Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
On January 6, the CFPB, DOJ, and DOD filed an amicus brief on behalf of the United States in support of a consumer servicemember plaintiff’s appeal in Jerry Davidson v. United Auto Credit Corp, arguing that the hybrid loan at issue in the case, which was used for both an MLA-exempt and non-exempt purpose, must comply with the MLA. The loan included an amount used to purchase Guaranteed Auto Protection (GAP) insurance coverage, and the plaintiff alleged that, among other things, the auto lender (defendant) violated the MLA by forcing the plaintiff to waive important legal rights as a condition of accepting the loan and by requiring him to agree to mandatory arbitration should any dispute arise related to the loan. The plaintiff also alleged that the defendant failed to accurately communicate his repayment obligations by failing to disclose the correct annual percentage rate. The case is before the U.S. Court of Appeals for the Fourth Circuit after a district court held that the plaintiff’s GAP insurance fell within the car-loan exception to the MLA as “inextricably tied to” and “directly related” to the vehicle purchase.
Arguing that GAP coverage “is not needed to buy a car and does not advance the purchase or use of the car,” the agencies’ brief noted that GAP coverage is identified as “debt-related product that addresses a financial contingency arising from a total loss of the car” and that the coverage can be purchased as a standalone product. According to the brief, the plaintiff’s loan is a “hybrid loan—that is, a loan that finances a product bundle including both an exempt product (such as a car) and a distinct non-exempt product (such as optional GAP coverage),” and the district court erred in failing to interpret the MLA consistent with guidance issued in 2016 and 2017 by the DOD suggesting that such “hybrid loans” are consumer credit subject to the protections in the MLA. The 2017 guidance explained that “a credit transaction that includes financing for Guaranteed Auto Protection insurance … would not qualify for the exception,” and the agencies argued that although the 2017 guidance was withdrawn in 2020, the “withdrawal did not offer a substantive interpretation of the statute that would alter the conclusion” that the plaintiff’s loan was not exempt from the MLA.
On January 10, the U.S. Supreme Court issued a short summary disposition granting a petition for a writ of certiorari filed by a lender and an appraisal management company. Rather than hearing arguments in the case, the Court immediately vacated the judgment against the defendants and ordered the U.S. Court of Appeals for the Fourth Circuit to reexamine its decision in light of the Court’s ruling in TransUnion v. Ramirez (which clarified the type of concrete injury necessary to establish Article III standing, and was covered by InfoBytes here).
As previously covered by InfoBytes, in March 2021, a divided 4th Circuit affirmed a district court’s award of over $10 million in penalties and damages based on a summary judgment that an appraisal practice common before 2009 was unconscionable under the West Virginia Consumer Credit and Protection Act. During the appeal, the defendants argued that summary judgment was wrongfully granted and that the class should not have been certified since individual issues predominated over common ones, but the appellate court majority determined, among other things, that there was not a large number of uninjured members within the plaintiffs’ class because plaintiffs paid for independent appraisals and “received appraisals that were tainted.”
The defendants argued in their petition to the Court that the 4th Circuit’s “fundamentally unjust” holding could not stand in the wake of TransUnion, which ruled that every class member must be concretely harmed by an alleged statutory violation in order to have Article III standing. According to the defendants, the divided panel “affirmed the class certification and the class-wide statutory-damages award, because the class members all faced the same risk of harm: the appraisers had been ‘exposed’ to the supposed procedural error, and the class members paid for the appraisals, even though the court ‘cannot evaluate whether’ any harm ever materialized.”
On November 16, the U.S. Court of Appeals for the Fourth Circuit upheld a district court’s ruling denying defendants’ bid to dismiss or compel arbitration of a class action concerning alleged usury law violations. The plaintiffs—Virginia consumers who defaulted on short-term loans received from online lenders affiliated with a federally-recognized tribe—filed a putative class action against tribal officials as well as two non-members affiliated with the tribal lenders, alleging the lenders violated the Racketeer Influenced and Corrupt Organizations Act (RICO) and Virginia usury laws by charging interest rates between 544 and 920 percent. The defendants moved to compel arbitration under a clause in the loan agreements and moved to dismiss on various grounds, including that they were exempt from Virginia usury laws. The district court denied the motions to compel arbitration and to dismiss, ruling that the arbitration provision was unenforceable as a prospective waiver of the borrowers’ federal rights and that the defendants could not claim tribal sovereign immunity. The district court also “held the loan agreements’ choice of tribal law unenforceable as a violation of Virginia’s strong public policy against unregulated lending of usurious loans.” However, the district court dismissed the RICO claim against the tribal officials, ruling that RICO only authorizes private plaintiffs to sue for money damages and not injunctive or declaratory relief.
