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District Court dismisses usury claim against New York lender
On August 12, the U.S. District Court for the Western District of New York dismissed usury claims against a lender, concluding that lenders licensed in New York can charge interest rates up to 25 percent on loans under $25,000. According to the opinion, a consumer received a check in the mail in the amount of $2,539 from a licensed lender under Article IX of New York Banking Law, with terms requiring repayment at an annual interest rate of 24.99 percent, if the consumer cashed the check. The consumer cashed the check, agreeing to the loan terms. After failing to repay the debt in full, the consumer filed a complaint against the lender asserting various claims, including that the interest rate is unenforceable under New York General Obligations Law (GOL) § 5-511 because it exceeds 16 percent. The lender moved to dismiss the action.
The court agreed with the lender on the usurious claim, concluding that as a licensed lender in New York, the lender is “authorized to extend loans of $25,000 or less with interest rates up to 25[percent]” which is “the limit set by New York’s criminal usury statute, New York Penal Law § 190.40.” The court cited to NYDFS interpretations, stating that unlicensed nonbank lenders may not charge more than a 16 percent annual interest rate, but lenders that “obtain an Article IX license [] may charge interest up to 25[percent] per annum on the small loans.” Because the lender was licensed under Article IX in the state of New York, the lender “was permitted to loan $2,539.00 to [the consumer] at an agreed-upon annual interest rate of 24.99[percent] without violating GOL § 5-511.”
District court applies OCC’s valid-when-made final rule but raises true lender question
On August 12, the U.S. District Court for the District of Colorado reversed in part a bankruptcy court judgment, concluding that the OCC’s valid-when-made rule applied but that discovery was needed to determine whether a nonbank entity was the true lender. According to the opinion, a debtor corporation commenced an adversary proceeding against a creditor in their bankruptcy, alleging, among other things, that the interest rate of the underlying debt’s promissory note is usurious under Colorado law. The promissory note was executed between a Wisconsin state-charted bank and a Colorado-based corporation, with an interest rate of nearly 121 percent. The note included a choice of law provision dictating that federal law and Wisconsin law govern. A deed of trust, dictating that Colorado law (the property’s location) governs, was pledged as security on the promissory note and incorporated by referencing the terms of the note. Subsequently, the Wisconsin bank assigned its rights under the note and deed of trust to a nonbank entity registered in New York with a principal place of business in New Jersey. The bankruptcy court denied the debtor’s claims, concluding that the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) applied, which dictated the application of Wisconsin law, making the interest rate valid.
On appeal, the district court applied the OCC’s valid-when-made rule (which was finalized in June and covered by a Buckley Special Alert), concluding that “a promissory note with an interest rate that was valid when made under DIDMCA § 1831d remains valid upon assignment to a non-bank.” However, the district court noted that DIDMCA § 1831d does not apply to promissory notes “with a nonbank true lender” and the parties did not “conduct discovery on the factual question of whether [the nonbank entity] was the true lender.” Thus, the court reversed and remanded to the Bankruptcy Court to determine whether the nonbank entity was the true lender.
District court: Lender does not owe PPP fees to accountant without contract
On August 17, the U.S. District Court for the Northern District of Florida dismissed an action alleging an accounting firm is entitled to a portion of the fees paid by the Small Business Administration (SBA) to lenders making loans under the Paycheck Protection Program (PPP). According to the order, an accounting firm filed an action against a lender alleging the lender did not pay “agent fees” reportedly due to it under the PPP. The accounting firm argued that the PPP and its implementing regulation require lenders to pay agent fees “irrespective of whether there is an agreement between the agent or borrower and the lender to do so.” Moreover, the accounting firm asserted the fees were required based on “equitable principles [] under state common law,” because the lender was “aware of and benefitted from the work [the accounting firm] did on the borrowers’ PPP loan applications.”
The district court dismissed the action, concluding that the CARES Act—which created the PPP—and its implementing regulation do not “require lenders to pay the agent’s fees absent an agreement to do so.” According to the court, the CARES Act establishes a ceiling on fees an agent may collect in preparing an application for a borrower and the applicable interim final regulation (IFR) “simply explains that, if an agent is to be paid a fee, the fee must be paid by the lender from the fee it receives from the SBA.” The court noted that the SBA’s existing Section 7(a) lending requirements establish that fees charged by an agent require a “compensation agreement” to be provided to the SBA, and because these existing Section 7(a) program requirements “do not conflict with the IFR, they apply to agents who assist borrowers in obtaining loans under the PPP.” Because there was no contractual agreement between the parties, the court concluded that the financial institution had no legal obligation to pay the accounting firm agent fees. Lastly, the court rejected the state common law claims, concluding that the accounting firm did not establish that it directly conferred a benefit on the financial institution, noting that the SBA fees were “merely an incidental benefit of [the accounting firm]’s work for the borrowers.”
