Sheppard Mullin Financial Institutions Law Blog

Federal Agencies Issue Final Rules On Fighting Identity Theft

Sheppard Mullin — 2008-02-15T13:11:40-05:00

Several federal regulatory agencies have adopted final rules requiring financial institutions and other creditors to adopt policies aimed at fighting identity theft. The rules require the adoption of an Identity Theft Prevention Program, and took effect January 1, 2008, although covered financial institutions and other creditors have until November 1, 2008 to comply.

]]>The final rules implement sections 114 and 315 of the Fair and Accurate Credit Transactions Act (FACTA), and apply to "each financial institution and creditor that holds any consumer account, or other account for which there is a reasonably foreseeable risk of identity theft." The Program must include reasonable policies and procedures for detecting, preventing, and mitigating identity theft and enable a financial institution or creditor to:

identify relevant patterns, practices, and specific forms of activity that are "red flags" signaling possible identity theft and incorporate those red flags into the Program;
detect red flags that have been incorporated into the Program;
respond appropriately to any red flags that are detected to prevent and mitigate identity theft; and
ensure the program is updated periodically to reflect changes in risks from identity theft.

The federal agencies also are issuing guidelines for financial institutions and creditors to facilitate the formulation and maintenance of a Program that satisfies the requirements of the rules.

In addition, the rules require credit and debit card issuers to "assess the validity of notifications of changes of address under certain circumstances." For example, if a request for a change of address is followed closely by a request for an additional or a replacement card on the same account, the card issuer may not honor the request and issue the new card unless the issuer assesses the validity of the change of address request, using one of the methods specified in the rules.

The requirements for Identity Theft Prevention Programs will be subject to a great deal of interpretation, and will also be governed to a large extent by the federal regulatory guidelines, when issued. Sheppard Mullin has a great deal of experience in interpreting these types of requirements, and can also assist clients in preparing their Programs.

Please contact David Sands at 213.617.5536 or Sherwin Root at 213.617.5465 with any questions.

Federal Banking Regulators Issue Final Rule On Financial Institutions' Affiliate Marketing

Sheppard Mullin — 2008-02-14T11:04:02-05:00

The five federal financial regulatory agencies have jointly issued final regulations implementing Section 214 of the Fair and Accurate Credit Transactions Act (FACTA), which amends the Fair Credit Reporting Act (FCRA). The regulations allow consumers to opt out and prevent a financial institution from using information provided by an affiliated company to market its products and services to the consumer. These regulations impose requirements for information sharing that exceed the requirements of the Gramm-Leech-Bliley Act, which impose no limitations upon information sharing with affiliates. These new regulations also do not supersede or replace existing provisions in Section 603 of FCRA concerning the consumer's right to opt out of allowing consumer information, including credit report or credit information on the consumer taken from other sources, other than transaction and experience information to be shared between affiliates. A financial institution's failure to comply with these regulations may result in the financial institution being treated as a consumer reporting agency under FCRA.

]]>In general, the regulations prohibit a financial institution from using information received from an affiliated institution to solicit a customer unless that customer has been given notice of the intended solicitation and a reasonable opportunity and a simple method by which to opt out of such solicitations - and has chosen not to opt out.

The rule applies to information obtained from the consumer's transactions or account relationship with the affiliate of the potential advertising institution, any application the consumer has submitted to that affiliate, and any information held by third-party sources such as credit reports, if the information is to be used for marketing purposes.

The rule specifies that the opt-out must be valid for at least five years, and after the opt-out period expires, the customer must be given an opportunity to renew the opt out before marketing is permitted.

The affiliate that has, or previously had, a business relationship with the consumer must be the one to provide the consumer with notice of the opportunity to opt-out of the marketing effort. The rule contains a number of exceptions to the notice and opt-out requirements, such as situations in which the marketing affiliate has a pre-existing business relationship with the consumer, or is responding to a consumer-initiated request for information.

An appendix contains model forms to assist financial institutions in complying with the notice and opt-out requirements. Financial institutions are urged to consider combining the affiliate marketing opt-out notice under these regulations with the annual Gramm-Leech-Bliley privacy notice, so that consumers receive a single notice they can use to review and exercise all privacy opt-outs.

The rule took effect January 1, 2008, with a mandatory compliance date of October 1, 2008.

