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On June 10, the U.S. District Court for the Southern District of California denied a national payday lender’s motion to compel arbitration, agreeing with plaintiffs that the arbitration provision in their loan agreement was unenforceable because it was procedurally and substantively unconscionable. According to the opinion, plaintiffs filed a putative class action suit against the payday lender alleging the lender sells loans with usurious interest rates, which are prohibited under California’s Unfair Competition Law and Consumer Legal Remedies Act. The lender moved to compel arbitration asserting that the consumers’ loan agreements contain prohibitions on class actions in court or in arbitration, require arbitration of any claims arising from a dispute related to the agreement, and disallow consumers from acting as a “private attorney general.”
The court first determined that California law applied. It concluded that, while the lender was headquartered in Kansas, the consumers obtained their loans in California, and California “has a materially greater interest than Kansas in employing its laws to resolve the instant dispute,” based on its “material and fundamental interest in maintaining a pathway to public injunctive relief in unfair competition cases.”
The court then determined that the arbitration provision was procedurally unconscionable because, even though the consumers had a 30-day opt-out window, it required them to waive statutory causes of action “before they knew any such claims existed.” Finally, because the provision contained a waiver of public injunctive relief, the court determined it was substantively unconscionable based on the California Supreme Court decision in McGill v. Citibank, N.A (covered by a Buckley Special Alert here). The court rejected the lender’s arguments that McGill was preempted under the Federal Arbitration Act (FAA), noting a 2015 decision by the U.S. Court of Appeals for the 9th Circuit, “effectively controls” the dispute and the 9th Circuit reasoned that a similar state-law rule against waivers was not preempted by the FAA. Lastly, the court held that the unconscionable public injunctive relief waiver provision was not severable from the entire arbitration provision, because the agreement contained “poison pill” language that would invalidate the entirety of the arbitration provision.
On May 30, the OCC filed a letter with the U.S. District Court for the Southern District of New York notifying the court that it intends to work with NYDFS to issue a proposed final order to the court in the action challenging the OCC’s decision to allow fintech companies to apply for a Special Purpose National Bank Charter (SPNB). As previously covered by InfoBytes, in May, the court denied the OCC’s motion to dismiss, concluding that, among other things, 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, and therefore, the challenge “is ripe for adjudication.” In its letter, the OCC states that while it “disagrees with the Court’s decision, and reserves its right to appeal, it believes that the decision renders entry of final judgment in this matter appropriate.” An entry of final judgment, would allow the OCC to challenge the decision with the U.S. Court of Appeals for the 2nd Circuit.
On May 2, the U.S. District Court for the Southern District of New York denied the OCC’s motion to dismiss a complaint filed by NYDFS arguing that the agency’s decision to allow fintech companies to apply for a Special Purpose National Bank Charter (SPNB) is a move that will destabilize financial markets more effectively regulated by the state. (See previous InfoBytes coverage here.) The court, however, 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.” Specifically, NYDFS alleged that granting a national charter to fintech firms would limit its ability to regulate non-depository institutions and could potentially lead to a loss in revenue derived from assessments levied against state licensed institutions. The court rejected the OCC’s preemption arguments, writing that the “threats to New York's sovereignty are so clear that the OCC does not even mention, let alone contest, the state's interests. Instead, OCC focuses exclusively on constitutional and prudential ripeness.” The court further dismissed the OCC’s ripeness argument that it has yet to receive, review, or approve a SPNB application, and referred to NYDFS’ allegations that the OCC has “invited fintech companies . . . to discuss SPNB charters,” which potentially demonstrates “at least some demand for, and interest in, such charters.” While the court concedes that the potential for fintech companies to “flout” New York's laws would only occur once a fintech company has applied and been granted a SPNB charter, “those steps do not stymie [NYDFS’s] standing.”
