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Financial Services Law Insights and Observations


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  • 3rd Circuit overturns decision in WESCA suit


    On August 16, the U.S. Court of Appeals for the Third Circuit overturned a district court’s decision in a Wiretapping and Electronic Surveillance Control Act (WESCA) suit against a retailer and third-party marketing company (collectively, “defendants”). According to the opinion, the plaintiff searched the retailer’s website while the “browser simultaneously communicated” with both the retailer and a third-party marketing service. The messages to the third party marketing service alerted it to how the plaintiff was interacting with the website, including which pages she visited, when she filled in an email address, and when she added an item to her cart. The plaintiff filed suit against the defendants for using a software that used a code that placed “cookies on the user’s browser so that her activity on the webpage had an associated visitor ID,” and “told the user’s browser to begin sending information to [the third party marketing service] as she navigated through the website, such as communicating that the user had clicked the ‘add to cart’ button or tabbed out of a form field,” in violation of WESCA. The district court dismissed the common law claim and subsequently granted summary judgment to the defendants on the WESCA claim, finding that the defendants were exempt from liability as direct parties to the electronic communications.

    The 3rd Circuit reversed and remanded, stating that the district court “never addressed whether [the retailer] posted a privacy policy and, if so, whether that policy sufficiently alerted [the plaintiff] that her communications were being sent to a third-party company.” The appellate court further disagreed “with the District Court’s holding that [the third party marketing company] is exempt from liability because it was a direct party to [the plaintiff’s] communications and that interception only occurred at the site of [the third party marketing company] servers in Virginia.”

    Courts Appellate Third Circuit Privacy, Cyber Risk & Data Security Wire Tapping

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  • 3rd Circuit adopts new “reasonable reader” standard for evaluating accuracy of credit reports


    On August 8, the U.S. Court of Appeals for the Third Circuit issued an opinion in a matter consolidated on appeal concerning claims of alleged violations of the FCRA brought by several student loan borrowers. According to the opinion, each of the three borrowers defaulted on their student loan payments. The original lenders closed the accounts and transferred the loans to other lenders after the borrowers were more than 120 days late in their payments. The borrowers claimed that a “pay status” notation included in each of their credit reports, which read “Account 120 Days Past Due Date,” was inaccurate and could create the misleading impression that the borrowers were currently four months behind on payments when they did not owe a balance to the previous creditors. The consumer reporting agency (CRA) responsible for the credit reports at issue countered that the notations accurately reflected the historical status of the closed accounts. The borrowers appealed, arguing that the district court misapplied the “reasonable creditor” standard and that the credit reports did not meet the FCRA’s “maximum possible accuracy” requirement.

    On appeal, the 3rd Circuit agreed with the CRA’s interpretation, holding that the credit reports “contain multiple conspicuous statements reflecting that the accounts are closed and Appellants have no financial obligations to their previous creditors.” As such, “[t]hese statements are not in conflict with the Pay Status notations, because a reasonable interpretation of the reports in their entirety is that the pay status of a closed account is historical information,” the appellate court wrote. However, while the 3rd Circuit affirmed previous rulings dismissing the cases issued by the U.S. District Court for the Eastern District of Pennsylvania, it concluded that the “reasonable creditor” standard that the district court applied did not accurately reflect how the FCRA contemplates a range of permissible users, such as employers, investors, and insurers, and not just creditors. To account for this, the 3rd Circuit adopted a new standard for evaluating whether credit reports are inaccurate or misleading when read in their entirety by a “reasonable reader,” and applied that test in its precedential opinion. “A court applying the reasonable reader standard to determine the accuracy of an entry in a report must make such a determination by reading the entry not in isolation, but rather by reading the report in its entirety,” the appellate court said.

