in determining entitlement to punitive damages." For more information and copy of the opinion, please contact .
District Court Holds Mailings Are Solicitations, Not “Firm Offer under FCRA.” The U.S. District Court for the Northern District of Indiana held that mailers soliciting customers for subprime first-mortgages that lacked crucial terms “such as interest rate percentage, or a range of interest rate percentages, whether the offer is for a fixed or variable rate mortgage loan, a reasonable estimate of the loan, the length of the loan, how the loan was to be repaid, or any applicable fees,” were merely advertisements and solicitations that did not rise to the level of a “firm offer” under the Fair Credit Reporting Act (FCRA). The court rejected the lender’s argument that it should consider the credit transaction as a whole, not just the initial offer letter, to determine whether there was a meaningful offer of credit. However, the court, citing the opinion of the U.S. Court of Appeals for the Seventh Circuit in Murray v. GMAC that “courts ‘need only determine whether the four corners of the offer’ amount to a firm offer of credit,” held that because the value of the offer was not reflected in the “four corners” of the initial letter, the offer had “no meaningful economic value” to the consumers and did not qualify as a “firm offer” under FCRA. See Bonner v. Home123 Corp., No. 2:05-CV-146, 2007 WL 118447 (N.D. Ind. Mar. 9, 1007). Please contact for a copy of this decision.
When Requesting a "File" under FCRA, Consumers are only Entitled to Information Contained in their Consumer Reports. The U.S. Court of Appeals for the Seventh Circuit concluded that the term "file" with respect to consumer requests for information under the Fair Credit Reporting Act (FCRA) only includes information that is contained in "consumer reports" to users, and not all information on the consumer maintained by a consumer reporting agency (CRA). Section 607(a)(1) of FCRA, 15 U.S.C. § 1681g(a)(1), requires consumer reporting agencies, upon request, to clearly and accurately disclose to consumers all information "in the consumer's file at the time of the request." The plaintiffs argued that the term "file" encompasses all information contained in a CRA's consumer file including "purge dates" internally maintained by the CRA to trigger the removal of negative information from consumer reports. The court reasoned that because the term "file" in the statute is followed by a list of specific information that the term includes, to hold that "file" includes all information would make the specific list superfluous. Moreover, although not binding on the court, the FTC Commentary on FCRA limits the scope of "file" to only include information in a consumer report that has been or may be issued. The legislative history of the provision also indicated to the court that legislators were concerned with ensuring receipt by consumers of all information contained in their consumer reports. As a result, absent a showing that Trans Union disclosed "purge dates" in past consumer reports or planned to disclose such information in the future, the court declined to require Trans Union's disclosure of them as a part of the "file" now. See Gillespie v. Trans Union Corp., 2007 U.S. App. Lexis 6081 (7th Cir. Mar. 16, 2007). For a copy of this opinion, contact .
Real Estate Investor May Not Pursue FCRA Claims. A federal court in Kentucky dismissed plaintiff’s Fair Credit Reporting Act (FCRA) claims because the transactions in question were commercial transactions. In Breed v. Nationwide Insurance Co., No. 05-CV-547, 2007 WL 789771 (W.D. Ky. Mar. 13, 2007), the plaintiff, a real estate investor who purchased homes, remodeled them, and sold them for a profit, sued a collection agency and a credit reporting agency under FCRA and the Fair Debt Collection Practices Act (FDCPA). Plaintiff’s claims stemmed from an allegedly false credit report that resulted in plaintiff being denied credit and offered credit at higher rates. Following a pretrial conference, the Court dismissed plaintiff’s FCRA claims and raised doubts about his FDCPA claims because the credit transactions at issue were for commercial purposes. In reaching this decision, the Court relied on the express language and legislative history of FCRA, which make it clear that FCRA only applies to credit “used primarily for personal, family, or household purposes.” The Court left unresolved whether plaintiff could pursue damages for emotional distress under FCRA, requesting further briefing on the issue. In addition, and while the issue was not before it, the Court cast doubt on plaintiff’s FDCPA claim, noting that the statute contains similar language to FCRA – restricting it to debts incurred “primarily for personal, family, or household purposes.” Breed v. Nationwide Insurance Co., No. 3_05CV-547, 2007 WL 789771 (W.D. Ky. Mar. 13, 2007). For a copy of this case please contact .
Magnuson-Moss Warranty Act Claims Not Subject to Binding Arbitration. In an opinion issued March 20, the Maryland Court of Appeals held that claims brought under the Magnuson-Moss Warranty Act (MMWA), 15 U.S.C. §§2301 et seq., are not subject to binding arbitration. Plaintiffs in Koons Ford of Baltimore, Inc. v. Raymond Calvin Lobach, 2007 Md. LEXIS 115 (Md.) brought MMWA claims against defendant for allegedly misrepresenting the history and condition of a used car that plaintiffs purchased. Defendant moved to compel arbitration based on an arbitration clause included in the buyer’s order, which plaintiffs had signed. The agreement required that disputes involving the vehicle be resolved through binding arbitration, and provided that “[n]or shall anything herein be construed to limit any remedies under . . . the [MMWA].” In denying defendant’s motion to compel arbitration, the Court held that this language expressly exempted MMWA claims from binding arbitration. Defendant argued, however, that the remedies available under the MMWA – an informal, non-binding dispute resolution mechanism – did not preclude defendant’s binding arbitration provision, which was favored by the pro-arbitration policy set forth in the Federal Arbitration Act (FAA), 9 U.S.C. §§1 et. seq. The Court disagreed, finding that the MMWA specifically precludes binding arbitration and therefore preempts the FAA. Specifically, the MMWA allows warrantors to include provisions for an undefined “informal dispute settlement procedure” for breach of warranty claims. Congress left the responsibility for defining “informal dispute settlement procedure” to the FTC, which developed a procedure that expressly precluded the resolution of claims through forced or binding arbitration. According to the Court, the MMWA provisions and FTC procedures, combined with some MMWA legislative history, evidenced Congress’ intent to preclude binding arbitration of claims under the MMWA. In reaching this result, the Court relied on support from federal district courts in Ohio and Virginia. As the dissent points out, however, this result is contrary to decisions from the Fifth and Eleventh Circuit Courts of Appeal, federal district courts in Arizona, Alabama and Michigan, and state appellate courts in Alabama, Indiana, Illinois, Michigan, Louisiana and Texas. For a copy of this decision, please contact .
Conditional Firm Offer Does Not Violate FCRA. In Soroka v. JP Morgan Chase & Co., No. 05 Civ. 7578 (S.D.N.Y. opinion issued March 19, 2007), the court dismissed a putative FCRA class action challenge to a mortgage lender’s prescreened offer of credit letter. Under the facts as alleged by the plaintiff Soroka, the lender violated FCRA by accessing the consumer’s credit report and transmitting an offer to make a home loan subject to approval of an additional application. The consumer alleged that defendant’s letter inviting him to take advantage of the offer violated FCRA because (1) it was not a firm offer and (2) it did not clearly and conspicuously make the credit disclosures required by FCRA. The Court granted defendant’s motion to dismiss both claims. The Court held that, under FCRA, a creditor may access a consumer’s credit report provided that it does so in connection with a “firm offer” of credit. According to the Court, such an offer of credit remains a “firm offer” even when it is subject to the consumer satisfying further stated conditions, citing Kennedy v. Chase Manhattan Bank USA, NA, 369 F.3d 833, 841 (5th Cir. 2004) (“[A] firm offer of credit under [FCRA] really means a firm offer if you meet certain criteria.”). The consumer also argued, based on the Seventh Circuit’s Cole decision, that the letter violated FCRA because it failed to include certain terms such as the rate and term applicable to the offer. The Court rejected this contention, holding that, while TILA would require such disclosures at the time of application and/or approval, FCRA does not require such disclosures in connection with firm offers of credit. Furthermore, the Court dismissed plaintiff’s claim that the letter did not provide certain FCRA-required disclosures clearly and conspicuously. Without addressing whether the disclosures met this standard, the Court joined the vast majority of courts that have considered the issue in holding that amendments to FCRA enacted in 2004 eliminated any private right of action plaintiff may have had for claims under FCRA’s clear and conspicuous disclosure requirements. For a copy of this decision, please contact .