On appeal, the 4th Circuit concluded that the arbitration clauses in the loan agreements impermissibly force borrowers to waive their federal substantive rights under federal consumer protection laws, and contained an unenforceable tribal choice-of-law provision because Virginia law caps general interest rates at 12 percent. As such, the appellate court stated that the entire arbitration provision is unenforceable. “The [t]ribal [l]enders drafted an invalid contract that strips borrowers of their substantive federal statutory rights,” the appellate court wrote. “[W]e cannot save that contract by revising it on appeal.” The 4th Circuit also declined to extend tribal sovereign immunity to the tribal officials, determining that while “the tribe itself retains sovereign immunity, it cannot shroud its officials with immunity in federal court when those officials violate applicable state law.” The appellate court further noted that the “Supreme Court has explicitly blessed suits against tribal officials to enjoin violations of federal and state law.” The 4th Circuit ultimately affirmed the district court’s judgment, noting that the loan agreement provisions were unenforceable because “tribal law’s authorization of triple-digit interest rates on low-dollar, short-term loans violates Virginia’s compelling public policy against unregulated usurious lending.”
The appellate court also agreed with the district court that RICO does not permit private plaintiffs to seek an injunction. “Congress’s use of significantly different language” to define the scope of governmental and private claims under RICO “compels us to conclude” that “private plaintiffs may sue only for treble damages and costs,” the appellate court stated. While plaintiffs “urge us to consider by analogy the antitrust statutes,” provisions outlined in the Clayton Act (which explicitly authorize injunction-seeking private suits) have “no analogue in the RICO statute,” the appellate court wrote, adding that “nowhere in the RICO statute has Congress explicitly authorized private actions for injunctive relief.”
CFPB, FTC, and North Carolina argue public records website does not qualify for Section 230 immunity
On October 14, the CFPB, FTC, and the North Carolina Department of Justice filed an amicus brief in support of the consumer plaintiffs in Henderson v. The Source for Public Data, L.P., arguing that a public records website, its founder, and two affiliated entities (collectively, “defendants”) cannot use Section 230 liability protections to shield themselves from credit reporting violations. The case is currently on appeal before the U.S. Court of Appeals for the Fourth Circuit after a district court determined that the immunity afforded by Section 230 of the Communication and Decency Act applied to the FCRA and that the defendants qualified for such immunity and could not be held liable for allegedly disseminating inaccurate information and failing to comply with the law’s disclosure requirements.
The plaintiffs alleged, among other things, that because the defendants’ website collects, sorts, summarizes, and assembles public record information into reports that are available for third parties to purchase, it qualifies as a consumer reporting agency under the FCRA. According to the amicus brief, the plaintiffs’ claims do not seek to hold the defendants liable on the basis of the inaccurate data but rather rest on the defendants’ alleged “failure to follow the process-oriented requirements that the FCRA imposes on consumer reporting agencies.” According to plaintiffs, the defendants, among other things, (i) failed to adopt procedures to assure maximum possible accuracy when preparing reports; (ii) refused to provide plaintiffs with copies of their reports upon request; (iii) failed to obtain required certifications from its customers; and (iv) failed to inform plaintiffs they were furnishing criminal information about them for background purposes. The defendants argued that they qualified for Section 230 immunity. The 4th Circuit is now reviewing whether a consumer lawsuit alleging FCRA violations seeking to hold a defendant liable as the publisher or speaker of information provided by a third party is preempted by Section 230.
In their amicus brief, the CFPB, FTC, and North Carolina urged the 4th Circuit to overturn the district court ruling, contending that the court misconstrued Section 230—which they assert is unrelated to the FCRA—by applying its immunity provision to “claims that do not seek to treat the defendant as the publisher or speaker of any third-party information.” According to the brief, liability turns on the defendants’ alleged failure to comply with FCRA obligations to use reasonable procedures when reports are prepared, to provide consumers with a copy of their files, and to obtain certifications and notify consumers when reports are furnished for employment purposes. “As the consumer reporting system evolves with the emergence of new technologies and business practices, FCRA enforcement remains a top priority for the commission, the Bureau, and the North Carolina Attorney General,” the brief stated. “The agencies’ efforts would be significantly hindered, however, if the district court’s decision  is allowed to stand.”