Advertising & Promotions Law

Sheppard Mullin — 2008-01-10T18:05:28-05:00

Antitrust Law

Sheppard Mullin — 2008-01-08T22:54:30-05:00

Bankruptcy and Restructuring Law

Sheppard Mullin — 2008-01-07T00:30:18-05:00

Corporate & Securities Law

Sheppard Mullin — 2008-01-04T01:06:24-05:00

ESOP Law

Sheppard Mullin — 2007-12-19T13:38:00-05:00

Fashion & Apparel Law

Sheppard Mullin — 2007-12-04T18:42:01-05:00

FCC Law

Sheppard Mullin — 2007-12-03T10:59:36-05:00

Government Contracts Law

Sheppard Mullin — 2007-09-21T16:28:43-05:00

Operating Subsidiaries Of National Banks Also Not Subject To State Law Licensing, Reporting, And Visitorial Regulations

Sheppard Mullin — 2007-04-17T17:56:11-05:00

Question: Section 484(a) of the National Bank Act provides that, "[n]o National Bank shall be subject to any visitorial powers except as authorized by Federal law." Does this statute, which preempts state laws of general application that conflict with the letter or purposes of the NBA, also apply to operating subsidiaries of National Banks?

]]>Answer: Yes, According to the United States Supreme Court in Watters, Commissioner v. Wachovia Bank, N.A., No. 05-1342 (April 17, 2007).

This case resolved the issue of whether Michigan's real estate mortgage lending regulations, which would be preempted if applied to national banks themselves, could nonetheless be applied to a mortgage lending subsidiary of a national bank (Wachovia Bank, N.A.). Writing for the Court, Justice Ginsberg noted that the NBA "specifically authorizes federally chartered banks to engage in real estate lending" and that Wachovia's real estate business, if conducted by the national bank itself, "would be subject to OCC's superintendence, to the exclusion of state registration requirements."

Holding that the NBA's "[s]ecurity against significant interference by state regulators is a characteristic condition of the 'business of banking' conducted by national banks, and mortgage lending is one aspect of that business," the Court concluded, in a 5-3 opinion (Justice Thomas not participating) that such security "should adhere whether the business is conducted by the bank itself or is assigned to an operating subsidiary licensed by OCC…."

An electronic copy of the Opinion is attached.

Intellectual Property Law

Sheppard Mullin — 2007-04-13T18:14:28-05:00

Courts Remain Split on Availability of Class Actions for Rescission Under Truth in Lending Act

Sheppard Mullin — 2007-03-05T14:46:21-05:00

Three recent decisions, one by the U.S. 1st Circuit Court of Appeals, one by a California state appeals court and one by a U.S. District Court for the Eastern District of Wisconsin, have been issued within the last few weeks with respect to whether plaintiffs may assert class claims for rescission under the Truth in Lending Act. The 1st Circuit and California cases held that class claims for rescission are not available under TILA. The U.S. District Court in Wisconsin reached the opposite conclusion.

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In the California case, LaLiberte v. Pacific Mercantile Bank (in which Sheppard Mullin represented the Bank), which was the first California state court case to rule upon this issue, the court first stated that section 1635 of TILA, which provides the borrower with the right to rescind his or her mortgage loan under certain circumstances, provides a personal remedy which requires the party seeking to rescind to provide the lender with a notice of rescission. Since plaintiffs did not (and indeed could not) assert that any of the class members served a notice of rescission, it was doubtful that most of the class members would even desire this remedy, the court therefore held that it was not at all clear that a justiciable controversy would exist between the class and the Bank.

The court went on to point out that Congress had expressly provided for class actions under section 1640 of TILA, governing statutory damages, and had never amended section 1635, governing rescission, to include any mention of class actions. In addition, section 1640 had been amended to cap money damages recoverable in a class action at the lesser of $500,000 or one percent of the net worth of the creditor. According to a House of Representative conference report, this was done "to protect small business firms from catastrophic judgments." The court added that it would be "difficult to believe that Congress would carefully balance the deterrent effect of class actions under TILA against the potential harm to businesses in the context of statutory damages, and yet allow class action rescission to proceed without any safeguard for the affected business." Finally, in order to demonstrate the efficacy of this point, the court stated that if 100 class members with loan amounts similar to that of plaintiffs were to seek rescission through a class action, the Bank could face the loss of security exceeding $37 million, a result that would likely be "catastrophic" (i.e., exactly the type of result Congress apparently sought to avoid through its enactment of a cap on class action monetary damages).