    Courts Appellate Third Circuit Credit Report Consumer Finance Student Lending FCRA

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  • 3rd Circuit: Student loan servicer’s calling system is not an autodialer under the TCPA


    On June 14, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s ruling in favor of a defendant student loan servicer, holding that it is not enough for telecommunication equipment to be capable of using a random or sequential number generator to dial telephone numbers in order to meet the definition of an automatic telephone dialing system (autodialer). Instead, to constitute a violation of the TCPA, the telecommunication system must actually employ such random- or sequential-number generation when placing the actual call. The plaintiffs filed a putative class action complaint against the defendant alleging it used an autodialer to call class members’ cell phones without their prior express consent. The defendant countered that the TCPA claims fail because its calling system “lacked the capacity to generate random or sequential telephone numbers and then dial those numbers.” As such, it could not be an autodialer. The district court granted summary judgment in favor of the defendant, ruling that the defendant did not use an autodialer to place the calls at issue as the calling system did not have “the necessary present capacity to store or produce telephone numbers using a random or sequential number generator.”

    On appeal, the 3rd Circuit disagreed with the district court’s finding that the defendant’s telecommunication system was not an autodialer, noting that the district court used too narrow a definition of the term “equipment” and holding that “an [autodialer] may include several devices that when combined have the capacity to store or produce telephone numbers using a random or sequential number generator and to dial those numbers.” Thus, the 3rd Circuit held that the district court erred in accepting defendant’s argument that the defendant’s telephone system was not an autodialer because the defendant’s SQL Server (which was capable of generating random and sequential numbers) was independent of the defendant’s dialing system.

    Nonetheless, the 3rd Circuit affirmed the district court’s ruling on the basis that it did not matter whether the defendant’s calling system could be classified as an autodialer under the TCPA because the phone numbers were drawn from a contact list stored on the defendant’s SQL Server and not randomly generated. As such, the appellate court held that the plaintiffs’ claims fail because the defendant did not actually use random- or sequential-number generation when it placed the specific calls in question.

    While agreeing with the decision to affirm, one of the judges argued that the majority focused on the wrong question. “In my view, the fundamental question is: what is an [autodialer] under Section 227(a)(1)? I would hold that a dialing system must actually use a random or sequential number generator to store or produce numbers in order to qualify as an [autodialer] under § 227(a)(1),” the concurring judge wrote. “Because [defendant’s] dialing system did not do so, it is not an [autodialer], and [defendant] is entitled to summary judgment.”

    Courts Appellate Third Circuit TCPA Robocalls Class Action Autodialer

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  • 3rd Circuit affirms decision that creditors can collect after issuing 1099-C notice


    On June 14, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s dismissal of a class action alleging a national bank (defendant) violated state laws in New Jersey by attempting to collect on a debt after it had issued a 1099-C notice to the plaintiff to cover the debt that was discharged. According to the opinion, the defendant obtained a judgment against the plaintiff and his wife for an unpaid debt, which the plaintiff did not satisfy. The defendant issued an IRS 1099-C form to the plaintiffs, indicating that $199,427.80 of the $244,248.49 was discharged. After issuing the 1099-C, the defendant notified the plaintiff that such filing had not caused the defendant to release the judgment and that the plaintiff needed to either pay the judgment or reach a settlement. The plaintiff sued, alleging the defendant violated the New Jersey Consumer Fraud Act and other state laws based on defendant’s issuance of a 1099-C IRS Form for cancellation of debt. The district court granted a motion to dismiss filed by the defendant, which the plaintiff appealed.

    On appeal, the plaintiff argued the creditors should not send 1099-C notices unless the debt has actually been canceled, and that sending such a notice while still intending to collect on the debt constitutes an “unlawful practice.” The 3rd Circuit disagreed, holding that the text of the governing IRS regulation, 26 C.F.R. § 1.650P-1(a)(1), indicates that “the filing of a Form 1099-C is a reporting requirement that does not depend on whether the debt has been ‘actually discharged,’ or the debtor has actually been released from his obligations on the underlying debt.” The appellate court further noted that “[t]he satisfaction of this reporting requirement, additionally, does not operate to forgive or extinguish a debtor’s obligations to repay the debt at issue.”