Newly sworn-in CFPB Director Rohit Chopra and FTC Chair Lina M. Khan issued a joint statement saying “[t]his case highlights a dangerous argument that could be used by market participants to sidestep laws expressly designed to cover them. Across the economy such a perspective would lead to a cascade of harmful consequences.” They further stressed that “[a]s tech companies expand into a range of markets, they will need to follow the same laws that apply to other market participants,” adding that the agencies “will be closely scrutinizing tech companies’ efforts to use Section 230 to sidestep applicable laws. . . .”
On March 10, a divided U.S. Court of Appeals for the Fourth Circuit affirmed a district court’s summary judgment that an appraisal practice common before 2009 was unconscionable under the West Virginia Consumer Credit and Protection Act. According to the opinion, a class of borrowers filed a lawsuit against a lender and an appraisal management company, alleging the defendants relayed home value estimates provided by borrowers on their applications to appraisers and allegedly asked appraisers “to take another look” if the appraisal value came in lower than the estimated value. The plaintiffs claimed, among other things, that this practice constituted a breach of contract and unconscionable inducement under West Virginia law. Plaintiffs also filed a civil conspiracy claim against the defendants. The district court conditionally certified the class. It ultimately imposed a $9.6 million statutory penalty and awarded class members the appraisal fees paid as damages for breach of contract in an amount totaling nearly $1 million. However, no damages were awarded for conspiracy. The defendants appealed, arguing that summary judgment was wrongfully granted and that the class should not have been certified since individual issues predominated over common ones.
On appeal, the majority determined, among other things, that the acceptability of the challenged practice “shifted dramatically during the class period,” and that “[w]hat started out as a common (though questionable) practice became one that, in short order, was explicitly forbidden.” The majority determined the plaintiffs established their claim for unconscionable inducement, and that it “was unethical for Defendants to attempt to pressure or influence appraisers.” The majority also affirmed the district court’s ruling on the conspiracy claim. However, the appellate court concluded that the district court improperly granted summary judgment on the breach of contract claim and ordered the district court to reexamine whether breach of contract occurred and whether the plaintiffs suffered resulting damages.
The dissenting judge called the majority opinion “startling,” writing that “[t]his is an unjust punishment indeed for a company that followed a practice that was both customary and legal and only later modified to avoid potentially influencing appraisers.”
On February 12, the U.S. District Court for the Northern District of West Virginia denied for a second time a satellite TV provider’s (defendant) motion to compel arbitration in a TCPA class action, concluding that the arbitration provision was “overbroad, absurd and unconscionable.” As previously covered by InfoBytes, the plaintiff filed a lawsuit against the defendant alleging the defendant violated the TCPA by making automated and prerecorded telemarketing calls to an individual even though her number was on the National Do Not Call Registry. The defendant moved to compel arbitration, claiming that the plaintiff’s dispute was covered by an arbitration agreement in the contract governing her cell phone service with a telecommunications company, which is an affiliate of the defendant. The district court denied the request, ruling that the allegations “did not fall within the scope of the arbitration agreement.” On appeal, the U.S. Court of Appeals for the Fourth Circuit issued a split opinion vacating a district court’s decision with the majority concluding that the allegations fit within the broad scope of the arbitration agreement, and that even though the plaintiff agreed to arbitration with a telecommunications company in 2012, the agreement extends to the TCPA allegations against the defendant after the telecommunications company acquired the defendant in 2015. Specifically, the appellate court stated that the arbitration agreement had a “forward-looking nature,” and that it seemed unlikely that the telecommunications company and its affiliates “intended to restrict the covered entities to those existing at the time the agreement was signed.” The 4th Circuit remanded the case back to the district court for consideration of unconscionability.
