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California Federal Court Holds FTC Holder Rule Does Not Require Lenders, Creditors to Provide Holder Notice; NBA Preempts Certain California UCL Claims
On April 12, the U.S. District Court for the Northern District of California held that (i) the Federal Trade Commission’s (FTC) Holder Rule does not require lenders or creditors to include the FTC Holder Notice in consumer credit contracts when the seller has failed to do so, and (ii) the National Bank Act (NBA) preempts certain California Unfair Competition Law (UCL) claims in connection with the failure for a national bank to include the FTC Holder Notice. Kilgore v. Keybank, N.A., Case No. C-08-2958, 2010 WL 1461577 (N.D. Cal. Apr. 12, 2010). In this putative class action, the defendant bank was the partner and preferred lender for an educational institution that became bankrupt. The borrowers alleged that they took out loans from the bank to pay for tuition but were unable to complete their studies because the institution declared bankruptcy. The borrowers brought six claims under the UCL and sought to enjoin the bank from collecting on the loans. The borrowers alleged that its service contracts with the educational institution and the promissory notes with the bank were both consumer credit contracts and omitted the Holder Notice, which the borrowers argued was required. The court first held that the bank was not required to provide the Holder Notice because it was the lender, not a seller, in the transaction. The court reasoned that the Holder Rule imposes obligations only on sellers: “[a]lthough a seller violates the Holder Rule by taking a consumer credit contract – or by accepting proceeds of a purchase money loan made pursuant to a contract – that omits the notice, the same cannot be said of a lender or creditor.” The court also dismissed the borrowers’ fraud claim because it did not properly plead that the bank breached a duty to disclose, as required by the UCL. Next, the court held that the NBA and Office of the Comptroller of the Currency (OCC) regulations preempted several remaining UCL claims against the bank. The court concluded that enjoining the lender from enforcing the notes, based on alleged violations of the UCL, because the borrowers would have had a defense to payment if the Holder Notice had been included, would contravene OCC regulations by allowing the plaintiffs to use state law to alter the terms of credit in the bank’s promissory notes. As stated by the court, “[p]laintiffs’ theory would deploy the UCL to require [the national bank] to comply with a federal regulation that does not itself require [the national bank’s] compliance. Abiding by the Holder Rule would directly affect the terms of credit extended by [the national bank], infringing on a power that national banks are meant to exercise free from state authority.”
California Federal Court Dismisses State Law Claims Against National Bank on Preemption Grounds
On March 15, the U.S. District Court for the Northern District of California held that federal law preempts several state law claims brought against a national bank. O’Donnell v. Bank of America, N.A., Case No. C-07-04500 (N.D. Cal. Mar. 15, 2010). In this putative class action, the plaintiff borrowers alleged that the defendant bank “did not adequately disclose the ‘actual’ interest rate and the certainty of negative amortization” in its adjustable rate mortgage (ARM) loan agreements, and brought claims of breach of contract, as well as fraud and unfair competition under the California Unfair Competition Law (UCL). Regarding the UCL claims, the court held that the claims were preempted because they impermissibly “regulate [the bank’s] disclosures for its ARM loans and to require it to make additional disclosures about negative amortization, applicable interest rates, and payment schedules.” The court further noted that the Office of the Comptroller of the Currency (OCC) has promulgated regulations authorizing national banks to make ARM loans secured by interests in real estate without interference from state law, and to make real state loans without regard to state law with respect to (i) “[t]he terms of credit, including schedule for repayment of principal and interest, amortization of loans, balance, payments due, [and] minimum payments,” (ii) “[d]isclosure and advertising,” (iii) “origination…of…mortgages,” and (iv) “[r]ates of interest on loans.” Hence, the court explained that the “OCC’s regulations…expressly preempt plaintiffs’ ability to use state law to reach [the defendant’s] ‘disclosures’ about its Option ARM loans and the ‘amortization of [the Option ARM] loans,’ including how the amortization and interest rate features are disclosed.” In dicta, the court clarified that its “holding does not mean that state laws of general application…are necessarily preempted if applied to a national bank;” instead, “a state law is preempted only if it requires affirmative action by a national bank in an area covered by a national bank regulation,” as in this case where the borrowers sought “to impose disclosure obligations other than those mandated by” federal law. In addition to its preemption analysis, the court also dismissed breach of contract claims against the bank on the theories that (i) the bank failed to apply monthly payments to both principal and interest on a fully-amortizing basis – because the note stated that "[e]ach monthly payment will be applied as of its scheduled due date and will be applied first to current interest, then to prior unpaid interest, and the remainder to Principal,” and (ii) the bank "switched the interest rate charged on the loans to a much higher rate than the one they promised” and “demanded payments in amounts that exceeded those permitted by the Notes” – because “[a]lthough the interest rates that could be charged were arguably not ‘clearly and conspicuously’ set forth as required by TILA, a careful reading of the loan documents reveals that they did explain how interest rates would be charged and payments credited.”