11th Circuit holds forfeiture is required for money laundering even without financial harm
On August 12, the U.S. Court of Appeals for the Eleventh Circuit reversed a district court’s denial of a government forfeiture order, concluding that a forfeiture order is still mandatory when a defendant is convicted of a money laundering scheme even when no financial harm is caused to a bank. According to the opinion, between 2000 and 2009 an international businessman engaged in “mirror-image” financial transactions, which includes using phony invoices to launder money between his corporations. The bank involved incurred no financial loss from the transactions, due to the “mirror-image nature of the scheme,” and all financial draws were repaid with interest. The opinion notes that “had the Bank known of the falsehoods that prompted these financial transactions, it would not have approved [them].” In 2017, the defendant pled guilty to conspiracy to commit money laundering and the government requested forfeiture of over $20.8 million. The district court sentenced the defendant to 27-months imprisonment and denied the government’s forfeiture motion, noting that the purpose of forfeiture would not be served since the defendant returned all the money plus interest.
On appeal, the 11th Circuit disagreed, holding that the language of the U.S. money laundering statute (18 U.S.C. § 982(a)(1)), as stated by the Supreme Court, “provides that a district court ‘shall order’ forfeiture, [Congress] ‘could not have chosen stronger words to express its intent that forfeiture be mandatory.’ The appellate court noted that there is no “double counting” merely because the money was returned to the bank, and this is not a case of “double recovery” because the defendant “made no payment to the government body seeking forfeiture.” Moreover, the court agreed with the government that “substitute forfeiture” is permitted, rejecting the defendant’s claim that the bank was the owner of the funds; therefore, not a “third party” to whom the money was transferred within the meaning of e 21 U.S.C. § 853(p). Lastly, the appellate court rejected the district court’s conclusion that the $20.8 million forfeiture order was “excessively punitive,” holding that the court “failed to properly define the harm” when performing the excessiveness analysis. The appellate court noted that on remand, the district court “must consider the adverse impact on society that money laundering generally has as well as the specific conduct that [the defendant] engaged in” when determining the forfeiture amount.
Lender and owner to pay $12.5 million in civil money penalties in CFPB administrative action
On August 4, an Administrative Law Judge (ALJ) recommended that a Delaware-based online payday lender and its CEO be held liable for violations of TILA, CFPA, and the EFTA and pay restitution of $38 million and $12.5 million in civil penalties in a CFPB administrative action. As previously covered by InfoBytes, in November 2015, the Bureau filed an administrative suit against the lender and its CEO alleging violations of TILA and the EFTA, and for engaging in unfair or deceptive acts or practices. Specifically, the CFPB argued that, from May 2008 through December 2012, the online lender (i) continued to debit borrowers’ accounts using remotely created checks after consumers revoked the lender’s authorization to do so; (ii) required consumers to repay loans via pre-authorized electronic fund transfers; and (iii) deceived consumers about the cost of short-term loans by providing them with contracts that contained disclosures based on repaying the loan in one payment, while the default terms called for multiple rollovers and additional finance charges. In 2016, an ALJ agreed with the Bureau’s contentions, and the defendants appealed the decision. In May 2019, CFPB Director Kraninger remanded the case to a new ALJ.
After a new hearing, the ALJ concluded that the lender violated (i) TILA (and the CFPA by virtue of its TILA violation) by failing to clearly and conspicuously disclose consumers’ legal obligations; and (ii) the EFTA (and the CFPA by virtue of its EFTA violation) by “conditioning extensions of credit on repayment by preauthorized electronic fund transfers.” Moreover, the ALJ concluded that the lender and the lender’s owner engaged in deceptive acts or practices by misleading consumers into “believing that their APR, Finance Charges, and Total of Payments were much lower than they actually were.” Lastly, the ALJ concluded the lender and its owner engaged in unfair acts or practices by (i) failing to clearly disclose automatic rollover costs; (ii) misleading consumers about their repayment obligations; and (iii) obtaining authorization for remote checks in a “confusing manner” and using the remote checks to “withdraw money from consumers’ bank accounts after consumers attempted to block electronic access to their bank accounts.” The ALJ recommends that both the lender and its owner pay over $38 million in restitution, and orders the lender to pay $7.5 million in civil money penalties and the owner to pay $5 million in civil money penalties.
