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Financial Services Law Insights and Observations


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  • District Court approves supplemental $22 million class action foreclosure settlement


    On July 26, the U.S. District Court for the Northern District of California granted preliminary approval of a proposed supplemental class settlement, adding new class members who were not part of the list of borrowers included in the court’s October 2020 original settlement order. The supplemental settlement provides more than $21.8 million for additional class members who lost their homes after allegedly being denied loan modifications from a national bank. Class members include borrowers who allegedly should have qualified for loan modifications but were not offered a home loan modification or repayment plan “due to excessive attorney’s fees being included in the loan modification decisioning” and “whose home[s] [the bank] sold in foreclosure.” According to the court’s order granting class certification, a software glitch allegedly caused a calculation error, which resulted in certain fees being misstated and led to incorrect mortgage modification denials. The original settlement set aside $1 million to compensate borrowers who endured “severe emotional distress” as a result of the error, and the supplemental settlement will provide new class members the same opportunity to apply for additional settlement amounts.

    Courts Class Action Settlement Mortgages Foreclosure

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  • 5th Circuit overturns ruling that insurer must defend data breach


    On July 21, the U.S. Court of Appeals for the Fifth Circuit reversed a lower court’s decision to grant summary judgement for a Houston-based insurer (defendant), finding that publication of material that violates a person’s right of privacy under the insurer’s policy can include making credit card information generally available. According to the opinion, a retail company (plaintiff) was sued by a branch of a national bank (bank) for alleged violations of an agreement that led to a $20 million data breach dispute. In response, the plaintiff filed a separate suit in Texas court against the defendant for breaching the insurance policy. The district court granted the defendant’s motion and dismissed all the claims. In doing so, “the district court held that the bank’s complaint did not allege a ‘publication’ of material that violated a person’s right to privacy because it asserted only that ‘[a] third party hacked into [the] credit card processing system and stole customers’ credit card information.’” Furthermore, the district court found that the complaint also did not allege a violation of a person’s right to privacy because the bank involves the payment processor’s contract claims, not the cardholders’ privacy claims.

    On appeal, the 5th Circuit adopted a broad definition of “publication” because such term was undefined, and found that the contract dispute brought by the bank against the plaintiff “plainly alleges” that hackers published the credit card information of the plaintiff customers in several ways. First, the bank accused the plaintiff of publishing its customers’ credit cards to hackers. Then, the hackers allegedly published the information by using it to make fraudulent purchases. The appellate court then examined whether the defendant “has a duty to defend [the plaintiff] in the [u]nderlying [bank] [l]itigation.” The appellate court applied Texas’s “eight-corners rule,” which compares the “four corners of the [p]olicy to the four corners of the [bank’s] complaint.” In doing so, the appellate court found that the bank’s “alleged injuries arise from the violations of customers' rights to keep their credit card data private,” and “[u]nder the eight-corners rule, [the defendant] must defend [the plaintiff] in the underlying [bank’s] litigation.”

    Courts Data Breach Appellate Fifth Circuit Privacy/Cyber Risk & Data Security

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  • District Court grants Georgia regulator default judgment against unauthorized bank

    State Issues

    On July 26, the Georgia Department of Banking and Finance (Department) announced that the Superior Court of DeKalb County entered an order granting default judgment against defendants for unauthorized banking activities and the unapproved use of the word “bank.” Under Georgia law, it is unlawful to conduct, advertise, or be affiliated with a banking business in the state without a bank charter. Georgia law also prohibits the use of the words “bank” and/or “trust” in any entity’s name without permission from the Department. In 2020, the Department issued a cease and desist order against the defendants after the Department determined that it had no records of the entity and had not approved it or the individual defendant to organize a bank and/or conduct a banking business in or from Georgia. Nor had the Department granted the entity defendant the ability to use the word “bank” in its name. The Department later discovered that the defendants violated the cease and desist order by continuing to engage in unauthorized banking activities and continuing to advertise using the word “bank” without approval. The court ordered the defendants to comply with the cease and desist order and permanently enjoined them from, among other things, using bank nomenclature and advertising or providing financial products or services from within Georgia without written authorization from the Department.

