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U.S. Supreme Court vacates decision on interest for escrow accounts, orders further review
On May 30, the U.S. Supreme Court vacated and remanded for further proceedings a 2022 decision by the Second Circuit that held that the National Bank Act preempted a New York state law requiring the payment of interest on mortgage escrow accounts. The plaintiff borrowers obtained home mortgage loans from a national bank and were required to make monthly deposits into escrow accounts for the payment of property taxes and insurance. New York law required the payment of interest on such accounts. When the national bank, relying on federal preemption, did not pay such interest, the borrowers sued. The district court rejected the bank’s preemption argument, but the 2nd Circuit reversed, holding that the state law significantly interfered with the bank’s exercise of its authorized power to create and fund escrow accounts (covered by InfoBytes here). The Supreme Court granted certiorari to resolve a split between the 2nd Circuit’s decision and an earlier decision of the 9th Circuit (covered by InfoBytes here).
The Supreme Court held that the 2nd Circuit did not properly apply the applicable preemption standard created by the Dodd-Frank Act. The Dodd-Frank Act preempts state law “only if” the state law (i) discriminates against national banks as compared to state banks; or (ii) “prevents or significantly interferes with the exercise by the national bank of its powers,” as determined “in accordance with the legal standard for preemption in the Supreme Court’s decision in Barnett Bank of Marion County, N. A. v. Nelson, Florida Insurance Commissioner, et al.”
Because the state law did not discriminate against national banks, the Court focused its analysis on the Barnett Bank/significant interference test. The Court held that “Barnett Bank did not purport to establish a clear line to demarcate when a state law ‘significantly interfere[s] with the national bank’s exercise of its powers[,]’” but instead “analyzed the Court’s precedents on that issue.” Stating that those precedents “furnish content to Barnett Bank’s significant interference test—and therefore also to Dodd-Frank’s preemption standard,” the Court then proceeded to analyze those same precedents, identifying cases that illustrate the types of state laws that do and do not constitute a “significant interference” with national bank powers. The Court ultimately concluded that a “court applying [the] Barnett Bank standard must make a practical assessment of the nature and degree of the interference caused by a state law.” In a footnote, the Court added that in “Barnett Bank and each of the earlier precedents, the Court reached its conclusions about the nature and degree of the state laws’ alleged interference with the national banks’ exercise of their powers based on the text and structure of the laws, comparison to other precedents, and common sense.”
Because the 2nd Circuit had not analyzed the preemption issue “in a manner consistent with Dodd-Frank and Barnett Bank,” the Court vacated its decision and remanded the case for further proceedings.
Massachusetts’ Attorney General settles with lender for alleged usury claims
On May 21, the Massachusetts Attorney General (AG) released an Assurance of Discontinuance against a lender for allegedly violating the state’s Consumer Protection Act (CPA) provision on unfair and deceptive acts and practices. Specifically, the AG stated that the lender made loans with “usurious interest rates” from May 30, 2018, to December 29, 2022. The AG also alleged that, although the CPA prohibited charging interest greater than 20 percent per year, the lender’s Massachusetts loans had an average APR above 100 percent and that the interest on these loans exceeded 20 percent “uniformly.” The lender neither admitted nor denied any of the AG’s findings.
Under the Assurance of Discontinuance the lender will perform a self-audit of all Massachusetts loans and pay a pro-rata refund to affected consumers totaling $625,000. The lender agreed to not “collect, attempt to collect, or assign any right to collect payment” on all defaulted and active loans. The lender must also submit a report based upon its self-audit to the AG.
Florida appellate court reverses crypto-asset company’s money license suspension
On May 22, a Florida appellate court set aside the state’s Office of Financial Regulation (OFR) Emergency Suspension Order (ESO), suspending a Florida-based digital assets company’s (Petitioner) money services business (MSB) license. The OFR issued the ESO because Petitioner’s controlling shareholder and CEO had entered into federal plea agreements for BSA/AML violations. Under Fla. Stat. § 120.60(6), the OFR “may” suspend an MSB’s license if the OFR finds the licensee posed an “immediate serious danger” to “public health, safety, or welfare.” However, the OFR may only take such action by procedure that would be “fair under the circumstances,” and must describe its “reasons” for concluding that the procedure was fair. Petitioner argued that the ESO, among other things, did not meet this standard, and the Court agreed.
