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Financial Services Law Insights and Observations

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  • Pennsylvania Governor Signs Two Bills Amending State Mortgage Law

    State Issues

    On June 29, Pennsylvania Governor Edward G. Rendell signed SB 170 and HB 985 to amend Pennsylvania mortgage law. SB 170 prohibits a mortgage broker or mortgage originator from being or designating the sole recipient of communications from a lender or servicer to a consumer. HB 985 prohibits mortgage companies from bringing a cause of action for damages against employees who report illegal activity or take part in an investigation, hearing or inquiry against the company. Both bills become effective August 28, 2009.

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  • Oregon Legislation Limits Negative Amortization Loans; Requires Multi-Lingual Disclosures

    State Issues

    On June 26, Oregon Governor Ted Kulongoski signed H.B. 2188, a bill that amends the Oregon Mortgage Lender Law. Under the new law, mortgage bankers, mortgage brokers, and loan originators may not negotiate or make, or offer to negotiate or make, a negative amortization loan without regard to the borrower’s repayment ability at the time the loan is made. Also, under the new law, mortgage bankers, mortgage brokers, and loan originators that advertise or otherwise solicit business and conduct transactions substantially in a language other than English are required to provide the borrower with certain materials in the language in which the parties conducted the transaction.

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  • California Court Holds Class Action Waiver with Opt-Out Provision in Cardholder Agreement Unenforceable

    State Issues

    On June 19, the California Court of Appeals held that a class action waiver with an opt-out provision contained in an arbitration provision of a cardholder agreement is procedurally unconscionable. Duran v. Discover Bank, No. B203338, 2009 WL 1709569 (Cal. Ct. App. Jun. 19, 2009). Previously in this case, the lower court held that the class action waiver in the defendant bank’s credit card agreement was unconscionable, and therefore unenforceable, under California law. On appeal, the defendant challenged the finding of procedural unconscionability, arguing that (i) the contract was not a contract of adhesion because the contract contained an opt-out provision, and (ii) Delaware law, not California law, should govern the dispute. The court first held that opt-out provisions do not automatically render contracts nonadhesive under California law. The court reasoned that a class action waiver might not sufficiently explain the disadvantages of the arbitration agreement compared to litigation, thus potentially preventing a consumer from making an “authentic informed choice” about whether to opt-out. In this case, the court found that the agreement did not sufficiently explain (i) the disadvantages of consenting to the arbitration and class waiver provisions, (ii) the costs of arbitration, and (iii) the “practical consequences” of a class action waiver. In addition, the court held that California law governed the dispute, reasoning that, even though Delaware has a substantial relationship to the dispute and class action waivers are enforceable under Delaware law, (i) the enforcement of the waiver would “contravene a fundamental policy of California,” and (ii) California has a materially greater interest than Delaware as to the enforceability of the class action waiver at issue. As a result, the court affirmed the lower court’s finding that the class action waiver provision of the agreement was procedurally unconscionable under California law.

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  • Massachusetts Attorney General Settles with Lender for $10 Million

    State Issues

    On June 9, Massachusetts Attorney General Martha Coakley announced a $10 million settlement agreement with Fremont Investment & Loan and its parent Fremont General Corporation (Fremont) to resolve a lawsuit against the lender. The lawsuit, first filed in 2007, alleged that Fremont engaged in unfair and deceptive loan origination and sales conduct, and that it made risky loans that it knew were designed to fail. As part of the settlement, Fremont agreed not to foreclose upon loans deemed “unfair” without certain protections for borrowers and not to originate “unfair” loans in Massachusetts. The settlement makes permanent the protections against foreclosure of “presumptively unfair” loans, which Massachusetts courts had previously enforced against Fremont (reported in Special Alert Mass Supreme Court Upholds Fremont Preliminary Injunction).

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  • Maine Bans Collecting Data of Minors for Marketing Purposes Without Parental Consent

    State Issues

    On June 2, Maine Governor John Baldacci signed into law an Act making it an illegal and unfair trade practice for a person or company “to knowingly collect or receive health-related information or personal information for marketing purposes from a minor without first obtaining verifiable parental consent of that minor’s parent or legal guardian.” Maine PUBLIC Law, Chapter 230 LD 1183, Item 1. Under the law, persons and entities cannot collect a minor’s (i) first name, or first initial, and last name, (ii) home or other address, (iii) social security number, (iv) driver’s license number or state identification number, and/or (v) any additional related personally identifiable information. Such personal information, however, may be obtained with “verifiable parental consent,” which is defined as “any reasonable effort” to ensure that a parent or guardian authorizes and receives notice of the collection, use and/or disclosure of the minor’s personal information. The law carries civil penalties of between $10,000 and $20,000 for an initial violation and at least $20,000 for subsequent violations.