On remand, the district court again denied the motion, stating that the “arbitration provision is overbroad, absurd and unconscionable, and far exceeds anything contemplated by Congress in enacting the [Federal Arbitration Act].” Specifically, the court stated the plaintiff was “an ordinary wireless consumer” given a “small electronic pinpad device” with a few lines of the agreement displayed at a time and an option to skip to an acknowledgment screen, which required her signature, in order to “obtain her line of service.” She would then be “irrevocably locked in to face demands that she arbitrate any dispute arising out of any relationship with virtually any of [the telecommunications company]’s corporate cousins—a list that could, overtime, comprise  current competitors or not-yet created subsidiaries.” Because the arbitration provision was unconscionably broad, the court denied the motion to arbitrate.
On October 2, the U.S. Court of Appeals for the Fourth Circuit reversed the dismissal of a putative class action, concluding that the current mortgage servicer has the obligation under RESPA to pay tax payments as they become due. According to the opinion, after a consumer refinanced their mortgage loan, the mortgage was sold to a new mortgage company (defendant), which took over the servicing rights and responsibilities from the previous servicer, effective October 2017. The consumer continued making payments on the mortgage loan, which included payments to an escrow account for property taxes. The defendant allegedly did not pay the consumer’s property taxes due in November 2017 until sometime in 2018. The city assessed late penalties (which the defendant ultimately paid) and the late payment adversely affected the consumer’s income tax bill in the amount of $895. The consumer filed a putative class action alleging, among other things, that the defendant violated RESPA by failing to make the tax payment on time. The district court dismissed the action, concluding that the previous servicer was “responsible as ‘the servicer’ under RESPA” to make the payments.
On appeal, the 4th Circuit disagreed, concluding that the consumer plausibly alleged that the defendant was responsible for servicing his mortgage at the time, and therefore, responsible for making his tax payment when due. The appellate court rejected the defendant’s argument that RESPA requires the entity that “received funds for escrow” to make the tax payment when due. RESPA, according to the appellate court, “connects the servicer’s obligation to a payment’s due date, not the date of payment into escrow by the borrower.” Thus, the defendant would be “the servicer” responsible for paying the mortgage tax from the borrower’s escrow account on its due date.
9th Circuit splits with 4th Circuit, concludes arbitration agreement does not apply to acquired company
On September 30, the U.S. Court of Appeals for the Ninth Circuit issued a split opinion affirming a district court’s decision against arbitration in a proposed class action, which accused a satellite TV provider (defendant) of violating the TCPA by allegedly placing unauthorized prerecorded messages to customers’ cell phones without prior express written consent. According to the opinion, the plaintiff signed a contract containing an arbitration agreement with a telecommunications company in 2011 that eventually acquired the defendant in 2015. After the plaintiff filed his complaint, the defendant moved to compel arbitration, arguing that as an affiliate of the telecommunications company, it was entitled to arbitration. The district court disagreed and ruled that the contract signed between the plaintiff and the telecommunications company “did not reflect an intent to arbitrate the claim that [the plaintiff] asserts against [the defendant].”
On appeal, the majority concluded that “under California contract law, looking to the reasonable expectations of the parties at the time of the contract, a valid agreement to arbitrate did not exist between plaintiff and [the defendant] because [the defendant] was not an affiliate of the [telecommunications company] when the contract was signed.” The majority acknowledged that its decision is contrary to a recent 4th Circuit opinion (covered by InfoBytes here), in which that majority concluded that that an arbitration agreement signed by the plaintiff with the telecommunications company in 2012 when she opened a new line of service was extended to potential TCPA allegations against the defendant when the telecommunications company acquired the defendant in 2015. However, the 9th Circuit majority held that under the defendant’s interpretation of the agreement, the plaintiff “would be forced to arbitrate any dispute with any corporate entity that happens to be acquired by [the telecommunications company], even if neither the entity nor the dispute has anything to do with providing wireless services to [the plaintiff]—and even if the entity becomes an affiliate years or even decades in the future.” Moreover, the majority concluded that to enforce an agreement the plaintiff signed with the telecommunications company before it acquired the satellite TV provider would lead to “absurd results.”
In dissent, the minority wrote that because the agreement with the telecommunications company covered its affiliates and there is nothing in the agreement’s wording stating that it would only “refer to present affiliates” on the day of signing, the defendant should be able to compel arbitration.