In addressing NYDFS’s Administrative Procedures Act claim, the court found, among other things, that engaging in the “business of banking” under the National Bank Act (NBA) “unambiguously requires receiving deposits as an aspect of the business.” Furthermore, the court concluded that “absent a statutory provision to the contrary, only depository institutions are eligible to receive [a SPNB] from [the] OCC.” However, the court dismissed NYDFS’s claims that a SPNB charter conflicts with state law in violation of the Tenth Amendment of the U.S. Constitution. According to the court, while NYDFS has standing to raise a Tenth Amendment claim, it has failed to state such a claim “because federal law preempts state law only when ‘Congress has clearly expressed its intent,’” and in this instance, “the operative question is not whether the federal government has the power to take the action challenged in this case, but whether Congress has, in fact exercised that power.”
On February 8, the U.S. District Court for the Western District of North Carolina dismissed a consumer’s state law claims under the North Carolina Unfair and Deceptive Trade Practices Act and civil conspiracy claims because they were preempted by the FCRA. According to the opinion, which affirmed and adopted a Magistrate Judge’s recommendation, and also allowed the consumer’s FDCPA claims to proceed, the consumer alleged the furnisher improperly filed delinquencies on his credit report, wrongfully refused to remove the delinquencies, and improperly handled the investigation of his claims. The consumer had objected to the Magistrate’s conclusions with regard to the state law claims, arguing that the FCRA preemption was not applicable because the unfair and deceptive conduct occurred after the furnisher allegedly reported inaccurate information to the credit bureaus. The district court rejected this argument, concluding that the state law claims “run  into the teeth of the FCRA preemption provision” and are “squarely preempted” by the federal statute.
On January 25, the U.S. District Court for the Southern District of California granted a bank’s motion to compel arbitration in connection with a lawsuit concerning the bank’s assessment of two types of fees. According to the order, the plaintiff filed a lawsuit asserting claims for breach of contract and violation of California’s Unfair Competition Law due to the bank’s alleged practice of charging fees for out-of-network ATM use and overdraft fees related to debit card transaction timing. The bank moved to compel arbitration pursuant to the arbitration provision in the deposit account agreement executed between the bank and the plaintiff. The plaintiff argued against arbitration, citing a California Supreme Court case, McGill v. Citibank, which held that “waivers of the right to seek public injunctive relief in any forum are unenforceable.” In response, the bank argued that (i) McGill does not apply because the plaintiff is not seeking public injunctive relief; and (ii) McGill is preempted by the Federal Arbitration Act (FAA). The court agreed with the bank, determining that the relief sought by the plaintiff would primarily benefit her, stating “any public injunctive relief sought by [plaintiff] is merely incidental to her primary aim of gaining compensation for injury.” As for preemption, the court noted that even if the McGill rule was applicable to a contract, it would not survive preemption as the U.S. Supreme Court has “consistently held that the FAA preempts states’ attempts to limit the scope of arbitration agreements,” and “the McGill rule is merely the latest ‘device or formula’ intended to achieve the result of rendering an arbitration agreement against public policy.”
On November 19, the U.S. Supreme Court declined to review the U.S. Court of Appeals for the 9th Circuit’s March decision, which held that a California law requiring banks to pay interest on mortgage escrow funds is not preempted by federal law. As previously covered by InfoBytes, a national bank petitioned for writ of certiorari in August, arguing the 9th Circuit’s decision—holding that the Dodd-Frank Act of 2011 codified the existing National Bank Act preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson—warranted further review “because it creates significant uncertainty about whether national banks must comply with similar laws in other states” and whether other state banking laws also apply to national banks. Additionally, the petition argued the uncertainty is exacerbated by the fact that the appellate court “disregarded and refused to enforce longstanding OCC regulations” and that the court interpreted the Barnett decision incorrectly.
District of Columbia moves to dismiss lawsuit alleging city’s student loan servicer regulations are preempted by federal law
On September 7, the District of Columbia filed a memorandum in support of its motion to dismiss a lawsuit claiming that the city’s regulations and requirements for student loan servicers are preempted by federal law. The plaintiff, a D.C.-based trade group whose membership consists of national student loan servicers, argues in its complaint that various provisions of District of Columbia Law 21-214, and rules promulgated thereunder, are preempted by the Federal Higher Education Act (HEA). For example, the complaint alleges that the licensing, examination, and annual reporting requirements are expressly preempted by the HEA, and the requirement to provide records to the D.C. Commissioner of Securities and Banking, upon request, violates the requirement that third party requests for records be made directly to the Department of Education.