Court Holds for Lender in FCRA “Firm Offer” Case Involving Student Loan Consolidation Offer. On March 15, 2007, the U.S. District Court for the Eastern District of New York dismissed a consumer’s claim that a student lender did not make a “firm offer” of credit under FCRA where the lender’s offer of student loan consolidation allegedly lacked definite terms and did not contain “sufficient value.” According to the court, the lender’s offer had to be read to include the terms and conditions for student loan consolidation set forth in the Higher Education Act (HEA), as the “precise terms for a consolidated loan can . . . only be determined and disclosed once the recipient provides the would-be lender with more information about existing loans.” With respect to the offer’s “value,” the court distinguished the case from the Seventh Circuit’s decision in Cole v. U.S. Capital, Inc., noting that the plaintiff in Cole was offered a loan of $300 toward the purchase of a car at a particular dealership, whereas in this case, the student lender’s solicitation concerned no other product, only the extension of credit. Although the court found the issue of whether the lender’s solicitation had “sufficient value” to be immaterial in the context of a student loan consolidation offer, to the extent that such an analysis was necessary, the court found the defendant’s offer to have “sufficient value.” Thus, the lender’s solicitation was a “firm offer” of credit under FCRA, “with specific pre-set terms based on the provisions of the HEA.” See Schwartz v. Goal Financial LLC, No. 06-CV-1478, 2007 U.S. Dist. LEXIS 18340 (E.D.N.Y. March 15, 2007). For a copy of the opinion, please contact .
Court Grants Class Certification in FCRA Firm Offer Case. The U.S. District Court for the Northern District of Illinois granted class action certification to a consumer who alleged that the solicitation sent to her did not constitute a “firm offer of credit.” The lender argued that the plaintiff was not an adequate representative for the class because she was not seeking actual or punitive damages, but rather, only statutory damages. The Court cited to Murray v. GMAC Mortgage to support its holding that the pursuit of statutory damages only in a FCRA case does not bar class certification. The lender also argued that class certification is not appropriate because the Court would ultimately have to make individualized inquiries as to the impact of the solicitation on each class member. Again citing Murray v. GMAC Mortgage, the Court rejected this argument because the value of an offer can be determined by considering the offer’s usefulness to the “normal consumer.” Asbury v. People’s Choice Home Loan, Inc. No. 05-C-5483, 2007 WL 809531 (N.D. Ill. March 12, 2007). For a copy of the opinion, please contact .
Court Allows Consumer’s Claim for FCRA Notice Violations. The U.S. District Court for the District of Hawaii acknowledged that the Fair and Accurate Credit Transactions Act of 2003 (FACTA) eliminated private actions under the notice provisions of the Fair Credit Reporting Act (FCRA), which include, among other things, adverse action and prescreening notice requirements. Grab v. American Lawyers Co., No. 05-00812, 2007 WL 842045 (D. Haw. Mar. 19, 2007). However, in this case, the Court noted that the actions in question occurred between the enactment of FACTA on December 4, 2003, and the effective date of the provision that repealed the private right of action, December 1, 2004. The Court reasoned that, because the statute did not explicitly state a Congressional intent to apply it retroactively and doing so would impair rights that the consumer possessed before the amendments, retroactivity did not apply. Therefore, the Court determined that the consumer could maintain his claim. The Court also held that the defendant, as a user of a consumer report, was liable for obtaining or using a report without a permissible purpose. For a copy of the opinion, please contact .
Mailer Was “Firm Offer” Despite Failure to State Minimum Line of Credit. The U.S. District Court for the Northern District of Illinois held that a credit card offer sent by mail that does not state a minimum line of credit may constitute a firm offer of credit in compliance with FCRA. In King v. Commerce Bancshares, Inc., No. 06 C 4117, 2007 WL 781732 (N.D. Ill. Mar. 12, 2007), a putative class action, the court considered the four factors set out in the Seventh Circuit’s Cole v. U.S. Capital case for determining whether an offer is a bona fide firm offer or a sham: (1) whether credit approval is guaranteed; (2) the amount of credit offered; (3) the stated rate of interest and the method of computation; and (4) the applicability of the credit to various merchants. Here, the court found that the mailing met three of the four factors; the only element not expressly stated in the mailing was the amount of credit offered. But the court weighed this finding against the fact that the Federal Trade Commission (FTC) does not consider the amount of credit offered a major element of a firm offer, as the FTC's model solicitation letter for credit card offers does not include a space for the minimum amount of credit. Therefore, the court held that the failure to state the minimum line of credit did not render the offer valueless and that, therefore, the lender had not violated FCRA. For a copy of the opinion, please contact .
Court Rules that Failure to Disclose Yield Spread Premiums on GFE Violates RESPA and Washington Law. A federal court in Washington recently ruled in a class action decision that failure to adequately disclose yield spread premiums (YSP) on good faith estimate (GFE) disclosures violated the Real Estate Settlement Procedures Act (RESPA) and the Washington Consumer Loan Act (CLA), and that the disclosures constituted a per se violation of the Washington Consumer Protection Act (CPA). Pierce v. Novastar Mortgage, Inc., No. C05-5835RJB, 2007 U.S. Dist. LEXIS 18336 (W.D. Wash. March 15, 2007). The GFEs either failed to mention YSPs at all or they gave a range of costs (starting with 0%) and a dollar amount of $0.00 or no actual percentage or dollar amount. With regard to the CLA, Novastar claimed that it made the loans to plaintiffs under the Mortgage Broker Practices Act (MBPA) and not the CLA, and thus the CLA did not apply. Novastar admitted that it was licensed under the CLA but contended that, although it was exempt from licensing under MBPA, loans that it made at interest rates of 12% or lower were made pursuant to the MBPA, not the CLA. However, the Court ruled that the CLA applied because the regulations under the CLA provide that all loans made by a CLA licensee are subject to the authority and restrictions of the CLA. In analyzing compliance with the CLA, the Court stated that the CLA requires a written disclosure containing an itemized estimate of all the fees and costs that the borrower is required to pay in connection with the loan. The Court ruled that Novastar’s GFEs did not violate this provision because the borrower is not required to pay the YSP. However, the Court explained that the CLA also requires compliance with RESPA’s disclosure requirements. Under RESPA, the GFE must list the “amount or range” of settlement charges. Settlement charges include indirect or back-funded payments made by lenders to mortgage brokers. Therefore, the Court concluded that a GFE must disclose the yield spread premium in order to be in compliance with RESPA. However, the Court denied a motion with respect to the other GFEs because the plaintiffs failed to demonstrate that the ranges or estimates in these disclosures were not made in good faith. For a copy of this case please contact .
Banc of America Securities Settles Claim for Failure to Safeguard Nonpublic Research Information and Publication of Fraudulent Research. On March 14, the Securities and Exchange Commission (SEC) announced that it had settled an enforcement action brought against Banc of America Securities LLC (BAS) for failure to safeguard its forthcoming research reports and publication of fraudulent research. Specifically, the SEC alleged that, from January 1999 through December 2001, BAS lacked policies and procedures designed to prevent the misuse of material nonpublic information concerning its research reports. As a result, BAS personnel, on several occasions, learned of forthcoming research reports, which included information concerning upgrades and downgrades of certain companies, and on at least two occasions, improperly traded in those companies before the research was issued to the firm’s customers. The SEC also alleged that BAS failed to address conflicts of interest that compromised the independence and integrity of its analysts, which resulted in the firm publishing materially false and misleading research reports on three companies. The SEC alleged that BAS created an environment in which its investment bankers inappropriately influenced its analysts, who were charged with producing objective research. As a result, BAS issued research reports on companies which did not reflect the true opinions of the analysts covering those companies. As part of the settlement, BAS, without admitting or denying the SEC’s allegations, agreed to a censure, cease-and-desist order, and payment of $26 million in disgorgement and penalties. Additionally, BAS will (i) retain an independent consultant to conduct a review of its internal controls and (ii) implement structural and other reforms of its investment banking and research departments to strengthen the integrity of the firm's equity research. The full text of the SEC’s order is available at http://sec.gov/litigation/admin/2007/34-55466.pdf.
FIRM NEWS
Jerry Buckley moderated a panel on RESPA developments at the American Bar Association Consumer Financial Services Committee meeting in Washington on March 17. HUD Assistant General Counsel Peter Race spoke regarding HUD’s enforcement of RESPA and signaled the Department’s interest in business arrangements involving marketing agreements and other structures under which parties referring settlement services business are offered the opportunity to participate in money making programs.
Jeffrey Naimon will be speaking on the RESPA panel at the American Conference Institute's upcoming seminar "Preventing, Defending and resolving Consumer Credit Litigation" taking place on June 5-6, 2007 in New York. For more information, or to register, go to http://www.americanconference.com/Litigation/creditlit.htm.
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. For more information, or to register, see http://www.aspratt.com/store/V03.php.