Bank settles overdraft fee litigation for $7.5 million
On August 10, the U.S. District Court for the Southern District of Florida granted final approval of a $7.5 million settlement, resolving a decade-long multidistrict litigation concerning overdraft fees. The settlement covers allegations that a U.S.-based affiliate of an international bank charged improper assessment and collection of overdraft fees due to “high-to-low posting.” In 2012, the bank was purchased by a U.S. national bank and the national bank inherited the litigation as the successor in interest. The settlement involves over 148,000 class members, “who, from October 10, 2007 through and including March 1, 2012, incurred one or more Overdraft Fees as a result of [the bank]’s High-to-Low Posting.” The $7.5 million settlement includes $10,000 to the sole class representative and over $2.6 million to the class attorneys (representing 35% of the settlement fund).
2nd Circuit: Furnisher’s duty to investigate triggered only after it receives notice of dispute from CRA
On August 10, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal with prejudice of FCRA and related state law allegations against a state bank and trust company, concluding that the bank’s duty to investigate is triggered only after it receive a notice of dispute from a consumer reporting agency (CRA). According to the opinion, the plaintiffs obtained a mortgage from the bank but later defaulted on their payments. The bank initiated foreclosure proceedings, and in 2014 both parties agreed to a deficiency judgment. In February 2016, one of the plaintiffs notified the bank that his credit report “inaccurately indicated ‘that the mortgage. . .was still open and payments had not been made in more than two years.’” The bank acknowledged the error in March, said a correction had been made to report the loan as closed, and indicated that “information [would] be supplied to the credit reporting agencies.” However, the plaintiff claimed the bank did not correct the information until November 2016. In their amended complaint, the plaintiffs alleged the bank violated the FCRA by (i) “negligently and willfully fail[ing] to perform a reasonable reinvestigation and correction of inaccurate information”; and (ii) “engag[ing] in behavior prohibited by [the] FCRA by failing to correct errors in the information that it provided to credit reporting agencies.” The bank countered that its “duty of investigation is only triggered after a furnisher of information receives notice of a dispute from a consumer reporting agency” and that the plaintiffs failed to allege that the bank “‘ever received notice of a dispute from a consumer reporting agency.’” The district court granted the bank’s motion to dismiss with prejudice for failure to state a claim.
On appeal, the 2nd Circuit agreed with district court, concluding, among other things, that the plaintiffs “do not allege that a CRA notified [the bank] of their dispute concerning the information in the [r]eport.” According to the appellate court, the plaintiffs “do not even allege that they notified a CRA of the discrepancy. The [a]mended [c]omplaint alleges only that, after receiving the [r]eport, [the plaintiff] directly notified [the bank] of the [r]eport’s inaccuracy. This alone is insufficient to state a claim under Section 1681s–2(b).”
District court rescinds arbitration order in ATM and overdraft fee case
On August 10, the U.S. District Court for the Southern District of California agreed to reconsider a prior decision, which granted a bank’s motion to compel arbitration in connection with a lawsuit concerning the bank’s assessment of two types of fees. As previously covered by InfoBytes, the court compelled arbitration of a plaintiff’s lawsuit asserting claims for breach of contract and violation of California’s Unfair Competition Law due to the bank’s alleged practice of charging fees for out-of-network ATM use and overdraft fees related to debit card transaction timing. The court concluded that even if the California Supreme Court case McGill v. Citibank rule— which held that an arbitration agreement is unenforceable if it constitutes a waiver of the plaintiff’s substantive right to seek public injunctive relief (covered by a Buckley Special Alert here)—was applicable to a contract, it would not survive preemption as the U.S. Supreme Court has “consistently held that the Federal Arbitration Act (FAA) preempts states’ attempts to limit the scope of arbitration agreements,” and “the McGill rule is merely the latest ‘device or formula’ intended to achieve the result of rendering an arbitration agreement against public policy.”
The plaintiff moved for the court’s reconsideration after the U.S. Court of Appeals for the Ninth Circuit issued opinions in Blair v. Rent-ACenter, Inc. et al and McArdle v. AT&T Mobility LLC). In Blair (and similarly in McArdle), the 9th Circuit concluded that McGill was not preempted by the FAA. The appellate court found that McGill does not interfere with the bilateral nature of a typical arbitration, stating “[t]he McGill rule leaves undisturbed an agreement that both requires bilateral arbitration and permits public injunctive claims.” (Covered by InfoBytes here.)
