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State AGs challenge FDIC’s “valid-when-made” rule
On August 20, eight state attorneys general—from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina, and the District of Columbia—filed an action in the U.S. District Court for the Northern District of California challenging the FDIC’s valid-when-made rule. As previously covered by InfoBytes, the FDIC’s final rule clarifies that, under the Federal Deposit Insurance Act (FDIA), whether interest on a loan is permissible is determined at the time the loan is made and is not affected by the sale, assignment, or other transfer of the loan (details on the effect of the rule can be found in Buckley’s Special Alert on the issuance of the OCC’s similar rule).
In the complaint—which follows a similar action filed in July by three of the same attorneys general against the OCC for issuing a final rule designed to effectively reverse the Second Circuit’s 2015 Madden v. Midland Funding decision (previously covered here)—the attorneys general argue, among other things, that the FDIC does not have the power to issue the rule, asserting that the FDIC has the power to issue “‘regulations to carry out’ the provisions of the FDIA,” but not regulations that would apply to non-banks. Moreover, the attorneys general assert that the rule’s extension of state law preemption would “facilitate evasion of state law by enabling “rent-a-bank” schemes.” Finally, the complaint states that the FDIC failed to explain its consideration of evidence contrary to its assertions, including evidence demonstrating that “consumers and small businesses are harmed by high interest-rate loans, and thus that Madden is likely to have been beneficial rather than harmful.” The complaint requests the court to declare that the FDIC violated the Administrative Procedures Act in issuing the rule and hold the rule unlawful.
District court lifts litigation stay in challenge to CFPB’s Payday Rule
On August 20, the U.S. District Court for the Western District of Texas granted a joint motion to lift a stay of litigation in a lawsuit filed by two payday loan trade groups (plaintiffs) challenging the CFPB’s 2017 final rule covering payday loans, vehicle title loans, and certain other installment loans (Rule). As previously covered by InfoBytes, in 2018 the plaintiffs filed a lawsuit asking the court to set aside the Rule, claiming the Bureau’s rulemaking failed to comply with the Administrative Procedure Act and that the Bureau’s structure was unconstitutional. The parties filed their joint motion to lift the stay last month following several recent developments, including the U.S. Supreme Court’s decision in Seila Law LLC v. CFPB, which held that the clause that required cause to remove the director of the CFPB was unconstitutional but was severable from the statute establishing the Bureau (covered by a Buckley Special Alert). In light of the Court’s decision, the Bureau ratified the Rule’s payments provisions and issued a final rule revoking the Rule’s underwriting provisions (covered by InfoBytes here). The litigation will focus on the Rule’s payments provisions, with the Bureau noting in the joint motion that it intends to “promptly fil[e] a motion to lift the stay of the compliance date for the payments provisions of the 2017 Rule.” The order outlines the briefing schedule for the parties, with summary judgment briefing due to be completed by December 18.
District court: BIPA does not violate Illinois constitution
On August 19, the U.S. District Court for the Southern District of Illinois denied defendants’ motion to dismiss claims that they unlawfully collected individuals’ biometric fingerprint data without first receiving informed consent. The court also addressed an argument as to whether the Illinois Biometric Information Privacy Act (BIPA) exemption for financial institutions violates the state’s constitution, ruling that the exemption applies only to institutions already subject to data protection standards of the Gramm-Leach-Bliley Act (GLBA) and therefore does not arbitrarily exempt financial institutions. According to the order, the plaintiff filed a putative class action against two companies (defendants) alleging they violated Section 15(b) of BIPA by unlawfully collecting employees’ biometric fingerprint data for timetracking purposes without informing employees in writing “of the purpose and period for which [their] fingerprints were being collected, stored, or used.” The plaintiff also claimed the defendants violated Section 15(a) of BIPA, which requires them to implement and follow a publically available biometric data retention and destruction schedule. The defendants filed a motion to dismiss, which presented several arguments, including that (i) the plaintiff failed to plead an actual injury and therefore lacked Article III standing; (ii) BIPA violates the state’s constitution because it imposes strict compliance requirements on certain entities but “arbitrarily” exempts “‘the entire financial industry’”; (iii) one of the defendants—a fingerprint database manager—qualifies as an exempt financial institution under BIPA; and (iv) the claims are time-barred and barred by waiver or equitable estoppel.