Ninth Circuit Affirms Dismissal of RESPA, California UCL Claims Against National Bank
On March 9, the U.S. Court of Appeals for the Ninth Circuit affirmed that (i) overcharges do not violate Section 8(b) of the Real Estate Settlement Procedures Act (RESPA), and (ii) National Bank Act and Office of the Comptroller of the Currency (OCC) regulations preempt various provisions of the California Unfair Competition Law (UCL). Martinez v. Wells Fargo Home Mortgage, Inc., No. 07-17277, 2010 WL 779549 (9th Cir. Mar. 9, 2010). In Martinez, the plaintiffs claimed that the defendant bank charged excessive fees for the refinancing of their home mortgage loans. The plaintiffs alleged that the overcharges violated RESPA, while the overcharge and mark-up violated the UCL. Regarding the RESPA claim, the court found that “Section 8(b) does not prohibit charging fees, excessive or otherwise, when those fees are for services that were actually performed.” Although the U.S. Department of Housing and Urban Development (HUD) had issued a policy statement interpreting Section 8(b) as prohibiting overcharges, the court noted that weight is given to an agency’s interpretation of a statute only if the court concludes that the statute is “silent or ambiguous with respect to the specific issue.” In rejecting HUD’s interpretation, the court found that “Section 8(b) is unambiguous and does not extend to overcharges,” and that further analysis was not warranted. Regarding the UCL claims, the plaintiffs alleged that the bank (i) “committed ‘unfair’ competition by overcharging underwriting fees and marking up tax service fees,” (ii) “engaged in ‘fraudulent’ practices by failing to disclose actual costs of its underwriting and tax services, and (iii) engaged in “unlawful practices” by overcharging and marking-up the refinancing fees, as well as failing to disclose such costs. As to the allegations of “unfair” and “fraudulent” conduct, the court found that these claims were preempted by the National Bank Act (NBA) and regulations promulgated by the OCC. Under the NBA, federally chartered banks are subject to generally applicable state laws only to the extent such laws do not conflict with the general purposes of the NBA, which include real estate lending powers as part of the general powers of a national bank. OCC regulations provide that national banks have the power to set fees, and that national banks may make real estate loans under the NBA and the regulations without regard to state-law limitations on disclosures, advertising and processing or origination of such loans. As a result, the court held that federal law preempted the plaintiffs’ claims of “unfair” and “fraudulent” practices in connection with overcharges, mark-ups, and disclosure of fees. Finally, the court held that the alleged predicate violation to establish a claim of “unlawful practices” under the UCL – in this case, a failure to disclosed “actual costs” on the HUD-1 Settlement Statement – was either not unlawful or preempted by the NBA.
Washington Federal Court Holds State Law Claims Regarding Real Estate Lending Fees Not Preempted by NBA
On March 9, the U.S. District Court for the Western District of Washington held that the National Bank Act (NBA) and regulations promulgated by the Office of the Comptroller of the Currency (OCC) do not preempt state law claims challenging the legality of fees related to real estate lending. Deming v. First Franklin, No. 09-5418, 2010 WL 891009 (W.D. Wash. Mar. 9, 2010). The plaintiff borrower in Deming alleged that defendants’ "Administration" and "Compliance Review" fees charged in connection with his two mortgage loan transactions were fraudulent, constituted breach of contract, and violated the Washington Consumer Protection Act. The defendants moved to dismiss the complaint, arguing that the borrower’s state-law claims were preempted by the NBA and OCC regulations because the claims sought to impose state-law limitations on the real estate lending activity of a national bank. The court denied the defendants’ motion, holding that “the NBA is not so broad as to cover ‘fees’ in this context.” According to the court, the OCC regulation that the defendants’ argued is controlling law regarding “fees” only involves national bank charges, not real estate loan transactions. Moreover, an OCC regulation permitting national banks to “make real estate loans . . . without regard to state law limitations concerning . . . [p]rocessing, origination, [and] servicing . . . mortgages,” while applicable to real estate lending, does not explicitly define “processing, origination, [and] servicing” to include “fees.” The court found dispositive that, while the NBA regulations are extensive, “the OCC chose not to address fees related to real estate lending specifically,” and therefore federal law did not preempt the borrower’s state-law claims challenging the fees.
