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FDIC argues “valid-when-made rule” fills statutory gaps
On July 15, the FDIC filed a reply in support of its motion for summary judgment in a lawsuit challenging the agency’s “valid-when-made rule.” As previously covered by InfoBytes, last August state attorneys general from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina, and the District of Columbia filed a lawsuit in the U.S. District Court for the Northern District of California arguing, among other things, that the FDIC does not have the power to issue the rule, and asserting that the FDIC has the power to issue “‘regulations to carry out’ the provisions of the [Federal Deposit Insurance Act],” but not regulations that would apply to non-banks. The AGs also claimed that the rule’s extension of state law preemption would “facilitate evasion of state law by enabling ‘rent-a-bank’ schemes,” and that the FDIC failed to explain its consideration of evidence contrary to its assertions, including evidence demonstrating that “consumers and small businesses are harmed by high interest-rate loans.” The complaint asked the court to declare that the FDIC violated the Administrative Procedures Act (APA) in issuing the rule and to hold the rule unlawful. The FDIC countered that the AGs’ arguments “misconstrue” the rule because it “does not regulate non-banks, does not interpret state law, and does not preempt state law,” but rather clarifies the FDIA by “reasonably” filling in “two statutory gaps” surrounding banks’ interest rate authority (covered by InfoBytes here).
The AGs disagreed, arguing, among other things, that the rule violates the APA because the FDIC’s interpretation in its “Non-Bank Interest Provision” (Provision) conflicts with the unambiguous plain-language statutory text, which preempts state interest-rate caps for federally insured, state-chartered banks and insured branches of foreign banks (FDIC Banks) alone, and “impermissibly expands the scope of [12 U.S.C.] § 1831d to preempt state rate caps as to non-bank loan buyers of FDIC Bank loans.” (Covered by InfoBytes here.) In its reply in support of the summary judgment motion, the FDIC’s arguments included that the rule is a “reasonable interpretation of §1831d” in that it filled two statutory gaps by determining that “the interest-rate term of a loan is determined at the time when the loan is made, and is not affected by subsequent events, such as a change in the law or the loan’s transfer.” The FDIC further claimed that the rule should be upheld under Chevron’s two-step framework, and that §1831d was enacted “to level the playing field between state and national banks, and to ‘assure that borrowers could obtain credit in states with low usury limits.’” Additionally, the FDIC refuted the AGs’ argument that the rule allows “non-bank loan buyers to enjoy § 1831d preemption without facing liability for violating the statute,” pointing out that “if a rate violates § 1831d when the loan is originated by the bank, loan buyers cannot charge that rate under the Final Rule because the validity of the interest is determined ‘when the loan is made.’”
Maryland Court of Special Appeals: Borrower may maintain cause of action before credit grantor’s collections exceed principal amount
On July 1, the Court of Special Appeals of Maryland affirmed a state circuit court’s ruling, holding that “a consumer borrower may maintain a cause of action against a credit grantor under the Credit Grantor Closed End Credit Provisions (CLEC). . .before the credit grantor has collected more than the principal amount of the loan.” In 2014, the borrower entered into a loan agreement with the credit grantor. Although the borrower allegedly made numerous payments on the credit contract, her personal property was repossessed in 2017. She filed a CLEC claim against the credit grantor, alleging the company “specifically refused” to provide her with a requested written statement memorializing her account history, “including all debits and credits to her account and any monthly statements sent to [her] and all other documents which refer to payments due or received.” The credit grantor moved to dismiss, arguing, among other things, that the borrower was not entitled to monetary recovery under CLEC and that she failed to allege that she paid amounts in excess of the principal, and as such, did not assert a proper claim under CLEC. The borrower countered “that ‘CLEC damages are available regardless of whether a credit grantor has collected more than [the] principal amount of the loan,” and that furthermore, citing several cases, “‘[t]he relief that is provided by CLEC § 12-1018 has also already been determined by Maryland Appellate Courts and includes monetary, equitable and declaratory relief[.]’” The circuit court granted the credit grantor’s motion to dismiss, in part, as to the CLEC claim, holding that when relying on the plain language of the statute, the consumer was not entitled to relief.
On appeal, the Court of Special Appeals held, based on CLEC’s plain language, statutory construction, legislative history, and precedent that a consumer can bring a claim under CLEC for damages, and/or declaratory and injunctive relief before the consumer has paid amounts in excess of principal. However, because the borrower had “failed to allege actual damages or request other appropriate relief under CLEC,” the Court of Special Appeals affirmed the judgment of the circuit court dismissing her CLEC claim.