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  • Washington Enacts Foreclosure Law Requiring Contact With Borrowers Before Filing Notice of Default

    State Issues

    Washington Governor Christine Gregoire recently signed a bill, SB 5810, prohibiting trustees, beneficiaries, or authorized agents from filing a notice of default until at least 30 days after contacting the borrower or attempting with due diligence to contact the borrower. The new contact requirements apply only to deeds of trust made from January 1, 2003, to December 31, 2007 that are recorded against owner-occupied residential real property. Under the new law, a trustee or beneficiary must contact or diligently attempt to contact the borrower by letter and by telephone in order to assess the borrower’s financial ability to pay the debt secured by the deed of trust and explore options for the borrower to avoid foreclosure. Any notice of default subsequently filed must include a declaration stating that contact was made or diligently attempted. In addition, the new law requires trustees, prior to recording a notice of sale with respect to residential real property, to have proof that the beneficiary is the owner of any promissory note or other obligation secured by the deed of trust. Lastly, the new law provides that a tenant or subtenant in possession of a residential real property at the time the property is sold in foreclosure must be given sixty days’ written notice to vacate before the tenant or subtenant may be removed from the property. The bill becomes effective July 26, 2009. The provisions regarding contact with a borrower in default are set to expire on December 31, 2012

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  • Oregon Passes Loan Modification, Foreclosure Legislation

    State Issues

    Oregon Governor Ted Kulongoski recently signed two bills, H.B. 2191 and S.B. 628, pertaining to loan modifications and foreclosures. H.B. 2191 expands Oregon law regulating debt consolidation companies to include the regulation of “debt management services” – including services in connection with loan modifications. Under H.B. 2191, a debt management service is any activity done for consideration where a person (i) receives or offers to receive funds from a consumer for the purpose of distributing the funds among the consumer’s creditors in full or partial payment of the consumer’s debts, (ii) improves or offers to improve a consumer’s credit record, credit history or credit rating, (iii) modifies or offers to modify the terms and conditions of an existing loan or obligation, or (iv) obtains or attempts to obtain a concession from a creditor including, but not limited to, a reduction in the principal, interest, penalties or fees associated with a debt. Among other requirements, debt management service providers must (i) register with the Oregon Department of Consumer and Business Services, (ii) post a surety bond of at least $10,000, and (iii) adhere to certain fee limitations. S.B. 628 requires mortgage creditors to send borrowers a notice whenever a trustee records a notice of default on property subject to a residential trust deed. The required notice must include a form that a borrower may use to request a loan modification. Additionally, S.B. 628 provides the borrower with up to 30 days from when the trustee signs a notice of default to request a loan modification, during which time the trustee cannot initiate foreclosure proceedings. If the borrower opts to pursue a loan modification, the creditor has up to 45 days to approve or deny the request and cannot initiate foreclosure proceedings until a final decision has been made regarding the modification request. Both bills became effective immediately on passage. However, S.B. 628’s loan modification provisions become effective September 29, 2009 and are scheduled for repeal January 2, 2012.

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  • Nevada Passes Legislation Regarding Mortgage Foreclosure; Requires Licensure of Foreclosure, Loan Modification Consultants

    State Issues

    Recently, Nevada Governor James A. Gibbons acted on four bills (AB 149, AB 151, AB 152, and AB 486) relating to mortgage foreclosure. Signed on May 29 and phasing into place by July 1, 2009, AB 152 requires certain foreclosure consultants, loan modification consultants, and others to register and be licensed as mortgage brokers or agents. Signed on May 29 and effective July 1, 2009, AB 149 concerns foreclosure mediation and will allow homeowners in default to request a mediation hearing with their lender and no further action may be taken to exercise the power of sale until the completion of the mediation. Also signed on May 29 and effective upon the governor’s signature, AB 151 requires mortgage brokers to include their license number on each loan secured by a lien on real property. Among other things, the bill also details applicable fines and penalties associated with failing to properly disclose a license number as directed. Finally, AB 486, effective October 1, 2009, became law without the Governor’s signature on May 26. This bill allows a party to a loan contract to void the contract if a person engaged in the escrow business or as a mortgage broker, mortgage agent or mortgage banker is operating without a proper license. The bill designates a $50,000 administrative fine against such unlicensed parties, and also authorizes parties to bring civil suits against unlicensed parties in certain circumstances

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  • Nevada Law Requires Businesses to Encrypt Personal Information; Compliance with PCI Data Security Standard

    State Issues

    On May 29, Nevada Governor James A. Gibbons signed SB 227, a bill that requires Nevada data collectors to encrypt “personal information” that is moved or electronically transferred to an outside party. If such encryption is in place, a company is shielded from liability resulting from a data breach, except in cases of gross negligence or intentional misconduct. The bill further requires data collectors that accept debit or credit cards to comply with the current Payment Card Industry Data Security Standard. The bill becomes effective January 1, 2010. 

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  • Nevada Amends State Mortgage Law

    State Issues

    On May 29, Nevada Governor Jim Gibbons signed AB 513, a bill amending Nevada state mortgage law. Among other things, the bill (i) requires additional disclosures pertaining to fees earned by mortgage brokers, (ii) eliminates the mortgage broker, agent, and banker licensure exemption for “consumer finance companies,” and (iii) requires proof of the right to transact mortgage loans, if applicable, in another jurisdiction as a condition to obtaining, among other things, a licensing exemption. The cited portions of the bill are effective immediately.

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