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New York Appeals Court Holds State Appraisal Laws Not Preempted

On November 22, the New York Court of Appeals ruled in Cuomo v. First American Corporation, No. 184, 2011 WL 5838482 (N.Y. Nov. 22, 2011) to affirm two lower court rulings and allow the state attorney general to pursue state law claims against an appraiser. The court held that New York state laws regulating appraisal practices are not preempted by federal laws, including the Home Owner's Loan Act (HOLA) and the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). In its complaint, the state alleges that a title company illegally inflated appraisal reports for a lender with which it did a substantial volume of business, in violation of the state's Executive Law and Consumer Protection Act, as well as state common law. Arguing alternatively that federal law occupied the entire field of real estate appraisals, or that New York's regulations obstructed the lenders ability to finance real estate transactions, the appraiser moved to dismiss and lost. On appeal to the Appellate Division, the appraiser abandoned the second theory regarding conflict, but the lower court decision holding no preemption still was affirmed. The Court of Appeals agreed, holding that "FIRREA governs the regulation of appraisal management companies and explicitly envisioned a cooperative effort between federal and state authorities." Moreover, the court found "no basis to conclude that HOLA itself or federal regulations promulgated under HOLA preempt" state common or statutory law claims. Those regulations do not explicitly list appraisal laws as a type of preempted state law, and to the contrary provide that state laws that only incidentally affect lending operations of federal savings associations are not preempted. According to the court, authority to pursue the appraisal company under state law would, at most, incidentally affect the institutions lending operations. One judge dissented from the majority opinion and argued that federal guidance on preemption creates conflicts in that some mortgage-related state laws are preempted, e.g. those regarding mortgage processing, under HOLA.

West Virginia Federal Court Holds That A State Debt Collection Law Is Not Preempted Under Dodd-Frank

On October 13, the U.S. District Court for the Southern District of West Virginia held that the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank or Act) did not preempt provisions of the West Virginia Consumer Credit and Protection Act (WVCCPA) that regulate debt collection activities. Cline v. Bank of America, N.A., Case No. 2:10-1295 (S.D. W. Va. Oct. 13, 2011). Plaintiff's complaint alleged that national bank defendant harassed him in violation of the WVCCPA in order to collect on a motorcycle loan. Defendant moved for a judgment on the pleadings, arguing that the WVCCPA was preempted by the National Bank Act (NBA) and a preemption regulation promulgated by the Office of the Comptroller of the Currency (OCC). The court noted that Dodd-Frank amended the NBA by providing that a state consumer financial law is preempted if in accordance with Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996), the state law prevents or significantly interferes with the exercise of a national bank power. The court stated that the preemption standard set forth in Barnett Bank is whether the state law (i) imposes an obligation on a national bank in direct conflict with federal law or (ii) is an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. The court also noted that the OCC amended its preemption regulation pursuant to Dodd-Frank to clarify that its focus is no longer on whether a state law obstructed, impaired, or conditioned a national bank power or more than incidentally affected the exercise of that power, but whether the state law is preempted based on an application of Barnett Bank. The court next discussed whether the preemption provisions contained in Dodd-Frank applied to the instant case, because the Act provides that it does not alter or affect OCC regulations governing the applicability of state law to any contract entered on or before July 21, 2010. The court concluded that this Dodd-Frank provision was intended only to preserve existing contracts by national banks, and not to protect national banks from state consumer protection laws. Therefore, the Dodd-Frank preemption provisions applied to the instant action. The court then found that Dodd-Frank's preemption provisions only concerned state consumer financial laws, and that if a state law is not a state consumer financial law, the state law is not preempted by the NBA.* The court held that the state law protects West Virginia residents from unfair and abusive collection practices, and thus is not a consumer financial law. Accordingly, the court concluded that none of plaintiff's claims were preempted. The court then analyzed whether plaintiff's claims were preempted under the OCC's amended regulation. The court stated that the OCC's new regulation tied preemption to Barnett Bank, and that in this case, the West Virginia law did not impose an obligation on defendant in direct conflict with federal law or stand as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. The court thus denied defendant's motion.

