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Financial Services Law Insights and Observations


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  • District Court enters final judgment, says only depository institutions can receive OCC fintech charter


    On October 21, the U.S. District Court for the Southern District of New York entered a final judgment in NYDFS’s lawsuit against the OCC challenging the agency’s Special Purpose National Bank Charter (SPNB), concluding that the regulation should be “set aside with respect to all fintech applicants seeking a national bank charter that do not accept deposits.” As previously covered by InfoBytes, in May the district court denied the OCC’s motion to dismiss the complaint by NYDFS, which argued that the agency’s decision to allow fintech companies to apply for a SPNB is a move that will destabilize financial markets more effectively regulated by the state. The court stated that because the OCC failed to rebut NYDFS’s claims that the proposed national fintech charter posed a threat to the state’s ability to establish its own laws and regulations, the challenge “is ripe for adjudication.” After the May decision, the OCC informed the court that it would be seeking final judgment in the case, and on October 7, each party submitted proposed final orders (available here and here). The proposals were “nearly identical,” according to the court, as both (i) “direct the Clerk of Court to enter final judgment in favor of plaintiff [NYDFS] and close the case,” and (ii) “provide that each party shall bear its own fees and costs.” However, NYDFS proposed “that the regulation be ‘set aside with respect to all fintech applicants seeking a national bank charter that do not accept deposits,’” while the OCC suggested the regulation only be set aside “‘with respect to all fintech applicants seeking a national bank charter that do not accept deposits, and that have a nexus to New York State…in a manner that would subject them to regulation by [NYDFS].’” The court agreed with NYDFS, concluding that the OCC “failed to identify a persuasive reason to deviate from ordinary administrative law procedure,” which requires “vacatur” of the regulation.  

    Courts Fintech OCC NYDFS Fintech Charter State Issues National Bank Act Preemption

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  • District Court allows consumer protection claims to proceed against car dealership


    On October 17, the U.S. District Court for the District of New Jersey issued an opinion allowing consumer protection claims to proceed against a car dealership related to fees added to vehicle purchase prices, while granting two other related entities’ motions to dismiss. The plaintiff’s complaint against the dealership and related entities alleged that the dealership charged her additional mandatory fees when purchasing the vehicle, required her to spend $3,500 on a service contract in order to obtain financing, and charged interest on the contract even though, the plaintiff alleged, the contract constituted a fee related to the extension of credit and therefore was not subject to interest. These actions, the plaintiff alleged, violated TILA, the Consumer Fraud Act (CFA), the Truth-in-Consumer Contract, Warranty and Notice Act, and the Consumer Service Contract Act (CSCA). According to the plaintiff, the contracts contained cancellation provisions that guaranteed a full refund if a request was submitted within a specified period with a guaranteed 10 percent penalty for each 30-day period for which the refund was unpaid. The plaintiff executed timely refund requests but claimed that the entities failed to refund the fees within the allotted contractual period. In separate motions to dismiss, the entities argued that, while the allegations could be considered contractual breaches, they were not sufficient to constitute violations under the alleged consumer protection statutes. The court agreed and granted the entities’ motions, ruling that their contract language complied with the CSCA and that, although the entities allegedly failed to perform under their contracts, they would only have violated the CFA if they knew at the time the contract was formed that they did not intend to fulfill their contractual duties. Moreover, the court referred to a New Jersey Supreme Court holding, which said that a breach of warranty or contract, “‘is not per se unfair or unconscionable. . .and. . .alone does not violate a consumer protection statute” unless there are “substantial aggravating circumstances.” As such, the court determined, the entities’ alleged breaches of the cancellation provisions were not “‘unconscionable commercial practices’” as required under the CFA. However, the plaintiff can amend her claims.

    Moreover, the court ruled that the allegations against the dealership can proceed, and denied the dealership’s bid to send the case to arbitration. According to the court, the dealership’s argument that it never received notices that the plaintiff had initiated arbitration proceedings because of a “clerical error” or a wrong mailing address were unpersuasive, and referred to the American Arbitration Association’s decision to decline “to administer the case due to the failure of [the dealership] to pay the required arbitration fees.”

