Client Alert

Financial Services Report, Winter 2007


In this issue:

Editor Note

On the Edge
The next law firm newsletter you place in the bottom of your bird cage may be an award-winning one.  No way, you say, but hey:  Way.  We just won a “Burton Award” for 2007 in the category Best Law Firm Newsletter, presented by the Association of Legal Administrators.  You may not recognize the difference, but your avian friends will. 

Will success go to our heads?  Success might.  Watch for our on-line 3-D version, coming soon, in which this newsletter’s topic editors (with digitally-enhanced abs) hurl barbed metaphors that whistle past your ears so fast you will want to duck.  Puns will drip with sarcasm so real it will make you scream.  You will need seat belts just to read this newsletter. 

Until then, we have to confine our gimmickry to 2-D.  Take this issue’s Beltway Report, for example. Congressmen are tripping over one another as the subprime mess becomes the Washington equivalent of reality TV.  Think “Lost.” The Second Circuit decided the much-awaited preemption case Clearing House Association v. Spitzer.  The “firm offer” litigation also continues unabated.  But at least taxpayers got their money’s worth from the federal agencies who were busy issuing rules, proposed rules, final rules, joint rules, joint final rules, and a smattering of guidance.  The privacy area was especially hard hit. 

Until next time, have a wondrous holiday and a Happy New Year.   

 William L. Stern, Editor


MoFo Metrics

43         States that have enacted immigration laws this year

182       Number of new state immigration laws

41         Percentage of U.S. pregnancies not intended

10         Number of years before withdrawals from Social Security Trust Fund exceed deposits

2.9        Millions of millionaires in U.S.

33         Percentage of millionaires worldwide who live in U.S.

3,750    Docket entries since April 2007 in New Century Financial bankruptcy

4,500    Calories consumed by an average American on Thanksgiving


Beltway Report

Final Reg R Broker Rules
Prior to the adoption of the GLB Act, banks generally were exempt from the definition of “broker” under the Exchange Act and were not required to register as brokers.  After years of delay, the SEC and the FRB have jointly issued final rules that provide exceptions and exemptions from the broker registration requirement.  Banks seeking to rely on those broker exceptions and exemptions must comply with the required criteria by the first day of the first fiscal year after September 30, 2008, or be subject to broker registration requirements.  The FRB and the SEC have joint authority to propose or adopt rules relating to the other “broker” exceptions in the Exchange Act not addressed in these final rules, and together with the OCC and the FDIC, they will also issue any interpretations and response to requests for no-action letters or other interpretive guidance concerning the scope or terms of the exceptions and rules.  Banks may also ask the SEC for an exemption.

Reg Z Comment Period Closes

The FRB issued detailed proposed amendments to Regulation Z, which would: (1) significantly alter open-end credit disclosures; (2) substantively revise existing change-in-terms requirements; and (3) change the “effective” APR disclosure.  The comment period closed on October 12, 2007.  It has received 2,400 comments.  Given the magnitude of the proposed amendments, the complexity of the issues, and politics, don’t expect a final rule soon. 

DOD Has Talent

The Department of Defense (“DoD”) issued a final rule effective October 1, 2007, implementing the much criticized Talent Amendment, which would limit the cost and terms of certain types of consumer credit offered or extended to service members and their dependents.  In implementing the Talent Amendment, the DoD adopted a narrow definition of “consumer credit.” Specifically, the final rule limits coverage to payday loans, vehicle loans, and tax refund anticipation loans.  As a result, the final rule does not cover credit cards.  Exhale.   

You’ve Got Mail

The FRB amended Regs B, E, M, Z, and DD to clarify consumer disclosures made electronically.  The amendments, representing final action on a proposal issued for comment in April 2007, simplify the Board’s rules by: (1) withdrawing certain portions of the 2001 interim final rules that restate or cross-reference provisions of the E-Sign Act; (2) withdrawing those provisions of the 2001 interim final rules that pose undue burdens on e-banking or may be unnecessary for consumer protection; and (3) adopting provisions that provide guidance on the use of electronic disclosures.  The mandatory compliance date is October 1, 2008.

