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Antitrust and Trade Regulation
Arbitration Clauses
Americans with Disabilities Act
Bank Secrecy Act
Breach of Contract
Breach of Fiduciary Duty
Civil Rights Act
Debt Collection
Deposit Account Fraud/UCC Issues
Due On Sale Clauses
Electronic Communications Privacy Act
Encoding Errors
Fair Credit Reporting Act
Fair Labor Standards Act
Fair Lending
Family Medical Leave Act
Federal Preemption
Financial Privacy
Garnishments, Levies, Attachments
ID Theft
Improper Disclosure of Information
Insider Lending
Interest Rates or Usury
Lender Liability
Letter of Credit
Premises Security
Reg Z
Regulatory Disputes
Rehabilitation Act
Secured Transactions
Social Security Offsets
Soldiers' and Sailors' Civil Relief Act/Servicemembers Civil Relief Act
Stop Payment - Cashier's Check
Truth in Lending (TILA)
Truth in Savings (TISA)
Whistleblower Laws


Wal-Mart Stores, Inc., et al. v. Visa U.S.A. Inc. et al.
On January 4, 2005, the United States Court of Appeals for the Second Circuit handed down its decision on the appeal from the December 19, 2003, decision of the U.S. District Court for the Eastern District of New York, affirming the lower court's order. This was the decision awarding class action status for millions of credit card merchants, involving the largest settlement in the history of antitrust law (more than $3 billion dollars).


Green Tree Financial Corporation v. Randolph
The U.S. Supreme Court held that a party resisting arbitration bears the burden of proof that Congress intended to preclude arbitration of statutory claims. The issue of the case was whether a binding arbitration clause in a consumer financing agreement is a violation of the Equal Credit Opportunity Act.

Thompson v. Irwin Home Equity Corp., et al. The 1st Circuit Court of Appeals has handed down a decision in a case where the lender allegedly violated the Truth in Lending Act by failing to notify the plaintiffs of their right to rescind. The lender had simply delivered blank generic notice forms without the pertinent dates filled in, accompanied by "Instructions for Completing the Notice of Right to Cancel." The plaintiffs contend that this "do-it-yourself disclosure scheme" is not adequate under the statute and they therefore have a right to invoke the longer, three-year time limit on the exercise of their right of rescission. Their loan agreement provided that "[a]ny controversy or claim . . . arising out of or relating to this Agreement . . . shall be determined by binding arbitration." Lender sought to compel arbitration. The borrowers balked, arguing that if they rescind, the agreement, including its mandatory arbitration clause would, in effect, no longer exist. The 1st Circuit disagreed and said that "[N]either the statute nor the regulation establishes that a borrower's mere assertion of the right of rescission has the automatic effect of voiding the contract. . . . If a lender disputes a borrower's right to rescind, [which Irwin is doing] the designated decision maker -- here an arbitrator -- must decide whether the conditions for rescission have been met. Until such decision is made, the [borrower has] only advanced a claim seeking rescission."


In a retaliation claim against an employer under the Americans with Disabilities Act, are compensatory and punitive damages available as a remedy? A new case of first impression sets forth one court's view.
Compensatory and Punitive Damages Unavailable in an ADA Retaliation Case


Keven R. McCarthy, Ttee, v. BMW Bank of North America (see under Secured Transactions)

  In Re: Vincent J. Connors
When does a debtor's right to cure a mortgage default end? In its opinion filed on August 3, 2007, the Third Circuit Court of Appeals resolved a long-standing split of opinions between federal bankruptcy and district courts in New Jersey. The controversy revolved around the language of § 1322(c)(1) (11 U.S.C. 1322(c)(1)) of the Bankruptcy Code, and whether it affords the debtor a right to cure a default on a mortgage loan secured by the debtor's principal residence between the time the residence is sold at a foreclosure sale and the time the deed is delivered to the purchaser. The appeals court parsed the wording of § 1322(c)(1) and its legislative history to decide the issue, affirming the lower court ruling that § 1322(c)(1) creates a "gavel rule," ending the right to cure under that section with the fall of the gavel at the foreclosure sale conducted under state law. The court noted that a separate section of the Bankruptcy Code -- § 108(b) -- may extend the period during which a debtor can exercise post-sale remedies afforded under state law.

Dawson v. Washington Mutual Bank, F.A.
Court Reverses Self, Rules Emotional Stress Damages Recoverable in Bankruptcy
In its opinion filed on December 10, 2004, the Ninth Circuit Court of Appeals has opined that emotional stress damages can be awarded if a creditor violates the automatic stay provision in a bankruptcy proceeding. The court had earlier ruled that such damages were not available, but was later convinced that it had erred.

Mann v. Chase Manhattan Mortgage Corp.
In this January, 2003 decision from the 1st Circuit Court of Appeals, the Court considers the debtors' contention that the lender's mere recordation of postpetition, preconfirmation attorney fees incurred by the lender, on its internal books, violated the automatic stay. The Court disagreed, saying such unilateral accruals of amounts assertedly due, but in no manner communicated to the debtor, the debtor's other creditors, the bankruptcy court, nor any third party, plainly are not the sort of "act" Congress sought to proscribe.

In Re: Jan Weilert RV, Inc.
Are Those Payments Preferences?
If your institution finances used vehicle dealers and takes a security interest in the dealer's trade-ins, this case will be of interest to you.

American General Finance, Inc. v. Bassett
Court Gives Tips on Making Reaffirmation Agreement Statements "Clear and Conspicuous"

The 9th Circuit U.S. Court of Appeals held the test of whether or not the language of a reaffirmation agreement is clear and conspicuous is the likelihood that a reasonable person would actually see a term in an agreement.

In re Cardelucci
In this case, the United States Court of Appeals for the Ninth Circuit on April 12, 2002 held that a bankruptcy creditor's judgment claim would bear interest calculated using the federal judgment rate. The issue before the Court was whether post petition interest is to be calculated using the federal rate or can be determined by the parties' contract or state law. Now we know!

Jamo v. Katahdin Federal Credit Union
All or Nothing Reaffirmation Discussions Allowed by Federal Court
The U.S. Court of Appeals for the First Circuit held that a lender who is owed both secured and unsecured debts in a bankruptcy proceeding may insist upon the reaffirmation of the unsecured debts as a condition to agreeing to the reaffirmation of the secured obligations.

Stanton v. Harrison Jewell
Advance To Debtor After Guarantor's Bankruptcy Upheld
The U.S. Court of Appeals for the Ninth Circuit held that a bankruptcy trustee could not avoid a home mortgage lien that was created by a guarantor homeowner prior to the filing of bankruptcy. However a lender's claim to the collateral based on advances made to the principal debtor after the guarantor's bankruptcy filing were junior to the claims of the trustee.

Union Planters Bank, N.A. vs. Connors
Inadequate Recordkeeping by Debtor Leads to Denial of Discharge
The Seventh Circuit U.S. Court of Appeals upheld a bankruptcy court decision that a debtor who does not maintain adequate financial records may be denied a discharge even if there is no evidence of fraud or intentional misconduct.


Customer Identification Programs

Sultaana Lakiana Myke Freeman v. Department of Highway Safety and Motor Vehicles

Drivers' Licenses are of particular concern to financial institutions as they follow the dictates of their Customer Identification Programs when new customers establish their banking relationships. This Florida case illustrates the great care that state's courts took in deciding whether a Muslim woman's religious beliefs could trump the state's requirement for a full-face photograph on a driver's license.

Suspicious Activity Reporting

Stoutt, et al v. Banco Popular de Puerto Rico
The 1st Circuit Court of Appeals has held that a bank who filed a CRF, the predecessor of a SAR, was entitled to absolute civil immunity under the safe harbor provisions of the Annunzio-Wiley Anti-Money Laundering Act 31 U.S.C. 5318(g)(3). The Court sided with the 2nd Circuit decision in Lee Case that the statute does not require a good faith element for the immunity to apply. The Court rejected the reasoning of the 11th Circuit in the Lopez Case that immunity should be conditioned upon a finding of good faith on the part of the reporting bank. (Lee & Lopez are below.)

Lopez v. First Union National Bank
The 11th Circuit Court of Appeals in 1997 held that verbal instructions from government authorities, by themselves, are not enough to form a good faith basis to suspect a violation of a law or statute. The bank released information regarding a customer's wire transfers to federal law enforcement authorities based solely upon verbal instructions of the authorities. The customer learned of the action (because of a subsequent seizure order and civil forfeiture) and sued the bank for violation of the Right to Financial Privacy Act, among other things.

Lee v. Bankers Trust Company
The 2nd Circuit Court of Appeals interpreted the "safe harbor" protection from liability for institutions filing an SAR and held there exists a broad and unambiguous provision for immunity from any law (except the federal Constitution) for any statement made in an SAR by anyone connected to a financial institution. There is not even a hint that the statements must be made in good faith in order to benefit from immunity.


This is a case involving the Home Affordable Modification Program ("HAMP"). The action was brought in Massachusetts state court, but removed to federal court by Wells Fargo on the basis of diversity. The plaintiff sought monetary and injunctive relief on various grounds:
  • Breach of contract (two counts),
  • breach of implied covenant of good faith and fair dealing,
  • negligent and intentional infliction of emotional distress, and a
  • claim under the Massachusetts Unfair Debt Collection Practices Act as well as a
  • stay of the foreclosure action.
The U.S. District Court dismissed the case, and plaintiff appealed. The First Circuit Court of Appeals affirmed the dismissal with regard to the to one of the two counts for breach of contract as duplicative, the breach of implied covenant and the emotional distress claims, but vacated the dismissal with regard to the other claims, remanding to the remaining claims for breach of contract, UDCPA and stay of the foreclosure to the district court.

The Court of Appeals noted that while the remaining breach of contract claim was badly pled, that: "[T]he complaint's allegations indicate that defendants breached the contract by failing to provide a permanent modification agreement by the modification effective date, [the plaintiff] has done enough to survive a motion to dismiss."

Editors Notes: From reading the case the bank may have perceived its role as managing an internal workout program instead of being a participant in a federal program. Young's complaint includes a series of miscommunications or misunderstandings which lead to this protracted legal suit.

It started in August 2008 when a $2,600 payment to bring the account current was sent. Shortly thereafter, a notice was posted on her door stating that she was late on her mortgage payment, but instructing her to ignore the notice if she had already made the payments. When Young called Wells Fargo she was told that her payment had been received, but the bank would not process her check and intended to foreclosure. This contradicts the notice. Young then agreed to send an additional payment of $5,628 and Wells Fargo promised to send a forbearance agreement to her. Young was told several weeks later there was no agreement and because Wells Fargo had not processed the $2,600 check she was still past due. A supervisor agreed that had the bank applied that check, the loan would be current. Eventually the forbearance agreement was sent, but the monthly payment was then disclosed to be $800 higher. To try and save her home, Young agreed to the terms but could not make the payments.

Young was then qualified for HAMP and was sent a Trial Period Plan (TPP) packet with three payment coupons for her first three monthly payments. She was to make three payments of $1,368 from November to January to qualify for a permanent loan modification. The three payments were made, but Wells Fargo said they were not timely as required by the agreement and refused the final modification. Young's attorney called and was told that letter was in error and to ignore it. Permanent modification papers would be sent. It was June when the modification papers were actually received and the payment was $300 more than the trial period payment amounts. These were not signed by Young and foreclosure proceeds commenced.

Disputes over the agreement include the fact that the permanent payment was increased over the trial period payment. What was the purpose of the trial period if it was not to determine that Young could make then consistently? Also, after the trial period, why was a permanent modification not done, as Young believed it would be?

Actually, the TPP agreement does state that it is not a modification and that the payment is an estimate. A problem here is that these terms were not discussed with Young and she did not understand what the outcome would be. This continued confusion between the lender and the borrower contributed to the expense of this case. As to the timeliness of modification, the court documents also state that "Defendants respond that we are precluded from considering this argument on appeal because the complaint does not plead a theory of breach based on a failure to tender a permanent modification by a certain date. They are wrong. The complaint states numerous facts related to Wells Fargo's repeated mistakes and delays in offering her a permanent modification, including that the end of the trial period passed without the proffer of a permanent modification agreement."

In the end, the bank failed to explain what was happening to the borrower and to walk the borrower through the steps. The bank failed to process payments timely, to understand its own procedures by making demands and retracting them and the borrower (who the law is intended to protect) did not have a firm grasp on the agreements that were being made. Perhaps the latter was due to the stress of the situation and financial ignorance toward the agreement in general. Had the collections efforts been explained and understood by both parties, years of litigation expenses could have been avoided.


Watson Coatings, Inc., v. American Express Travel Related Services, Inc.
The 8th Circuit Court of Appeals filed its order on January 31, 2006, affirming a district court's ruling in favor of American Express, in a case brought under Missouri's Uniform Fiduciaries Law, the Uniform Commercial Code, and certain common law concepts. The ruling helps clarify when a payee may and may not be held liable for a fiduciary's breach of duty in states, like Missouri, that have enacted a version of the Uniform Fiduciaries Act. It also states that the payee of a check may qualify as a holder in due course under the UCC and therefore be insulated from common law claims, under limited circumstances.

In this case, Watson's trusted employee issued $746 thousand in company checks to American Express over a four-year period, all in payment of amounts owed on her husband's American Express account. Watson alleged that American Express was put on notice of the employee's breach of duty when it accepted corporate checks in payment of the husband's debt.

The court held that Missouri's Uniform Fiduciary's Law limits the common law concept of notice to cases in which there is "actual" notice of the breach or knowledge of sufficient facts to constitute "bad faith." The court then found that Amex had neither actual notice nor knowledge of sufficient facts to be acting in bad faith.


Carla Rodgers v. U.S. Bank
Bank Discharge of Employee Upheld
This case turns on whether the bank had violated the Civil Rights Act of 1964 (and the Missouri Human Rights Act) by firing a minority employee for an infraction of bank policy when it failed to fire a white employee for breaking the same policy. The U.S. Court of Appeals for the Eighth Circuit agreed that the plaintiff was treated less favorably than the white employee, but nonetheless upheld the bank's action. The court found that the bank had reasonably disciplined the plaintiff, whose infraction was much more serious than that of the non-minority employee. Therefore, reasoned the court, there was not disparate treatment.


Frank Thomas v. Law Firm of Simpson & Cybak, et al.
Court Summons Ruled an "Initial Communication" Under FDCPA
This case turns on what constitutes an "initial communication" under the Fair Debt Collection Practices Act (FDCPA). The U.S. District Court for the Northern District of Illinois ruled that filing a summons in a debt collection suit is not a "communication" under FDCPA. The Seventh Circuit Court of Appeals disagreed and remanded the case for further consideration.

