InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
California Federal Court Holds Equitable Tolling Applicable to TILA Damages Claim; HOLA Does Not Preempt Certain State Law Claims
On February 22, the U.S. District Court for the Eastern District of California held that the doctrine of equitable tolling was applicable to a damages claim under the Truth in Lending Act (TILA) and that the Home Owners’ Loan Act (HOLA) did not preempt claims of fraudulent omissions and certain claims under the California Unfair Competition Law (UCL). Yang v. Home Loan Funding, Inc., No. CV F 07-1454, 2010 WL 670958 (E.D. Cal. Feb. 22, 2010). In this case, the plaintiff borrowers proposed a class of borrowers who obtained Pay Option Adjustable Rate Mortgages (ARMs) from the defendant lenders. According to the borrowers, the ARMs were “designed to, and always would, cause negative amortization” because the margin rate of the loans was always greater than the teaser rate. The borrowers subsequently filed claims against the lenders under TILA and the California UCL, as well as claims under state common law. With respect to the borrowers’ TILA claim, the court held that it could not conclude that the complaint failed to support a claim for rescission. The court further concluded that that the doctrine of equitable tolling was applicable to the TILA damages claims because the borrowers alleged that they “were not informed of the sharp increase in the interest rate [of the ARM], and the fact that their monthly payments were not enough to pay the interest accruing on the loan, until they had made multiple payments following the closing of the loan.” Regarding the borrowers’ common law claim of fraudulent omissions and statutory claim under the UCL, the court held that HOLA did not preempt these claims. However, the court recognized that, to the extent such claims “attempt to impose liability under state law against [the federal thrift] for acts actually committed by [the federal thrift] that fall within the preemptive scope of [HOLA], those claims would be held preempted.” The court further held that TILA does not preempt the plaintiffs’ UCL claims to the extent those claims are based on allegations of oral misrepresentations amounting to fraud, but TILA does preempt those claims based on allegations of written deficiencies in the Truth in Lending Disclosure Statements. Finally, with respect to the plaintiffs’ breach of contract and unjust enrichment claims, the court found that the ambiguity of several terms (e.g., the calculation of the interest rate and the timing of the interest rate changes during at least the first year of the loan) in the loan contract warranted denial of the motions to dismiss.
Second Circuit Affirms Dismissal of Sherman Act Claims Against Title Insurers Based on Filed Rate Doctrine
On February 11, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s dismissal of a case alleging a price-fixing conspiracy in violation of the Sherman Act and deceptive practices in violation of New York state law in connection with title insurance. Dolan v. Fidelity National Title Ins. Co., No. 09-2697, 2010 WL 457318 (2nd Cir. Feb. 11, 2010). In Dolan, the plaintiffs alleged that several title insurance companies conspired (i) to fix title insurance rates, (ii) to include agency commission costs in the rates, (iii) to embed kickbacks in the rates, and (iv) to obscure these supposed costs from regulatory scrutiny by funneling the costs to and through title agents. The district court dismissed the claims based on the “filed rate doctrine,” which holds that any filed rate – i.e., a rate approved by the governing regulatory agency – is “per se reasonable and unassailable in judicial proceedings brought by ratepayers.” In this case, the title insurance rates at issue had been filed with and approved by the New York Insurance Department. The court of appeals, in affirming the dismissal, rejected the plaintiffs’ arguments that the filed rate doctrine did not apply, reasoning that (i) the rates were properly filed, (ii) the doctrine applies “to all filed rates, not merely those rates investigated before their approval,” (iii) New York insurance law did not provide a private right of action for the plaintiffs, (iv) the filed rate doctrine applied to New York’s title insurance system, and (v) the plaintiffs were merely seeking lower title insurance rates, and antitrust law cannot enjoin operation under established rates. The court further noted that decisions invoking the Real Estate Settlement Procedures Act (RESPA) and declining to apply the filed rate doctrine were inapplicable because RESPA provides for rights of action and remedies not invoked by the plaintiffs.
