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This month we welcome a new State Editor (Litigation and Bankruptcy) for California -- Tom Prenovost, of the Santa Ana law firm of Prenovost, Normandin, Bergh & Dawe. Tom's firm is very active in representing creditors in California in litigation and bankruptcy matters. Elizabeth Huber, of the Hudson Cook California office, remains as California State Editor (Compliance). Last month we welcomed Ed Wilmesherr as our HouseLaw State Editor for Mississippi. Johnny Healy and Cliff Harrison, who are also members of Butler, Snow, O'Mara, Stevens & Cannada, PLLC, join with Ed Wilmesherr in representing Mississippi. Look for their biographies in the Mississippi Section.

You will notice that the State Section of HouseLaw has undergone a few changes. This time of year, we give the State Section a thorough cleaning, and we have also made minor changes to the format. With regard to the clean out, we have removed all references to Attorney General Opinions and miscellaneous materials reprinted in 1999 and all references to non-final regulations that were proposed in 1998.

In addition, we have removed all 1999 legislation to make room for the 2000 legislation, except in those states where the 2000 legislative session is a carryover from 1999. The states that have carryover legislative sessions are Alaska, California, Delaware, Georgia, Hawaii, Illinois, Iowa, Kansas, Maine, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Washington and Wisconsin.

With regard to the format changes, you will notice that we have eliminated our system of using symbols to indicate final versus pending legislation. Instead, we have grouped the final legislation at the top, followed by the pending legislation, followed by final regulations and then pending regulations, and so forth. Any item that constitutes a "new" development for that month, whether it be pending or final, will still be highlighted in bold font. We hope that you will find this new format more helpful.

By now, hopefully everyone has become aware that HouseLaw is available over the Internet at HouseLaw.net. If you are an existing subscriber and have not received information via e-mail about signing up for a password, please contact Robert Cook by e-mail at rcook@hudco.com. The only way to request access from HouseLaw.net is to sign up for a 30-day trial. For the time being, we will continue to send the hard copy of HouseLaw to all subscribers, unless you call and ask us not to send it. Soon, however, we will be asking subscribers to make an election and to decide whether to keep getting the big green books or to join the electronic age. We will provide you with more details on this election in the next month or two. We will notify subscribers by e-mail when the February 2000 HouseLaw is available on the Internet. We welcome any comments you may have regarding HouseLaw.net.

As you read through Highlights this month, make sure you don't miss the General Interest Section. We have interesting reports this month from several state editors discussing pending litigation that they are either handling or following. Our thanks to Richard Eckman, with Pepper Hamilton, our HouseLaw State Editor for Delaware; Alan Kaplinsky, with Ballard, Spahr, Andrews & Ingersoll, our HouseLaw State Editor for Pennsylvania; Jeffrey Naimon with the D.C. office of Goodwin, Procter & Hoar; and Maury Shevin and Stephen Collins of Sirote & Permutt, our HouseLaw State Editors for Alabama.

In addition, you find reports from Sirote & Permutt, our HouseLaw State Editors for Alabama; Connecticut HouseLaw State Editor Patrick McHugh; Kentucky HouseLaw State Editor Richard Vance; Maine State Editors Richard Hackett and Ryan Stinneford; Margaret Crockett, one of our HouseLaw State Editors for Massachusetts; North Carolina HouseLaw State Editor Don Lampe; and Brian Witt of Farleigh, Wada & Witt, P.C., our Oregon State Editor, in our State Sections. Our thanks to all of our contributing State Editors.

Privacy is a major topic this month. The Federal Reserve Board has released its proposed Regulation P, which will implement the privacy provisions of the Gramm-Leach-Bliley Act. The comment period on this proposal runs only through March 31, 2000, so you may want to take a look at this monster. It's only about 90 pages long. See Tab 1 in the Federal Section.

The Federal Reserve Board has announced its approval of an interim rule setting forth procedures for bank holding companies and foreign banks with U.S. offices to elect to be treated as financial holding companies under the Gramm-Leach-Bliley Act. The interim rule becomes effective March 11, 2000, the effective date of Title I of the Gramm-Leach-Bliley Act. See Tab 10 in the Federal Section.

