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  • Federal Court Holds Combination of Clickwrap Agreement and 30-Day Right to Cancel Letter Made Arbitration Clause Clear to User

    Fintech

    Recently, the U.S. District Court for the District of Colorado held that a clickwrap agreement combined with a follow up thirty-day right to cancel letter presented users with an arbitration clause in a reasonably conspicuous manner. Grosvenor v. Qwest Corp., No. 09-02848, 2012 WL 602655 (D. Colo. Feb. 23, 2012). The plaintiff brought suit against his internet service provider (ISP), Qwest Corporation, claiming that Qwest violated a lifetime price guarantee for the service. Qwest moved to compel arbitration. The court held that although the terms were not presented in the clearest manner, they were sufficiently conspicuous and provided an opportunity for a reasonable user to review them. The installation software provided to the plaintiff specifically mentioned the existence of an arbitration clause, directed the plaintiff to the ISP's website to review the agreement, and required that the plaintiff accept the terms before installing the software. The court raised concerns that once directed to the ISP website to review the arbitration terms, the plaintiff was required to click through two pages to find the terms. Despite this, the court stated that, as a matter of law, the multiple clicks requirement does not prevent contractual formation. Moreover, a follow up "Welcome Letter" sent to the plaintiff by the ISP again identified the arbitration clause and provided plaintiff with an opportunity to cancel the service within thirty days. The court decline to determine whether either the clickwrap agreement or the letter would be sufficient on their own, but together they rendered the contractual terms sufficiently clear for a reasonable user. In the end, the court found the arbitration agreement unenforceable on other grounds.

    Arbitration

  • Feds Announce Mortgage-Related False Claims Act Settlement

    Lending

    On February 24, HUD and the U.S. Attorney for the Southern District of New York announced that they had obtained from Flagstar Bank FSB an admission that the bank submitted false certifications to HUD when seeking government insurance for residential mortgages in violation of the False Claims Act. As part of a settlement agreement the bank also agreed to pay $132.8 million in damages and penalties, and reform its businesses practices. This is the second recent settlement of mortgage-related violations of the False Claims Act following the largest such settlement in history, announced as part of the multi-party settlement with five mortgage servicing companies. That agreement included a $1 billion settlement of False Claims Act allegations against Bank of America with regard to Countrywide loans.  In all of the cases federal authorities alleged, among other things, that a financial institution participating in the FHA‘s Direct Lender Program repeatedly and falsely endorsed loans for FHA insurance that did not comply with underwriting requirements. The loans therefore should not have been eligible for government insurance, yet the federal insurance fund was unnecessarily impaired when those borrowers defaulted.

    HUD

  • HUD Publishes Revised Proposal for Limiting Seller Concessions

    Lending

    On February 23, HUD published for comment a revised proposal for reducing seller concessions that supplants its initial July 15, 2010 issuance.  In its previous issuance, HUD had proposed, as one of its initiatives to reduce risk to its insurance fund, reducing the cap on seller conditions from six percent of the lesser of the sales price or appraised value to three percent.  In response to the significant public comment on its July proposal, HUD is now proposing to reduce the amount of seller concessions permitted as offsets to three percent or $6,000, whichever is greater, although the offsets would not be permitted to exceed the borrower’s actual costs. To address future increases to closing costs, the $6,000 cap would be indexed to increase at the same rate as the FHA national loan limit floor. HUD also proposes limiting acceptable uses of seller concession to payments toward borrower closing costs, prepaid items, discount points, the FHA Up Front Mortgage Insurance Premium, and an Interest Rate Buydown. Comments on this revised proposal are due March 26, 2012.

    Mortgage Origination HUD

  • FHFA Takes Initiative on Idled Housing Finance Reform

    Lending

    On February 21, the Federal Housing Finance Agency (FHFA) submitted a strategic plan outlining the next phase of its conservatorship of Fannie Mae and Freddie Mac (the Enterprises). FHFA’s plan is in part a response to requests from lawmakers, including requests made during a December 2011 hearing. FHFA states that it will seek to build a new infrastructure for the secondary mortgage market, contract the Enterprises’ current market dominance, and maintain the Enterprises’ roles in foreclosure prevention activities and refinance initiatives. FHFA also outlines the legal authority under which it plans to act.