The court disagreed, allowing the plaintiff’s informed consent claims under Section 15(b) to proceed, noting, among other things, that BIPA’s financial institution exclusion is not “‘artificially narrow’ in its focus since both exempt and non-exempt financial institutions are subject to data reporting laws, with neither group receiving a benefit the other does not.” The court further noted that it has no indication in the pleading or declaration filed in motion practice that the fingerprint database manager defendant is a financial institution subject to the GLBA. However, the court remanded part of the suit back to state court. According to the court, the plaintiff’s Section 15(a) claims were not sufficient to establish Article III standing because this section “does not outline an entity’s duty to an individual” but rather “outlines a duty to the public generally.”
Pennsylvania Supreme Court says state mortgage law does not apply retroactively
On August 18, the Supreme Court of Pennsylvania affirmed a lower court’s decision, holding that 2008 amendments to the Pennsylvania Loan Interest and Protection Law (also known as “Act 6”), which raised the mortgage principle-amount ceiling from $50,000 to nearly $215,000, do not apply retroactively to loans executed prior to 2008. According to the opinion, in May 2002, homeowners executed a mortgage for $74,000. In 2008, the homeowners defaulted on their mortgage and in 2009, their bank—through its counsel—filed a mortgage foreclosure complaint, which included $1,300 in attorneys’ fees. In 2012, while their foreclosure was still pending, the homeowners filed a class action against the bank’s counsel, alleging the counsel violated Act 6’s limit on attorney’s fees. The trial court sustained the counsel’s demurrer, concluding that the homeowners’ mortgage was not “a ‘residential mortgage’ as Act 6 defined that term in 2002.” The superior court affirmed.
On appeal, the Pennsylvania Supreme Court agreed with the superior court, noting not only the “presumption against finding statutes retroactive,” but the state’s General Assembly’s “explicit instruction that courts should avoid applying legislation retroactively unless the statute clearly and manifestly states otherwise.” Because Act 6 does not expressly state that the 2008 increased mortgage-ceiling should apply to mortgages executed prior to the amendment, the Court concluded there was “no basis allowing for application of the updated law to the [homeowners]’ mortgage,” and thus, the counsel was not subject to Act 6’s limitation on attorneys’ fees.
District court certifies class in a lawsuit against an unlicensed debt collector
On August 17, the U.S. District Court for the District of Utah certified two classes related to a debt collector’s efforts to pursue judgments on defaulted debts without being appropriately registered with the state. The order certified two classes: one for class claims arising under the FDCPA, and another for class claims brought under the Utah Consumer Sales Practices Act (UCSPA). The court certified the UCSPA class for liability purposes only, as the statute does not allow a plaintiff to seek statutory damages on behalf of a class, leaving “issues related to what relief may be available for which class members to subsequent proceedings.” According to the order, the lead plaintiff filed a lawsuit against the defendant after it attempted to collect unpaid medical debt. The defendant obtained a judgment but was not registered as a debt collector in the state when it filed the action. The defendant argued that Utah’s registration requirement did not apply to it and filed a motion for summary judgment, but the court disagreed and allowed the plaintiff to seek certification for two classes of individuals who had debt collection lawsuits filed against them in Utah by the defendant while it was unlicensed. Among other things, the defendant argued that the plaintiff’s proposed class included individuals without an underlying consumer debt, which destroyed commonality under Rule 23. The court agreed and limited the proposed FDCPA class to individuals who were sued for a “debt” as defined by 15 U.S.C. § 1692a(5). However, the court stated that the need for individualized determinations concerning each class member’s debt did not upset Rule 23’s predominance requirement, and concluded that the issue does not predominate over the question of whether the failure to register as a debt collector was a violation of the FDCPA and UCSPA. The court also disagreed with the defendant’s res judicata argument to defeat the certification request, ruling that even though the defendant ultimately obtained a judgment against the lead plaintiff—which it also allegedly did for at least 645 other members of the class—that was not enough to prove a conflict existed between the lead plaintiff and the other unaffected members of the class.
