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Financial Services Law Insights and Observations

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  • California Federal Court Dismisses TILA, Fraud, Unfair Business Practices, and Quiet Title Claims

    State Issues

    On August 25, the U.S. District Court for the Northern District of California granted defendant’s motion to dismiss without prejudice because, inter alia, plaintiff failed to comply with Truth in Lending Act (TILA) requirements and did not plead his fraud claim with particularity. Briosos v. Wells Fargo Bank, 2010 WL 3341043, No. C 10-02834 LB (N.D. Cal. Aug. 25, 2010). Plaintiff alleged that defendant made fraudulent statements and concealed information about his ability to afford the loans in order to induce him to obtain a refinance loan. Plaintiff also alleged that the defendant failed to provide him with disclosures required under TILA and refused his request to rescind one of the loans. The court found that although plaintiff had not filed suit until after the three-year limitations period for TILA rescission claims had expired, plaintiff had timely exercised his right to rescission by making a rescission request by letter within three years after the transaction was consummated. However, plaintiff did not adequately allege facts demonstrating his ability to tender the loan proceeds, and thus his TILA rescission claim failed. The court further held that plaintiff failed to plead fraud with particularity and failed to assert his quiet title claim in a verified complaint, as is required under California law. As plaintiff failed to sufficiently plead his fraud and TILA claims, his § 17200 claim could not proceed because that claim depends on an underlying violation of federal or state law.

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  • Ninth Circuit Holds Debtor’s Claim Under California Consumer Credit Reporting Act Preempted Under the Federal Fair Credit Reporting Act

    State Issues

    On August 18, the U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s grant of summary judgment for defendants in an action concerning alleged violations of the California Consumer Credit Reporting Agencies Act (CCRAA). Carvalho v. Equifax Information Services LLC, 2010 WL 323947, No. 09-15030 (9th Cir. Aug. 18, 2010). In this matter, the Debtor had filed a class action complaint in California state court under the CCRAA alleging that the defendant consumer reporting agencies (CRAs) failed to properly "reinvestigate" a disputed credit report. The case was removed from state court to federal district court after the CRAs learned, during discovery, that the case met the $5 million amount in controversy requirement under the Class Action Fairness Act of 2005, 28 U.S.C. §13320(d). The CRAs moved for summary judgment, which the district court granted. On appeal, the debtor challenged the court’s decision and claimed that the notice of removal was untimely filed; that the federal Fair Credit Reporting Act (FCRA) did not pre-empt her state law causes of action; and that the CRAs violated the CCRAAs reinvestigation provision. The Ninth Circuit rejected the debtor’s challenge. In upholding the district court’s grant of summary judgment, the court held that: (i) removal was timely, because the debtor’s complaint failed to indicate an amount in controversy necessary to trigger the 30 day period for removing a class action to federal court; (ii) the debtor’s claim under the CCRAA that the collection agency failed to assist in the reinvestigation of the dispute was preempted by the FCRA; and (iii) the debtor’s claim that the reported debt was misleading, rather than inaccurate, failed to establish a prima facie reinvestigation claim under the CCRAA.

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  • New York Enacts Law Addressing Telemarketing Abuses and Regulates Robo-Calls

    State Issues

    On August 13, New York Governor David Paterson signed into law A. 8839 which updates the state’s telemarketing laws by, among other things, restricting the hours telemarketers can call state residents and by applying the federal Do Not Call Registry to robo-calls. Specifically, the bill: (i) restricts, absent expressed consent, unsolicited telemarketing calls to the hours of 8 a.m. to 9 p.m.; (ii) requires telemarketers at the outset of a call to disclose their identity and the nature of good or services they are selling; (iii) amends New York’s existing Do Not Call registry law to include robo-calls and prohibits robo-calls to customers on the federal Do Not Call registry; and (iv) gives the state’s Consumer Protection Board subpoena power with regard to telemarketing violations. The new law takes effect on December 11, 2010.

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  • Maine Court Holds MERS Lacks Standing To Foreclose In Maine

    State Issues

    On August 12, the Maine Supreme Judicial Court held that Mortgage Electronic Registration Systems, Inc. (MERS) - the "nominee" for the lender under the mortgage - was not the proper party to commence a foreclosure action against delinquent borrowers. MERS, Inc. v. Saunders, No. 09-640, 2010 ME 79 (ME Sup. Jud. Ct. Aug. 12, 2010). In this case, the plaintiffs executed a residential mortgage that named MERS as a nominee for the lender. After the plaintiffs defaulted on their loan, MERS filed a complaint seeking to foreclose. The plaintiffs opposed, arguing that MERS lacked standing because it could not show that it was the holder of the mortgage. The Supreme Judicial Court agreed, holding that, because MERS was a "nominee" for the lender and not a "mortgagee," it lacked standing to foreclose on the mortgage under Maine law. However, the court also held that the substitution of the bank for MERS during the foreclosure proceedings was proper. Nonetheless, the court found that the lower court’s grant of summary judgment on the foreclosure proceeding was improper because the record did not establish what property owned by the borrowers actually secured the mortgage.

