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Financial Services Law Insights and Observations

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  • National bank settles alleged SCRA violations

    Courts

    Recently, the U.S. District Court for the District of Kansas granted a plaintiff’s motion for final approval of a class action settlement resolving allegations that a national bank violated the Servicemembers Civil Relief Act by incorrectly repossessing vehicles owned by certain servicemembers. The bank, which denied all claims and allegations of wrongdoing, entered into the settlement agreement to avoid further uncertainties and expenses. The approximately $5.1 million settlement fund will go to affected servicemembers who have not, as of the effective date, already accepted payments in accordance with settlement agreements reached between the bank and the DOJ and OCC in 2016. (Covered by InfoBytes here.)

    Courts Servicemembers SCRA Auto Finance

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  • Supreme Court holds that creditor may be held in civil contempt for violation of bankruptcy discharge injunction

    Courts

    On June 3, the U.S. Supreme Court unanimously held that a creditor may be held in civil contempt for violating a bankruptcy court’s discharge order “if there is no fair ground of doubt as to whether the order barred the creditor’s conduct.” At issue was Section 524(a)(2) of the Bankruptcy Code, which specifies that a discharge order triggers an automatic injunction against any creditor that attempts to collect a pre-bankruptcy discharged debt.  In the case before the Court, a defendant to a lawsuit proceeding in state court filed for Chapter 7 bankruptcy during the course of that litigation.  After the bankruptcy court entered a discharge order, the state court ordered the debtor to pay the plaintiffs’ attorneys’ fees. While the monetary judgment would have ordinarily violated the discharge, the state court concluded that it was permissible under a lower-court doctrine holding that the discharge no longer applies when a debtor “return[s] to the fray” of litigation after filing for bankruptcy. The bankruptcy court appellate panel vacated the bankruptcy court’s decision and the  9th Circuit affirmed, concluding that a creditor may not be held in contempt for violating a discharge order if the creditor held a subjective good faith belief—even if “unreasonable”—that its actions did not violate the injunction.

    Upon review, the Supreme Court reversed the 9th Circuit’s opinion, noting that the standard for civil contempt “is generally an objective one,” and nothing about a bankruptcy court discharge order should modify that principle.  The Supreme Court emphasized that “a party’s subjective belief that [the party] was complying with an order ordinarily will not insulate [the party] from civil contempt if that belief was objectively unreasonable,” and that civil contempt “may be appropriate when the creditor violates a discharge order based on an objectively unreasonable understanding of the discharge order or the statutes that govern its scope.” The -debtor’s argument for a standard that would operate like a “strict-liability” standard—where creditors who are unsure of whether a debt has been discharged can obtain an advance determination from the bankruptcy court prior to attempting to collect the debt—was also rejected. The Supreme Court stated that because “there will often be at least some doubt as to the scope of such orders,” a preclearance requirement may “lead to frequent use of the advance determination procedure,” as well as additional costs and delays.

    Courts U.S. Supreme Court Bankruptcy

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  • 7th Circuit: Detailed creditor information does not violate FDCPA

    Courts

    On June 6, the U.S. Court of Appeals for the 7th Circuit, in a consolidated appeal, affirmed summary judgment in favor of a debt collector in actions alleging that the debt collector violated the FDCPA by naming the “original creditor” and the “client” in its collection letters, but declining to identify the current owner of the debt. According to the opinion, two consumers received collection letters naming an online payment processor as the “client” and a bank as the “original creditor,” and stating that, “upon the debtor’s request, [the collector] will provide ‘the name and address of the original creditor, if different from the current creditor.’” The consumers filed class actions against the debt collector, alleging that it violated, among other things, Section 1692g(a)(2) of the FDCPA by failing to disclose the current creditor or owner of the debt in the initial collection letters. In both cases, the respective district court granted summary judgment for the debt collector, concluding that the letter not only includes the original creditor—the bank—but also provides additional information for the unsophisticated consumer by including the online payment processor so that the consumer could better recognize the debt.

    On appeal, the 7th Circuit agreed with the lower courts and concluded that the letters did not violate the FDCPA. The appellate court noted that “the letter identifies a single ‘creditor,’ as well as the commercial name to which the debtors had been exposed, allowing the debtors to easily recognize the nature of the debt.” The appellate court rejected the consumers’ argument that calling the bank the “original creditor” instead of the “current creditor” creates confusion, because the letter contained language that notified consumers that the original and current creditors may be one and the same. Because the letter “provides a whole picture of the debt for the consumer,” the court concluded it is not abusive or unfair and does not violate Section 1692g(a)(2) of the FDCPA.

