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9th Circuit concludes district attorneys can sue national banks in state court
On February 27, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s decision to abstain from enjoining a state action brought by a California county district attorney (DA) against a national bank, concluding that the enforcement action was not an exercise of “visitorial powers.” According to the opinion, the DA launched an investigation into the bank’s vendor and issued the bank an investigative subpoena seeking records of its banking activities. The bank objected, claiming the request “improperly infringes on the exclusive visitorial powers of the [OCC]” because it sought to inspect the bank’s books and records. The bank subsequently filed a complaint in the U.S. District Court for the Central District of California asking the court to enjoin the state action and requesting injunctive relief to prevent the DA from taking any action to enforce federal and state lending, debt collection, and consumer laws against the bank, or from exercising visitorial powers in violation of the National Bank Act (NBA). The DA withdrew his investigative subpoena and moved to dismiss for lack of subject matter jurisdiction on the ground that the case was now moot. The motion to dismiss was denied on the premise that the DA had not demonstrated that a “renewed investigative subpoena against [the bank] ‘could not be reasonably be expected.’”
The DA then filed a complaint in state court claiming the bank violated California law by hiring a third-party vendor to place “extensive harassing” debt collection phone calls to residents in the state. The complaint alleged violations of California’s Unfair Competition Law, the Rosenthal Fair Debt Collections Practices Act, and the right to privacy under the California Constitution. In federal court, the bank moved for summary judgment, arguing that the state action was an improper exercise of visitorial powers. The district court, however, ruled that the Younger v. Harris abstention (in which a federal court refrains from staying or enjoining pending state criminal prosecutions absent extraordinary circumstances or state civil enforcement actions when certain conditions are met) applied. The bank appealed.
The 9th Circuit considered two questions: (i) whether the Younger abstention was correctly applied, and (ii) whether the DA’s state court action “was an impermissible exercise of visitorial powers vested exclusively with the OCC.” The 9th Circuit held that the district court was correct in applying the Younger abstention doctrine because (i) “the state action qualified as an ‘ongoing’ judicial proceeding because no proceedings of substance on the merits had taken place in the federal action”; (ii) the state court action implicated an important state interest in consumer protection and nothing in federal law bars a DA from suing a national bank; (iii) the bank had the option to raise a federal defense under the NBA in the state court action; and (iv) the injunction the bank requested in the federal action would interfere with the state court proceeding. The 9th Circuit also rejected the bank’s arguments that the state action constituted an illegal exercise of visitorial powers that only belongs to the OCC or state attorneys general. The 9th Circuit cited the U.S. Supreme Court’s decision in Cuomo v. Clearing House Ass’n, L.L.C., in which the high court “held that bringing a civil lawsuit to enforce a non-preempted state law is not an exercise of visitorial powers,” and that “a sovereign’s ‘visitorial powers’ and its power to enforce the law are two different things.” Relying on the Cuomo holding, the 9th Circuit found that accepting the bank’s position “would mean that actions brought against national banks by federal or state agencies or, for that matter, individuals would be forbidden as unlawful exercises of visitorial powers.” “Such a result is wrong. It contradicts established law and is unsupported by any legal authority cited by [the bank]” and would additionally “raise serious anti-commandeering concerns under the Tenth Amendment.”