The big three U.S. credit reporting agencies agreed to pay $2.5 million to settle government charges that they failed to maintain toll-free telephone numbers. See Tabs 17 through 20 in the Federal Section.

The Federal Reserve Board recently released a study looking at the performance and profitability of CRA-related lending. To see if your experience matches what the Fed reports, see Tab 7 in the Federal Section.

Everyone knows that certain information, particularly subprime lending data, is not being reported to the nation's credit bureaus. The federal financial institution regulators are urging depository institutions to develop strategies to identify and compensate for this lack of reliable credit reporting information. See Tab 11 in the Federal Section.

A class action alleging violations of RESPA Section 8 has been filed against Republic Mortgage Insurance Company, one of the largest providers of private mortgage insurance in the country. Maury Shevin and Stephen Collins of Sirote & Permutt, our HouseLaw State Editors for Alabama, have provided a short memo with details about the case. See Tab 2 in the General Interest Section.

A similar class action lawsuit has been filed against Mortgage Guaranty Insurance Corporation. The complaint filed in this case, provided by Jeffrey Naimon with the D.C. office of Goodwin, Procter & Hoar, is at Tab 3 in the General Interest Section.

Plaintiffs are attacking "bi-saver" lending programs, under which the homeowner makes mortgage payments through an ACH authorization usually on a bi-weekly schedule in accordance with a wage or salary payment schedule. Alan Kaplinsky, our HouseLaw State Editor for Pennsylvania, provides us with copies of two complaints attacking this program. See Tabs 4 through 6 in the General Interest Section.

Richard Eckman, with Pepper Hamilton, our HouseLaw State Editor for Delaware, has provided a memo on a TILA/Arbitration case being appealed to the Third Circuit Court of Appeals. The U.S. District Court for the District of Delaware held that a mandatory arbitration clause was unenforceable because it frustrated the purpose of the Truth in Lending Act and the Electronic Funds Transfer Act. See Richard's memo for details regarding the case at Tab 7 in the General Interest Section.

Look for the complaint filed in an interesting lawsuit by First Union Corporation against an Internet company that aggregates financial information for its subscribers. First Union complains that the defendant obtains personal identifying information from its subscribers and then surreptitiously obtains the subscriber's banking information from First Union's web site. The defendant is then able to aggregate this information with other financial information obtained for the subscriber. Our thanks to John Lee with Wells Fargo Bank for providing us with a copy of the complaint. See Tab 8 in the General Interest Section.

The following are state law HIGHLIGHTS. Keep in mind that you should also refer to the Final State Action list for a full account of enacted legislation, adopted regulations and other state items contained in this issue.

The Sirote Weekly Alabama Law Update, provided by our HouseLaw State Editors, the Birmingham law firm of Sirote & Permutt, provides interesting updates on litigation developments in Alabama. In addition, the Alabama Insurance Department issued a Notice of Hearing for several matters, one of which is a revision of Regulation No. 111, which sets forth the rules and regulations that apply to agents marketing credit insurance. The proposed revisions are primarily to expand the definitions so as to include other forms of credit insurance currently in the marketplace. The hearing is scheduled for February 16, 2000. The proposal would make the revisions effective March 1, 2000. See the Alabama Section.

California AB 431 affects mortgage foreclosure proceedings, the duties and liabilities of a trustee under a deed of trust, and the licensing requirements for real estate appraisers. We have picked up a release from the California Department of Insurance regarding a settlement under which First American Title Company agreed to pay $2.5 million to settle allegations that it paid kickbacks for referral business. The announcement came in mid-October of last year, but we just became aware of it. See the California Section.

Connecticut HouseLaw State Editor Patrick McHugh provides us with a memorandum on some important recent cases relative to mortgage lending in Connecticut. See the Connecticut Section.

There are two tables in the Florida Section that are very helpful in checking whether new law enacted in 1999 has affected any particular section of the Florida Statutes. The tables also cross reference Senate and House bill numbers and provide effective dates of the new laws. See the Florida Section.

Kentucky HouseLaw State Editor Richard Vance gives us an update on legislation pending in Kentucky and also reports that the Kentucky Bar Association has published an opinion stating that the conduct of real estate closings by non-attorneys constitutes the unauthorized practice of law. See the Kentucky Section.