Thompson v. Mastercard International, Inc., et al.
After losing money through online gambling, two men sued credit card companies and issuing banks, alleging RICO violations and attempted collection of unlawful debt. The dismissal of this suit was upheld by the 5th Circuit Court of Appeals November 20, 2002.

Neilsen v. Dickerson
Creditor Held Liable in FDCPA Class Action
Normally, it is the debt collector which faces liability for wrongful conduct under the Fair Debt Collection Practices Act. In this case, however, it was the creditor which may be liable.


The case of Young v. Equifax Credit Information Services, J. C. Penney Co. and Credit Bureau of Lake Charles
Publication of Defamatory Information - Settlement Do’s and Don’ts


  PATCO Constructions Company, Inc., v. People’s United Bank, d/b/a Ocean Bank
In May 2009, Ocean Bank authorized six ACH transfers totaling $588,851.26 from PATCO’s account. The transfers were fraudulently ordered using Ocean Bank’s internet banking portal and PATCO’s office computer, which had been compromised by unidentified cybercriminals. The criminals were able to correctly supply access credentials and customized answers to security challenge questions. The bank’s security system flagged the six transactions as “high-risk” because they were inconsistent with the timing, value, and geographic location of PATCO’s regular payment orders, but neither the system nor the bank notified PATCO of the alert and the payments were allowed to be processed. Although some of the funds were returned, there was a loss of $345,444.43.

PATCO sued Ocean Bank, alleging that the bank should bear the loss because its security system was not commercially reasonable under UCC Article 4A, and that PATCO had not consented to the procedures. The district court ruled in 2011 that the security system was commercial reasonable (because it met the customer verification standards in the then-current guidance from federal regulators (“Authentication in an Internet Banking Environment,” 2005). The U.S. Court of Appeals for the First Circuit. in its July 3, 2012, decision, found that Ocean Bank increased the risk of fraudulent transactions by asking for security answers for all transactions over $1, by failing to monitor its security system reports for transactions flagged as “high-risk,” and failing to provide notice to customers before high-risk transactions were allowed to be completed, and therefore the court could not consider the bank’s security system to be commercially reasonable under Article 4A. The case was remanded to the district court for further deliberations on the responsibilities of the parties when the bank’s security measures are not considered commercially reasonable, with a suggestion that the parties “may wish to consider whether it would be wiser to invest their resources in resolving this matter by agreement.”

  Phil & Kathy's Inc. v. Safra National Bank of New York
Phil & Kathy's gave a $1.5 million payment order to Harris Trust and Savings Bank. The order named a beneficiary that was not identifiable as a customer at Safra Bank, and Safra did not accept the order. The intended beneficiary contacted Phil & Kathy's with a new beneficiary name. Phil & Kathy's issued a new payment order with the new beneficiary name, which Safra accepted and credited to the proper beneficiary. Harris Trust also contacted Safra to amend the first order. Safra complied, and accepted the amended order, crediting it to the intended beneficiary (which now had received $3 million). Phil & Kathy's sued Safra for return of the extra $1.5 million and lost, both in the district court and on appeal.

The case turns on the ability of the beneficiary's bank to accept an amended payment order, under § 4-A-211(2) of the New York UCC (numbered as § 4A-211(a) in some states' UCC version). There's a clear message here, however, in Harris Trust's mis-steps in this case: Decide how you'll fix a problem like the $1.5 million wire instruction error, and stick to the plan. Don't try two different approaches, or you risk creating a bigger problem. Good case management processes could have prevented Harris Trust's major mistake.

The case does not discuss whether Phil & Kathy's has other rights to recover the extra payment directly from the beneficiary or from its own bank for its error.

  J. Walter Thompson, U.S.A., Inc. v. Bank of America Corporation
A check was written to a vendor. Someone intercepted the check, altered the payee, and deposited the check to an account in the name of the new payee. When the drawer of the check realized what had happened, it demanded reimbursement from the payor bank, which in turn made transfer and presentment warranty claims against the depositary bank and an intermediary collecting bank. This decision from the U.S. Court of Appeals for the Second Circuit provides a refreshingly clear illustration of how the UCC is designed to allocate losses from altered checks, and affirms that a payor bank may initiate transfer and presentment warranty claims before actually having reimbursed its customer for the improper payment of an altered item.

One caveat, however: A key finding in this case hinges on the lack of availability of Payee Matching Positive Pay technology in 2001. The result in this case would likely have been different if the events had occurred later, after such technology became available.

  Fernando Tatis v. US Bancorp
Bank Deflects Forged Check Claim

The Sixth Circuit U.S. Court of Appeals affirmed a district court's summary judgment in favor of US Bancorp. A depositor had claimed that the bank had wrongfully paid several forged checks on his account. The court found that the depositor had failed to promptly notify the bank, as required by the Ohio UCC and by a provision in the bank's depository contract modifying the UCC requirement for prompt statement examination.

Douglas Companies, Inc. v. Commercial National Bank of Texarkana
Encoding Error Proves Costly

Nearly everything that could go wrong did in this case. A bank under-encoded a large check, shorting its depositor $216,000. The depositor didn't catch the error for several months. The bank sent its adjustment request to the wrong address. The drawer of the check went bankrupt. The result, decided the Eighth Circuit Court of Appeals, is that the depository bank, which created the problem with its encoding error, was liable not only for the underpayment to its depositor, but also for the legal fees incurred by its customer and by the payor bank.

The court's decision points out the limited scope of many banks' attempts to shorten their depositors' timeframes for claiming errors on deposit accounts. The bank in this case had argued that its contractual language required Douglas to report the deposit error in 60 days. The court found that the contract only addressed depositors' responsibilities under UCC section 4-406, which deals with check alterations and unauthorized signatures, not with deposit errors.

Wachovia Bank, N.A. v. Federal Reserve Bank of Richmond
Altered Check: Who Pays?
A large dollar item being mailed by a bank customer to a payee is stolen from the mail. The payee is altered. The item is paid. Who bears the loss? In the latest addition to Court Watch, we tell you about a new 4th Circuit case where the drawee bank was able to successfully pass the loss on to an intermediary bank under a theory of breach of transfer and presentment warranties. The case is of interest on several levels, but it is particularly noteworthy that the court rejected arguments that the drawee bank's failure to examine the item, which had a face amount of more than $500,000, constituted a lack of good faith.

Barki v. Liberty Bank & Trust Company
Doctor writes checks payable to banks for TT&L payments. Accountant embezzles by placing the checks into his own accounts. Years later, the doctor realizes the taxes haven't been paid and sues her bank. Tons of issues, from customer negligence to statutes of limitations are explored. Plus, although the drawee bank relied on the warranty of a depositary bank in paying some of the checks, it couldn't pass on the loss for those because the depositary bank failed in the meantime.

Beshara v. Southern National Bank
After developing a social relationship a bank employee, the customer opened a checking account at the bank. The customer allowed the employee to conduct virtually all his business at the bank including making deposits and withdrawals from the account. Unknown to the customer the employee added herself as an authorized signer on the account and redirected the statements to her home address. Upon the discovery by the bank of the embezzlement, it froze the customer's account pending completion of an internal audit. The account remained frozen for over three year despite the recovery of insurance claims by the bank and a determination that the customer had over $100,000.00 in verified funds remaining in the account. The Supreme Court of Oklahoma held the customer had valid claims against the bank regarding wrongful dishonor of checks, breach of good faith and conversion that should be submitted to a jury for its determination.

Cassello v. Allegiant Bank and Royal Banks of Missouri
Court Allows Common Law Negligence Claim to Survive UCC Preemption Challenge
One of the issues that arises in check fraud situations is what type of cause of action can be used. In this case, the customer sued for negligence and the bank argued that the UCC preempted claims for negligence. The United State Court of Appeals for the Eight Circuit held that not all common-law actions of negligence against a bank in connection with its handling of checks are preempted by the UCC.

Dalton & Marberry v. NationsBank
Employee of bank customer embezzled over $100,000 by exchanging over a period of four and one-half years 93 company checks made payable to the bank for blank cashier's checks or money orders. The Supreme Court of Missouri held that a bank could be liable under the common law duty of inquiry for failing to inquire as to the authority of the employee to exchange the checks and the holder in due course defense under Missouri's version of the Uniform Commercial Code was not available to the bank.

National Title Insurance Corporation Agency v. First Union National Bank
Bank Successfully Shortens Time Period for Checking Checks
How long does a customer have to discover a forged signature check? The UCC, in 4-406, says if it's been more than a year, the customer is precluded from passing the loss to the bank. Here's a recent representative case that deals with a reduction, by deposit account agreement, of that time period.

Santucci v. Citizens Bank of Rhode Island</a> Does a Bank Owe a Duty of Care To Elderly Customers?
How do you respond if the son of an elderly customer asks why the bank let his mother cash her CD early and give the funds to a con artist? Did the bank do anything wrong when it honored the withdrawal requests of the customer who was later declared incompetent?


Fidelity Federal Savings & Loan Association v. De La Cuesta
The issue in this 1982 U.S. Supreme Court case was the pre-emptive effect of a regulation issued by the Federal Home Loan Bank Board (FHLBB) that permitted federal savings and loan associations to invoke "due-on-sale" clauses in mortgage contracts if the property was sold or transferred. The regulation was in conflict with a provision of California state law and a California state court decision that limited a lender's right to exercise such a clause to cases where the lender could demonstrate the transfer of the property would impair the lender's security interest. The Supreme Court held the FHLBB acted within its authority in issuing the regulation and it was the intent of the regulation to pre-empt conflicting state limitations on the due-on-sale practices of federal savings and loans.

The De La Cuesta case was decided in February, 1982. In October, 1982, Congress passed the Garn-St. Germain Depository Institutions Act, legislatively making due-on-sale clauses enforceable. For more on the issue, readd "The Truth About Getting Around Due-on-sale Clauses".


Fraser v. Nationwide Mutual Insurance Co.
Under federal law, the monitoring of emails by an employer is governed primarily by the Electronic Communications Privacy Act of 1986 (ECPA), 18 U.S.C. §§ 2510 et seq. Under the ECPA, the lawfulness of particular monitoring activities will depend heavily upon whether employees' messages are intercepted during transmission or are retrieved from storage on the company's server.

In Fraser v. Nationwide Mutual Insurance Co., the 3rd U.S. Circuit Court of Appeals ruled that since employee Richard Fraser's emails were stored on Nationwide's system, any search by the company was authorized by an express exemption in the federal ECPA for email service providers. The unanimous three-judge panel rejected Fraser's claim that he was wrongfully discharged in September 1998 in retaliation for his lodging complaints against Nationwide with state authorities and his efforts to get legislation passed that would have protected agents like himself from being fired for anything less than just cause.

3rd Circuit Judge Thomas L. Ambro found Title I of the ECPA prohibits only those "intercepts" that occur at the time of transmission. "Every circuit court to have considered the matter has held that an 'intercept' under the ECPA must occur contemporaneously with transmission," Ambro wrote in an opinion joined by 3rd Circuit Judges Dolores K. Sloviter and Edward R. Becker. Ambro found that Title II prohibits "seizures" of stored emails but includes an exception for seizures authorized "by the person or entity providing a wire or electronic communications service."


Who can sue whom for an encoding error?
France v. Ford Motor Credit Company
Arkansas Supreme Court, 1996
This case is almost a comedy of errors, but you can bet none of the parties were laughing. France bought a tractor and obtained financing from Ford Motor Credit Company (Ford Credit) for it. France decided to prepay the debt, but because of encoding errors on the first check and errors in drawing the second check, France's account was only debited for a fraction of the amount due. He refused to pay the balance, Ford Credit sought to replevy the tractor.

Here's the good part. What makes this case really interesting (besides the holding) is its fact situation. It's a classic case of "What can go wrong will go wrong." The amount owed on the tractor, including finance charges, was $9,845.76. Prior to the due date of the first payment, France decided to pay off the tractor. He would have owed $8,506.19 at that time (after deducting unearned interest, etc.). France's wife, an attorney, wrote out check #2224 on their joint account at Bank of Eureka Springs for that amount and mailed it to the lockbox for Ford Credit which was monitored by Mellon Financial Services (Mellon). Mellon MICR-encoded the amount of the check and sent it to Ford Credit's depositary bank. There was an error in the encoding, however: the amount was shown as $506.19, rather than $8,506.19.

Texas Commerce Bank credited France with a payment of $506.19. The check was forwarded to the payor bank, which debited the France account for $506.19. The encoding error was discovered and the wife wrote a second check, #2313, about a month after the first check was written. Her goal was to pay off the remaining $8,000 balance. Unfortunately, although she wrote $8,000.00 on the check where the numerical amount appears, she wrote "Eight dollars and 00/100" where the amount is spelled out in words.

This time there was another encoding error! Mellon didn't encode the check for $8.00 (which would have been the correct amount, due to the way the check was written.) It didn't encode it for $8,000 (which would have been an easy mistake, considering the fact that the numerical amount was $8,000). Instead, it inexplicably encoded the item for $800. Texas Commerce Bank credited $800 to the France account with Ford Credit and sent the check to the payor bank. The payor bank debited the France account $8.00, then notified Texas Commerce of the error and Texas Commerce reversed the $800.00 credit and substituted $8.00. That meant Ford Credit was still owed $7992, but France thereafter refused to pay the balance.

One of France's arguments was that Ford Credit's remedy is against its agent which made the encoding error and not against Mr. France. The Trial Court, disagreed, holding replevin was proper. The Arkansas Supreme Court affirmed, saying "The [UCC encoding warranties] statute provides warranties to collecting banks and payors but not to a payee such as Ford Credit."


  American Bar Association v. Federal Trade Commission
The U.S. District Court of Appeals for the DC Circuit decided on March 4, 2011 that Congressional action to amend the FCRA to clarify the definition of "creditor" under the "Red Flags" requirements of the Fair and Accurate Credit Transactions Act (FACTA) has made moot the case brought by the American Bar Association (ABA) against the FTC in which the ABA claimed that the FTC's interpretation of FACTA to include attorneys and law firms within the scope of the Red Flags rules under an Extended Enforcement Policy was unlawful. The Red Flag Program Clarification Act of 2010 (Pub. L. 111-319), enacted on 12/18/2010, made the case moot, said the Court of Appeals, which directed the lower court to dismiss the case. The Clarification Act made it clear that a creditor's allowance of deferred payments alone could not trigger the identity theft protection requirements.

Stergiopoulos & Castro v. First Midwest Bancorp, Inc.
Shopping Dealer Paper under the FCRA
Car dealers have been "shopping" their deals with multiple lenders for years. Their customers don't necessarily know which lenders will get a shot at these loans, and they usually don't care, if they get the financing they want to buy their cars. But is it legal under the FCRA for a lender to request a credit report if that lender isn't identified to the consumer when the application is signed?

