News & Developments

 

New York Attorney General Sues First American and its Subsidiary, eAppraiseIT, For Conspiring with Washington Mutual to Inflate Real Estate Appraisals

NOVEMBER 1, 2007 – A lawsuit was filed by the New York Attorney General, Andrew M. Cuomo, in the Supreme Court of the State of New York against First American Corporation and its subsidiary, eAppraiseIT ("EA"), a real-estate appraisal company. The complaint alleges that EA violated appraiser independence laws by selecting appraisers identified by Washington Mutual ("WaMu") who were known to inflate appraisals on homes. The complaint further alleges that EA selected these appraisers at First American's direction in order to secure future business from WaMu. According to the complaint, EA continues to improperly allow WaMu's loan production staff to "hand-pick appraisers who bring in appraisal values high enough to permit WaMu's loans to close, and improperly permits WaMu to pressure EA appraisers to change appraisal values that are too low to permit loans to close."

The complaint extensively quotes emails between executives at EA, First American, and WaMu that allegedly show willingness on the part of EA officials to violate appraisal independence regulations to comply with WaMu's demands. In particular, the complaint alleges violations by First American and EA of New York's fraudulent business practices and deceptive practices laws and unjust enrichment. The Attorney General asks the court to enjoin First American and EA from continuing to use appraisers identified by WaMu in violation of these laws and to direct First American and EA to disgorge all profits and pay all damages caused by these practices.

This lawsuit reflects the increased enforcement focus of the New York Attorney General and other state attorneys general with respect to mortgage lending issues. It also reflects the increased focus on mortgage-related fraud and appraisal issues in addition to more traditional fair lending issues.

FTC Releases Report on Effects of Credit-Based Insurance Scores

JULY 24, 2007—The Federal Trade Commission released a report presenting the results of a study concerning credit-based insurance scores and automobile insurance. The study found that these scores are effective predictors of the claims that consumers will file. It also determined that, as a group, African-Americans and Hispanics tend to have lower scores than non-Hispanic whites and Asians. Credit based-insurance scores are calculated based on a consumer's credit history information. Insurance companies use them to predict the claims that consumers are likely to file, and to determine the premiums they are charged.

Supreme Court Decision in FRCA Case

In Safeco Ins. Co. of Am. v. Burr, 548 U.S., 2007 WL 1582951, (June 4, 2007), the Supreme Court addressed what qualifies as “willful” conduct under the Fair Credit Reporting Act, and what constitutes an “adverse action” triggering certain notice requirements under the Act. The Court unanimously held that one who acts in reckless disregard of obligations imposed by the Act is liable for actual or statutory damages, as well as punitive damages, under section 1681n(a) of the Act. Thus, the Court determined that the Act’s imposition of liability on “[a]ny person who willfully fails to comply with any requirement imposed under this title” reaches one who knowingly or recklessly violates the Act. Whether one was reckless was to be determined by an objective standard: “[A] company subject to [the] FCRA does not act in reckless disregard of it unless the action is not only a violation under a reasonable reading of the statute’s terms, but shows that the company ran a risk of violating the law substantially greater than the risk associated with a reading that was merely careless.”

The Court then resolved the question of when notice of an “adverse action” must be provided, under section 1681m of the Act, in the context of an offer of insurance. The Court held that, under section 1681a(k)(1)(B)(i), an “increase” in a charge for insurance applies to the rate quoted or charged to a new applicant with whom the insurance company has not previously dealt. If the increase was “based in whole or in part” on a credit report, then the “adverse action” notice requirement of section 1681m was triggered. The Court equated the “based in whole or in part” requirement with a “but for causal relationship.” In other words, “an increased rate is not ‘based in whole or in part on,’ the credit report” – and the notice requirement is not triggered – “unless the report was a necessary condition of the increase.” As the Court tidily “sum[med] up, the difference required for an increase can be understood without reference to prior dealing (allowing a first-time applicant to sue), and considering the credit report must be a necessary condition for the difference.”