California Court Holds FCRA Preempts California’s Confidentiality of Medical Information Act
On January 29, the California Court of Appeals, Second District, held that the Fair Credit Reporting Act (FCRA) preempts claims regarding the disclosure of medical information under California’s Confidentiality of Medical Information Act (CMIA). Brown v. Mortensen, No. B199793, 2010 WL 324749 (Cal. Ct. App. Jan. 29, 2010). In this case, the plaintiff disputed a medical debt with the defendant debt collector. To verify the existence of the debt, the debt collector disclosed confidential medical information to three consumer credit reporting agencies. The plaintiff subsequently filed suit, arguing that the disclosure of the records violated the CMIA. Holding that FCRA expressly preempted the claim, the court noted that FCRA “preempts state law relating to the duties of furnishers of information to consumer reporting agencies” and reasoned that, because “[the CMIA claims] are rooted in [the debt collector’s] furnishing of information to consumer reporting agencies,” FCRA preempted the consumer’s CMIA claims, regardless of the fact that the CMIA pertains to the disclosure of medical information and not to consumer reporting. In arriving at its decision, the court noted that its approach accorded with several decisions finding for preemption of state law by FCRA, including (i) Pirouzian v. SLM Corp., 396 F.Supp.2d 1124 (S.D.Cal. 2005), which held that FCRA preempted certain claims under the Rosenthal California Fair Debt Collection Practices Act (CFDCPA), (ii) Howard v. Blue Ridge Bank, 371 F.Supp.2d 1139 (N.D.Cal. 2005), which held that FCRA preempted an unfair competition claim brought under section 17200 of the California Business and Professions Code, (iii) Roybal v. Equifax, 405 F.Supp.2d 1177 (E.D.Cal. 2005), which held that FCRA preempted negligence and negligent misrepresentation claims, as well as claims for violations of section 17200 of the California Business and Professions Code, the CFDCPA, and the California Consumer Legal Remedies Act, and (iv) Sanai v. Saltz 170 Cal.App.4th 746 (Cal. Ct. App. 2009), which held that FCRA preempted claims of slander, libel, intentional and negligent interference with prospective economic advantage, intentional and negligent infliction of emotional distress, and violations of the California Consumer Credit Reporting Agencies Act. The court noted that, while the 2003 amendment to FCRA, the Fair and Accurate Credit Transactions Act (FACTA), addresses the use and sharing of medical information in connection with debt collection, the court held that those provisions did not apply in this case because the events in dispute and the filing of the complaint occurred prior to the effective date of FACTA.
California Federal Court Holds State Law Claims Preempted by FCRA
On October 30, the U.S. District Court for the Central District of California held that a claim brought under California Bus. & Prof. Code § 17200 was preempted by the Fair Credit Reporting Act (FCRA) because it related to the responsibilities of a furnisher of information to credit reporting agencies (CRAs). Forester v. Pennsylvania Higher Education Assistance Agency, No. SACV 09-0930, 2009 WL 3710517 (C.D. Cal. Oct. 30, 2009). The consumer in Forester sued the servicer of his student loans, alleging that the servicer violated FCRA and Cal. Bus. & Prof. Code § 17200 by failing to investigate the accuracy of their credit reporting after the consumer filed a “Notice of Dispute” and that the servicer violated Cal. Bus. & Prof. Code §§ 17200 and 17500 by falsely promising that the consumer’s credit report would not show any derogatory history if the consumer rehabilitated his student loans. The servicer argued that FCRA preempted the state law claims. Acknowledging that FCRA and § 17200 both “relate to the duties of the furnishers of information to CRAs,” and following the recent trend of courts in the Ninth Circuit that hold that FCRA “totally preempts ‘all state statutory and common law causes of action which fall within the conduct proscribed by [15] § 1681s-2 [Section 623 of FCRA],’” the court found that FCRA clearly preempted the consumer’s claims, which relate to the servicer’s responsibilities as furnishers of information to CRAs, the court dismissed the consumer’s state law claims. The court, however, refused to dismiss the consumer’s FCRA claims, rejecting the servicer’s argument that they were time-barred because the alleged violation was a failure to investigate the item raised in the dispute, which occurred during the limitations period.