ILC Legislation

H.R. 698, closing the ILC loophole, passed the House in May but all eyes are now on the Senate, where identical legislation, S. 1356, is under consideration.  The ABA and other industry trade groups urged the Senate Banking Committee to quickly pass the bill, as the FDIC moratorium on deposit insurance applications for commercially owned ILCs expires on January 31.  The biggest issue now seems to be lack of time.

Credit Report Regs

On November 27, the financial regulatory agencies and the FTC proposed new FACT Act rules and guidelines to implement section 312, which is intended to improve credit report accuracy and give consumers more power to dispute report items. Companies furnishing information would be required to investigate consumer disputes, but would not be required to investigate claims beyond their purview, such as employment records.

Hello Kitty

In October, the Department of the Treasury and the FRB held a polka fest.  A joint proposed rule on “unlawful Internet gambling” would require participants in “designated payment systems” to develop written policies to identify and block restricted transactions.  But tracking bets that are “restricted transactions” is more difficult than pulling the lever on a slot machine.  In some cases, this will result in “over blocking.”  Comments initially filed indicate that gaming establishments and other interested bettors are poised to come to the window and back a different horse to get their transactions under the wire.  Comments are due by December 12, 2007.

FTC … Super Nanny

On December 5, the House passed H.R. 3526, would place all banking agencies within the existing regulatory authority under the FTC Act and would allow the OCC and the FDIC to write consumer protection rules governing depository institutions, in addition to the FRB’s existing authority.  Also, the House Banking Committee approved legislation granting the FDIC and the OCC the power to define unfair and deceptive practices in mortgage lending.  This legislation is in response to criticism that the Federal Reserve Board has not adequately used its power under HOEPA to prevent abusive mortgage practices. 

Ahead of the Summons

Looking At Clouds From Both Sides Now
Still don’t know subprime clouds at all?  If you think it’s loans’ illusions you recall, we are here to fix that.

A series of racial discrimination class actions have been brought alleging discrimination in mortgage loans made to African-American and other minority borrowers.  The NAACP got things going by suing twelve lenders, and there are now approximately twenty private follow-on cases.  The suits allege violations of the FHA, ECOA, federal civil rights statutes and, occasionally, state UDAP statutes.  All are vaguely based on studies that look at the HMDA data and purport to control for risk factors (mostly borrower income) related to credit-worthiness.  The theory of these cases is highly suspect.  The cases never identify facts suggesting discrimination in HMDA data relating to the particular defendant.  Moreover, the supposed disparity does not account for all the costs borrowers incur.  For example, HMDA data do not disclose all of the risk factors, and the studies relied on do not consider such things as credit score.  Motions are pending, none yet decided, but we will provide updates in future newsletters. 

Wax the Surfboards, Here Comes the Next Wave

If the subprime race discrimination suits are the mothers of mortgage litigation right now, the dozens of cookie-cutter “option ARM” class actions are the mothers-in-law.  A coalition of plaintiffs’ firms have completed the initial filing of a barrage of nearly identical class action complaints against 40 mortgage lenders, including Countrywide, Bank of America, and Washington Mutual, alleging wrongdoing in the offering of payment-option adjustable rate mortgages.  Plaintiffs, who assert claims under TILA and state UDAP laws, contend that lenders aggressively marketed option ARMs during the last four years but did not adequately disclose features, such as the possibility of negative amortization of those loans.  These cases were originally concentrated in California, but new filings are popping up around the country.

Pyramiding the Cap

We’re not against turning nouns into verbs and, apparently, neither are plaintiffs’ lawyers.  Suppose you identified a nationwide violation of a federal consumer protection law that is burdened by a class action “cap” (e.g., TILA, EFTA, FDCPA, etc.).  Why not chop it into smaller class actions in order to lay claim to multiple $500,000 caps?  This is an all-too-common practice.  A federal judge in California has put his foot down.  See Guevarra v. Progressive Financial Services, Inc., N.D. Cal. No. 05-3466-VRW (July 31, 2007).  Judge Walker characterized this as a “mis-incentive” and stopped just short of referring class counsel to the state Bar. 