Given that Safeco’s interpretation of the relevant FCRA provision “has a foundation in the statutory text,” and the absence of any “guidance from the courts of appeals or the Federal Trade Commission (FTC) that might have warned it way from the view it took,” the Court found no need to “pinpoint the negligence/recklessness line.” Thus, the Court concluded that in light of the “dearth of guidance and the less-than-pellucid statutory text, Safeco’s reading was not objectively unreasonable, and so falls well short of raising the ’unjustifiably high risk’ of violating the statute necessary for reckless liability.”

FTC Announces Final Amendment to Franchise Rule

The FTC has announced final amendments to the Franchise Rule, with a phased-in effective date. This link is to the press release, which, in turn, links to the massive text of the rule and statement of basis and purpose.

Ninth Circuit Decides First Alliance Mortgage Case

On Friday, December 8, the U.S. Court of Appeals for the Ninth Circuit decided In re First Alliance Mortgage Co. This is an important case regarding a third party’s liability for fraud committed by a mortgage lender.

First Alliance Mortgage Company, a non-prime mortgage lender, had been driven into bankruptcy in the aftermath of lawsuits and investigations relating to allegations of unfair and deceptive business practices. Lehman Brothers, Inc. had extended credit to First Alliance and underwritten and managed its asset-backed securities. A class of borrowers sued Lehman in a California federal court for aiding and abetting First Alliance’s “fraud” and for violation of the state’s unfair competition law. The plaintiffs claimed that Lehman was aware of and assisted First Alliance in its conduct. The liquidating trustee of the First Alliance estate also brought claims for equitable relief against Lehman. Lehman defended on the grounds that it was not an active participant in the allegedly fraudulent practices and that it assisted First Alliance’s business generally, but not the specific practices.

Following a jury verdict, the district court awarded the plaintiffs over $5 million in damages on the aiding and abetting claim. The bankruptcy claims were dismissed. Lehman appealed the damages award, arguing, among other things, that the borrowers did not prove systematic fraud on a class-wide basis, that the jury was improperly instructed on the elements of aiding and abetting fraud and that there was insufficient evidence to establish aiding and abetting liability. The Ninth Circuit affirmed the judgment against Lehman on the basis that Lehman’s internal reports indicated direct knowledge of First Alliance’s questionable business practices. The Court also rejected Lehman’s claim that it had assisted First Alliance’s business but not its fraud, holding that such a distinction is irrelevant whena company’s whole business is “built like a house of cards on a fraudulent enterprise.” The Court, however, did remand the case for a recalculation of the damages amount.

Further Updates on FCRA Cases

On January 16, 2007, the Supreme Court of the United States heard argument in two cases reviewing the Ninth Circuit Court of Appeals’ decision in Reynolds v. Hartford Fin. Servs. Group, 435 F.3d 1081 (9th Cir. 2006).  The cases under review are Safeco Insurance Company of America, et al. v. Burr (No. 06-84) and GEICO General Insurance Co., et al. v. Edo (No. 06-100).

Countrywide Home Loans: Assurance of Discontinuance

On December 5, 2006, Countrywide Home Loans, Inc. entered into an Assurance of Discontinuance with the Office of the Attorney General of the State of New York (the "OAG") resolving an inquiry into its residential mortgage lending practices in New York State predicated on the OAG’s review and analysis of Countrywide’s 2004 Home Mortgage Disclosure Act ("HMDA") pricing data.

The Assurance represents the first significant settlement arising out of disclosures of pricing data under HMDA. It is also the first fair lending settlement that requires a lender to monitor and police broker pricing.

After reviewing Countrywide’s 2004 HMDA data, the OAG opened its inquiry to determine whether any racial or ethnic disparities existed in Countrywide’s home loan pricing. According to the Assurance, the OAG found that, "on average, after controlling for such race-and-ethnicity neutral factors, black and Hispanic customers paid more for Loans than white customers in Countrywide’s prime retail and wholesale channels" due, in part, to certain discretionary pricing components including rate sheet departures and broker compensation. The Assurance reflects that Countrywide denies any wrongdoing and disputes the OAG’s findings.

