InfoBytes Blog

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.

NJ Supreme Court Applies State Consumer Fraud Act to Post-Foreclosure Judgment Forbearance Agreement

In Gonzalez v. Wilshire Credit Corp., No. 065564 (N.J. Aug. 29, 2011) a unanimous New Jersey Supreme Court held that a post-foreclosure judgment forbearance agreement qualified as a stand-alone extension of credit under the New Jersey Consumer Fraud Act (CFA), which provides a private cause of action to consumers subjected to "any unconscionable commercial practice . . . in connection with the sale or advertisement of any merchandise or real estate, or with the subsequent performance" thereof, including the extension of consumer credit.  After obtaining a judgment for foreclosure, the defendant mortgage servicer entered into an agreement with plaintiff mortgagor whereby the defendant agreed to refrain from proceeding with the sheriff's foreclosure sale in exchange for a lump sum, up-front payment and a series of monthly paymentsthat included various fees to reinstate the loan and bring it current. Noting that the CFA, a remedial statute, was intended to be "flexible enough to combat newly packaged forms of fraud," the New Jersey Court ruled that a post-judgment forbearance agreement may be reviewed for unconscionable practices relating to both origination and execution as "a lender or its servicing agent cannot use unconscionable practices" in "fashioning and collecting" any loan. The court rejected the defendant's argument that applying the CFA to work-out agreements would discourage servicers from negotiating such forbearance agreements and lead to increased loss of homes, noting application of the CFA had not chilled extensions of credit in other industries.  The court opined that "[t]hose businesses dealing with the public fairly and honestly . . . have nothing to fear" from the CFA. The court, was, however, careful to note that its holding was limited to the applicability of the CFA to post-foreclosure judgment agreements involving stand-alone extensions of credit and did not extend to settlement agreements in general.

Ohio Federal Court Approves Robo-Signing Class Action Settlement

On August 12, the U.S. District Court for the Northern District of Ohio, in Midland Funding, LLC v. Brent, No. 3:08-cv-01434, 2011 WL 3557020 (N.D. Ohio Aug. 12, 2011), approved a settlement of class action litigation regarding the use of affidavits where the affiant lacked personal knowledge of the facts set forth in the affidavit. The debt collection company had sued the defendant borrower concerning a debt that borrower owed. The borrower asserted a class action counterclaim alleging violations of the Fair Debt Collection Practices Act (FDCPA). The counterclaim alleged that form affidavits, such as the one initially filed against the borrower, were signed by employees who lacked personal knowledge of the facts asserted. The court held that the practice of "robo-signing" affidavits during debt collection actions violated both the FDCPA and the Ohio Consumer Sales Protection Act. That decision induced further class action complaints in other states. Following unsuccessful mediation, the court granted class certification of individuals who had been sued using an affidavit that falsely claimed to be based on the affiant's personal knowledge, while rejecting class certification of individuals who had been sued in an effort to collect on a higher interest rate than the law allowed. Following completion of motions practice in the original defendant's action, the parties agreed to participate in a settlement conference with the court. This conference led to an agreement to settle the original action as well as other actions against the debt collection company.

The parties stipulated to the certification of a class of individuals who had been sued by the debt collection company between January 1, 2005 and the date that the Order of Preliminary Approval of Class Action Settlement was entered into by the Court, in any debt collection action in any court where an affidavit attesting to facts about the underlying debt was used in connection with the lawsuit. In exchange for a class-wide release, the debt collection company agreed to pay $5.2 million into an interest-bearing fund for the benefit of the class, with no more than $1.5 million in attorney's fees being paid out of the fund. All eligible class members were to receive $10 each, with possible increases based on the availability of remaining funds. The settlement also included injunctive relief that required the debt collection company to create and implement written procedures for generating and using affidavits in debt collection lawsuits to prevent the use of affidavits where an affiant lacks personal knowledge of the facts in the affidavit. Despite objections from the attorneys general of 38 states and the Federal Trade Commission that the release was overbroad and the settlement sum insufficient, the court approved the settlement of the class action litigation. The court found that the "release is limited to claims where the basis for relief is the affidavit itself," and did not include instances where "the factual basis for the claim is something other than the affidavit." The court further noted that the "release simply prevents a deficient affidavit from furnishing the basis for an independent claim for damages" against the debt collection company. The court also found that the settlement was the product of arms-length negotiations and was fair, reasonable, and adequate. 