The OFR’s ESO did not state specific reasons for concluding that its procedures were fair, and instead merely relied on § 120.60(6) for blanket authorization. According to the court, the ESO should have offered an explanation as to why less drastic measures were insufficient or acknowledged the potential harm to Florida consumers. To comply with the ESO, for example, Petitioner would need to liquidate all digital asset holdings for all Florida customers, with a total of 170,000 accounts, which would threaten financial harm and might create “unplanned and extensive” tax liabilities to customers. Because the ESO did not discuss the OFR’s reasoning or alternative remedies, the court held the ESO was not fair under the circumstances. As such, the court set aside the ESO, but stayed its order pending timely and authorized motions for rehearing.
2nd Circuit rules that text messages are not artificial voices
Recently, the U.S. Court of Appeals for the Second Circuit ruled that a text message did not violate the Telephone Consumer Protection Act (TCPA) and affirmed the lower court’s order. The appellate court granted the defendant’s motion to dismiss for failure to state a claim based on its finding that the TCPA did not apply. In December 2016, the defendant sent an automated text message to the plaintiff’s cell phone to market the defendant’s free chips promotion. The plaintiff no longer wished to receive these text messages, and accordingly, she responded to the promotion with a “STOP” message. The defendant then received a response stating that she would “no longer receive any more messages.” A few days later, the plaintiff received another automated text message with an offer.
The Court found that the TCPA did not apply because (1) the underlying system used to send the plaintiff a text message was not an automatic telephone dialing system (but rather a “stored” list of telephone numbers used), and (2) the message did not utilize “artificial or prerecorded voice,” each of which were required elements of prohibited activity under the TCPA.
District court dismisses FDCPA class action for lack of standing
Recently, the U.S. District Court for the District of New Jersey granted defendant debt collectors’ motion to dismiss a FDCPA class action without prejudice. In 2016, the defendants obtained the plaintiff’s credit card debt and then settled that debt with plaintiff for approximately half of the original amount owed. Thereafter, plaintiff initiated a putative class action alleging defendants made false and misleading representations in the collection letter because they did not specify if the total amount owed included interest, costs, or fees. To establish Article III standing, the Court stated that plaintiff must “allege some form of detrimental reliance on the representations made by a defendant in a collection letter.” The Court found that the plaintiff ultimately failed to demonstrate that the alleged missing interest information in defendants' collection letter was detrimental, and that “informational statements in the [c]ollection [l]etter are not an actual injury unless [p]laintiff acted on them.” Accordingly, the Court concluded that the plaintiff failed to allege any adverse effects of the misleading information, and as a result, failed to establish standing.
6th Circuit affirms district court’s decision to discard case for lack of standing
On May 17, the U.S. Court of Appeals for the Sixth Circuit affirmed a lower court’s sua sponte dismissal for lack of subject-matter jurisdiction. This case was brought by two nonprofit organizations seeking to halt the Department of Education’s (DOE) plan to provide participants in the Public Service Loan Forgiveness (PSLF) program with a one-time account adjustment that would allow time spent in excessive forbearance status to count toward debt forgiveness under the program, as announced in April 2022 and July 2023. Plaintiffs alleged standing on the basis that they “have previously employed, and currently employ, borrowers who participate, may become eligible to participate, or have previously participated in the statutory PSLF program” and “expect to recruit other such employees in the future.” Notably, and not long after filing their complaint in the lower court, plaintiffs filed an ex parte motion for a temporary restraining order and preliminary injunction, seeking to prevent the Department of Education from discharging any debt through the long-term forbearance aspect of the adjustment. Before defendants could respond, however, the U.S. District Court for the Eastern District of Michigan dismissed plaintiffs’ complaint sua sponte without prejudice.
On appeal, plaintiffs argued that they were not required to link the proposed adjustment to a specific tangible loss and that the adjustment injured them by reducing their expected benefits under a loan forgiveness program. The Sixth Circuit disagreed. It found plaintiffs failed to allege standing due to an injury resulting “from the [student loan] adjustment based on competitor standing and deprivation of a procedural right” and affirmed the dismissal for lack of subject-matter jurisdiction.
