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Financial Services Law Insights and Observations

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  • Online payday lender settles usury suit for $141 million

    Courts

    On June 26, the U.S. District Court for the Eastern District of Virginia approved a preliminary settlement to resolve putative class allegations against an online payday lending company and related entities (defendants) accused of issuing high interest loans through a “rent-a-tribe” lending operation. According to the class’s second amended complaint, the defendants’ “rent-a-tribe” operation was an “attempt to circumvent state and federal law by issuing high interest loans in the name of a Native American tribal business entity that purports to be shielded by the principle of tribal sovereign immunity.” The class—which consists of borrowers from throughout the U.S.—alleged that the defendants provided “financing and various lending functions” carrying “extortionately high interest rates for short-term loans” that were “far beyond legal limits,” and that the unlawful interest rates were not disclosed to borrowers during the application process. Additionally, the class alleged that the defendants failed to provide key loan terms or misrepresented the loan terms, including repayment schedules, finance charges, and the total amount of payments due. Under the terms of the settlement, the defendants will pay a $65 million cash payment, cancel $76 million in high-interest loans, and provide other non-monetary relief.

    Courts Payday Lending Settlement Usury Interest Rate Sovereign Immunity

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  • 9th Circuit: Judicial foreclosure not debt collection under FDCPA

    Courts

    On June 30, the U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal of an FDCPA action, concluding that the FDCPA does not apply when a creditor is enforcing a security interest through a foreclosure, but is not seeking a deficiency judgment. According to the opinion, the plaintiff filed an action against Fannie Mae, Fannie Mae’s loan servicer, the law firm that represented Fannie Mae in the foreclosure proceeding, and the firm’s attorneys (collectively, “defendants”) for, among other things, violating the FDCPA when seeking to foreclose on his residential property. The district court dismissed the action, concluding that the FDCPA did not apply because the defendants had not engaged in any debt collection behavior by initiating the judicial foreclosure. In 2018, the 9th Circuit affirmed the dismissal, but subsequently ordered a supplemental briefing based on the U.S. Supreme Court’s intervening decision in Obduskey v. McCarthy & Holthus LLP (which held that law firms performing nonjudicial foreclosures are not “debt collectors” under the FDCPA, covered by InfoBytes here).

    After the supplemental briefing, the appellate court affirmed the district court’s dismissal of the action. The appellate court rejected the plaintiff’s argument that the letter sent by the defendants when initiating the judicial foreclosure, which included monetary amounts owed, amounted to debt collection activity under the FDCPA. The appellate court noted that the defendants were merely fulfilling a procedural requirement (that has since been amended) of Oregon foreclosure law, and “in no event would a money award have been enforceable against [the plaintiff],” because of Oregon’s anti-deficiency judgment law. Thus, the appellate court concluded that a judicial foreclosure is not considered a debt collection activity when it does not “include a request for a deficiency judgment or some other effort to recover the remaining debt,” and therefore, the district court properly dismissed the action.

    Courts Appellate Ninth Circuit FDCPA Foreclosure Debt Collection

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  • Small business owners previously excluded from PPP granted application extension

    Courts

    On June 29, the U.S. District Court for the District of Maryland issued a memorandum to address two similar suits, which will provide several small business owners with criminal records three additional weeks to apply for loans through the Paycheck Protection Program (PPP). The court ruled that previous versions of the Small Business Administration’s (SBA) rule that excluded felony convictions of applicants or owners of applicants were “arbitrary and capricious” because the rules contained no explanation for the criminal history exclusion. The ruling extends the PPP application deadline for the business owners to July 21 following the SBA’s issuance of an interim final rule (IFR)—effective June 24 (covered by InfoBytes here)—that, according to the court, “provides a reasoned explanation for a more limited criminal history exclusion.” The court rejected the SBA’s argument that the case is now moot, stating that even though the business owners are now eligible to apply for PPP loans, they “still face difficulties in applying at the last minute either because banks are no longer accepting applications or because banks are still using old forms with the prior criminal history exclusion. Therefore, the plaintiffs continue to face ongoing harm because of the allegedly unlawful prior iterations of the rule.”

    However, the court disagreed with one of the business owner’s claim that the criminal history exclusion violates the CARES Act, finding that the SBA is within its rights to consider borrowers’ ability to repay PPP loans. “While the court agrees that the PPP functions differently than the SBA’s other loan programs, it is not unreasonable to consider ability to repay, because if the loans are not used for specified purposes, then they are not forgivable,” the court wrote. The court also declined to extend the PPP application deadline to all newly eligible individuals who were previously excluded, stating that “past harm cannot justify an injunction extending the application deadline,” since it is unclear “what harm to [the business] resulting from prior iterations of the criminal history exclusion will continue past June 30.”

