InfoBytes Blog

California Federal Court Holds State Law Claims Preempted by FCRA

On October 30, the U.S. District Court for the Central District of California held that a claim brought under California Bus. & Prof. Code § 17200 was preempted by the Fair Credit Reporting Act (FCRA) because it related to the responsibilities of a furnisher of information to credit reporting agencies (CRAs). Forester v. Pennsylvania Higher Education Assistance Agency, No. SACV 09-0930, 2009 WL 3710517 (C.D. Cal. Oct. 30, 2009). The consumer in Forester sued the servicer of his student loans, alleging that the servicer violated FCRA and Cal. Bus. & Prof. Code § 17200 by failing to investigate the accuracy of their credit reporting after the consumer filed a “Notice of Dispute” and that the servicer violated Cal. Bus. & Prof. Code §§ 17200 and 17500 by falsely promising that the consumer’s credit report would not show any derogatory history if the consumer rehabilitated his student loans. The servicer argued that FCRA preempted the state law claims. Acknowledging that FCRA and § 17200 both “relate to the duties of the furnishers of information to CRAs,” and following the recent trend of courts in the Ninth Circuit that hold that FCRA “totally preempts ‘all state statutory and common law causes of action which fall within the conduct proscribed by [15] § 1681s-2 [Section 623 of FCRA],’” the court found that FCRA clearly preempted the consumer’s claims, which relate to the servicer’s responsibilities as furnishers of information to CRAs, the court dismissed the consumer’s state law claims. The court, however, refused to dismiss the consumer’s FCRA claims, rejecting the servicer’s argument that they were time-barred because the alleged violation was a failure to investigate the item raised in the dispute, which occurred during the limitations period. 

Connecticut “Debt Negotiation” License Required For Certain Activities Performed on Behalf of Connecticut Debtors

Effective October 1, the Connecticut Department of Banking will require licensure for “debt negotiation” - including loan modification, short sales or foreclosure rescue activities - performed on behalf of Connecticut debtors. Persons triggering debt negotiation licensure must license a corporate or “main office,” as well as all branch locations where debt negotiation will occur. The application process requires, among other things, the submission of forms as drafted by the Department, licensing fees, and surety bond and personal forms for “control persons.” Connecticut law exempts from the debt negotiation licensing requirements (i) an attorney admitted to practice in Connecticut, when engaged in such practice, (ii) certain banks and credit unions (however, subsidiaries of such institutions other than operating subsidiaries of federal banks and federally-chartered out-of-state banks are not exempt from licensure), (iii) licensed Connecticut debt adjusters, while performing debt adjuster services, (iv) individuals performing “debt negotiation” under court order, and (v) a “bona fide nonprofit organization.”

Illinois Governor Signs Legislation Relating to Residential Property Foreclosures

On July 31, Illinois Governor Pat Quinn signed two bills (HB 3863 and HB 153) amending the Illinois Code of Civil Procedure in connection with residential property foreclosures. Among other things, HB 3863 requires certain entities - such as lenders acting in the capacity of a mortgagee in possession of REO - to (i) make a good faith effort to ascertain the identities and addresses of all known occupants of the property, and (ii) notify known occupants that such property has been acquired, as well as provide information about the new ownership and occupants’ rights. HB 3863 becomes effective 90 days after July 31. For a foreclosure action filed on or before the effective date of the amendments, the relevant entities will have an additional 60 days to comply with the new provisions. HB 153 requires any deed executed pursuant to the Mortgage Foreclosure Act (or similar judgment vesting title by a consent foreclosure) to state the grantee’s or mortgagee’s name, the name of a contact person, street and mailing address, and telephone number. HB 153 became effective July 31.