Maine State Editors Richard Hackett and Ryan Stinneford bring to our attention a recent development concerning interest rate lock-in agreements. As an attachment to their memo, you will find the Maine Creditor Update, published by the Maine Office of Consumer Credit Regulation. See the Maine Section.

Margaret Crockett, one of our HouseLaw State Editors for Massachusetts, has sent us the Massachusetts Division of Banks Digest of Selected Opinions for the third quarter of 1999. See the Massachusetts Section.

In the Michigan Section, you will find a table containing 1999 Public Acts. The table references the House or Senate bill number, the date the law was approved, and the effective date of the law. It also contains subject-matter information. See the Michigan Section.

The Mississippi Office of the Commissioner of Insurance has adopted Regulation 99-3, which requires life and health insurance companies to deliver a "Summary Document" to policy or contract owners. It is not clear from the face of the materials issued by the Commissioner whether the notice requirement applies to group credit life and group credit accident and health policies. The effective date for the new regulation is April 10, 2000. See the Mississippi Section.

The Nebraska Department of Insurance has published a revision to a November 24, 1999 notice sent to title insurance agencies and underwriters regarding what instruments meet the requirements of "good funds" as described in Neb.Rev.Stat. § 44-19,116(1)(e)(i). See the Nebraska Section.

The State of New York Banking Department has published information brochures for consumers on predatory lending. The New York Attorney General's Office is taking an active role in implementing new privacy protections for New York citizens. As part of these efforts, Attorney General Eliot Spitzer announced a settlement with Chase Manhattan Bank regarding the sharing of information of its credit customers and a settlement with InfoBeat, an Internet company, relating to the disclosure of personal identifying information. Finally, the New York Banking Department has issued a letter alerting banking institutions to concerns regarding electronic cash management services. See the New York Section.

North Carolina HouseLaw State Editor Don Lampe provides a memorandum discussing a proposed Formal Ethics Opinion relative to the role of paralegals or legal assistants in residential loan closings in North Carolina. Don also discusses the "stealth override" effect of the new predatory lending law on HOEPA loans. See the North Carolina Section.

The Oklahoma Department of Consumer Credit has issued a number of notices of proposed rulemaking. See the Oklahoma Section.

Pennsylvania SB 555, entitled the "Electronic Transactions Act," was signed into law in December. Look for a bulletin on the new law prepared by Reed Smith Shaw & McClay, LLP. Also look for a bulletin describing decennial reports that will be required by the Corporation Bureau. The requirements apply to both domestic and foreign corporations. See the Pennsylvania Section.

Brian Witt of Farleigh, Wada & Witt, P.C., our Oregon State Editor, has provided a survey of important legislation pending in Washington. His summaries include information on where to find the bills on the Internet. See the Washington Section.

Courts Continue To Question Arbitration, Examine Relevance of Fees: Courts have repeatedly examined the issue of fees when considering whether to enforce arbitration in consumer transactions. The U.S. Court of Appeals for the Eighth Circuit recognized that this issue may turn an otherwise valid arbitration agreement into an unconscionable agreement, but it nonetheless ruled that a lower court's decision to lift a stay on judicial proceedings based on an estimate of total arbitration fees was improper. The fee estimate was based in part on the plaintiff's demand for damages, which the Eighth Circuit found might be an unreasonable demand. It also ruled that the lower court should order the plaintiff to explore the service provider's fee waiver procedures before ruling out arbitration in favor of the judicial forum. See Dobbins v. Hawk's Enterprises at Tab 1. The U.S. District Court for the Northern District of Illinois said that Congress did not authorize courts to evaluate arbitration costs on a case-by-case basis when determining whether to grant a motion to compel arbitration. The court also noted that the plaintiff was able to seek a reduction in arbitration fees from the service provider. The court granted the motion to compel arbitration in Thompson v. Illinois Title Loans, Inc. at Tab 2. In a case alleging Truth in Lending Act claims, the U.S. District Court for the Southern District of Florida denied the defendants' motion to compel arbitration even though they offered to pay all fees and costs incurred by the plaintiff in connection with the arbitration. Judge King found the arbitration clause to be unconscionable, suggesting that the defendants were required to show that the selected arbitration forum was "neutral, inexpensive and efficient." The case was transferred to another judge after this ruling, and the defendants have appealed to the Eleventh Circuit. The new judge stayed all proceedings, pending the Eleventh Circuit's resolution of the appeal. See Baron v. Best Buy Co., Inc. at Tab 3.