California Appeals Court Affirms Decision Requiring Recordation of Assignment for a Mortgage but not Deed of Trust

On September 11, the California Court of Appeals for the Second Appellate District affirmed a lower court's ruling that California Civil Code §2932.5 does not apply when the power of sale is conferred in a deed of trust rather than a mortgage. Calvo v. HSBC Bank USA, N.A., No. BC415545 (Cal. Ct. App. 2011) The plaintiff received a loan, not from the defendant, that was secured by a deed of trust against her residence and was recorded on September 1, 2006. In 2008, a substitution of trustee and notice of default was recorded by the defendant purporting to be the assignee of the loan.  The substitution of trustee did indicate that an assignment had occurred, however, no actual assignment of deed of trust was recorded.  The defendant assignee bought the plaintiff's residence at the foreclosure sale.  The plaintiff then sued, alleging that the defendant violated California law by initiating the foreclosure proceeding under the deed of trust without recording the assignment of the deed of trust. The court held that it has been established since 1908 that under §2932.5, an assignment for the beneficial interest in a debt that was secured by real property required recordation if the assignee wanted to exercise the power of sale only for a mortgage and not for a deed of trust. The court noted that this holding has never been reversed or modified in any reported California decision in the 100 years since. Plaintiff contended that in the modern era, no difference exists between a mortgage and a deed of trust. The court responded that California case law does not support that interpretation and that other statutes allowed parties to initiate foreclosure on behalf of the defendant irrespective of the recording of an assignment of deed of trust. 

Iowa Federal Court Holds That State Electronic Funds Transfer Law Is Preempted

On August 29, the U.S. District Court for the Southern District of Iowa held that a state statute regulating state bank electronic funds transfers (EFTs) was preempted with respect to how a national bank could provide services to those state banks. U.S. Bank N.A. v. Schipper, Case No. 4:10-cv-00064 (S.D. Iowa Aug. 29, 2011). In this case, U.S. Bank provided EFT services to Iowa state-chartered banks and sought a declaration that the State regulators could not enforce the Iowa Electronic Transfer of Funds Act against the national bank or any other financial institution engaging in business with the national bank. The District Court agreed, finding that the OCC has specified that national banks may provide to other financial institutions any service the bank may perform for itself, including EFT services without qualification or reservation. Furthermore, the Court held that the Iowa statute, while not directly enforceable against a national bank, does significantly impair the bank's ability to exercise its federally granted powers. The Court issued a permanent injunction, prohibiting the state regulatory agencies from enforcing the state statutory sections at issue against U.S. Bank or any entity to which U.S. Bank provides the EFT-related services. Importantly, the Court also stated that the Dodd-Frank Act adopted the same standard applied by the U.S. Supreme Court in its 2007 Watters v. Wachovia decision, and that it did not materially alter the standard for preemption the Court must apply.  The court thus issued a permanent injunction.

Ninth Circuit Finds California Debt Collection Law Is Not Preempted

On August 1, the U.S. Court of Appeals for the Ninth Circuit held that the National Bank Act and regulations promulgated thereunder do not preempt the California Rees-Levering Act's (Act) provision that the lender may not collect a deficiency unless certain notices are given to the borrower before the lender sells a repossessed vehicle. Aguayo v. U.S. Bank, Case No. 09-56679 (9th Cir. Aug. 1, 2011). The borrower sued its lender, a national bank, alleging that the bank sold his vehicle without giving him the required notices. The District Court found that the Act's requirements were preempted and granted the bank's motion to dismiss. On appeal, the Ninth Circuit reversed and remanded for further proceedings. The Ninth Circuit noted that 12 C.F.R. § 7.4008 - a regulation promulgated by the OCC preempting certain state laws related to non-real estate loans - contains a savings clause providing that it does not preempt state laws related to rights to collect debts. The Ninth Circuit determined that the savings clause applied to the Act because debt collection, including the right to repossess property, is a fixture of state law, not federal law. The Ninth Circuit added that the bank chose to use its right to self-help repossession under state law, but now claims that it no longer needs to comply with state law to collect any remaining debt. The Ninth Circuit found that this inconsistency demonstrates that the bank's debt collection efforts fall within the savings clause and thus are not preempted. The bank argued that recovering a deficiency falls within the bank's lending power, and thus more than incidentally affects lending powers and therefore does not fall within the reach of the savings clause. The Ninth Circuit, however, found that there is no loan at this point, but only an outstanding debt for which the bank seeks to recover by using a state law remedy. After finding that the savings clause applies to the Act's notice requirements, the Ninth Circuit then addressed whether express preemption is still available under the provision in § 7.4008 preempting state laws related to disclosures in credit-related documents. The Ninth Circuit held that the notice requirements in the Act operate differently from disclosure requirements, and that a debt collection notice is not a credit-related document because the lending relationship has ended. Therefore, the notice requirements do not fall within the scope of the express preemption provision in § 7.4008. As a result, the bank lost the right to obtain a deficiency after selling the repossessed car because it did not give the required notice.