Senate Banking Committee Hears Testimony on Mortgage Market. On March 22, the Senate Banking Committee held a hearing entitled “Mortgage Market Turmoil: Causes and Consequences.” The panel included representatives from the federal banking agencies (OCC, OTS, FDIC, and Federal Reserve), as well as high ranking executives from several prominent lenders. In his opening remarks, committee Chairman Chris Dodd (D – Conn.) said that “the checks and balances that we are told exist in the marketplace, and the oversight that the regulators are supposed to exercise, have been absent until recently.” For the text of Dodd’s remarks, the prepared speeches of the regulators, and a video record of the hearing, please see http://banking.senate.gov/index.cfm?Fuseaction=Hearings.Detail&HearingID=254.
IL Predatory Lending Database Revival Proposed. On March 21, Illinois Governor Rod Blagojevich announced proposed new rules for the Illinois Predatory Lending Database Pilot Program, or HB 4050. Earlier this year, Governor Blagojevich halted this program, by directing the “pilot area” be designated to be no area at all, over concerns it would drive lenders out of the test area and harm borrowers (see the January 26th issue of InfoBytes). The new proposals would make the “pilot area” the whole of Cook County. The new rules, among other things, (i) require counseling only for first time homebuyers seeking mortgages with certain nontraditional components or low documentation, (ii) require counseling for refinancing borrowers seeking mortgages with certain nontraditional qualities, and (iii) removes all reference to FICO scores from the counseling criteria. The regulating agency, the Department of Financial & Professional Regulation, has announced a 45-day period to file comments and/or request a public hearing. For more information, and a copy of the proposed rules, see http://www.idfpr.com/newsrls/HB4050Update.htm.
Federal Agencies Seek Public Comment on Model Privacy Notice. On March 21, the federal agencies charged with enforcing the privacy provisions of the Gramm-Leach-Bliley Act (GLB Act) (the Federal Reserve System, the CFTC, the FDIC, the FTC, the NCUA, the OCC, the OTS, and the SEC) released a notice of proposed rule making (NPR) requesting comment on a model privacy form that financial institutions would be able to use for the privacy notices required by the GLB Act to be given to consumers. The NPR proposes that a financial institution that chooses to use the model form would satisfy the disclosure requirements for the notices and thus take advantage of a "safe harbor." While financial institutions would not be required to use the model form, the NPR proposes to remove the current safe harbor for use of the sample clauses currently included in some of the agencies' privacy rules. The Financial Services Regulatory Relief Act of 2006 amended the GLB Act to require the agencies to propose a model form that is succinct and comprehensible to consumers, allows consumers to easily compare privacy practices of financial institutions, and uses easily readable type font. Written comments on the proposed rule amendments may be submitted within 60 days after publication in the Federal Register, which is expected in late March. For the joint press release, including a copy of the NPR, see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070321/.
Court Rules that Failure to Disclose Yield Spread Premiums on GFE Violates RESPA and Washington Law. A federal court in Washington recently ruled in a class action decision that failure to adequately disclose yield spread premiums (YSP) on good faith estimate (GFE) disclosures violated the Real Estate Settlement Procedures Act (RESPA) and the Washington Consumer Loan Act (CLA), and that the disclosures constituted a per se violation of the Washington Consumer Protection Act (CPA). Pierce v. Novastar Mortgage, Inc., No. C05-5835RJB, 2007 U.S. Dist. LEXIS 18336 (W.D. Wash. March 15, 2007). The GFEs either failed to mention YSPs at all or they gave a range of costs (starting with 0%) and a dollar amount of $0.00 or no actual percentage or dollar amount. With regard to the CLA, Novastar claimed that it made the loans to plaintiffs under the Mortgage Broker Practices Act (MBPA) and not the CLA, and thus the CLA did not apply. Novastar admitted that it was licensed under the CLA but contended that, although it was exempt from licensing under MBPA, loans that it made at interest rates of 12% or lower were made pursuant to the MBPA, not the CLA. However, the Court ruled that the CLA applied because the regulations under the CLA provide that all loans made by a CLA licensee are subject to the authority and restrictions of the CLA. In analyzing compliance with the CLA, the Court stated that the CLA requires a written disclosure containing an itemized estimate of all the fees and costs that the borrower is required to pay in connection with the loan. The Court ruled that Novastar’s GFEs did not violate this provision because the borrower is not required to pay the YSP. However, the Court explained that the CLA also requires compliance with RESPA’s disclosure requirements. Under RESPA, the GFE must list the “amount or range” of settlement charges. Settlement charges include indirect or back-funded payments made by lenders to mortgage brokers. Therefore, the Court concluded that a GFE must disclose the yield spread premium in order to be in compliance with RESPA. However, the Court denied a motion with respect to the other GFEs because the plaintiffs failed to demonstrate that the ranges or estimates in these disclosures were not made in good faith. For a copy of this case please contact .
District Court Holds Mailings Are Solicitations, Not “Firm Offer under FCRA.” The U.S. District Court for the Northern District of Indiana held that mailers soliciting customers for subprime first-mortgages that lacked crucial terms “such as interest rate percentage, or a range of interest rate percentages, whether the offer is for a fixed or variable rate mortgage loan, a reasonable estimate of the loan, the length of the loan, how the loan was to be repaid, or any applicable fees,” were merely advertisements and solicitations that did not rise to the level of a “firm offer” under the Fair Credit Reporting Act (FCRA). The court rejected the lender’s argument that it should consider the credit transaction as a whole, not just the initial offer letter, to determine whether there was a meaningful offer of credit. However, the court, citing the opinion of the U.S. Court of Appeals for the Seventh Circuit in Murray v. GMAC that “courts ‘need only determine whether the four corners of the offer’ amount to a firm offer of credit,” held that because the value of the offer was not reflected in the “four corners” of the initial letter, the offer had “no meaningful economic value” to the consumers and did not qualify as a “firm offer” under FCRA. See Bonner v. Home123 Corp., No. 2:05-CV-146, 2007 WL 118447 (N.D. Ind. Mar. 9, 1007). Please contact for a copy of this decision.
Real Estate Investor May Not Pursue FCRA Claims. A federal court in Kentucky dismissed plaintiff’s Fair Credit Reporting Act (FCRA) claims because the transactions in question were commercial transactions. In Breed v. Nationwide Insurance Co., No. 05-CV-547, 2007 WL 789771 (W.D. Ky. Mar. 13, 2007), the plaintiff, a real estate investor who purchased homes, remodeled them, and sold them for a profit, sued a collection agency and a credit reporting agency under FCRA and the Fair Debt Collection Practices Act (FDCPA). Plaintiff’s claims stemmed from an allegedly false credit report that resulted in plaintiff being denied credit and offered credit at higher rates. Following a pretrial conference, the Court dismissed plaintiff’s FCRA claims and raised doubts about his FDCPA claims because the credit transactions at issue were for commercial purposes. In reaching this decision, the Court relied on the express language and legislative history of FCRA, which make it clear that FCRA only applies to credit “used primarily for personal, family, or household purposes.” The Court left unresolved whether plaintiff could pursue damages for emotional distress under FCRA, requesting further briefing on the issue. In addition, and while the issue was not before it, the Court cast doubt on plaintiff’s FDCPA claim, noting that the statute contains similar language to FCRA – restricting it to debts incurred “primarily for personal, family, or household purposes.” Breed v. Nationwide Insurance Co., No. 3_05CV-547, 2007 WL 789771 (W.D. Ky. Mar. 13, 2007). For a copy of this case please contact .
Conditional Firm Offer Does Not Violate FCRA. In Soroka v. JP Morgan Chase & Co., No. 05 Civ. 7578 (S.D.N.Y. opinion issued March 19, 2007), the court dismissed a putative FCRA class action challenge to a mortgage lender’s prescreened offer of credit letter. Under the facts as alleged by the plaintiff Soroka, the lender violated FCRA by accessing the consumer’s credit report and transmitting an offer to make a home loan subject to approval of an additional application. The consumer alleged that defendant’s letter inviting him to take advantage of the offer violated FCRA because (1) it was not a firm offer and (2) it did not clearly and conspicuously make the credit disclosures required by FCRA. The Court granted defendant’s motion to dismiss both claims. The Court held that, under FCRA, a creditor may access a consumer’s credit report provided that it does so in connection with a “firm offer” of credit. According to the Court, such an offer of credit remains a “firm offer” even when it is subject to the consumer satisfying further stated conditions, citing Kennedy v. Chase Manhattan Bank USA, NA, 369 F.3d 833, 841 (5th Cir. 2004) (“[A] firm offer of credit under [FCRA] really means a firm offer if you meet certain criteria.”). The consumer also argued, based on the Seventh Circuit’s Cole decision, that the letter violated FCRA because it failed to include certain terms such as the rate and term applicable to the offer. The Court rejected this contention, holding that, while TILA would require such disclosures at the time of application and/or approval, FCRA does not require such disclosures in connection with firm offers of credit. Furthermore, the Court dismissed plaintiff’s claim that the letter did not provide certain FCRA-required disclosures clearly and conspicuously. Without addressing whether the disclosures met this standard, the Court joined the vast majority of courts that have considered the issue in holding that amendments to FCRA enacted in 2004 eliminated any private right of action plaintiff may have had for claims under FCRA’s clear and conspicuous disclosure requirements. For a copy of this decision, please contact .