2nd Circuit: NY law on interest payments for escrow accounts is preempted
On September 15, the U.S. Court of Appeals for the Second Circuit held that New York’s interest-on-escrow law impermissibly interferes with the incidentals of national bank lending and is preempted by the National Bank Act (NBA). Plaintiffs in two putative class actions obtained loans from a national bank, one before and the other after certain Dodd-Frank provisions took effect. The loan agreements—governed by New York law—required plaintiffs to deposit money into escrow accounts. After the bank failed to pay interest on the escrowed amounts, plaintiffs sued for breach of contract, alleging, among other things, that under New York General Obligations Law (GOL) § 5-601 (which sets a minimum 2 percent interest rate on mortgage escrow accounts) they were entitled to interest. The bank moved to dismiss both actions, contending that GOL § 5-601 did not apply to federally chartered banks because it is preempted by the NBA. The district court disagreed and denied the bank’s motion, ruling first that RESPA (which regulates the amount of money in an escrow account but not the accruing interest rate) “shares a ‘unity of purpose’ with GOL § 5-601.” This is relevant, the district court said, “because Congress ‘intended mortgage escrow accounts, even those administered by national banks, to be subject to some measure of consumer protection regulation.’” Second, the district court reasoned that even though TILA § 1639d does not specifically govern the loans at issue, it is significant because it “evinces a clear congressional purpose to subject all mortgage lenders to state escrow interest laws.” Finally, with respect to the NBA, the district court determined that “the ‘degree of interference’ of GOL § 5-601 was ‘minimal’ and was not a ‘practical abrogation of the banking power at issue,’” and concluded that Dodd-Frank’s amendment to TILA substantiated a policy judgment showing “there is little incompatibility between requiring mortgage lenders to maintain escrow accounts and requiring them to pay a reasonable rate of interest on sums thereby received.” As such, GOL § 5-601 was not preempted by the NBA, the district court said.
On appeal, the 2nd Circuit concluded that the district court erred in its preemption analysis. According to the appellate court, the important question “is not how much a state law impacts a national bank, but rather whether it purports to ‘control’ the exercise of its powers.” In reversing the ruling and holding that that GOL § 5-601 was preempted by the NBA, the appellate court wrote that the “minimum-interest requirement would exert control over a banking power granted by the federal government, so it would impermissibly interfere with national banks’ exercise of that power.” Notably, the 2nd Circuit’s decision differs from the 9th Circuit’s 2018 holding in Lusnak v. Bank of America, which addressed a California mortgage escrow interest law analogous to New York’s and held that a national bank must comply with the California law requiring mortgage lenders to pay interest on mortgage escrow accounts (covered by InfoBytes here). Among other things, the 2nd Circuit determined that both the district court and the 9th Circuit improperly “concluded that the TILA amendments somehow reflected Congress’s judgment that all escrow accounts, before and after Dodd-Frank, must be subject to such state laws.”
In a concurring opinion, one of the judges stressed that while the panel concluded that the specific state law at issue is preempted, the opinion left “ample room for state regulation of national banks.” The judge noted that the opinion relies on a narrow standard of preempting only those “state laws that directly conflict with enumerated or incidental national bank powers conferred by Congress,” and stressed that the appellate court declined to reach a determination as to whether Congress subjected national banks to state escrow interest laws in cases (unlike the plaintiffs’ actions) where Dodd-Frank’s TILA amendments would apply.
10th Circuit: Extended overdraft fees do not qualify as interest under the NBA
On April 8, the U.S. Court of Appeals for the Tenth Circuit concluded that extended overdraft fees do not legally qualify as interest under the National Bank Act (NBA). According to the opinion, after the plaintiff overdrew funds from his checking account, the bank covered the cost of the item and charged an initial overdraft fee. The bank later began imposing an extended overdraft fee each business day following the initial overdraft, ultimately assessing 36 separate overdraft fees. The plaintiff filed a putative class action, contending that the bank’s extended overdraft fees qualify as interest under the NBA, and that the amount charged (which he claimed translated to an effective annualized interest rate between 501 and 2,462 percent) violated the NBA’s anti-usury provisions because it exceeded Oklahoma’s maximum annualized interest rate of 6 percent. While the plaintiff recognized that the initial overdraft fee qualifies as a “deposit account service,” he argued that the extended overdraft fee “‘is an interest charge levied by [the bank] for the continued extension of credit made in covering a customer’s overdraft’ and therefore cannot be considered connected to the same banking services that [the bank] provides to its depositors.” The district court disagreed and dismissed the action for failure to state a claim after determining that the bank’s extended overdraft fees were fees for “deposit account services” and were not “interest” under the NBA.