    Courts Seventh Circuit FDCPA Debt Collection Class Action

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  • 9th Circuit: Class decertification appropriate when representative lacks standing

    Courts

    On June 5, the U.S. Court of Appeals for the 9th Circuit affirmed a lower court’s decision to decertify a class of callers claiming their cellphone calls were unlawfully recorded, holding that the class representative lacked standing as to its individual claim. According to the opinion, customers of a concrete supplier alleged that calls placed to a phone system that the company began using in 2009 failed to inform callers that their cellphone calls were being recorded. In 2013, the company changed the recording to state that the calls maybe be “monitored or recorded.” The class representative sought to certify a class of all persons whose calls were recorded between the time that the company started using the call recording system in 2009 to when it updated the recording. The district court initially denied certification under the Federal Rule of Civil Procedure Rule 23’s predominance requirement, and later—after certifying the class based on evidence presented concerning the timing of certain recorded calls—decertified the class for failing to satisfy the “commonality” and “predominance” requirements once the concrete supplier identified nine customers who claimed they had actual knowledge of the recording practice during the class period. In addition, the court concluded that the class representative lacked standing to seek damages on its individual claim or injunctive relief because it lacked standing under the 2016 Supreme Court opinion Spokeo, Inc. v. Robins, which required that it show a concrete or particularized injury as a result of the concrete supplier's alleged violation. 

    On appeal, the 9th Circuit rejected the class’s argument that it “has standing to appeal the decertification order notwithstanding the adverse judgment against it on the merits” due to the following two exceptions to the mootness doctrine that may permit a class representative to appeal decertification even if its individual claims have been mooted: (i) the class representative “retains a ‘personal stake’ in class certification”; or (ii) “the claim on the merits is ‘capable of repetition, yet evading review,’” even though the class representative has lost “his personal stake in the outcome of the litigation.” The appellate court concluded that “neither of these mootness principles can remedy or excuse a lack of standing as to the representative's individual claims.”

    Courts Ninth Circuit Appellate Spokeo Standing Class Action State Issues

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  • 4th Circuit overrules own precedent, holds undersecured homestead mortgage claims can be bifurcated

    Courts

    Recently, the U.S. Court of Appeals for the 4th Circuit overruled its own precedent, holding that the plain language of the Bankruptcy Code authorizes modification of undersecured homestead mortgage claims—not just the payment schedule for such claims—including through bifurcation and cram down. According to the opinion, a creditor initiated a foreclosure action against a mortgage debtor alleging that the debtor failed to repay approximately $136,000 due under the mortgage. The debtor filed Chapter 13 bankruptcy and valued the mortgaged property at $40,000 in his petition. The debtor proposed a bankruptcy plan that would bifurcate the creditor’s claim into a secured component commensurate with the value of the mortgaged property, and an unsecured component for the remainder. The bankruptcy court rejected the debtor’s proposal on the grounds that the 4th Circuit’s 1997 holding in Witt v. United Cos. Lending Corp (In re Wiit) barred any modification or bifurcation of the creditor’s claim, and thus entitled her to a secured claim in the full amount due under the mortgage, plus interest. The district court and a 4th Circuit panel affirmed.

    Following an en banc rehearing, the 4th Circuit reversed, overruling its decision in Witt. The en banc appellate court concluded that the plain text of Section 1322(c)(2) authorizes modification of covered homestead mortgage payments and claims, and allows for the bifurcation of undersecured homestead mortgages into secured and unsecured components. The appellate court noted that its initial interpretation in Witt had been “universally” criticized by courts and commentators, including for running “contrary to accepted canons of statutory construction.” Therefore, the appellate court reversed the district court’s judgment relying on Witt and remanded the case.

    In dissent, three circuit judges stated that the majority went too far in its interpretation of Section 1322, and that Section 1322(c)(2) allows debtors to repay their mortgages over the full duration of their plan. The dissent’s view was that the majority’s decision essentially overturns the Supreme Court’s holding in Nobelman v. American Savings Bank without “any clear desire by Congress to do so.” Moreover, the dissent argued that, while it agreed that “Congress meant for [Section] 1322(c)(2) to create an exception to Nobelman’s prohibition against modifying the timing of loan repayments,” Congress did not intend to “eviscerate Nobelman altogether.”