    Courts Appellate Third Circuit IRS Consumer Finance State Issues New Jersey

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  • 3rd Circuit confirms adversary proceeding required to discharge student debt in bankruptcy


    On March 25, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s dismissal of an FDCPA and FCRA case against a student loan servicer and three credit reporting companies for attempting to collect a loan debt after it had been discharged in bankruptcy. After the discharge and completion of his bankruptcy case, the plaintiff filed suit, alleging the defendants violated the FDCPA and the FCRA by attempting to collect student loan debt that had been discharged. The district court granted the defendants’ motion to dismiss, ruling that the plaintiff failed to state a claim because under Section 523(a)(8) of the Bankruptcy Code, student loan debt is presumptively non-dischargeable and the plaintiff had not filed an adversary proceeding to determine otherwise.

    On appeal, the plaintiff “argued that he was not required to file an adversary proceeding in Bankruptcy Court to determine the dischargeability of his student loan debt,” and that the Bankruptcy Court’s determination that the plaintiff was indigent rebuts “the presumption that his debt was nondischargeable by satisfying the exception in §523(a)(8) for undue hardship.” However, the appellate court held that “a finding of indigence is not the same as an undue hardship determination under §538(a)(8)” and that while the Bankruptcy Code does not require an adversary proceeding to discharge student loan debt, the procedures established in the Bankruptcy Rules do include such a requirement by providing that adversary proceedings include “a proceeding to determine the dischargeability of a debt” and are commenced by serving a summons and complaint on affected creditors. Accordingly, the appellate court affirmed dismissal.

    Courts Appellate Third Circuit Bankruptcy Consumer Finance Student Lending FDCPA FCRA Credit Reporting Agency

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  • Appeals Court to consider whether CFPA covers trusts


    On February 11, the U.S. District Court for the District of Delaware stayed a 2017 CFPB enforcement action against a collection of Delaware statutory trusts and their debt collector after determining there may be room for reasonable disagreement related to questions of “covered persons” and “timeliness.” As previously covered by InfoBytes, last December the court ruled that the CFPB could proceed with the enforcement action, which alleged, among other things, that the defendants filed lawsuits against consumers for private student loan debt that they could not prove was owed or that was outside the applicable statute of limitations. The court concluded that the suit was still valid and did not need ratification in light of the U.S. Supreme Court’s 2020 decision in Seila Law v. CFPB (which determined that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau—covered by a Buckley Special Alert), upending its previous dismissal of the case, which had held that the Bureau lacked enforcement authority to bring the action when its structure was unconstitutional. At the time, the court also disagreed with the defendants’ argument that, as trusts, they are not “covered persons” under the Consumer Financial Protection Act (CFPA). While the defendants argued that they used subservicers to collect debt and therefore did not “engage in” providing services listed in the CFPA, the court stated that the trusts were still “engaged” in their business and the alleged misconduct even though they contracted it out. 

    However, the court now certified two questions for appeal to the U.S. Court of Appeals for the Third Circuit. The first question centers on whether the defendants qualify as “covered persons” subject to the Bureau’s enforcement authority. The court concluded that another court may rule differently on this “novel” issue. “I was the first judge to decide whether the Bureau may bring enforcement actions against creditors like the Trusts who contract out debt collection and loan servicing,” the judge wrote, noting that the judge previously assigned to the case had also “expressed ‘some doubt’ that the Trusts are covered persons.” The second question addresses the Bureau’s efforts to continue the case after Seila. The defendants argued that the suit should be dismissed because the initial filing was invalid due to the director’s unconstitutional insulation and was not ratified within the statute of limitations. In December the court had held that the Bureau did not need to ratify the suit because—pointing to the majority opinion in the Supreme Court’s decision in Collins v. Yellen (covered by InfoBytes here)—“‘an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed[,]’” and therefore the agency’s actions are not void and do not need to be ratified, unless a plaintiff can show that “the agency action would not have been taken but for the President’s inability to remove the agency head.” The court now acknowledged, however, that Collins “is a very recent Supreme Court decision” whose scope is still being “hashed out” in lower courts, which therefore “suggests that there is room for reasonable disagreement and thus supports an interlocutory appeal here.”