    State Issues State Regulators Courts Georgia Compliance

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  • 6th Circuit: CDC was not authorized to implement eviction moratorium


    On July 23, the U.S. Court of Appeals for the Sixth Circuit held that statutory language did not authorize the CDC to implement a moratorium on evictions in response to the Covid-19 pandemic. The plaintiffs, a group of rental property owners and managers, filed a lawsuit seeking declaratory judgment and a preliminary injunction, claiming the CDC’s order exceeded the government’s statutory grant of power and violated the Constitution and the Administrative Procedures Act. The district court found that the moratorium exceeded the government’s statutory authority under 42 U.S.C. § 264(a) and ruled in favor of the plaintiffs on the declaratory judgment claim. The 6th Circuit denied the government’s motion for an emergency stay pending appeal, citing that the government was unlikely to succeed on the merits.

    In affirming the district court’s ruling and addressing the merits in the current order, the 6th Circuit reviewed whether Section 264(a) of the Public Health Act of 1944 allowed the CDC to issue its moratorium. The appellate court held that while the statute allows the Surgeon General, with the approval of the Secretary, to make and enforce such regulations as are “necessary to prevent the introduction, transmission, or spread of communicable diseases from foreign countries into the States or possessions, or from one State or possession into any other State or possession,” it “does not grant the CDC the power it claims.” Additionally, the appellate court concluded that an eviction moratorium did not fit the mold of actions permitted under the statute’s language. The 6th Circuit emphasized that even if the language of the statute could be construed more expansively, it could not “grant the CDC the power to insert itself into landlord-tenant relationships without clear textual evidence of Congress’s intent to do so.” Writing that “[a]gencies cannot discover in a broadly worded statute authority to supersede state landlord-tenant law,” the appellate court explained that the government’s interpretation of the statute presented a nondelegation problem, which “would grant the CDC director near-dictatorial power for the duration of the pandemic, with authority to shut down entire industries as freely as she could ban evictions.” Furthermore, the appellate court concluded that any potential ratification taken by Congress last December when former President Trump signed the Consolidated Appropriations Act, which, among other things, extended the expiration date of the eviction moratorium, “did not purport to alter the meaning of § 264(a), so it did not grant the CDC the power to extend the order further than Congress had authorized.”

    Courts Appellate Sixth Circuit Covid-19 CDC Administrative Procedures Act Evictions

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  • 7th Circuit vacates $59 million CFPB penalty against mortgage-assistance relief companies


    On July 23, the U.S. Court of Appeals for the Seventh Circuit vacated a 2019 restitution award in an action brought by the CFPB against two former mortgage-assistance relief companies and their principals (collectively, “defendants”) for violations of Regulation O. As previously covered by InfoBytes, in 2014, the CFPB, FTC, and 15 state authorities took action against several foreclosure relief companies and associated individuals, including the defendants, alleging they made misrepresentations about their services, failed to make mandatory disclosures, and collected unlawful advance fees. The district court’s 2019 order (covered by InfoBytes here) held one company and its principals jointly and severally liable for over $18 million in restitution, while another company and its same principals were held jointly and severally liable for nearly $3 million in restitution. Additionally, the court ordered civil penalties totaling over $37 million against company two and four principals.

    In 2021, the principals urged the 7th Circuit to vacate the judgment, arguing, among other things, that the restitution order used the company’s net revenues instead of net profits in determining restitution and that they were exempt from liability because Regulation O exempts properly licensed attorneys engaged in providing mortgage-assistance relief services as part of the practice of law, provided they comply with state law and regulations. The principals also disagreed with the district court’s finding that they acted recklessly in calculating the civil penalty amount, contending that “they were not aware of a risk that their conduct was illegal.”

    The 7th Circuit reviewed the application of the U.S. Supreme Court’s ruling in Liu v. SEC, which held that a disgorgement award cannot exceed a firm’s net profits (covered by InfoBytes here). While the Bureau argued that Liu focused on disgorgement and not restitution, the appellate court held that the Bureau’s interpretation was “too narrow a reading of Liu.” According to the appellate court, “Liu’s reasoning is not limited to disgorgement; instead, the opinion purports to set forth a rule applicable to all categories of equitable relief, including restitution.” The appellate court vacated the restitution award and remanded the suit for recalculation based on net profits.

    With respect to the alleged violations of Regulation O, the appellate court affirmed the district court’s ruling, concluding that attorneys who are subject to liability for violating consumer laws “cannot escape liability simply by virtue of being an attorney.” However, the appellate court vacated the recklessness finding in the civil penalty calculation pertaining to certain of the defendants, writing that “[a]lthough we have found that they were not engaged in the practice of law, the question was a legitimate one. We consider it a step too far to say that they were reckless—that is, that they should have been aware of an unjustifiably high or obvious risk of violating Regulation O.” The appellate court ordered the district court to apply the penalty structure for strict-liability violations. Additionally, the 7th Circuit remanded an injunction which permanently banned the principals from providing “debt relief services,” finding that the injunction requires “some tailoring” as the violations at issue involved mortgage-relief services and not debt-relief services.