Under the Assurance, Countrywide agreed to:

• Engage an independent consultant acceptable to the OAG to statistically monitor certain of its discretionary pricing-related decisions.
• Conduct statistical monitoring of broker pricing decisions – especially the amount of broker compensation sought for loans – and implement remedial measures with respect to brokers who have unexplained pricing disparities.
• Implement procedures to monitor and track underwriting exceptions to ensure they are granted in a non-discriminatory manner.
• Conduct statistical monitoring to ensure that the choice of loan products and/or features are not being offered in a discriminatory manner.
• Provide enhanced disclosures with respect to reduced documentation loans.
• Review reduced documentation loans provided to black and Hispanic consumers, and offer those consumers the opportunity to provide full documentation and obtain a refund and/or reduced interest rate.
• Compensate black and Hispanic retail customers who received a subprime loan or "Alt-A" loan in 2004, but may have qualified for a better loan. The Assurance does not quantify the expected total cost of this relief.
• Implement a $3 million consumer education program.
• Pay $200,000 to the State for the cost of the investigation.

Update on FCRA Cases

On September 26, 2006, the Supreme Court of the United States granted certiorari to review the Ninth Circuit Court of Appeals’ decision in Reynolds v. Hartford Fin. Servs. Group, 435 F.3d 1081 (9th Cir. 2006). The Court will review whether an insurer must provide an "adverse action" notice under the Fair Credit Reporting Act ("FCRA") even if the insurer’s consultation of the consumer’s credit information has had either no impact or a favorable impact on the rates and terms of insurance offered or provided to the insured/potential insured. The Court will also review the Ninth Circuit’s determination that "willfully" in Section 1681n of the FCRA may be based on a finding of recklessness or gross negligence. The cases under review are Safeco Insurance Company of America, et al. v. Burr (No. 06-84) and GEICO General Insurance Co., et al. v. Edo (No. 06-100). Oral argument is scheduled for January 16, 2007.

FTC Puts a Permanent Halt to Illegal Spamming Operations

The Federal Trade Commission has brought a permanent halt to four illegal spamming operations. The FTC charged the operators with sending spam that violated provisions of the CAN-SPAM Act, and has halted the illegal spamming.

Identity Theft Task Force Announces Interim Recommendations

The President’s Identity Theft Task Force has adopted interim recommendations on measures that can be implemented immediately to help address the problem of identity theft. The Identity Theft Task Force, which was established by Executive Order of the President on May 10, 2006, and is now comprised of 17 federal agencies and departments, will deliver a final strategic plan to the President in November.

Federal Trade Commission Releases Report on Gas Price Manipulation

Deadline for U.S. Compliance With WTO Gambling Ruling Comes and Goes With No U.S. Action

The deadline for the United States to bring into compliance U.S. laws relating to the ban on Internet gambling that a World Trade Organization tribunal ruled against last year has passed. The U.S. government has taken no action to change the U.S. law that the WTO panel identified as violating U.S. WTO obligations. Thus, the United States is now subject to trade sanctions.

Scheidler et al. v. National Organization for Women, Inc. et al.

On February 28, 2006, the United State Supreme Court decided Scheidler et al. v. National Organization for Women, Inc. et al. The case reversed and remanded a Seventh Circuit Court of Appeals ruling that allowed RICO claims against anti-abortion protesters. The case has been back and forth between the Supreme Court and the Seventh Circuit Court of Appeals for over twenty years. The case can be found at 2006 U.S. LEXIS 2022 and 74 U.S.L.W. 4149.

Federal Trade Commission Amicus Brief Expresses Concern with Class Action Settlement Involving Coupons

The Commission has authorized the staff to file an amicus brief opposing a proposed class action settlement in Chavez v. Netflix, Inc., No. CGC-04-434884 (Sup. Court of San Francisco County, Cal.). The plaintiff in the case has alleged that Netflix failed to provide “unlimited” DVD rentals and “one day delivery” of DVDs as represented in its marketing materials.