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5th Circuit: Collection letters misrepresenting legal enforceability of underlying debt violate FDCPA
On April 29, the U.S. Court of Appeals for the Fifth Circuit held that letters seeking the collection of time-barred debt that include ambiguous offers and contain threats misrepresenting the legal enforceability of the underlying debt violate section 1692e of the FDCPA. In 2011, a creditor placed the plaintiff’s debt with the defendant for collection. Six collection letters were initially sent to the plaintiff for which there was no response, and in 2017, the defendant sent four more letters to the plaintiff. While it was undisputed that the four-year statute of limitations to sue to collect the debt had expired, none of the letters mentioned that the debt was time-barred or that a partial payment may restart the statute of limitations clock. The plaintiff filed suit claiming the 2017 letters violated the Texas Debt Collection Act and were false or misleading and unfair or unconscionable in violation of FDCPA §§ 1692e and 1692f respectively. The district court granted summary judgment for the plaintiff on the 1692e claim, but ruled that “‘there is a growing consensus’ that a claim under § 1692f is a ‘backstop’ to catch conduct outside that barred by § 1692e and other provisions,” and granted summary judgment to the defendant on the 1692f claim. The defendant appealed the 1692e decision.
On appeal, the 5th Circuit affirmed and held that, read as a whole, the letters misrepresented the legal enforceability and character of the debt in violation of § 1692e. The appellate court found that the 2017 letters were ambiguous and failed to even mention when the debt was incurred, which may have provided some insight to the plaintiff as to whether the debt might be legally enforceable. The appellate court also took issue with the 2017 letters’ use of unexplained “urgent” language and vague collection threats, and stated that “the complete silence in these letters works in conjunction with their vague language to mislead the unsophisticated consumer that the debt is enforceable.”
4th Circuit: Disgorgement calculation lacks necessary casual connection between profits and violations
On April 27, the U.S. Court of Appeals for the Fourth Circuit held that a district court’s disgorgement calculation for a banker found in contempt of a consent order rested on “an erroneous legal interpretation of the terms of the underlying consent order” and “lacked the necessary causal connection” between profits and a violation. As previously covered by InfoBytes, the banker settled RESPA and state law allegations with the CFPB and the Maryland Attorney General concerning his participation in a mortgage-kickback scheme. The 2015 final judgment order banned the defendant from participating in the mortgage industry for two years but did not prohibit him “from acting solely as a personnel or human-resources manager for a mortgage business operated by a FDIC-insured banking institution. . . .” In 2018, the banker was held in civil contempt for violating the final judgment order, and the district court ordered the disgorgement of over half-a-million dollars of his contemptuous earnings. The banker appealed the contempt finding and disgorgement.
On appeal, the 4th Circuit first held that the district court properly found the banker in violation of the consent order, determining among other things that, while the final judgment order did not broadly prohibit his participation in the mortgage industry, there was sufficient evidence that he “continued to communicate impermissibly with third-party businesses engaged in settlement services” and that he failed to follow various reporting requirements, such as uploading the consent order to a national registry and notifying regulators of a change in residence and business activity. However, the 4th Circuit found that the district court erred in its approach to calculating disgorgement because it assumed that “managing the business was improper and set out identifying [the banker’s] profits from his business because any such profit was contemptuous income.” (Emphasis in the original.) Holding that the district court’s view relied on an overbroad interpretation of the consent order and lacked the causal connection between the banker’s profits and a violation, the 4th Circuit vacated the disgorgement order and remanded the case to the district court to reassess the disgorgement calculation based on the banker’s more limited conduct that did not comply with the order.
5th Circuit: Non-signatories not compelled to arbitrate FCRA claims
On April 21, the U.S. Court of Appeals for the Fifth Circuit affirmed a district court’s order denying a plaintiff’s motion to compel arbitration, holding that two credit reporting agencies (CRAs) are not subject to arbitration because of their contractual relationships with a bank. The plaintiff sued the bank and the CRAs, alleging violations of the FCRA and that the bank additionally violated the TCPA and the Fair Credit Billing Act in connection with disputed, unfamiliar charges that appeared on his credit card. The bank moved to compel arbitration pursuant to a provision in its credit card agreement, and the CRA defendants moved to stay the claims against them pending the outcome of the arbitration between the plaintiff and the bank. While the plaintiff opposed the bank’s motion to compel arbitration, he simultaneously moved to compel the CRAs to arbitration in the event that the bank’s motion was granted. The district court granted the bank’s motion to compel arbitration and denied the plaintiff’s motion to compel the CRAs to arbitration, reasoning that “‘there is a rebuttable presumption that non-signatories to a contract cannot be bound by arbitration agreements.’”
