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On January 25, the U.S. District Court for the Southern District of California granted a bank’s motion to compel arbitration in connection with a lawsuit concerning the bank’s assessment of two types of fees. According to the order, the plaintiff filed a lawsuit asserting claims for breach of contract and violation of California’s Unfair Competition Law due to the bank’s alleged practice of charging fees for out-of-network ATM use and overdraft fees related to debit card transaction timing. The bank moved to compel arbitration pursuant to the arbitration provision in the deposit account agreement executed between the bank and the plaintiff. The plaintiff argued against arbitration, citing a California Supreme Court case, McGill v. Citibank, which held that “waivers of the right to seek public injunctive relief in any forum are unenforceable.” In response, the bank argued that (i) McGill does not apply because the plaintiff is not seeking public injunctive relief; and (ii) McGill is preempted by the Federal Arbitration Act (FAA). The court agreed with the bank, determining that the relief sought by the plaintiff would primarily benefit her, stating “any public injunctive relief sought by [plaintiff] is merely incidental to her primary aim of gaining compensation for injury.” As for preemption, the court noted that even if the McGill rule was applicable to a contract, it would not survive preemption as the U.S. Supreme Court has “consistently held that the FAA preempts states’ attempts to limit the scope of arbitration agreements,” and “the McGill rule is merely the latest ‘device or formula’ intended to achieve the result of rendering an arbitration agreement against public policy.”
On November 19, the U.S. Supreme Court declined to review the U.S. Court of Appeals for the 9th Circuit’s March decision, which held that a California law requiring banks to pay interest on mortgage escrow funds is not preempted by federal law. As previously covered by InfoBytes, a national bank petitioned for writ of certiorari in August, arguing the 9th Circuit’s decision—holding that the Dodd-Frank Act of 2011 codified the existing National Bank Act preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson—warranted further review “because it creates significant uncertainty about whether national banks must comply with similar laws in other states” and whether other state banking laws also apply to national banks. Additionally, the petition argued the uncertainty is exacerbated by the fact that the appellate court “disregarded and refused to enforce longstanding OCC regulations” and that the court interpreted the Barnett decision incorrectly.
District of Columbia moves to dismiss lawsuit alleging city’s student loan servicer regulations are preempted by federal law
On September 7, the District of Columbia filed a memorandum in support of its motion to dismiss a lawsuit claiming that the city’s regulations and requirements for student loan servicers are preempted by federal law. The plaintiff, a D.C.-based trade group whose membership consists of national student loan servicers, argues in its complaint that various provisions of District of Columbia Law 21-214, and rules promulgated thereunder, are preempted by the Federal Higher Education Act (HEA). For example, the complaint alleges that the licensing, examination, and annual reporting requirements are expressly preempted by the HEA, and the requirement to provide records to the D.C. Commissioner of Securities and Banking, upon request, violates the requirement that third party requests for records be made directly to the Department of Education.
The city countered that the potential harm is “hypothetical” and the plaintiff’s preemption claims are insufficient to establish standing. Several nonprofit groups filed an amicus brief in support of the city, stating that the lawsuit “is part of a strenuous effort by the Department and loan servicers not to protect federal interests, but to reach an outcome whereby no government entity provides meaningful regulation.” Moreover, the amicus brief claims that the lawsuit was filed following the Department’s Interpretation issued last March (as previously covered in InfoBytes here), which took the position that state regulation of Direct Loan servicing is broadly preempted by the HEA because it “impedes uniquely Federal interests,” and state regulation of the servicing of Federal Family Education Program Loans “is preempted to the extent that it undermines uniform administration of the program.”
On May 16, a panel of three judges on the U.S. Court of Appeals for the 9th Circuit denied the petition for an en banc rehearing of its March decision, which held that a California law that requires a bank to pay interest on escrow funds is not preempted by federal law. In addition to the national bank’s appeal for a rehearing, the OCC notably filed an amicus brief supporting the rehearing, arguing that the court “comprehensively misinterpreted” the Supreme Court’s 1996 decision Barnett Bank of Marion County v. Nelson. (Previously covered by InfoBytes here.) The panel noted that the full court had been advised of the bank’s petition for rehearing, and no judge had requested a vote on rehearing.
On April 24, the OCC filed an amicus curiae brief in support of an en banc rehearing of the U.S. Court of Appeals for the 9th Circuit’s March decision, which held that a California law that requires the bank to pay interest on escrow funds is not preempted by federal law. As previously covered by InfoBytes, the 9th Circuit held that the Dodd-Frank Act of 2011 (Dodd-Frank) essentially codified the existing National Bank Act (NBA) preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson.
