InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
District Court dismisses suit challenging Biden’s student debt relief plan
On August 14, the U.S. District Court for the Eastern District of Michigan dismissed without prejudice a lawsuit filed against the federal government aimed at blocking the Biden administration’s effort to provide debt relief to student borrowers (covered by InfoBytes here). U.S. District Judge Thomas L. Ludington held that the plaintiffs lacked standing because they failed to plausibly demonstrate how the government’s plans would impact their efforts to recruit participants as qualified employers under the Public Service Loan Forgiveness program. The court detailed that “[Plaintiffs] merely make vague and conclusory statements that some ‘undisclosed’ number of borrowers will receive credit toward loan forgiveness for some periods of forbearance” but “do not allege that any current employee received Adjustment credit.” Furthermore, any such “hypothetical injur[y]” would be traceable to “Plaintiffs’ own employees or prospective employees, not the Adjustment.” Because there was no standing, the court dismissed the complaint without prejudice and denied the plaintiffs’ motion for a temporary restraining order and preliminary injunction as moot.
Plaintiffs file suit challenging Biden’s latest student debt relief plan
On August 4, two nonprofit entities filed a lawsuit against the federal government aimed at blocking the Biden administration’s recent effort to provide debt relief to student borrowers. The administration’s efforts were implemented in response to the Supreme Court’s June 30 decision striking down the DOE’s student loan debt relief program that would have canceled between $10,000 and $20,000 in debt for certain student borrowers (covered by InfoBytes here). The lawsuit, filed in the U.S. District Court for the Eastern District of Michigan, targets the administration’s efforts to credit borrowers participating in the Public Service Loan Forgiveness (PSLF) plan and Income-Driven Repayment (IDR) plan by providing credit for periods when loans were in forbearance or deferment, which would affect more than 804,000 borrowers, forgiving approximately $39 billion in loan payments, according to the DOE.
As an initial matter, plaintiffs assert that they are injured by the administration’s actions because, as 501(c)(3) nonprofit organizations, they benefit from the PSLF program by allowing them to “attract and retain borrower-employees who might otherwise choose higher-paying employment with non-qualifying employers in the private sector.” Thus, according to plaintiffs, cancellation of PSLF loans would reduce the incentive for borrowers to work at public service employers and the decision “unlawfully deprives [PSLF] employers of the full statutory benefit to which they are entitled under PSLF.”
Plaintiffs accuse the administration of putting the plan on an “accelerated schedule apparently designed to evade judicial review.” The plaintiffs assert that the DOE lacks authority to classify “non-payments as payments,” and that the statutes for the PSLF and IDR programs require actual payments to qualify for forgiveness under each plan. The suit brings four claims against the administration: (i) violation of the Appropriation Clause of the U.S. Constitution by canceling debt that Congress did not authorize; (ii) violation of the Administrative Procedure Act (APA) by issuing a final agency decision without appropriate statutory authority; (iii) violation of the APA by taking an arbitrary and capricious agency action by failing to “explain why [DOE] has changed its policy from not crediting non-payments during periods of loan forbearance to crediting such payments for purposes of PSLF and IDR forgiveness” and “entirely fail[ing] to consider the cost to taxpayers of crediting periods of forbearance toward PSLF and IDR forgiveness,” among other reasons; and (iv) violation of the APA by failing to undertake notice-and-comment procedures in implementing the changes.
District Court says bank discrimination suit can proceed
On July 21, the U.S. District Court for the Western District of Michigan denied a bank’s motion to dismiss plaintiff’s allegations that she was discriminated against on the basis of race when her account was frozen due to a purported suspicious deposit. Plaintiff, an African-American woman, sued the bank claiming violations of both federal and state anti-discrimination laws after she was allegedly questioned by bank employees about the authenticity of a check she tried to deposit in the amount of $27,616, which was money she received from a legal settlement. Plaintiff claimed that the bank maintained the check was fraudulent and soon afterward froze her account and deactivated her debit card. Plaintiff further stated that her debit card remained frozen even after her attorney explained the legal settlement to the bank and her check was cleared. Claiming the bank’s treatment was racially discriminatory, plaintiff maintained that because bank “employees assumed that her ‘having money must be evidence of fraud or wrongdoing,’” she suffered financial hardships and “significant emotional and physical distress.” The bank argued that plaintiff failed to state a claim because she has not shown a connection between the bank’s actions and her race and claimed the bank employees were acting to prevent fraud.