Court Grants Class Certification in FCRA Firm Offer Case. The U.S. District Court for the Northern District of Illinois granted class action certification to a consumer who alleged that the solicitation sent to her did not constitute a “firm offer of credit.” The lender argued that the plaintiff was not an adequate representative for the class because she was not seeking actual or punitive damages, but rather, only statutory damages. The Court cited to Murray v. GMAC Mortgage to support its holding that the pursuit of statutory damages only in a FCRA case does not bar class certification. The lender also argued that class certification is not appropriate because the Court would ultimately have to make individualized inquiries as to the impact of the solicitation on each class member. Again citing Murray v. GMAC Mortgage, the Court rejected this argument because the value of an offer can be determined by considering the offer’s usefulness to the “normal consumer.” Asbury v. People’s Choice Home Loan, Inc. No. 05-C-5483, 2007 WL 809531 (N.D. Ill. March 12, 2007). For a copy of the opinion, please contact .
OTS Revises Examination Handbook for One- to Four-Family Mortgage Lending. On March 21, the Office of Thrift Supervision (OTS) released a revised Examination Handbook Section 212, One- to Four-Family Residential Real Estate Lending, to, among other things, incorporate recent interagency guidance on nontraditional mortgages (reported in the September 29, 2006 issue of InfoBytes). The revised version also specifies that borrowers of teaser rate, nontraditional, and subprime mortgages must qualify for a loan at the fully indexed amortizing interest rate. For a summary and text of the new handbook, see http://www.ots.treas.gov/docs/7/74830.pdf.
Senate Banking Committee Hears Testimony on Mortgage Market. On March 22, the Senate Banking Committee held a hearing entitled “Mortgage Market Turmoil: Causes and Consequences.” The panel included representatives from the federal banking agencies (OCC, OTS, FDIC, and Federal Reserve), as well as high ranking executives from several prominent lenders. In his opening remarks, committee Chairman Chris Dodd (D – Conn.) said that “the checks and balances that we are told exist in the marketplace, and the oversight that the regulators are supposed to exercise, have been absent until recently.” For the text of Dodd’s remarks, the prepared speeches of the regulators, and a video record of the hearing, please see http://banking.senate.gov/index.cfm?Fuseaction=Hearings.Detail&HearingID=254.
Federal Agencies Seek Public Comment on Model Privacy Notice. On March 21, the federal agencies charged with enforcing the privacy provisions of the Gramm-Leach-Bliley Act (GLB Act) (the Federal Reserve System, the CFTC, the FDIC, the FTC, the NCUA, the OCC, the OTS, and the SEC) released a notice of proposed rule making (NPR) requesting comment on a model privacy form that financial institutions would be able to use for the privacy notices required by the GLB Act to be given to consumers. The NPR proposes that a financial institution that chooses to use the model form would satisfy the disclosure requirements for the notices and thus take advantage of a "safe harbor." While financial institutions would not be required to use the model form, the NPR proposes to remove the current safe harbor for use of the sample clauses currently included in some of the agencies' privacy rules. The Financial Services Regulatory Relief Act of 2006 amended the GLB Act to require the agencies to propose a model form that is succinct and comprehensible to consumers, allows consumers to easily compare privacy practices of financial institutions, and uses easily readable type font. Written comments on the proposed rule amendments may be submitted within 60 days after publication in the Federal Register, which is expected in late March. For the joint press release, including a copy of the NPR, see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070321/.
OTS Publishes Final CRA Rule. On March 19, the Office of Thrift Supervision (OTS) published a final rule amending regulations implementing the Community Reinvestment Act (CRA) to bring them more into alignment with those of other banking regulators. Aside from a minor technical adjustment, the rule is identical to that proposed last November (see the December 1, 2006 issue of InfoBytes). The rule is effective July 1, 2007. For the official press release and a copy of the rule, see http://www.ots.treas.gov/docs/7/777016.html.
OTS Revises Examination Handbook for One- to Four-Family Mortgage Lending. On March 21, the Office of Thrift Supervision (OTS) released a revised Examination Handbook Section 212, One- to Four-Family Residential Real Estate Lending, to, among other things, incorporate recent interagency guidance on nontraditional mortgages (reported in the September 29, 2006 issue of InfoBytes). The revised version also specifies that borrowers of teaser rate, nontraditional, and subprime mortgages must qualify for a loan at the fully indexed amortizing interest rate. For a summary and text of the new handbook, see http://www.ots.treas.gov/docs/7/74830.pdf.
7th Circuit Finds Debt Collector’s Error Detection Process Reasonable Even If Not State-of-the-Art. The Seventh Circuit recently ruled that a debt collector’s error detection procedures are reasonable, even though the procedures do not utilize the most current technological developments. Ross v. RJM Acquisitions Funding LLC, No. 06-2059 (6th Cir. Mar. 13, 2007). In this case, the defendant debt collector attempted to recover a debt that had been discharged when the plaintiff had emerged from bankruptcy. The plaintiff alleged a violation of the Fair Debt Collection Practices Act (FDCPA), in that the defendant had made a false claim for a debt not owed by the plaintiff. The plaintiff claimed that the defendant’s error detection procedures were inadequate, since they did not utilize the most up-to-date technological advances. Specifically, the error detection process failed to discover that “Delisa Ross,” the name used on the bankruptcy petition, and “Lisa Ross,” the name under which the plaintiff incurred the debt in question and under which the defendant attempted to collect, belonged to the same person. The court, in an opinion written by Judge Richard Posner, rejected this claim, noting that the FDCPA provides a complete defense if a debt collector’s procedures are “reasonable.” The court said, “The word ‘reasonable’ in the Fair Debt Collection Practices Act defense cannot be equated to ‘state of the art,’ which is to say, at the technological frontier.” Moreover, the court noted that plaintiff was at fault since she failed to disclose in her bankruptcy proceedings that she had incurred debt under the name “Lisa Ross.” For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?caseno=06-2059&submit=showdkt&yr=06&num=2059.
Kmart Settles Gift Card Complaint from FTC. On March 12, the Federal Trade Commission (FTC) announced a settlement with Kmart Corporation over that company’s gift card program. The FTC’s complaint alleged that Kmart failed to adequately disclose to consumers a “dormancy fee” for card inactivity and misrepresented that the card would never expire. The settlement requires Kmart to clearly display effective expiration dates and fees on gift cards going forward, and outlines a process by which consumers can recover any “dormancy fees” charged in the past. The text of the settlement specifically states that it “does not constitute an admission… that the law has been violated” by Kmart Corporation. For the official press release, the complaint, and the settlement, please see http://www.ftc.gov/opa/2007/03/kmart.htm.
When Requesting a "File" under FCRA, Consumers are only Entitled to Information Contained in their Consumer Reports. The U.S. Court of Appeals for the Seventh Circuit concluded that the term "file" with respect to consumer requests for information under the Fair Credit Reporting Act (FCRA) only includes information that is contained in "consumer reports" to users, and not all information on the consumer maintained by a consumer reporting agency (CRA). Section 607(a)(1) of FCRA, 15 U.S.C. § 1681g(a)(1), requires consumer reporting agencies, upon request, to clearly and accurately disclose to consumers all information "in the consumer's file at the time of the request." The plaintiffs argued that the term "file" encompasses all information contained in a CRA's consumer file including "purge dates" internally maintained by the CRA to trigger the removal of negative information from consumer reports. The court reasoned that because the term "file" in the statute is followed by a list of specific information that the term includes, to hold that "file" includes all information would make the specific list superfluous. Moreover, although not binding on the court, the FTC Commentary on FCRA limits the scope of "file" to only include information in a consumer report that has been or may be issued. The legislative history of the provision also indicated to the court that legislators were concerned with ensuring receipt by consumers of all information contained in their consumer reports. As a result, absent a showing that Trans Union disclosed "purge dates" in past consumer reports or planned to disclose such information in the future, the court declined to require Trans Union's disclosure of them as a part of the "file" now. See Gillespie v. Trans Union Corp., 2007 U.S. App. Lexis 6081 (7th Cir. Mar. 16, 2007). For a copy of this opinion, contact .