Debtor in Bankruptcy Denied Permission to 'Ride Through' Without Making Election as to Mortgage Debt: Some courts, including the Second Circuit, have concluded that debtors have another option in addition to redemption, reaffirmation or surrender of collateral in bankruptcy -- what some commentators have referred to as "ride through," meaning that the debtor doesn't elect any of the Code's three options, but retains possession of the collateral and continues to pay on the obligation secured by the collateral. The issue has arisen most often with automobile-secured creditors. In a case we report on this month, however, the debtor tries to do the same thing with a mortgage obligation, citing Second Circuit precedent. The U.S. Bankruptcy Court for the Northern District of New York rejected the debtor's position, finding the elusive fourth option, which is not derived from language in the Bankruptcy Code, to be discretionary with the court. Distinguishing the facts of the Second Circuit case relied upon by the debtor, the bankruptcy court noted that the debtor's payment history with the mortgagee prior to bankruptcy was erratic. The court concluded there was no guarantee that the debtor would continue to make payments; it, therefore, granted the mortgagee its requested relief. See In re Gaines at Tab 9.

West Virginia Requires Strict Compliance With Disclosure Statute for Balloon Notes: Plaintiff borrowers challenged several aspects of their loan transaction and brought one class action claim, alleging that the defendant failed to comply with a West Virginia disclosure law relative to balloon mortgage notes. The U.S. District Court for the Southern District of West Virginia found the lender liable under the statute, notwithstanding that at least five documents at closing, all signed by the borrowers, disclosed the balloon note payment. Even though the lender was found liable, the court ruled that statutory penalties were unavailable under the provision relied on by the plaintiffs because it pertained to consumer leases, not consumer credit transactions. However, there's always more than one way to skin a cat, and in this case, the plaintiffs found a viable alternative for the penalties they sought. The plaintiffs asserted that the loan documents were unconscionable. The court refused to make such a finding on a motion for summary judgment, but allowed the claim to proceed as a class action, against the protestations of the lender. See Mallory v. Mortgage America, Inc. at Tab 11.

Virginia High Court Says Fair Housing Organization Has 'No Standing' To Sue Under State's Fair Housing Law: In a split decision with a strong dissent, the Supreme Court of Virginia ruled that Housing Opportunities Made Equal, Inc. (HOME) did not have standing to pursue claims against defendants for alleged redlining practices relative to sales of homeowners insurance. The majority and dissenting judges completely disagreed in their interpretations of the relevant definitional issues under the statute. The standing issue was appealed to the state's highest court after a jury rendered a verdict in favor of the plaintiff, awarding $500,000 in compensatory damages and $100 million in punitive damages against the defendants. A majority of the Virginia high court overturned the jury verdict and rendered judgment for the defendant. See Nationwide Mutual Insurance Company v. Housing Opportunities Made Equal, Inc. at Tab 28.

Mortgagee Proves Entitlement to Damages for 'Actual Loss' Under Title Insurance Policy: In a case involving a lender's claim against a title insurance company for losses related to an undiscovered senior lien, the Supreme Court of Ohio addressed several issues, reversing in part and affirming in part two lower court decisions. The Ohio Supreme Court ruled in favor of the lender on nearly all issues, finding that its loss under the title policy was the amount the lender would have received from a foreclosure sale but for the presence of the senior lien (i.e. the amount of foreclosure sale proceeds paid to the senior lienholder). The court also ruled that it was improper to rely on fair market value of the property to determine the lender's loss given the language relating to the insurer's liability under policy. Nor was the mortgagee required to mitigate its losses by bidding on the property at foreclosure, since the title policy did not require this as a condition precedent to recovery. The only ruling against the lender was the court's dismissal of its tort claims. The court concluded the lender was limited to the remedies provided for in the title insurance policy. See Chicago Title Insurance Company v. The Huntington National Bank at Tab 38.