    Courts Arbitration Consumer Protection Auto Finance Fees

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  • Fourth Circuit affirms dismissal of FDCPA suit


    On October 16, the U.S. Court of Appeals for the Fourth Circuit affirmed the dismissal of an action against a debt collector for allegedly violating the FDCPA and related state statutes when attempting to collect on unpaid debt. The plaintiffs alleged that the defendant’s attempts to collect unpaid homeowners association debt was a violation of the FDCPA’s prohibition on false, deceptive, or misleading representations or unfair or unconscionable means to collect on a debt. According to the opinion, during the process of collecting one plaintiff’s debt, the defendant requested writs of garnishment that sought post-judgment enforcement costs. The plaintiff argued that collecting costs greater than the costs actually assessed in the case violated the FDCPA because it falsely represented the amount due. The district court disagreed, ruling that the defendant abided by Maryland court rules and procedures which allow a judgment creditor to list the original amount of judgment plus any additional court costs, including a writ of garnishment. The district court then considered whether the plaintiff’s claim “that ‘continuing lien clauses,’ which state that the lien covered additional costs that may come due after the lien is recorded, violate the FDCPA.” Here, the district court ruled that the homeowners association’s governing documents authorize continuing liens to cover additional costs that may come due after the lien is recorded, and that the plaintiff was aware that a lien’s amount may change because he signed the documents. Moreover, the district court determined that Maryland law “‘does not expressly permit or prohibit’ continuing lien clauses,” and dismissed the remaining state law claims without prejudice.

    On appeal, the 4th Circuit agreed with the district court that nothing the defendant did constituted a violation of the FDCPA, and concurred that a continuing lien clause does not constitute a violation of the FDCPA. Furthermore, the appellate court held that there is no requirement that the district court remand, as opposed to dismiss, the state law claims as argued in the plaintiffs’ appeal.

    Courts Appellate Fourth Circuit FDCPA

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  • District Court allows NCUA to substitute plaintiff, denies dismissal of breach of contract claim in RMBS action


    On October 15, the U.S. District Court for the Southern District of New York held that the NCUA may substitute a new plaintiff to represent the agency’s claims in a residential mortgage-backed securities (RMBS) action against an international bank serving as an RMBS trustee. In the same order, the court dismissed certain tort claims, but allowed claims for breach of contract to move forward against the trustee.

    According to the opinion, NCUA brought the action on behalf of 97 trusts for which the international bank served as the trustee, even though NCUA only had direct interest in eight of the trusts. NCUA argued it had derivative standing to pursue the claims on behalf of the other 89 trusts “on the theory that it had a latent interest in the [the 89 trusts] after they wound down and as ‘an express third-party beneficiary under the [89 trusts] Indenture Agreements.’” The trustee moved to dismiss the action and after hearing oral arguments on the motion, the court stayed the case pending the outcome of NCUA’s appeal regarding derivative standing in similar action before the U.S. Court of Appeals for the Second Circuit. In August 2018, the 2nd Circuit held that NCUA lacked standing to bring the derivative claims because the trusts had granted the right, title, and interest to their assets, including the RMBS trusts, to the Indenture Trustee. (Previously covered by InfoBytes here.) Based on the appellate court decision in the similar action, NCUA moved to file a second amended complaint and substitute a newly appointed trustee as plaintiff for the claims made on behalf of the 89 trusts for which it did not have direct standing.

    Despite the trustee’s objections, the district court granted NCUA’s request, concluding that NCUA’s claims were timely and allowing the NCUA’s “Extender Statute”—which gives the agency the ability to bring contract claims at “the longer of” “the 6-year period beginning on the date the claim accrues” or “the period applicable under State law”—to apply to the new substitute plaintiff. Additionally, the court denied the bank’s motion to dismiss NCUA’s breach of contract claim alleging the trustee had notice of the defects in the mortgage files held in the various trusts. The court concluded that NCUA sufficiently plead that the trustee “did indeed receive notice [of the defective mortgages] and should have thus acted,” under the Pooling and Servicing Agreements.

    Courts RMBS NCUA Appellate Second Circuit Standing Securities

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  • District Court denies MSJ because of ambiguities in bank’s ATM fee contract language


    On October 7, the U.S. District Court for the Southern District of California denied a national bank’s motion for partial summary judgment in a class action alleging the bank wrongfully charged ATM fees in violation of the bank’s standardized account agreement. According to the opinion, the plaintiffs filed the action asserting that the bank charges its customers two out-of-network (OON) fees when an account holder conducts a balance inquiry and then obtains a cash withdrawal at an OON ATM. The bank moved for summary judgment on the breach of contract claim, arguing that the terms and conditions of the contract provide for the charge of a fee “for each balance inquiry, cash withdrawal, or funds transfer undertaken at a non-[bank] branded ATM.” After conducting a limited discovery on the breach of contract issue, the district court denied the bank’s motion, concluding there are “ambiguities regarding the contract terms.” Specifically, the court noted that contract documents describe a “Foreign ATM Fee” as “initiated at an ATM other than a [bank] ATM” and that it uses the singular term of “fee” while providing “no further explanation as to what ‘initiated’ means.” According to the court, there is “ambiguity in the term ‘initiate’ that is ‘susceptible to at least two reasonable alternative interpretations.’” Moreover, the court also concluded that certain onscreen warnings about the right to cancel caused “uncertainty and ambiguity” regarding the assessment of fees, and because there are ambiguities regarding the fee terms, the court could not conclude that the plaintiffs failed to prove a breach of contract.