    Courts Covid-19 SBA CARES Act Small Business Lending

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  • 11th Circuit vacates punitive damages award against CRA for FCRA violation

    Courts

    On June 19, the U.S. Court of Appeals for the Eleventh Circuit vacated a magistrate judge’s final judgment in an FCRA action, concluding that there was no competent proof of a willful violation of the Act on the part of a consumer reporting agency (CRA). According to the opinion, a consumer brought an action against the CRA and other defendants alleging, among other things, that the CRA “negligently and willfully” violated the FCRA by not reinvestigating an item on his credit report he alleged was reported in error. Approximately 75 days after a small claims debt against the consumer was dismissed with prejudice, the consumer and his attorney ran his credit report and finding the debt still reported, wrote to the CRA with the dismissal order and requested that it reinvestigate the debt listing and remove it. The CRA diverted the letter under its suspicious mail policy for unknown reasons (since the CRA did not have a system to record the reason a letter was marked as suspicious), and sent a letter to the consumer informing him that it had determined the letter was suspicious and was not sent by him, but suggesting he call if he believed his credit report was in error. Less than two months later, the CRA removed the credit line after receiving a communication from the debt holder, but the consumer had already filed the action five days prior to that time. A jury trial found that the CRA’s “negligent failure to reinvestigate” caused harm to the consumer and awarded $5,000 in compensatory damages and further concluded that the violation of the FCRA was willful, assessing $3 million in punitive damages. Subsequently, the magistrate judge remitted the punitive damages to $490,000 on due process principles.

    On appeal, the 11th Circuit vacated the magistrate judge’s final judgment on the willfulness claim, noting that the consumer “offered no evidence of a broad or systemic problem with [the CRA]’s suspicious mail policy,” and that the consumer did not establish by clear and convincing evidence that the CRA “ran an unjustifiably high risk of violating its duties under the FCRA.” Moreover, the actions of the CRA “had a foundation in the statutory text,” even if the policy’s application was negligent when applied to the consumer. Because the appellate court concluded the violation was not willful, the punitive damages judgment was eliminated.

    Courts Appellate Eleventh Circuit FCRA Consumer Reporting Agency

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  • U.S. Supreme Court upholds SEC’s disgorgement authority with limits

    Courts

    On June 22, in an 8-1 ruling, the U.S. Supreme Court vacated the U.S. Court of Appeals for the Ninth Circuit’s judgment in Liu v. SEC, holding that the SEC may continue to collect disgorgement in civil proceedings in federal court as long as the award does not exceed a wrongdoer’s net profits, and that such awards for victims of the wrongdoing are equitable relief permissible under §78u(d)(5). The ruling impacts petitioners who were ordered by a California federal court to disgorge $26.7 million in money collected from investors for a cancer treatment center that was never built, with the related SEC investigation finding that more than $20 million was spent on ostensible marketing expenses and salaries, far in excess of what the offering memorandum permitted. As previously covered by InfoBytes, the Court examined whether the SEC’s statutory authority to seek “equitable relief” permits it to seek and obtain disgorgement orders in federal court. The petitioners asked the Court to bar the SEC from seeking court-ordered disgorgement (covered by InfoBytes here), arguing that Congress never authorized the SEC to seek disgorgement in civil suits for federal securities fraud as a form of equitable relief or otherwise. The petitioners pointed to the Court’s 2017 decision in Kokesh v. SEC, in which the Court reversed the ruling of the U.S. Court of Appeals for the Tenth Circuit when it unanimously held that disgorgement operates as a penalty under 28 U. S. C. §2462, which establishes a 5-year limitations period for “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture.”

    The Court rejected the petitioners’ argument, noting that equity practice has “long authorized courts to strip wrongdoers of their ill-gotten gains,” although “to avoid transforming an equitable remedy into a punitive sanction, courts restricted the remedy to an individual wrongdoer’s net profits to be awarded for victims.” As such, the Court determined that the SEC’s disgorgement remedy must be limited in various ways. The Court discussed three limits: (i) the “profits remedy” must return the defendant’s wrongful gains to those harmed by the defendant’s actions, as opposed to depositing them in the Treasury; (ii) disgorgement under the statute requires a factual determination of whether petitioners can, consistent with equitable principles, be found liable for profits as partners in wrongdoing or whether individual liability is required; and (iii) disgorgement must be limited to “net profits” and therefore “courts must deduct legitimate expenses before ordering disgorgement” under the statute. The Court vacated the judgment against the petitioners and remanded to the lower court to examine the disgorgement amount in light of its opinion.

