InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
National bank settles overdraft fee MDL
On January 24, the U.S. District Court for the District of South Carolina entered final judgment for the approval of a $43 million settlement between a national bank and consumers to resolve multidistrict litigation (MDL) concerning overdraft charges. According to the settlement, since 2013, several groups of consumers have filed putative class action complaints against the bank in multiple jurisdictions alleging improper assessment and collection of overdraft fees, including claims that class members incurred overdraft fees as a result of the bank’s alleged practice of assessing fees based on an account’s available balance rather than its ledger balance. Other claims include allegations that the bank assessed overdraft fees for an ATM or one-time debit card transaction, assessed sustained overdraft fees, or assessed overdraft fees on ride-sharing transactions. In 2015 the Judicial Panel for Multi-District Litigation consolidated the actions for pretrial purposes.
In 2018, as previously covered by InfoBytes, the court dismissed one of the complaints in the MDL action, which alleged that the bank’s $20 overdraft fee is an interest charge on credit and therefore exceeds usury limits under the National Bank Act (NBA). The court noted that it had previously rejected a materially identical usury claim in December 2015 and that no new evidence or authority had been brought to light that would change its decision. In addition, the court concluded that “the law is still clear that sustained overdraft fees are not interest, and that assessing such fees cannot violate the usury provision of the NBA.” In 2019, the parties agreed to settle the action in its entirety, without any admission of liability by the bank. Under the terms of the settlement agreement, six classes of consumers will receive payouts or overdraft fee forgiveness, which will include $27 million “in the form of reductions to the outstanding balances of [class members] whose accounts were closed with amounts owed to the [bank].”
1st Circuit: Statute of limitations starts on loan closing
On January 17, the U.S. Court of Appeals for the First Circuit affirmed the dismissal of claims against a mortgage holder and a loan servicer (defendants), concluding the allegations were barred on statute-of-limitations grounds. In 2018, ten years after the borrower defaulted on her loan, she filed a suit against the defendants “alleging that the loan was predatory because at its inception the lender knew or should have known that she would not be able to repay it.” The borrower alleged first that the defendants violated the Massachusetts Consumer Protection Act (MCPA) by committing unfair and deceptive practices when trying to enforce a “predatory mortgage loan,” and second that the defendants violated the Massachusetts Fair Debt Collection Practices Act (MFDCPA) by collecting or attempting to collect on the loan in an unfair, deceptive, or unreasonable manner. The district court dismissed the first claim as time-barred, stating that the four-year statute of limitations period began when the borrower closed on the loan in 2005. The district court also ruled that Chapter 93, Section 49 of the MDFCPA does not provide a private right of action for the second claim.
The 1st Circuit affirmed on appeal, determining that, with respect to the borrower’s MCPA claim, the four-year limitations period “began to run on the signing date when interest began to accrue,” and that the borrower failed to show that any of the defendants’ later collection actions triggered a new limitations period. Concerning the borrower’s MFDCPA claim that the collection efforts were “unfair because they constituted enforcement of inherently unfair and deceptive loan terms,” the appellate court concluded it was unnecessary to decide the issue of whether the borrower held a private right of action under the MFDCPA because the borrower’s claim is time-barred.
Appellate Court reverses and remands FACTA action
On January 22, the Illinois Appellate Court, Second District, reversed the dismissal for lack of standing of a FACTA class action brought on behalf of the class by two individuals (consumers) who claimed that an entertainment company (defendant) violated the act when it printed more than the last five digits of the consumers’ payment card number on their receipts. According to the opinion, the complaint alleged that the consumers made a number of purchases from the defendant, each time receiving sales receipts with the first six digits and the last four digits of the consumers’ debit card printed on each receipt. The consumers then filed a class action suit accusing the defendant of willful violation of FACTA, and further, of knowingly or recklessly failing to adhere to the acts’ prohibition against ‘“print[ing] more than the last 5 digits of the card or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction.”’ The defendants first removed the action to federal district court, which granted the consumers’ motion to remand back to state court. The defendants then argued that: (i) the consumers lacked standing because they failed to allege an injury; and (ii) the consumers failed to allege facts showing a willful violation of FACTA. The lower court granted the defendant’s motion to dismiss as to standing on the first allegation, but did not consider the second allegation of willfulness, after which the consumers appealed.
