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California Approves Petition for Personal Privacy Ballot Initiative
Recently, the California Secretary of State announced that the proponents of a new initiative regarding personally identifying information (PII) may begin collecting petition signatures for their proposed ballot measure. The potential ballot measure would propose a constitutional amendment that would create a presumption that an individual's PII—including financial or health information—is confidential when collected for a commercial or governmental purpose, and would create a presumption of harm when PII is disclosed without the subject’s authorization. The measure also would require a collector of PII to use all reasonably available means to protect it from unauthorized disclosure. The ballot measure proponents have until February 14, 2014 to collect 807,615 registered voters’ signatures in order to qualify it for the ballot.
Federal District Court Denies Tribal Lenders' Attempt to Block New York Internet Lending Investigation
On September 30, the U.S. District Court for the Southern District of New York denied a motion filed by two Native American tribes and related entities seeking to enjoin the New York Department of Financial Services (NY DFS) from interfering with the tribes’ online payday lending activities. Otoe-Missouria Tribe of Indians v. N.Y. St. Dept. of Fin. Servs., No 13-5930, 2013 WL 5460185 (S.D.N.Y. Sept. 30, 2013). In August, the NY DFS sent letters to 35 online lenders, including lenders affiliated with Native American tribes, demanding that they cease and desist offering loans to New York borrowers that allegedly violate the state’s 16% usury cap. The plaintiffs filed suit, claiming a right to market and sell short-term, high-interest loans to New York residents via the Internet and that the NY DFS’s actions violate the plaintiffs’ inherent sovereignty and the Indian Commerce Clause of the U.S. Constitution. Citing prior analysis from a Colorado appeals court and the Tenth Circuit, as well as the undisputed facts that the New York DFS’s actions are directed at activity involving New York residents in New York, the court rejected the plaintiffs’ contention that the targeted online lending activity occurs on the tribes’ lands. The court held that the plaintiffs failed to identify an applicable “express federal law” prohibiting the state’s activity and that the tribes are subject to the state’s anti-usury laws. The court denied the plaintiffs’ motion for preliminary injunction and ordered the parties to begin discovery.
Federal Court Dismisses Challenge to California City's Eminent Domain Plan
On September 16, the U.S. District Court for the Northern District of California dismissed one of two suits filed recently by investors to preempt a California city’s plan to seize certain mortgages using the government’s eminent domain authority. Wells Fargo Bank, N.A. v. City of Richmond, No. 13-3663, slip op. (N.D. Cal. Sept. 16, 2013). The court restated its decision reported last week that the mortgage investors’ claims were not ripe for action and further held that the case must be dismissed, instead of stayed, because the “[r]ipeness of the[] claims does not rest on contingent future events certain to occur, but rather on events that may never occur”—i.e. the city may not ever move forward with its seizure plan. The decision only addressed the timing of the suit, and did not reach the merits of the investors’ claims that the city’s plan, among other things, will violate the U.S. Constitution’s Takings Clause, Commerce Clause, and Contract Clause, as well as the state’s statutory prohibitions against extraterritorial seizures. A second similar action filed by a separate group of investors remains pending.
Fourth Circuit Holds TCPA Disclosure Requirements Constitutional
On August 28, the U.S. Court of Appeals for the Fourth Circuit published an opinion, previously under seal, in which it held that provisions of the Telephone Consumer Protection Act (TCPA) requiring all automated telephone messages to disclose the entity initiating the call and its telephone number are constitutional. State of Maryland v. Universal Elections, Inc., No. 12-1791 (4th Cir. July 29, 2013). In affirming the district court’s judgment, the court identified three important government interests served by the disclosure requirements: (i) protecting residential privacy, by providing call recipients the information needed to stop future calls; (ii) promoting disclosure to avoid misleading recipients of recorded calls, by enabling call recipients to better evaluate the veracity of such messages; and (iii) promoting effective law enforcement by assisting the government in detecting violations.