Magnuson-Moss Warranty Act Claims Not Subject to Binding Arbitration. In an opinion issued March 20, the Maryland Court of Appeals held that claims brought under the Magnuson-Moss Warranty Act (MMWA), 15 U.S.C. §§2301 et seq., are not subject to binding arbitration. Plaintiffs in Koons Ford of Baltimore, Inc. v. Raymond Calvin Lobach, 2007 Md. LEXIS 115 (Md.) brought MMWA claims against defendant for allegedly misrepresenting the history and condition of a used car that plaintiffs purchased. Defendant moved to compel arbitration based on an arbitration clause included in the buyer’s order, which plaintiffs had signed. The agreement required that disputes involving the vehicle be resolved through binding arbitration, and provided that “[n]or shall anything herein be construed to limit any remedies under . . . the [MMWA].” In denying defendant’s motion to compel arbitration, the Court held that this language expressly exempted MMWA claims from binding arbitration. Defendant argued, however, that the remedies available under the MMWA – an informal, non-binding dispute resolution mechanism – did not preclude defendant’s binding arbitration provision, which was favored by the pro-arbitration policy set forth in the Federal Arbitration Act (FAA), 9 U.S.C. §§1 et. seq. The Court disagreed, finding that the MMWA specifically precludes binding arbitration and therefore preempts the FAA. Specifically, the MMWA allows warrantors to include provisions for an undefined “informal dispute settlement procedure” for breach of warranty claims. Congress left the responsibility for defining “informal dispute settlement procedure” to the FTC, which developed a procedure that expressly precluded the resolution of claims through forced or binding arbitration. According to the Court, the MMWA provisions and FTC procedures, combined with some MMWA legislative history, evidenced Congress’ intent to preclude binding arbitration of claims under the MMWA. In reaching this result, the Court relied on support from federal district courts in Ohio and Virginia. As the dissent points out, however, this result is contrary to decisions from the Fifth and Eleventh Circuit Courts of Appeal, federal district courts in Arizona, Alabama and Michigan, and state appellate courts in Alabama, Indiana, Illinois, Michigan, Louisiana and Texas. For a copy of this decision, please contact .
Court Holds for Lender in FCRA “Firm Offer” Case Involving Student Loan Consolidation Offer. On March 15, 2007, the U.S. District Court for the Eastern District of New York dismissed a consumer’s claim that a student lender did not make a “firm offer” of credit under FCRA where the lender’s offer of student loan consolidation allegedly lacked definite terms and did not contain “sufficient value.” According to the court, the lender’s offer had to be read to include the terms and conditions for student loan consolidation set forth in the Higher Education Act (HEA), as the “precise terms for a consolidated loan can . . . only be determined and disclosed once the recipient provides the would-be lender with more information about existing loans.” With respect to the offer’s “value,” the court distinguished the case from the Seventh Circuit’s decision in Cole v. U.S. Capital, Inc., noting that the plaintiff in Cole was offered a loan of $300 toward the purchase of a car at a particular dealership, whereas in this case, the student lender’s solicitation concerned no other product, only the extension of credit. Although the court found the issue of whether the lender’s solicitation had “sufficient value” to be immaterial in the context of a student loan consolidation offer, to the extent that such an analysis was necessary, the court found the defendant’s offer to have “sufficient value.” Thus, the lender’s solicitation was a “firm offer” of credit under FCRA, “with specific pre-set terms based on the provisions of the HEA.” See Schwartz v. Goal Financial LLC, No. 06-CV-1478, 2007 U.S. Dist. LEXIS 18340 (E.D.N.Y. March 15, 2007). For a copy of the opinion, please contact .
Court Allows Consumer’s Claim for FCRA Notice Violations. The U.S. District Court for the District of Hawaii acknowledged that the Fair and Accurate Credit Transactions Act of 2003 (FACTA) eliminated private actions under the notice provisions of the Fair Credit Reporting Act (FCRA), which include, among other things, adverse action and prescreening notice requirements. Grab v. American Lawyers Co., No. 05-00812, 2007 WL 842045 (D. Haw. Mar. 19, 2007). However, in this case, the Court noted that the actions in question occurred between the enactment of FACTA on December 4, 2003, and the effective date of the provision that repealed the private right of action, December 1, 2004. The Court reasoned that, because the statute did not explicitly state a Congressional intent to apply it retroactively and doing so would impair rights that the consumer possessed before the amendments, retroactivity did not apply. Therefore, the Court determined that the consumer could maintain his claim. The Court also held that the defendant, as a user of a consumer report, was liable for obtaining or using a report without a permissible purpose. For a copy of the opinion, please contact .
Magnuson-Moss Warranty Act Claims Not Subject to Binding Arbitration. In an opinion issued March 20, the Maryland Court of Appeals held that claims brought under the Magnuson-Moss Warranty Act (MMWA), 15 U.S.C. §§2301 et seq., are not subject to binding arbitration. Plaintiffs in Koons Ford of Baltimore, Inc. v. Raymond Calvin Lobach, 2007 Md. LEXIS 115 (Md.) brought MMWA claims against defendant for allegedly misrepresenting the history and condition of a used car that plaintiffs purchased. Defendant moved to compel arbitration based on an arbitration clause included in the buyer’s order, which plaintiffs had signed. The agreement required that disputes involving the vehicle be resolved through binding arbitration, and provided that “[n]or shall anything herein be construed to limit any remedies under . . . the [MMWA].” In denying defendant’s motion to compel arbitration, the Court held that this language expressly exempted MMWA claims from binding arbitration. Defendant argued, however, that the remedies available under the MMWA – an informal, non-binding dispute resolution mechanism – did not preclude defendant’s binding arbitration provision, which was favored by the pro-arbitration policy set forth in the Federal Arbitration Act (FAA), 9 U.S.C. §§1 et. seq. The Court disagreed, finding that the MMWA specifically precludes binding arbitration and therefore preempts the FAA. Specifically, the MMWA allows warrantors to include provisions for an undefined “informal dispute settlement procedure” for breach of warranty claims. Congress left the responsibility for defining “informal dispute settlement procedure” to the FTC, which developed a procedure that expressly precluded the resolution of claims through forced or binding arbitration. According to the Court, the MMWA provisions and FTC procedures, combined with some MMWA legislative history, evidenced Congress’ intent to preclude binding arbitration of claims under the MMWA. In reaching this result, the Court relied on support from federal district courts in Ohio and Virginia. As the dissent points out, however, this result is contrary to decisions from the Fifth and Eleventh Circuit Courts of Appeal, federal district courts in Arizona, Alabama and Michigan, and state appellate courts in Alabama, Indiana, Illinois, Michigan, Louisiana and Texas. For a copy of this decision, please contact .
Advertiser Can be Liable for the Actions of Parties Promoting its Product or Service. A federal court recently determined that the CAN-SPAM Act does not make an advertiser strictly liable for the violations of entities it hires to promote its product or service; however, an advertiser can be liable for the promoter’s activities if the advertiser exerts sufficient control over the promoter. United States v. Cyberheat, Inc., CV-05-457-TUC-DCB (D. Ariz. Mar. 2, 2007). In Cyberheat, the U.S. Department of Justice (DOJ) argued that the defendant was liable for the actions of its “affiliates,” who were paid by the defendant to promote its website. The affiliates’ promotional activities allegedly included violations of the CAN-SPAM Act. DOJ argued that the defendant was liable for the affiliates’ activities because it “procured” the transmission of e-mails that violated the CAN-SPAM Act by paying the affiliates for their activities. The defendant, however, argued that it was not liable for the affiliates’ activities because it “did not permit or condone the illegal activity.” On a summary judgment motion, the court determined that the CAN-SPAM did not impose “strict liability” on the defendant for the acts of its affiliates. Nevertheless, the court noted that “based on the duty imposed by this Act, if [defendant] is not a direct violator of the Statute, it may be vicariously liable for the foreseeable violations of its affiliates” if the facts show that the affiliates were acting as the agent of the advertiser, rather than as an independent contractor. Such an inquiry is a question of fact, however, and therefore is inappropriate for summary judgment. Clients may wish to examine their online advertising contracts and online advertising initiatives to ensure continued compliance with CAN-SPAM. Please contact for a copy of the decision.