    Until Congress can enact broader housing finance reform, FHFA envisions moving the Enterprises into a single open-architecture securitization platform that could become a type of public utility that would outlast the Enterprises. This move would also be accompanied by uniform standards for underwriting, disclosures, and servicing, and a robust and standard pooling and servicing agreement. FHFA will also contract Enterprise operations by (i) working to shift mortgage credit risk to private investors through some combination of increasing the g-fee, establishing loss sharing arrangements, and/or expanding reliance on mortgage insurance; (ii) directing the Enterprises to conduct a market analysis of the viability of their multifamily operations without government guarantees; and (iii) considering whether to retain each Enterprise's capital markets expertise to manage portfolios, or to hire a third-party investment firm to manage the portfolios. Finally, the FHFA asserts that it will maintain foreclosure prevention efforts and credit availability by (i) continuing existing programs such as the Servicing Alignment Initiative, HARP, and REO disposition initiatives; (ii) aligning and making policies for representations and warranties more transparent, in conjunction with the ongoing Uniform Mortgage Data Program; and (iii) pursuing lawsuits alleging securities law violations in private-label mortgage-backed securities purchased by the Enterprises.

    The FHFA paper notes that these strategic goals and plans are consistent with each of the housing finance reform options identified in a February 2011 Obama administration report to Congress, as well as "leading legislative proposals." However, the paper also reminds legislators that fully addressing the Enterprises and the federal government's role in the secondary mortgage market will require congressional action, which should not be impaired by the FHFA's immediate pursuit of its strategic goals. For additional details on the strategic plan, please click here.

    Freddie Mac Fannie Mae

  • CFPB Turns Attention to Bank Overdraft Practices

    Consumer Finance

    On February 22, the CFPB launched an inquiry into overdraft practices with a coordinated release of information. The official announcement came during a CFPB Roundtable discussion at Hunter College in New York City. At that event, CFPB Director Richard Cordray drew similarities between overdraft practices and payday lending, which was the subject of a prior CFPB field event. Mr. Cordray expressed his “concern[] that overdraft practices employed by some banks unnecessarily increase consumer costs by making it difficult to anticipate and avoid fees.” He also identified some practices the CFPB views as problematic, including those related to (i) ordering of transactions, (ii) missing or confusing information, and (iii) misleading marketing. To address those and other practices, the CFPB issued a request for information from consumers, third party processors, and financial institutions, regarding overdraft programs and their costs, benefits and risks to consumers. The CFPB also released and is seeking comment on a prototype “penalty fee box” that would appear on checking account statements to highlight overdraft activity and fees. Finally, the CFPB is collecting data from several large banks to inform a study of the effects of prior federal regulations and guidance regarding overdraft fees. While conducting these initiatives, Director Cordray promised to employ the CFPB’s supervisory and enforcement authorities to take action against financial institutions engaged in deceptive marketing related to overdrafts.

    CFPB

  • California Class Action Suits Allege Mislabeled Privacy Policy Links

    Fintech

    In the last three months, five class action cases filed in California under the state’s “Shine a Light” statute have alleged that online businesses, including Microsoft Corp., CBS Interactive Inc., and Time Inc., failed to properly label links to their privacy policies. The five suits, all filed by a single firm, claim $3,000 per violation plus additional damages (Boorstein v. CBS Interactive Inc., Cal. Super. Ct., No. 476015, complaint filed 12/28/11; Boorstein v. Men's Journal LLC, Cal. Super. Ct., No. 475697, complaint filed 12/22/11; Miller v. Hearst Communications, C.D. Cal., No. 12-733, complaint filed 1/27/12; Murray v. Time Inc., N.D. Cal., No. 12–431, notice of removal filed 1/26/12; Smith v. Microsoft Corp., Cal. Super. Ct., No. 476413, complaint filed 1/9/12). The "Shine a Light" statute, in effect since 2005, requires businesses that collect California residents’ personal data and then share that data for marketing purposes to disclose or allow consumers to opt out of that sharing. Each defendant company allegedly mislabeled links to their online privacy policies or otherwise failed to meet the statute’s requirements.