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  • Massachusetts Regulator Issues 43 Cease-And-Desist Orders to Mortgage Loan Originators in Violation of Massachusetts SAFE Act Law

    State Issues

    On August 9, the Massachusetts Division of Banks announced the issuance of 43 temporary cease-and-desist orders against licensed mortgage loan originators in Massachusetts for failing to meet requirements for licensure under Massachusetts’ Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) compliance law. Under the law, mortgage loan originators licensed after July 31, 2009 had until July 31, 2010 to meet the new licensing requirements, while mortgage loan originators licensed prior to July 31, 2009 must pass the required state and national test by October 31, 2010 and must submit fingerprints for a national criminal background check by December 31, 2010.

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  • New Jersey Orders Use of State-Specific Settlement Disclosure Form

    State Issues

    On August 2, the Commissioner of the New Jersey Department of Banking and Insurance (the Department), issued Bulletin 10-17, which provides guidance on how mortgage lending entities should comply with both amended federal regulations governing Good Faith Estimate (GFE) and HUD-1/HUD-1A Settlement Statements and New Jersey’s settlement disclosure requirements which require broader disclosures than included in the amended federal forms. New Jersey regulations currently permit lenders to rely on U.S. Department of Housing and Urban Development (HUD) disclosure forms to meet New Jersey disclosure requirements provided lenders also disclose whether certain settlement service fees are refundable, and how to receive such a refund. The newly amended HUD forms, however, provide less information regarding broker and banker fees than New Jersey requires, and lenders are forbidden by HUD from modifying the HUD forms to meet state disclosure requirements. According to Bulletin 10-17, until the Department revises its regulations the Department will no longer permit lenders to rely on the HUD disclosure forms to meet New Jersey disclosure requirements. Instead, lenders must create a "New Jersey Disclosures Form" which lists all applicable origination and settlement fees referenced in N.J.A.C. 3:1-16.2, totaled by category and matching the amounts listed on the GFE, and identifying which fees are refundable and the terms and conditions for such refund. Lenders cannot attach the New Jersey form to any HUD form, nor refer to the New Jersey form as a supplement or addendum to a HUD form. New Jersey Disclosure Forms must be signed, dated, and maintained in the licensee’s mortgage files.

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  • Illinois Passes Law Requiring Courts to Set Aside Certain Judicial Sales Related to HAMP

    State Issues

    On July 23, Illinois Governor Pat Quinn signed HB 5735, a bill requiring courts to set aside judicial sales of real estate under certain circumstances. Under the law, if a mortgagor can prove prior to confirmation of the sale that he or she had applied for assistance under the Home Affordable Modification Program (HAMP), and that the judicial sale materially violated HAMP’s procedural requirements, then the court must set the sale aside. The bill is effective immediately.

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  • Fifth Circuit Holds Variable Rate Home Equity Loan Did Not Violate Texas Constitution

    State Issues

    On July 22, the U.S. Court of Appeals for the Fifth Circuit affirmed a decision by a Texas district court finding that the terms of an adjustable rate home equity loan did not violate the Texas Constitution. Cerda v. 2004-EQR1 L.L.C., No. 09-50619, 2010 WL 2853651 (5th Cir. July 22, 2010). In response to a foreclosure proceeding, the plaintiff borrowers in Cerda alleged that the terms of a 2002 home equity loan refinance violated the Texas Constitution because (i) it was issued in violation of a mandated waiting period of 12 days between submission of an "application" and closing, (ii) it called for monthly payments that were not "substantially equal," and (iii) it required the payment of fees in excess of a 3% cap. The district court rejected these arguments and, following a bench trial, granted judgment to the defendants. The Fifth Circuit affirmed in all respects. First, the court held that an oral application, which the borrowers indisputably made over the telephone more than 12 days before the loan closed, was sufficient to commence the required waiting period. Second, with respect to the Texas Constitution’s requirement that scheduled payments on home equity loans be "substantially equal" in amount, the Fifth Circuit recognized that the provision was "in some tension with" a separate provision explicitly permitting "variable rate[s] of interest." The Fifth Circuit reconciled the provisions by holding that, in combination, the provisions merely required that home equity loans fully amortize - i.e., that installments extinguish principal and interest over the life of the loan - and, in addition, that there be no final, "balloon" payment. Because the plaintiffs’ loan comported with these requirements, the Fifth Circuit held that the "substantially equal" provision had not been violated. Third, the Fifth Circuit held that the loan did not exceed a 3% cap on fees, reasoning that the yield spread premium on the loan was not a "fee" because it was paid by the lender - not the borrower - to the broker, and that discount points are properly considered to be interest rather than a fee subject to the cap. As the Fifth Circuit noted, its rulings were based on the Texas Constitution as of 2002. Since that time, certain provisions at issue in this case have been amended.

