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Financial Services Law Insights and Observations


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  • 6th Circuit: Merchant indemnified against card breach costs


    On June 7, the U.S. Court of Appeals for the 6th Circuit affirmed a lower court’s ruling that an agreement between a Texas-based merchant and a payment processor did not require the merchant to pay millions of dollars in damage-control costs related to two card system data breaches. After the data breaches, the payment processor withheld routine payment card transaction proceeds from the merchant, asserting that the merchant was responsible for reimbursing the amount that the issuing banks paid to cardholders affected by the breaches. However, the merchant refused to pay the payment processor, relying on a “consequential damages waiver” contained in the agreement.

    The payment processor argued that, under the agreement’s indemnification clause and provision covering third-party fees and charges, the merchant retained liability for assessments passed down from the card brands’ acquiring bank. The district court, however, granted summary judgment to the merchant, finding that the merchant was not liable for the card brands’ assessments. The court further ruled that the payment processor materially breached the agreement when it diverted funds to reimburse itself.

    On review, the 6th Circuit agreed with the lower court that the assessments “constituted consequential damages” and that the agreement exempted consequential damages from liability under a “conspicuous limitation” to the indemnification clause. According to the 6th Circuit, the “data breaches, resulting reimbursement to cardholders, and levying of assessments, though natural results” of the merchant’s failure to comply with the Payment Card Industry's Data Security Standards, “did not necessarily follow from it.” In addition, the appellate court agreed with the district court’s holding that third-party fees and charges in the contract refer to routine charges associated with card processing services rather than liability for a data breach. The appellate court also concurred that the payment processor’s decision to withhold routine payment card transactions, constituted a material breach of the agreement.

    Courts Sixth Circuit Appellate Payment Processors Credit Cards Data Breach Privacy/Cyber Risk & Data Security Indemnification

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  • Splitting from the 6th Circuit, 7th Circuit holds mere procedural violation of FDCPA not sufficient harm for standing


    On June 4, the U.S. Court of Appeals for the 7th Circuit held that the receipt of an incomplete debt collection letter is not a sufficient harm to satisfy Article III standing requirements to bring a FDCPA claim against a debt collector. According to the opinion, a consumer received a collection letter which described the process for verifying a debt but did not specify that she had to communicate with the collector in writing to trigger the protections under the FDCPA. The consumer filed a class action against the debt collector alleging the omission “‘constitute[d] a material/concrete breach of her rights’” under the FDCPA. In the complaint, the consumer did “not allege that she tried—or even planned to try—to dispute the debt or verify that [the stated creditor] was actually her creditor.” The district court dismissed the action, concluding that the consumer had not alleged that the FDCPA violation “caused her harm or put her at an appreciable risk of harm” and therefore, the consumer lacked standing to sue.

    On appeal, the 7th Circuit affirmed the district court’s decision, concluding that because the consumer did not allege that she tried to dispute or verify the debt orally, leaving her statutory protections at risk, she suffered no harm to her statutory rights under the FDCPA. The appellate court emphasized that “procedural injuries under consumer‐protection statutes are insufficiently concrete to confer standing.” The court acknowledged that its opinion creates a conflict with a July 2018 decision by the U.S. Court of Appeals for the 6th Circuit, which held that consumers had standing to sue a debt collector whose letters allegedly failed to instruct them that the FDCPA makes certain debt verification information available only if the debt is disputed “in writing.” (Covered by InfoBytes here.) The appellate court also agreed with the district court’s decision to deny the consumer’s request for leave to file an amended complaint, noting that she did not indicate what facts she would allege to cure the jurisdictional defect.

    Courts Spokeo Seventh Circuit Sixth Circuit Appellate FDCPA

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  • 6th Circuit holds elements of Michigan foreclosure process are collection efforts under FDCPA


    On January 11, the U.S. Court of Appeals for the 6th Circuit held that a debt collector should not allow the essential elements of a Michigan foreclosure to proceed after receiving a dispute letter under the FDCPA. According to the opinion, in September 2016, a debt collector sent a notice to a mortgage debtor informing the homeowner it intended to foreclose on the property, and two weeks later it began the Michigan state foreclosure process. After the process began, and within 30 days of receiving the debt collection notice, the mortgage debtor sent a certified dispute letter to the collector, challenging the validity of the debt. After receiving the dispute letter, the debt collector posted a foreclosure notice on the property and published notices in the newspaper. The debt collector never sent the mortgage debtor a verification of the debt. The mortgage debtor filed suit against the debt collector alleging violations of, among other things, the FDCPA. The district court granted summary judgment for the debt collector, holding that as a matter of law, the FDCPA did not require that the debt collector verify the debt and that it had “cease[d] collection of the debt” pursuant to the statute. The mortgage debtor appealed, arguing the district court (i) erred in its decision to end discovery and consider summary judgment, and (ii) erred in its interpretation of the FDCPA and its finding that the collector ceased collection efforts.