Texas Adopts Provisions Regarding Criminal Prosecution of Mortgage Fraud

On June 17, Texas Governor Rick Perry signed into law S.B. 485, which adds an article to the Texas Code of Criminal Procedure to provide that offenses that are prosecuted as mortgage fraud may be brought in (i) the county in which the real estate is located, (ii) any county in which part of the transaction occurred, including the generation of documentation supporting the transaction, or (iii) any county authorized by Article 13.27, i.e., any county in which any material document was sent or any county in which any such material document was delivered. The amendment is effective September 1, 2011.

Eleventh Circuit Applies Dodd-Frank Preemption Standard To Find That State Law Is Preempted

On May 11, the U.S. Court of Appeals for the 11th Circuit held that a Florida law significantly interfered with federally-authorized bank powers and thus was preempted under the Dodd-Frank Act. Baptista v. JP Morgan Chase Bank, No. 6:10-cv-139 (11th Cir. May 11, 2011). The defendant national bank charged the plaintiff, who did not hold an account at the bank, a $6 fee for cashing a check. The plaintiff brought a class action lawsuit in federal district court, alleging that the bank’s check-cashing fee violated a Florida statutory provision that prohibited the fee and that it unjustly enriched the bank. The district court dismissed both claims as preempted under 12 U.S.C. § 24 (Seventh), which accords national bank powers incidental to the business of banking, and 12 C.F.R. § 7.4002, which is a regulation promulgated by the Office of the Comptroller of the Currency (OCC) authorizing national banks to charge customers non-interest charges and fees. In dismissing the plaintiff’s claims, the district court noted that the OCC interpreted "customer" to include not just accountholders, but any person who presents a check for payment. The plaintiff appealed, and the 11th Circuit affirmed. The court noted that the Dodd-Frank Act provides that "State consumer financial laws are preempted . . .if . . . in accordance with Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996), the State consumer financial law prevents or significantly interferes with the exercise by [a] national bank of its powers." The court concluded that under this standard, "the proper preemption test asks whether there is a significant conflict between the state and federal statutes-that is, the test for conflict preemption." The court concluded that the OCC was authorized by Congress to regulate banking, that the OCC’s definition of "customer" to include a non-accountholder presenting a check for payment was not unreasonable, and that the Florida law substantially conflicted with the authorization of national banks to charge non-accountholders with check-cashing fees.

Hawaii Amends State Code Concerning Mortgage Foreclosure Process

On May 5, Hawaii Governor Neil Abercrombie signed into law several amendments to the state’s mortgage foreclosure statutes. The changes were encompassed within Senate Bill (S.B.) No. 651, "Relating to Mortgage Foreclosures". The bill places numerous procedural requirements in the way of foreclosure completion. Section 667-D, entitled "Availability of dispute resolution required before foreclosure," mandates that a foreclosing mortgagee participate in a dispute resolution program at the election of the owner-occupant in order to "attempt to negotiate an agreement that avoids foreclosure or mitigates damages in cases where foreclosure is unavoidable." The amendments also require (at § 667-E) that foreclosure notices advise of that obligation. The program requires the owner-occupant to pay a $300 participation fee. (§ 667-H). Both the mortgagor and the owner-occupant may be represented by counsel in a dispute resolution; the owner-occupant may also be assisted by "an approved housing counselor or approved budget and credit counselor." (§ 667-J). Within ten days of conclusion of a dispute resolution, the neutral participant examining the parties’ claims is required to file a "closing report" with Hawaii’s Department of Commerce and Consumer Affairs, advising (among other things) whether the parties were able to resolve the dispute. The foreclosure process may resume (§ 667-K) after the report is recorded with Hawaii’s Bureau of Conveyances or Land Court (as appropriate).