In a strongly worded brief, the OCC states that the court “errs in matters of fundamental importance to the national banking system” and “comprehensively misinterpreted” Barnett Bank and the cases upon which that decision rests. The OCC specifically argues that the court misinterpreted the legal standard for preemption articulated by Barnett Bank, ignored applicable Supreme Court standards prescribing a test for reviewing preemptive regulations, improperly created a burden of proof on national banks to demonstrate Congressional intent as to preemption, and inappropriately imposed a higher bar for “large corporate banks” to show state law interference. The OCC also argues that the court’s reliance on the effective dates of the Dodd-Frank provisions relied upon by the Court pre-date the transactions that were at issue in the case, and would therefore have no application to the facts of the case.
This filing supports the national bank’s petition for en banc rehearing filed April 13 and previously covered by InfoBytes here.
Bank petitions for rehearing of 9th Circuit preemption decision; OCC to file amicus brief in support of bank
On April 13, a national bank filed a petition for an en banc rehearing of the U.S. Court of Appeals for the 9th Circuit’s March decision, which held that a California law that requires the bank to pay interest on escrow funds is not preempted by federal law. As previously covered by InfoBytes, the 9th Circuit held that the Dodd-Frank Act of 2011 (Dodd-Frank) essentially codified the existing National Bank Act (NBA) preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson. The panel cited to Section 1639d(g)(3) of Dodd-Frank, which, according to the opinion, expresses Congress’ view that the type of law at issue does not “prevent or significantly interfere with a national bank’s operations” because the law does not “prevent or significantly interfere” with the national bank’s exercise of its power. Additionally, the 9th Circuit concluded that the OCC’s 2004 preemption regulation had no effect on the preemption standard.
In its petition for rehearing, the bank argues that the 9th Circuit’s decision, if allowed to stand, “will create confusion regarding which state laws apply to national banks and restrict the terms on which they may extend credit” because the decision conflicts with previous decisions by the same court, the Supreme Court, and other circuits. The bank also acknowledges the OCC’s intent to file an amicus curiae brief in support of the petition no later than April 23.
Student loan servicer seeks declaratory and injunctive relief to resolve dispute concerning preemption of state law
On April 4, a Pennsylvania-based student loan servicer (servicer) that services federal student loans on behalf of the U.S. Department of Education (Department) filed a complaint in the U.S. District Court for the District of Columbia against the Connecticut Department of Banking and its banking commissioner (together, the Connecticut Defendants), and the Department, seeking a judicial determination that the federal Privacy Act of 1974 (Privacy Act) preempts Connecticut law requiring the servicer to disclose certain records containing confidential information about its student loan borrowers to the state, along with data related to borrower complaints, or risk revocation of its state servicer’s license. In addition, the servicer seeks injunctive relief against the Connecticut Defendants to prevent the enforcement of state law in contravention of the Privacy Act and revocation of the servicer’s license.
In support of the injunctive relief sought, the servicer cites several irreparable harms, including (i) the potential termination of its federal loan servicing contract; (ii) the revocation of its license to service, which would adversely affect approximately 100,000 student borrowers in the state, and (iii) the potential impact on loan servicing arrangements that the servicer has with “dozens of private lenders doing business in Connecticut.”
As previously covered in InfoBytes, on March 12 Department Secretary Betsy DeVos published an Interpretation that asserted the position that state “regulation of the servicing of Direct Loans” is preempted because it “impedes uniquely Federal interests,” and state regulation of the servicing of loan under the Federal Family Education Loan Program “is preempted to the extent that it undermines uniform administration of the program.” However, last month—as discussed in InfoBytes—a bipartisan coalition of 30 state Attorneys General released a letter urging Congress to reject Section 493E(d) of the Higher Education Act reauthorization—H.R. 4508, known as the “PROSPER Act”—which would prohibit states from “overseeing, licensing, or addressing certain state law violations by companies that originate, service, or collect on student loans.” The states expressed a concern that, if enacted, the law would preempt state consumer protection laws for student borrowers and constitute “an all-out assault on states’ rights and basic principles of federalism.”
On March 21, the U.S. District Court for the District of Colorado held that the Federal Deposit Insurance Act (FDIA) does not completely preempt a Colorado state regulator’s claims that a non-bank lender violated state law and remanded the case back to state court. The underlying action results from charges brought by the administrator of Colorado’s Uniform Consumer Credit Code against a non-bank lender – which the administrator argues is the “true lender” of loans issued by a New Jersey-chartered bank – for allegedly overcharging interest and other fees in violation of state law. In granting the motion to remand, the court noted that the administrator sufficiently alleged the non-bank was the “true lender” of the loans in question as the non-bank provided the website through which customers apply for the loans, determined the criteria for marketing the loans, decided which applications receive loans, and purchased the loans within two days after they were made by the New Jersey bank. The district court concluded that while courts are split as to banks, because the true lender of the loans was a non-bank, complete preemption by FDIA does not apply even though the non-bank lender has a “close relationship” with a state or national bank. The district court also stated that whether the non-bank is a “true lender” is “not relevant to the issues of complete preemption, which determine whether remand is warranted.”