In the 1st Circuit case, McKenna v. First Horizon Home Loan Corp., the court, in the first federal appellate court decision on this issue since 1980, the appeals court reversed a trial court decision certifying a class for a rescission claim and held that based on a review of legislative intent (i.e., that Congress had placed a limitation on statutory damages in class actions under TILA), Congress had not intended that class actions be available for rescission claims. The court stated that "[t]he notion that Congress would limit liability to $500,000 with respect to one remedy while allowing the sky to be the limit with respect to another remedy for the same violation strains credulity." The California and 1st Circuit cases had both been closely watched in the mortgage lending industry, and a number of lender's groups combined to file an amicus brief in the McKenna case.

In the U.S. District Court case, Andrews v. Chevy Chase Bank, F.S.B., the court rejected the argument that Congress's amendment of TILA to include a cap on class action monetary damages without referencing rescission claims should be interpreted to mean that Congress intended to not permit class action rescission claims. The court did not analyze the issue at all (as the California court did in LaLiberte and the 1st Circuit Court did in McKenna), but merely stated that it was just as likely that Congress did not intend to limit rescission claims in any way. The court then stated that public policy strongly favors allowing class actions in cases such as this, and that denial of class action status would reward defendants who may have committed wrongs and leave victims who may have been wrong uncompensated (which makes no sense, since those "victims" would still have the right to individually rescind their loans if they chose to do so).

It is worth pointing out that the District Court's determination that the defendant had been deficient with respect to three material disclosures in the Truth in Lending Disclosure Statement provided to plaintiffs (and which thereby served as the basis for the plaintiffs' rescission claim) will be quite controversial. The court first stated that defendant had improperly disclosed the payment schedule for the loan, even though defendant had disclosed 60 payments at one amount and 300 payments at a larger amount, because defendant added a sentence to the Disclosure Statement stating that "this loan program allows you to select the type of payment you make each month, in accordance with disclosures provided to you earlier." First the court misquoted the text by inserting the word "may" between "you" and "make", and then ruled that this language would somehow cause the plaintiff to not understand that loan payments were required on a monthly basis, stating that an ordinary consumer would interpret this sentence as permission to decide for herself whether to make a payment and in what amount. The court went on to find other fault with the added sentence.

Next, the court held that an ordinary consumer reading defendant's disclosures would be confused about the cost of the loan, expressed as an annual percentage rate. This supposed confusion stemmed in large part from the fact that the plaintiff's loan featured a one month teaser rate of 1.95%. The monthly payment would be fixed for five years, but the interest rate would adjust monthly starting after one month. A disclosure with respect to the terms of the teaser rate is not required to appear in the TILA Disclosure Statement, but the court found fault with defendant's other disclosures, which the court stated made the defendant's disclosure of the annual percentage rate in the Disclosure Statement unclear. Among the statements the court criticized was a statement from defendant's program disclosure form that the plaintiff's initial rate "may" have been discounted. The court said this could confuse a borrower even though (1) the form is a printed disclosure which is provided to every loan applicant that expresses interest in the program, and does not (and is not meant to) take into account the unique terms of the applicant's loan, and (2) the language the court criticized is the exact language that is suggested for use by the Commentary to Regulation Z.

Third, the court found fault with defendant's disclosure that the loan contained a variable rate feature. The main cause of criticism here was again something that defendant added to the TILA Disclosure Statement, i.e., an identifier at the top of the form that the type of loan was a "5-year fixed" and that the note interest rate was 1.95%. The court held that this language could cause the plaintiff to believe that the variable rate did not take effect until after the first five years of the loan, even though this is totally irrelevant in connection with whether the disclosure was correct, since the only requirement is that the Disclosure Statement state whether the loan contains a variable rate feature. In this case, the court even suggested that the problem could have been solved by adding the word "payment" to the type of loan, so it would read "5-year fixed payment." This would certainly have been clearer.

Finally, the court found that the defendant violated TILA by adding information to the TILA Disclosure Statement that is not directly related to required information. The court again focused on the inclusion by defendant of the 1.95% initial interest rate.

The lessons to be learned from this case are threefold: (1) Never include extraneous information in the TILA Disclosure Statement; (2) make sure that all of your disclosures are clear, concise and correct; and (3) regardless of how careful you are, you may end up in front of a judge with an agenda who renders a decision that is questionable at best.

Author: Sherwin Root

Sheppard Mullin — 2007-01-31T20:30:28-05:00

Robert S. Beall, II - Partner - Orange County

Mr. Beall specializes in complex civil litigation and intellectual property disputes, with emphasis in unfair competition, securities, trade secret, patent and professional liability litigation. Mr. Beall represents many major clients including, Georgia Pacific, Unisource, LaSalle Business Credit, U.S. Bancorp, Comerica Bank, General Electric Capital Corporation, Storage USA, American Megatrends, Inc., Taylor Made Golf Company, Inc., Iron Grip Barbell Company and Fender Musical Instruments, Inc.