    Justice Clarence Thomas dissented, however, stating that he would have barred the SEC from seeking disgorgement in federal court under the statute rather than limiting the remedy, because while 15 U. S. C. §78u(d)(5) allows the SEC to seek equitable relief that may be appropriate or necessary for the benefit of investors, “disgorgement is not a traditional equitable remedy.”

    Courts U.S. Supreme Court Appellate Liu v. SEC SEC Disgorgement

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  • New Jersey Supreme Court holds that state fiduciary law does not permit affirmative cause of action against bank

    Courts

    On June 17, the New Jersey Supreme Court reversed an appellate division’s judgment and dismissed a complaint against a bank after concluding that the New Jersey Uniform Fiduciaries Law (UFL) does not permit an affirmative cause of action against banks but rather provides them with limited immunity for failing to take notice of and action on the breach of a fiduciary’s obligation. In 2015, the plaintiff filed a complaint on behalf of himself and his dental practice against two of his employees who allegedly took insurance company checks issued to the plaintiff and his practice totaling “several hundred thousand dollars,” forged his endorsement on them, and deposited the checks into personal accounts held by a bank who was sued in the same lawsuit for common law claims of conversion and negligence. The trial court dismissed the cause of action against the bank for failure to state a claim, reasoning that “‘common law negligence is not such a remedy’ in the absence of a ‘special relationship’ between [the plaintiff] and the bank.” The trial court also rejected the plaintiff’s argument that the UFL provided the basis for a cause of action, concluding that the individuals acted as “errant employees”—not as fiduciaries—and that the bank had no fiduciary relationship with the plaintiff who was not a bank customer. The appellate division partially reversed, concluding that plaintiff should be allowed to plead a UFL claim. Among other things, the plaintiff argued that the employees were acting in a fiduciary capacity as “constructive trustees” of the funds and the bank met a bad faith requirement under the UFL in depositing the checks.

    The New Jersey Supreme Court disagreed, holding that “[n]othing in the plain language of the UFL suggests that the UFL is itself the basis for an affirmative cause of action.” Moreover, the “UFL does not provide for a recovery through a private action or set forth remedies or a statute of limitations—all indicia of a statutory cause of action.” According to the New Jersey Supreme Court, “[w]hen an action is brought against a bank, the UFL provides that a bank’s liability depends on whether the bank acted with actual knowledge or bad faith in the face of a fiduciary’s breach of his obligations.”

    Courts State Issues Fiduciary Duty

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  • 7th Circuit dismisses FDCPA action over interest accrued post-write off

    Courts

    On June 19, the U.S. Court of Appeals for the Seventh Circuit affirmed the dismissal of an action alleging a debt collector violated the FDCPA by attempting to collect interest that accrued on a debt after the creditor wrote off the debt but before the collector acquired it. According to the opinion, the plaintiffs’ original unpaid debt was $3,226.35 before the original creditor ceased collection efforts and stopped sending monthly statements. Approximately two years later, the creditor sold the debt to the collection agency, and approximately two years after that, the debt collector sent a demand letter seeking payment of $5,800, which included around $1,600 in interest for the months after the original creditor ceased collection efforts. The debt collector sent a second letter two months later, and a third letter the following year to their attorney in response to the attorney’s request to verify the debt, but the third letter did not explain how much of the debt was interest. The plaintiffs filed the action against the debt collector, alleging the collector violated the FDCPA’s prohibition on false, deceptive, or misleading representations in connection with collection of a debt by demanding interest that accrued between charge-off and sale. The district court dismissed the action as untimely.

    On appeal, the 7th Circuit affirmed dismissal, but determined the suit was filed timely. Specifically, the appellate court concluded that the one year statute of limitations applied to the third letter the debt collector sent to the plaintiffs’ lawyer in response to a demand for debt verification. However, the appellate court concluded that the third collection letter did not violate the FDCPA, arguing the plaintiffs “promised to pay interest, and [the debt collector]’s computer used the correct rate.” Moreover, the appellate court stated that “[a] statement is false, or not, when made; there is no falsity by hindsight,” and previous instances in the circuit “in which a letter was deemed to have falsely stated the amount of the debt dealt with errors known or readily knowable when the letter was sent.” Lastly, the appellate court rejected the plaintiffs’ post-argument submission that the debt collector “must openly state the legal position behind its calculation” in order to avoid having the letter be misleading, noting that the third letter was sent to their lawyer, and it “would not have misled a competent lawyer.”

