InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
9th Circuit affirms no jurisdiction without exhaustion of administrative remedies
On December 27, the U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal of a TILA case brought by a consumer against his mortgage lender, citing lack of subject matter jurisdiction under the provisions of FIRREA that require claims involving a bank that is in receivership to be presented to the FDIC before the borrower files suit. In 2009 the consumer filed an adversary proceeding in bankruptcy court against his lender for rescission of his mortgage loan under TILA. The consumer claimed that the lender’s notice of right to cancel was defective when the loan was signed, resulting in an extended rescission period under TILA, but his suit was dismissed for lack of jurisdiction. Once again, in 2012, the district court dismissed the consumer’s TILA suit after finding that the consumer had not exhausted his administrative remedies with the FDIC before filing suit.
On appeal, the three-judge panel rejected the consumer’s claim that his lender was not placed into receivership until after his loan was sold, and therefore he did not have to exhaust his administrative remedies before filing suit. The panel subscribed to the Fourth Circuit’s interpretation of the exhaustion requirement, stating that “even where an asset never passes through the FDIC’s receivership estate, the FDIC should assess the claim first.” According to the opinion, the FIRREA requirement that the consumer exhaust his remedies with the FDIC applied to this action because the panel determined that (i) the consumer’s claim was “susceptible of resolution under the FIRREA claims process”; (ii) the consumer’s claim was related to an act or omission of the lender; and (iii) the FDIC, which “was not required to have possessed the loan before determining a claim” had been appointed as receiver for that lender, stripping the appellate court of subject matter jurisdiction until after the FDIC determined his claim.
$24 million settlement proposed in FCRA class action against credit reporting agency
On December 31, a credit reporting agency (agency) and a class of consumers whose payday loan servicer collapsed jointly filed a proposed $24 million settlement agreement for approval by the U.S. District Court for the Central District of California (also, see the memorandum in support here). The proposed agreement would resolve a class action suit alleging that the agency provided incorrect and potentially harmful information on the class members’ credit reports in violation of the FCRA.
In 2016, the class representative (the consumer) sued the agency claiming it was reporting disputed debts from a payday loan servicer that had previously requested that the agency stop reporting the servicer’s pool of payday loan accounts. Because the servicer had also discontinued its servicing operations, the debts could no longer be verified. The consumer alleged that although the agency claimed to have deleted the payday loan servicer’s accounts in January of 2015, it continued to report as delinquent more than 100,000 loans until the accounts were actually deleted more than a year later. After the district court granted a motion for summary judgment filed by the agency, the consumer appealed to the U.S. Court of Appeals for the Ninth Circuit.
As previously covered in InfoBytes, upon appeal in 2019, the appellate court vacated the lower court’s grant of summary judgment on the ground that the consumer’s allegations regarding the inaccuracy of the agency’s information and the willfulness of its actions “raised genuine issues of material fact.” On remand, the district court granted class certification in October. The proposed settlement agreement, if approved, would automatically award each class member approximately $270, and provide up to $15,000 to the consumer who originally filed the lawsuit as the class representative. A hearing date is set for January 27.California Court of Appeal: Borrowers allowed opportunity to cure default on missed loan modification payments
On December 16, the California Court of Appeal for the First Appellate District allowed borrowers who missed payments on their modified mortgage loan to reinstate the loan and avoid foreclosure by paying the amount in default under the terms of the modified loan, rather than the amount that would have been in default under the original loan terms. According to the court, the borrowers missed four monthly payments on their modified loan, which had deferred certain amounts due on the original loan (including principal). The loan-modification agreement stated that any future default would allow the lender to void the loan modification and enforce the original loan terms. According to the lender, in order to reinstate their account and avoid foreclosure, the borrowers would have to pay the amount that would have been past due on the original loan principal before the loan was modified, plus the four missed monthly payments, associated late charges, and fees and costs. The borrowers filed suit, alleging violations of California Civil Code §§ 2924c and 2953. Section 2924c overrides typical mortgage acceleration clauses to give the borrower the right to cure a default by paying the amount in default rather than the entire principal balance, plus specified fees and expenses. Section 2953 provides that the right of reinstatement created by § 2924c cannot be waived in “[a]ny express agreement made or entered into by a borrower at the time of or in connection with the making of or renewing of any loan secured by a deed of trust, mortgage, or other instrument creating a lien on real property.”