Mary Ruffin-Thompkins v. Experian Information Solutions, Inc.
This case, decided on September 7, 2005, by the U.S. Court of Appeals for the Seventh Circuit, does not directly involve a financial institution, although credit information supplied by US Bank was the trigger that set off the suit. We include it here strictly because of a comment in the court's decision that has little to do with the matters decided, but sends a message to anyone concerned with clear and effective communication.

The case involves a claim by Ruffin-Thompkins that Experian, by failing to properly handle her dispute of information supplied by US Bank, violated the FCRA. Ruffin-Thompkins' appeal failed on several technical grounds. However, the appeals court's opinion includes a suggestion that Experian's communications methods are deserving of scrutiny. After Circuit Judge Kanne offers, "It seems that Experian has a systemic problem in its limited categorization of the inquiries it receives and its cryptic notices and responses," he notes that this potential problem didn't get reviewed in the court's deliberations because Ruffin-Thompkins' appeal was defeated on other grounds.

There's a lesson here for anyone concerned with framing an institution's customer communications: Make sure your message is complete and understandable.

Reynolds v. Hartford Financial Services Group, et al; and Edo v. GEICO Casualty Company et al (cases joined in decision)
Must Insurors Send Adverse Action Notices?
In this U.S. Court of Appeals case from the Ninth Circuit, the Court determined that adverse action under the Fair Credit Reporting Act can occur when pricing the premium for a newly-issued policy of insurance, and not only when an initial premium cost is increased, as contended by the issuing companies. The court also found that the assignment of a policy to one of a group of companies can constitute adverse action by more than one of the companies, if a premium higher than the best available is charged based on information from a consumer report.

Johnson v. MBNA America Bank, NA
On 2/11/04, the 4th Circuit Court of Appeals handed down its decision in this appeal, affirming a judgment entered against MBNA following a jury verdict in favor of plaintiff Johnson on a claim that MBNA violated the Fair Credit Reporting Act by failing to conduct a reasonable investigation of plaintiff's dispute concerning an MBNA account appearing on her credit report. MBNA's first contention was that the district court made an error when it ruled furnishers of credit information must perform a "reasonable" investigation of consumer disputes. MBNA, in essence, says there isn't a qualitative component to the investigation provision that would allow a court or jury to assess whether the creditor's investigation was reasonable. The Court went back to the plain meaning of the term "investigation" and concluded it would make little sense to believe that Congress would use the term "investigation" to include superficial, unreasonable inquiries. The court therefore held that creditors must indeed conduct a "reasonable" investigation of their records after receiving notice of a consumer dispute from a credit reporting agency. The next issue, then, was whether the jury's determination that MBNA did not conduct a reasonable investigation was supported by the evidence. The Court looks at the steps MBNA took and finds that a jury could reasonably conclude that MBNA acted unreasonably. Although the disputed credit account was for $17,000, the jury found that Johnson's actual damages stemming from the incorrect information furnished by MBNA totaled $90,300. After finding that MBNA had negligently failed to comply with the FCRA, the jury awarded Johnson $90,300 and that verdict was upheld on appeal. There are many other issues discussed. Read the Court's opinion for complete details.

Phillips v. Grendahl
We have included this case, which does not directly involve a financial institution, because it provides a good opportunity to focus your attention on two factors: the need to guard against abuse of credit report access and the need to do background checks on prospective employees because people are not always what they appear to be.

What is of interest here is the attempt to use information from something like a credit report for a purely personal purpose. Financial institutions have faced liability in the past when employees have pulled credit reports for personal reasons unrelated to the institution. Make sure your employee training on this issue stresses that consumer reports may only be obtained for a "permissible purpose" as defined by the FCRA. The second point of interest is that the individual being investigated looked good on the surface, but may have had hidden flaws in his past, like bad check writing and delinquent child support. In the employment context, it is dangerous to make assumptions about background, character, and financial history. You can't believe everything an applicant says - whether orally or in a written application. Do background screening.

The Eighth U.S. Circuit Court of Appeals upheld the dismissal of the plaintiff's claim of violation of the Fair Credit Reporting Act but allowed the tort claim of Invasion of Privacy. A mother was suspicious of her daughter's fiancée and after doing some investigations, she hired a private investigator. The investigator utilized a service that "pulled" a "finder's report" on the suitor and passed the information on to the mother. The boyfriend sued the mother, private eye and the reporting service contending a claim for wrongful disclosure and invasion of privacy. The Court held that non-compliance under the applicable section of the FCRA required knowing and intentional commission of an act by the defendant who knew the act would violate the law.

Employer Liability for Unauthorized Access to Consumer Report by Employee
Jones v. Federated Financial Reserve Corporation
The 6th Circuit Court of Appeals finds that an employer may be subject to vicarious liability for unauthorized access to a credit report by an employee. The Court states that failure to impose vicarious liability on a corporation like Federated would allow it to escape liability for "willful" or "negligent" violations of the statute. Because a corporation can act only through its agents, it is difficult to imagine a situation in which a company would ever be found to have willfully violated the statute directly by obtaining a credit report for an impermissible purpose. And the FCRA's deterrence goal would be subverted if a corporation could escape liability for a violation that could only occur because the corporation cloaked its agent with the apparent authority to request credit reports Thus, vicarious liability is appropriate.

Civil Liability under FCRA for Furnisher of Information
Nelson v. Chase Manhattan Mortgage Corporation
The issue in the case was whether the FCRA creates a cause of action for a consumer against a furnisher of credit information. The 9th Circuit Court of Appeals held that the FCRA is to protect consumers against inaccurate and incomplete credit reporting and Section 1681s-2(b) provides a private remedy to injured consumers. Thus, a consumer can sue a company for furnishing inaccurate and/or incomplete information. In this case, the furnisher allegedly failed to take prompt and appropriate corrective action once it was notified that it had reported inaccurate information.


  Mortgage Bankers Association v. Seth D. Harris, as Acting Secretary of Labor, U.S. Department of Labor, et al.

Editor's Note (6/17/14): The U.S. Supreme Court has agreed to hear an appeal of this decision.

On July 2, 2013, the United States Court of Appeals for the District of Columbia Circuit, in an appeal by the Mortgage Bankers Association (MBA) from the U. S. District Court for the District of Columbia, found for the appellant, reversed the District Court's order dismissing the MBA's motion for summary judgment, and directed the lower court to vacate a 2010 Department of Labor (DOL) Administrator Interpretation.

In 2006, the Department of Labor issued an opinion letter concluding that mortgage loan officers with typical job duties fell within the "administrative employee" exemption to the Fair Labor Standards Act requirement for overtime pay for employees working more than 40 hours per week. In 2010, Deputy DOL Administrator Nancy Leppink issued an "Administrator's Interpretation" stating that "employees who perform the typical job duties" of a mortgage loan officer "do not qualify as bona fide administrative employees." The 2010 interpretation explicitly withdrew the 2006 Opinion Letter. MBA brought the action in the District Court to argue that the DOL violated the Administrative Procedures Act (APA) when it amended, in effect, its 2006 rule without the notice and comment procedures required by the APA. The District Court denied the MBA's motion for a summary judgment.

The decision of the Court of Appeals not only reversed the lower court's order denying the request for summary judgment; it also remanded the case to the lower court with instructions to vacate the 2010 Administrator's Interpretation. The Court of Appeals did not take a position on the merits of the DOL interpretation, but directed that DOL must conduct the APA-required notice and comment rulemaking if it wishes to readopt the 2010 interpretation.

Currently, therefore, the 2006 Opinion Letter has been reinstated for the moment. The DOL may decide to move back to the 2010 rule through the notice and comment rulemaking process, so the question of overtime pay for mortgage loan officers may not have been finally settled.


Meyer v. Holley, et al.
On January 23, 2003, the U.S. Supreme Court handed down a decision in a case where plaintiffs sought to hold an individual who was the realty corporation's president, sole shareholder, and licensed “officer/broker” vicariously liable in one or more of these capacities for the salesman's unlawful actions under the Fair Housing Act. The Court held that the Fair Housing Act imposes liability without fault upon the employer in accordance with traditional agency principles, i.e., it normally imposes vicarious liability upon the corporation but not upon its officers or owners.

Rowe v. Union Planters Bank of S. E. Missouri
If You Are Sued For Discrimination
In this U.S. Court of Appeals case from the Eighth Circuit, the Court listed the elements required for a plaintiff to establish a violation based on racial discrimination of the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA). The plaintiff contended bad advice from a bank officer, the officer's mishandling of a loan application and the subsequent denial of the loan by the bank were motivated by racial discrimination. The Court ruled the plaintiff did not satisfy all the requirements to constitute an FHA or ECOA claim.


Mainor v. Bankfinancial FSB
When Mainor was refused leave under the FMLA she resigned. Bankfinancial released her immediately. She went to the doctor on her own behalf that day. Three issues came about:
  1. Submitting a resignation and being dismissed immediately means that person is no longer an employee and cannot sue for denial of FMLA leave once she has resigned her position;
  2. A few visits to the doctor do not meet the FMLA criteria for a "serious health condition"; and
  3. Telling one's employer that time off is needed to visit her sick grandmother does not qualify as adequate notice.

The rule of law that allows Congress to pass laws on a subject and make those laws controlling over state laws, or prevent states from enacting laws on the same subject, if Congress specifically states that it has "occupied the field" (assumed control of the subject). The National Bank Act is such a law, but only to the extent that it regulates national banks and their related activities.

  Coumo v. Clearing House Assn., L.L.C.
The Supreme Court created a little crack in the armor of the OCC's interpretation of the National Bank Act (NBA) on June 29, 2009, when it partially reversed a lower court ruling that the OCC's regulations prevented the Attorney General of the State of New York from issuing an information request to national banks "in lieu of subpoena" for nonpublic information about their lending practices. The AG was attempting to gather information to determine if certain national banks had violated the state's fair lending laws. Specifically, the Court ruled that "visitorial powers" are separate from the power to enforce the law, and that the OCC's interpretation of "visitorial powers" (which states cannot exercise over national banks) to include "enforcing compliance with any applicable federal or state laws concerning" national banks' activities overreaches the language and intent of the National Bank Act.

We can expect that the OCC will be revising its regulations at 12 CFR § 7.4 in response to the ruling.

  SPGGC, LLP; Metabank; U.S. Bank, N.A. v. Kelly A. Ayotte
The U. S. Court of Appeals for the First Circuit upheld an opinion of the U.S. District Court for the District of New Hampshire that the National Bank Act and the Home Owners Loan Act, and regulations issued under them, preempt a provision of the New Hampshire Consumer Protection Act to the extent that it attempted to regulate the issuance of gift cards by national banks and federal savings associations.

The court cited the Supreme Court's opinion in Watters v. Wachovia Bank, N.A. (below) in its discussion of the case. The gift cards issued in this case were issued by SPGGC, LLP (which operates Simons malls) as agent for U.S. Bank, N.A. and Metabank, under agreements with terms substantially different from those in an earlier agreement for gift card issuance involving Bank of America. On May 30, 2007, the court affirmed the decisions of the district court.

  Watters v. Wachovia Bank, N.A.
The U.S. Supreme Court has upheld the OCC's regulation (12 C.F.R. 7.4006) preempting the applicability of state mortgage lending law to operating subsidiaries of national banks.

Wachovia Mortgage Corporation is a North Carolina chartered entity licensed by the OCC as an operating subsidiary of Wachovia Bank, N.A. It does business in Michigan and in other states. Michigan requires bank subsidiaries to register with the state's Office of Insurance and Financial Services (OIFS), and to submit to state supervision. When Wachovia Mortgage became a wholly owned operating subsidiary of Wachovia Bank, it surrendered its Michigan registration. Watters, the OIFS Commissioner, informed Wachovia Mortgage it could no longer operate in Michigan. Wachovia Bank sued for relief based on the National Bank Act and on OCC regulations that preempt state mortgage lending laws' applicability to a national bank's operating subsidiary.

Watters argued that the OCC exceeded its authority in issuing the preemptive regulations, and on other grounds. Watters' arguments were rejected by the Federal District Court, and by the U.S. Court of Appeals for the Sixth Circuit. On April 17, 2007, the U.S. Supreme Court affirmed the decisions of the lower courts.


NACS v. Board of Governors

On March 21, 2014, the U.S. Court of Appeals for the District of Columbia Circuit overturned the July 31, 2013, opinion of the U.S. District Court for D.C. in the case of NACS, f/k/a National Association of Convenience Stores, et al v. Board of Governors of the Federal Reserve System (see BOL's Top Stories for August 1, 2013). The lower court had ruled that the Board's interchange transaction fee (Regulation II, 12 CFR § 235.3(b)) and network non-exclusivity (§ 235.7(a)(2)) provisions should be remanded to the Board with instructions that they be vacated, on the grounds that the Board had disregarded Congress's statutory intent in crafting the language of those Regulation II provisions. The Board appealed from the District Court ruling. The Court of Appeals found that the Board's rules do not violate the plain language of the statute (the so-called "Durbin Amendment" to the Dodd-Frank Act), but remanded to the Board of Governors for further explanation the matter of the Board's treatment of transactions-monitoring costs. The Court of Appeals reversed the District Court's grant of summary judgment to the merchants, and remanded the case for further proceeding.

  Murphy v. National City Bank
Juliet M. Murphy filed a class action suit against National City Bank (a national banking association), claiming that the bank's practice of charging fees for the cashing of its teller's checks violated provisions of the Michigan Uniform Commercial Code (MUCC). The U.S. District Court for the Eastern District of Michigan granted the bank summary judgment based on pre-emption of the state law by the National Banking Act. On appeal, the U. S. Court of Appeals for the Sixth Circuit affirmed the summary judgment for the bank, but for the reasons that the MUCC is not violated when a bank charges a non-accountholder a fee to cash its teller's check.

The bank issued teller's checks drawn on Citibank, N.A. A branch of the bank charged Murphy a $10 fee for the service of cashing such a check payable to Murphy. Murphy's suit argued that the MUCC provision at 440.3414 (which tracks section 3-414 of the "model" UCC) required the bank to pay its teller's check "according to its terms at the time it was issued."

The court found for the bank because the check was not drawn on the bank itself, but on Citibank. Accordingly, the provisions of 3-414 would not apply because its requirements are conditioned upon dishonor of the check: "If an unaccepted draft is dishonored, the drawer is obliged to pay the draft ... according to its terms at the time it was issued ...." Dishonor of a draft (including the teller's check) requires "presentment for payment ... to the drawee," [UCC 3-502(b)(2)] and Murphy had not presented the check to Citibank, but to the drawer, National City Bank. The court also found that imposition of the check-cashing fee was not a waiver of presentment by the bank (which could have triggered the provisions of 3-414).