U.S. Supreme Court rules CFPB funding structure is constitutional
On May 16, the U.S. Supreme Court ruled 7-2 that the funding structure of the CFPB was consistent with the Constitution’s appropriations clause, reversing a decision of the U.S. Court of Appeals for the Fifth Circuit that had called the Bureau’s ability to continue operating without Congressional action into question. The Supreme Court recognized that the CFPB’s funding structure was unique: Congress authorized the Bureau to draw from the Federal Reserve System instead of appropriating funds through the annual appropriations process. However, the Supreme Court found that this unique feature did have constitutional significance. The only question presented was whether the Bureau’s funding mechanism was an “Appropriatio[n] made by Law.” The Supreme Court found that the answer was yes.
Specifically, the Supreme Court held that Congress’s statutory authorization to allow the Federal Reserve System to fund the CFPB satisfied the appropriations clause since “appropriations need only identify a source of public funds and authorize the expenditure of those funds for designated purposes to satisfy the Appropriations Clause,” and both criteria were met. The Supreme Court found the trade associations’ arguments as to why the Bureau’s funding mechanism violated the appropriations clause were unpersuasive.
The CFPB’s constitutionality was challenged following the Bureau’s promulgation of a 2017 regulation on payday lending. In response to a challenge to that regulation, the District Court for the Western District of Texas granted summary judgment to the CFPB; however, the U.S. Court of Appeals for the Fifth Circuit agreed with the trade associations’ arguments and reversed the lower court’s decision, holding that the CFPB’s funding mechanism violated the appropriations clause. The Supreme Court has now reversed this decision and remanded the case back to the court of appeals.
CFPB’s credit card late fee rule stayed
On May 10, the U.S. District Court for the Northern District of Texas entered an opinion and order granting the plaintiffs, comprising several trade organization, its motion for preliminary injunction and placed a stay on the CFPB’s credit card late fee rule. As previously covered by InfoBytes, a suit was filed against the CFPB by multiple trade organizations to challenge the Bureau’s final rule to amend Regulation Z and limit most credit card late fees to $8.
The court decided not to address the plaintiffs’ arguments regarding the CARD Act, TILA, and APA violations due to the Court of Appeals for the Fifth Circuit opinion that the CFPB's funding structure was unconstitutional; therefore, any regulations promulgated by the CFPB would be unconstitutional. For that reason, due to the CFPB’s unconstitutional structure found by the 5th Circuit, the District Court decided that all factors weighed in favor of issuing a preliminary injunction and thus staying the final rule.
11th Circuit rejects a proposed TCPA class action settlement
On May 13, the U.S. Court of Appeals for the Eleventh Circuit vacated and remanded a proposed TCPA class action settlement agreement. The class, consolidated from three class actions, accused the defendant, the “world’s largest services platform for entrepreneurs,” of violating the TCPA by using an automatic telephone dialing system to send unwanted calls and text messages to promote its products. The $35 million settlement and attorney’s fees, up to $10.5 million, was approved preliminarily in 2020.
According to the appellate court’s opinion, the district court abused its discretion in approving a proposed $35 million settlement because it: (i) did not consider the 2018 amendments to Rule 23(e)(2); (ii) overlooked possible collusion in the settlement agreement; and (iii) inadequately informed class members about the case. Additionally, the court incorrectly calculated the attorneys’ fees and wrongly treated the settlement as a common fund rather than a claims settlement. The class’s counsel was criticized for appearing to represent their own interests over those of the class since they were supposed to receive $10.5 million in fees. The court also found issues with the opt-out process, which was deemed overly complex and likely to discourage class members from opting out. As a result, the judgment was vacated.
District Court denies mortgage lender’s motion to dismiss against CFPB
On May 2, the U.S. District Court for the Southern District of Florida denied a mortgage lender’s motion to dismiss. The CFPB sued the lender in October 2023 for violating HMDA and Regulation C by intentionally misreporting data regarding borrower race, ethnicity, and sex pursuant to a data reporting requirement from a prior consent order. In a sample of the defendant’s data reporting submission, the CFPB allegedly found 51 data errors across seven data fields. The court sided with the CFPB on all four grounds raised in the lender’s motion to dismiss. First, the court found that the CFPB pleaded a plausible violation of the HMDA, sufficient to survive a motion to dismiss. Second, the court rejected the lender’s arguments that HMDA and Regulation C are “unconstitutionally vague” because they established a standard for covered loan data that meets a constitutional standard. Third, the court sided again with the CFPB in finding that the injunctive relief at issue did not qualify as an “obey the law” injunction since it provided reasonable clarity of what was required of the lender. And fourth, the court upheld the funding structure of the CFPB as constitutional, therein following guidance from the Second Circuit in upholding the structure as constitutional.