Federal Circuit Court Accepts Appeals of Challenges to Dodd-Frank Act
On August 12, the U.S. Court of Appeals for the District of Columbia Circuit agreed to hear appeals filed by several state Attorneys General (AGs) and certain private plaintiffs regarding the U.S. District Court for D.C.'s dismissal of a suit in which the AGs and the private plaintiffs challenged the Orderly Liquidation Authority (OLA) created by the Dodd-Frank Act, and in which the private plaintiffs challenged the constitutionality of Title X, which created the CFPB, and the Financial Stability Oversight Council (FSOC) created by Title I. The parties separately appealed, but the court consolidated the appeals for its review.
Investors Sue to Preempt Locality's Planned Seizure of Mortgages Using Eminent Domain; FHFA Outlines Potential Responses
On August 7, trustees representing the interests of investors in mortgage backed securities filed two separate suits to halt the planned use of eminent domain by the city of Richmond, California to seize a group of mortgages. Wells Fargo Bank, N.A. v. City of Richmond, No. 13-3663 (N.D. Cal., complaint filed Aug. 7, 2013); Bank of NY Mellon v. City of Richmond, No. 13-3664 (N.D. Cal., complaint filed Aug. 7, 2013). The city recently threatened to seize 626 mortgages if the owners and servicers of those debts do not agree to sell the mortgages to the city. The complaints allege that the city is seeking to use its eminent domain power impermissibly to generate profits for private investors. The trustees explain that the city’s plan primarily involves performing loans and would value those loans at steeply discounted prices rather than the loan balance, under the guise of seizing “underwater” mortgages to prevent future defaults and foreclosures. The complaints assert that the vast majority of the loans are not at imminent risk of default and are located outside of the city, and, as such, the seizure plan will violate the U.S. Constitution’s Takings Clause, Commerce Clause, and Contract Clause, as well as the state’s statutory prohibitions against extraterritorial seizures. The trustees seek a declaration that the eminent domain plan violates the U.S. Constitution, the California Constitution, and other state laws, and an order enjoining the city from implementing the program.
On the same day, the FHFA released a memorandum prepared by its general counsel regarding eminent domain, based in part on public input solicited last year. In a separate statement, the FHFA states that it could: (i) initiate legal challenges to any local or state action that sanctions the use of eminent domain to restructure mortgage loan contracts that affect FHFA’s regulated entities; (ii) act by order or by regulation to direct the regulated entities to limit, restrict or cease business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts; or (iii) take such other appropriate actions to respond to market uncertainty or increased costs created by any movement to put in place such programs.
Federal District Court Dismisses Challenge to Dodd-Frank Act, CFPB
On August 1, the U.S. District Court for the District of Columbia dismissed in its entirety a lawsuit that challenged Titles I, II, and X of the Dodd-Frank Act as unconstitutional. The lawsuit was brought originally by three private parties and later joined by several state attorneys general. The court determined that that the plaintiffs lacked standing and had not demonstrated injury sufficient to permit a challenge of the law on any of their claims.
The private plaintiffs' challenge to Title X, which created the CFPB, was based on “financial injuries directly caused by the unconstitutional formation and operation of the [CFPB,]” including substantial compliance costs, increased costs of doing business, and forced discontinuance of profitable and legitimate business practices in order to avoid risk of prosecution. The court concluded that such “self-inflicted” harm could not confer standing to challenge Title X. With respect to the private plaintiffs’ challenge to the Financial Stability Oversight Council (FSOC) created by Title I, the court concluded that while an unregulated party is not precluded from establishing standing to challenge the creation and operation of FSOC, standing is “substantially more difficult to establish” under such circumstances and the theories asserted by the plaintiffs were too remote to confer standing.
Both the private plaintiffs and the state attorneys general challenged Title II, claiming that the “orderly liquidation authority” (OLA) provisions violate the separation of powers, deny due process to creditors of a liquidated firm, and violate the requirement for uniformity in bankruptcy. The court again concluded that none of the plaintiffs established either present or future injury sufficient to confer standing to challenge the OLA.