The Court of Appeal reversed the trial court’s grant of summary judgment to the lender. It held that the loan modification at issue was “appropriately viewed as the making or renewal of a loan secured by a deed of trust . . . and is thus subject to the anti-waiver provisions of Section 2953.” Therefore, the court held that the lender had failed to show that the borrowers “could not prevail on their claim” that the lender violated § 2924c and was accordingly not entitled to summary judgment, and remanded the matter to the trial court.
9th Circuit: Student loan guaranty agency is not a debt collector under FDCPA
On December 18, the U.S. Court of Appeals for the Ninth Circuit held that a nonprofit guaranty agency that collected delinquent student loans was exempt from the FDCPA because its “collection activity was incidental to its fiduciary obligation to the Department of Education.” According to the opinion, the matter dates back decades, where a judgment on the borrower’s three defaulted student loans was eventually assigned to the defendant, which began collection efforts on behalf of the Department of Education (the Department had previously repaid the guarantor of the loans). The defendant sent the borrower a notice in 2009 that it would begin collecting the Department’s claim by having the Department of Treasury “offset ‘all payment streams authorized by law,’ including his Social Security benefits,” to which the borrower did not respond. The borrower eventually disputed the debt in 2012 once the offset took effect, and filed a lawsuit in 2015 claiming FDCPA and Fifth Amendment due process violations. The district court granted summary judgment in favor of the defendant, ruling that the defendant was not a debt collector subject to the FDCPA and was not subject to due process because it was not a state actor.
On appeal, the 9th Circuit agreed with the district court, concluding that while the defendant satisfied the general criteria for debt collectors because it regularly collected debts that were owed to someone else, the defendant qualified for an exception because its debt collection activities were “incidental to a bona fide fiduciary obligation.” Specifically, the appellate court held that “incidental to” a fiduciary obligation meant that debt collection could not be the “sole or primary” reason the judgment had been assigned to the defendant. The appellate court explained that the defendant had a broader role beyond the collection of debts, because it had also accepted recordkeeping and administrative duties. Finally, concerning the borrower’s argument that the defendant had “arbitrarily and maliciously” garnished his benefits in violation of his due process rights, the 9th Circuit concluded that there was no due process violation because the defendant (i) had provided the borrower with a notice of the debt and its intention to recover the claim from his Social Security benefits; (ii) the notice was sent to the correct address; and (iii) the defendant’s misstatement that the debt arose from one loan rather than the total of three loans was not a due process violation.
FTC asks Supreme Court to delay review of $1.3 billion judgment
On December 13, the FTC filed a brief in a U.S. Supreme Court action that is currently awaiting the Court’s decision to grant certiorari. The question presented to the Court asks whether the FTC is empowered by Section 13(b) of the FTC Act to demand equitable monetary relief in civil enforcement actions. The petitioners, who include a Kansas-based operation and its owner, filed the petition for a writ of certiorari in October, appealing a December 2018 decision by the U.S. Court of Appeals for the Ninth Circuit (covered by InfoBytes here), which upheld a $1.3 billion judgment against the petitioners for allegedly operating a deceptive payday lending scheme. Among other things, the 9th Circuit rejected the petitioners’ argument that the FTC Act only allows the court to issue injunctions, concluding that a district court may grant any ancillary relief under the FTC Act, including restitution. The 9th Circuit also rejected the petitioners’ request to revisit those precedents in light of the Court’s 2017 holding in Kokesh v. SEC—which limited the SEC’s disgorgement power to a five-year statute of limitations period applicable to penalties and fines under 28 U.S.C. § 2462 (previously covered by InfoBytes here)—concluding that the district court did not abuse its discretion in calculating the award. Additionally, the 9th Circuit referenced the Court’s statement in Kokesh that noted “[n]othing in [its] opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings.”
