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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.

New Hampshire Amends Definition of "Mortgage Loan Originator"

On July 5, New Hampshire enacted Senate Bill 189, which amended the definition of "mortgage loan originator" for purposes of the state’s mortgage banker and mortgage broker licensing statute. Under the bill, "mortgage loan originator" has been redefined so as to exclude any individual "who performs purely administrative or clerical tasks as an employee at the direction of and subject to the supervision and instruction of a licensed person who is described in subparagraph (a)" and who is not otherwise described in subparagraph (a). The change will be effective as of September 3, 2011.

Rhode Island Eliminates Minimum Net Worth Requirement for Mortgage Loan Originators

On June 29, the Rhode Island General Assembly enacted Senate Bill 507, which amended the Federal Secure and Fair Enforcement for Mortgage Licensing Act of 2009. Among other provisions, the bill (i) exempts certain mortgage loan originators from the requirement to obtain and maintain annually a state license to originate mortgage loans, and (ii) eliminates the minimum net worth requirement for mortgage loan originators, while retaining the surety bond requirement.

Supreme Court Strikes Down Vermont Prescription Data Law

On June 23, the United States Supreme Court held that the Vermont Prescription Confidentiality Law (PCL) improperly restrains speech in violation of the First Amendment to the United States Constitution, which is likely to have impact on similar restrictions on use of financial information. Sorrell v. IMS Health Inc., No. 10-779 (June 23, 2011). The PCL, absent a prescriber’s consent, prohibits prescriber-identifying information from being (i) sold by pharmacies and similar entities, (ii) disclosed by pharmacies and similar entities for marketing purposes, or (iii) used for marketing purposes by pharmaceutical manufacturers. However, the PCL sets forth a number of exceptions to these prohibitions-for example, if the information is to be used for "health care research." Vermont enacted the PCL to, among other things, address pharmaceutical manufacturers’ use of prescriber-identifying information to more effectively promote brand name drugs through sales representatives that meet with prescribers. The Court found that the provisions of the PCL under examination impose content- and speaker-based restrictions on the sale, disclosure, and use of prescriber-identifying information. In doing so, the Court emphasized that the law disfavors speech with a particular content (i.e., marketing) and particular speakers (i.e., the sales representatives), while allowing prescriber-identifying information to be purchased, acquired, and used for other types of speech and by other types of speakers. Therefore, the Court found that the PCL provisions are subject to heightened judicial scrutiny. Under such a standard, the PCL, in order to sustain its restriction on protected expression, would need to advance a substantial government interest and be drawn to achieve that interest. The Court found that while the PCL possibly advances a proper interest (e.g., lowering healthcare costs and improving public health), it does not permissibly achieve such an interest, making the selling, sharing, and use limitations of the PCL unconstitutional. The decision, authored by Justice Kennedy and joined by five others, affirmed the Second Circuit’s judgment.

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