California Federal Court Holds FCRA Preempts California State Law Claims
On February 2 the U.S. District Court for the Northern District of California held that the Fair Credit Reporting Act (FCRA) preempts certain claims under the California Consumer Credit Reporting Agencies Act (CCRAA) and the California Unfair Competition Law (UCL). Wang v. Asset Acceptance, LLC, No. 09-4794-SC, 2010 WL 409848 (N.D. Cal. Feb. 2, 2010). In Wang, the plaintiff consumer brought a putative class action against defendant debt collection agency, stating that the debt collection agency’s alleged practice of reporting debts to credit reporting agencies (CRA) without reporting that the debts are disputed or that the debts are passed their statute of limitations violates CCRAA § 1785.25(a) and UCL § 17200. The debt collection agency moved to dismiss, arguing that the consumer’s claims were preempted by FCRA. The court granted the motion in part and denied it in part. While recognizing that CCRAA § 1785.25(a) is expressly excluded from FCRA preemption, the court held that the claim was, nonetheless, preempted, because the claim should have been brought under Section 1785.25(c) of the CCRAA – prohibiting the reporting of information that is disputed by the consumer without noting that it is disputed – which does not enjoy such exclusion from FCRA preemption. With respect to the consumer’s claim that the debt collection agency failed to report information related to the debt’s statute of limitations, the court held that Section 1785.25(a) of the CCRAA does not expressly impose such a duty, and that implying such a per se duty would not be appropriate because the statute of limitations is an affirmative defense subject to waiver. However, the court held that, in the instant case, the individual the consumer had stated a claim under CCRAA § 1785.25(a) because there was evidence that the consumer had successfully relied on the statute of limitations defense in the past and that the debt collection agency was not actually pursuing his debt because of that defense. However, the court did not decide whether this claim would be a viable class claim. Finally, the court held that the consumer’s UCL § 17200 claims based on the debt collection agency’s alleged failure to report that a debt was in dispute or that a debt was past its statue of limitations are preempted by FCRA because enforcing such a claim “would impose an independent requirement or prohibition on furnishers of information to CRAs.”
New York District Court Denies Summary Judgment in Challenge to Electronically-Signed Application
In a recent case, a New York federal district court denied summary judgment on claims that the online submission of a life insurance policy violated the New York Electronic Signatures and Records Act (ESRA). The Prudential Ins. Co. of America v. Dukoff, No. 07-1080, 2009 WL 4884008 (E.D.N.Y. Dec. 18, 2009). In this case, The Prudential Insurance Company of America (Prudential) challenged the validity of a life insurance policy and alleged, among other things, that the applicant had made materially false statements on the application. The defendants (the spouse and estate of the deceased policy holder) counterclaimed for full payment under the insurance policy and argued that, among other things, the statements made in the application could not be used to rescind the contract because the application failed to comply with the requirements of ESRA. Both parties moved for summary judgment on various claims. In particular, the defendants argued that the purported material misstatements were barred because the application was not a “written instrument” signed by the policy holder, and pointed specifically to an interpretive opinion issued by the Office of General Counsel for the New York Insurance Department (Department), which stated that a checked box on an internet application is a valid electronic signature only if the insurer using the technology “is capable of verifying that the person providing the signature is actually the party to be charged.” The defendants argued that Prudential had no such verification ability. The court considered whether Prudential’s “click-through” electronic submission process satisfied the requirements for an electronic signature. The court first noted that the New York legislature had amended ESRA to remove a requirement that an electronic signature be accompanied by an “identifier,” that is capable verification that is unique to the person signing the electronic record; yet, nevertheless, the court afforded deference to the Department’s opinion. Thus, the court held that Prudential could use statements made in the application only if it could “reasonably identify” the person who made the statements. The court stated that while the final page of the insurance application does not require identifying information, “the applicant nonetheless transmits important identifying information to Prudential—including his or her address, social security number, and physical description—when he or she submits the application.” Consequently, the court denied the motion for summary judgment, finding that there was a triable issue of fact as to whether the application process satisfied the requirements of the Department’s opinion. The court further denied all other motions for summary judgment made by both parties.