California court orders CFPB to issue Section 1071 NPRM by September 30
On July 16, the U.S. District Court for the Northern District of California issued an order setting September 30 as the deadline for the CFPB to issue a notice of proposed rulemaking (NPRM) on small business lending data. As previously covered by InfoBytes, the Bureau is obligated to issue an NPRM for implementing Section 1071 of the Dodd-Frank Act, which requires the agency to collect and disclose data on lending to women and minority-owned small businesses. The requirement was reached as part of a stipulated settlement reached in 2020 with a group of plaintiffs, including the California Reinvestment Coalition (CRC), that argued that the Bureau’s failure to implement Section 1071 violated two provisions of the Administrative Procedures Act, and has harmed the CRC’s ability to advocate for access to credit, advise organizations working with women and minority-owned small businesses, and work with lenders to arrange investment in low-income and communities of color (covered by InfoBytes here).
Find continuing Section 1071 coverage here.
District Court allows usury claims to proceed, calling tribal immunity “irrelevant”
On July 13, the U.S. District Court for the Northern District of California denied defendants’ motion for summary judgment in a consolidated class action concerning whether a now-defunct online lender can use tribal immunity to circumvent state interest rate caps. The plaintiffs took out short-term loans carrying allegedly usurious interest rates from entities run through several federally recognized tribes. While the defendants attempted to rely on tribal immunity as a defense, the court determined that California law applies to the plaintiffs and class members who took out loans in the state. According to the court, “California, with its strong history of prohibiting usury, has the materially greater interest in enforcing its usury laws and protecting its consumers from usurious conduct than either of the relevant [t]ribal [e]ntities whose connection to the loans—while not insignificant—was temporal and whose aims were to avoid state usury laws.” Calling tribal immunity “irrelevant,” the court added that the “claims here hinge on the personal conduct of the defendants. While that conduct is based in significant part on the services defendants personally engaged in or approved to be provided to the [t]ribes, the claims do not impede on the sovereignty of the [t]ribes where the [t]ribes are not defendants in this case and no [t]ribal [e]ntities remain.”
District Court approves $35 million settlement in student debt-relief action
On July 14, the U.S. District Court for the Central District of California entered a stipulated final judgment and order against the named defendant in a 2019 action brought by the CFPB, the Minnesota and North Carolina attorneys general, and the Los Angeles City Attorney, which had alleged a student loan debt relief operation deceived thousands of student-loan borrowers and charged more than $71 million in unlawful advance fees. As previously covered by InfoBytes, the complaint asserted that the defendants violated the CFPA, the Telemarketing Sales Rule, and various state laws. A second amended complaint also included claims for avoidance of fraudulent transfers under the FDCPA and California’s Uniform Voidable Transactions Act.
In 2019, the named defendant filed a voluntary petition for Chapter 11 relief, which was later converted to a Chapter 7 case. As the defendant is a Chapter 7 debtor and no longer conducting business, the Bureau did not seek its standard compliance and reporting requirements. Instead, the finalized settlement prohibits the defendant from resuming operations, disclosing or using customer information obtained during the course of offering or providing debt relief services, or attempting “to collect, sell, assign, or otherwise transfer any right to collect payment” from any consumers who purchased or agreed to purchase debt relief services. The defendant is also required to pay more than $35 million in redress to affected consumers, a $1 civil money penalty to the Bureau, and $5,000 in civil money penalties to each of the three states.
The court previously entered final judgments against several of the defendants, as well as a default judgment and order against two other defendants (covered by InfoBytes here, here, here, and here).
2nd Circuit: Willful FBAR violations capped at 50 percent of aggregate balance
On July 13, the U.S. Court of Appeals for the Second Circuit held 2-1 that, under 31 U.S.C. § 5321 as amended, the maximum penalty for failing to file a Foreign Bank and Financial Accounts Report (FBAR) is 50 percent of the aggregate balance in the accounts at the time of the failure. According to the opinion, after a now deceased individual willfully failed to file an FBAR in 2008 for two foreign bank accounts, the IRS assessed a “willful penalty” that amounted to 50 percent of the aggregate account balances (approximately $4.2 million). The individual passed away without paying the penalty, and the U.S. government filed a lawsuit against his estate’s co-executors (defendants). A 1987 regulation limited the penalties for willful violations to $100,000 per account, but a 2004 amendment to the statute increased the maximum penalty for willful violations, to the greater of $100,000 or 50 percent of the aggregate account balance at the time of the violation. The defendants argued that the 1987 $100,000 penalty cap should apply, but the district court granted summary judgment for the government, though it noted that, despite the 2004 amendment, Treasury did not amend the 1987 regulation’s “now-inconsistent FBAR penalty provision,” which remains codified in the Code of Federal Regulations.
On appeal, the majority agreed with the district court, holding that the 2004 statute amended the penalty provisions: “Given that, [] Congress in 2004 raised the maximum penalty for such violations after being informed by the Secretary [of the Treasury] that perhaps as many as 800,000 persons required to file FBARs were noncompliant, a regulation purporting to nullify the statutory increase plainly does not ‘carry out’ Congress’s goal of encouraging compliance with the FBAR requirement.” The 2nd Circuit also rejected the defendants’ argument that the rule of lenity requires that any ambiguity be resolved in their favor, pointing out that “[t]here is no ambiguity or uncertainty as to what Congress intended in the 2004 Statute when it” increased the penalties. The dissenting judge stated that the majority’s decision “departs from basic administrative law and unjustifiably accommodates ‘the Treasury’s relaxed approach to amending its regulations.’”