    On appeal, the 6th Circuit rejected the mortgage debtor’s arguments that summary judgment was granted while there were outstanding discovery motions, concluding the debtor provided no evidence the debt collector failed to comply with discovery requests and noted that most of the motions were filed after discovery period expired. As for the FDCPA appeal, the court reversed the district court’s decision, concluding that, as a matter of law, the debt collector was required to intervene and stop the foreclosure actions that were put into motion prior to receiving the dispute letter. The appellate court agreed with the debtor that the newspaper advertisement and posted notice are necessary elements of the Michigan foreclosure process and therefore constituted “collection activity” under the FDCPA. Regardless of whether the debt collector personally took any actions after receiving the dispute letter, the appellate court concluded the debt collector had the responsibility to cancel any elements of the Michigan foreclosure process until it obtained sufficient verification of the debt.

    Courts Sixth Circuit Appellate FDCPA State Issues Foreclosure Debt Collection

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  • 6th Circuit holds that failing to report a trial modification plan can constitute incomplete reporting under FCRA


    On August 23, the U.S. Court of Appeals for the 6th Circuit held that a borrower met the requirements necessary for a Fair Credit Reporting Act (FCRA) claim to proceed when two mortgage servicers failed to report the existence of a trial modification plan when reporting the borrower was delinquent to reporting agencies. In 2014, a borrower brought an action against three credit reporting agencies and two mortgage servicers alleging, among other claims, violations of the FCRA due to payments being reported as past due while successfully making payments under a trial modification plan (also referred to as a Trial Period Plan, or “TPP”) and working towards a permanent modification. Regarding the FCRA claim, the 6th Circuit reversed the lower court’s decision granting the servicers’ motion for summary judgment, finding that the borrower met the statutory requirements for an FCRA claim because failing to report the existence of a TPP can constitute “incomplete reporting” in violation of the statute. The 6th Circuit rejected the servicers’ argument that the Home Affordable Modification Program guidelines “encouraged, but did not require” that they report a TPP. The court acknowledged this distinction but noted that “[r]eporting that [a borrower] was delinquent on his loan payments without reporting the TPP implies a much greater degree of financial irresponsibility than was present here.” The court remanded the case to the district court to determine whether the servicers conducted a reasonable investigation after the borrower disputed the reporting.

    Courts Sixth Circuit Mortgages Loss Mitigation Mortgage Servicing Credit Report Credit Reporting Agency FCRA HAMP Consumer Finance

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  • 6th Circuit cites Spokeo, but holds plaintiffs alleged sufficient harm from deficient debt collection letters


    On July 30, the U.S. Court of Appeals for the 6th Circuit held that consumers had standing to sue a debt collector whose letters allegedly failed to instruct them that the Fair Debt Collection Practices Act (FDCPA) makes certain debt verification information available only if the debt is disputed “in writing.” The court found that these alleged violations of the FDCPA presented sufficiently concrete harm to satisfy the “injury-in-fact” required for standing under Article III of the Constitution.

    The debt collector had filed a motion to dismiss in the lower court, arguing that the putative class action plaintiffs lacked Article III standing under the Supreme Court’s 2016 ruling in Spokeo, Inc. v. Robins (covered by a Buckley Sandler Special Alert). The district court denied the motion, determining that the letters “created a ‘substantial’ risk that consumers would waive important protections afforded to them by the FDCPA” due to the insufficient instructions. The 6th Circuit affirmed. After analyzing Spokeo, the court agreed that the “purported FDCPA violations created a material risk of harm to the interests recognized by Congress in enacting the FDCPA,” namely the risk of unintentionally waiving the verification and suspension rights afforded by the FDCPA when a debt is disputed.

    Courts Appellate Sixth Circuit Spokeo Debt Collection Debt Verification FDCPA

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  • 6th Circuit affirms dismissal of certain TCPA class action claims, reverses decision on survivability issue


    On July 20, in a matter of first impression for the Courts of Appeals, the U.S. Court of Appeals for the 6th Circuit held that claims under the Telephone Consumer Protection Act (TCPA) survive the death of a plaintiff and may be brought by a successor in interest. In so doing, the court reversed the lower court’s decision that held the opposite and remanded the case back to the lower court for further proceedings. The 6th Circuit opined that the lower court erred in holding that TCPA was penal rather than remedial in nature, and thus could not survive a plaintiff’s death. “The purpose of the TCPA [is] to redress individual wrongs felt by individual consumers . . . [and] recovery under the statute runs to the harmed individual and not the public,” both of which suggest that TCPA claims were remedial, and thus survive a party’s death. Separately, the court affirmed the district court’s order granting a motion to sever and motion to dismiss.