In this case, the Court of Appeals addressed the question of applicability of the MUCC provision to the bank's actions. It did not address the question of pre-emption by the National Bank Act. It is also important to note that the decision applies only to teller's checks (drawn on another bank), and not to cashier's checks. Had National City Bank issued cashier's checks, it's arguable that UCC 3-412 would require payment of the check "according to its terms." In such a case, the question of pre-emption by the National Bank Act might affect the outcome.

Wells Fargo Bank of Texas, et al. v. James
The Fifth Circuit U.S. Court of Appeals held that the National Bank Act preempted a state law that prohibited a national bank from charging a fee for cashing an on-us check for a payee who no account at the bank.

The Plaintiffs in the case were five national banks that do business in the state of Texas and the defendant was the Texas State Banking Commissioner. The Texas Legislature enacted a par value statute that provided "a payor bank shall pay a check drawn on it against a sufficient balance at par, without regard to whether the payee holds an account at the bank". The Plaintiffs contended the statute was preempted by the National Bank Act and 12 C.F.R. 7.4002(a) which provides that a national bank may "charge its customers non-interest charges and fees". The OCC has interpreted the word "customer" to include any person who presents a check for payment and issued identical opinion letters to three of Plaintiffs that they were authorized to charge a checking-cashing fee to non-account holders.

The Plaintiffs initiated this action seeking a permanent injunction and a declaration that the statute was null and void. The district court issued a permanent injunction, found the statute was preempted by the National Bank Act, and declared it null and void. The Defendant appealed.

The Court noted a state statute may regulate national banks, where doing so does not prevent or significantly interfere with the national bank's exercise of its powers. When a state statute interferes with a power which national banks are authorized to exercise, the state statute irreconcilably conflicts with federal law and is preempted by the Supremacy Clause of the U.S. Constitution.

The Court held that the OCC interpretation of the word "customer" was controlling and included payees who presented checks for payment. In addition, 12 C.F.R. 7.4002(a) authorized a national bank to charge non-account holding payees a check cashing fee. The state law, which prohibited such a fee, was in irreconcilable conflict with the federal regulatory scheme and was preempted.

The decision of the district court was affirmed.


Flowers v. First Hawaiian Bank
Bank Trapped in RFPA Violation Through Army Subpoena
The 9th Circuit Court of Appeals held 7/2/2002 that a bank violated the federal Right to Financial Privacy Act when it turned over customer financial records pursuant to a subpoena in connection with a Section 32 Army proceeding. The bank believed an exception to the RFPA applied because the records were sought in connection with a proceeding to which the Army (a government authority) and the customer whose records were sought were parties. The liability resulted from the fact that no exception to the RFPA was applicable (because the subpoena was not a subpoena issued "under the Federal Rules of Civil or Criminal Procedure or comparable rules of other courts"), and the bank was not protected from liability when it turned over the records because it had not obtained a certificate of compliance from the Army.


BancInsure, Inc. v. Marshall Bank, N.A.
Coverage under your standard financial institution bond can protect you from various types of losses, including forged guarantees, but you have to do your part, too. That's a lesson Marshall Bank learned the hard way.

The litigation between BancInsure and the bank arose out of a $2.56 million loan Marshall Bank made to allow borrowers to purchase one minor league hockey team and refinance another. The bank required personal guarantees from two individuals. The loan documents were executed before the guarantees were obtained, however, and the bank disbursed the proceeds after receiving what appeared to be faxed copies, not originals, of the guaranty documents. Ultimately, the loan went bad and the bank discovered the personal guarantees had been forged.

After the bank suffered a significant loss on the loan, it made a claim for coverage under its bond with BancInsure. BancInsure denied coverage and sought a declaratory judgment that the loss was not covered. The district court granted summary judgment to BancInsure and, on appeal, the 8th Circuit Court of Appeals has affirmed. The courts ruled that the bank should have had the originals of the guarantees before they disbursed proceeds and that protection afforded by the policy is against forgery, but not forgery committed by use of faxed documents, accepted by the bank without perusal of the originals.

United States v. Thomas
Court Casually Criticizes Bank Personnel's Inaction
What should a financial institution do if an employee suspects that a care giver is taking advantage of an elderly customer? If the customer is contacted and repeatedly does not object to questionable withdrawals, is any additional action necessary?

This is a criminal case involving the construction of the bank fraud statute, but it's not the holding in the case that is of interest here. What we found interesting was the Court's criticism of bank personnel for not alerting the authorities to the possibility of unauthorized withdrawals from an elderly customer's account.

SEC v. Sharp Capital (Janvey v. Fernandez)
Misuse of Your Logo and Name Could Lead to Liability
How is your institution's name and logo being used by third parties? If it's used in a way that appears to connote you have a different or larger role in a transaction than you actually have undertaken, you could find yourself the target of a lawsuit. Here's a case where individuals involved in a fraudulent investment scheme tried to hold the custodial bank liable.

Travelers v. Baptist Health System
Fraudulent transactions continue to plague businesses. Make sure you have sufficient internal controls over invoice payments to make sure you can avoid the loss like the one suffered by one company who lost over $875,000 due to fraudulent invoices submitted by a scammer.

Your internal controls should include training against social engineering. Con artists attempt to gain information through apparently harmless telephone calls to employees, sometimes posing as another banker or as an equipment salesperson. They ask questions regarding the type of printers and copiers utilized by the institution, who is in charge of ordering supplies, and what procedures are followed. With this information, they can easily prepare fake invoices which are submitted for payment. The invoices appear to be legitimate because they contain information that an insider is unlikely to know. Now would be a good time to review your invoice payment procedures, training schedule and insurance policies.

  • Match all invoices to orders;
  • Centralize your purchasing function and have the purchasing person/department approve all invoices before payment;
  • Don't utilize something simple like an "OK to pay" stamp or other method that could easily be duplicated;
  • Alert your employees to the fact that a caller may attempt to social engineer them into divulging information about the type of equipment your institution uses in order to later dummy-up invoices. A common ploy is for the scammer to call, pretending to be selling copiers, for example. They'll say, "Are you happy with your current copier? Are you thinking about making a change in the near future?" Typically, the person will say they're happy with the existing equipment. The "salesman" will then say, "I'm just curious. Would you mind telling me the make and model you currently use?" They will then politely thank the bank employee for their time and promise to call again in the future. A call like that barely registers as a blip on the banker radar because it seems so innocuous, but the whole purpose is to gain vital information that will aid the con artist in making legitimate-looking invoices that will be paid without question.
In this case, the fact that the claim was not covered by insurance means the company bore the entire loss - nearly a million dollars!

The case involved a heath care provider and an insurance company. The vendor learned that the company's invoice payment procedures involved the payment of all invoices marked "ok to pay". Instead of submitting invoices to the appropriate department for approval, the vendor marked them "ok to pay" and delivered them directly to the accounting department of the health care provider for payment. When the fraud was discovered, the company filed a claim with its insurer, but the claim was refused. The Fifth Circuit U.S. Court of Appeals held that the provisions of the insurance contract only covered forgeries or alterations of certain instruments and did not include invoices.


Southwestern Glass Company, Inc v. Waelder Oil and Gas, Inc.
Zero Balance Accounts and Garnishments
Learn the reasoning behind the Eighth Circuit's decision which held a bank liable for over $500,000 for failure to properly answer a garnishment involving a line of credit and a zero balance account.


Jessup v. Pulaski Bank
Court Allows Credit Card Loan Interest Rate to Exceed State Usury Rate
What interest rate usury laws apply to a financial institution that solicits and issues credit cards? Is it bound by the laws of its home state or the state of its customers or neither? The Eighth Circuit Court of Appeals has answered the question for financial institutions located in its jurisdiction. The answer may surprise you.


  Luciano Pisciotta et al v. Old National Bancorp
Info Breach: No Harm, No Foul
On August 23, 2007, the U.S. Court of Appeals for the Seventh Circuit agreed with a lower court that there is no claim for damages for costs of past and future credit watch services subscribed to because of a data security breach. The case involved a bank whose website was hacked. The bank informed 101,000 customers or potential customers the breach could result in the theft of those customers' identities. But the court ruled that the costs of credit watch services aren't recoverable. At least that's the way the federal court decided that Indiana courts would rule when interpreting Indiana law.

Could this ruling benefit your bank in a similar situation? Read our analysis -- Info Breach, No Harm No Foul.

Private Bank & Trust Company v. Progressive Casualty Insurance Company
This case provides an illustration of what we refer to as double-layer identity fraud. An individual using a false identity for himself took two stolen checks made payable to a corporation into a bank and, using the name of a sham entity which was nearly identical to the name of the check payee and bogus corporate documents, set up an account, deposited the checks, and made away with more than $400,000. After the bank suffered the loss, it attempted to make a claim against its insurer for an "on premises loss" under its financial institution bond. The trial court and the 7th Circuit Court of Appeals granted summary judgment in favor of the insurance company, holding that because the on premises clause covered "theft, false pretenses, common-law or statutory larceny committed by a person present in an office or on the premises of the Insured ..." (emphasis supplied) and this particular loss occurred when the crook made a telephone transfer from the fraudulently opened account to the account of another bank customer from whom he made a purchase of gold coins, the loss was not an "on premises" loss and the insurer wasn't required to pay. Obviously, the best way to avoid a loss like this is to have strong, effective CIP procedures that would enable you to spot the fake ID and bogus corporate papers and block the opening of an account.


Orr v. Bank of America
Even though the bank prevailed in this case from the 9th Circuit regarding allegations of improper disclosure of information concerning a former employee, it provides a good laundry list of the possible causes of action that might be raised by a former employee including slander, fraudulent misrepresentation and violations of both RICO and the Employee Polygraph Protection Act.


Roque De La Fuente II v. FDIC
In this case, the Ninth Circuit U.S. Court of Appeals reviewed an appeal of an FDIC Enforcement Order regarding alleged Reg O violations from a former bank director who was removed from banking for life.

Bankers will find this case of interest because it sheds light on the analysis to be applied in determining whether an entity (whether a trust, corporation, etc.) should be deemed a "related interest" of an insider. It explores the various facets of the test for "control".

In this instance loans were made to trusts created by the director, his relatives and associates. The Court reviewed each transaction and indicated how Reg O came into play with each.


Brown et al. v. Legal Foundation of Washington et al.
In recent years, the legality of IOLTA (Interest on Lawyers' Trust Accounts) has been called into question in several court cases. The matter has now been resolved by the U.S. Supreme Court in a five to four decision that upholds the legality of IOLTA. The Court held that a state law which required an attorney or a real estate escrow agent to place client funds that would not otherwise generate net interest earnings into an IOLTA account was not a "regulatory taking" under the Fifth Amendment. As a side note, if an attorney mistakenly places into an IOLTA account client funds which would have generated net interest earnings after payment of the expenses of the account, the client has a claim against the attorney and not the state. No claim was made against the financial institution where the IOLTA account was maintained.

Bescos v. Bank of America
We're Not Liable, We're the Assignee!
This California case involves the issue of whether a lending institution, which finances a vehicle lease but is not an agent of the automobile dealer in the lease transaction, may be responsible as a lessor for misrepresentations made by the dealer in violations of when the misrepresentations were unknown to the lending institution and not apparent on the face of the leasing agreement.


National Market Share, Inc. et al v. Sterling National Bank
Bank Breaches Duty, But Damages Set At One Dollar

Can you imagine losing a law suit and breathing a sigh of relief? That's undoubtedly what happened when Sterling National Bank ("Sterling") lost in a suit brought by former loan clients in the U.S. District Court for the Southern District of New York. That court found that Sterling had breached its duty of good faith and fair dealing, but the plaintiffs had failed to show that the breach caused the demise of their business. The U.S. Court of Appeals for the Second Circuit affirmed that ruling, which awarded only $1 in damages, in its December 23, 2004, decision.

But there is an important lesson for lenders in this case that should cause them to think about promises made and broken!

Sallee v. Fort Knox National Bank
Two Bad Loans Don't Equal One Good Loan
The U.S. Court of Appeals for the 6th Circuit held that a bank was liable to a loan customer for actual and punitive damages for failing to reveal a negative appraisal and misleading the customer into executing a release of all claims against the bank.


Voest-Alpine Trading USA Corporation v. Bank of China
Letter of Credit Refusal Notice Defects Lead to Liability
The 5th Circuit U.S. Court of Appeals held an issuing bank who fails to give timely and proper notice of refusal of payment of a letter or credit is liable to the beneficiary for the entire amount of the letter of credit even if the presentment was flawed.


Also see Social Security Offsets for related cases.

  Veronica Gutierrez v. Wells Fargo Bank, N.A.
Veronica Gutierrez and Erin Walker sued Wells Fargo under California state law for engaging in unfair business practices by imposing overdraft fees based on a high-to-low posting order and for engaging in fraudulent business practices by misleading clients as to the actual posting order used by the bank. The U.S. District Court for the Northern District of California held that the bank's actions were both "unfair" and "fraudulent" under California's Unfair Competition Law. That court in 2010 ordered the bank to cease its practice of charging overdraft fees based on its posting in high-to-low order for all debit-card transactions, and ordered a $203 million restitution to affected consumers in the state of California. The bank appealed to the U. S. Court of Appeals for the Ninth Circuit. The Court of Appeals, in a decision filed on 12/26/2012, reversed in part and affirmed in part the lower court's ruling. It found that as a national bank, Wells Fargo was protecting in its pricing decision by the preemption provision of the National Bank Act, and that the application of the unfair business practices provision of California's Unfair Competition Law to dictate a national bank's order of posting is similarly preempted. Also struck down under the preemption provision were the imposition under California law of affirmative disclosure requirements and imposition of liability based on failure to disclose. The lower court's injunction requiring the bank to cease the use of a high-to-low posting order and to make restitution relating to prior use of such a posting order were vacated by the Court of Appeals.

The court however, held that the National Bank Act does not preempt a provision of California's Unfair Competition Law against affirmative misrepresentations. The Court of Appeals affirmed the district court's finding that Wells Fargo had violated that provision. It ordered that the lower court may both provide injunctive relief to prohibit future misreprsentations and order restitution for past misleading representations. The case was returned to the district court for any further action.

  Chirou Sola and Nadine Viseth v. Washington Mutual Bank
Sola and Viseth initiated a class action case under the Truth in Lending Act and maintained that the fees charged for the processing of withdrawals against nonsufficient funds were finance charges. The United States Court of Appeals for the Ninth Circuit said these fees do not meet the definition of "finance charges" under TiLA. This affirmed a lower court ruling that neither TiLA nor the Home Owners Loan Act are applicable. Overdrafts are not extensions of credit for these purposes. You can also read the California Bankers Association and American Bankers Association Amicus Curiae brief.


Pinsonneault v. Merchants & Farmers Bank & Trust Company
The bank won this premises liability suit that stemmed from a deadly attack on a night deposit customer by escapees from a local jail. The case is worth reading because it shows the types of facts that a court will examine in this type of suit, from statistics regarding similar incidents to lighting, use of security guards, hedge trimming and more.