    Courts CFPB Student Lending Appellate Third Circuit Enforcement UDAAP CFPA Consumer Finance Seila Law U.S. Supreme Court

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  • 3rd Circuit: Applying Pennsylvania usury laws to out-of-state lender does not violate “Commerce Clause”


    On January 24, the U.S. Court of Appeals for the Third Circuit held that applying Pennsylvania usury laws to an out-of-state lender is not a violation of the “dormant Commerce Clause” of the Constitution. According to the opinion, the lender provides motor vehicle loans with interest rates allegedly “as high as 180%” to consumers, including residents of Pennsylvania. The opinion noted that the “entire loan process—from the application to the disbursement of funds—takes place . . . at one of [the lender’s] brick-and-mortar locations” outside of Pennsylvania, and that under the lender’s motor vehicle loan terms, the borrower receives the applicable loan proceeds “in the form of ‘a check drawn on a bank outside of Pennsylvania.’” Pursuant to its enforcement authority under Pennsylvania’s Consumer Discount Company Act (CDCA) and the Loan Interest and Protection Law (LIPL), the Pennsylvania Department of Banking and Securities (Department) issued a subpoena asking the lender to provide documents related to its interactions with Pennsylvania residents. The lender stopped making loans to Pennsylvania residents after receiving the subpoena, and later filed a lawsuit in the U.S. District Court for the District of Delaware against the Department claiming it “lost revenue as a result” of the Department’s actions. The suit sought “injunctive and declaratory relief for, among other things, violations of the Commerce Clause.” The Department separately filed a petition in state court to enforce the subpoena.

    While the lender did not dispute that before 2017, it engaged in loan servicing activities and vehicle repossessions in Pennsylvania, the lender maintained that it “does not have any offices, employees, agents, or brick-and-mortar stores in Pennsylvania and is not licensed as a lender in the Commonwealth.” Additionally, the lender claimed that while “it has never used employees or agents to solicit Pennsylvania business, and [] does not run television ads within Pennsylvania,” advertisements may still reach Pennsylvania residents. The district court eventually determined that because the lender’s “loans are ‘completely made and executed outside Pennsylvania and inside. . .[brick-and-mortar] locations in Delaware, Ohio, or Virginia,’ the Department’s subpoena’s effect is to apply Pennsylvania’s usury laws extraterritorially in violation of the Commerce Clause.”

    On appeal, the 3rd Circuit examined the “territorial scope” of the transactions the Department “has attempted to regulate” and considered whether these transactions occur “wholly outside” of Pennsylvania. The appellate court concluded that the lender’s “conduct does not occur wholly outside of Pennsylvania,” and that the transactions are “more than a simple conveyance of money,” but rather "create a creditor-debtor relationship that imposes obligations on both the borrower and lender until the debt is fully paid.” Moreover, even if the appellate court considered the local benefits with respect to interstate commerce, it “would conclude that they weigh in favor of applying Pennsylvania laws to [the lender].” The CDCA and LIPL “protect Pennsylvania consumers from usurious lending rates,” the 3rd Circuit wrote, adding that applying Pennsylvania’s usury laws to the lender’s loans furthers the state’s local interest in prohibiting usurious lending. “Pennsylvania may therefore investigate and apply its usury laws to [the lender] without violating the Commerce Clause,” the appellate court explained. “[A]ny burden on interstate commerce from doing so is, at most, incidental.”

    Courts Appellate Third Circuit Usury State Issues Pennsylvania Auto Finance

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  • 3rd Circuit vacates TILA/RESPA judgment in favor of mortgage lender


    On January 12, the U.S. Court of Appeals for the Third Circuit vacated an order granting summary judgment in favor of a mortgage lender (defendant) for alleged violations of TILA and RESPA, among other claims. The plaintiff, a retired disabled military veteran, contracted with a home builder to purchase a home and used the defendant to obtain mortgage financing, which was later transferred to a servicing company. The plaintiff contended that the defendant allegedly (i) provided outdated TILA and RESPA disclosures; (ii) misrepresented that the plaintiff would not have to pay property taxes; (iii) failed to make a reasonable and good faith determination of the plaintiff’s ability to pay; and (iv) failed to provide notice of the transfer of servicing rights. On appeal, the 3rd Circuit determined that the defendant did not meet the initial burden to show no genuine dispute as to any material fact related to the plaintiff’s claims, and remanded the action. Without assessing the evidentiary value of the testimonies and materials submitted by each party in support of their own version of events, the appellate court reasoned that “these materials do not foreclose a reasonable jury from crediting [the plaintiff’s] testimony over [the defendant’s] account and finding [the defendant] liable.”