    Courts TCPA Student Lending Servicing Appellate Sixth Circuit

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  • 6th Circuit affirms no breach of contract for processing ACH transactions in order received


    On July 6, the U.S. Court of Appeals for the 6th Circuit affirmed a district court’s decision, holding that there was no breach of contract between a consumer and a bank arising from the order in which the bank processed automated clearing house (ACH) transactions against the consumer’s checking account. According to the opinion, the consumer brought two state law breach of contract claims against the bank alleging that the order in which the bank processed ACH transactions against his checking account resulted in eight initial overdraft fees. Addressing the first breach of contract claim, the appeals court rejected the consumer’s argument that the agreement required the bank to process ACH transactions in the order incurred by the consumer. According to the agreement, “transactions will be processed ‘as they occur on their effective date for the business day on which they are processed’”—not necessarily the actual date that the transaction was initiated. Under the ACH Guidelines, the “effective date” is the date when the merchant presents the transactions to the ACH Operator (the Federal Reserve). Specifically, the bank processed the transactions in the order presented in the Federal Reserve’s batch files. The 6th Circuit also rejected the consumer’s second breach of contract claim, which asserted that the bank’s initial debiting of eight overdraft fees violated the parties’ agreement. Under the terms of the parties’ agreement, the consumer was not required to pay more than five overdraft fees per day, and while the initial debiting of the eight charges constituted a breach, the next-business-day reversal eliminated any damages. Accordingly, the appeals court affirmed the lower court’s decision to grant summary judgment in favor of the bank.

    Courts Sixth Circuit Appellate ACH

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  • Bank and shareholders reach settlement over BSA/AML compliance allegations


    On March 30, a regional bank reached a $13 million settlement with a group of its shareholders over allegations of misleading statements and omissions regarding the bank’s compliance with fair lending laws, and Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations. The shareholders—purchasers of the bank’s stock between July 2013 and July 2014—allege that the bank’s misrepresentations regarding their compliance with BSA/AML laws, as well as other laws and regulations, artificially inflated the price of the bank’s stock. According to the settlement, both parties’ decisions to enter into the agreement were partially due to the length and expense of continued litigation, which began in 2014. The shareholders initiated the class action litigation in July 2014; however, the U.S. Court of Appeals for the 6th Circuit vacated the initial class certification in September 2016, remanding to the district court for further proceedings. The class was recertified by the district court in June 2017 with the 6th Circuit denying the bank’s petition for appeal of the recertification. The bank denies all allegations of wrongdoing and liability in the settlement.

    Securities Settlement Bank Secrecy Act Anti-Money Laundering Appellate Sixth Circuit Class Action

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  • Sixth Circuit rules borrowers lack standing under FDCPA


    On February 16, the U.S. Court of Appeals for the Sixth Circuit held that a letter sent from an attorney on behalf of a mortgage servicing company to consumers violated the Fair Debt Collection Practices Act (FDCPA), but because the alleged violation did not meet the “injury in fact” requirement for standing, the consumers had no standing to sue. According to the opinion, the letter confirmed receipt of an executed warranty deed in lieu of foreclosure and reaffirmed that the mortgage servicer would “not attempt to collect any deficiency balance.” When the mortgage servicer attempted to collect the debt, the consumers cited the letter and the servicer agreed that nothing was owed. However, the consumers sued the attorney and the mortgage servicer claiming that the letter violated the FDCPA and the Ohio Consumer Sales Practices Act because it did not include a notice that it was from a debt collector. The claims against the servicer were resolved through arbitration, but a district court ruled that the attorney violated Ohio law for failing to include the appropriate disclosures. The attorney appealed, arguing that the consumers did not have standing to assert their federal and state law claims. However, citing the Supreme Court ruling in Spokeo, Inc. v. Robins, the Sixth Circuit held that the consumers must show more than a “bare procedural violation.” Even though the letter lacked the required disclosures required by the FDCPA, this lack of disclosures caused no harm to the consumers, and in fact, the “letter was good news when it arrived, and it became especially good news when [the servicer] persisted in trying to collect a no-longer-collectible debt.” Because the letter created no cognizable injury, the Sixth Circuit reversed the district court’s decision and dismissed the claims brought under the FDCPA and the Ohio Consumer Sales Practice Act for lack of standing.

    Courts Appellate Sixth Circuit FDCPA Spokeo Debt Collection

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