    Privacy/Cyber Risk & Data Security

  • Colorado State Court Rules Payday Lending Firms Affiliated with Native American Tribes are Immune from State Investigation and Prosecution

    Consumer Finance

    On February 13, the District Court for the City and County of Denver ruled that online payday lending businesses affiliated with two Native American tribes are protected from state investigation and enforcement. Colorado v. Cash Advance, No. 05-1143 (Col. Dist. Ct. Feb. 13, 2012). For several years the state had been trying to investigate and regulate the payday lending practices of the firms and brought suit to enforce subpoenas and cease and desist orders issued with regard to the firms’ operations. The state claimed that, among other things, the businesses were in violation of state laws that require firms doing business with Colorado consumers over the internet to have a valid state license. The defendants moved to dismiss, arguing that the firms are immune from those subpoenas and enforcement orders under the doctrine of tribal sovereign immunity. The defendant’s motion to dismiss was denied. On appeal, the state supreme court held that tribal sovereign immunity applies to state investigative subpoena enforcement actions and remanded the case to the trial court for additional inquiry into the immunity status of the tribes’ affiliated businesses. On remand, the state claimed that sovereign immunity did not apply because the firms engaged non-tribal members in some of their operations and designed their affiliation with two online payday lending firms to avoid state regulation and oversight, a practice sometimes referred to as “rent-a-tribe.” After discovery, the court disagreed and ruled for the defendant tribes and their businesses, holding that the companies are extensions of the tribes and therefore immune from state investigatory actions and judicial enforcement.

    Payday Lending State Attorney General

  • New York State Appeals Panel Reinstates Foreclosure Action, Reversing Justice Known for Tossing Out Foreclosure Motions

    Lending

    On February 14, a panel of judges in the Appellate Division, Second Department of the New York State Supreme Court reinstated the foreclosure action at issue in Aurora Loan Services, LLC v. Sookoo, 2012 WL 503663 (N.Y. App. Div. Feb. 14, 2012). The borrower defaulted on her mortgage loan and did not later appear in the foreclosure action or answer the complaint. The plaintiff, the holder of the mortgage and note, moved for an order of reference appointing a referee to compute the amount due. Brooklyn New York State Supreme Court Justice Aaron Schack, sua sponte, directed the dismissal of the complaint with prejudice and cancelled the notice of pendency based upon the plaintiff’s failure to provide the loan origination documents as required by the judge’s earlier order dated March 31, 2009. Reversing the decision, the unanimous panel wrote that Justice Schack "erred in, sua sponte, directing the dismissal of the complaint with prejudice and the cancellation of the notice of pendency.”  The panel remitted the matter for proceedings before a different justice, deeming it “appropriate” “under the circumstances of this case.” Justice Schack is known for his staunch stance against banks pursuing foreclosure actions and this is not the first instance in which he has been reversed in a foreclosure action (see, for example, US Bank, N.A. v. Guichardo, 90 A.D.3d 1032 (N.Y. App. Div. 2011)).

    Foreclosure

  • FTC Takes Action Against Collectors of Alleged Phantom Payday Loan Debts

    Consumer Finance

    On February 21, the FTC announced that, at its request, a U.S. federal court stopped the operations of entities the FTC alleges collected over $5 million of payday loan debts that either did not exist or were owed to another entity. The FTC asked the court to freeze the assets of the firm while it continues its investigation and prosecution. The FTC charges that the defendants, California-based American Credit Crunchers LLC and affiliated entities and individuals, violated the FTC Act and the Fair Debt Collection Practices Act by posing as law enforcement and demanding immediate payment of payday loan debts from consumers that had no such debt.

    FTC Payday Lending

  • U.S. Supreme Court Upholds Pre-Emptive Power of the Federal Arbitration Act

    Courts

    On February 21, the U.S. Supreme Court upheld the Federal Arbitration Act’s (FAA) pre-emptive power over conflicting state laws and vacated a West Virginia Supreme Court of Appeals decision in which the West Virginia court found that arbitration clauses in nursing home contracts were unenforceable if adopted prior to an occurrence of negligence that resulted in personal injury or wrongful death. Marmet Health Care Center, Inc. v. Brown, 565 U.S. __ (2012) (per curiam). The three plaintiffs—family members of patients who had died in nursing homes—sued the homes in state court alleging negligence. The trial court dismissed two of the suits based on agreements to arbitrate that were found in the contracts. The Supreme Court of Appeals of West Virginia consolidated all three cases, and held that the arbitration clauses in the contracts were unenforceable “as a matter of public policy.”  The U.S. Supreme Court, citing recent decisions in which the FAA pre-emptive power was reinforced, reversed the West Virginia court, stating, “[t]he West Virginia court’s interpretation of the FAA was both incorrect and inconsistent with clear instruction in the precedents of this Court.” The Court explained that whenever a state law prohibits outright the arbitration of a particular type of claim, the conflicting rule is displaced by the FAA. Because West Virginia’s prohibition against predispute agreements to arbitrate negligence claims in nursing home suits was a categorical rule prohibiting arbitration, the rule was contrary to the terms and coverage of the FAA and could not be used to avoid arbitration.

    Arbitration

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