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Financial Services Law Insights and Observations

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  • California Court of Appeal: Prejudgment interest accrual did not violate Rosenthal Fair Debt Collection Practices Act

    Courts

    On July 1, the California Court of Appeal for the Fourth Appellate District affirmed in part and reversed in part a previous superior court judgment in favor of a debt collector, holding that the debt collector did not violate the California Rosenthal Fair Debt Collection Practices Act (the Rosenthal Act) by adding prejudgment interest from the date of charge-off to a consumer’s account, and reporting the account, with such additional interest, to several credit bureaus.

    The lawsuit initially arose when the debt collector sued to collect the entire amount owed, and the consumer filed a cross-complaint alleging the debt collector had violated the Rosenthal Act, among other laws, by “‘falsely representing the character, amount, or legal status of the alleged debt,’ ‘failing to verify that the amount demanded was accurate,’ and ‘failing to provide an accurate accounting of the alleged debt.’” The superior court rejected the consumer’s claims and entered judgment in favor of the debt collector in the amount of the debt plus attorney’s fees.

    On appeal, the Court of Appeal concluded that the debt collector did not violate the Rosenthal Act because the consumer failed to show that the original creditor waived the right to accrue additional interest on the account by not accruing the interest after charge-off. Moreover, the Court of Appeal noted that the statutory prejudgment interest rate is only available when there is no specified contractual rate. However, the Court determined that the debt collector did not improperly accrue interest when it applied a seven percent interest rate, as seven percent is lower than the statutory interest rate and the contractual interest rate. With respect to attorney’s fees, the Court of Appeal concluded the superior court improperly awarded fees associated with the legal action to collect the debt and the cross-complaint, noting that the superior court, “should have limited the fee award to time spent on efforts necessary to prove the allegations in the complaint.” Therefore, the court reversed the fee judgment and remanded the case back to superior court for “further consideration of the fee award in accordance with our narrower interpretation of the contractual fee provision.”

    Courts State Issues Debt Collection Attorney Fees Interest

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  • Class action alleges national bank’s grace period practices breach terms of cardholder agreement

    Courts

    On June 3, a consumer filed a class action complaint against a national bank alleging that the bank charges interest on credit card accounts even when consumers’ balances are paid in full by the billing cycle due date, in breach of the bank’s cardholder agreement. The complaint alleges that the cardholder agreement and monthly billing statements disclose to consumers that interest will not be charged on new purchases if those new purchases are paid off by the billing cycle’s due date, but that in practice the grace period is eliminated for new purchases “[i]f a consumer leaves even $1 on her account balance after a billing period due date.” The complaint alleges that the bank’s practice of only providing a grace period on new purchases for consumers “who have paid off their balances in full for two prior months” directly contradicts the cardholder agreement and consumer disclosures. In addition to breach of contract, the consumer alleges a violation of Delaware’s Consumer Fraud Act and breach of the covenant of good faith and fair dealing. The consumer is seeking certification of a class of similarly situated consumers; damages and restitution; and injunctive relief.

    Courts Class Action Credit Cards Consumer Finance Interest

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  • 1st Circuit: “Sustained Overdraft Fees” are not interest under the National Bank Act

    Courts

    On March 26, the U.S. Court of Appeals for the 1st Circuit affirmed a district court’s decision to dismiss putative class action allegations that a bank charged usurious interest rates on its overdraft products, finding that the bank’s “Sustained Overdraft Fees” are not interest under the National Bank Act (NBA). The plaintiff filed a lawsuit against the bank in 2017, alleging that sustained overdraft fees should be considered interest charges subject to Rhode Island’s interest rate cap of 21 percent, and that because the alleged annual interest rates exceeded the cap, the fees violated the NBA. The district court, however, dismissed the case, ruling that the sustained overdraft fees were service charges, not interest charges.

    On appeal, the split three-judge panel held that, because the sustained overdraft fees did not constitute interest payments under the NBA and the OCC’s regulations interpreting the NBA, the class challenges cannot move forward. The panel stated that the agency’s interpretation in its 2007 Interpretive Letter is due “a measure of deference.” The panel found the agency’s interpretation persuasive because “[f]lat excess overdraft fees (1) arise from the terms of a bank’s deposit account agreement with its customers, (2) are connected to deposit account services, (3) lack the hallmarks of an extension of credit, and (4) do not operate like conventional interest charges.”