    Courts ATM Fees Class Action

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  • Fifth Circuit affirms dismissal of reverse-false-claims action in benefits payment fraud matter


    On October 7, the U.S. Court of Appeals for the Fifth Circuit affirmed the dismissal of a whistleblower’s reverse-false-claims action because it was barred by the False Claims Act’s (FCA) public-disclosure provision and the alleged scheme was not plead with sufficient detail. The relator, a former fraud investigator for the Department of Veterans Affairs Office of the Inspector General, alleged that the 15 financial institution defendants “avoided their regulatory obligation to return government-benefit payments they received for beneficiaries they knew to be deceased.” According to the relator, the defendants must have known of the beneficiary deaths because the Social Security Administration sends death notification entries to all receiving depository financial institutions. However, the district court determined that defendants provided documents showing the information had already been publicly disclosed and the relator was not the original source of the information (which would have been required to maintain a claim with respect to information that has already been publicly disclosed) because he obtained the information through his employment as a fraud investigator. As such, the court permanently dismissed the complaint on the grounds that the relator relied on public disclosures, and that the complaint failed to plead the allegations with sufficient detail.

    On appeal, the 5th Circuit agreed that the complaint could not survive the FCA’s public disclosure bar, explaining that the public-disclosure bar is met if the following elements apply: (i) the disclosure is public; (ii) the disclosure contains “‘substantially the same allegations’” as in the complaint; and (ii) the relator is not the “‘original source’” of the information. In addition, the appellate court agreed that the complaint lacked sufficient factual matter to satisfy federal rules of civil procedure, and concluded that further amendments would be futile because there are no claims left to amend.

    Courts Whistleblower Appellate Fifth Circuit False Claims Act / FIRREA

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  • District Court rules debt collection attorney can invoke arbitration provision


    On October 8, the U.S. District Court for the Northern District of Illinois granted a defendant’s motion to compel arbitration in a putative class action suit alleging that he threatened to charge unauthorized late fees on defaulted consumer debt. The suit claimed that the defendant, who was an attorney hired to collect the debt, violated the FDCPA when he sent a letter attempting to collect on a delinquent account containing the language: “Because of interest, late charges, attorneys fees, if any, and other charges that my vary from day to day, the amount due on the day you pay may be greater.” According to the borrower, the statement was false and misleading because late fees could not accrue on her debt anymore since the debt had already been “fully accelerated” under the provisions of consumer loan agreement signed with the company that owned her consumer loan account. The attorney moved to compel arbitration based on an arbitration provision in the borrower’s loan agreement. While the borrower did not dispute that the arbitration provision was valid, she argued that the attorney does not fall within the provision’s scope. Among other things, the borrower asserted that (i) the attorney was not a party to the loan agreement and, thus, could not invoke its arbitration provision; and (ii) FDCPA claims can only be brought against a debt collector and not against the creditor, and that, because the company (not the attorney) was her creditor, the arbitration provision would not cover her FDCPA claims.

    The court disagreed. “The fact that an FDCPA claim against [the company] would be a clear loser does not mean that the arbitration provision does not cover FDCPA claims—which have been brought, and will continue to be brought, against creditors,” the court stated. “Arbitration provisions cover weak and strong claims alike, so long as the claim falls within the provision’s defined scope.” According to the court, the claims fell comfortably within the provision’s broad agreement to arbitrate “any dispute, claim or controversy” related to a borrower’s account, loan agreement or relationship with the company. Concerning the borrower’s argument that the attorney cannot invoke the arbitration provision because he is not a party to the loan agreement, the court agreed that, “as a general rule, ‘[o]nly signatories to an arbitration agreement can file a motion to compel arbitration.’” However, it ruled that Illinois law allows an exception to the general rule where the signatory’s agent seeks to compel arbitration. Moreover, the court further ruled that the attorney has not waived his right to arbitration by litigating the case for nine months before moving to compel arbitration.

    Courts Debt Collection FDCPA Arbitration

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  • House tells Supreme Court CFPB structure is constitutional


    On October 4, the U.S. House of Representatives filed an amicus brief with the U.S. Supreme Court arguing that the CFPB’s structure is constitutional. The brief was filed in response to a petition for writ of certiorari by a law firm, contesting a May decision by the U.S. Court of Appeals for the Ninth Circuit, which held that, among other things, the Bureau’s single-director structure is constitutional (previously covered by InfoBytes here). The House filed its brief after the amicus deadline, but requested its motion to file be granted because it only received notice that the Bureau changed its position on the constitutionality of the CFPB’s structure the day before the filing deadline. As previously covered by InfoBytes, on September 17, the DOJ and the CFPB filed a brief with the Court arguing that the for-cause restriction on the president’s authority to remove the Bureau’s single Director violates the Constitution’s separation of powers; and on the same day, Director Kraninger sent letters (see here and here) to House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Mitch McConnell (R-Ky.) supporting the same argument.