Privacy Report

To The Maxx
It all began in January, when TJX revealed that payment card data was compromised and the portion of its computer network that handles customer transactions for many of its 2,500 stores worldwide was hacked.  So, let’s review what’s happened lately.

In September, TJX announced the proposed settlement of the consumer class actions, even though no consumers were harmed.  This was a “Fear of ID Theft” case.  Still, the fact that Christmas season was approaching and that TJX planned to offer coupons might have clinched the deal.  Several state AGs objected.

Then in October, TJX’s merchant processor (Fifth Third Bank) announced that Visa has levied $880,000 in fines for failing to ensure that TJX complied with the Payment Card Industry Data Security Standards (PCI DSS).  That fine is being rescinded as part of a settlement.  See next.

On November 29, Visa negotiated a settlement by which TJX would pay $40.9 million to the bank-issuers of Visa-branded credit and debit cards.  The amount of the payment to individual banks will be determined by Visa’s calculations under its ADR system used when Visa and banks disagree over fraud losses.  Visa-issuing banks will have until December 19 to accept and will be paid December 27.

Odd timing that, because the settlement was announced the same day a federal court in Massachusetts hearing the bank-issuer class action suit against Fifth Third and TJX denied class certification.  (In re TJX Cos. Retail Security Breach Litig., D. Mass., No. 1:07-cv-10162-WGY (D. Mass. 11/29/07).)  Judge Young decided there was a debilitating intra-class conflict (between merchant-banks and issuer-banks), that individual inquiries would be needed to assess damages, and that the claims presented individual issues of reliance. 

In December, the court will hear Fifth Third Bank’s motion for summary judgment.

Final Fact Act Affiliate Marketing Rules

The federal banking agencies and the FTC issued rules implementing the affiliate-marketing restrictions of the FACT Act.  If a person receives “eligibility information” regarding a consumer from an affiliate, he may not use that information to make solicitations unless the consumer opts out.  But affiliated entities of all types should assess whether these requirements might pose challenges to the ways they use consumer information.  For starters, the final rule prescribes requirements pertaining to the use of information that triggers the notice and opt-out requirements as well exceptions, e.g., for “pre-existing business relationships.”  It also includes requirements relating to which affiliate must give the notice, as well as model language.  Also, institutions should consider whether the affiliate-marketing notice should be coordinated with GLBA privacy notices.  The rule is effective on January 1, 2008, mandatory as of October 1, 2008.

Identity Theft Red Flags

Final rules were adopted to implement certain FACT Act provisions aiming to combat identity theft.  These rules require each “financial institution” or “creditor” to establish a risk-based Identity Theft Prevention Program to mitigate identity theft Red Flags in connection with “covered accounts.”  Importantly, the requirements apply also to business accounts.  Financial institutions should be able to build on existing anti-fraud programs, but are required to include “Guidelines” containing Red Flags aplenty, ripe for detection and mitigation.  Plus, the final rules impose administrative duties.  Although the compliance deadline is nearly a year away, institutions should consider taking steps to resolve potentially vexing operational issues, e.g., how red-flag procedures should identify Red Flags for each covered account.  Mandatory compliance begins November 1, 2008.

Discrepancy Rule

Another final FACT Act rule imposes address verification and confirmation requirements on any company that uses consumer reports.  The final rule requires a user to develop policies and procedures to enable it to form a “reasonable belief” that a consumer report relates to the consumer about whom the user requested a report when it receives an address-discrepancy notice from a consumer reporting agency.  If a user is an institution subject to the Red Flags rule (i.e., a “financial institution” or “creditor”), receipt of an address-discrepancy notice may be a Red Flag and may require an appropriate response by the user under its Program.  In addition, a user must furnish to a CRA a confirmed address for the consumer under certain circumstances.   