On March 12, the U.S. Department of Education published an Interpretation in the Federal Register, which takes the position that state regulation of servicers of loans made under the William D. Ford Federal Direct Loan Program (Direct Loans) and the Federal Family Education Loan Program (FFEL Program Loans) is preempted by Federal law. Specifically, the Department noted that state “regulation of the servicing of Direct Loans” is preempted because it “impedes uniquely Federal interests,” and state regulation of the servicing of FFEL Program Loans “is preempted to the extent that it undermines uniform administration of the program.” The Interpretation was issued in response to several states having recently enacted regulatory regimes, or sought to apply existing consumer protection statutes, imposing additional requirements on such student loan servicers. The Ranking Member of the House Committee on Education and the Workforce, Representative Bobby Scott, D-VA, issued a statement following the notice of publication on March 9, disagreeing with the Department’s Interpretation: “Congress has not given the Secretary the authority to preempt state consumer protection law for student borrowers. . . . I urge the Secretary to reverse this egregious overreach of Federal authority to rescind states’ ability to protect student borrowers and hold unscrupulous servicers accountable.”
On March 2, the U.S. Court of Appeals for the 9th Circuit held that a national bank must comply with a California law that requires mortgage lenders to pay interest on the funds held in a consumer’s escrow account because the law does not “prevent or significantly interfere” with the national bank’s exercise of its power. The case results from a 2014 lawsuit in which a consumer sued the national bank for refusing to pay interest on the funds in his mortgage escrow account as required by a California state law. The district court dismissed the action, holding that the California state law interfered with the bank’s ability to perform its business making mortgage loans and therefore, was preempted by the National Bank Act (NBA).
In reversing the district court’s decision, the 9th Circuit held that the Dodd-Frank Act of 2011 (Dodd-Frank) essentially codified the existing NBA preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson. The panel cited to Section 1639d(g)(3) of Dodd-Frank (“if prescribed by applicable State or Federal law, each creditor shall pay interest to the consumer on the amount held in any . . . escrow account that is subject to this section in the manner as prescribed by that applicable State or Federal law”), which, according to the opinion, expresses Congress’ view that the type of law at issue does not “prevent or significantly interfere with a national bank’s operations.” Moreover, the panel disagreed with the national bank’s reliance on the OCC’s 2004 preemption regulation, which interpreted the standard more broadly, by concluding that the regulation had no effect on the preemption standard. This decision could have significant implications for the rise of preemption by federally chartered banks.
- Jeffrey S. Hydrick to discuss "State legislative update" at the NMLS Annual Conference & Training
- Kathryn L. Ryan to speak at the "Business model primer" at the NMLS Annual Conference & Training
- Daniel P. Stipano to discuss "Dynamic customer due diligence and beneficial ownership from KYC to ongoing CDD and the new rule implementation" at the Puerto Rican Symposium of Anti-Money Laundering
- Jon David D. Langlois to discuss "Regulatory risks of convenience fees" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Michelle L. Rogers to discuss "Preparing for servicing exams in the current regulatory environment" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- APPROVED Webcast: NMLS Annual Conference & Ombudsman Meeting: Review and recap
- Brandy A. Hood to discuss "Keeping your head above water in flood insurance compliance" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Melissa Klimkiewicz to discuss "Servicing super session" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jessica L. Pollet to discuss "Law & compliance speedsmarts" at the American Financial Services Association Law & Compliance Symposium
- Daniel P. Stipano to discuss "Lessons learned from recent high profile enforcement actions" at the Florida International Bankers Association AML Compliance Conference
- Moorari K. Shah to provide "Regulatory update – California and beyond" at the National Equipment Finance Association Summit
- Sasha Leonhardt and John B. Williams to discuss "Privacy" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Aaron C. Mahler to discuss "Regulation B/fair lending" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Heidi M. Bauer to discuss "'So you want to form a joint venture' — Licensing strategies for successful JVs" at RESPRO26
- Jonice Gray Tucker to to discuss "DC policy: Everything but the kitchen sink" at CBA Live
- Jonice Gray Tucker to discuss "Small business & regulation: How fair lending has evolved & where are we heading?" at CBA Live
- Daniel P. Stipano to discuss "Lessons learned from ABLV and other major cases involving inadequate compliance oversight" at the ACAMS International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "A year in the life of the CDD final rule: A first anniversary assessment" at the ACAMS International AML & Financial Crime Conference
- Moorari K. Shah to discuss "State regulatory and disclosures" at the Equipment Leasing and Finance Association Legal Forum
- Hank Asbill to discuss "Pay no attention to the man behind the curtain: Addressing prosecutions driven by hidden actors" at the National Association of Criminal Defense Lawyers West Coast White Collar Conference
- Daniel P. Stipano to discuss "Keep off the grass: Mitigating the risks of banking marijuana-related businesses" at the ACAMS AML Risk Management Conference
- Daniel P. Stipano to discuss "Mid-year policy update" at the ACAMS AML Risk Management Conference
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program