Upon appeal, the court reversed the lower court’s dismissal for lack of standing noting that unlike federal courts, Illinois circuit courts are vested with “jurisdiction to adjudicate all controversies,” and determined that the consumers did have standing to sue even without pleading actual injury, as an allegation of the violation was sufficient. The court stated that “when a person willfully fails to comply with FACTA’s truncation requirements, the statute provides a private cause of action for statutory damages and does not require a consumer to suffer actual damages before seeking recourse.” Additionally, the court decided that the consumers had alleged “sufficient facts” to show that defendant willfully violated FACTA. The panel remanded the case to the lower court to further consider the issues.
Parties file amicus briefs in CFPB constitutionality challenge
On January 22, a coalition of attorneys general from 23 states and the District of Columbia filed an amicus brief in Seila Law LLC v. CFPB arguing that the U.S. Supreme Court should preserve the CFPB and other consumer protections provide under Title X of Dodd-Frank. Last October the Court granted cert in Seila to answer the question of whether an independent agency led by a single director violates the Constitution’s separation of powers under Article II. The Court also directed the parties to brief and argue whether 12 U.S.C. §5491(c)(3), which sets up the CFPB’s single director structure and imposes removal for cause, is severable from the rest of the Dodd-Frank Act, should it be found to be unconstitutional. (Previous InfoBytes coverage of the parties’ submissions available here.) In their amicus brief, the AGs argue that the Bureau’s structure is constitutional, and that—even if the for-cause removal provision is deemed invalid—the Bureau and the rest of Title X should survive. The brief highlights joint enforcement actions and information sharing between the states and the Bureau, and emphasizes the importance of Title X provisions that are unrelated to the Bureau but provide states “powerful new tools” for combating fraud and abuse. “These provisions are entirely independent of the provisions governing the CFPB, and they serve distinct policy goals that Congress would not have wanted to abandon even if the CFPB itself were no longer operative,” the AGs write. While the AGs support the U.S. Court of Appeals for the Ninth Circuit’s decision that the Bureau’s single-director structure is constitutional (previously covered by InfoBytes here), they stress that should the leadership structure be declared unconstitutional, the specific clause should be severed from the rest of Dodd-Frank. According to the AGs, “[s]everability is supported not only by [Dodd-Frank’s] express severability clause, but also by Congress’s strongly expressed intent to create a more robust consumer-protection regime to avert another financial crisis.” Moreover, the AGs assert that the states would suffer concrete harm if the Court decides to eliminate the Bureau or rule that the entirety of Title X should be invalidated.
The same day the U.S. House of Representatives filed an amicus brief arguing that the Court should resolve Seila without deciding the constitutionality of the Bureau director’s removal protection because the removal protection has no bearing on the issue in the case, which is an action addressing whether the Bureau’s civil investigative demand should be enforced. However, should the Court take up the constitutionality question, the brief asserts it should uphold the removal protection. “In establishing the CFPB, Congress built upon its long history of creating, and this Court’s long history of upholding, independent agencies.” The brief states that the “CFPB performs the same functions independent regulators have long performed, and it does so under the same for-cause standard this Court first blessed 85 years ago. The CFPB’s single-director structure does not transform that traditional standard into an infringement on the President’s authority.”
Earlier on January 21, Seila Law filed an unopposed motion for divided argument and enlargement of time for oral argument, which states that all parties “agree that divided argument is warranted among petitioner, the government, and the court-appointed amicus.” The brief suggests a total of 70 minutes, with 20 minutes for the petitioner, 20 minutes for the government, and 30 minutes for the court-appointed amicus, and notes that any time allotted to the House of Representative should come from the court-appointed amicus’ time. (The House filed a separate brief asking to be allotted oral argument time.)