Taylor v. Nationsbank, NA
How upset would you be if your paycheck was accidentally deposited into someone else's account? If you are a banker and that happens to one of your customers, your natural inclination is to want to try to help. As this case shows, however, it's important to not harm one customer while trying to help another.

Garfield Taylor and Walter Scott worked for Fannie Mae and signed up for direct deposit of their paychecks. Scott's pay stub showed an account number that wasn't his. He checked with his bank and learned that his pay had not been received. In talking with a representative of his bank, he learned the number on his stub was an actual account number that belonged to someone else, his direct deposit had been erroneously sent to that account, and since it was Saturday, the bank couldn't correct the error until Monday. Scott discussed with the bank employee what steps he could take to protect himself and retrieve the funds. In the course of that conversation, the bank employee revealed l) who owned the account the funds had been deposited into; and the unlisted phone number for that individual (Garfield Taylor). The banker suggested Scott call Taylor and discuss the situation. Scott made the call. The bank got sued, alleging that, as a “private person by nature” the ensuing unexpected conversation “caused him a great deal of mental anguish and mental pain, and a severe shock to his nervous system,” the petitioner filed suit against the bank. The trial court granted summary judgment for the bank. The appellate court reversed, holding the summary judgment was improper because the bank's voluntary disclosure of the depositor's name and unlisted telephone number, which identified that depositor's checking account number to another depositor, constituted a violation of both the depositor's contract with the banking institution and the common law, and there was therefore a genuine dispute as to material facts.


Sinclair v. Hawke
Can a stockholder or assignee of the assets of a failed financial institution assert claims in a civil action against the Comptroller and other OCC personnel who made the decision to close the institution? In this case, the major stockholder claimed violations of his First and Fifth Amendment rights, his Federal civil rights and RICO.

Aggressive Regulators Are Not Racketeers -- The 8th Circuit U. S. Court of Appeals held that Congress had not authorized wide ranging judicial review in personal damage actions of regulators' motives regarding regulatory decisions that might have a chilling effect on their willingness to aggressively attack unsafe and unsound banking practices. In addition, the Court rejected allegations of RICO claims against OCC employees regarding the closing of a national bank and stated "bank regulators do not become racketeers by acting like aggressive regulators".

  Rehabilitation Act

  American Council of the Blind v. Henry M. Paulson Jr., Secretary of the Treasury
Could there be yet another major change in the works for U.S. currency? The final gavel hasn't dropped on that question, but the U.S. Treasury Department lost a second round in its defense against a suit brought by the American Council of the Blind in an attempt to force change. The Council filed suit under section 504 of the Rehabilitation Act (29 U.S.C. § 794), alleging that the Treasury Department's failure to design and issue paper currency that is readily distinguishable to the visually impaired constitutes a denial of meaningful access to currency, and that the issuance of currency is an activity conducted by an Executive agency (the Treasury Department) of the U.S. In December 2006, the federal district court denied the government's motion for dismissal, and granted a partial judgment for the plaintiffs.

On May 20, 2008, the United States Court of Appeals for the District of Columbia Circuit affirmed the order of the district court. The court took Treasury to task for presenting faulty cost estimates for redesign of U.S. currency, and pointed out the both the Council and the district court had left it to Treasury to determine how to make currency denominations readily distinguishable to visual-impaired individuals. The court stated that Treasury had not met its burden to prove that the least expensive plan for currency redesign would be an undue financial burden on the government.

If Treasury ultimately makes changes to accommodate visually impaired individuals, there would have to be a major retooling of currency handling equipment, from bill counters to vending machines to ATMs and beyond. If Treasury decides to issue bills that vary in size (as have many nations), that retooling would be even more extensive. After the Court of Appeals ruling, it appears that Treasury's only alternatives to redesigning U.S. cash are an appeal to the Supreme Court or pursuit of congressional action to exclude currency issuance from the scope of the Rehabilitation Act.


  Freeman et al. v. Quicken Loans, Inc.
Does Section 8(b) of RESPA (12 USC 2607(b)) prohibit a real estate settlement services provider from charging an unearned fee? The U.S. Supreme Court settled a division between the U.S. Circuit Courts of Appeals, and cleared the air for many in the mortgage industry in its May 24, 2012, decision.

Three couples claimed they were charged "unearned fees" at closing in violation of 12 USC 2607(b). Two of the couples claimed they paid loan discount fees of about $1,000 but got no reduction in their interest rates. Another couple challenged a $575 "loan processing fee" and an origination fee over $5,000.

The Court unanimously agreed that Section 2607(b) is to be construed literally: “No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.” In the view of the Court, Section 8(b) “unambiguously covers only a settlement-service provider’s splitting of a fee with one or more other persons; it cannot be understood to reach a single provider’s retention of an unearned fee.”

The decision effectively nullifies at least a portion of a 2001 HUD policy statement (66 FR 53059) that interpreted Section 2607(b) "as not being limited to situations where at least two persons split or share an unearned fee." Lenders will be watching for reaction from the CFPB, which assumed authority for interpreting RESPA from HUD on July 21, 2011.

Eddie Watt & Susan Watt v. GMAC Mortgage Corporation
Does RESPA forbid the charging of a fee to provide a payoff amount? The United States Court of Appeals for the Eighth Circuit says it does not. Specifically, the court found, in its August 4, 2006, ruling, that a response to a qualified written request from a borrower is not among the statements for which the law and HUD's Regulation X prohibit the imposition of a fee. The court noted that Congress had a second chance to prohibit a payoff statement fee when it amended RESPA in 1990, and did not do so. The court opined that, by omitting a fee from a list of prohibited fees, Congress intended to exclude it from the prohibition.

Before mortgage servicers rush off to start imposing such a fee, they should note that two other questions mentioned in the court's ruling were not decided.

First, the Watts argued that, if the payoff fee was not prohibited by RESPA, GMAC's $20 fee for preparation of a payoff statement was unreasonable, and should therefore be disallowed. The appellate court refused to consider this question on procedural grounds, leaving the issue undecided.

Second, the court noted that the lower court had declined to hear the Watts' claim that GMAC breached its contract with the Watts by imposing the fee. We presume the District Court determined that question should be a matter for state court jurisdiction.

Hardy vs. Regions Mortgage, Inc.
Can a borrower bring suit under RESPA when escrow account disclosures are inaccurate? The United States Court of Appeals for the Eleventh Circuit says no, ruling that §10 of RESPA (addressing escrow account disclosures) does not provide for a private right of action against a mortgage lender/servicer. Actions and penalties for violations must instead be assessed by the Secretary in the form of civil money penalties.

The background of the case is as follows: Mr. and Mrs. Hardy joined a retail shopping program through Regions which added $5 to each mortgage payment. The fee for the shopping program was not reflected on their annual escrow statements, and over time they had forgotten about the membership. After seven years, when they realized the fee had been omitted from the escrow statement, they attempted to bring suit against Regions and have it certified as a class action.

They filed the complaint under §10 or the Real Estate Settlement Procedures Act which requires annual escrow statements and specific content concerning monies paid in and distributed (§3500.17(o)). The United States District Court for the Northern District of Alabama held, and the U.S. Court of Appeals for the 11th Circuit affirmed, that §10 does not allow for the consumer to seek damages for errors in escrow statements. The Hardy's maintained that §6 of RESPA does, and they argued that escrow statements are related to that.

§6 addresses the servicing of mortgage loans and the administration of escrow accounts. The court held that Sections 6 and 10 of RESPA regulate two different aspects of mortgage lending. §6 requires disclosures relating to servicing transfer notices and timely payments of escrowed funds for taxes, insurance and other charges. That is not the basis for the complaint in this case. The complaint deals with the ongoing disclosure of the monthly payments and distribution of those funds. The regulations explicitly state that failure to comply with §3500.17 is a violation of RESPA §10, not a violation of RESPA §6, and §10 doesn't provide for a private right of action.

The Hardy's claim for damages was denied, which made the request for class action status moot. The court noted this decision does not address actions between the lender and their regulatory agency.

Santiago et al v. GMAC Mortgage Group, Inc., et al
RESPA: Private Suits for Markups

The Third District Court of Appeals found, in a decision filed August 4, 2005, that RESPA Section 8(b) provides consumers a cause of action for illegal markups, but not for overcharges, and provided definition for when a lender's markups may violate the law.

The question of whether the specific markups in the Santiago case violated RESPA was remanded to the U. S. District Court for the Eastern District of Pennsylvania, but the Court of Appeals outlined three criteria to use in determining whether markups are legal under the law:
  • Does the lender itself provide a service that is ancillary to that supplied by the third party provider?
  • Is the ancillary service more than nominal in nature?
  • Does the ancillary service justify the added cost?
Snow et al v. First American Title Insurance Company
Chenault et al. v. Mississippi Valley Title Insurance Company and Old Republic National Title Insurance Company (cases consolidated on appeal)
The underlying cases involved allegations that RESPA's anti-kickback and fee-splitting provisions were violated by title insurance companies whose compensation plans rewarded agents for generating high volumes of sales. The plaintiff alleged that the agents who sold them title insurance received additional compensation in violation of the RESPA provisions.

The appeal involved the issue of when RESPA's statute of limitations begins to run.

Both suits were filed more than one year after the plaintiffs' real estate closings and the defendants argued that the claims arose at closing and were barred by RESPA's one-year statute of limitations. The district courts agreed and entered judgment for the defendants. The plaintiffs appealed. The cases were consolidated on appeal to the 5th Circuit U.S. Court of Appeals.

On appeal, the plaintiffs acknowledged the applicability of the one year statute of limitations but argued the time started running not at closing, but when the agents received the additional compensation.

The 5th Circuit Court held that the one year statute of limitations started running at closing and affirmed the decision of the lower courts.

Hirsch v. BankAmerica Corporation
11th Circuit, April 23, 2003
This is another decision relating to the legality of the payment of Yield Spread Premiums (YSPs) by mortgage lenders to mortgage brokers. Applying the 2001 HUD Statement of Policy on YSPs, the Court first determined whether the broker has provided goods or services of the kind typically associated with a mortgage transaction. [A recitation of the services provided appears in a footnote to the court's decision.] Finding that the broker had done so, the court then moved on to the second step, which is determining whether the total compensation paid to the broker is reasonably related to the total value of the goods or services actually provided." The Court found that, indeed, it was reasonable. The 11th circuit therefore affirmed the district court's grant of summary judgment in favor of BankAmerica Corp. and the other defendants after finding that the district court had correctly determined that both elements of HUD's test were met.

Heimmerman v. First Union
First Union Mortgage Corporation appealed the district court's grant of class certification to a class of plaintiffs seeking damages for First Union's alleged violation of Section 8 of RESPA. On September 18, 2002, the 11th Circuit Court of Appeals vacated the district court's grant of class certification and remanded the case for further proceedings. In so doing, the 11th Circuit took the position that HUD's 2001 Statement of Policy (SOP) on yield spread premiums may be retroactively applied to this case, that the SOP is entitled to deference, and that the SOP's interpretation of RESPA is contrary to and, in effect, overrules Culpepper III. The 11th Circuit held that the district court abused its discretion in granting class certification because the 2001 SOP demonstrates that the district court applied the wrong legal standard.

Schuetz v. Bank One Mortgage Corporation
9th Circuit Applies HUD's 2001 Statement of Policy Regarding Yield Spread Payments

  Culpepper v. Irwin Mortgage Corporation
This update was provided by Howard Lax of Lipson, Neilson, Cole, Seltzer & Garin, P.C. Culpepper Case Nears an End - July 19, 2007

The case of Culpepper v. Irwin Mortgage Corporation was one of the first of many decisions questioning the legitimacy of lender paid broker fees (aka yield spread premiums). These cases died a quiet death, for the most part, after HUD issued RESPA Statements of Policy 1999-1 and 2001-1. The class action lawsuit filed by the Culpeppers in 1996 was reviewed four times by the Court of Appeals for the Eleventh Circuit, and hopefully will end with the latest decision. The procedural history of the case, and a summary of the prior decisions, is found in Culpepper IV (you may read this on your own when you are having a hard time falling asleep). It is sufficient to note that the Culpeppers won in the prior decisions, only to see the Court reverse and overrule the principles favoring the Culpeppers in decisions rendered after HUD issued its Statements of Policy. The Culpeppers argued that the Court's subsequent decisions overruling the holding in Culpepper III could not be applied to case, since the Court of Appeals was bound to follow its prior holding, right or wrong (the "law of the case doctrine"). The Court of Appeals disagreed. First, the HUD Statements of Policy were the controlling law binding the Court, not the Court's prior decisions. Second, the approach to RESPA liability taken in Culpepper III was "clearly erroneous," such that continuing to apply it "would work manifest injustice."

The Court of Appeals then reviewed the District Court's holding that Culpepper had not shown any evidence that the yield spread premium was unreasonable compensation for the services provided by the mortgage broker. The Court of Appeals compared the compensation paid to the Culpeppers' broker with the compensation paid to brokers in other cases, and found that the yield spread premium paid to the Culpeppers' broker was less than the yield spread premium paid in other cases that were held to be acceptable by the Court. The Court of Appeals stated:

"The Borrowers do not present any evidence demonstrating that these compensation amounts were unreasonable in light of the total array of services performed. Instead, they argue that the fact that the YSP payment did not in any way reduce their up-front closing costs establishes that they were unreasonable under RESPA. This contention fails, for two reasons. First, as discussed previously, in deciding the question of reasonableness we are instructed to assess the "total compensation" the broker received, which "includes direct origination fees and other fees paid by the borrower, indirect fees, including those that are derive from the interest rate paid by the borrower, or a combination [thereof] . . . ." 66 Fed. Reg. 53055. Second, as the district court concluded, the fact that the Borrowers' up-front closing costs were not reduced is not sufficient, standing alone, to establish that the brokers' compensation was unreasonable in light of the services that they performed. This is especially so where the services they performed otherwise appear to have aided and benefited the Borrowers in closing their mortgage transactions.

"Nor are we convinced by the Borrowers' contention that the YSP was per se unreasonable because under federal regulations a broker's compensation is limited to an origination fee of 1%. See 24 C.F.R. § 203.27(a)(2)(i). Other circuits that have considered that argument have rejected it, concluding that the limitation on mortgage broker fees set forth in 24 C.F.R. § 203.27(a)(2)(i) only applies to fees "directly collected [from the mortgagor], not indirectly collected [from the lender]." See Bjustrom v. Trust One Mortgage Corp., 322 F.3d 1201, 1205 (9th Cir. 2003). Because we agree with the Ninth Circuit that 24 C.F.R. § 203.27(a)(2)(i) does not preclude a mortgage broker from collecting a YSP indirectly from a mortgage lender, we cannot accept the Borrowers' blanket contention that any compensation in excess of the 1% origination fee is per se unreasonable under RESPA. Such an approach would flout HUD's case-by-case inquiry to YSP payments.