Change-of-Address Rule

We’re not through yet.  Credit and debit card issuers get yet another FACT Act rule, namely, address-validation requirements applying to a change-of-address request by a consumer.  A card issuer must establish policies and procedures to assess the validity of a change-of-address request if it receives notice of a change of address for a consumer’s debit or credit card account and, within a short period of time afterwards (at least 30 days after receiving such notice), the card issuer receives a request for an additional or replacement card for the same account.  If that happens, the card issuer may not issue a new card until it (1) notifies the cardholder of the request and provides the cardholder with the means to promptly report incorrect address changes or (2) otherwise assesses the validity of the change of address in accordance with its Program. 

California Report

Taking the Heat Off Appraisers
California has gotten ahead of the rest of the country by enacting a statute (S.B. 223), effective immediately, that prohibits anyone with an interest in a real estate transaction in connection with a mortgage loan from improperly influencing the appraisal.  Specifically prohibited are “coercion, extortion, and bribery.”  A similar federal bill, H.R. 3837, would prohibit certain interested parties in a real estate transaction involving an appraisal from engaging in the coercion or intimidation of real estate appraisers in connection with a mortgage loan. 

Operations Report

A federal court in November tossed an antitrust case alleging that the country’s five largest credit card issuers conspired to fix prices and maintain a floor for late fees in violation of Section 1 of the Sherman Act.  The suit also alleged that the issuers’ late fees and over-limit fees constituted excessive penalties in violation of the National Bank Act.  The court gave leave to replead, but only if plaintiffs can do so in “good faith.”  It is hard to imagine how they can plead around these deficiencies.  In re Late Fee and Over-Limit Fee Litigation, No. C-07-0634 (N.D. Cal., Nov. 16, 2007.)  The Firm represented one of the bank defendants.

’Tis the Season to Index

The FRB amended Reg D to reflect the annual indexing of the reserve requirement exemption amount ($9.3 million versus $8.5 million) and the low reserve tranche ($43.9 million versus $45.8 million) for 2008.  As total reservable liabilities of all depository institutions increased 11% between June 30, 2006, and June 30, 3007, the Board amended Regulation D to increase the reserve requirement exemption amount by $0.8 million.  For net transaction accounts in 2008, the first $9.3 million, up from $8.5 million in 2007, will be exempt from reserve requirements.  A 3% reserve ratio will be assessed on net transaction accounts over $9.3 million up to and including $43.9 million, down from $45.8 million in 2007.  A 10% reserve ratio will be assessed on net transaction accounts in excess of $43.9 million.

Revised Regulation DD Examination Guidelines

The FFIEC approved revised consumer compliance examination procedures for Regulation DD, implementing the Truth in Savings Act.  The procedures specifically: (1) prohibit misleading advertisements; (2) require additional disclosures about fees and other terms for overdraft services; and (3) require institutions promoting in an advertisement the payment of overdrafts to disclose on periodic statements the total dollar amount imposed for overdraft fees and the total dollar amount imposed for returned-item fees, both for the statement period and for the calendar year to date. 

Firm Offer Update

The Firm serves as coordinating counsel to the Mortgage Bankers Association in the so-called “firm offer of credit” class actions, so each issue we track the developing case law under the FCRA. 

No Cole in This Stocking
The Seventh Circuit applied its Cole holding in Forrest v. Universal Savings Bank, F.A., 2007 WL 3102077 (7th Cir. Oct. 25, 2007), but found defendant’s letter to constitute a “firm offer.”  In that case, a bank sent plaintiff a letter indicating she was prequalified to receive a credit card at a 10.99% variable APR with no annual fee and a credit line of up to $15,000.  Plaintiff challenged the mailing as not constituting a firm offer of credit under FCRA and therefore challenging defendant’s access to the credit report for lack of a permissible purpose.  The Seventh Circuit upheld the dismissal of the FCRA claim, relying on the fact that, as stated in the mailer, to establish an account the plaintiff had to transfer balances of at least $5,000 to the card, which was sufficient to establish a minimum credit offer of at least $5,000.