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 Finds Certain California State Law Claims Preempted by HOLA
On January 27, the U.S. District Court for the Southern District of California held that certain state law claims arising from the origination of a mortgage loan were preempted by the Home Owners Loan Act (HOLA) and OTS regulations. Ibarra v. Loan City, No. 09-CV-02228 (S.D. Cal. Jan. 27, 2010). In Ibarra, the plaintiff borrower alleged that his loan servicer (i) violated the California Business and Professions Code § 17200, (ii) engaged in predatory lending, constructive fraud, fraud, and negligent misrepresentation, and (iii) breached its fiduciary duty to him in connection with the origination of his mortgage loan. The servicer – a wholly owned operating subsidiary of a federally chartered bank – moved to dismiss, arguing, among other things, that the borrower’s state law claims were preempted by HOLA and OTS regulations. The court granted the motion in part, and denied it in part. Specifically, the court held that the borrower’s claims of constructive fraud, fraud, and negligent misrepresentation, as well as a portion of plaintiff’s § 17200 claim – each of which were based on alleged misrepresentations relating to the terms of the loan – were not preempted. According to the court, “when plaintiffs rely on the duty not to misrepresent material facts, which is generally applicable to all businesses, and when application of the law would not regulate lending activity, such claims are not preempted.” On the other hand, the court found that the borrower’s claim under California’s predatory lending laws were preempted because those laws “explicitly impose requirements of the type listed in [HOLA] Section 560.2(b), including ‘loan-related fees’ and ‘terms of credit,’ ‘disclosures,’ and the ‘processing, origination, servicing, sale or purchase of, or investment or participation in, mortgages.’” As such, these claims would more than “incidentally affect the lending operations of Federal savings associations.” Likewise, the court found that the borrower’s § 17200 claim – to the extent that it was based on claims that the servicer violated state lending laws and failed to extend loan modification assistance – was preempted because it “explicitly affects banking and lending.” Notably, the court did not decide whether the borrower’s breach of fiduciary duty claim was preempted, because, according to the court, “it is well established that a financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.”
Louisiana Appellate Court Holds YSP Included in HOEPA Points and Fees Test Calculation
On January 26 the Court of Appeals of Louisiana, Fifth Circuit held, among other things, that a yield spread premium (YSP) should be included in the points and fees calculation under the Home Ownership and Equity Protection Act (HOEPA). Bank of N.Y. v. Parnell, No. 09-CA-439, 2010 WL 291752 (La. Ct. App. Jan. 26, 2010). In Parnell, the plaintiff bank filed foreclosure proceedings against the defendant borrower. In defense the borrower argued that the mortgage was void—and that foreclosure on the property was, therefore, wrongful—because the bank failed to provide material disclosures required under HOEPA. The court reversed the lower court’s dismissal of the plaintiff’s HOEPA claim, agreeing with the borrower that the total amount of points and fees on the loan exceeded eight percent and, thus, triggered HOEPA’s disclosure requirements. Importantly, the court concluded that the yield spread premium (YSP) charged to the borrower should have been included in the points and fees test calculation, as it constituted “points and fees payable by [the plaintiff] at or before closing.” According to the court, a YSP, while financed over the course of a loan, should be included in the points and fees test calculation because it is, in fact, “payable” at the time of loan closing. This court decision is at variance with the Federal Reserve Board’s Regulation Z, which implements the Truth in Lending Act (including HOEPA). The court additionally affirmed the dismissal of the borrower’s RESPA claim arising out of the bank’s alleged failure to respond to the borrower’s qualified written request for an accounting. The court reasoned that because the bank was not a servicer, the bank was not liable under the servicer provisions of RESPA pertaining to qualified written requests. The court also affirmed the lower court’s dismissal of the borrower’s Louisiana Unfair Trade Practices and Consumer Protection Law (LUTPA) claim, holding that the bank was covered by LUTPA’s exemption for financial institutions subject to federal banking regulation. Finally, the court reversed the lower court’s dismissal of the borrower’s claims for damages under state law for wrongful seizure of the property and wrongful acceleration of the note. In doing so, the court emphasized that issues of material fact still existed as to whether the bank complied with contractual requirements in accelerating the sums secured by the defendant’s mortgage.