In response to the petition, the FTC asked the Court to delay reviewing the appeal, stating that the Court should hold the petition pending the disposition in a matter that was recently granted cert “to decide whether district courts may award disgorgement to the [SEC] under analogous provisions of the securities laws.” The FTC acknowledged that while the “relevant statutory schemes are not identical, and the FTC’s and the SEC’s authority to seek monetary relief will not necessarily rise and fall together,” the questions presented in both cases overlap.
Written request for HAMP assistance resets foreclosures limitations
On December 13, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s grant of summary judgement in favor of a bank and mortgage servicer defendants in an action brought by a consumer to prevent foreclosure of his property. According to the unpublished opinion, in 2016, the consumer, who was struggling with his mortgage payments, submitted loan modification requests on three occasions. In each request, the consumer provided written acknowledgment of the original debt and expressed his desire to pay in order to keep his property. The consumer asserted that Washington state law and the FDCPA prohibited the defendants from instituting foreclosure proceedings on his mortgage because the six-year statute of limitations for filing for foreclosure had expired. On appeal, the three judge panel rejected the consumer’s argument, determining that the limitation on filing for foreclosure had not run, explaining that because the consumer had not communicated to defendants “an intent not to pay,” and each of the modification requests acknowledged the debt in writing, the foreclosure statute of limitations period was restarted each of the three times he submitted his loan modification requests.
District Court’s reversal of jury verdict in FDCPA case overturned
On December 12, the U.S. Court of Appeals for the Fifth Circuit reversed the district court’s ruling overturning a jury verdict in favor of the consumer for a debt collection company’s (company) violation of the FDCPA and the Texas Fair Debt Collection Practices Act (Texas Act). The consumer sued the company claiming that after she sent the company a letter disputing a debt, the company failed to report to the credit bureaus that the debt was “disputed.” At trial, the jury awarded the consumer $61,000 for the company’s alleged FDCPA and Texas Act violations. Afterwards, the district court granted the company’s post-trial motion for judgment as a matter of law, overturned the jury’s verdict, and dismissed the case, ruling that the consumer failed to provide evidence that the disputed debt was a consumer debt.
On appeal, the 5th Circuit held that it is within the jury’s discretion to make credibility determinations and that it was permissible for the jury to credit the consumer’s testimony about the consumer nature of the debt—a determination which cannot be disturbed unless it is impossible that the testimony is true. In addition, the appellate court noted that the jury has discretion to draw inferences and that it reasonably inferred that the disputed debt was, in fact, a consumer debt, as the consumer claimed.
Connecticut Supreme Court reverses in favor of consumer in unfair trade practices appeal
On November 26, the Connecticut Supreme Court reversed a trial court’s ruling on a mortgage servicer’s motion to dismiss a Connecticut Unfair Trade Practices Act (CUTPA) action brought by a consumer. The trial court had ruled in favor of the servicer, stating, among other things, that ruling in the consumer’s favor might dissuade servicers from engaging in loan modifications for fear of negligence claims and additional liability. According to the Connecticut Supreme Court opinion, the consumer defaulted on his mortgage and his servicer instituted foreclosure proceedings, at which time the consumer requested a loan modification under the HAMP program. The complaint claims that over the next five years, the servicer mishandled the loan modification process, failed to respond to the consumer’s inquiries about the modification status, and repeatedly requested applications and additional documents from the consumer.
Based on the facts stated in the complaint, the consumer claims that when the servicer finally extended a HAMP modification (which capitalized accrued but unpaid interest, default fees, and the servicer’s attorney fees), the consumer filed a complaint against the servicer for violation of CUTPA, alleging that the servicer “committed unfair or deceptive acts in the conduct of trade or commerce by failing to exercise reasonable diligence in reviewing and processing the [consumer’s] loan modification applications.” Additionally, the consumer alleged negligence, claiming that the servicer “owed the [consumer] a duty of care arising out of the servicing standards imposed by RESPA, the 2011 federal consent order, the national mortgage settlement, and the Connecticut foreclosure mediation statutes.”