In affirming the district court’s dismissal, the appellate majority (an issue of first impression in the 10th Circuit) agreed that the fees qualify as non-interest account fees rather than interest charges under the NBA. The majority deferred to the OCC’s 2007 Interpretive Letter, which addressed the legality of a similar overdraft program fee structure. The letter “represents OCC’s reasonable interpretation of genuinely ambiguous regulations, and OCC’s determination that fees like [the bank’s] extended overdraft fees are ‘non-interest charges’ is neither plainly erroneous nor inconsistent with the regulations it interprets,” the majority wrote. “As ‘non-interest charges’ under § 7.4002, [the bank’s] extended overdraft fees are not subject to the NBA’s usury limits, and [plaintiff] fails to state a claim,” the majority added.
The dissenting judge countered that extended overdraft fees are interest, and that the OCC’s interpretation did not deserve deference because these fees “unambiguously” meet the definition of interest under 12 C.F.R. § 7.4001(a). According to the dissenting judge, this regulation provides that “‘interest’ ... includes any payment compensating a creditor ... for an extension of credit,” and that as such, the “definition maps onto extended overdraft fees like [the bank’s]” and thus the plaintiff had stated a claim.
CSBS drops suit against OCC fintech charter after revised application
On January 13, the Conference of State Bank Supervisors (CSBS) announced that it has withdrawn its complaint challenging the OCC’s Special Purpose National Bank (SPNB) Charters and a financial services provider’s application for an OCC nonbank charter. CSBS filed a notice of voluntary dismissal without prejudice in the U.S. District Court for the District of Columbia asking the court to close the case. According to its press release, CSBS voluntarily took this action after the company, which had previously filed an application for an OCC SPNB charter, “amended its application to include seeking FDIC deposit insurance, thus complying with the legal requirement that national banks obtain federal deposit insurance before operating as a bank.”
As previously covered by InfoBytes, CSBS filed a complaint in December 2020, to oppose the OCC’s potential approval of the company’s SPNB charter application. CSBS argued that the company was applying for the OCC’s nonbank charter, which was invalidated by the U.S. District Court for the Southern District of New York in October 2019 (the court concluded that the OCC’s SPNB charter should be “set aside with respect to all fintech applicants seeking a national bank charter that do not accept deposits,” covered by InfoBytes here). At the time, CSBS argued that “by accepting and imminently approving” the company’s application, the “OCC has gone far beyond the limited chartering authority granted to it by Congress under the National Bank Act (NBA) and other federal banking laws,” as the company is not engaged in the “business of banking.” CSBS sought to, among other things, have the court declare the agency’s nonbank charter program unlawful and prohibit the approval of the company’s charter under the NBA without obtaining FDIC insurance.
OCC acting Comptroller of the Currency Michael J. Hsu issued a statement following the withdrawal of the legal challenge. “We must modernize the regulatory perimeter as a prerequisite to conducting business as usual with firms interested in novel activities. Modernizing the bank regulatory perimeter cannot be accomplished by simply defining the activities that constitute ‘doing banking,’ but will also require determining what is acceptable activity to be conducted in a bank. Consolidated supervision will help ensure risks do not build outside of the sight and reach of federal regulators.”
5th Circuit: Extended overdraft charges are not interest
On September 29, the U.S. Court of Appeals for the Fifth Circuit held that the daily fees imposed on a consumer who failed to timely pay an overdraft were deposit-account service charges, not interest, and thus not subject to usury limits. The plaintiff allegedly overdrew her account and her bank paid the overdraft. The bank began charging a daily fee after the plaintiff did not repay the overdraft within five business days (called an “Extended Overdraft Charge”), which the plaintiff argued constituted interest on an extension of credit and was usurious in violation of the National Bank Act (NBA). In dismissing the plaintiff’s complaint for failure to state a claim, the district court reasoned that the bank does not make a loan to a customer when it covers the customer’s overdraft, and therefore the NBA’s limitations on interest charges do not apply. On appeal, the appellate court sided with the district court and deferred to the interpretation of the OCC that the fees at issue were not “interest” under the law. The court found the OCC’s interpretation to be reasonable and otherwise entitled to Auer deference, and on that basis affirmed.