"In summary, the Borrowers bear the burden of demonstrating, with specific evidence, that the total remuneration that their brokers received was unreasonable, see Hirsch, 328 F.3d at 1309, in light of both objective market standards and the subjective facts of their mortgage transactions. 66 Fed. Reg. 53055. This is a burden they have failed to satisfy. Because neither of the Borrowers has submitted evidence sufficient to demonstrate that the total compensation paid to their respective brokers was somehow "unreasonable" under HUD's RESPA analysis, summary judgment was appropriate for Irwin."

Finally, the Court of Appeals held that the District Court did not abuse its discretion by deciding to decertify the class action lawsuit, essentially stripping away all of the potential claims of other borrowers. The Court of Appeals, citing the HUD Statements of Policy and the majority of other decisions holding that RESPA kickback claims must be decided on a case by case basis, agreed that the case should not have been certified as a class action in the first instance. The Culpeppers may appeal the decision to the US Supreme Court; however, the prior denial of certification of Culpepper III by the Supreme Court makes it unlikely that the Supreme Court will review the decision in Culpepper IV.

Culpepper v. Irwin Mortgage Corporation RESPA Updates - Dec. 10, 2001
The U.S. 11th Circuit Court of Appeals held that whether or not payments made by a lender to a mortgage broker who handles loan applications are considered illegal fees or kickbacks prohibited by section 8 of RESPA rather than bona fide fees for services, depends on the terms and conditions under which they are paid.

Haug v. Bank of America, NA
On January 23, 2003, the 8th Circuit Court of Appeals rendered an opinion in a putative class action suit in which plaintiffs claimed that, "based on Defendant's nondisclosures, or false and misleading disclosures, they unknowingly paid charges for credit reports or other loan related services for federally related mortgage loans that exceeded Defendant's actual costs for those services." According to Plaintiffs, those charges violated RESPA and a Missouri state statute. The bank argued that the Section 8(b) of RESPA requires that one party must give and another party must receive an unearned portion, split, or percentage of a settlement service fee. The bank moved to dismiss the case on the grounds that Plaintiffs failed to state a RESPA claim because they did not allege a third party kickback or fee split with respect to the overcharges. The district court denied Defendant's motion to dismiss, citing a 2001 HUD Policy Statement which states that Section 8(b) proscribes all unearned portions or percentages of settlement fees as well as splits, meaning a single settlement service provider violates Section 8(b) whenever it receives an unearned fee.

On appeal to the 8th Circuit, however, the appellate court reversed the denial of the motion to dismiss. It said:
We therefore hold that Section 8(b) prohibits only transactions in which the defendant shares a “portion, split, or percentage of any charge” with a third party.
As for HUD's Policy Statement, and whether the district court should have considered it, the 8th Circuit Court said: "Because the language of Section 8(b) unambiguously requires the giving or receiving of an unearned portion of a settlement fee, the district court's inquiry should have ended with the plain language of the statute."

Notice of transfer issue
Wagner v. EMC Mortgage Corporation
The Fifth District California Court of Appeal held that the Notice of Servicing Transfer Requirements of RESPA and Regulation X were violated when the notice was mailed to the address shown on the note and deed of trust and not to the current address of the borrower. The Court noted the provisions of RESPA and Reg. X do not define the terms .notify. or .notice. and stated a servicer must exercise reasonable care and diligence in determining the correct address of the borrower when mailing a notice of transfer. The Court also held that actual damages recoverable under RESPA are not limited to claims for wrongful foreclosure. An alleged violation based upon separate and distinct wrongful acts a part from the foreclosure may result, if proven, in an award of actual damages. A recovery of actual damages is not dependent upon proving the foreclosure was wrongful.

Giving notice of claim under RESPA
If the customer's suit is based upon an alleged violation of RESPA, the petition/complaint needs to say so. In Gardner, et al v. First American Title Insurance Company, et al, the Eighth Circuit U. S. Court of Appeals held that a compliant alleging a RESPA violation must specifically note that it relates to a federally related mortgage loan, thus bringing RESPA into play. The claimant need not set out in detail the facts upon which the claim is based but must give the defendant fair notice of what the claim is and the grounds upon which it rests.

Boulware v. Crossland Mortgage Corporation
In this 4th circuit case decided 5/22/02, Boulware sought to certify a class to challenge Crossland Mortgage Corporation's alleged overcharge for credit reports. Crossland was charging $65 for the credit report when it cost Crossland $15 or less to obtain it. Boulware claimed that Crossland kept the $50 over-charge for itself without performing additional services. She did not allege that the credit reporting agency or any other third party received payment from Crossland beyond that owed to it for services actually performed.

The district court found that Boulware did not allege any split or kickback of the overcharge from Crossland to a third party. It thus dismissed Boulware's com- plaint and denied class certification. The 4th Circuit agreed with the Seventh Circuit that § 8(b) is a prohibition on kickbacks rather than a broad price control provision. It therefore affirmed the judgment.

The court says § 8(b) only prohibits overcharges when a "portion" or "percentage" of the overcharge is kicked back to or "split" with a third party. Compen- sating a third party for services actually performed, without giving the third party a "portion, split, or percentage" of the overcharge, does not violate § 8(b). By using the language "portion, split, or percentage," Congress was clearly aiming at a sharing arrangement rather than a unilateral overcharge.

Echevarria v. Chicago Title & Trust Company
RESPA Updates
The U.S. 7th Circuit Court of Appeals held that a recorder of mortgages who retains excess recording fees and does not share them with a third party is not in violation of section 8(b) of RESPA which prohibits the splitting of fees with a third party. The Court held portion of the fees paid to the county recorder of deeds did not constitute payment to a third party.


  Keven R. McCarthy, Trustee, v. BMW Bank of North America
This case provides an example of imperfect legislation and an apparently "dawdling DMV" that caused delayed perfection of a lien, giving a bankruptcy trustee the perfect opportunity to take advantage of an avoidable transfer.

A BMW was purchased and the District of Columbia (DC) certificate of title annotated with the security interest was not issued until more than two months later. One of the purchasers/debtors filed for bankruptcy protection under Chapter 7 less than 90 days after the vehicle was bought. The Trustee in Bankruptcy sought to avoid the transfer of the bankrupt's interest to BMW. BMW argued that DC common law provided for perfection under a "first in time, first in right" theory, and that the common law had not been superseded. That would mean that perfection was completed within the 20-day period then allowed under the Bankruptcy Code as an exception to to the 90-day avoidable transfer rule. BMW's arguments persuaded first the Bankruptcy Court and then the U.S. District Court.

The U.S. Court of Appeals for the District of Columbia Circuit disagreed in its ruling handed down on November 23, 2007. The D.C. UCC and its motor vehicle title statute provide that perfection of a motor vehicle lien occurs only when the lien is noted on the vehicle's certificate of title (superseding common law). The Permanent Editorial Board Commentary for the UCC pointed out to state (and the DC) legislatures, in Official Comment 5 to UCC § 9-311, that such a requirement could put a lender at the mercy of a "dawdling Department of Motor Vehicles," because it leaves the lender exposed to intervening liens during any delay in issuing the certificate of title. The Comment goes on to suggest that jurisdictions could adopt amendments to their title laws to provide for perfection upon receipt by "the appropriate State official of a properly tendered application for a certificate of title on which the security interest is to be indicated." The Council of the District of Columbia failed to take that step, and therefore left lenders like BMW exposed. McCarthy, as Trustee, was entitled to avoid the debtor's transfer of interest in the vehicle.

Note: The 20-day perfection "window" in effect when the security interest was given has since been expanded by Congress to 30 days.

Dragnet Clause
Fischer v. First International Bank
A California Appellate Court Decision which held the enforceability of a dragnet clause in a loan agreement was dependent on the reasonable expectations of the parties.

In re: Perry Hollow Management Company, Inc.

On July 23, 2002 the U.S. Court of Appeals for the First Circuit held that a security interest was not perfected if a UCC-1 financing statement was incorrectly filed due to the lender reliance on the representations of the debtor as to the correct location of the debtor. The case deals with a pre-Revised Article 9 filing but illustrates the necessity for lenders to verify information provided by the debtor.


Quick Reference Guide to Social Security Setoff Cases
Use our Quick Reference Guide to keep current on the latest developments.

  Miller v. Bank of America, NT & SA
Bank of America did not act illegally when it accepted direct deposits of government benefits to overdrawn customer accounts. Its actions were not exercises of the right of setoff, and a long-standing banking practice is acceptable in California.

In an opinion filed on November 20, 2006, a state appellate court agreed with BofA that applying direct deposits of Social Security and other government benefits to clear overdraft balances is not exercising a right of setoff. Setoff had been the linchpin of the lower court case that could have cost BofA more than a billion dollars. Banks across the country had been awaiting the outcome of BofA's appeal, although the case involved on its face only the application of California law. Noting that state courts deciding cases involving common law concepts like the right of setoff are often influenced by decisions in other states, bank legal departments were concerned that Miller could have started a wave of similar cases.

The First Appellate District Court of the State of California found that the San Francisco County Superior Court erred when it reached for support in the form of the California Supreme Court's 1974 Kruger decision. Kruger stated that California banks are prohibited from setting off against public benefits to recover on a delinquent credit card account. BofA successfully argued that the 1974 case was not germane, because it dealt with setoff only, and setoff requires the existence of two separate and offsetting obligations. The Miller case involved the customary crediting of direct-deposited government benefit payments to accounts with significant overdraft balances, and did not involve separate credit accounts.

This case was considered significant enough to attract amicus curiae support for BofA's case from eight California and national financial services trade associations, as well as the U.S. Department of the Treasury. Upwards of a billion dollars in statutory damages and $284 million in compensatory damages, now overturned, had been ordered in the lower court decision, which was reversed in its entirety.

March 21, 2007 - The California Supreme Court will review the First Appellate District Court's decision, although no hearing date has been set.

June 1, 2009 - The California Supreme Court has upheld the 2006 appeals court ruling.

Original Trial Court Decision, 2004

California's First District Appellate Court Decision

California's Supreme Court Decision, June 1, 2009

Offsets: The U.S. Supreme Court Speaks 2/25/03
The U.S. Supreme Court handed down a decision on 2/25/03 in the case of Washington State Department of Social and Health Services, et al., v. Guardianship Estate of Danny Keffler, et al. Although it did not directly involve a financial institution, the case is still of interest to the financial services industry because it represents a clear statement of the nation's highest court on the issue of how the federal statute which bars execution and attachment against Social Security benefit funds should be interpreted. The Supreme Court opted for a narrow reading of the statute, saying:
The case boils down to whether those activities are “other legal process.” The statute uses that term restrictively, for under the established interpretative canons of noscitur a sociis and ejusdem generis, where general words follow specific words in a statutory enumeration, the general words are construed to embrace only objects similar to those enumerated by the specific words. E.g., Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 114–115. Thus, “other legal process” should be understood to be process much like the processes of execution, levy, attachment, and garnishment, and at a minimum, would seem to require utilization of some judicial or quasi-judicial mechanism, though not necessarily an elaborate one, by which control over property passes from one person to another in order to discharge or secure discharge of an allegedly existing or anticipated liability." [Taken from the Syllabus of the case]

Looks to us like a financial institution's use of offset would not rise to the level of process the Supreme Court says is covered under this federal law and should thus be permissible. See what your legal counsel has to say!

Lopez v. Washington Mutual Bank, Inc.
Reversal of Lopez Case on Social Security Offsets
Prior articles (now updated due to the court's reversal of its decision):
Offsets Against Social Security Payments
Bank Offsets Against Social Security & V.A. Direct Deposits by Charles Cheatham
The 9th Circuit U.S. Court of Appeals initially held a financial institution that utilizes Social Security deposits and/or SSI benefits to offset account overdrafts and charges is in violation of federal law unless there was a "knowing, affirmative and unequivocal" consent of the customer to the offset after each deposit is made, because federal law prohibits execution, attachment, "or other legal process" against such funds. Subsequently, however, the Court reversed its opinion. Old opinion; new opinion

Tom v. First American Credit Union
The 10th Circuit U.S. Court of Appeals held that a credit union violated both the Social Security and Civil Service Retirement Acts when the customer was delinquent on a loan and the credit union offset against an account which contained only Social Security and SSI funds received by the customer.


Cathey v. BancorpSouth Bank
Reservist Achieves Victory Under SSCRA: What Every Lender Should Know
Federal district court granted summary judgment on the Section 526 SSCRA claims to the plaintiffs. A bank acquired by BancorpSouth had made a loan to Cathey's corporation. Cathey and his wife were listed as co-borrowers and also as guarantors and their personal house was one of the pieces of collateral. When Cathey was called up on active duty as a reservist, the bank declined to reduce the interest rate to 6%. Disastrous consequences ensued. Ultimately, the Catheys sued and the court granted summary judgment.
UPDATE: This case was scheduled to go to jury trial on the issue of damages beginning May 6, 2002. Instead, the case was settled. Read the Press Release announcing the settlement.

Stop Payment - Cashier's Check

Richard N. Golden, Respondent, v. Citibank, N.A., Appellant
The Court of Appeals of New York affirmed the Appellate Divisions ruling regarding the inability of a bank to place a stop payment on a cashier's check.

In December 2009 Citibank, N.A. issued a cashier's check in the amount of $300,000 to "Richard Golden as attorney." XOX Solutions, Inc. deposited a check in the amount of $335,600 as the offset and purchased the cashier's check. Golden deposited the cashier's check into his attorney escrow account at JP Morgan Chase. The item XOX deposited was returned because of an endorsement error and Citibank subsequently stopped payment on the cashier's check. At his client's request Golden had already withdrawn $102,083 which was presented against insufficient funds and triggered an investigation by the attorney grievance committee. Six days later the endorsement error was corrected and the check re-deposited by XOX but Citibank was told an alternate payment had already been arranged with Golden so the stop order remained in effect.

Golden brought action against Citibank because the bank had no valid reason to not pay the cashier's check. Stop payment ability is limited to only a few circumstances. There must be evidence of fraud, or the check is lost, stolen, or destroyed. Golden said Citibank needed to collect from XOX. In this case Citibank maintained it received no consideration from XOX for issuing the check and because Golden had paid no value he was not a holder in due course. The Appellate Division said Golden had shown the cashier's check was properly issued, cashed and Citibank presented no evidence of fraud. Citibank argued that it was well established that there was a legal right to stop payment when there was a failure of consideration for the cashier's check. The Court of Appeals of New York has ruled the order of the Appellate Division should be affirmed, with costs.


Jesinoski et ux. v. Countrywide Home Loans, Inc., et al.
Supreme Court of the United States

In this case, argued before the Court on November 4, 2014, and decided January 13, 2015, the Court reversed and remanded the decision of the Eighth Circuit Court of Appeals.