The court disagreed, ruling that due to the bank’s alleged actions and the fact that plaintiff’s account was frozen in violation of its own policies, discriminatory intent is plausible. The court noted that “most significantly,” plaintiff’s account remained frozen for eight days after the check cleared and the possibility of fraud was discounted. The court reasoned that defendant failed to explain why its fraud-prevention policies would justify keeping an account frozen after a check has been cleared. “[A] defendant’s hostile treatment of a plaintiff can allow for an inference of discriminatory intent even if the defendant’s actions lack a direct connection to race,” the court wrote, noting that fraud prevention does not fully explain all of the bank’s actions, which “went beyond” simply conveying suspicion about a potentially fraudulent check or freezing plaintiff’s account.
Michigan Supreme Court limits applicability of “usury savings clauses”
On June 23, the Michigan Supreme Court reversed a circuit court’s decision on a case involving Michigan’s “longstanding prohibition on excessive interest rates for certain loans.” The case involved a “usury savings clause,” which is a term sometimes used in notes, which requires the borrower to pay the maximum legal interest rate if the contractual terms impose an illegal rate. In the case, a nonbank investment group (plaintiff) lent a realty service company (defendant) $1 million to flip tax-foreclosed homes. Plaintiff sued for breach of contract and fraud after defendant discontinued payments after paying more than $140,000 in interest on the loan. Defendant argued that plaintiff violated the criminal usury statute by, “knowingly charging an effective interest rate exceeding 25%,” which it alleged barred plaintiff from recovering on the loan under the wrongful-conduct rule.
The circuit court determined that the fees and charges associated with the loan constituted disguised interest, making the total interest the plaintiff was seeking above the legal 25% limit and “criminally usurious.” However, the court agreed with the defendant that the usury savings clause was enforceable and the note was not facially usurious. Nevertheless, “the court agreed that the appropriate remedy is to relieve [defendant] of its obligation to pay the interest on the loan but not its obligation to repay the principal.”
The Michigan Supreme Court held that in determining whether a loan agreement imposes illegal rates of interest, a usury savings clause is ineffective if the loan agreement requires a borrower to pay an illegal interest rate, even if the interest is labeled as a “fee” or something else. Further, the court held that enforcing usury savings clauses would undermine the state’s usury laws because it would nullify the statutory remedies for usury, which would relieve lenders of their obligation to ensure that their loans have a legal interest rate. The court also held that a lender is not criminally liable for seeking to collect on an unlawful interest rate in a lawsuit. The court reasoned that seeking relief through the court of law is generally encouraged over extrajudicial means. According to the opinion, the court held that “[t]he appropriate remedy for a lender’s abusive lawsuit is success for the borrower in that lawsuit and appropriate civil sanctions, not a criminal conviction for usury.”
Michigan Court of Appeals affirms dismissal of post-judgment interest case, says state court rule precludes class actions
On April 21, the Michigan Court of Appeals affirmed a trial court’s dismissal of a post-judgment interest putative class action after concluding that a court rule that precludes “‘actions’ based on claimed violations of statutes that permit[ ] recovery of statutory damages in lieu of actual damages” necessitated the dismissal of the plaintiff’s class action claim. According to the opinion, after the plaintiff defaulted on her $900 credit card debt, the debt was assigned to the defendant debt collector who calculated the plaintiff’s unpaid balance to be $6,241.20. The defendant sought judgment against the plaintiff in that amount, plus interest, fees, and costs, and obtained a default judgment against the plaintiff after she did not respond. The defendant consequently obtained several writs of garnishment, all of which indicated that post-judgment interest had been added to the debt. Several years later, the plaintiff filed a putative class action alleging the defendant violated the FDCPA and the Michigan Regulation of Collection Practices Act (RCPA) by overstating how much she owed “and by impermissibly inflating [defendant’s] costs and the amount of interest it charged.” The state trial court dismissed the plaintiff’s class action claims with prejudice on the basis that Michigan Court Rules (MCR) preclude her from recovering statutory damages under the RCPA because the RCPA does not explicitly permit class actions. The court also dismissed her individual claims for lack of subject-matter jurisdiction.