Click here for full bio.

Roy Goldberg - Partner - Washington, D.C.

Mr. Goldberg concentrates his practice on complex commercial and regulatory litigation. He represents companies and other organizations that are challenging the actions by local, state or national government agencies, or are involved in commercial business disputes. In addition to general civil litigation, he has particular experience in matters involving the airline industry, and is the head of the firm's aviation group.

Click here for full bio.

Fred R. Puglisi - Partner - Century City

Mr. Puglisi has extensive experience in complex and general business litigation in state and federal courts, including class actions. He has conducted numerous trials and arbitrations, including trying class and representative actions. Mr. Puglisi also has broad appellate work which includes arguments to the California Court of Appeal and Ninth Circuit Court of Appeal. Most recently, he has defended a number of complex class and representative actions alleging various business torts, unfair competition, false advertising, and violations of the California Consumers Legal Remedies Act.

Click here for full bio.

Susan G. Rosenthal - Partner - New York

Ms. Rosenthal concentrates her practice in corporate and commercial litigation, representing businesses and financial institutions in areas such as contract interpretation, the Uniform Commercial Code, equipment leasing, secured transactions and lender liability. She also conducts investigations for businesses, banks and financial institutions, as well as representing businesses, banks and financial institutions in defense of class actions. She has successfully litigated cases in federal, state and bankruptcy courts throughout the country (i) proving that a personal property lease is a true lease and not a conditional sale under the Uniform Commercial Code; (ii) enforcing the rights of assignees of commercial paper where debtors assert among other defenses (a) fraud (b) lack of consideration (c) non-negotiability of the instrument (d) oral modifications and/or amendments to contracts; (iii) defeating attempts to equitably subordinate debt; and (iv) defeating vendors' claims for the purchase price of equipment from financial institutions that finance the end-users.

Click here for full bio.

Robert J. Stumpf, Jr. - Partner - San Francisco

Mr. Stumpf is the chair of Sheppard Mullin's Financial Institutions Litigation Practice Group. Bob's principal areas of practice are commercial litigation and appellate law. His commercial litigation practice focuses upon financial institution litigation, securities litigation, contract and partnership disputes, bankruptcy litigation, and other types of complex commercial litigation. Bob is also a Certified Specialist in Appellate Law.

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Edward D. Vogel - Partner - San Diego

Mr. Vogel's practice encompasses a variety of litigation areas with a focus on business litigation. He has handled significant and current issues in the areas of creditor's rights, lender liability, commercial law, and products liability. He has been responsible for arbitrations and trials in the state, federal, and bankruptcy courts and appeals in both the state and federal appellate courts. Mr. Vogel has handled appeals which have resulted in published opinions regarding issues of lender liability and good faith settlements in the products liability area.

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PREPAYMENT PENALTY CLAIM PREEMPTED BY HOLA

Sheppard Mullin — 2007-01-30T15:56:37-05:00

Question: Is a lawsuit challenging a federal savings and loan association's prepayment penalty formula preempted by the Home Owner's Loan Act?

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Answer: Yes, according to the Second District Court of Appeal in Weiss v. Washington Mutual Bank, 07 C.D.O.S. 1013 (Jan. 29, 2007).

In this case, plaintiffs borrowed $4 million from Washington Mutual Bank and signed promissory notes that included a formula for calculating the "prepayment premium." A disagreement then arose as to its interpretation, and plaintiffs sued the Bank for fraud, unfair and deceptive business practice, and similar claims. The trial court dismissed the complaint on the grounds it was preempted by HOLA.

The court of appeal affirmed, holding that the Office of Thrift Supervision "has the exclusive authority to regulate the operations of federal savings associations such as Washington Mutual." Why? "Because all of Weiss's claims against [the Bank] seek relief that if granted would necessarily impose requirements on Washington Mutual's prepayment penalty provisions." For good measure, the court also affirmed the dismissal of the plaintiffs' fraud claim against the Bank's loan officer, noting that he was at all times acting within the scope of his authority and "thus cannot be personally liable" to the plaintiffs. "In short, claims preempted as against the employer are necessarily preempted against the employee who acted within the course and scope of his employment."

An electronic copy of the opinion is attached.