Ninth Circuit Holds Fixed APR in Credit Card Solicitation May Be Misleading To Consumers

On July 21, the U.S. Court of Appeals for the Ninth Circuit held that a plaintiff properly alleged claims under the Truth in Lending Act (TILA) and the California Unfair Competition Law (UCL) because the use of the term "fixed" to describe an annual percentage rate (APR) along with an enumeration of three specific exceptions may have been misleading to a consumer when the APR was also subject to change for other reasons. Rubio v. Capital One Bank, No. 08-56544, 2010 WL 2836994 (9th Cir. July 21, 2010). In Rubio, the plaintiff consumer applied for and received a credit card pursuant to a direct-mail solicitation from the defendant bank in 2004. The solicitation’s "Schumer Box," as required by federal law, described the credit card’s APR as a "fixed rate of 6.99%." A paragraph below the Schumer Box stated that the APR was subject to increase in the case of (i) a failure to make a payment when due, (ii) an overlimit account, and/or (iii) a returned payment. When the consumer received her credit card, she also received a Cardholder Agreement that contained a reservation of the right of the bank to "amend or change any part" of the agreement "at any time." While none of the three enumerated conditions occurred, three years later the consumer received notice from the bank that her APR would increase. The consumer subsequently filed suit against the bank, alleging violations of TILA and the UCL and asserting a breach of contract claim.

In concluding that the bank’s disclosure was misleading under TILA, the Ninth Circuit relied in part on a study conducted by the Federal Reserve Board, which found that consumers "frequently assume that a rate that is labeled ‘fixed’ cannot be changed for any reason." Based in part on the same study, the Federal Reserve Board recently promulgated revisions to Regulation Z, which, as of July 1, 2010, bar the use of the term "fixed" in the Schumer box in certain circumstances. While those regulations did not apply retroactively to this case, the Ninth Circuit found them persuasive in determining that the disclosure at issue should be viewed as misleading. The Ninth Circuit reasoned that a reasonable consumer could conclude that the APR was "’unchangeable’ except for the three exceptions" listed next to the Schumer box and that it was, thus, reasonable for a consumer to conclude that the three enumerated conditions tied to the Schumer box were identified "precisely because they were the only reasons that the APR could change." The Ninth Circuit further held that the misleading nature of the disclosure as measured under TILA’s standards was sufficient to state a claim under the UCL.

Florida Federal Court Holds NBA Preempts State Law Barring Check Cashing Fees

On June 4, the U.S. District Court for the Middle District of Florida held that the National Bank Act (NBA) and Office of the Comptroller of the Currency (OCC) regulations preempt a Florida law prohibiting check cashing fees. Baptista v. JP Morgan Chase Bank, No. 6:10-cv-139, 2010 WL 2342436 (M.D. Fla. June 4, 2010). In this putative class action, the defendant bank charged the plaintiff a fee for cashing a check at the bank because she was a non-account holder. The plaintiff sued, claiming unjust enrichment and arguing that Fla. Stat. § 655.85 forbids banks from cashing checks at less than par value. The court granted the bank’s motion to dismiss, finding that § 655.85 only forbids check-cashing fees on bank-to-bank transactions, and, thus, does not apply to the plaintiff. The court additionally held that the NBA and OCC regulations would preempt the statute’s prohibition on check cashing fees even if § 655.85 applied to the plaintiff. The court reasoned that the Florida check cashing fee statute conflicts with OCC regulations that (i) authorize national banks to charge their customers non-interest charges and fees, and (ii) provide that the establishment and amounts of non-interest charges and fees are business decisions made at their discretion. Ruling on whether the non-account holder was a “customer” under the relevant OCC regulations, the court added that OCC interpretive letters define “customer” as any party that obtains a product or service from the bank; thus, the plaintiff was a “customer” because she received check cashing services, even if she was a non-account holder. The court also dismissed the plaintiff’s claim for unjust enrichment, finding that the claim sought damages from the bank for exercising federally-authorized powers, and, thus, was preempted.