Texas Rejects Cole
Three cases from the Southern District of Texas recently rejected the Seventh Circuit’s Cole standard.  In all three cases, plaintiffs received mailings from car dealerships stating that they were pre-approved for an automobile loan with low payments and a $0 down payment.  Plaintiffs challenged the mailers as not constituting firm offers of credit under the Fair Credit Report Act.  After analyzing the conflicting approaches taken by federal circuits in regard to firm offers of credit, the court rejected the Seventh Circuit’s interpretation.  A mailer need not include interest rates, repayment period, or similar terms under the FCRA.  A firm offer exists so long as credit is honored if the consumer meets pre-established criteria.  Villagran v. Central Ford, Inc., 2007 WL 3125297 (S.D. Tex. Oct. 23, 2007); Hoge v. Parkway Chevrolet, Inc., 2007 WL 3125298 (S.D. Tex. Oct. 23, 2007); Hoffer v. Landmark Chevrolet, Ltd., 2007 WL 3125299 (S.D. Tex. Oct. 23, 2007). 

Appeals Pending
A handful of “firm offer” appeals have been argued of late in the Seventh Circuit, and more appeals are pending in the First, Eighth, and Ninth Circuits.


Arbitration Report

More Circuits Strike Class Action Waivers

The Eleventh and the First Circuits found class action waivers to be unconscionable this quarter.  In Dale v. Comcast Corp., 498 F.3d 1216 (11th Cir. 2007), the Eleventh Circuit held that a class action waiver was unenforceable in a suit by cable subscribers challenging allegedly excessive franchise fees.  The decision is important because the Eleventh Circuit had previously issued two opinions enforcing class action waivers.  Jenkins v. First Am. Cash Advance of Ga., LLC, 400 F.3d 868 (11th Cir. 2005); Randolphv. Green Tree Fin. Corp., 244 F.3d 814 (11th Cir. 2001).  In the Eleventh Circuit, the enforceability of a particular class action waiver must be determined on “a case-by-case basis, considering the totality of the facts and circumstances.”  Id. at 1224.

Meanwhile, the First Circuit has again looked with disfavor on class action waivers.  It held in Skirchak v. Dynamics Research Corp., 2007 U.S. App. LEXIS 26741 (1st Cir. Nov. 19, 2007), that an employer could not enforce a class action waiver in a newly-adopted arbitration the employer had instituted by sending a five-line email to its employees two days before Thanksgiving.

Anti-Arbitration Legislation
The “Arbitration Fairness Act” is alive and well and, if passed, would outlaw mandatory predispute arbitration agreements for all private contracts involving consumers, employment, and franchising.  Similar anti-arbitration provisions are being attached to other new bills.  For instance, H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007, bans binding arbitration in the mortgage context. 

Preemption Report

Visitorial Preemption
On December 4, the Second Circuit issued its long-awaited opinion in The Clearing House Association, LLC v. Cuomo, No. 05-5996 (Dec. 4, 2007).  A majority of the panel ruled in favor of the OCC and the Clearinghouse on whether the OCC’s exclusive visitorial powers under 12 U.S.C. § 484 preclude the New York Attorney General from pursuing investigatory or enforcement actions against national banks based on New York law. The majority also found, however, that the Attorney General’s suggestion that he might have a basis for investigatory and enforcement actions under the Fair Housing Act (FHA) could not be barred at this time, on the ground that the district court lacked jurisdiction over such a claim.  The FHA claim was not ripe for decision, given that the Attorney General had merely suggested he might take action under the FHA, but not actually done so.  Importantly—and of significance going forward—the Second Circuit left open whether a state Attorney General may bring an FHA action against a national bank as (on or behalf of) an “aggrieved person.”