    Courts Appellate Fourth Circuit Mortgages Bankruptcy

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  • CFPB delays underwriting compliance of Payday Rule

    Agency Rule-Making & Guidance

    On June 6, the CFPB released a final rule to delay the August 19, 2019 compliance date for the mandatory underwriting provisions of the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (the Rule). Compliance with these provisions of the Rule is now due by November 19, 2020.

    As previously covered by InfoBytes, in February, when the CFPB released two notices of proposed rulemaking (NPRM) related to certain lending requirements under the Rule—one proposing the delay to the compliance date for mandatory underwriting provisions, and the other proposing to rescind the underwriting portion of the Rule that would make it an unfair and abusive practice for a lender to make covered high-interest rate, short-term loans, or covered longer-term balloon payment loans without reasonably determining that the consumer has the ability to repay—the Bureau emphasized that the NPRM extending the compliance date for mandatory underwriting provisions did not extend the effective date for the Rule’s provisions governing payments. 

    Notably, on May 30, the U.S. District Court for the Western District of Texas entered an order continuing the stay of the original compliance date for both the underwriting provisions and the payment provisions of the Rule in a payday loan trade group’s litigation challenging the Rule. (Previous InfoBytes coverage on the litigation is available here.) The order requires the parties to file a joint status report no later than August 2.

    Agency Rule-Making & Guidance CFPB Payday Rule Courts Payday Lending Underwriting

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

    Courts

    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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  • 9th Circuit upholds rejection of consumer’s class action against auto finance company

    Courts

    On May 30, the U.S. Court of Appeals for the 9th Circuit affirmed summary judgment in favor of an auto finance corporation and various dealerships (collectively, “defendants”) in a putative class action alleging the defendants failed to provide add-ons the plaintiff purchased with the vehicle. The case, which was originally brought in Washington state superior court, was removed to federal court over the consumer’s objection, where the consumer amended the complaint to include a federal TILA claim. 

    According to the opinion, plaintiff alleged that his purchased vehicle did not come with three add-ons listed in the “Dealer Addendum,” which was a sticker affixed to the car. At the time of purchase, the customer was not aware of what the add-ons were, nor were they explained to him; the add-ons were only listed in the addendum. Plaintiff  argued that if he had known what the add-ons were, he would have declined them and paid a lower price for the vehicle. The district court rejected plaintiff’s arguments and granted summary judgment for the defendants on all claims.

    On appeal, the 9th Circuit upheld the entirety of the district court’s ruling, concluding the consumer offered no evidence that the add-ons identified in the Dealer Addendum were made part of the vehicle purchase transaction. Moreover, the appellate court upheld the district court’s decision not to remand the case back to state court, determining that while the district court did not have subject-matter jurisdiction at the time of removal, it had subject-matter jurisdiction at the time it rendered its final decision, due to the consumer’s voluntary addition of the TILA claim to the complaint. The appellate court also found that the district court did not abuse its discretion in denying the consumer’s request for additional discovery based on plaintiffs failure to “identif[y] the specific facts that further discovery would have revealed or explained[ed].”

    Courts Appellate Ninth Circuit Auto Finance Class Action

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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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  • 4th Circuit upholds certification of TCPA class action against satellite provider

    Courts

    On May 30, the U.S. Court of Appeals for the 4th Circuit held that a lower court correctly certified a class of individuals who claimed a satellite provider (defendant) violated the TCPA when its authorized sales representative routinely placed telemarketing calls to numbers on the national Do-Not-Call registry. The plaintiff-appellee alleged that because his number was on the registry, the calls were not only annoying but illegal. He therefore filed a lawsuit against the defendant for violations of the TCPA, and in 2018, the court issued a final judgment upholding a jury’s verdict as to both liability and damages for a class of 18,066 members, tripling the damages to more than $61 million. The defendant appealed the verdict asserting that the class definition was too broad in that included uninjured consumers. Specifically, the defendant argued that the definition should be limited to telephone subscribers or the person who actually received the calls. The defendant further asserted on appeal that it was not responsible for the sales representative’s actions.

    On appeal, the 4th Circuit affirmed the lower court’s judgment, stating that it saw “no basis for imposing such a limit,” on the class definition given that “[t]he text of the TCPA notes that it was intended to protect ‘consumers,’ not simply ‘subscribers.’” Concerning the defendant’s argument that it was not responsible for the violations, the appellate court noted that the sales representative’s “entire business model was to make calls like these on behalf of television service providers,” like the defendant, which the defendant knew were being placed on its behalf.

    Courts Appellate Fourth Circuit Privacy/Cyber Risk & Data Security TCPA Robocalls

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