District Court: Maryland escrow law does not confer private right of action
On September 22, the U.S. District Court for the District of Maryland granted a national bank’s motion for summary judgment in an action claiming the bank allegedly failed to pay interest on mortgage escrow accounts. The plaintiff filed a putative class action asserting various claims including for violation of Section 12-109 of the Maryland Consumer Protection Act (MCPA), which requires lenders to pay interest on funds maintained in escrow on behalf of borrowers. In response, the bank filed a motion to dismiss on the basis that the MCPA is preempted by the National Bank Act and by 2004 OCC preemption regulations. In 2020, the court denied the bank’s motion to dismiss after it determined, among other things, that under Dodd-Frank, national banks are required to pay interest on escrow accounts when mandated by applicable state or federal law. (Covered by InfoBytes here.) Citing previous decisions in similar escrow interest cases brought against the same bank in other states (covered by InfoBytes here and here), the court stated that Section 12-109 “does not prevent or significantly interfere with [the bank’s] exercise of its federal banking authority, because [Section] 12-109’s ‘interference’ is minimal, when compared with statutes that the Supreme Court has previously found were preempted.” The court further noted that state law—which “still allows [the bank] to require escrow accounts for its borrowers”—provides that the bank must pay a small amount of interest to borrowers if it chooses to maintain escrow accounts.
However, in its most recent ruling, the court held that the MCPA does not authorize the plaintiff to sue either. “[T]his court finds that § 12-109 does not confer a private right of action,” the court wrote, adding that the plaintiff’s breach of contract claim could not get around a notice-and-cure provision in her mortgage agreement that she had not complied with before suing. The plaintiff argued that these requirements did not apply because “her self-styled breach of contract claim is actually a statutory claim because the allegedly breached contractual provision is one which pledges general adherence to applicable law.” The court disagreed, stating that under the plaintiff’s theory “any claim for breach of contract, which also violated a federal or state law, would be vaulted to a privileged hybrid status. Such claims would enjoy an unlimited private right of action (regardless of whether the underlying statute created one) and. . .would be unbounded by any of the provisions or conditions precedent detailed in the contract itself.” The court also ruled that the plaintiff’s escrow statements, which “correctly reflected that her account was not accruing interest,” are themselves “not rendered deceptive by the mere fact that Plaintiff believes such interest is owed.”
OCC cites preemption decision in valid-when-made rule challenge
On August 24, the OCC filed a statement of recent decision in support of its motion for summary judgment in an action brought against the agency by several state attorneys general challenging the OCC’s final rule on “Permissible Interest on Loans that are Sold, Assigned, or Otherwise Transferred” (known also as the valid-when-made rule). The final rule was designed to effectively reverse the U.S. Court of Appeals for the Second Circuit’s 2015 Madden v. Midland Funding decision and provide that “[i]nterest on a loan that is permissible under [12 U.S.C. § 85 for national bank or 12 U.S.C. § 1463(g)(1) for federal thrifts] shall not be affected by the sale, assignment, or other transfer of the loan.” (Covered by a Buckley Special Alert.) The states’ challenge argued that the rule “impermissibly preempts state law,” is “contrary to the plain language” of section 85 (and section 1463(g)(1)), and “contravenes the judgment of Congress,” which declined to extend preemption to non-banks. Moreover, the states contended that the OCC “failed to give meaningful consideration” to the commentary received regarding the rule, essentially enabling “‘rent-a-bank’ schemes.” (Covered by InfoBytes here.) Both parties sought summary judgment, with the OCC arguing that the final rule validly interprets the National Bank Act (NBA) and that not only does the final rule reasonably interpret the “gap” in section 85, it is consistent with section 85’s “purpose of facilitating national banks’ ability to operate their nationwide lending programs.” Moreover, the OCC asserted that 12 U.S.C. § 25b’s preemption standards do not apply to the final rule, because, among other things, the OCC “has not concluded that a state consumer financial law is being preempted.” (Covered by InfoBytes here.)