8th Circuit affirms summary judgment for mortgage servicer
On July 9, the U.S. Court of Appeals for the Eighth Circuit affirmed summary judgment in favor of a mortgage loan servicer (defendant), concluding that the defendant’s communications were not in connection with an attempt to collect a debt. The plaintiff had alleged that the defendant violated the FDCPA by engaging in misrepresentations and unfair conduct when processing the plaintiff’s application for loss mitigation assistance and selling the plaintiff’s home through a foreclosure sale. According to the 8th Circuit, “the district court applied the ‘animating purpose’ test, which considers the content of each communication individually, and determined that they were not made in connection with the collection of a debt.”
In affirming the district court’s recent order, the 8th Circuit agreed with the district court’s decision that the defendant did not violate the FDCPA because the substance of each of the communications indicates that none were made in connection with an attempt to collect on the underlying mortgage debt.
District Court says retailer not an intended third-party beneficiary of a credit card arbitration provision
On July 8, the U.S. District Court for the Central District of California denied a retailer’s motion to compel arbitration in a consumer data sharing putative class action, ruling that the retailer was not an intended third-party beneficiary of an arbitration provision in a credit card agreement. The proposed class had filed an amended complaint accusing several national retailers of illegally sharing consumer transaction data in violation of the FCRA, the California Consumer Privacy Act, and California’s unfair competition law, among others. The motion at issue, filed by one of the retailers, addresses a named plaintiff’s opposition to compel arbitration. The retailer argued that as an “intended” third-party beneficiary of the contract, it had the right to enforce an arbitration clause contained in a credit card agreement purportedly signed by the plaintiff when she opened a retailer credit card account issued by an online bank.
The court disagreed, finding that the contract’s arbitration provisions specifically referred to the bank, and that the contract did not clearly “express an intention to confer a separate and distinct benefit on [the retailer].” Moreover, the court noted the contract at issue instructed the plaintiff to send any arbitration demand notices to the bank, adding that “[i]t seems unlikely that the parties would expect a demand for arbitration solely against the [retailer]—that does not involve [the bank]—to be sent to [the bank].”
District Court allows CFPB to pursue 2016 structured settlement claims
On July 12, the U.S. District Court for the District of Maryland issued an opinion denying several motions filed by parties in litigation stemming from a 2016 complaint filed by the CFPB, which alleged the defendants employed abusive practices when purchasing structured settlements from consumers in exchange for lump-sum payments. As previously covered by InfoBytes, the Bureau claimed the defendants violated the CFPA by encouraging consumers to take advances on their structured settlements and falsely representing that the consumers were obligated to complete the structured settlement sale, “even if they [later] realized it was not in their best interest.” After the court rejected several of the defendants’ arguments to dismiss based on procedural grounds and allowed the CFPB’s UDAAP claims against the structured settlement buyer and its officers to proceed, the CFPB filed an amended complaint in 2017 alleging unfair, deceptive, and abusive acts and practices and seeking a permanent injunction, damages, disgorgement, redress, civil penalties and costs.
In the newest memorandum opinion, the court considered a motion to dismiss the amended complaint and a motion for judgment on the pleadings on the grounds that the enforcement action was barred by the U.S. Supreme Court’s decision in Seila Law LLC v. CFPB, which held that that the director’s for-cause removal provision was unconstitutional (covered by a Buckley Special Alert), and that the ratification of the enforcement action “came too late” because the statute of limitations on the CFPA claims had already expired. The court reviewed, among other things, whether the doctrine of equitable tolling saved the case from dismissal and cited a separate action issued by the Middle District of Pennsylvania which concluded that an “action was timely filed under existing law, at a time where there was no finding that a provision of the Dodd-Frank Act was unconstitutional.” While noting that the ruling was not binding, the court found the facts in that case to be similar to the action at issue and the analysis to be persuasive. As such, the court denied the motion to dismiss and the motion for judgment on the pleadings, and determined that the Bureau may pursue the enforcement action originally filed in 2016.
District Court approves final settlement in tribal lending class action
On July 9, the U.S. District Court for the Eastern District of Virginia granted final approval of a revised class action settlement, certifying the settlement class, approving the settlement terms, and entering final judgment regarding allegations that an operation used tribal sovereign immunity to evade state usury laws when charging unlawful interest on loans. As previously covered by InfoBytes, in March, the plaintiffs filed a class action complaint against the operation alleging, among other things, violations of the Racketeer Influenced and Corrupt Organizations Act, EFTA, and TILA. The settlement cancels roughly 71,000 loans, requires the operation to pay $86 million in damages, and caps fees at $15 million. According to the final approval, the court finds the revised settlement to be “fair, reasonable, and adequate.”