    Courts CFPB Enforcement Appellate Seventh Circuit Regulation O Mortgages

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  • District Court finds that investors qualify for SEC whistleblower protections


    On July 21, the U.S. District Court for the Southern District of New York ruled that the SEC’s whistleblower protection rule extends to investors. In June 2020, a Nevada-based company and its owner (collectively, “defendants”) filed a motion to dismiss, strike portions of, and enter judgment on the pleadings of an amended complaint filed by the SEC which alleged, among other things, that the defendants violated Rule 21F-17 of the Securities Exchange Act. Rule 21F-17 “prohibits any ‘person’ from taking ‘any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.’” The defendants argued that the SEC’s rulemaking authority extends only to “whistleblower-employees,” claiming they “were not in an employer-employee relationship with those individuals whom the SEC claims were impeded (that is, investor-victims),” and objected to a magistrate judge’s report and recommendation (R&R) “as it relates to the SEC’s claim for impermissible impeding of Rule 21F-17 in violation of the Exchange Act.” The SEC countered that “Section 21F is not limited to protecting whistleblowers in the employee-employer relationship, and as such, Rule 21F-17’s application to any ‘person’ is a proper exercise of its rulemaking authority.”

    On review, the court sided with the SEC in finding that Section 21F broadly defines “[w]histleblower” as “any individual who provides . . . information relating to a violation of the securities laws” to the SEC, ruling that Rule 21F-17 “falls squarely within the SEC’s statutory authority to issue ‘necessary and appropriate’ regulations to implement Section 21F of the Exchange Act.” The court further held that “[w]hile certain portions of Section 21F provide anti-retaliation protections specific to those whistleblowers who are employees, nothing in the statute’s text nor the supporting documents indicates that Congress intended to protect only those whistleblowers who are employees.”

    Courts SEC Whistleblower Securities Exchange Act

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  • District Court grants final approval to grocery store data breach settlement


    On July 21, the U.S. District Court for the Central District of Illinois granted final approval to a class action data breach settlement, resolving allegations that a grocery chain was responsible for a data breach that exposed the credit card information of consumers. The final settlement (which was preliminarily approved in January) allows class members representing consumers who used a payment card to make a purchase at an impacted point-of-sale device during the security incident to receive reimbursement of up to $225 for out-of-pocket expenses related to the breach, including (i) unreimbursed bank, overdraft, and late fees; (ii) telecommunication charges; (iii) payday loan interest; and (iv) costs related to credit monitoring, identity theft protection, and time spent replacing credit cards and addressing fraudulent charges. Additionally, class members may be awarded up to $5,000 for “extraordinary expenses” resulting from the compromise of personal information. The grocery chain also agreed to “establish and maintain security enhancements that are estimated to cost more than $20 million.” However, the court reduced the attorneys’ fees to $739,000 in the final settlement after determining the initial fee request was too high compared to the overall relief for class members.

    Courts Class Action Settlement Privacy/Cyber Risk & Data Security Data Breach

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  • 2nd Circuit says private student loans not explicitly exempt from bankruptcy discharge


    On July 15, the U.S. Court of Appeals for the Second Circuit held that private student loans are not explicitly exempt from the discharge of debt granted to debtors in a Chapter 7 bankruptcy. According to the opinion, the plaintiff filed for Chapter 7, which led to an ambiguous discharge order as to how it applied to his roughly $12,000 direct-to-consumer student loans. After the plaintiff received the discharge in 2009, the student loan servicer started collection efforts. Because the plaintiff did not know whether the discharge applied to his student loans, he repaid the loans in full. In 2017, the plaintiff moved to reopen his bankruptcy case and filed an adversary proceeding against the student loan servicer and the servicer’s predecessor (collectively, “defendants”), seeking a determination that his student loans were in fact discharged during the original proceeding. The servicer moved for dismissal claiming the loans were exempt under 11 U.S.C. § 523(a)(8)(A)(ii), but the bankruptcy judge denied the motion, ruling that the bankruptcy code “does not sweep in all education-related debt.” The district court subsequently certified the bankruptcy court’s order for interlocutory appeal.