Ninth Circuit Holds Discretionary Increase in Cardholder's Interest Rate Does Not Violate the Delaware Banking Act

On August 9, the U.S. Court of Appeals for the Ninth Circuit held that Section 944 of the Delaware Banking Act (DBA) permitted a creditor to make a discretionary increase in a cardholder's interest rate following a default due to the cardholder's late payment. McCoy v. Chase Manhattan Bank, USA, National Association, No. 06-56278 (9th Cir. Aug. 19, 2011). In this matter, the plaintiff cardholder brought a putative class action against the defendant bank, alleging the bank unlawfully increased his interest rate retroactively to the beginning of his payment cycle as the result of a late payment. The cardholder claimed that the interest rate increase violated the Truth in Lending Act (TILA) because the bank failed to give him notice of the increase until it had already taken effect, and that it violated the DBA § 944 because the DBA did not authorize a discretionary post-default rate increase, but only a rate increase that was "in accordance with a schedule or formula." The Ninth Circuit had previously reversed the dismissal of the plaintiff's TILA claim and the state law claim under DBA § 944. That decision was appealed to the Supreme Court, which overturned the Ninth Circuit's TILA decision but left the state law claims untouched. On remand, the Ninth Circuit also reversed its previous decision regarding the DBA and affirmed the district court's dismissal of the action. First, the court noted, two other circuit courts had since weighed in and held that Section 944 authorized the discretionary rate change as long as it was authorized in the cardholder agreement. Second, and more importantly, the Delaware legislature enacted a clarifying amendment to Section 944 which stated that the bank had the discretionary authority to increase the interest rate, at a rate lower than the maximum rate, pursuant to "any event or circumstance specified in the plan, which may include borrower default." Here, the discretionary rate increase was up to the maximum rate specified in the cardholder agreement and thus allowable under the DBA. The court rejected the cardholder's argument that the statutory amendment should not be applied retroactively, noting that the amendment makes clear that it is simply a clarifying statement on the statute and not a substantive change to the law. 

Illinois Amends Judicial Foreclosure Procedure

Illinois recently enacted House Bill 1960, which amended the Judicial Foreclosure Procedure by adding a 60 day deadline in any residential foreclosure action to file a motion to dismiss or to quash service of process that objects to the court's jurisdiction over the person. Unless extended by the court for good cause shown, the deadline is 60 days after the earlier of (i) the date that the moving party filed an appearance, or (ii) the date that the moving party participated in a hearing without filing an appearance. The moving party waives all objections to the court's jurisdiction over the party's person if the party files a responsive pleading or motion prior to the filing of a motion objecting to the court's jurisdiction. The new law became effective on August 12, 2011.

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.

Illinois Adds New Exemption to the Residential Mortgage Licensing Act

On July 14, Illinois enacted Senate Bill 1603, which amended the Residential Mortgage Licensing Act of 1987 (the Act) by adding to the list of individuals and entities that are exempt from the Act’s licensing requirements for those engaged in the residential mortgage business. "Exempt person or entity," as defined in subsection (d) of Section 1-4 of the Act, now includes individuals and entities that (1) do not originate mortgage loans in their ordinary course of business; (2) but make or acquire residential mortgage loans with their own funds or for their own investment; and (3) do not intend to make, acquire, or resell more than three residential mortgage loans in one calendar year. Furthermore, under amended Section 1-3(a) of the Act, the new exemption is retroactive to January 1, 2011.

Connecticut Expands Processing and Underwriting Licensing Requirements

On July 13, Connecticut enacted a law that, among other things, requires a broader range of loan processors and underwriters to obtain a license. Previously, loan processors or underwriters who were independent contractors were required to obtain a license, but the act expands the licensing requirement to include processors and underwriters who are not employed by a licensed mortgage lender, correspondent or broker or other person exempt from the licensing requirement. Loan processors and underwriters employed by mortgage lenders, correspondent lenders, mortgage brokers or exempt entities remain exempt from the licensing requirements. The law also permits exempt entities to register on the National Mortgage Licensing System and Registry as an exempt registrant for purposes of sponsoring a mortgage loan originator or loan processor or underwriter without impacting their exempt status. Finally, the law amends the licensing act’s educational requirements and surety bond requirements. The pertinent provisions of the act take effect October 1, 2011.

Hawaii Amends Provisions Relating To Mortgage Loan Originators

On July 7, 2011, Hawaii Senate Bill 1519, which amended Chapter 454F, a statute that relates to mortgage loan originators, became effective. Among other provisions, the bill (i) authorizes certain persons exempt from licensing to register with the Nationwide Mortgage Licensing System (Licensing System) to sponsor certain mortgage loan originators, (ii) requires all mortgage loan originators to be sponsored by an exempt or non-exempt sponsoring mortgage loan originator company, (iii) provides for an administrative hearing in connection with a denied license application, (iv) provides for certain license applications to be considered abandoned, (v) sets forth the duties of a "qualified individual" and a "branch manager," (vi) requires certain exempt sponsoring mortgage loan originator companies to register with the Licensing System and pay related fees, (vii) provides for automatic secondary review of license applications, and (viii) prohibits unfair or deceptive practices related to mortgage loan origination activities. 

Maine Consumer Credit Code Amended

On July 6, Maine enacted Senate Paper 415, which amended the Maine Consumer Credit Code To Conform with Federal Law (the Act). The Act incorporates consumer protections provided by federal law and regulation, including restrictions on credit card lending provided by the Credit CARD Act of 2009 and the implementing provisions of Regulation Z. It also amends the Maine Consumer Credit Code’s truth in lending provisions, based on authority granted by the Dodd-Frank Act, and sections of the Maine Consumer Credit Code relating to the registration of loan officers.