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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 Amends Mortgage Loan Originators Licensing Provisions

On October 4, California amended provisions under the California Finance Lenders Law regarding mortgage loan originator licensing. The amendments include the following:  (i) allowing the possibility that applicants who have an expunged or pardoned felony conviction can obtain a license, although the underlying crime, facts, or circumstances can be considered when determining whether to issue a license; (ii) authorizing a person exempt from the provisions of the California Finance Lenders Law to apply to the Commissioner of Corporations for an exempt company registration for the purpose of sponsoring one or more individuals required to be licensed under the SAFE Act if specific requirements are met; (iii) requiring an exempt person to comply with all rules and orders that the Commissioner deems necessary to ensure compliance with the federal SAFE Act and pay an annual registration fee; and (iv) authorizing a licensed mortgage originator who is an insurance producer for an insurer that is registered to do business in the state, to originate loans on behalf of exempt persons, or on behalf of a licensed financial lender that originates loans for a single exempt person.

Ninth Circuit Allows Class Recovery of Cumulative Damages Under FDCPA and California Rosenthal Act

On September 23, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court's decision granting summary judgment to a class of plaintiffs for violations of the Fair Debt Collection Practices Act, 15 U.S.C. § 1692e (FDCPA) and California's Rosenthal Act, Cal. Civ. Code § 1788, et seq., and a jury's award of statutory damages under both statutes.  In Gonzales v. Arrow Financial Services, No. 10-55379 (Sept. 23, 2011 9th Cir.), Mr. Gonzales, on behalf of himself and a class of plaintiffs, alleged that defendant Arrow Financial Services, a debt buyer and collector, violated the FDCPA and Rosenthal Act when it sent nearly identical letters to 40,000 California residents implying that failure to repay certain debts it was attempting to collect could result in its reporting negative information to credit reporting agencies about those consumers. The Ninth Circuit affirmed the district court's ruling that the letters were "false, deceptive, or misleading" because, in fact, the debts were too old to be legally reported under the FDCPA's limit on reporting debts more than seven years old. After granting summary judgment on these facts, the district court held a jury trial to determine damages. The jury awarded cumulative damages for the FDCPA and the Rosenthal Act, allowing the lead plaintiff and class members to recovery equal amounts under each act for the violations. Defendant argued that the Rosenthal Act does not allow class actions and, even if it did, recovery should not be allowed under both it and the FDCPA. The court rejected these arguments. First, it held the Rosenthal Act was amended in 1999 to allow class actions.  Second, it explained that the jury's award was consistent with the Rosenthal Act's intention that its remedies be "cumulative and . . . in addition to" remedies of other laws, and with the FDCPA's express language and deterrent purpose. Affirming the district court decisions, the court summarized that "letters, which misleadingly implied that [defendant] had the ability to report obsolete debts to credit bureaus, and impliedly threatened to make such reports, violated [the FDCPA]," and that "the Rosenthal Act's remedies are cumulative, and available even when the FDCPA affords relief."

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. 

California District Court Allows Missouri Resident to Advance Class-Action Disability Claim Linked to Online Identity Verification

On September 7, in Earll v. eBay Inc., No. 5:11-cv-00262-JF (N.D. Cal., Sept. 7, 2011) the U.S. District Court for the Northern District of California ruled that a Missouri resident could proceed with a putative class action claim against eBay, challenging its web-based identity verification system under California's civil rights and disability laws, notwithstanding that she lived out-of-state. The hearing-impaired plaintiff originally alleged that the defendant's automated, phone-based seller verification system discriminated against the deaf in violation of the Americans with Disabilities Act (ADA) and California's Unfair Competition Law(UCL), but later sought to amend her complaint to remove the UCL claim and add a claim under the state's Unruh Civil Rights Act (Unruh). The court held that public policy favored allowing the plaintiff to pursue California state law claims where eBay had sought transfer of the case from Missouri and California and, in doing so, had relied upon a forum selection clause in its user agreement providing that the agreement was governed by California law. The court also held that while the ADA was limited to actual physical spaces, the Unruh and the state's Disabled Persons Act apply to websites as a kind of business establishment and accommodation, and that no "nexus to physical [places] need be shown."  Because the plaintiff did not plead sufficient facts to assess whether a standard implicated under either state law was met, the court ordered the plaintiff to file an amended complaint within 30 days.

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.