7th Circuit Finds Debt Collector’s Error Detection Process Reasonable Even If Not State-of-the-Art. The Seventh Circuit recently ruled that a debt collector’s error detection procedures are reasonable, even though the procedures do not utilize the most current technological developments. Ross v. RJM Acquisitions Funding LLC, No. 06-2059 (6th Cir. Mar. 13, 2007). In this case, the defendant debt collector attempted to recover a debt that had been discharged when the plaintiff had emerged from bankruptcy. The plaintiff alleged a violation of the Fair Debt Collection Practices Act (FDCPA), in that the defendant had made a false claim for a debt not owed by the plaintiff. The plaintiff claimed that the defendant’s error detection procedures were inadequate, since they did not utilize the most up-to-date technological advances. Specifically, the error detection process failed to discover that “Delisa Ross,” the name used on the bankruptcy petition, and “Lisa Ross,” the name under which the plaintiff incurred the debt in question and under which the defendant attempted to collect, belonged to the same person. The court, in an opinion written by Judge Richard Posner, rejected this claim, noting that the FDCPA provides a complete defense if a debt collector’s procedures are “reasonable.” The court said, “The word ‘reasonable’ in the Fair Debt Collection Practices Act defense cannot be equated to ‘state of the art,’ which is to say, at the technological frontier.” Moreover, the court noted that plaintiff was at fault since she failed to disclose in her bankruptcy proceedings that she had incurred debt under the name “Lisa Ross.” For a copy of the opinion, please see http://www.ca7.uscourts.gov/fdocs/docs.fwx?caseno=06-2059&submit=showdkt&yr=06&num=2059.
Kmart Settles Gift Card Complaint from FTC. On March 12, the Federal Trade Commission (FTC) announced a settlement with Kmart Corporation over that company’s gift card program. The FTC’s complaint alleged that Kmart failed to adequately disclose to consumers a “dormancy fee” for card inactivity and misrepresented that the card would never expire. The settlement requires Kmart to clearly display effective expiration dates and fees on gift cards going forward, and outlines a process by which consumers can recover any “dormancy fees” charged in the past. The text of the settlement specifically states that it “does not constitute an admission… that the law has been violated” by Kmart Corporation. For the official press release, the complaint, and the settlement, please see http://www.ftc.gov/opa/2007/03/kmart.htm.
$1.58 Billion Verdict Against Morgan Stanley Overturned for Failure of Coleman Holdings to Show Actual Damages. On March 21, 2007, the Florida District Court of Appeal for the Fourth District overturned a decision in favor of Coleman Holdings Inc. against Morgan Stanley & Co., Inc. for conspiracy and aiding and abetting fraud in connection with the merger between The Coleman Company, Inc. and Sunbeam, Inc. Morgan Stanley & Co., Incorporated v. Coleman (Parent) Holdings, Inc., No. 4D05-2606 (Fl. Ct. App. March 21, 2007). Morgan Stanley, Sunbeam's investment banker, was found to have helped Sunbeam in carrying out a fraudulent scheme to inflate the price of Sunbeam stock until after the merger, and a jury accordingly awarded a $1.58 billion judgment against Morgan Stanley ($604M compensatory and $850M punitive damages). In this recent decision by the Florida appeals court, Judge Carole Taylor found that Coleman Holdings had failed to show any “legally cognizable damage'' stemming from the alleged fraud and that because "there was no proof presented at trial on the correct measure of damages, the trial court should have granted Morgan Stanley's motion for directed verdict." The final judgment for compensatory damages was reversed and remanded because Coleman had failed to meet its burden of proving the actual, "fraud-free" value of the Sunbeam stock on the date of the transaction and, instead, had measured damages based on the stock's value years after the transaction. The punitive damages were similarly reversed because the Court held that to prevail in an action for fraud, a plaintiff must prove its actual loss or injury from acting in reliance on the false representation. Since the Court found no damage to have been shown, punitive damages could not be awarded. The Court explained further that even if Coleman had established some unquantified damage (which could support a nominal damage award), this would not have been enough to justify punitive damages in a fraud case. The Court importantly explained that "[a]lthough the Florida Supreme Court’s recent Engle opinion does state that 'an award of compensatory damages is not a prerequisite to a finding of entitlement to punitive damages,' [the Court] read[s] the opinion as addressing the order of proof in determining entitlement to punitive damages." For more information and copy of the opinion, please contact .
District Court Holds Mailings Are Solicitations, Not “Firm Offer under FCRA.” The U.S. District Court for the Northern District of Indiana held that mailers soliciting customers for subprime first-mortgages that lacked crucial terms “such as interest rate percentage, or a range of interest rate percentages, whether the offer is for a fixed or variable rate mortgage loan, a reasonable estimate of the loan, the length of the loan, how the loan was to be repaid, or any applicable fees,” were merely advertisements and solicitations that did not rise to the level of a “firm offer” under the Fair Credit Reporting Act (FCRA). The court rejected the lender’s argument that it should consider the credit transaction as a whole, not just the initial offer letter, to determine whether there was a meaningful offer of credit. However, the court, citing the opinion of the U.S. Court of Appeals for the Seventh Circuit in Murray v. GMAC that “courts ‘need only determine whether the four corners of the offer’ amount to a firm offer of credit,” held that because the value of the offer was not reflected in the “four corners” of the initial letter, the offer had “no meaningful economic value” to the consumers and did not qualify as a “firm offer” under FCRA. See Bonner v. Home123 Corp., No. 2:05-CV-146, 2007 WL 118447 (N.D. Ind. Mar. 9, 1007). Please contact for a copy of this decision.
When Requesting a "File" under FCRA, Consumers are only Entitled to Information Contained in their Consumer Reports. The U.S. Court of Appeals for the Seventh Circuit concluded that the term "file" with respect to consumer requests for information under the Fair Credit Reporting Act (FCRA) only includes information that is contained in "consumer reports" to users, and not all information on the consumer maintained by a consumer reporting agency (CRA). Section 607(a)(1) of FCRA, 15 U.S.C. § 1681g(a)(1), requires consumer reporting agencies, upon request, to clearly and accurately disclose to consumers all information "in the consumer's file at the time of the request." The plaintiffs argued that the term "file" encompasses all information contained in a CRA's consumer file including "purge dates" internally maintained by the CRA to trigger the removal of negative information from consumer reports. The court reasoned that because the term "file" in the statute is followed by a list of specific information that the term includes, to hold that "file" includes all information would make the specific list superfluous. Moreover, although not binding on the court, the FTC Commentary on FCRA limits the scope of "file" to only include information in a consumer report that has been or may be issued. The legislative history of the provision also indicated to the court that legislators were concerned with ensuring receipt by consumers of all information contained in their consumer reports. As a result, absent a showing that Trans Union disclosed "purge dates" in past consumer reports or planned to disclose such information in the future, the court declined to require Trans Union's disclosure of them as a part of the "file" now. See Gillespie v. Trans Union Corp., 2007 U.S. App. Lexis 6081 (7th Cir. Mar. 16, 2007). For a copy of this opinion, contact .
Real Estate Investor May Not Pursue FCRA Claims. A federal court in Kentucky dismissed plaintiff’s Fair Credit Reporting Act (FCRA) claims because the transactions in question were commercial transactions. In Breed v. Nationwide Insurance Co., No. 05-CV-547, 2007 WL 789771 (W.D. Ky. Mar. 13, 2007), the plaintiff, a real estate investor who purchased homes, remodeled them, and sold them for a profit, sued a collection agency and a credit reporting agency under FCRA and the Fair Debt Collection Practices Act (FDCPA). Plaintiff’s claims stemmed from an allegedly false credit report that resulted in plaintiff being denied credit and offered credit at higher rates. Following a pretrial conference, the Court dismissed plaintiff’s FCRA claims and raised doubts about his FDCPA claims because the credit transactions at issue were for commercial purposes. In reaching this decision, the Court relied on the express language and legislative history of FCRA, which make it clear that FCRA only applies to credit “used primarily for personal, family, or household purposes.” The Court left unresolved whether plaintiff could pursue damages for emotional distress under FCRA, requesting further briefing on the issue. In addition, and while the issue was not before it, the Court cast doubt on plaintiff’s FDCPA claim, noting that the statute contains similar language to FCRA – restricting it to debts incurred “primarily for personal, family, or household purposes.” Breed v. Nationwide Insurance Co., No. 3_05CV-547, 2007 WL 789771 (W.D. Ky. Mar. 13, 2007). For a copy of this case please contact .