A full list of amicus briefs is available here. Oral arguments are set for March 3.
SEC files Supreme Court brief in favor of disgorgement
On January 15, the SEC filed a brief in a pending U.S. Supreme Court action, Liu v. SEC. The question presented to the Court asks whether the SEC, in a civil enforcement action in federal court, is authorized to seek disgorgement of money acquired through fraud. The petitioners were ordered by a California federal court to disgorge the money that they collected from investors for a cancer treatment center that was never built. The SEC charged the petitioners with funneling much of the investor money into their own personal accounts and sending the rest of the funds to marketing companies in China, in violation of the Securities Act’s prohibitions against using omissions or false statements to secure money when selling or offering securities. The district court granted the SEC’s motion for summary judgment, and ordered the petitioners to pay a civil penalty in addition to the $26.7 million the court ordered them to repay to the investors. The petitioners appealed to the Supreme Court and in November, the Court granted certiorari.
The petitioners argued that Congress has never authorized the SEC to seek disgorgement in civil suits for securities fraud. They point 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 is a penalty and not an equitable remedy. Under 28 U.S.C. § 2462, this makes disgorgement subject to the same five year statute of limitations as are civil fines, penalties and forfeitures (see previous InfoBytes coverage here). The petitioners also suggested that the SEC has enforcement remedies other than disgorgement, such as injunctive relief and civil money penalties, so loss of disgorgement authority will not hinder the agency’s enforcement efforts.
According to the SEC’s brief, historically, courts have used disgorgement to prevent unjust enrichment as an equitable remedy for depriving a defendant of ill-gotten gains. More recently, five statutes enacted by Congress since 1988 “show that Congress was aware of, relied on, and ratified the preexisting view that disgorgement was a permissible remedy in civil actions brought by the [SEC] to enforce the federal securities laws.” The agency notes that the Court has recognized disgorgement as both an equitable remedy and a penalty, suggesting, however, that “the punitive features of disgorgement do not remove it from the scope of [the Exchange Act’s] Section 21(d)(5).” Regarding the petitioner’s reliance on Kokesh, the brief explains that “the consequence of the Court’s decision was not to preclude or even to place special restrictions on SEC claims for disgorgement, but simply to ensure that such claims—like virtually all claims for retrospective monetary relief—must be brought within a period of time defined by statute.”
In addition to the brief submitted by the SEC, several amicus briefs have been filed in support of the SEC, including a brief from several members of Congress, and a brief from the attorneys general of 23 states and the District of Columbia.
7th Circuit says “time sensitive document” on envelope violates FDCPA
On January 21, the U.S. Court of Appeals for the Seventh Circuit partially reversed a district court’s dismissal of an action concerning a debt collector’s use of language or symbols other than the collector’s address on an envelope sent to a consumer. According to the opinion, the consumer received a debt collection letter enclosed in an envelope stamped with the words “TIME SENSITIVE DOCUMENT” in bold font. The consumer filed a complaint against the defendant asserting various claims under the FDCPA, including that inclusion of “TIME SENSITIVE DOCUMENT” on the envelope was a violation of section 1692f(8). The defendant had argued that an exception should be carved out for “benign” language in this instance, and the district court agreed.
As previously covered by InfoBytes, the 7th Circuit invited the CFPB to file an amicus brief on whether there is a benign language exception to section 1692f(8)’s prohibition, and, if so, whether the phrase “TIME SENSITIVE DOCUMENT” falls within that exception. The Bureau asserted that there is no benign language exception, and stressed that while section 1692f(8) recognizes that debt collectors may be permitted to include language and symbols on an envelope that facilitate the mailing of an envelope, section 1692f(8), by its own terms, does not allow for benign language. Additionally, the Bureau commented that section 1692f’s prefatory text does not “provide a basis for reading a ‘benign language’ exception into section 1692f(8),” nor does the prefatory text suggest that the prohibition applies only in instances where it may be “‘unfair or unconscionable’” in a general sense.