    The brief, which was submitted by the Office of General Counsel for the House, argues that the case “presents an issue of significant important to the House” and, because the Solicitor General “has decided not to defend” Congress’ enactment of the for-cause removal protection through the Dodd-Frank Act, the “House should be allowed to do so.” The brief asserts that the 9th Circuit correctly held that the Bureau’s structure is constitutional based on the D.C. Circuit’s majority in the 2018 en banc decision in PHH v. CFPB (covered by a Buckley Special Alert). Moreover, the brief argues that when an agency is “headed by a single individual, the lines of Executive accountability—and Presidential control—are even more direct than in a multi-member agency,” as the President has the authority to remove the individual should they be failing in their duty. Such a removal will “‘transform the entire CFPB and the execution of the consumer protection laws it enforces.’”

    Courts CFPB Single-Director Structure Dodd-Frank U.S. House U.S. Supreme Court Ninth Circuit Appellate D.C. Circuit Amicus Brief

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  • District Court denies TCPA class certification involving collection calls placed to wrong number


    On September 27, the U.S. District Court for the Middle District of Florida denied class certification in an action alleging violations of the TCPA, the Florida Consumer Collection Practices Act, and the FDCPA brought against two companies. The action alleged that defendants used an automated telephone dialing system (autodialer) to call the plaintiff’s cell phone using a “prerecorded voice” while trying to contact a different individual to collect an unpaid debt. The defendants allegedly called the plaintiff’s cell phone number—which was listed as the other individual’s home phone number but had been reassigned to the plaintiff—multiple times even after the plaintiff informed the defendants that they had the wrong phone number. The plaintiff alleged violations of the TCPA, claiming the defendants placed the calls without first obtaining prior express consent.

    Among other arguments, the defendants challenged the proposed class definition, which included more than 9,000 non-customers who allegedly received calls from the defendants and were identified by a code that the plaintiff contended is assigned to calls made to “bad phone” numbers. According to the defendants, the plaintiff’s expert developed a process for “identify[ing] calls where [autodialed] calls and prerecorded messages were made to cell phones after a record documenting an event consistent with a wrong number and/or a request to stop calling.” However, the defendants argued, among other things, that there are many different reasons why a “bad phone” code could be assigned to an account, and that the plaintiff’s assertions do not “satisfy the clearly ascertainable standard,” which must be met for class certification.

    “Indeed, when presented with similar evidence regarding ‘wrong number’ call log designations, this [c]ourt recognized that ‘in the debt collection industry ‘wrong number’ oftentimes does not mean non-consent because many customers tell agents they have reached the wrong number, though the correct number was called, as a way to avoid further debt collection,’” the court stated. “The difficulty in ascertaining this information is compounded by the fact that the phone numbers at issue were initially provided to [the defendants] by consenting customers.”

    Courts Debt Collection TCPA Autodialer Class Action

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  • District Court: New York’s interest on escrow law not preempted by National Bank Act


    On September 30, the U.S. District Court for the Eastern District of New York held that the National Bank Act (NBA) does not preempt a New York law requiring interest on mortgage escrow accounts. According to the opinion, plaintiffs brought a pair of putative class actions against a national bank seeking interest on funds deposited into their mortgage escrow accounts, as required by New York General Obligation Law § 5-601. The bank moved to dismiss both complaints, arguing that the NBA preempts the state law. The district court disagreed, concluding that the plaintiffs’ claims for breach of contract can proceed, while dismissing the others. The court concluded there is “clear evidence that Congress intended mortgage escrow accounts, even those administered by national banks, to be subject to some measure of consumer protection regulation.” As for the OCC’s 2004 preemption regulation, the court determined that there is no evidence that “at this time, the agency gave any thought whatsoever to the specific question raised in this case, which is whether the NBA preempts escrow interest laws,” citing to and agreeing with the U.S. Court of Appeals for the Ninth Circuit’s decision in Lusnak v. Bank of America (which held that a national bank must comply with a California law that requires mortgage lenders to pay interest on mortgage escrow accounts, previously covered by InfoBytes here). Lastly, the court applied the preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson, and found that the law does not “significantly interfere” with the banks’ power to administer mortgage escrow accounts, noting that it only “requires the Bank to pay interest on the comparatively small sums” deposited into the accounts and does not “bar the creation of mortgage escrow accounts, or subject them to state visitorial control, or otherwise limit the terms of their use.”

    Courts State Issues National Bank Act Escrow Preemption Ninth Circuit Appellate U.S. Supreme Court Mortgages

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