In its August 24 filing, the OCC brought to the court’s attention a recent order issued by the U.S. District Court for the Western District of Wisconsin. As previously covered by InfoBytes, the Wisconsin court reviewed claims under the FDCPA and the Wisconsin Consumer Act (WCA) against a debt-purchasing company and a law firm hired by the company to recover outstanding debt and purported late fees on the plaintiff’s account in a separate state-court action. Among other things, the court examined whether the state law’s notice and right-to-cure provisions were federally preempted by the NBA, as the original creditor’s rights and duties were assigned to the debt-purchasing company when the account was sold. The court ultimately concluded that the WCA provisions “are inapplicable to national banks by reason of federal preemption,” and, as such, the court found “that a debt collector assigned a debt from a national bank is likewise exempt from those requirements” and was not required to send the plaintiff a right-to-cure letter “as a precondition to accelerating his debt or filing suit against him.”
District Court: State law right-to-cure provisions preempted by National Bank Act
On August 4, the U.S. District Court for the Western District of Wisconsin granted defendants’ motion for partial summary judgment in an action alleging claims under the FDCPA and the Wisconsin Consumer Act (WCA). The defendants were a debt-purchasing company and a law firm hired by the company to recover outstanding debt and purported late fees on the plaintiff’s account in a separate state-court action. After the plaintiff failed to make payments on his outstanding balance, the original creditor (a national bank) charged late fees and mailed him a “right to cure” letter advising him of the minimum payment due and the deadline to make the payment. The account was eventually sold to the debt-purchasing company after the plaintiff failed to make any minimum payments. The law firm sent the plaintiff two letters on behalf of the debt-purchasing company, one which outlined his right to dispute the debt and one which provided a “notice of right to cure default.” A small claims action was filed against the plaintiff in state court, in which the plaintiff argued for dismissal, contending in part that the notice of default failed to itemize delinquency charges as required under Wisconsin law. The plaintiff then filed this suit in federal court alleging violations of the FDCPA and the WCA, claiming that the defendants “falsely represented the status of his debt in violation of § 1692e by purporting to have properly accelerated his debt and filed suit against him despite [the plaintiff] never being provided an adequate right to cure letter pursuant to Wisconsin law.”
First, in reviewing whether the plaintiff had standing to sue, the court determined that the “costs, time, and energy” incurred by the plaintiff to defend himself in the state-court action amounted to a “concrete injury in fact” that established his standing in the federal-court action. However, upon reviewing the WCA’s right-to-cure provisions as the basis for the plaintiff’s claims that the defendants violated federal and state laws by allegedly falsely representing that they could accelerate the plaintiff’s debt and sue him, the court examined whether the state law’s notice and right-to-cure provisions were federally preempted by the National Bank Act (NBA), as the original creditor’s rights and duties were assigned to the debt-purchasing company when the account was sold. The court determined that while the WCA right-to-cure provisions “do relate in part to debt collection,” they also “go beyond that by imposing conditions on the terms of credit within the lending relationship.” The court ultimately concluded that the WCA provisions “are inapplicable to national banks by reason of federal preemption,” and, as such, the court found “that a debt collector assigned a debt from a national bank is likewise exempt from those requirements” and was not required to send the plaintiff a right-to-cure letter “as a precondition to accelerating his debt or filing suit against him.”
District Court stays CSBS’s fintech charter challenge while OCC reviews framework
On June 16, the U.S. District Court for the District of Columbia entered an order staying litigation in a lawsuit filed by the Conference of State Bank Supervisors (CSBS) challenging the OCC’s authority to issue Special Purpose National Bank Charters (SPNB). (Covered by InfoBytes here.) Earlier this year, the OCC responded to CSBS’s opposition to the agency’s alleged impending approval of an SPNB for a financial services provider (proposed bank), in which CSBS argued that the OCC was exceeding its chartering authority (covered by InfoBytes here). The OCC countered that the same fatal flaws that pervaded CSBS’s prior challenges, i.e., that its challenge is unripe and CSBS lacks standing, still remain (covered by InfoBytes here). Moreover, the agency argued, among other things, that the cited application (purportedly curing CSBS’s prior ripeness issues) is not for an SPNB (the proposed bank that has applied for the charter would conduct a full range of services, including deposit taking), but that even it if was an application for an SPNB charter, there are multiple additional steps that need to occur prior to the OCC issuing the charter, which made the challenge unripe.