According to media reports, an appeal of the ruling by at least one of the private plaintiffs is anticipated.
Service Provider Challenges CFPB Authority
On July 22, a Connecticut bankruptcy attorney and a firm with whom the attorney contracts for legal support services filed a lawsuit charging the CFPB with “grossly overreaching its authority” in requesting “sensitive and privileged information” about thousands of consumers and challenging the constitutionality of the Bureau itself. The suit was filed in response to a CFPB investigation into the service provider’s relationships with law firms that provide debt settlement assistance to consumers facing bankruptcy. The complaint asserts that the CFPB lacks authority to regulate the law firms supported by the service provider and that the information demanded by the CFPB – disclosed to lawyers by clients seeking advice regarding bankruptcy – is protected by the attorney-client privilege.
Texas Supreme Court Holding Requires Lender-Retained Fees To Be Factored into Home Equity Loan Fee Cap
On June 21, the Texas Supreme Court invalidated state regulations that defined “interest” with regard to home equity loans to exclude lender-retained fees and allowed home equity loan closings through an agent. Finance Commission of Texas v. Norwood, No. 10-0121, 2013 WL 3119481 (Tex. Jun. 21, 2013). The state constitution caps home equity loan fees at three percent of principal, but excludes “interest” from the definition of “fees.” The Texas Supreme Court held that a state regulation that defined “interest” for the purpose of home equity lending by referencing a state code definition that excludes lender-retained fees effectively rendered the constitutional fee cap meaningless by giving the state legislature authority to modify the cap. The legislature’s broader definition of interest was designed to prohibit usury, a function inversely related to the constitutional cap for home equity loans, the court explained. The court held that the constitutional definition of interest means the amount determined by multiplying the loan principal by the interest rate, and therefore does not include lender-retained fees. The court also invalidated a regulation that allowed borrowers to mail consent to a lender to have a lien placed on the homestead and to attend the equity loan closing through an agent, reasoning that a constitutional provision designed to prohibit the coercive closing of a home equity loan at the owner’s home requires that execution of consent or a power of attorney must occur at one of the locations specified in the provision – the office of the lender, an attorney, or a title company. Finally, the court upheld a regulation that created a rebuttable presumption that a specific home equity loan consumer disclosure required by the state constitution is received three days after it is mailed.
SCOTUS To Hear Recess Appointment Case, Potential Implications for CFPB Director
This morning, the U.S. Supreme Court agreed to hear the federal government’s challenge to a January 2013 decision by the Court of Appeals for the D.C. Circuit that appointments to the National Labor Relations Board (NLRB) made by President Obama in January 2012 during a purported Senate recess were unconstitutional. NLRB V. Noel Canning, No. 12-1281. Last month, the Third Circuit similarly invalidated a different NLRB recess appointment made by President Obama.
CFPB Director Richard Cordray was appointed in the same manner and on the same day as the NLRB members, and his appointment is the subject of a lawsuit currently pending in the U.S. District Court for the District of Columbia. Mr. Cordray, whose recess appointment is due to expire at the end of this year, was re-nominated by President Obama this year to serve a full term as director, but his confirmation is being held up in the Senate. All but two Senate Republicans have pledged to oppose Mr. Cordray for the position unless oversight of the CFPB is altered, including by changing its governance structure to a commission structure.
In its review, the Supreme Court will address two questions presented by the government, as well as a third the Court added. The government’s petition asked the court to determine (i) whether the President’s recess appointment power may be exercised during a recess that occurs within a session of the Senate, or is instead limited to recesses that occur between enumerated sessions and (ii) whether the President’s recess appointment power may be exercised to fill vacancies that exist during a recess, or is instead limited to vacancies that first arose during that recess. The Court also signaled its intent to address the issue of Senate pro forma sessions with a question it added - whether the President's recess appointment power may be exercised when the Senate is convening every three days in pro forma sessions. The Court is likely to hear the case in the fall and issue its opinion next year.