Conditional Firm Offer Does Not Violate FCRA. In Soroka v. JP Morgan Chase & Co., No. 05 Civ. 7578 (S.D.N.Y. opinion issued March 19, 2007), the court dismissed a putative FCRA class action challenge to a mortgage lender’s prescreened offer of credit letter. Under the facts as alleged by the plaintiff Soroka, the lender violated FCRA by accessing the consumer’s credit report and transmitting an offer to make a home loan subject to approval of an additional application. The consumer alleged that defendant’s letter inviting him to take advantage of the offer violated FCRA because (1) it was not a firm offer and (2) it did not clearly and conspicuously make the credit disclosures required by FCRA. The Court granted defendant’s motion to dismiss both claims. The Court held that, under FCRA, a creditor may access a consumer’s credit report provided that it does so in connection with a “firm offer” of credit. According to the Court, such an offer of credit remains a “firm offer” even when it is subject to the consumer satisfying further stated conditions, citing Kennedy v. Chase Manhattan Bank USA, NA, 369 F.3d 833, 841 (5th Cir. 2004) (“[A] firm offer of credit under [FCRA] really means a firm offer if you meet certain criteria.”). The consumer also argued, based on the Seventh Circuit’s Cole decision, that the letter violated FCRA because it failed to include certain terms such as the rate and term applicable to the offer. The Court rejected this contention, holding that, while TILA would require such disclosures at the time of application and/or approval, FCRA does not require such disclosures in connection with firm offers of credit. Furthermore, the Court dismissed plaintiff’s claim that the letter did not provide certain FCRA-required disclosures clearly and conspicuously. Without addressing whether the disclosures met this standard, the Court joined the vast majority of courts that have considered the issue in holding that amendments to FCRA enacted in 2004 eliminated any private right of action plaintiff may have had for claims under FCRA’s clear and conspicuous disclosure requirements. For a copy of this decision, please contact .
Court Holds for Lender in FCRA “Firm Offer” Case Involving Student Loan Consolidation Offer. On March 15, 2007, the U.S. District Court for the Eastern District of New York dismissed a consumer’s claim that a student lender did not make a “firm offer” of credit under FCRA where the lender’s offer of student loan consolidation allegedly lacked definite terms and did not contain “sufficient value.” According to the court, the lender’s offer had to be read to include the terms and conditions for student loan consolidation set forth in the Higher Education Act (HEA), as the “precise terms for a consolidated loan can . . . only be determined and disclosed once the recipient provides the would-be lender with more information about existing loans.” With respect to the offer’s “value,” the court distinguished the case from the Seventh Circuit’s decision in Cole v. U.S. Capital, Inc., noting that the plaintiff in Cole was offered a loan of $300 toward the purchase of a car at a particular dealership, whereas in this case, the student lender’s solicitation concerned no other product, only the extension of credit. Although the court found the issue of whether the lender’s solicitation had “sufficient value” to be immaterial in the context of a student loan consolidation offer, to the extent that such an analysis was necessary, the court found the defendant’s offer to have “sufficient value.” Thus, the lender’s solicitation was a “firm offer” of credit under FCRA, “with specific pre-set terms based on the provisions of the HEA.” See Schwartz v. Goal Financial LLC, No. 06-CV-1478, 2007 U.S. Dist. LEXIS 18340 (E.D.N.Y. March 15, 2007). For a copy of the opinion, please contact .
Court Grants Class Certification in FCRA Firm Offer Case. The U.S. District Court for the Northern District of Illinois granted class action certification to a consumer who alleged that the solicitation sent to her did not constitute a “firm offer of credit.” The lender argued that the plaintiff was not an adequate representative for the class because she was not seeking actual or punitive damages, but rather, only statutory damages. The Court cited to Murray v. GMAC Mortgage to support its holding that the pursuit of statutory damages only in a FCRA case does not bar class certification. The lender also argued that class certification is not appropriate because the Court would ultimately have to make individualized inquiries as to the impact of the solicitation on each class member. Again citing Murray v. GMAC Mortgage, the Court rejected this argument because the value of an offer can be determined by considering the offer’s usefulness to the “normal consumer.” Asbury v. People’s Choice Home Loan, Inc. No. 05-C-5483, 2007 WL 809531 (N.D. Ill. March 12, 2007). For a copy of the opinion, please contact .
Court Allows Consumer’s Claim for FCRA Notice Violations. The U.S. District Court for the District of Hawaii acknowledged that the Fair and Accurate Credit Transactions Act of 2003 (FACTA) eliminated private actions under the notice provisions of the Fair Credit Reporting Act (FCRA), which include, among other things, adverse action and prescreening notice requirements. Grab v. American Lawyers Co., No. 05-00812, 2007 WL 842045 (D. Haw. Mar. 19, 2007). However, in this case, the Court noted that the actions in question occurred between the enactment of FACTA on December 4, 2003, and the effective date of the provision that repealed the private right of action, December 1, 2004. The Court reasoned that, because the statute did not explicitly state a Congressional intent to apply it retroactively and doing so would impair rights that the consumer possessed before the amendments, retroactivity did not apply. Therefore, the Court determined that the consumer could maintain his claim. The Court also held that the defendant, as a user of a consumer report, was liable for obtaining or using a report without a permissible purpose. For a copy of the opinion, please contact .
Mailer Was “Firm Offer” Despite Failure to State Minimum Line of Credit. The U.S. District Court for the Northern District of Illinois held that a credit card offer sent by mail that does not state a minimum line of credit may constitute a firm offer of credit in compliance with FCRA. In King v. Commerce Bancshares, Inc., No. 06 C 4117, 2007 WL 781732 (N.D. Ill. Mar. 12, 2007), a putative class action, the court considered the four factors set out in the Seventh Circuit’s Cole v. U.S. Capital case for determining whether an offer is a bona fide firm offer or a sham: (1) whether credit approval is guaranteed; (2) the amount of credit offered; (3) the stated rate of interest and the method of computation; and (4) the applicability of the credit to various merchants. Here, the court found that the mailing met three of the four factors; the only element not expressly stated in the mailing was the amount of credit offered. But the court weighed this finding against the fact that the Federal Trade Commission (FTC) does not consider the amount of credit offered a major element of a firm offer, as the FTC's model solicitation letter for credit card offers does not include a space for the minimum amount of credit. Therefore, the court held that the failure to state the minimum line of credit did not render the offer valueless and that, therefore, the lender had not violated FCRA. For a copy of the opinion, please contact .
Court Rules that Failure to Disclose Yield Spread Premiums on GFE Violates RESPA and Washington Law. A federal court in Washington recently ruled in a class action decision that failure to adequately disclose yield spread premiums (YSP) on good faith estimate (GFE) disclosures violated the Real Estate Settlement Procedures Act (RESPA) and the Washington Consumer Loan Act (CLA), and that the disclosures constituted a per se violation of the Washington Consumer Protection Act (CPA). Pierce v. Novastar Mortgage, Inc., No. C05-5835RJB, 2007 U.S. Dist. LEXIS 18336 (W.D. Wash. March 15, 2007). The GFEs either failed to mention YSPs at all or they gave a range of costs (starting with 0%) and a dollar amount of $0.00 or no actual percentage or dollar amount. With regard to the CLA, Novastar claimed that it made the loans to plaintiffs under the Mortgage Broker Practices Act (MBPA) and not the CLA, and thus the CLA did not apply. Novastar admitted that it was licensed under the CLA but contended that, although it was exempt from licensing under MBPA, loans that it made at interest rates of 12% or lower were made pursuant to the MBPA, not the CLA. However, the Court ruled that the CLA applied because the regulations under the CLA provide that all loans made by a CLA licensee are subject to the authority and restrictions of the CLA. In analyzing compliance with the CLA, the Court stated that the CLA requires a written disclosure containing an itemized estimate of all the fees and costs that the borrower is required to pay in connection with the loan. The Court ruled that Novastar’s GFEs did not violate this provision because the borrower is not required to pay the YSP. However, the Court explained that the CLA also requires compliance with RESPA’s disclosure requirements. Under RESPA, the GFE must list the “amount or range” of settlement charges. Settlement charges include indirect or back-funded payments made by lenders to mortgage brokers. Therefore, the Court concluded that a GFE must disclose the yield spread premium in order to be in compliance with RESPA. However, the Court denied a motion with respect to the other GFEs because the plaintiffs failed to demonstrate that the ranges or estimates in these disclosures were not made in good faith. For a copy of this case please contact .
Banc of America Securities Settles Claim for Failure to Safeguard Nonpublic Research Information and Publication of Fraudulent Research. On March 14, the Securities and Exchange Commission (SEC) announced that it had settled an enforcement action brought against Banc of America Securities LLC (BAS) for failure to safeguard its forthcoming research reports and publication of fraudulent research. Specifically, the SEC alleged that, from January 1999 through December 2001, BAS lacked policies and procedures designed to prevent the misuse of material nonpublic information concerning its research reports. As a result, BAS personnel, on several occasions, learned of forthcoming research reports, which included information concerning upgrades and downgrades of certain companies, and on at least two occasions, improperly traded in those companies before the research was issued to the firm’s customers. The SEC also alleged that BAS failed to address conflicts of interest that compromised the independence and integrity of its analysts, which resulted in the firm publishing materially false and misleading research reports on three companies. The SEC alleged that BAS created an environment in which its investment bankers inappropriately influenced its analysts, who were charged with producing objective research. As a result, BAS issued research reports on companies which did not reflect the true opinions of the analysts covering those companies. As part of the settlement, BAS, without admitting or denying the SEC’s allegations, agreed to a censure, cease-and-desist order, and payment of $26 million in disgorgement and penalties. Additionally, BAS will (i) retain an independent consultant to conduct a review of its internal controls and (ii) implement structural and other reforms of its investment banking and research departments to strengthen the integrity of the firm's equity research. The full text of the SEC’s order is available at http://sec.gov/litigation/admin/2007/34-55466.pdf.