The court granted the plaintiff’s motion, concluding that the public injunction waiver in the account agreement is “encompassed by McGill” and therefore, the arbitration agreement is “invalid and unenforceable,” and because the arbitration agreement includes a non-severability clause, the “clause plainly invalidates the entire arbitration agreement section as a result of the invalidity and unenforceability of the public injunction waiver provision therein.”
Court rejects consumer’s RESPA claims against mortgage servicer
On August 5, the U.S. District Court for the Northern District of West Virginia granted a mortgage servicer’s motion for summary judgment, concluding that the servicer “maintained contact and regularly worked” with the consumer to complete her loss mitigation application and thus did not violate Regulation X. According to the opinion, after obtaining the rights to the property and assuming mortgage responsibilities pursuant to a divorce decree, the consumer stopped making mortgage payments in July 2018. The mortgage servicer confirmed the consumer as the successor in interest to the mortgage on March 7, 2019 and on March 14, 2019, the consumer sent the servicer an incomplete loss mitigation application. Between March 2019 and June 2019, the consumer submitted additional loss mitigation application materials and partial application materials for a loan assumption, with the servicer regularly contacting the consumer to obtain documents necessary to complete the applications. The consumer asserted that the servicer, in violation of §1024.41(b)(1), failed to exercise reasonable diligence in obtaining documents and information from her to complete her loss mitigation application and, in violation of §1024.41(c)(1) and §1024.41(c)(2), failed to evaluate her complete loss mitigation application for all loss mitigation options available.
The court granted summary judgment in favor of the servicer. The court reasoned that “undisputed evidence” establishes that the servicer “maintained contact and regularly worked” with the consumer to obtain the paperwork it needed. Moreover, the court noted that while Regulation X requires a servicer to “evaluate a borrower for all loss mitigation options available, that does not mean it must offer every option it considered—or any option at all.” The court rejected the consumers’ claims that the servicer should have offered a loan modification that did not require information from her ex-husband, concluding that Regulation X “required” her ex-husband’s inclusion and nonetheless, “[u]nder the regulatory framework, [the servicer] has discretion to determine which option(s), if any, it offers an applicant.” Lastly, the court disagreed that the mortgage servicer’s actions caused the consumer to incur “substantial damages,” concluding that “evidence of record is clear that her damages were not caused by or even attributable to [the servicer].”
4th Circuit: Arbitration agreement applies to acquired company
On August 7, the U.S. Court of Appeals for the Fourth Circuit issued a split opinion vacating a district court’s decision against arbitration in a proposed class action, which accused a satellite TV provider (defendant) of violating the TCPA by allegedly making automated and prerecorded telemarketing calls to an individual even though her number was on the National Do Not Call Registry. The plaintiff filed a lawsuit against the defendant and several other entities and individuals seeking class certification as well as statutory damages and injunctive relief. The defendant moved to compel arbitration, claiming that the plaintiff’s dispute was covered by an arbitration agreement in the contract governing her cell phone service with a telecommunications company, which is an affiliate of the defendant. The district court denied the request, ruling that the allegations “did not fall within the scope of the arbitration agreement.” The plaintiff appealed, “defend[ing] the district court’s scope ruling,” but arguing that no agreement was formed.
On appeal, the majority concluded that not only did the plaintiff form an agreement to arbitrate with the defendant, the allegations fit within the broad scope of the arbitration agreement. Specifically, the appellate court determined that an arbitration agreement signed by the plaintiff with the telecommunications company in 2012 when she opened a new line of service was extended to potential TCPA allegations against the defendant when the telecommunications company acquired the defendant in 2015. Even though the acquisition happened several years after the plaintiff signed the contract, the majority stated the arbitration agreement had a “forward-looking nature” and that it seemed unlikely that the telecommunications company and its affiliates “intended to restrict the covered entities to those existing at the time the agreement was signed.” According to the majority, “[w]e need not define the outer limits of this arbitration agreement to conclude, based on the arbitration provisions and the contract as a whole, that [the plaintiff’s] TCPA claims about [the defendant’s] advertising calls fall within its scope.” As to the plaintiff’s argument that she only signed the account on behalf of her husband who was the account holder, the majority said the agreement covered “all authorized or unauthorized users,” which the plaintiff was at the time.