Round Two on Gift Cards
In SPGGC, LLC v. Blumenthal, 05-4711-cv, 2007 U.S. App. LEXIS 24436 (2d Cir. Oct. 19, 2007), the Second Circuit held that application of the Connecticut Gift Card Law to gift cards sold by a shopping mall owner and issued by a national bank was preempted by the National Bank Act only to the extent that it prohibited gift card expiration dates.  Those provisions interfered with a national bank by preventing it from acting as the issuer in light of VISA’s fraud prevention and card maintenance requirements.  However, fee provisions were not preempted because they affected only the shopping mall owner.  National banks issuing gift cards in conjunction with third parties should heed the factual distinction that led the Second Circuit to come out differently from the First Circuit on gift card fee provisions in SPGGC LLC v. Ayotte, 488 F.3d 525 (1st Cir. 2007): federal preemption applies where “the national bank that issued the cards ha[s] ‘sole control’ over their terms and conditions and [is] ‘solely responsible for compliance’ with such terms,” and does not apply where the national bank merely approves the terms and conditions set by the third party.  Blumenthal, 2007 U.S. App. LEXIS, at *16. 

Consumer Protection Claims Preempted
A district court in Los Angeles found that a claim under California state law challenging the amount and disclosure of a national bank’s NSF and overdraft fees to be preempted.  The plaintiff’s challenge to the fees conflicted with the National Bank Act, and the challenge to the disclosures was expressly preempted by OCC regulations.  Montgomery v. Bank of America Corp., CV 07-1204, __ F. Supp. 2d __, 2007 WL 2907324 

When Preemption Goes Bad
The National Consumer Law Center doesn’t like preemption.  No surprise there.  The report it just issued concludes that the proliferation of low-line/high-fee credit cards, bad products those, is the result of federal preemption.  See “Fee-Harvesters: Low-Credit, High-Cost Cards Bleed Consumers.”

“Good Neighbor” Conflict
Are independent mortgage brokers who are supervised by a federal thrift subject to state licensing requirements?  It depends where they work.  A district court in Ohio ruled that state mortgage broker licensing laws applied to State Farm’s independent contractors and are not preempted.  State Farm Bank F.S.B. v. Reardon, No. __ F. Supp. 2d __, 2007 WL 2822793 (S.D. Ohio Oct. 10, 2007).  The court acknowledged that a Connecticut court reached the opposite conclusion in ruling that a nearly identical state statute was preempted.  See State Farm Bank, F.S.B. v. Burke, 445 F. Supp. 2d 207 (D. Conn. 2006).  The Ohio court rejected the OTS counsel’s analogy between subsidiaries of federal thrifts and third-party mortgage brokers. 

FCRA Preemption Rocks
District courts across the country have issued recent decisions finding state common law and statutory claims brought against banks and credit reporting agencies preempted by FCRA.  The claims found preempted include libel, negligence, invasion of privacy, defamation, and claims brought under the California Consumer Credit Reporting Agencies Act.  Knudson v. Wachovia Bank, N.A., __ F. Supp. 2d __, 2007 WL 2877564 (M.D. Ala. Oct. 4, 2007); Abouelhassan v. Chase Bank, C 07-03951, 2007 WL 3010421 (N.D. Cal. Oct. 12, 2007); Thulin v. EMC Mortg. Corp., 06-3514, 2007 WL 3037353 (D. Minn. Oct. 16, 2007); Boccone v. American Express Co., 05-3436, 2007 WL 2914909 (D. Md. Oct. 4, 2007).  All of these courts cited Section 1681h(e), which limits private actions in the nature of defamation, invasion of privacy, or negligence with respect to the reporting of information except as to “false information furnished with malice or willful intent to injure [the] consumer.”