The 7th Circuit concluded that section 1692f(8) is clear. Because the language at issue does not fall within the list of exceptions—it is not the debt collector’s name or its address—the inclusion of the phrase “TIME SENSITIVE DOCUMENT” is a violation of section 1692f(8), and the district court erred in dismissing this claim. However, the appellate court agreed with the district court’s dismissal of the consumer’s section 1692e claims that the language used on the envelope and in the body of the letter were false and deceptive.
FDCPA class action garnishments award overturned
On January 16, the U.S. Court of Appeals for the Sixth Circuit overturned a district court’s class action award to the plaintiffs in an FDCPA action. According to the opinion, the credit card company hired the defendant, a law firm, to collect an unpaid credit card debt from the plaintiff. The defendant filed suit against the plaintiff and secured a judgment against her. The defendant then filed several writ of garnishment requests attempting to satisfy the judgment and, in addition, seeking the costs of the current writ request. In later garnishment requests, the defendant also added the costs of prior failed garnishments. The plaintiff then filed a class action in district court against the defendant alleging the requests for writ of garnishment from the defendant contained false statements in violation of the FDCPA. The court found for the plaintiff and awarded class members a total of $3,662, and attorney’s fees of $186,680 and the defendant appealed.
After rejecting a jurisdictional argument by the defendant, the appellate court addressed whether the defendant’s writ of garnishment requests seeking all total costs to date, including the cost of the current garnishment,” were false, deceptive, or misleading. The appellate court concluded that it was reasonable to request the costs of the current garnishment request, as Michigan law at the time allowed creditors to include “the total amount of the post-judgment costs accrued to date” in their garnishment requests. Additionally, the opinion pointed to the recently revised Michigan rule that explicitly allows debt collectors to “include the costs associated with filing the current writ of garnishment” as clarification that the prior version of the rule was intended to cover current costs.
Regarding the costs of prior failed garnishment requests, the opinion stated that Michigan law did not allow a creditor to seek these costs and that including them was therefore a false representation under the FDCPA. The appellate court remanded the case, however, to provide the defendants an opportunity to prove the violation was a “bona fide” mistake of fact and that its procedure for preventing such mistakes were sufficient. In addition to vacating the award and attorney’s fees, and remanding the case, the court vacated the class certification order.
District Court approves class settlement in mortgage tax action
On January 15, the U.S. District Court for the Southern District of California granted final approval of a class action settlement between homeowners and a mortgage company to resolve allegations that the company violated the Internal Revenue Code by failing to report deferred mortgage interest from certain consumers with adjustable rate mortgages (ARM), which allegedly prevented consumers from fully benefiting from the mortgage tax credit. According to the approval order, the plaintiffs contended that “even though the accrued interest is added back to principal, the negative amortization is still interest that should have been reported” to the IRS. However, the order notes that the court previously rejected this theory in part, finding that 26 U.S.C. § 6050H “is ambiguous as to ‘how, whether and when’ such interest must be reported.” Furthermore, the order notes that in 2016 the company began investigating and reporting the negative amortization on loans received via transfer from other companies that allegedly failed to include the negative amortization in their data. These transferred loans, the company asserted, were the only instances where it failed to report negative amortization. Under the terms of the settlement, the company is required to provide amended mortgage interest statements to homeowners whose capitalized interest was incorrectly reported to the IRS for the 2016 through 2018 tax years.
District Court: Michigan privacy law covers out-of-state residents
On January 16, the U.S. District Court for the Eastern District of Michigan denied a publishing company’s motion to dismiss putative class allegations that it disclosed subscribers’ personal information to third parties, ruling that the subscribers did not need to live in Michigan in order to bring claims under the state’s Personal Privacy Protection Act (PPPA). According to the plaintiff, the company allegedly disclosed magazine subscribers’ personal reading information (PRI) to data aggregators that would then supplement it with additional information (including age, gender, income, and employer names) in order to create detailed customer profiles. The company then allowed “almost any organization to rent a customer list containing numerous categories of detailed customer information,” the plaintiff alleged. The company argued, however, that the plaintiff, who resides in Virginia, lacked standing to bring claims under the PPPA because the law protects only Michigan residents. The company also contended that the plaintiff failed to demonstrate concrete injury suffered as a result of the company’s alleged disclosure of PRI to third parties without consent.