9th Circuit: No bona fide error defense when relying on creditor to provide information
On August 17, the U.S. Court of Appeals for the Ninth Circuit reversed a summary judgment ruling in favor of a debt collector (defendant) accused of violating the FDCPA, determining the district court erred in concluding that the defendant qualified for the bona fide error defense. According to the opinion, the plaintiff incurred a debt to a medical provider (creditor), who eventually placed the debt with the defendant for collection. The plaintiff alleged that the defendant violated the FDCPA when it miscalculated the interest on the unpaid debt. While the parties did not dispute the issue of whether the defendant unintentionally violated the FDCPA when it miscalculated interest on the debt, the issue remained as to whether the defendant had reasonable procedures in place to qualify for the bona fide error defense. The defendant argued that it has reasonable procedures in place because its agreement with the creditor contained a requirement that the creditor supply it with accurate information for collection. The defendant argued “that this procedure was reasonably adapted to avoid violations of the FDCPA,” and that it should be entitled to the bona fide error defense. The district court agreed with the defendant and granted its request for summary judgment.
On appeal, the 9th Circuit determined that relying on creditor-clients to provide accurate information is insufficient to establish a bona fide error defense. Moreover, a “boilerplate agreement” between the creditor and the defendant “effectively outsourced the defendant’s statutory duty under the FDCPA,” the appellate court held, noting that defendants are not allowed to simply rely on the information they are being provided.
District court: $925 million statutory damages award not constitutionally excessive
On August 14, the U.S. District Court for the District of Oregon refused to reduce a $925 million statutory damages award against a company found to have violated the TCPA by sending almost two million unsolicited robocalls to consumers. The company argued that the statutory damages award violates due process because “it is so severe and oppressive as to be wholly disproportionate to the offense and obviously unreasonable.” The court rejected the company’s argument that the penalty was unconstitutionally excessive, noting that the U.S. Court of Appeals for the Ninth Circuit has not yet answered the question as to “whether due process limits the aggregate statutory damages that can be awarded in a class action lawsuit under the TCPA.” Instead, the district court concluded that the allowance for at least $500 per violation under the TCPA is constitutionally valid and that the penalty’s “large aggregate number comes from simple arithmetic.” Referencing an opinion issued by the U.S. Court of Appeals for the Seventh Circuit, the court reasoned that “[s]omeone whose maximum penalty reaches the mesosphere only because the number of violations reaches the stratosphere can’t complain about the consequences of its own extensive misconduct.” Thus, the court rejected the company’s argument that the aggregate damages award should be reduced, finding that due process does not require the reduction of the aggregate statutory award where the company violated the TCPA nearly two million times.
OCC defends fintech charter authority in NYDFS challenge
On August 13, the OCC filed its reply brief in its appeal of a district court’s 2019 final judgment, which set aside the OCC’s regulation that would allow non-depository fintech companies to apply for Special Purpose National Bank charters (SPNB charter). As previously covered by InfoBytes, last October, the U.S. District Court for the Southern District of New York entered final judgment in favor of NYDFS, ruling that the SPNB regulation should be “set aside with respect to all fintech applicants seeking a national bank charter that do not accept deposits,” rather than only those that have a nexus to New York State.
As discussed in its opening brief filed in April appealing the final judgment (covered by InfoBytes here), the OCC reiterated that the case is not justiciable until it actually grants a fintech charter, that it is entitled to deference for its interpretation of the term “business of banking,” and that the court should set aside the regulation only with respect to non-depository fintech applicants with a nexus to New York. Following NYDFS’s opening brief filed last month (covered by InfoBytes here), the OCC argued, among other things, that the case is not ripe and NYDFS lacks standing because its alleged injuries are speculative and “rely on a series of events that have not occurred: OCC receiving and approving an SPNB charter application from a non-depository fintech that intends to conduct business in New York, and then does so in a manner that causes the harms [NYDFS] identifies.”