On appeal, the 5th Circuit agreed with the district court, concluding that because the CRAs were not signatories to the credit card agreement and were neither expressly nor implicitly parties to the agreement, they could not be compelled to arbitrate the plaintiff’s FCRA claims. Furthermore, while Alabama law governed the agreement, the appellate court rejected the plaintiff’s arguments that equitable estoppel and third-party beneficiary theories under Alabama common law required the CRAs to arbitrate the claims.
OCC appeals judgment in NYDFS fintech charter challenge
On April 23, the OCC filed its opening brief in the U.S. Court of Appeals for the Second Circuit to appeal a district court’s final judgment in an NYDFS lawsuit that challenged the agency’s decision to allow non-depository fintech companies to apply for Special Purpose National Bank charters (SPNB charter). As previously covered by InfoBytes, last October the district court 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. The judgment followed the court’s denial of the OCC’s motion to dismiss last May (covered by InfoBytes here), in which the court concluded, among other things, that the OCC failed to rebut NYDFS’s claims that the proposed national fintech charter posed a threat to the state’s ability to establish its own laws and regulations, and that engaging in the “business of banking” under the National Bank Act (NBA) “unambiguously requires receiving deposits as an aspect of the business.” Highlights of the OCC’s appeal include:
- The OCC claims that NYDFS lacks standing and that its claims are unripe because its alleged injuries are premised on a non-depository fintech company receiving a SPNB charter and commencing business in the state. However, the OCC has yet to receive even an application. The OCC also argues that NYDFS “would not be prejudiced by waiting to resolve these claims until OCC takes affirmative steps to approve an application” because the period between preliminary conditional approval and final approval would provide “ample opportunity to challenge such an application.”
- The OCC argues that the district court erred in holding that the agency’s decision to accept SPNB charter applications from non-depository fintechs was not entitled to Chevron deference. Specifically, the term “business of banking” under the NBA is “ambiguous” on whether it requires deposit-taking, and the OCC’s resolution of that ambiguity is reasonable as it is consistent with U.S. Supreme Court case law.
- The OCC argues that even if NYDFS’s claims were justiciable (and even if the OCC’s interpretation was not entitled to Chevron deference), any relief NYDFS is entitled to receive must be limited to the state. The OCC contends that the district court’s decision to grant nationwide relief was improper because it is inconsistent with Article III, which establishes that “remedies should not extend beyond what is necessary to redress the plaintiff’s alleged injuries,” as well as equitable principles and the Administrative Procedure Act.
Student loan servicer settles public service loan relief suit
On April 24, a proposed class of borrowers and a national student loan servicer agreed to settle a lawsuit, which alleged the servicer failed to inform the borrowers of a loan forgiveness program for public service employees. The proposed settlement, which was granted final court approval in October, settles the one remaining deceptive acts and practices claim under a section of the New York General Business Law after the U.S. District Court for the Southern District of New York dismissed the rest of the borrowers’ claims last July. The court noted in its order that it did not agree with the servicer’s argument that the claims were preempted by the federal Higher Education Act (HEA), stating that the borrowers “do not seek to impose state law ‘disclosure requirements’ on federal student loans,” but instead “seek to hold [the servicer] liable for affirmative misrepresentations made in the course of performing its duties under various contracts.” According to the court’s order, language under the HEA “does not express the ‘clear and manifest purpose of Congress’ to preempt such claims.”
While the servicer denies any allegations of wrongful conduct and damages, it has agreed to, among other things, put in place enhancements to identify borrowers who may qualify for Public Service Loan Forgiveness and “distribute comprehensive and accurate information about how to qualify, which are meaningful business practice enhancements.” The servicer will also fund a $2.25 million education and counseling program for student loan borrowers in public service.
PPP loan application agent files suit against lenders for compensation
On April 30, an Illinois financial advising and consulting services business (company) filed a putative class action in the U.S. District Court for the Northern District of Illinois against several financial institutions (defendants) claiming that the defendants owe the business certain fees for assisting Paycheck Protection Program (PPP) loan applicants with applying for PPP loans under the CARES Act. The complaint alleges that the PPP SBA regulations specify that the lender must provide compensation of between one quarter of a percent and one percent of a loan’s value to an agent—which includes loan brokers, applicant representatives, consultants, accountants, and attorneys—for preparing PPP loan applications for small business applicants. Additionally, the company states that the PPP regulations prohibit it from collecting application fees directly from small business applicants that it assists. The company alleges that the defendants, in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, failed to compensate it for assisting with the preparation of applications submitted to the defendants for processing. The company seeks certification of the class, disgorgement, and punitive damages, among other things.