Exactly three years after borrowing money from Countrywide Home Loans, Inc., to refinance their home mortgage, Larry and Cheryle Jesinoski sent Countrywide and Bank of America Home Loans, which had acquired Countrywide, a letter purporting to rescind the transaction. Bank of America replied, refusing to acknowledge the rescission's validity. A year and a day later, the Jesinoskis filed suit in federal court, seeking a declaration of rescission and damages. The District Court entered judgment for Countrywide and BofA, concluding that a borrower can exercise the Truth in Lending Act's right to rescind a loan, see 15 U. S. C. §1635(a), (f), only by filing a lawsuit within three years of the date the loan was consummated. The Jesinoskis' complaint, filed four years and one day after the loan's consummation, was ineffective. The Eighth Circuit affirmed.

The Supreme Court, in a unanimous opinion delivered by Justice Scalia, held that a "borrower exercising his right to rescind under the Act need only provide written notice to his lender within the 3-year period, not file suit within that period. Section 1635(a)'s unequivocal terms—a borrower "shall have the right to rescind . . . by notifying the creditor . . . of his intention to do so" (emphasis added)—leave no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind. This conclusion is not altered by §1635(f), which states when the right to rescind must be exercised, but says nothing about how that right is exercised. Nor does §1635(g)—which states that "in addition to rescission the court may award relief . . . not relating to the right to rescind"—support [the lenders'] view that rescission is necessarily a consequence of judicial action. And the fact that the Act modified the common-law condition precedent to rescission at law, see §1635(b), hardly implies that the Act thereby codified rescission in equity."

SCOTUS's decision settles the question of how a mortgagor must exercise his right to rescind: a suit isn't required. Whether the Jesinoskis had the right to rescind the mortgage was not decided; hence the remand to the lower court.

  Weintraub v. Quicken Loans, Incorporated
(United States District Court for the Eastern District of Virginia)

In this case, the U.S. District Court upheld that for a loan to be rescinded, it must first be consummated.

On Feb. 1, 2008 Rita and Barry Weintraub applied for a $220,000 loan with Quicken Loans to refinance their principal residence. That same day Quicken electronically sent them a Good Faith Estimate and an interest rate disclosure agreement. The Weintraubs were asked to pay a deposit of $500 for any out of pocket expenses and they agreed. On Feb. 7, 2008 an appraisal was completed. The property was valued at $32,000 less than anticipated which triggered a half-point discount fee to be added to the costs.

On Feb. 18, 2008 closing documents which reflected this change were sent to the Weintraubs and a closing date of Feb. 26, 2008 was set. However, six days before this was to happen, on Feb. 20, 2008, the Weintraubs executed the rescission notice and expressed their desire to cancel the transaction. They requested the return of the $500 deposit.

Quicken Loans deducted the cost of the appraisal and credit report and refunded the difference. The Weintraubs sued under the Truth in Lending Act that because of the rescission they were entitled to the entire $500. The court ruled that only a consummated transaction may be rescinded. The court said that even though TILA does not define "transaction," it does define a "residential mortgage transaction" and a "reverse mortgage transaction." Each is treated as a consummated event and only after that can it be rescinded.

  McCoy v. Chase Manhattan Bank USA, NA
Court Faults Default Rate Practice

In this case, the U.S. Court of Appeals for the Ninth District effectively prevents credit card issuers subject to the ruling from imposing interest rate increases for a consumer cardholder's default until after notice of the increased rate is given to the consumer. The Federal Reserve Board has changed the Regulation Z provision that the court applied, effective July 1, 2010. Read the BOL Exclusive article linked above for details of the case and decision.

  Wiggins v. Avco
(United States District Court for the District of Colombia)

Gladys Wiggins filed suit against Avco Financial Services both under the Truth in Lending Act (regarding rescission rules) and the District of Columbia Consumer Protection Procedures Act. The latter is explained in the decision but is not explored here as the focus is on the rescission issue.

At the heart of the dispute is the rescission form. A commonly used form explains the rescission, has signature lines to acknowledge receipt of the form, and has another signature line to indicate that the rescission period has passed and those people with rescission rights have not elected to do so.

Wiggins signed the form multiple times at closing acknowledging both receipt and that the required period had passed and she had not rescinded. No funding occured during the rescission period. However, by acknowledging at closing that the rescission period had passed and that she was not rescinding, it could be construed that she had effectively given up her right to rescind. At best the form was not clear or conspicuous.

This same issue was raised in Rodash v. AIB Mortgage, U.S. Court of Appeals for the Eleventh Circuit, 1994. In Rodash the rescission period was extended to three years because of this material defect. Wiggins loan however dates to December 1994. Wiggins was successful in this case in that the rescission form was considered defective. Her claim was filed just shy of three years from the date of settlement. However she has statutory damages available for only one year from the date the material disclosures were to be made. In this part addressing the statutory damages, Avco was successful.

  Greenpoint Mortgage Funding, Inc. v. Bach
(Court Of Appeal Of The State Of California, Second Appellate District, Division Four)
This update was provided by Howard Lax of Lipson, Neilson, Cole, Seltzer & Garin, P.C.

In Greenpoint Mortgage Funding, Inc. v. Bach, an unpublished opinion, the lender erroneously excluded certain charges from the disclosed finance charge when Bach took out a home equity loan. The lender disclosed its error and offered Bach the right to cancel the transaction. Bach did cancel the transaction, and the lender returned interest paid by Bach. The lender sent a payoff letter to Bach for the loan amount less closing costs paid by Bach. The lender then attempted to arrange for return of the loan proceeds in return for discharge of the deed of trust. Bach resisted all attempts to settle the matter, so the lender put its reconveyance document in escrow with instructions to the escrow company to release the reconveyance when it received the loan proceeds. Bach demanded that the deed of trust be discharged. The lender sued Bach for the loan proceeds, and Bach claimed the lender violated TILA by not removing the deed of trust, which Bach now claimed was void. The Court sided with the lender, holding that rescission is a process started by a request to cancel the transaction. The lender satisfied TILA by beginning the process of removing the deed of trust within the 20 day period after receiving Bach's request to cancel the transaction. The lender does not have to complete the process of rescission in 20 days unless the borrower is prepared to repay the loan proceeds immediately. Bach cannot escape the duty to repay the net loan proceeds, and the lender has a right to ask a court to modify the procedures outlined in Regulation Z to condition the removal of the lender's security interest on repayment of the loan proceeds if it appears that the lender will not be repaid immediately. The Court also held that the lender's good faith in promptly disclosing its error precluded any award of statutory damages. This case highlights the proper procedures that a lender should take in the event that it receives a late rescission request and discovers that there may be a disclosure error that entitles the borrower to cancel the transaction.

  Hamm/Jones vs. Ameriquest Mortgage Securities et al
(United States Court of Appeals for the Seventh Circuit)

For want of a word, a disclosure failed. For want of the disclosure, the lender lost. There are two things that are remarkable about this decision, handed down on October 17, 2007. First, it points out the fact that a lot depends on the court that hears a case -- at least until the appeal. Second, this ruling emphasizes what compliance experts have known for a long time -- "when it comes to TILA, 'hypertechnicality reigns.'"

Sarah Hamm and Shirley Jones each sued Ameriquest and two of its affiliates on a pair of Truth in Lending Act technicalities. One of those technicalities, involving rescission rights, was not involved in the appeals. Hamm lost in the federal district court; Jones, whose case was heard by a different district judge, won. Because both cases involved the same lender and alleged TILA violation, the Court of Appeals joined them in this decision. In its disclosure of the payment stream for the Hamm and Jones mortgages (and presumably in hundreds of others closed in the same period), Ameriquest failed to state the payment period (monthly). It simply gave the starting date, number and amount of the payment series, and the date and amount of the final payment. The finding on appeal in both cases was that, although a reasonable individual could readily infer that monthly payments were called for (other documents signed by both Hamm and Jones described the payments as monthly), Regulation Z requires that the disclosure document explicitly state the payment period. The lower court decision for Jones was affirmed. The decision against Hamm was reversed.

As the court observed, Ameriquest could easily have complied with the technical requirement of Regulation Z by adding the word "monthly" to its disclosure form. One can only wonder how many suits similar to those brought by Hamm and Jones will be pursued to counter foreclosure proceedings.

  Cunningham vs. Nationscredit Financial Services Corporation D/B/A Equicredit Corporation Of Illinois, Loan Center, Incorporated
(United States Court of Appeals for the Seventh Circuit)

Can fraudulent charges imposed on a borrower be included in the limited Section 32 (HOEPA) category? In 1999 Elizabeth and Louise Cunningham refinanced their mortgage to capture some of the equity for repairs. They contacted a contractor to do the repairs, who in turn referred them to Derwin Moore, a loan officer for Equicredit. To qualify for a loan, Moore had the Cunninghams complete a false application. When the loan was funded, $10,500 was paid to D&E Services, a company unknown to the Cunninghams but owned by Moore. Moore later deposited the funds into his personal account.

Two years later Elizabeth Cunningham's attorney (Louise had died) served notice that Elizabeth was rescinding the loan. She claimed this was a high-cost, HOEPA-applicable loan, which required disclosures that were not made. In this case disclosures would have been required if the percentage of fees paid plus the annual percentage rate were eight percent higher than a comparable Treasury security. The fees disclosed brought the rate to 7.97 percent. If the funds paid to D&E are included as mortgage broker fees, the fees would exceed the eight percent trigger.

The Court held that neither Moore nor D&E was a broker on this transaction. The HUD-1 Settlement Statement listed D&E as a creditor and was signed by the borrowers, validating it as an accurate description of the transaction. They also signed a Loan Brokerage Agreement making the Loan Center the sole broker. The court concluded that this was not a high-cost loan, and that HOEPA disclosures were not required. The court said TILA is meant to allow comparisons of borrowing costs, and is not intended to act as a prohibition against fraudulent transactions. Those would have to be addressed elsewhere.

  Santos/Rojas vs. Doral Mortgage Corporation,
(United States Court of Appeals for the First Circuit)

Two plaintiffs, the Santoses and the Rojases, brought suit against Doral Mortgage Corporation in the U.S. District Court for the District of Puerto Rico. Each had a mortgage loan with Doral and each refinanced with them. Doral provided the rescission form H-8 (a general rescisison form) found in Appendix H to Reg Z, instead of using form H-9 (a rescission with the same lender on the old and new loans). Santos/Rojas maintained that because the incorrect form was used, they had three years to rescind. Doral fought the claim and the district court agreed with Doral. It was then taken to the U.S. Court of Appeals for the First Circuit.

There were two issues reviewed. Santos/Rojas maintained that because Doral used the wrong rescission form, the borrowers were entitled to a three year rescission period. The Court noted that the lender may use a model form or (emphasis added) a comparable written notice. Use of the model forms is not obligatory and this portion of the complaint was denied.

The second portion of the complaint was that use of the incorrect form was misleading as to the customers' rights to rescind. The court examined the elements of the rescission requirements. The rescission notice must be a separate, written document that is "clear and conspicuous." There are five elements to being clear and conspicuous:
Requirements Procedure Followed by Doral with form H-8
1 - State that there will be the retention or acquisition of a security interest in their principal dwelling. The form stated there would be a mortgage on their home.
2 - Tell the consumer they have the right to rescind The form stated they could rescind without cost within three days.
3 - Explain how to rescind the loan. The form explained that they must rescind in writing and may use any written statement, signed and dated, or they could use the notice provided.
4 - Describe the effects of rescission. The form stated "If you cancel the transaction, the mortgage, lien or security interest is also cancelled."
5 - Describe when the rescission period expires. Forms H-8 and H-9 are similar in describing date triggers for rescission.

The Appeals Court noted that "Most courts have concluded that the TILA's clear and conspicuous standard is less demanding than a requirement of perfect notice." Because the requirements were met, the appeals court affirmed the district court's dismissal.

Mitchell vs. Beneficial Loan & Thrift Company,
(United States Court of Appeals for the Eight Circuit)

In the first reported decision we've seen emanating from the Home Ownership and Equity Protection Act (HOEPA), borrowers had sued asserting HOEPA disclosure violations. They claimed their loan was covered because of the total points and fees they paid at closing. Lender argued the appraisal and title insurance fees were bona fide and reasonable, and thus excluded from the definition of total points and fees under HOEPA. Borrowers disagreed and claimed the fees violated RESPA, and therefore weren't bona fide or reasonable. The court held they were paid to an unaffiliated third party for services actually performed; the lender derived no benefit from them. Therefore, held the 8th Circuit, those fees didn't violate RESPA, were bona fide and reasonable, were excludable from the points and fees calculation for HOEPA purposes, and the loan was thus not covered by HOEPA and no HOEPA disclosures were necessary.

Barrett vs. JP Morgan Chase Bank, N.A.,
(United States Court of Appeals for the Sixth Circuit)

In this appeal decided by the 6th Circuit on April 18, 2006, the court dealt with an issue involving the right of rescission under Regulation Z and the Truth in Lending Act. The underlying question is, "will extinguishing a debt such as with a refinancing cure errors affecting the ability to rescind the loan?"

  1. 1989, Mr. and Mrs. Barrett purchased their home and later refinanced this with another lender
  2. March 2000, home improvement loan funded by a government assistance program
  3. May 2000, Bank One refinanced the purchase loan
  4. January 2001, Bank One consolidated and refinanced debts including the March and May 2000 debts above
  5. May 2001, Mr. and Mrs. Barrett refinanced with a new lender
  6. September 2002, the Barrett's asked to rescind the January 2001 loan
  7. January 2003, the Barrett's asked to rescind the May 2000 loan
The Truth in Lending Act (TILA) was enacted in 1968. In the Act, Congress was clear that meaningful disclosure of credit terms was vital so that the consumer will be able to compare credit terms available and avoid the uninformed use of credit. This is the foundation which requires complete and accurate disclosures.

Regulation Z implements TILA. Reg. Z provides that rescission is available:
  • until midnight of the third business day following consummation,
  • delivery of the rescission notices, or
  • delivery of all material disclosures,
    whichever occurs last.
If the required notice or material disclosures are not delivered as required,
  • the right to rescind shall expire 3 years after consummation,
  • upon transfer of all of the consumer's interest in the property, or
  • upon sale of the property,
    whichever occurs first.
Reg. Z is clear in that rescission is within three business days, three years, or when those who had the right to rescind no longer own the property. Any refinance or renewal of the loan is not a condition affecting rescission.

Without the disclosure rules being met, the ability to compare credit choices and make informed credit decisions does not exist. It is these errors which lead to longer periods where the transaction is rescindable. In King v. State of California, the court ruled that a loan which had been refinanced no longer existed and was therefore no longer rescindable. The decision focused on the security interest and the fact that the loan in question no longer existed, instead of what had existed. Based on this case, some lenders have used this (refinance) as a means to cure rescission errors and subsequent court decisions were also based on this premise.