The OCC further argued that NYDFS “cannot show the statutory term ‘business of banking’ is unambiguous, or that it requires a bank to accept deposits to receive an OCC charter.” Highlighting the evolution of the “business of banking” over the last 160 years, the OCC contended that the National Bank Act does not contain a requirement “that an applicant for a national bank charter accept deposits if it can present the OCC with a viable business model that does not require it,” and that its regulation interpreting the ambiguous phrase “business of banking” is reasonable as it is consistent with U.S. Supreme Court case law. Lastly, the OCC argued that NYDFS’s claim that it is entitled to nationwide relief afforded under the Administrative Procedure Act (APA) is inconsistent with another 2nd Circuit decision, “as well as principles of equity and the APA’s text and history.” The OCC stated that even if the appellate court were to conclude that NYDFS’s claims are justiciable, the regulations should be set aside only with respect to non-depository fintech applicants with a nexus to New York.
District Court dismisses usury claim against New York lender
On August 12, the U.S. District Court for the Western District of New York dismissed usury claims against a lender, concluding that lenders licensed in New York can charge interest rates up to 25 percent on loans under $25,000. According to the opinion, a consumer received a check in the mail in the amount of $2,539 from a licensed lender under Article IX of New York Banking Law, with terms requiring repayment at an annual interest rate of 24.99 percent, if the consumer cashed the check. The consumer cashed the check, agreeing to the loan terms. After failing to repay the debt in full, the consumer filed a complaint against the lender asserting various claims, including that the interest rate is unenforceable under New York General Obligations Law (GOL) § 5-511 because it exceeds 16 percent. The lender moved to dismiss the action.
The court agreed with the lender on the usurious claim, concluding that as a licensed lender in New York, the lender is “authorized to extend loans of $25,000 or less with interest rates up to 25[percent]” which is “the limit set by New York’s criminal usury statute, New York Penal Law § 190.40.” The court cited to NYDFS interpretations, stating that unlicensed nonbank lenders may not charge more than a 16 percent annual interest rate, but lenders that “obtain an Article IX license [] may charge interest up to 25[percent] per annum on the small loans.” Because the lender was licensed under Article IX in the state of New York, the lender “was permitted to loan $2,539.00 to [the consumer] at an agreed-upon annual interest rate of 24.99[percent] without violating GOL § 5-511.”
District court applies OCC’s valid-when-made final rule but raises true lender question
On August 12, the U.S. District Court for the District of Colorado reversed in part a bankruptcy court judgment, concluding that the OCC’s valid-when-made rule applied but that discovery was needed to determine whether a nonbank entity was the true lender. According to the opinion, a debtor corporation commenced an adversary proceeding against a creditor in their bankruptcy, alleging, among other things, that the interest rate of the underlying debt’s promissory note is usurious under Colorado law. The promissory note was executed between a Wisconsin state-charted bank and a Colorado-based corporation, with an interest rate of nearly 121 percent. The note included a choice of law provision dictating that federal law and Wisconsin law govern. A deed of trust, dictating that Colorado law (the property’s location) governs, was pledged as security on the promissory note and incorporated by referencing the terms of the note. Subsequently, the Wisconsin bank assigned its rights under the note and deed of trust to a nonbank entity registered in New York with a principal place of business in New Jersey. The bankruptcy court denied the debtor’s claims, concluding that the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) applied, which dictated the application of Wisconsin law, making the interest rate valid.
On appeal, the district court applied the OCC’s valid-when-made rule (which was finalized in June and covered by a Buckley Special Alert), concluding that “a promissory note with an interest rate that was valid when made under DIDMCA § 1831d remains valid upon assignment to a non-bank.” However, the district court noted that DIDMCA § 1831d does not apply to promissory notes “with a nonbank true lender” and the parties did not “conduct discovery on the factual question of whether [the nonbank entity] was the true lender.” Thus, the court reversed and remanded to the Bankruptcy Court to determine whether the nonbank entity was the true lender.