The court disagreed with both arguments, stating that the company’s argument “rests solely on the fact that a non-Michigan resident has never brought suit under the PPPA,” which is “unpersuasive and contravened by the language of the statute and case law.” The PPPA does not impose a residency requirement in order for customers to qualify for protections under the statute, the court stated, noting that “[i]f the Michigan legislature intended to limit the statute to Michigan residents, it could have done so explicitly.” Among other things, the court also concluded that the plaintiff satisfied the injury-in-fact element for Article III standing because “the alleged economic harm caused by the disclosure of PRI provides support to conclude [the plaintiff] suffered a concrete injury.”
Basis for invalidating CFPB is “remarkably weak,” says court-appointed defender
On January 15, Paul Clement, the lawyer selected by the U.S. Supreme Court to defend the leadership structure of the CFPB, filed a brief in Seila Law LLC v. CFPB arguing that Seila Law’s constitutionality arguments are “remarkably weak” and that “a contested removal is the proper context to address a dispute over the President’s removal authority.” First, Clement stated that “there is no ‘removal clause’ in the Constitution,” and that because the “constitutional text is simply silent on the removal of executive officers” it does not mean there is a “promising basis for invalidating an Act of Congress.” Moreover, the Constitution leaves it to Congress to decide “all manner of questions about the organization and structure of executive-branch departments and officers,” Clement wrote. Second, Clement disagreed with the argument that Congress cannot impose modest restrictions on the President’s ability to remove executive officers, so long as the President is the one exercising the removal powers. Third, Clement noted that in the past, the Court has repeatedly upheld the ability to place permissible restrictions on a President’s removal authority.
Clement further contended, among other things, that the dispute in Seila is “not just unripe, but entirely theoretical.” He referenced the Bureau’s brief filed last September (covered by InfoBytes here), in which the CFPB argued that the for-cause restriction on the President’s authority to remove the Bureau’s single director violates the Constitution’s separation of powers, and noted that “[w]hatever was true when this suit was first filed, the theory of the unitary executive appears alive and well in the Director’s office.” Rather, Clement stated, the Court should wait for an instance where a CFPB director has been fired for something short of the “inefficiency, neglect of duty, or malfeasance in office” threshold that Congress set for dismissing a CFPB director in Dodd-Frank before ruling on the question. Clement also emphasized that “text, first principles and precedent” all “strongly support” upholding the U.S. Court of Appeals for the Ninth Circuit’s decision from last May, which deemed the CFPB to be constitutionally structured and upheld a district court’s ruling enforcing Seila Law’s compliance with a 2017 civil investigative demand.
As previously covered by InfoBytes, the 9th Circuit held that the for-cause removal restriction of the CFPB’s single director is constitutionally permissible based on existing Supreme Court precedent. The panel agreed with the conclusion reached by the U.S. Court of Appeals for the D.C. Circuit majority in the 2018 en banc decision in PHH v. CFPB (covered by a Buckley Special Alert) stating, “if an agency’s leadership is protected by a for-cause removal restriction, the President can arguably exert more effective control over the agency if it is headed by a single individual rather an a multi-member body.”
The parties in Seila filed briefs last December. While both parties are in agreement on the CFPB’s single-director leadership structure, they differ on how the matter should be resolved. Seila Law argued that the Court should invalidate all of Title X of Dodd-Frank, whereas the Bureau contended that the for-cause removal provision should be severed from the rest of the law in accordance with Dodd-Frank’s express severability clause. Oral arguments are scheduled for March 3. (Previous InfoBytes coverage here.)