    Courts Appellate Seventh Circuit FDCPA Debt Collection

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  • Consumer advocacy groups claim CFPB taskforce is illegally chartered

    Courts

    On June 16, several consumer advocacy groups filed a lawsuit in the U.S. District Court for the District of Massachusetts against the CFPB claiming that the Bureau’s Taskforce on Federal Consumer Financial Law was “illegally chartered” and violates the Federal Advisory Committee Act (FACA). As previously covered by InfoBytes, the taskforce was established last year to examine the existing legal and regulatory environment facing consumers and financial services providers. As also covered by InfoBytes, the taskforce recently outlined its future plans, which include analyzing comments received from a March request for information, holding a public hearing, and participating in public listening sessions with the Bureau’s four advisory committees. The complaint argues, however, that the taskforce’s membership lacks balance, and that the appointed members who “uniformly represent industry views” have worked on behalf of several large financial institutions or work as industry consultants or lawyers. This composition, the consumer advocacy groups argue, undermines the purpose of the taskforce and is a violation of FACA and the Administrative Procedure Act. The complaint also states that while FACA requires advisory committee meetings to be open to the public and that records be disclosed, the taskforce has held closed-session meetings without providing public notice and has failed to make available any of the records related to these meetings or its other work.

    The complaint seeks declaratory and injunctive relief and asks the court to (i) set aside the taskforce’s charter, all orders and decisions, and the appointments of the taskforce members; (ii) enjoin the taskforce from meeting, or otherwise conducting taskforce business; (iii) order the Bureau to immediately release all materials prepared for the taskforce; and (iv) enjoin the Bureau from relying upon taskforce recommendations or advice. The complaint also seeks costs and attorneys’ fees.

    Courts CFPB Taskforce Federal Advisory Committee Act

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  • District court preliminarily approves $13 million settlement in ATM fee class action

    Courts

    On June 16, the U.S. District Court for the Southern District of California granted preliminary approval of a $13 million class action out-of-network (OON) ATM fee settlement. As previously covered by InfoBytes, the plaintiffs filed the action asserting that the bank charges its customers two OON fees when an account holder conducts a balance inquiry and then obtains a cash withdrawal at an OON ATM. The bank moved for summary judgment on the breach of contract claim, which the district court denied, concluding that there were ambiguities regarding the fee terms provided in the contract and on the on-screen ATM warnings. After participating in a private mediation, the plaintiffs filed an unopposed motion for preliminary approval of the settlement. The $13 million settlement covers a total of over 1.6 million class members—defined as all bank account holders in the U.S. who incurred at least one OON balance inquiry fee during varying time periods based on location— and provides for a $10,000 incentive award to each of the named plaintiffs and $3.9 million for plaintiffs’ counsel. In exchange for their share of the settlement funds, the class members will agree to release the bank from all claims relating to the action.

    Courts ATM Fees Class Action Settlement

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  • District court holds text system is not an autodialer under 7th Circuit definition

    Courts

    On June 15, the U.S. District Court for the Southern District of Indiana granted a motion for summary judgment in favor of a collection agency and another company (collectively, “defendants”) with respect to the plaintiff’s TCPA allegations, holding that the system used to send text messages to class members’ cell phones is not an automatic telephone dialing system (autodialer). According to the opinion, the plaintiff filed the class action alleging, among other things, that the defendants violated the TCPA by sending unsolicited text messages using an autodialer to cell phones after the recipients replied with “stop.” The parties submitted cross-motions for summary judgment, which were stayed pending the outcome of the U.S. Court of Appeals for the Seventh Circuit decision in Gadelhak v. AT&T Servs., Inc. As previously covered by InfoBytes, the 7th Circuit held in February that to be an autodialer under the TCPA, the system must both store and produce phone numbers “using a random or sequential number generator.” After reviewing the cross-motions in light of the 7th Circuit decision, the court concluded that the system used by the defendants is not an autodialer under the controlling definition because the defendants’ system sends text messages to cell phone numbers from stored customer lists. Notwithstanding the fact that neither party disputes that the text messages sent to the class members post-“stop” message were without their consent, the court granted summary judgment in favor of the defendants because the text messages were not sent using an autodialer.

    Courts Appellate Seventh Circuit TCPA Autodialer

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