The Connecticut Supreme Court reversed the lower court’s ruling striking the consumer’s CUTPA claim on a motion to strike (similar to a federal motion to dismiss), stating that, “viewed in the light most favorable to sustaining the complaint’s legal sufficiency, we agree with the [consumer] and conclude that these allegations describe conduct that was not merely a technical violation of these provisions or negligent or incompetent, but involved a conscious, systematic departure from known, standard business norms” and that the allegations, if true, could show that the servicer “deliberately engage[d] in a pattern of conduct intended to prevent” the consumer from getting a loan modification. However, the court agreed with the lower court regarding the negligence claim, rejecting the consumer’s claim that the servicer had a common-law duty “to use reasonable care in the review and processing of” his loan modification application.
10th Circuit affirms $5 million disgorgement in Kokesh
On December 6, the U.S. Court of Appeals for the Tenth Circuit affirmed a district court’s revised disgorgement order in SEC v. Kokesh. As previously covered by InfoBytes, in 2017, the U.S. Supreme Court handed down a unanimous ruling in Kokesh and rejected the SEC’s position that disgorgement is an equitable remedy and not a penalty. The Court’s decision limited the SEC’s disgorgement power to a five-year statute of limitations period applicable to penalties and fines under 28 U.S.C. § 2462. Following the Court’s ruling, in 2018, the 10th Circuit, on remand, directed the district court to enter an order for a lower disgorgement amount of $5 million (from nearly $35 million), holding that only a portion of the SEC’s claims were not time-barred by 28 U.S.C. § 2462. At the district court, the SEC also argued that prejudgment interest of more than $2.6 million should apply to the disgorgement penalty, as well as nearly $2.3 million in civil penalties, and the district court awarded such amounts, rejecting Kokesh’s argument that “the district court should reject any relief other than an order of disgorgement.” Kokesh again appealed, arguing, among other things, that “§ 2462 is jurisdictional and precludes this action in its entirety,” and that the permanent injunction and civil penalties were invalid.
On appeal, the 10th Circuit refused to address Kokesh’s jurisdictional argument, stating that, among other things, the appellate court had previously found that “each act of misappropriation should be considered separately” and that not all of the SEC’s claims were time-barred. The appellate court further concluded that because it had previously found that some alleged misappropriations happened within the five-year limit, the $5 million disgorgement calculation that the SEC requested was warranted. Moreover, the appellate court noted that Kokesh failed to show any reason that its 2018 decision was “clearly erroneous,” and during remand, “rather than. . .contesting timeliness or the SEC’s calculations, Kokesh conceded the district court should enter the disgorgement order and instead focused on the SEC’s new request for prejudgment interest.” Additionally, the appellate court refused to consider Kokesh’s challenges to the permanent injunction and the civil penalty ordered because they were first raised in Kokesh’s reply brief.
Appeals Court affirms enforceability of arbitration agreement
On November 27, the Superior Court of New Jersey, Appellate Division, affirmed an order requiring arbitration between a consumer and the buyer of the consumer’s debt (debt collector) in a lawsuit filed by the consumer claiming that the debt collector was not licensed to collect debts in New Jersey. According to the decision, the consumer had opened a credit card account with a bank, which included an arbitration agreement, then defaulted on the account. The debt collector then bought the debt and collected the consumer’s debt. The consumer subsequently sued the debt collector for its purported unlicensed collection of debts, but the trial court dismissed the complaint and compelled arbitration between the parties. The consumer appealed, arguing in part that the trial court erred by allowing an arbitrator to decide the validity of the assignment to the debt collector, and, therefore, the enforceability of the arbitration agreement. The appellate division court sided with the trial court that the arbitration clause “clearly and expressly stated claims relating to the ‘application, enforceability or interpretation of this Agreement, including this arbitration provision’ are subject to arbitration.” Moreover, the court concurred that the agreement did not violate the state’s plain language statute. However, the appellate division remanded the case to the trial court for issuance of an order to stay—rather than dismiss—the matter pending arbitration.