    On appeal, the 2nd Circuit reviewed whether the plaintiff’s private student loans could be discharged under bankruptcy. Under § 523(a)(8), the following types of student loans are exempt from discharge: (i) government or nonprofit institution student loans; (ii) obligations “to repay funds received as an educational benefit, scholarship, or stipend”; and (iii) qualified education loans. The defendants argued that the plaintiff’s loans fell into the “educational benefit” category, but the appellate court disagreed, concluding that § 523(a)(8) does not provide a blanket exception to the applicability of bankruptcy discharge to private student loans. In affirming the bankruptcy court’s ruling, the appellate court wrote, “if Congress had intended to except all educational loans from discharge under § 523(a)(8)(A)(ii), it would not have done so in such stilted terms.” The 2nd Circuit further added that “[i]nterpreting ‘educational benefit’ to cover all private student loans when the two terms listed in tandem describe ‘specific and quite limited kinds of payments that. . .do not usually require repayment,’. . .would improperly broaden § 523(a)(8)(A)(ii)’s scope.” 

    Courts Student Lending Student Loan Servicer Second Circuit Appellate Bankruptcy

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  • District Court certifies “rent-a-tribe” class action


    On July 20, the U.S. District Court for the Eastern District of Virginia certified a “rent-a-tribe” class action alleging an individual who orchestrated an online payday lending scheme violated the Racketeer Influenced and Corrupt Organization Act (RICO), engaged in unjust enrichment, and violated Virginia’s usury law by partnering with federally-recognized tribes to issue loans with allegedly usurious interest rates. The plaintiffs alleged the defendant partnered with the tribes to circumvent state usury laws even though the tribes did not control the lending operation. The court ruled that, as there was “no substantive involvement” by the tribes in the lending operation and evidence showed that the defendant was “functionally in charge,” the lending operation—which allegedly charged interest rates exceeding Virginia’s 12 percent interest cap—could not claim tribal immunity. The plaintiffs moved to certify two RICO classes, distinguished from each other based on the lending entity, each with two sub-classes of borrowers: (i) a usury sub-class of borrowers who either paid any principal, interest, or fees on their loans; and (ii) a unjust enrichment subclass of borrowers who paid any amount on their loans. The defendant challenged class certification, arguing that “due to his changing roles” in the lending operation over the class period “differences between class members will result in a need for a series of complicated mini-trials.” In certifying the two RICO classes, the court called the defendant’s recommendation to bring individual lender suits “an unnecessary and untenable burden on the judicial system.” Furthermore, the court wrote that “[w]ith respect to [p]laintiffs’ unjust enrichment claims, [the defendant] also attempts to argue that some [p]laintiffs did not confer a benefit on [the defendant] because they paid back less than they received on their loans.” However, the court noted that because Virginia law states that any contract in violation of the state’s usury law is void, “any money paid on a void contract could constitute a benefit for the purposes of an unjust enrichment.”

    Courts Class Action RICO Consumer Finance Tribal Lending Usury Interest Rate Payday Lending State Issues

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  • 7th Circuit: CRAs not required to make legal determinations under FCRA


    On July 15, the U.S. Court of Appeals for the Seventh Circuit affirmed the rulings from a district court in a consolidated appeal finding that it is up to the court, not a consumer reporting agency, to decide if a creditor possesses the proper legal relationship to a debt. In each case, the plaintiff allegedly had a debt that was purchased by a debt buyer, who reported the unpaid debts to the credit reporting agencies. The plaintiffs contacted the debt buyers and disputed the information being furnished on the basis that the creditors did not actually own the debts. The plaintiffs also contacted the consumer reporting agencies to request that they reinvestigate the accuracy of their credit reports. The reporting agencies contacted the creditors, confirming that they were the legitimate owners of the debts but did not provide additional information. The plaintiffs sued, alleging that the defendants violated the FCRA by not fully investigating the disputes. The district court, relying on a 2020 decision in Denan v. TransUnion LLC (previously covered by Infobytes), held that determining ownership of a debt is a legal question, not a duty imposed on the furnishers under the FCRA.

    On appeal, the 7th Circuit affirmed the district courts’ decisions, establishing that the key inquiry is “whether the alleged inaccuracy turns on applying law to facts or simply examining the facts alone.” because “consumer reporting agencies are competent to make factual determinations, but they do not make legal conclusion like courts and other tribunals do.” The appellate court further noted that “[b]ecause the plaintiffs in these cases asked the consumer reporting agencies to make primarily legal determinations, they have not stated claims under the [FCRA].”

    Courts Appellate FCRA Seventh Circuit Credit Reporting Agency

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