Washington Enacts Foreclosure Law Requiring Contact With Borrowers Before Filing Notice of Default

Washington Governor Christine Gregoire recently signed a bill, SB 5810, prohibiting trustees, beneficiaries, or authorized agents from filing a notice of default until at least 30 days after contacting the borrower or attempting with due diligence to contact the borrower. The new contact requirements apply only to deeds of trust made from January 1, 2003, to December 31, 2007 that are recorded against owner-occupied residential real property. Under the new law, a trustee or beneficiary must contact or diligently attempt to contact the borrower by letter and by telephone in order to assess the borrower’s financial ability to pay the debt secured by the deed of trust and explore options for the borrower to avoid foreclosure. Any notice of default subsequently filed must include a declaration stating that contact was made or diligently attempted. In addition, the new law requires trustees, prior to recording a notice of sale with respect to residential real property, to have proof that the beneficiary is the owner of any promissory note or other obligation secured by the deed of trust. Lastly, the new law provides that a tenant or subtenant in possession of a residential real property at the time the property is sold in foreclosure must be given sixty days’ written notice to vacate before the tenant or subtenant may be removed from the property. The bill becomes effective July 26, 2009. The provisions regarding contact with a borrower in default are set to expire on December 31, 2012

Washington Legislature Enacts “Prevent or Reduce Owner-Occupied Foreclosure Program”

On May 7, 2009, Washington Governor Christine Gregoire signed into law S.B. 6033, which creates the “Prevent or Reduce Owner-occupied Foreclosure Program” (PROOF). The Act requires the Washington Department of Financial Institutions (Department) and the Washington State Housing Finance Commission (Commission) to enter into an interagency agreement to implement and administer the program. The Commission, in consultation with the Department, will assist households and individuals facing foreclosure in obtaining work-out or modification agreements with their creditors. The Commission must also provide an annual report in which the Commission will create specific metrics and criteria by which the PROOF program can be measured. Section 4 of the Act, which would have required the State Housing Finance Commission to establish a program oversight committee, was vetoed by the Governor.

First Circuit Holds State Law Claims Insufficient to Defeat HOLA Preemption Defense

On April 3, the U.S. Court of Appeals for the First Circuit upheld the denial of a plaintiff’s state law claims in a case involving default interest charged on a credit card. Yeomalakis v. Federal Deposit Insurance Corporation, No. 08-1444, 2009 WL 884936 (1st Cir. Apr. 3, 2009). The plaintiff’s credit card issuer, Washington Mutual Bank (WaMu), charged an increased annual percentage rate (APR) on unpaid credit card balances on accounts where the holder defaulted. The increased rate was charged as of the first day of the billing cycle in which the default occurred. James Yeomalakis brought suit against WaMu to challenge this practice. The plaintiff claimed that WAMU (i) imposed an illegal penalty by retroactively increasing the APR and (ii) engaged in unfair and deceptive acts and practices in violation of Mass. Gen. Law ch. 93A, § 2, alleging that the retroactive increases were unfair and had not been adequately disclosed. The district court granted WaMu’s motion to dismiss the claims on the basis that both counts were preempted by the Home Owners’ Loan Act of 1933 (HOLA) and various regulations promulgated under HOLA, based on preemption of state interest rates (which includes penalties) and disclosures. On appeal, the plaintiff failed to make any plausible arguments as to why the penalty claim would not be preempted, and, further, the plaintiff provided no clear chapter 93A claim that would avoid preemption. The court of appeals indicated that the plaintiff could have alleged state contractual claims (that the card agreement did not permit the “retroactive” increase in APR) and/or state fraud claims, which may not be preempted by HOLA. However, the court pointed out that it is not the job of the court to provide arguments for a party that has not provided them, and the court upheld the lower court’s dismissal of the claims.

California Enacts Law Aimed at Preventing Foreclosures

On February 20, California Governor Arnold Swarzenegger signed the California Foreclosure Prevention Act (the Act) into law, which requires a person that files a notice of default to wait six months (versus three months) before filing a notice of sale. The waiting period is extended only if (i) the loan is secured by residential real property and was recorded between January 1, 2003 and January 1, 2008, (ii) the loan is the first mortgage or deed of trust that secures the property, (iii) the property was borrower-occupied and was the borrower’s principal residence at the time of default, and (iv) the notice of default has been filed. The Act exempts mortgage loans serviced by a mortgage loan servicer who has obtained an order of exemption after implementing a comprehensive loan modification program meeting the requirements set forth in the Act. Regulations clarifying the requirements applicable to obtaining an order of exemption are forthcoming, and the Act becomes effective 14 days after the issuance of these regulations. 

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