Mortgage Report

Mortgage Lending Overhaul
On November 15, 2007, the House approved H.R. 3915, which would reform mortgage practices in important respects: (1) create a national licensing system for residential mortgage loan originators, much like securities brokers; (2) establish a heightened duty of care for all mortgage loan originators that includes suitability standards; (3) require all mortgage loans to be based on ability to repay and net tangible benefit for refinancings; (4) attach limited liability to secondary market securitizers; (5) prohibit steering, defined to broadly include yield spread premiums; (6) allow states to pass more stringent laws against lenders and originators; (7) require that tenants be provided with notification and time to relocate before the home they rent is foreclosed; (8) lower the points and fees and interest rate triggers under HOEPA and require more pre-loan counseling; and (9) establish an Office of Housing Counseling through the Department of Housing and Urban Development to conduct activities relating to homeownership and rental housing counseling.  We’re keeping an eye on this.

It’s HMDA Time Again
It’s that time of year again.  The 2006 HMDA data is out, and, well, it’s not that surprising.  Overall, the data reflect a significant slowdown in the lending market.  Lenders reported on 27.5 million loan applications, which resulted in nearly 14 million loans, a 6% drop from 2005.  Most of that decline came from the slowdown in refinancing transactions, which were down 12% from 2005.  One interesting fact reflected in this year’s data is the substantial growth in the use of “piggyback” loans (junior loans used to fund some of the purchase price) since 2004 as an alternative of PMI transactions, which declined by about 6% from 2005 to 2006.  These “piggyback” loans have become increasingly important to home sales in recent years. 

More RESPA “Markup” Suits
RESPA cases are hot these days following recent federal appellate decisions supporting the legitimacy of “markup” claims under RESPA.  Wachovia and Countrywide are battling two class action suits.  The Wachovia suit, filed in the Eastern District of Pennsylvania, alleges that Wachovia violated RESPA by charging borrowers $35 for credit reporting services that plaintiffs claim Wachovia paid only $15 for.  The Countrywide suit, filed in the Middle District of Florida, alleges that Countrywide violated RESPA by marking up fees charged for various real estate settlement services, including flood certifications, tax services, and appraisals.  You can be sure to see more of these cases to come, so stay tuned.  

Don’t Assume Anything
Teachers warn that when you “assume,” you make an ass out of “u” and “me.”  Taking this to heart, the Seventh Circuit held in Hamm v. Ameriquest Mortgage Co., No. 05-3984, 2007 U.S. App. LEXIS 24259 (7th Cir. Oct. 17, 2007), that “the borrower should not have to make any assumptions” when reviewing TILA disclosures for a mortgage loan.  In Hamm, Ameriquest gave a payment disclosure form that stated that 360 payments would be made, with the last payment due 30 years in the future.  However, nowhere on the form did Ameriquest state that payments were to be made on a monthly basis.  Reiterating that “hypertechnicality reigns” when reviewing TILA disclosures, the Seventh Circuit held that this disclosure violated TILA as a matter of law because it required the borrower to infer or assume that payments were to be paid monthly. 

Spitzer Redux?
On November 7, 2007, New York Attorney General Cuomo sent subpoenas to Fannie Mae and Freddie Mac seeking information on the mortgage loans the two entities purchased from banks, their due diligence practices, information about appraisals and valuations by originating lenders, and policies and procedures related to valuing properties and appraisals.  Cuomo noted “a pattern of collusion between lenders and appraisers that has resulted in widespread inflation of the valuations of homes,” and the fact that pooling and securitization of loans as mortgage-backed securities makes lenders less vigilant against risky loans and inaccurate appraisals.  The Office of Federal Housing Enterprise Oversight (“OFHEO”), the regulator of the two entities, suggested in a letter that Mr. Cuomo might not understand how Fannie Mae and Freddie Mac work.   