9th Circuit: Providing disclosure with employment documents does not violate FCRA
On April 24, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s ruling that an employer that obtained a consumer report for employment purposes did not violate the FCRA when it provided disclosure simultaneously with other documents and failed to use a standalone document for the FCRA authorization. The plaintiff, a former employee, alleged that during the hiring process, applicants were presented with employment documents and were required to sign two forms related to consumer reports: (i) a separate “disclosure” form that informed applicants that the employer could obtain reports pertaining to their employment record, drug tests, and driving record; and (ii) an “authorization” form appearing at the end of the application, which authorized the employer or its agent or subsidiary to investigate the applicant’s previous employment record. The plaintiff’s suit alleged that the forms violated the FCRA’s standalone disclosure requirement because the defendant presented the forms at the same time as other application materials and failed to place the authorization on a standalone document. The district court granted summary judgment to the defendant.
On appeal, the 9th Circuit rejected the plaintiff’s argument, concluding that there is nothing that prohibits an employer from “providing a standalone FCRA disclosure contemporaneously with other employment documents.” While the 9th Circuit acknowledged that the FCRA requires a disclosure form to contain nothing more than the disclosure itself, “no authority suggests that a disclosure must be distinct in time, as well.” With respect to the authorization, the appellate court rejected the argument that it violated the FCRA because “the authorization subsection of FCRA lacks the disclosure subsection’s standalone document requirement” and only requires that the authorization be in writing.
U.S. Supreme Court announces May oral arguments to be delivered via teleconference
On April 28, the U.S. Supreme Court announced that on May 4-6 and 11-13, the Court will hear a number of the oral arguments that were previously postponed for March and April due to the Covid-19 pandemic. Counsel will present arguments to the Court via telephone conference as the Chief Justice prompts them, and the next case will follow immediately after the first ends.
SEC charges company and CEO for misleading statements concerning N95 masks
On April 28, the SEC announced that it filed suit in the U.S. District Court for the Southern District of Florida against a company and its CEO (defendants) for violating the Securities Exchange Act of 1934 by making false and misleading statements concerning their ability to source and supply N95 masks for the Covid-19 virus. The SEC alleges that the defendants’ actions sought to mislead investors because they “never had either a single order from any buyer to purchase masks, or a single contract with any manufacturer or supplier to obtain masks, let alone any masks actually in its possession.” Following regulatory inquiries (and an SEC March 26 order that temporarily suspended trading in the securities of the company), the SEC alleges in the complaint that the CEO issued a press release stating that the company never had masks available to sell. The SEC seeks injunctive relief and civil penalties against the defendant, as well as an officer-and-director bar against the CEO.
5th Circuit affirms summary judgment in FCRA case
On April 22, the U.S. Court of Appeals for the Fifth Circuit affirmed a district court’s dismissal of an FCRA action, holding that the plaintiff failed to prove that his alleged injuries were the result of the defendants’ actions. According to the opinion, the plaintiff alleged that a financial institution wrongfully reported a payment delinquency on his retail credit card, which he claimed caused the subsequent denial of a loan application. Upon learning of the denial, the plaintiff disputed the late-payment notation with three credit reporting agencies (CRAs). Prior to the district court’s judgment, the plaintiff settled with the retailer, the financial institution, and one of the three CRAs. The remaining two defendant CRAs reinvestigated the delinquency with the financial institution, confirmed the information, and notified the plaintiff of the result of their investigation. The plaintiff argued that the CRAs “failed to conduct a reasonable investigation” because they never directly contacted the retailer about the disputed late payment. However, the district court held that that the CRAs’ reliance on the Automated Consumer Dispute Verification (ACDV) system to investigate the dispute and confirm the information was “generally acceptable.”
On appeal, the 5th Circuit agreed with the district court that the plaintiff “offered no reasonable factual basis” for why the CRAs “should have been on notice of a need to go beyond the ACDV system as to this dispute.” The appellate court further agreed that the plaintiff was unable to show that contacting the retailer would have changed the CRAs’ conclusions about the information they already possessed. Finally, the 5th Circuit held that the plaintiff had shown no evidence that the denial of his loan application was a direct result of the CRAs’ actions because, as the district court concluded, the loan application was denied because of a credit report from the CRA that had previously settled with the plaintiff and was no longer a party to the suit.