On August 7, the U.S. Court of Appeals for the Fourth Circuit issued a split opinion vacating a district court’s decision against arbitration in a proposed class action, which accused a satellite TV provider (defendant) of violating the TCPA by allegedly making automated and prerecorded telemarketing calls to an individual even though her number was on the National Do Not Call Registry. The plaintiff filed a lawsuit against the defendant and several other entities and individuals seeking class certification as well as statutory damages and injunctive relief. The defendant moved to compel arbitration, claiming that the plaintiff’s dispute was covered by an arbitration agreement in the contract governing her cell phone service with a telecommunications company, which is an affiliate of the defendant. The district court denied the request, ruling that the allegations “did not fall within the scope of the arbitration agreement.” The plaintiff appealed, “defend[ing] the district court’s scope ruling,” but arguing that no agreement was formed.
On appeal, the majority concluded that not only did the plaintiff form an agreement to arbitrate with the defendant, the allegations fit within the broad scope of the arbitration agreement. Specifically, the appellate court determined that an arbitration agreement signed by the plaintiff with the telecommunications company in 2012 when she opened a new line of service was extended to potential TCPA allegations against the defendant when the telecommunications company acquired the defendant in 2015. Even though the acquisition happened several years after the plaintiff signed the contract, the majority stated the arbitration agreement had a “forward-looking nature” and that it seemed unlikely that the telecommunications company and its affiliates “intended to restrict the covered entities to those existing at the time the agreement was signed.” According to the majority, “[w]e need not define the outer limits of this arbitration agreement to conclude, based on the arbitration provisions and the contract as a whole, that [the plaintiff’s] TCPA claims about [the defendant’s] advertising calls fall within its scope.” As to the plaintiff’s argument that she only signed the account on behalf of her husband who was the account holder, the majority said the agreement covered “all authorized or unauthorized users,” which the plaintiff was at the time.
On July 21, the U.S. Court of Appeals for the Fourth Circuit affirmed a district court’s denial of defendants’ motion to compel arbitration, holding that the arbitration agreements operated as prospective waivers of federal law and were thus unenforceable. According to the opinion, a group of Virginia borrowers filed suit against two online lenders owned by a sovereign Native American tribe and their investors (collectively, “defendants”). In the action, the plaintiffs contended that they obtained payday loans from the defendants, which included annual interest rates between 219 percent to 373 percent—an alleged violation of Virginia’s usury laws and the Racketeer Influenced and Corrupt Organizations Act (RICO). The defendants moved to compel arbitration, which the district court denied, concluding that choice-of-law provisions—such as “‘[t]his agreement to arbitrate shall be governed by Tribal Law’; ‘[t]he arbitrator shall apply Tribal Law’; and the arbitration award ‘must be consistent with this Agreement and Tribal Law’”—prospectively excluded federal law, making them unenforceable.
On appeal, the 4th Circuit agreed with the district court despite a “strong federal policy in favor of enforcing arbitration agreements.” Most significantly, the appellate court rejected the defendants’ assertion that the choice-of-law provisions did not operate as a prospective waiver. The court noted that while the choice-of-law provisions “do not explicitly disclaim the application of federal law, the practical effect is the same,” as they limit an arbitrator’s award to “remedies available under Tribal Law,” effectively preempting “the application of any contrary law—including contrary federal law.” Moreover, the appellate court concluded that under the arbitration agreement, borrowers would be unable to effectively pursue RICO claims against the defendants, and more specifically, would be unable to “effectively vindicate a federal statutory claim for treble damages” under RICO. Thus, because federal statutory protections and remedies are unavailable to borrowers under the agreement, the appellate court concluded the entire agreement is unenforceable.
- Jeffrey P. Naimon to discuss “Section 1071: Small business data collection & fair lending” at the American Bar Association Consumer Financial Services Winter Meeting 2022
- Jonice Gray Tucker to discuss “Getting your company ready: Managing fair lending for IMBs” at the Mortgage Bankers Association Independent Mortgage Bankers Conference
- Jonice Gray Tucker to discuss “Be Your Compliance Best in 2022” at the California Mortgage Bankers Association webinar
- Lauren R. Randell to discuss “Significant legal developments in the Northeast” at the 37th Annual National Institute on White Collar Crime
- Jonice Gray Tucker to discuss “Small business & regulation: How fair lending has evolved & where it is heading?” at the Consumer Bankers Association Live program