    In dissent, Judge Lipez noted that, while the OCC interpretive letter laid out a clear case for overdraft fees as service, not interest charges, it was silent on the question of “Sustained Overdraft Fees.” He wrote that “[s]ilence, however, is not guidance, and we would thus need to infer a ruling on a debated issue from between the lines of the Letter.” Furthermore, he could “not see how we can defer to an interpretation that the OCC never clearly made on an issue that it previously described as complex and fact-specific.”

    Courts First Circuit Appellate Overdraft Interest National Bank Act Usury

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  • District Court allows usurious interest and TILA violation claims to proceed

    Courts

    On March 5, the U.S. District Court for the Eastern District of Arkansas denied a request for summary judgment by several defendant pawnbrokers and pawnshops concluding there exists “disputed general issues of material fact” concerning claims filed by two plaintiffs who entered into pawn-loan contracts with the defendants. Among other things, the plaintiffs alleged that the defendants violated Amendment 89 of the Arkansas Constitution (Amendment 89) and the Arkansas Deceptive Trade Practices Act (ADTPA) by charging usurious rates of interest, and violated ADTPA by making false statements on pawn loan contracts (pawn tickets). The plaintiffs additionally claimed that the defendants violated TILA by failing to identify creditors on the face of their pawn tickets.

    In dismissing the defendants’ motion for summary judgment, the court determined that success of the claims hinged upon whether “the pawn transactions . . . are ‘loans’ charging usurious rates of interest under Arkansas law.” Specifically, genuine issues of material fact remained on: (i) whether the defendants knowingly entered into loans charging usurious interest because “the differences between traditional bank loans and pawn transactions . . . may not prevent the pawn transactions entered into by [the plaintiffs] from being classified as ‘loans’ under Arkansas law”; (ii) whether the plaintiffs were charged usurious interest or otherwise suffered damages under Amendment 89 or ADTPA as a result of the pawn transactions; (iii) whether the language on the pawn tickets stating that “the finance charge ‘is not interest for any purpose of the law,’” was a false statement in violation of the ADTPA; and (iv) whether the defendants’ failure to disclose the identity of the creditors on the pawn tickets is a violation of TILA, because, among other things, there remains a dispute as to whether the identified finance charges constitute as “credit,” and whether certain defendants qualify as “creditors” under TILA. Furthermore, the court rejected the defendants’ argument that they were entitled to summary judgment on the plaintiffs’ TILA claims “due to plaintiffs’ alleged failure to demonstrate detrimental reliance.”

    Courts Interest TILA Usury Deceptive Consumer Finance

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  • New Jersey appeals court says choice-of-law exception may apply in interest rate class action suit

    Courts

    On October 9, the Superior Court of New Jersey Appellate Division reversed a trial court’s decision to revive a proposed class action that challenged, among other things, interest rates of over 30 percent on car title loans. According to the appellate court, the trial court dismissed the case because Delaware, not New Jersey, had a more substantial relationship with the parties’ dispute. While the plaintiff’s contract with the Delaware-based title loan company stipulated that Delaware law applied even though she resided in New Jersey, the appellate court said that under the second exception of the test established by Instructional Systems Inc. v. Computer Curriculum Corp., New Jersey courts will uphold the contractual choice unless the “application of the law of the chosen state would be contrary to the fundamental policy of the state which has a materially greater interest than the chosen state in the determination of the particular issue and which . . . would be the state of the applicable law in the absence of an effective choice of law by the parties.”

    “In her certification, plaintiff asserted that she applied for the title loan from her home in New Jersey and that defendant advised her that the loan had been approved by calling and advising her that all she had to do to pick up the money was to come to Delaware and sign the contract.” The appellate court stated that these additional facts may be sufficient to satisfy the second exception’s prerequisites, and that from a procedural standpoint, the trial court should have either converted the title loan company’s motion to dismiss to a motion for summary judgment in order to consider the new information or granted the plaintiff’s motion to file a second amended complaint.

    Courts State Issues Class Action Interest Auto Finance Usury

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  • Wisconsin repeals mortgage escrow interest requirement

    State Issues

    On April 17, the Wisconsin governor signed AB 822, which eliminates the requirement that financial institutions pay interest on certain residential mortgage loan escrow accounts. Previously, Wisconsin required institutions to pay interest on escrow accounts at a rate of no less than 5.25 percent if the loan was originated between February 1984 and December 1993, or at a variable rate if the loan was originated on or after January 1, 1994. Effective April 17, financial institutions are not required to pay interest on escrow accounts for residential mortgage loans originated on or after the effective date.

    State Issues Mortgages Escrow Interest State Legislation

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