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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.
Second Circuit Holds New York Champerty Statute Not a Bar to Trust’s Lawsuit Against Loan Originator
On January 11, the U.S. Court of Appeals for the Second Circuit held that a trust’s acquisition of rights to sue a loan originator for breach of a loan purchase agreement did not violate the New York Champerty Statute, and therefore was not barred by the affirmative defense of champerty. Trust for the Certificate Holders of the Merrill Lynch Mortg. Investors, Inc., v. Love Funding Corp., No. 07-1050-cv, 2010 WL 59276 (2nd Cir. Jan. 11, 2010). In this case, a trust sued the originator of a defaulted mortgage for breach of the representations and warranties made in the loan purchase agreement. The lawsuit came after the trust reached a settlement with the entity that purchased the loan from the originator and assigned it to the trust. As part of the settlement, the trust acquired the rights of the assignor as against the originator. In the instant case, despite having granted summary judgment in favor of the trust on its claims of breach of contract, the district court found that the trust’s claims were barred by the New York champerty statute because “the Trust’s primary purpose in accepting the Assignment was to buy a lawsuit against [the originator].” The trust appealed and the Second Circuit certified questions about the New York champerty statute to the New York Court of Appeals. In response, the New York Court of Appeals clarified that the champerty statute “does not apply when the purpose of an assignment is the collection of a legitimate claim,” and therefore “if a party acquires a debt instrument for the purpose of enforcing it, that is not champerty simply because the party intends to do so by litigation.” According to the New York Court of Appeals, “if, as a matter of fact, the Trust’s purpose in taking assignment of [the assignor’s] rights under the [originator’s loan purchase agreement] was to enforce its rights, then, as a matter of law, given that the Trust had a preexisting proprietary interest in the loan, it did not violate [the New York champerty statute].” Accepting the New York Court of Appeals’ answer, and noting that, even before the prior settlement, “the Trust had a significant interest in the repayment of the [defaulted loan],” the Second Circuit held that the evidence on the record did not allow, as a matter of law, for a finding that the assignment was champertous. Accordingly, the Second Circuit reversed the judgment of the district court and remanded the case for entry of judgment in favor of the trust.
Texas Court of Appeals Upholds 3% Cap On All Lenders’ Fees on Home Equity Loans
On January 8, the Texas Court of Appeals upheld a trial court’s ruling that "fees" that are considered "interest" under Texas usury law are subject to the 3% fee cap for home equity loans contained in the Texas constitution. Texas Bankers Ass’n. v. Ass’n. of Community Organizations for Reform Now, No. 03-06-00273-CV, 2010 WL 4587 (Tex. App. Jan. 8, 2010). The case arose after the Finance Commission of Texas and the Credit Union Commission of Texas (collectively, the Commissions) issued a rule interpreting Article 16, section 50(a)(6)(E) of the Texas Constitution. This section restricts the total amount of fees, other than interest, that can be charged on home equity loans to 3%. In interpreting the section, the Commissions stated that the term “interest” mirrored the definition of interest in Texas usury laws. As a result, the Commissions’ regulations permitted certain types of fees to avoid the 3% cap. The Association of Community Organizations for Reform Now (ACORN) challenged the Commissions’ interpretation under the Texas Administrative Procedures Act, arguing that it contradicted the Constitutional provision’s plain meaning. Instead, ACORN advocated a strict definition of interest that would include only the amount of interest described in the promissory note and would exclude fees. Both the trial court and the Texas Court of Appeals agreed. In upholding the lower court, the Court of Appeals reasoned that the Commissions’ interpretation (i) would render the Constitutional cap meaningless, because it would exclude nearly all fees charged by lenders, and (ii) conflicted with legislative intent. As a result, the court affirmed the invalidation of the regulations.
Lawsuits Allege Banks Did Not Maintain “Commercially Reasonable” Data Security Systems
Recently, data security breaches at banks in Texas and Maine have resulted in two separate lawsuits (see here and here) alleging that the banks did not maintain “commercially reasonable” data security systems. PlainsCapital Bank v. Hillary Mach. Inc., No. 4:09-cv-00653 (E.D. Tex. Dec. 31, 2009). Patco Constr. Co. Inc. v. People’s United Bank, No. 2:09-CV-00503 (D. Maine Feb. 2, 2010). In PlainsCapital, a Texas bank approved an $800,000 transfer request from the account of a machining company. The transfer was discovered to be fraudulent and, though the bank was able to recover nearly three-quarters of the transferred funds, the machining company sent a letter to the bank arguing that the bank was liable for the remaining funds, because it failed to maintain “commercially reasonable security measures” in its internet banking system. Shortly after receiving the letter, the bank filed a complaint in the Eastern District of Texas seeking a declaratory judgment that its security measures are “commercially reasonable” within the meaning of §§ 4A-201 and 4A-202 of the Uniform Commercial Code (UCC). In Patco, a construction company sued a Maine bank after the bank allowed a fraudulent transfer of $588,581 from the company’s account. In its complaint, the construction company alleged, among other things, (i) that the bank failed to maintain “commercially reasonable” data security, as required by § 4-1204 of Maine’s version of the UCC, because the bank employed single factor user authentication, instead of multi-factor user authentication as recommended by the Federal Financial Institutions Examination Council’s online banking security standards guidance, and (ii) set an unreasonably low threshold for the challenge question for authentication of customer passwords. In its answer, the bank argued that the construction company was contributorily negligent because it failed to perform daily monitoring of its account, as required by its eBanking agreement and Automated Clearing House transfer of funds contract with the bank.
Pennsylvania Department of Banking Issues Reverse Mortgage Policy
The Pennsylvania Department of Banking (the Department) recently issued a policy statement to provide guidance to licensees regarding the proper conduct of making, originating or servicing reverse mortgage loans and to inform licensees of the proper use of, and risks associated with, reverse mortgage loans. Because most reverse mortgages are marketed to elderly consumers, the Department’s policy addresses concerns that these consumers may be victimized by poor advice or outright fraud. The Department is also concerned that licensees may not be fully cognizant of the propriety of, and the necessary practices required to protect consumers who use, reverse mortgage loans. And the Department is particularly concerned about the special financial risks associated with proprietary reverse mortgage loans because they are not insured by the Federal government and are not required to follow the standards and requirements mandated by the Federal Housing Administration to obtain Federal insurance. The areas addressed by the policy statement are (i) the financial strength of the licensee lender, (ii) the content of reverse mortgage loan agreements, (iii) the procedures regarding reverse mortgage loan origination, (iv) the consequences of a reverse mortgage loan for a non-borrower spouse, (v) conflicts of interest, (vi) a prohibition on offering unsuitable reverse mortgage loans, (vii) servicing obligations, (viii) an applicant’s mental capacity, and (ix) power of attorney. There are no new regulatory requirements as a result of the policy statement.