HUD's 'Termination Regulation' Exceeded Agency's Authority Under National Housing Act: The U.S. Department of Housing and Urban Development, relying on the authority of a regulation it promulgated under the National Housing Act, terminated a mortgage lender's authorization to originate FHA-insured residential mortgages. However, the U.S. District Court for the District of Maryland found that HUD exceeded its authority under the statute in enacting the regulation. The federal district court found that HUD was not entitled to terminate a mortgagee's origination approval agreement based on an excessive claim and default rate without affording the lender the opportunity to submit a "corrective action plan." The HUD regulation was "directly inconsistent with" the statutory mandate of Section 533, the court said. It rejected HUD's arguments that the regulation was proper under the agency's "inherent regulatory authority." The court concluded that HUD deprived the lender of Fifth Amendment due process. See Capitol Mortgage Bankers, Inc. v. Cuomo at Tab 42.

New Hampshire High Court Says Variable Rate Loans Need Not Be Tied to Recognizable Index: The Supreme Court of New Hampshire reviewed a disclosure statute, RSA 399-B:2, that applies equally to commercial and consumer loans. The borrower claimed that the lender was not entitled to pursue a deficiency judgment after foreclosure because it failed to properly disclose the interest rate on the loan. The disclosure violated the statute, the borrower argued, because the variable rate was not tied to a recognizable index. The Supreme Court of New Hampshire ruled in favor of the lender, noting its agreement with the New Hampshire Bankers Association, amicus in the case, that a variable rate may be discretionary with the lender as long as it is properly disclosed. The court also noted that federal Regulation Z "requires lenders to provide disclosure when a variable rate is purely discretionary" and that conformity with Regulation Z satisfies RSA 399-B:2. See Bank of New Hampshire v. Scanlon at Tab 47.

'Payment Holiday' Case Continues as Class Action: We've reported on this case several times. The plaintiffs appealed the dismissal of their Truth in Lending Act claim to the U.S. Supreme Court, but the high court denied certiorari, and the case was sent back down. In this decision, the Court of Appeals of Ohio reversed the trial court's denial of class certification with respect to the plaintiff's misrepresentation claims. The appeals court found that because the alleged misrepresentations arose from the defendant's form solicitation letters, proof of reliance may be established by inference or presumption. The plaintiffs allege that the defendant misled class members by misrepresenting the "true cost" of the payment holidays, which, they assert, included "additional hidden compound interest charges over the life of the loan." See Begala v. PNC Bank, Ohio, N.A. at Tab 12.

Internet Provider of Real Estate-Related Services Fails To Obtain Injunction: The plaintiff, a provider of various Internet services on a site with the domain name "Home-Market.com" sought to enjoin another provider of similar services from using the domain name "Home-Market.net." The U.S. District Court for the District of Minnesota ruled against the plaintiff, finding that its case fell far short of the requirements necessary for a preliminary injunction. Even the plaintiff's likelihood of success on the merits did not weigh in favor of the court's granting an injunction. See Shade's Landing, Inc. v. Williams at Tab 15.

Seventh Circuit Rejects "Flat-Rating" Claim: The Seventh Circuit has rejected a claim that North Shore Agency, Inc., a large collection agency, was engaged in "flat-rating" when it sold a series of collection letters to a creditor along with other services. The Fair Debt Collection Practices Act prohibits the sale of form letters to a creditor that the creditor then uses to simulate mailings from a collection agency. Creditors have to be concerned with "flat-rating" claims because the FDCPA also makes it a violation for a creditor to use the correspondence purchased from a "flat-rater". The Seventh Circuit confirmed that the FDCPA prohibition does not reach an agency that offers additional services, even though they may not be extensive, along with its series of collection letters. See White v. Goodman at Tab 23.

Seventh Circuit Revisits Rule 12(b)(6) Standard in Context of FDCPA Claims: Again, the U.S. Court of Appeals for the Seventh Circuit has stated that an allegation of "confusion" under the Fair Debt Collection Practices Act is unsuitable for resolution on a motion to dismiss. When a plaintiff alleges that a collection letter is "confusing," the judge may need to accept evidence, the Seventh Circuit said, because such a claim presents a question of fact, and, the court reasoned, "judges are not good proxies for the 'unsophisticated consumer.'" The Seventh Circuit did note, however, that the plaintiff in this case did not intend to rely solely on the letter's language, but proposed to develop evidence as to the letter's effect on readers. See Walker v. National Recovery, Inc. at Tab 21.