On appeal, the plaintiff argued that the trial court erred when it dismissed her class action claims under MCR because she also sought equitable relief and actual damages; however, the Michigan Court of Appeals pointed to a provision in the MCR that states “[a]n action for a penalty or minimum amount of recovery without regard to actual damages imposed or authorized by statute may not be maintained as a class action unless the statute specifically authorizes its recovery in a class action.” The Court of Appeals explained that the RCPA is implicated under this rule because (i) it permits the recovery of statutory damages; and (ii) does not contain a provision explicitly permitting class actions, and as such, “plaintiff’s class action claims must be dismissed irrespective of the fact that she also sought injunctive relief, declaratory relief, and actual damages.” The Court of Appeals further held that even if the plaintiff attempted to plead individual claims, the case would not be allowed to proceed because the actual damages in this case are not high enough to meet the jurisdictional minimum amount in Michigan.
FDIC announces Michigan disaster relief
On July 23, the FDIC issued FIL-52-2021 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Michigan affected by severe storms, flooding, and tornadoes. The FDIC acknowledged the unusual circumstances faced by institutions affected by the storms and suggested that institutions work with impacted borrowers to, among other things, (i) extend repayment terms; (ii) restructure existing loans; or (iii) ease terms for new loans to those affected by the severe weather, provided the measures are done “in a manner consistent with sound banking practices.” Additionally, the FDIC noted that institutions “may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery.” The FDIC further stated that it will also consider regulatory relief from certain filing and publishing requirements.
Michigan regulator urges institutions to protect stimulus payments from overdrafts, fees
On March 15, the Michigan Department of Insurance and Financial Services issued a bulletin “strongly” encouraging financial institutions to protect payments made to customers under the American Rescue Plan from overdrafts and fees. The bulletin further instructs that if a financial institution’s system automatically applies such a payment to a preexisting overdraft, the institution should reverse the application of the direct payment as promptly as possible.
Michigan regulators, business associations urge underserved businesses to apply for PPP loans
On March 15, the Michigan Department of Insurance and Financial Services, the Michigan Bankers Association, Community Bankers of Michigan, the Michigan Credit Union League and the National Business League urged minority-owned and other underserved businesses in Michigan to apply for forgivable loans through the Paycheck Protection Program (PPP) prior to the March 31, 2021 deadline. The announcement highlighted that community development financial institutions offer specialized support to underserved communities and can assist customers with limited or no credit history to obtain a PPP Loan.
FDIC encourages regulatory relief for Michigan borrowers affected by severe weather
On July 16, the FDIC issued FIL-70-2020 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Michigan affected by severe storms and flooding from May 16 through May 22. In the guidance, the FDIC encourages institutions to consider, among other things, (i) extending repayment terms; (ii) restructuring existing loans; or (iii) easing terms for new loans to borrowers affected by the severe weather, provided the measures are “done in a manner consistent with sound banking practices, can contribute to the health of the local community and serve the long-term interests of the lending institution.” Additionally, the FDIC notes that institutions may receive Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery. The FDIC states it will also consider relief from certain filing and publishing requirements.
Find continuing InfoBytes coverage on disaster relief guidance here.
Michigan regulator announces that annual regulatory assessment invoices have been emailed to insurers
The Michigan Department of Insurance and Financial Services (DIFS) announced that, in light of many offices working remotely during the Covid-19 outbreak, it has emailed invoices for annual regulatory assessments to licensed insurance companies. Previously, these invoices were typically mailed. As such, all licensed insurers should have received their electronic invoices on or before June 30. DIFS encouraged insurers to use the its e-payment option to pay the invoice.