Basel Round II
Basel II is the “Full Monty” of bank regulations.  The OCC, FRB, FDIC, and OTS issued the Basel II final rule requiring some and permitting other qualifying banks to use an internal ratings-based approach to calculate regulatory credit risk capital requirements and advanced measurement approaches to calculate regulatory operational risk capital requirements.  For banking organizations meeting the relevant qualifying criteria, Basel II would replace the current rules implementing Basel I.  Basel II would be mandatory for large, internationally active banking organizations (so-called “core” banking organizations with at least $250 billion in total assets or at least $10 billion in foreign exposure) and optional for others.  Under Basel II, core banking organizations would be required to enhance the measurement and management of their risks, including credit risk and operational risk, through the use of advanced approaches for calculating risk-based capital requirements, have rigorous processes for assessing their overall capital adequacy in relation to their total risk profile, and publicly disclose information about their risk profile and capital adequacy.  The agencies intend to issue a proposed rule that would provide all non-core banking organizations, which are not required to adopt Basel II’s advanced approaches, with the option to adopt a standardized approach under Basel II.

Creditor’s Right and Bankruptcy

Bankruptcy Reform
An ancient Chinese curse goes, “May you live in interesting times.”  Maybe we’re cursed.  Bills have been introduced in the House and Senate granting bankruptcy judges the power to modify the terms of home mortgage loans in Chapter 13 bankruptcy proceedings.  H.R. 3609, strongly opposed by the banking industry, would allow bankruptcy judges to write down the debt on any home mortgage or equity line of credit, not just subprime loans.  The Senate bill, S. 2136, slightly less expansive, places a floor on the interest rate of the modified loan pegged at the prevailing fixed rate on conventional mortgages.  Even more aggressive legislation may be in the offing.  Senator Dodd promised to introduce even broader legislation to roll back some of the “anti-consumer” portions of the 2005 bankruptcy reform law.   

Even Lawyers Can Be Misled
The Seventh Circuit has decided that in FDCPA cases, even lawyers can be misled.  It held in  Evory v. RJM Acquisitions Funding LLC, ___ F.3d ___ [Slip Op., at 3] (7th Cir. Oct. 23, 2007), that: (1) FDCPA notice requirements applied even if the debtor was represented by counsel; (2) the FDCPA’s prohibition against unfair or unconscionable means to collect a debt meant that there was no reason to immunize these practices when directed against a consumer’s lawyer; but (3) the “unsophisticated consumer” standard did not apply; rather, the test was whether the communication would be likely to deceive a competent lawyer.  The Fourth Circuit has held that communications to lawyers are subject to the FDCPA, while the Second and Ninth Circuits held that such communications were not.

Everybody has heard that foreclosures are going up due to the credit crunch, but some lenders are encountering an unexpected snag due to the securitization of the underlying loans.  Securitization and pooling makes it hard to match promissory notes with the correct loan pools, and it has become a fairly common practice for lenders to bring foreclosure actions without attaching proof of ownership of the underlying note.  But borrowers and judges are saying no.  On October 31, an Ohio judge dismissed 14 foreclosure cases for lack of standing because the bank failed to demonstrate that it was the holder and owner of the note and mortgage.  See In re Foreclosure Cases, Case No. 1:07-CV-02282-CAB (N.D. Ohio Oct. 31, 2007).  Two weeks later, another judge from the same district dismissed 32 foreclosure actions.  See In re Foreclosure Actions, Case Nos. 1:07cv1007 (N.D. Ohio Nov. 14, 2007).  An affidavit of ownership was insufficient to show standing and, in both these cases, the assignments of the notes and mortgages were actually dated after the foreclosure complaints were filed. 

Practice Pointer:  Never say to a judge, “You just don’t understand how things work.”  The bank did, but the judge wasn’t amused.  That argument, he bristled, “reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process.”  Ouch.



Unsolicited e-mails and information sent to Morrison & Foerster will not be considered confidential, may be disclosed to others pursuant to our Privacy Policy, may not receive a response, and do not create an attorney-client relationship with Morrison & Foerster. If you are not already a client of Morrison & Foerster, do not include any confidential information in this message. Also, please note that our attorneys do not seek to practice law in any jurisdiction in which they are not properly authorized to do so.