Connecticut “Debt Negotiation” License Required For Certain Activities Performed on Behalf of Connecticut Debtors
Effective October 1, the Connecticut Department of Banking will require licensure for “debt negotiation” - including loan modification, short sales or foreclosure rescue activities - performed on behalf of Connecticut debtors. Persons triggering debt negotiation licensure must license a corporate or “main office,” as well as all branch locations where debt negotiation will occur. The application process requires, among other things, the submission of forms as drafted by the Department, licensing fees, and surety bond and personal forms for “control persons.” Connecticut law exempts from the debt negotiation licensing requirements (i) an attorney admitted to practice in Connecticut, when engaged in such practice, (ii) certain banks and credit unions (however, subsidiaries of such institutions other than operating subsidiaries of federal banks and federally-chartered out-of-state banks are not exempt from licensure), (iii) licensed Connecticut debt adjusters, while performing debt adjuster services, (iv) individuals performing “debt negotiation” under court order, and (v) a “bona fide nonprofit organization.”
Illinois Governor Signs Legislation Relating to Residential Property Foreclosures
On July 31, Illinois Governor Pat Quinn signed two bills (HB 3863 and HB 153) amending the Illinois Code of Civil Procedure in connection with residential property foreclosures. Among other things, HB 3863 requires certain entities - such as lenders acting in the capacity of a mortgagee in possession of REO - to (i) make a good faith effort to ascertain the identities and addresses of all known occupants of the property, and (ii) notify known occupants that such property has been acquired, as well as provide information about the new ownership and occupants’ rights. HB 3863 becomes effective 90 days after July 31. For a foreclosure action filed on or before the effective date of the amendments, the relevant entities will have an additional 60 days to comply with the new provisions. HB 153 requires any deed executed pursuant to the Mortgage Foreclosure Act (or similar judgment vesting title by a consent foreclosure) to state the grantee’s or mortgagee’s name, the name of a contact person, street and mailing address, and telephone number. HB 153 became effective July 31.
Washington Enacts Foreclosure Law Requiring Contact With Borrowers Before Filing Notice of Default
Washington Governor Christine Gregoire recently signed a bill, SB 5810, prohibiting trustees, beneficiaries, or authorized agents from filing a notice of default until at least 30 days after contacting the borrower or attempting with due diligence to contact the borrower. The new contact requirements apply only to deeds of trust made from January 1, 2003, to December 31, 2007 that are recorded against owner-occupied residential real property. Under the new law, a trustee or beneficiary must contact or diligently attempt to contact the borrower by letter and by telephone in order to assess the borrower’s financial ability to pay the debt secured by the deed of trust and explore options for the borrower to avoid foreclosure. Any notice of default subsequently filed must include a declaration stating that contact was made or diligently attempted. In addition, the new law requires trustees, prior to recording a notice of sale with respect to residential real property, to have proof that the beneficiary is the owner of any promissory note or other obligation secured by the deed of trust. Lastly, the new law provides that a tenant or subtenant in possession of a residential real property at the time the property is sold in foreclosure must be given sixty days’ written notice to vacate before the tenant or subtenant may be removed from the property. The bill becomes effective July 26, 2009. The provisions regarding contact with a borrower in default are set to expire on December 31, 2012
Washington Legislature Enacts “Prevent or Reduce Owner-Occupied Foreclosure Program”
On May 7, 2009, Washington Governor Christine Gregoire signed into law S.B. 6033, which creates the “Prevent or Reduce Owner-occupied Foreclosure Program” (PROOF). The Act requires the Washington Department of Financial Institutions (Department) and the Washington State Housing Finance Commission (Commission) to enter into an interagency agreement to implement and administer the program. The Commission, in consultation with the Department, will assist households and individuals facing foreclosure in obtaining work-out or modification agreements with their creditors. The Commission must also provide an annual report in which the Commission will create specific metrics and criteria by which the PROOF program can be measured. Section 4 of the Act, which would have required the State Housing Finance Commission to establish a program oversight committee, was vetoed by the Governor.