Informal Fax Communication Was 'Initial Communication' for Purposes of FDCPA: This case suggests the utmost caution when providing information to a debtor or, in this case, someone inquiring about a debt on behalf of the debtor. After a telephone conversation with the future father-in-law of the debtor, a representative of the debt collector faxed a one-page printout of an in-house computer screen, detailing the amount owed. The computer screen printout did not contain the 30-day validation notice required by the Fair Debt Collection Practices Act -- mistake number one -- and it showed a line-item for attorney's fees (standard in-house procedure, even though attorneys were not yet involved) -- mistake number two. Even though the communication was not sent directly to the debtor, the U.S. District Court for the District of Maryland found the fax to be the "initial communication," and, consequently, both of the above-noted mistakes were violations of the FDCPA. See Spencer v. Hendersen-Webb, Inc. at Tab 26.

Courts Scrutinize FCRA Claims: We report on two cases alleging violations of the Fair Credit Reporting Act. In one case, the plaintiffs tried to maintain a claim based on failure to maintain reasonable procedures and a claim for injunctive relief, but the U.S. Court of Appeals for the Fifth Circuit reversed a lower court's class certification of the claims. The Fifth Circuit found that the lower court misread the requirements of the FCRA. It ruled that the plaintiffs had to allege an improper disclosure of a credit report before they could maintain a claim based on failure to maintain reasonable procedures. Also, the plaintiffs were not entitled to seek injunctive relief. The Fifth Circuit said that injunctive relief was available only to the Federal Trade Commission, not private litigants. See Washington v. CSC Credit Services, Inc. at Tab 18. In another case, the U.S. District Court for the Western District of Kentucky found that the FCRA's two-year statute of limitations was subject to the doctrine of equitable tolling. Although the court's ruling may not be directly contradictory due to the type of claim alleged, the court did find "unpersuasive" the reasoning of three federal circuit courts of appeal, all ruling that equitable tolling does not apply to FCRA claims. The court also found that a state law claim in the nature of "invasion of privacy" was not preempted by the FCRA because the so-called preemption provision under the Act applies to "required disclosures" and the plaintiff's claim was based on an allegedly unlawful disclosure. See McAnly v. Middleton & Reutlinger, P.S.C. at Tab 19.

UNITED STATES DISTRICT COURTS CIVIL DOCKETS

Heading (Case Name)

Court

Docket Number

Nature of Suit

Date Filed

AFS Fin Inc v. Burdette, et al

IL N

1:00cv394

TILA

1/20/00

Altman v. American General, et al

AL N

4:00cv155

TILA/Class Action

1/19/00

Hayes, et al v. Lynch Chrysler

IL N

1:00cv447

TILA

1/24/00

Jaster v. First USA Bank NA

KN W

5:00 cv22

TILA

1/25/00

Lira v. Lee

OR

6:00cv6018

TILA

1/20/00

McQuown, et al v. Koons Ford, Inc.

VA E

1:00cv114

TILA

1/21/00

Pugh, et al v. Nationscredit, et al

MS S

3:00cv32

TILA

1/14/00

Richmond v. Mortgage Lenders, et al

VA E

3:00cv23

TILA

1/13/00

Rico v. Acceptance et al

NM

1:00cv104

TILA

1/27/00

Rivera v. Grossinger Motorcorp, et al

IL N

1:00cv442

TILA/Class Action

1/24/00

Sanders v. Ameriquest Mortgage

GA N

1:00cv182

TILA

1/25/00

Silas, et al v. Kibbons, et al

AZ

3:00cv95

TILA

1/20/00

Smith v. Aames Capital Corp, et al

DC

1:00cv125

TILA

1/20/00

Sooy v Experian Information, et al

NJ

3:00cv237

TILA

1/18/00

Wilson, et al v. American Redi-Bilt, et al

VA E

3:00cv34

TILA

1/20/00

**Note: The table does not include new case filings from the following U.S. District Courts: District of Alaska, District of Guam, Southern District of Indiana, District of Nevada, District of Northern Mariana Islands, District of Virgin Islands, and Western District of Wisconsin.