According to CSBS’s unopposed motion to stay litigation, a “90-day stay would conserve the [p]arties’ and the [c]ourt’s resources by avoiding potentially unnecessary briefing and oral argument.” Further, in referring to acting Comptroller Michael Hsu’s testimony to the U.S. House of Representatives—in which he stated that “the OCC is currently reviewing various regulatory standards and pending actions, including the OCC’s framework for chartering national banks”—CSBS noted that the OCC has represented that it anticipates this review period will take approximately 90 days and that it does not intend to take any action towards granting a charter to the proposed bank during this period. Following the conclusion of the 90-day stay, the parties agreed to confer and submit to the court a joint status report on or before September 27 “addressing the status of the OCC’s plans with respect to processing applications for uninsured national bank charters, including the [proposed bank’s] charter application, and the [p]arties’ proposed schedule for proceeding with or resolving the present case.”
OCC supports national bank’s challenge to state law requiring interest payments on escrow accounts
On June 15, the OCC filed an amicus curiae brief in support of a defendant-appellant national bank in an appeal challenging a requirement under New York General Obligation Law § 5-601 that a defined interest rate be paid on mortgage escrow account balances. As previously covered by InfoBytes, the bank argued that the National Bank Act (NBA) preempts the state law, but the district court disagreed and issued a ruling in 2019 concluding that there is “clear evidence that Congress intended mortgage escrow accounts, even those administered by national banks, to be subject to some measure of consumer protection regulation.” The district court also determined that, with respect to the OCC’s 2004 real estate lending preemption regulation (2004 regulation), there is no evidence that “at this time, the agency gave any thought whatsoever to the specific question raised in this case, which is whether the NBA preempts escrow interest laws,” citing to and agreeing with the U.S. Court of Appeals for the Ninth Circuit’s decision in Lusnak v. Bank of America (which held that a national bank must comply with a California law that requires mortgage lenders to pay interest on mortgage escrow accounts, previously covered by InfoBytes here). The district court further applied the preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson, and found that the law does not “significantly interfere” with the bank’s power to administer mortgage escrow accounts, noting that it only “requires the [b]ank to pay interest on the comparatively small sums” deposited into the accounts and does not “bar the creation of mortgage escrow accounts, or subject them to state visitorial control, or otherwise limit the terms of their use.”
In its amicus brief filed with the U.S. Court of Appeals for the Second Circuit, the OCC wrote that it “respectfully submits that the [appellate court] should reverse the decision of the [d]istrict [c]ourt and find that application of Section 5-601 to [the bank] is preempted by federal law,” adding that the 2019 ruling “upsets…settled legal principles” and “creates uncertainty regarding national banks’ authority to fully exercise real estate lending powers under the [NBA].” In addressing the district court’s application of Barnett, the OCC argued that the district court had incorrectly concluded that state laws cannot be preempted unless they “practical[ly] abrogat[e] or nullif[y] a national bank’s exercise of a federal banking power—a “stark contrast to the preemption standard set forth in Barnett and the OCC’s—as well as many other federal courts’—interpretation of that standard.” The OCC urged the appellate court to “conclude that a state law that requires a national bank to pay even a nominal rate of interest on a particular category of account impermissibly conflicts with a national bank’s power by disincentivizing the bank from continuing to offer the product. This is sufficient to trigger preemption under Barnett.”
The OCC further stated, among other things, that the district court also incorrectly disregarded the agency’s 2004 regulation, which the OCC said “specifically authorizes national banks to exercise their powers to make real estate loans ‘without regard to state law limitations concerning…[e]scrow accounts, impound accounts, and similar accounts….’” The agency further cautioned that the district court’s determination that the OCC’s 2004 regulation was not entitled to any level of deference was done in error and warned that “[i]f the OCC’s regulation regarding escrow accounts is rendered ineffective, this result could cause disruption within the banking industry by upsetting long-settled law regarding the applicability of state laws to national bank powers.”