The city countered that the potential harm is “hypothetical” and the plaintiff’s preemption claims are insufficient to establish standing. Several nonprofit groups filed an amicus brief in support of the city, stating that the lawsuit “is part of a strenuous effort by the Department and loan servicers not to protect federal interests, but to reach an outcome whereby no government entity provides meaningful regulation.” Moreover, the amicus brief claims that the lawsuit was filed following the Department’s Interpretation issued last March (as previously covered in InfoBytes here), which took the position that state regulation of Direct Loan servicing is broadly preempted by the HEA because it “impedes uniquely Federal interests,” and state regulation of the servicing of Federal Family Education Program Loans “is preempted to the extent that it undermines uniform administration of the program.”
On May 16, a panel of three judges on the U.S. Court of Appeals for the 9th Circuit denied the petition for an en banc rehearing of its March decision, which held that a California law that requires a bank to pay interest on escrow funds is not preempted by federal law. In addition to the national bank’s appeal for a rehearing, the OCC notably filed an amicus brief supporting the rehearing, arguing that the court “comprehensively misinterpreted” the Supreme Court’s 1996 decision Barnett Bank of Marion County v. Nelson. (Previously covered by InfoBytes here.) The panel noted that the full court had been advised of the bank’s petition for rehearing, and no judge had requested a vote on rehearing.
On April 24, the OCC filed an amicus curiae brief in support of an en banc rehearing of the U.S. Court of Appeals for the 9th Circuit’s March decision, which held that a California law that requires the bank to pay interest on escrow funds is not preempted by federal law. As previously covered by InfoBytes, the 9th Circuit held that the Dodd-Frank Act of 2011 (Dodd-Frank) essentially codified the existing National Bank Act (NBA) preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson.
In a strongly worded brief, the OCC states that the court “errs in matters of fundamental importance to the national banking system” and “comprehensively misinterpreted” Barnett Bank and the cases upon which that decision rests. The OCC specifically argues that the court misinterpreted the legal standard for preemption articulated by Barnett Bank, ignored applicable Supreme Court standards prescribing a test for reviewing preemptive regulations, improperly created a burden of proof on national banks to demonstrate Congressional intent as to preemption, and inappropriately imposed a higher bar for “large corporate banks” to show state law interference. The OCC also argues that the court’s reliance on the effective dates of the Dodd-Frank provisions relied upon by the Court pre-date the transactions that were at issue in the case, and would therefore have no application to the facts of the case.
This filing supports the national bank’s petition for en banc rehearing filed April 13 and previously covered by InfoBytes here.
Bank petitions for rehearing of 9th Circuit preemption decision; OCC to file amicus brief in support of bank
On April 13, a national bank filed a petition for an en banc rehearing of the U.S. Court of Appeals for the 9th Circuit’s March decision, which held that a California law that requires the bank to pay interest on escrow funds is not preempted by federal law. As previously covered by InfoBytes, the 9th Circuit held that the Dodd-Frank Act of 2011 (Dodd-Frank) essentially codified the existing National Bank Act (NBA) preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson. The panel cited to Section 1639d(g)(3) of Dodd-Frank, which, according to the opinion, expresses Congress’ view that the type of law at issue does not “prevent or significantly interfere with a national bank’s operations” because the law does not “prevent or significantly interfere” with the national bank’s exercise of its power. Additionally, the 9th Circuit concluded that the OCC’s 2004 preemption regulation had no effect on the preemption standard.
In its petition for rehearing, the bank argues that the 9th Circuit’s decision, if allowed to stand, “will create confusion regarding which state laws apply to national banks and restrict the terms on which they may extend credit” because the decision conflicts with previous decisions by the same court, the Supreme Court, and other circuits. The bank also acknowledges the OCC’s intent to file an amicus curiae brief in support of the petition no later than April 23.
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