$1.58 Billion Verdict Against Morgan Stanley Overturned for Failure of Coleman Holdings to Show Actual Damages. On March 21, 2007, the Florida District Court of Appeal for the Fourth District overturned a decision in favor of Coleman Holdings Inc. against Morgan Stanley & Co., Inc. for conspiracy and aiding and abetting fraud in connection with the merger between The Coleman Company, Inc. and Sunbeam, Inc. Morgan Stanley & Co., Incorporated v. Coleman (Parent) Holdings, Inc., No. 4D05-2606 (Fl. Ct. App. March 21, 2007). Morgan Stanley, Sunbeam's investment banker, was found to have helped Sunbeam in carrying out a fraudulent scheme to inflate the price of Sunbeam stock until after the merger, and a jury accordingly awarded a $1.58 billion judgment against Morgan Stanley ($604M compensatory and $850M punitive damages). In this recent decision by the Florida appeals court, Judge Carole Taylor found that Coleman Holdings had failed to show any “legally cognizable damage'' stemming from the alleged fraud and that because "there was no proof presented at trial on the correct measure of damages, the trial court should have granted Morgan Stanley's motion for directed verdict." The final judgment for compensatory damages was reversed and remanded because Coleman had failed to meet its burden of proving the actual, "fraud-free" value of the Sunbeam stock on the date of the transaction and, instead, had measured damages based on the stock's value years after the transaction. The punitive damages were similarly reversed because the Court held that to prevail in an action for fraud, a plaintiff must prove its actual loss or injury from acting in reliance on the false representation. Since the Court found no damage to have been shown, punitive damages could not be awarded. The Court explained further that even if Coleman had established some unquantified damage (which could support a nominal damage award), this would not have been enough to justify punitive damages in a fraud case. The Court importantly explained that "[a]lthough the Florida Supreme Court’s recent Engle opinion does state that 'an award of compensatory damages is not a prerequisite to a finding of entitlement to punitive damages,' [the Court] read[s] the opinion as addressing the order of proof in determining entitlement to punitive damages." For more information and copy of the opinion, please contact .
Banc of America Securities Settles Claim for Failure to Safeguard Nonpublic Research Information and Publication of Fraudulent Research. On March 14, the Securities and Exchange Commission (SEC) announced that it had settled an enforcement action brought against Banc of America Securities LLC (BAS) for failure to safeguard its forthcoming research reports and publication of fraudulent research. Specifically, the SEC alleged that, from January 1999 through December 2001, BAS lacked policies and procedures designed to prevent the misuse of material nonpublic information concerning its research reports. As a result, BAS personnel, on several occasions, learned of forthcoming research reports, which included information concerning upgrades and downgrades of certain companies, and on at least two occasions, improperly traded in those companies before the research was issued to the firm’s customers. The SEC also alleged that BAS failed to address conflicts of interest that compromised the independence and integrity of its analysts, which resulted in the firm publishing materially false and misleading research reports on three companies. The SEC alleged that BAS created an environment in which its investment bankers inappropriately influenced its analysts, who were charged with producing objective research. As a result, BAS issued research reports on companies which did not reflect the true opinions of the analysts covering those companies. As part of the settlement, BAS, without admitting or denying the SEC’s allegations, agreed to a censure, cease-and-desist order, and payment of $26 million in disgorgement and penalties. Additionally, BAS will (i) retain an independent consultant to conduct a review of its internal controls and (ii) implement structural and other reforms of its investment banking and research departments to strengthen the integrity of the firm's equity research. The full text of the SEC’s order is available at http://sec.gov/litigation/admin/2007/34-55466.pdf.
Virginia Passes Law for Electronic Notarization. On March 15, 2007, Virginia’s governor signed HB 2058, which amends Virginia’s notarization statutes to allow electronic notarization. Under this statute, electronic notaries must be registered with the Secretary of the Commonwealth and the notary must inform the Secretary of the technology being used to create electronic notarizations. The statute does not explicitly mandate the use of a specific technology, but does require that the electronic notarization be in a format that invalidates the certificate of notarization if the underlying document is improperly modified. To view the statute, please go to http://leg1.state.va.us/cgi-bin/legp504.exe?071+ful+CHAP0269.
Federal Agencies Seek Public Comment on Model Privacy Notice. On March 21, the federal agencies charged with enforcing the privacy provisions of the Gramm-Leach-Bliley Act (GLB Act) (the Federal Reserve System, the CFTC, the FDIC, the FTC, the NCUA, the OCC, the OTS, and the SEC) released a notice of proposed rule making (NPR) requesting comment on a model privacy form that financial institutions would be able to use for the privacy notices required by the GLB Act to be given to consumers. The NPR proposes that a financial institution that chooses to use the model form would satisfy the disclosure requirements for the notices and thus take advantage of a "safe harbor." While financial institutions would not be required to use the model form, the NPR proposes to remove the current safe harbor for use of the sample clauses currently included in some of the agencies' privacy rules. The Financial Services Regulatory Relief Act of 2006 amended the GLB Act to require the agencies to propose a model form that is succinct and comprehensible to consumers, allows consumers to easily compare privacy practices of financial institutions, and uses easily readable type font. Written comments on the proposed rule amendments may be submitted within 60 days after publication in the Federal Register, which is expected in late March. For the joint press release, including a copy of the NPR, see http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070321/.
Advertiser Can be Liable for the Actions of Parties Promoting its Product or Service. A federal court recently determined that the CAN-SPAM Act does not make an advertiser strictly liable for the violations of entities it hires to promote its product or service; however, an advertiser can be liable for the promoter’s activities if the advertiser exerts sufficient control over the promoter. United States v. Cyberheat, Inc., CV-05-457-TUC-DCB (D. Ariz. Mar. 2, 2007). In Cyberheat, the U.S. Department of Justice (DOJ) argued that the defendant was liable for the actions of its “affiliates,” who were paid by the defendant to promote its website. The affiliates’ promotional activities allegedly included violations of the CAN-SPAM Act. DOJ argued that the defendant was liable for the affiliates’ activities because it “procured” the transmission of e-mails that violated the CAN-SPAM Act by paying the affiliates for their activities. The defendant, however, argued that it was not liable for the affiliates’ activities because it “did not permit or condone the illegal activity.” On a summary judgment motion, the court determined that the CAN-SPAM did not impose “strict liability” on the defendant for the acts of its affiliates. Nevertheless, the court noted that “based on the duty imposed by this Act, if [defendant] is not a direct violator of the Statute, it may be vicariously liable for the foreseeable violations of its affiliates” if the facts show that the affiliates were acting as the agent of the advertiser, rather than as an independent contractor. Such an inquiry is a question of fact, however, and therefore is inappropriate for summary judgment. Clients may wish to examine their online advertising contracts and online advertising initiatives to ensure continued compliance with CAN-SPAM. Please contact for a copy of the decision.
Mailer Was “Firm Offer” Despite Failure to State Minimum Line of Credit. The U.S. District Court for the Northern District of Illinois held that a credit card offer sent by mail that does not state a minimum line of credit may constitute a firm offer of credit in compliance with FCRA. In King v. Commerce Bancshares, Inc., No. 06 C 4117, 2007 WL 781732 (N.D. Ill. Mar. 12, 2007), a putative class action, the court considered the four factors set out in the Seventh Circuit’s Cole v. U.S. Capital case for determining whether an offer is a bona fide firm offer or a sham: (1) whether credit approval is guaranteed; (2) the amount of credit offered; (3) the stated rate of interest and the method of computation; and (4) the applicability of the credit to various merchants. Here, the court found that the mailing met three of the four factors; the only element not expressly stated in the mailing was the amount of credit offered. But the court weighed this finding against the fact that the Federal Trade Commission (FTC) does not consider the amount of credit offered a major element of a firm offer, as the FTC's model solicitation letter for credit card offers does not include a space for the minimum amount of credit. Therefore, the court held that the failure to state the minimum line of credit did not render the offer valueless and that, therefore, the lender had not violated FCRA. For a copy of the 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.