Consumer Financial Services Alert - January 15, 2008

Two federal courts recently came to different conclusions on whether to allow injunctive relief classes in consumer class actions. In Drinkman v. Encore Receivable Management, the Western District of Wisconsin granted class certification to an injunctive relief class in a Fair Debt Collection Practices Act case alleging that pre-recorded messages failed to meaningfully disclose that the calls were from a debt collector. Because the primary relief sought was injunctive and because the defendant had acted “on grounds generally applicable to the class,” the Court allowed an injunctive class under Federal Rule 23(b)(2). See Drinkman v. Encore Receivable Management, Inc., No. 07-CV-363, W.D.Wis. Dec. 7, 2007.

Conversely, the Western District of Oklahoma denied an injunctive relief class in Barnes v. Countrywide, a case challenging the application of a particular prepayment penalty to a putative 12,000-member class. The Court concluded that since the prepayment period had expired for all but a handful of class members, the interpretation of the prepayment penalty no longer had general application to the class. It also found that the separate declaratory relief sought (that plaintiff’s interpretation of the prepayment provision was correct) did not correspond to any injunctive relief and thus was not appropriate for a Rule 23(b)(2) class. Goodwin Procter partner Jim McGarry represented Countrywide in this case. Click here for a copy of Barnes v. Countrywide Home Loans, Inc., No. CN-06-558-M, Dec. 18, 2007.

The SEC issued a letter addressing the FAS 140 accounting implications of the American Securitization Forum’s Streamlined Foreclosure and Loss Avoidance Framework. The ASF developed the Framework to encourage mortgage loan servicers to modify certain adjustable-rate subprime mortgage loans with particular risk characteristics that make them susceptible to default. For loans classed as “Segment 2” by the ASF Framework, modification may take the form of freezing the interest rate at the current introductory rate for five years from the upcoming reset date. The industry has questioned whether such modifications would violate the issuer’s qualifying special-purpose entity status under FAS 140 and risk the off-balance sheet accounting treatment of the loans. This is because FAS 140 significantly limits the ability of a specialized entity and its agents (including its servicers) to modify loans, unless default or delinquency is reasonably foreseeable. In its letter, the SEC states that it will not object to continued status as a special-purpose entity if Segment 2 loans are modified pursuant to the specific screening criteria in the ASF Framework. The SEC also states that it expects registrants to provide sufficient disclosures in filings with the SEC regarding the impact that the ASF Framework has had on qualifying special-purpose entities that hold subprime ARMs. Appendix A of the letter lists certain disclosures that registrants should consider providing. Click here for a copy of the SEC’s letter and here for a copy of the ASF Framework.

The Third Quarter 2007 issue of FDIC Quarterly features an article on the analytical case for a systematic and streamlined loan modification process that will help avert foreclosure for borrowers who are current on their loans, but who cannot refinance or afford the higher payments when interest rates reset. Click here for a copy of the article.

The Fourth Circuit cut in half an emotional distress damages award against a credit reporting service in Sloane v. Equifax Information Services LLC. The plaintiff had her identity stolen and repeatedly asked the reporting services to correct her credit as a result. Although the reporting service allegedly made numerous and repeated errors in correcting plaintiff’s information, the Court found the jury’s $245,000 emotional damages award excessive, reducing it to $150,000, which it recognized was still substantially higher than typical Fair Credit Reporting Act emotional distress awards. The Court found the reduced, yet still high, award justified in light of the repeated violations, multiple errors and long delays in correcting plaintiff’s information. Click here for a copy of Sloane v. Equifax Information Services LLC., 4th Cir., No. 06-2044, Dec. 27, 2007.

The IRS issued guidance on how individuals should allocate prepaid qualified mortgage insurance premiums and how entities receiving premiums should report them. Qualified mortgage insurance premiums paid or accrued in 2007 for qualified mortgage insurance contracts issued in 2007 can be treated as deductible qualified residence interest. However, if the premiums are prepaid, the deduction is limited to the amount allocable to 2007. In addition, the allocable amount may be reduced or eliminated due to the phaseout of the qualified residence interest deduction for higher-income taxpayers. Click here for a copy of the guidance.