Ninth Circuit Holds Higher Education Act Preempts Claims Against Student Loan Servicer
On January 25, the U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s decision that the Higher Education Act (HEA) preempted California’s business, contract, and consumer protection laws in a putative class action challenging certain Sallie Mae loan servicing practices. Chae v. SLM Corp., No. 08-56154, 2010 WL 253215 (9th Cir. Jan. 25, 2010). In Chae, Sallie Mae serviced various educational loans that the plaintiffs originated with from several lenders. The plaintiffs alleged that Sallie Mae violated California law by (i) using the “daily simple interest” or “simple daily interest” method to calculate interest, (ii) charging late fees, and (iii) setting the first repayment date on certain loans within 60 days while also charging interest during that period, so as to “deceptively increase[] the cost and life span of the loan.” The Ninth Circuit concluded that express preemption and conflict preemption barred the claims of the putative class. According to the court, the plaintiffs’ allegations were prohibited, in part, by the express preemption provision of the HEA. The court held that the remaining claims were preempted because they conflicted with congressional purposes and objectives to promote the funding of student loans. The court noted that the plaintiffs are not left without redress. It explained that the Department of Education (DOE) has the power to initiate informal compliance procedures against a third-party servicer that is the subject of a complaint, file a civil suit again the servicer, impose civil penalties, or terminate the servicer’s participation in the student loan program.
California Federal Magistrate Judge Grants Class Certification in TILA Case Against Mortgage Broker
On January 22, a California federal magistrate judge granted class certification in a case against a California mortgage broker accused of fraud (based on concealment of relevant facts) and of violating the federal Truth in Lending Act (TILA) and California’s Unfair Competition Law. Lymburner v. U.S. Fin. Funds, Inc. No. C-08-00325 (N.D. Cal. Jan. 22, 2010). The plaintiff, who obtained an IndyMac Bank 5-year fixed payment adjustable rate mortgage from the defendant mortgage broker in November 2006, alleged that the loan closing documents omitted certain information regarding interest rates and the applicability of negative amortization. In certifying the class, the judge determined that there was a class of as many as 121 borrowers, all with common issues of fact regarding disclosures in the loan documents. The court rejected the defendant’s argument that the claims of the proposed class were not “typical” because the availability of rescission would have to be examined individually for each class member. Additionally, the court found that there were common questions of law and fact predominant among the class members because (i) regarding the TILA claim, there was only one version of the loan documents, and (ii) regarding the fraud claim, the allegations regarded the disclosures on the loan documents of all of the class members – not individual representations made about the disclosures. Additionally, the court rejected the defendant’s argument that the plaintiff’s claims were subject to an “unclean hands” defense because the plaintiff misstated her income on the loan application. The court reasoned that the presence of this possible defense was not a basis to deny class certification.
California Federal Court Dismisses Suit Challenging Rejection of Modification Request
On January 20, the U.S. District Court for the Northern District of California dismissed various state law claims challenging a lender’s refusal to refund a $750 fee it charged to consider a loan modification request that it eventually denied. Stevens v. JPMorgan Chase Bank, N.A., No. 09-03116 (N.D. Cal. Jan. 20, 2010). In the case, plaintiff contacted defendant to obtain a loan modification. According to plaintiff’s allegations, defendant responded that plaintiff would “likely” qualify and that the “only obstacle” would be a subsequent appraisal of the property that did not support the value of the loan. Defendant allegedly charged plaintiff $750 to cover the cost of an appraisal, title search and processing. When the appraisal indicated that the value of the home was substantially lower than the amount of the loan, defendant denied the modification request and refused to reimburse the $750 fee. Plaintiff sued, asserting various state law claims, including violations of the California Unfair Competition Law (UCL), false advertising, fraud, negligent misrepresentation, and breach of the implied covenant of good faith and fair dealing. Each of the claims was based on the alleged representation that plaintiff was “likely” to qualify for a loan modification. Plaintiff also pointed to a report issued by the U.S. Department of Treasury (Treasury), which indicated that defendant had approved modifications for only 20% of its loans, suggesting that the statement that a modification was “likely” was fraudulent, misleading, and unfair and deceptive. The court dismissed each claim, but permitted the plaintiff leave to amend. According to the court, the complaint failed to state any claim because, among other things, it did not allege that defendant guaranteed a loan modification or that the fee would be reimbursed. The court also found that the nationwide modification statistics in the Treasury’s report were irrelevant to the possible success of plaintiff’s individual loan modification.