In the Barrett case, the Sixth Circuit said, "Not only does King of course not bind us, but it does not address the provisions of the Truth in Lending Act that undermine its conclusion." The Sixth Circuit was not being innovative as two cases cited in it agree with King, and six others do not. They hold instead that the transaction itself is rescindable. When a rescission occurs, two basic actions are taken: the lender voids their security interest and returns items such as prepayment penalties, mortgage filing fees, loan transaction fees, appraisal, and closing costs. When a refinance has occurred, especially in the case of a new lender, this court held that just because there is no security interest to reverse, does not mean there are no fees to refund and therefore make the consumer "whole".

A key issue in cases such a this are the time allowed to rescind and the fees a lender may have to refund up to years later. If a borrower rescinds within the first three business day period any security interest is voided. The lender cannot then claim that because there is no lien, there is no need to refund monies paid. The same test holds true in an extended rescission period. This means that a refinance is not a means to cure an error. The premise is, while one part of the transaction may no longer exist (the security interest) the monies were still paid and under the disclosure rules, may not have been had the disclosures been accurate and timely. The consumer was not able to make their informed decision. The entire transaction must then be "un-done" and this includes any security interest and monies paid.

This case does not say JP Morgan Chase Bank is at fault. The Sixth Circuit did not determine if a rescission error occurred. They have, for the Sixth Circuit however, said that extinguishing a debt does not cure violations.

Gibson vs. LTD, Incorporated
There is confusion over when consummation of a loan occurs. If a loan is not funded or, in the case of a dealer contract, sold to a lender and subsequently funded, was it ever a consumer loan? Are errors in the disclosure discounted because no loan really existed? Such is the case in Gibson and there are valuable lessons to be learned. One in particular relates to the financing of a product or service which is not delivered. Under TILA, the consumer may be charged only for those things of which they "have use." If the consumer has no use of the item because it was never provided, the disclosures would immediately be in error. Read on.

  1. 10-31-02 - Gibson purchases a 2002 truck from LTD
    - The contract is for $21,201.39.
    - Charges included of $499 are described only as "After MRKT" although Gibson refused after market products such as under-coating.
    - The contract included a clause allowing LTD to cancel the sale if a buyer of the loan could not be found.
  2. 11-11-02 - Unable to find a buyer, LTD reformulates the transaction and rewrites the contract. LTD deducts the "After MRKT" costs of $499, a $500 GAP insurance fee and collects an additional down payment.
    - A new contract for $17,114.17 is executed.
  3. Early 2003 - Gibson has an accident and totals the truck.
  4. 02-05-03 - Gibson purchases a new 2003 model truck from LTD.
    - The contract is for $22,889.36.
    - This amount includes $500 of GAP insurance (properly acknowledged) plus an additional $12.39 based on an error calculating license tax.
  5. 02-12-03 - Unable to find a buyer, LTD reformulates the transaction and again rewrites the contract.
    - The new contract amount is $21,248.70. The down payment was increased. GAP insurance was provided as it was the week earlier, but it was not properly acknowledged this time.
  6. 01-14-03 - Insurance was settled on the accident from the 2002 truck. It did not satisfy the debt and there was no GAP policy. LTD absorbed part of the loss and had Gibson renew his contract to satisfy the remainder
  7. 02-18-03 - A third contract is signed for the 2003 truck.
  8. After the contract was signed, LTD learned that Gibson quit his job 12 days earlier. LTD requested a voluntary repossession and Gibson complied.
Gibson took legal action for failure to comply with TILA and the implementing Regulation Z.

The $499 charge for "AFTER MRKT" on the first retail installment sales contract was improperly included in the amount financed. The after market products/services were neither requested, nor delivered. There was no explanation for the term "After MRKT," making it meaningless. And since these disclosures are all about informing the consumer of the cost of credit, this abbreviated term and the fact that it was included in a section with other charges and credits described as "dealer's business license tax," "Virginia title tax," "processing fee for consumer services," etc. failed to inform the consumer.

Further, LTD had not promised at any future time to actually provide this product and had not provided it in advance of the sale. 15 U.S.C. § 1638(a)(2)(A) specifies that the amount financed "shall be the amount of credit of which the consumer has actual use" and this was not the case. Therefore, there was no basis for the inclusion of this cost and the amount financed was incorrect because of it.

Next, the first 2003 retail installment sales contract included an overcharge of $12.39 for the dealer's business license tax. If there is any over-charge or markup, it must be clearly disclosed and not incorporated with other sums as it was here.

LTD maintained that because the contracts on which these violations existed were not purchased, and no funds were loaned, that they were not "consummated" as required by federal law. No TILA damages could result if this were the case.

But "consummation" is defined to occur at the "time that a consumer becomes contractually obligated on a credit transaction." The court concluded that because the regulation "expressly refers solely to the consumer's commitment" and because of "TILA's express purpose of protecting consumers from receiving inadequate disclosures prior to their entering into credit transactions," "consummation . . . encompasses unfunded, financing agreement options to which consumers contractually commit, and under which they can be bound at the lender's sole discretion." Even if the dealer has not signed the contract, the consumer has and consummation has occured.

During the court action, Gibson contended that LTD's inclusion of a GAP insurance charge in the amount financed on his second 2003 retail installment sales contract violated TILA because he did not authorize the charge. Without his authorization, he contends, LTD could only include the charge as part of the finance charges, not as part of the amount financed.

LTD maintained that the authorization from the preceding contract still applied and that the two transactions were as one. The second was a modification of the first.

The court concluded that the modifications materially affected the terms in the form of the down payment, the amount financed and the finance charge. The court saw a new agreement in place and ruled that new disclosures, including the GAP authorization, were required.

Two of the lower court's findings were upheld and one (the GAP disclosure) was reversed. Gibson now won on three counts. However, the initial ruling was that Gibson be awarded statutory damages plus attorney fees. The damages were based on the Nign case and provided $63,847.94, twice the sum of the two finance charges. That case was since reversed by the Supreme Court and statutory damages on three violations would pay $3,000. This makes the $53,627.50 in attorney fees disproportional to the TILA fine. The lower court will review the amount of the damages.

Vallies v. Sky Bank
Vallies purchased a truck from Phil Fitts Ford. The dealership arranged financing for Vallies through Sky Bank. Guaranteed Auto Protection (GAP) insurance was purchased and financed in the transaction. Sky Bank failed to include this in the total finance charge and failed to itemize the premium, but combined it with a service contract fee.

The same day as the loan documents were executed for the purchase, Vallies signed a "GAP Waiver Agreement" form provided by the dealership. This form correctly disclosed the cost of the GAP insurance and the required TILA disclosures pertaining to the charge.

At issue is whether the dealership could make this disclosure for Sky Bank, as the dealership was not an agent for the bank. While the District Court held it could, the Court of Appeals for the Third Circuit reversed the judgement.

The Court of Appeals maintains that TILA does not permit a creditor to delegate disclosure responsibilities to another and that the disclosures needed to have been made by Sky Bank. The Act (and the regulation that implements it) is clear in that it states at 12 C.F.R. § 226.17 that “[t]he creditor shall make the disclosures...clearly and conspicuously in writing, in a form that the consumer may keep." And at 12 C.F.R. § 226.18 it states “[f]or each transaction, the creditor shall disclose the following information...” Duties required by "the creditor" are referred to several times in the Act. It was determined that the creditor, and the creditor alone, has the disclosure responsibility.

The fact that what was originally disclosed was confusing and incorrect was a moot point. Also inconsequential was the fact that Vallies eventually received the correct disclosures. The issue at hand was who made the disclosures as required by law. It was not the creditor, and this meant that the disclosures were improperly made. A lender must rely on the dealership when transactions such as these are entered into. But each party has certain obligations which may not be imposed on another.

Spearman v. Tom Wood Pontiac-GMC, Incorporated
Customer bought a used car and financed it through the dealership. The salesman presented the contract, with all required Reg Z disclosures, to the customer in quadruplicate for review and signature. None of the copies indicated for whom they were intended. The customer signed the documents and handed them back to the salesman. He then handed back one of the copies of the contract. Subsequently, the customer sued, alleging the dealership violated Reg Z by failing to provide the necessary TILA disclosures in writing, in a form the consumer may keep, prior to consummation of the transaction. Spearman's argument was that she was deprived of the opportunity to shop around for a better deal with Tom Wood's deal in hand for comparison. The federal district court originally ruled in favor of the car buyer, then reversed itself upon reconsideration and granted judgment for the car dealer. In a December 3, 2002 opinion, the 7th Circuit Court of Appeals affirmed the judgment in favor of the car dealer. In doing so, the court carefully considered the wording of the relevant language in Reg Z, which reads "The creditor shall make the disclosures required by this subpart clearly and conspicuously in writing, in a form that the consumer may keep." The Court viewed the two requirements as being separate; i.e., the disclosures must be made (1) before consummation and (2) in a form the consumer may keep. Although the plaintiff contended that the disclosures were not in a form she could keep until after she signed the Contract and her copy was separated out, the Court didn't buy that argument. The Court noted there was no evidence to indicate the car salesman would have precluded her from taking the unsigned document, or taking a copy of it. The Court says:
"Although Spearman testified that she did not know she could keep this document (or any part of it) and that she felt some discomfort over tearing out a page, the only evidence in the record demonstrates that her reluctance to keep the document given to her was idiosyncratic. TILA does not require a creditor to explain a borrower's rights in this situation. Under Spearman's view of the evidence, the salesman would have been required to hand over the disclosures and then say, for example, 'This is yours to keep.' TILA imposes no such obligation."

Brannam v. Huntington Mortgage Company
Doc Prep Fee - The Huntington Case
The 6th Circuit Court of Appeals rejected the argument that only actual costs for preparing loan related documents may be charged. The Court ruled a document preparation fee is considered reasonable if it is for a service actually preformed and reasonable in comparison to the prevailing practices in the industry in the relevant market.

Supreme Court Decides Reg Z Case

In Koons Buick Pontiac GMC, Inc. v. Nigh, the U.S. Supreme Court determined the effect of the 1995 amendments to the damages limits for Truth in Lending violations. In so doing, they also shed light on what "subparagraph" and "clause" mean in the context of statutory interpretation. Bottom line: the $100/$1,000 limitation still stands.

Pfennig v Household Credit Service, Inc. and MBNA America Bank, N.A.
Updated 4/21/04 The United States Supreme Court has reversed the Sixth Circuit (Pfennig v Household Credit Service, Inc. and MBNA America Bank, N.A.) and held that over limit fees are not a finance charge and need not be disclosed as such.

The Court says, in this opinion, that Congress recognized an open-end credit plan may have both "finance charges" and other charges. Therefore, all charges are not "finance charges". The Truth in Lending Act explicitly addresses over-limit fees, defining them as fees imposed “in connection with an extension of credit” rather than “incident to an extension of credit".

Regulation Z, as written by the Federal Reserve Board, defines a "finance charge" as "a cost of consumer credit". Because an over the limit fee is imposed as a penalty for defaulting on the credit terms, it is "in connection with" and not "incident to" the extension of credit. As a penalty, it was excluded from the cost of credit and the finance charge.

The FRB adopted a uniform rule excluding from the term “finance charge” all penalties imposed for exceeding the credit limit. The Sixth Circuit adopted a case-by-case approach contingent on whether an act of default was “unilateral.” This method of defining finance charges would likely be neither workable for lenders nor understandable by consumers. As a result the FRB's interpretation will stand and the fees will not be included in calculations as a finance charge.
Opinion     Syllabus

PREVIOUS ACTION (Overruled 4/21/04 by the US Supreme Court)
Pfennig v Household Credit Service, Inc. and MBNA America Bank, N.A.
Court Strikes Down Reg Z Finance Charge Exclusion
The U.S. Court of Appeals for the Sixth Circuit held that despite the language of Reg Z that expressly excludes fees charged for exceeding a credit limit from the definition of the "finance charge", such fees were within the statutory definition of "finance charge" found in TILA and must be disclosed as, and treated as, finance charges. On July 2, 2002, the court paved the way for the plaintiffs to go back to the lower court and proceed on a claim for equitable relief. (A petition for rehearing filed by the defendants and supported by other parties, including various industry organizations, was denied.)

Rodash V. AIB Mortgage Company, 16 F.3d 1142 (11th Cir. 1994)
If you're new to banking, you've undoubtedly run into references to the Rodash case, but may not know the background. The opinion of the I1th Circuit Court of Appeals in this landmark case is not available online but we have included a summary because of its importance and the effect the case had regarding subsequent changes made to TILA and Regulation Z.
In Rodash the court allowed plaintiffs to rescind a mortgage as a result of minor TILA violations. (The lender had failed to include a $204 Florida intangible tax and a $22 Federal Express fee in the calculation of the finance charge and the plaintiff was therefore entitled to rescind her mortgage as a result of the lender's failure to do so.)

The Economic Growth and Regulatory Paperwork Reduction Act of 1996 (Public Law 104-208) contained so-called "Rodash amendments", designed to protect lenders from certain Truth in Lending Act rescission claims based on small errors in disclosure of finance charges in residential mortgage loans. The protection of the "Rodash" Amendments is limited to "any closed end consumer credit transaction that is secured by real property or a dwelling that is subject to [the Truth in Lending Act]." See Lucy Griffin's articles "TIL Amendments: Fixing "Rodash" and other problems" and "Truth In Lending: "Certain" Security Interest Charges".

(see also the Thompson v. Irwin Home Equity Corp. decision indexed above under the "Arbitration" category, which deals with compelling borrowers to use arbitration to determine if they have a right to seek rescission.)


Schnall v. Amboy National Bank
Exercise Caution in Disclosing "Bonus Rates"
The U.S. Court of Appeals for the 3rd Circuit held that TISA/APY violations resulted from the way a financial institution disclosed a rate that was only applicable for a portion of the year. The Court ruled the rate in question should have been advertised as a single composite rate based on a one-year term, calculated by applying the reduced introductory rate for the period of time it was applicable and then applying the variable rate for the remaining portion of the year.


Lippert v. Community Bank, Inc. 02/21/06
Ruling Gives Clues for Whistleblower Cases
The U.S. Court of Appeals for the Eleventh Circuit overturned a summary judgment in favor of defendant Community Bank, Inc., but in doing so, it provided some guidance on the types of reports than can and cannot be considered "protected communications" under the "whistleblower" provisions of FIRREA (at 12 U.S.C. § 1831j). The decision also serves as a reminder that there are several whistleblower statutes protecting employees who contact authorities about alleged wrongdoing of an employer. Employers who retaliate do so at great risk. The District Court's summary judgment for the defendant was vacated and the case remanded, with guidance from the Court of Appeals.

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