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  • Ninth Circuit Holds Fixed APR in Credit Card Solicitation May Be Misleading To Consumers

    State Issues

    On July 21, the U.S. Court of Appeals for the Ninth Circuit held that a plaintiff properly alleged claims under the Truth in Lending Act (TILA) and the California Unfair Competition Law (UCL) because the use of the term "fixed" to describe an annual percentage rate (APR) along with an enumeration of three specific exceptions may have been misleading to a consumer when the APR was also subject to change for other reasons. Rubio v. Capital One Bank, No. 08-56544, 2010 WL 2836994 (9th Cir. July 21, 2010). In Rubio, the plaintiff consumer applied for and received a credit card pursuant to a direct-mail solicitation from the defendant bank in 2004. The solicitation’s "Schumer Box," as required by federal law, described the credit card’s APR as a "fixed rate of 6.99%." A paragraph below the Schumer Box stated that the APR was subject to increase in the case of (i) a failure to make a payment when due, (ii) an overlimit account, and/or (iii) a returned payment. When the consumer received her credit card, she also received a Cardholder Agreement that contained a reservation of the right of the bank to "amend or change any part" of the agreement "at any time." While none of the three enumerated conditions occurred, three years later the consumer received notice from the bank that her APR would increase. The consumer subsequently filed suit against the bank, alleging violations of TILA and the UCL and asserting a breach of contract claim.

    In concluding that the bank’s disclosure was misleading under TILA, the Ninth Circuit relied in part on a study conducted by the Federal Reserve Board, which found that consumers "frequently assume that a rate that is labeled ‘fixed’ cannot be changed for any reason." Based in part on the same study, the Federal Reserve Board recently promulgated revisions to Regulation Z, which, as of July 1, 2010, bar the use of the term "fixed" in the Schumer box in certain circumstances. While those regulations did not apply retroactively to this case, the Ninth Circuit found them persuasive in determining that the disclosure at issue should be viewed as misleading. The Ninth Circuit reasoned that a reasonable consumer could conclude that the APR was "’unchangeable’ except for the three exceptions" listed next to the Schumer box and that it was, thus, reasonable for a consumer to conclude that the three enumerated conditions tied to the Schumer box were identified "precisely because they were the only reasons that the APR could change." The Ninth Circuit further held that the misleading nature of the disclosure as measured under TILA’s standards was sufficient to state a claim under the UCL.

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  • Michigan Supreme Court Invalidates State Rules Prohibiting the Practice of Insurance Scoring

    State Issues

    On July 8, the Michigan Supreme Court struck down rules issued by the state’s Commissioner of Financial and Insurance Regulation (Commissioner) banning the use of credit reports to determine automobile and homeowners insurance premiums, a practice known as “insurance scoring.”Ins. Inst. of Mich. v. Comm’r, Fin. & Ins. Servs., 2010 WL 2696342, No. 137400 (Mich. Jul. 8, 2010). The court held that the Commissioner’s rules were contrary to Michigan’s Insurance Code, which allows insurers to establish premium discount plans and rating systems based on factors that reasonably reflect an insurer’s anticipated reduction in losses, and, thus, exceeded the statutory scope of the Commissioner’s rule-making authority. The court based its determination largely on evidence in the record indicating that individuals with higher insurance scores pose a lower risk of loss to the insurer. Based on that evidence, the court found that there was “little difference between providing a discount for anti-lock brakes, for example, and providing a discount based on high insurance scores.” The court separately rejected an argument by the Commissioner that credit reports are unreliable and, therefore, their use violates an Insurance Code prohibition on “unfairly discriminatory” rates. In the course of its opinion, the court also noted that the Michigan Legislature had at one time considered legislation that would ban the use of credit scores in insurance underwriting. However, this legislation was abandoned by the Legislature after the governor made clear her intention to veto the legislation.

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