    Courts Appellate Third Circuit TILA RESPA Consumer Finance Mortgages State Issues Regulation Z Regulation X

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  • 2nd Circuit addresses TCPA’s definition of “unsolicited advertisement”


    On January 6, the U.S. Court of Appeals for the Second Circuit held that an unsolicited fax asking recipients to participate in a market research survey in exchange for money does not constitute as an “unsolicited advertisement” under the TCPA. According to the opinion, the plaintiff medical services company claimed the defendant sent two unsolicited faxes seeking participants for its market research surveys in exchange for an “honorarium of $150,” and filed a putative class action alleging violations of the TCPA, as amended by the Junk Fax Prevention Act of 2005 (JFPA). The district court agreed with the defendant that an unsolicited faxed invitation to participate in a market research survey is not an “unsolicited advertisement” under the TCPA and dismissed the case.

    The TCPA, as amended by the JFPA, defines an “unsolicited advertisement” as “any material advertising the commercial availability or quality of any property, goods, or services which is transmitted to any person without that person’s prior express invitation or permission.” On appeal, the 2nd Circuit found that the defendant’s faxes asking participants to take part in a market survey “plainly do not advertise the availability of any of those three things, and therefore cannot be ‘advertisements’ under the TCPA.” The 2nd Circuit added that “[t]his is not to say that any communication that offers to pay the recipient money is thereby not an advertisement. One could imagine many examples of communications, including faxed surveys, offering the recipient both money and services, that might incur liability under the TCPA.” The 2nd Circuit recognized that its decision disagrees with the 3rd Circuit’s ruling in Fischbein v. Olson Research Group, which held that faxes such as the ones at issue are advertisements because “an offer of payment in exchange for participation in a market survey is a commercial transaction, so a fax highlighting the availability of that transaction is an advertisement under the TCPA.” The 2nd Circuit held that in Fischbein the 3rd Circuit mistakenly relied “on an encyclopedia definition of what constitutes a ‘commercial transaction’. . . rather than focusing on the definition of ‘advertisement’ that the TCPA and FCC regulations provide.”

    Courts TCPA Privacy/Cyber Risk & Data Security Second Circuit Third Circuit Appellate Faxes

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  • 3rd Circuit overturns FDCPA ruling in plaintiff’s favor


    On July 6, the U.S. Court of Appeals for the Third Circuit overturned a district court’s decision, holding that a debt collector that sent an envelope with a quick reference (QR) code that when scanned, revealed an Internal Reference Number (IRN) with the first 10 characters of the plaintiff’s street address violated the FDCPA’s prohibition in 15 U.S.C. § 1692f(8) on “[u]sing any language or symbol, other than the debt collector’s address, on any envelope.” The district court, relying on the 3rd Circuit’s 2019 decision in DiNaples v. MRS BPO, dismissed the case, holding the plaintiff lacked standing under the FDCPA because the barcode on the envelope did not reveal enough protected information to rise to the level of a concrete injury, since numerous individuals could have an identical IRN.

    The 3rd Circuit reversed and remanded, explaining that the plaintiff had standing to bring a claim because the envelope’s QR code made protected information available to the public. The court rejected the defendant’s arguments that the envelope did not violate the FDCPA because it did not reveal the account number, the plaintiff did not know how to use the bar code to unlock the private information, and that there was no material risk of harm. The appellate court explained that “[a]ccount numbers are but one type of protected information” and that the plaintiff “did not need to know how to use IRNs to access accounts” nor “did he need to show an increased risk of harm.”

    Courts Appellate Third Circuit FDCPA Debt Collection

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