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District Court grants preliminary approval to national bank's auto lending settlement
On August 5, the U. S. District Court for the Central District of California granted preliminary approval and class certification to a settlement of at least $393.5 million to resolve multidistrict allegations that a national bank added force-placed auto insurance to auto loans that may have been unnecessary and without borrowers’ consent. Under the terms of the settlement, the auto insurance underwriter will pay an additional $7.5 million. The allegations stem from a 2017 lawsuit in which borrowers claimed the bank charged them for unnecessary collateral protection insurance. The settlement also requires the bank and the underwriter to pay up to $36 million in attorneys’ fees for the borrower class and up to $500,000 in litigation expenses. However, the court scheduled a settlement fairness hearing for October to examine the fees before granting final approval of the settlement. This settlement follows a 2018 settlement reached between the bank and the CFPB and the OCC concerning a similar set of allegations over the purported billing of force-placed insurance premiums that may not have been required. (See previous InfoBytes coverage here.)
11th Circuit rejects city’s FHA suit against bank
On July 30, the U.S. Court of Appeals for the 11th Circuit dismissed the City of Miami Gardens (City) Fair Housing Act (FHA) suit against a national bank for lack of standing. This decision was the result of the appeal of a lower court decision previously covered by InfoBytes in June 2018. In the prior decision, the U.S. District Court for the Southern District of Florida granted the national bank’s motion for summary judgment. This was a loss for the City, which had argued that the bank made loans that were more expensive for minority borrowers as compared to non-minority borrowers, resulting in greater rates of default and foreclosure and leading to reduced property values and tax revenue for the City. The district court granted the national bank summary judgment based on the City’s failure to present sufficient evidence of discriminatory lending.
On appeal, the bank argued that the district court should have dismissed the claims for lack of standing because “‘the undisputed evidence confirmed that none of the 153 loans originated by [the bank] [within the limitation period] foreclosed,’ so the City could not have suffered an injury as a result of any of [the] loans.” The 11th Circuit agreed that the City lacked standing, concluding that the City’s evidence that certain loans may go into foreclosure at some point in the future “does not satisfy the requirement that a threatened injury be ‘imminent, not conjectural or hypothetical.’” Moreover, although the City referenced ten loans that had gone into foreclosure, the appellate court ruled that “the City did not produce any evidence of the effect of these foreclosures on property-tax revenues or municipal spending,” nor that the loans were issued on discriminatory terms. Accordingly, the 11th Circuit vacated the district court’s award of summary judgment, and held that the district court should have dismissed the action on standing grounds.
5th Circuit says Congress, not courts, is responsible for changing rules for discharging student loans in bankruptcy
On July 30, the U.S. Court of Appeals for the 5th Circuit affirmed decisions by a bankruptcy court and a district court to dismiss a borrower’s student loan discharge request under the Bankruptcy Code, holding that Congress, not the courts, is responsible for changing the rules for discharging student loan debt in bankruptcy.
The borrower, who became unable to make payments on her student loans and other debts, initiated an adversarial action against the Department of Education in bankruptcy court after receiving a general discharge of her debts, in an attempt to have two student loans discharged as well. While the borrower was able to prove that her monthly expenses exceed her income, the bankruptcy and district courts found that she failed the three-prong test for evaluating claims of “undue hardship” established by the 2nd Circuit in Brunner v. New York State Higher Education Services Corp. and adopted in the 5th Circuit in In re Gerhardt. Primarily, the courts stated that the borrower failed to (i) show that she was “completely incapable of employment now or in the future”; or (ii) prove that her present state of affairs was likely to persist through the bulk of the loan repayment period. The borrower appealed, arguing that the three-prong test “is inconsistent with the plain meaning of the term ‘undue hardship’” and urged the appellate court to adopt instead “a ‘totality of the circumstances’ test.”
On appeal, the 5th Circuit agreed with the lower courts, stating that when Congress amended the bankruptcy law regarding the discharge of federal student loans, the intent was to limit it to cases of “undue hardship” in order to prevent the use of bankruptcy except in the most compelling circumstances. According to the appellate court, until an en banc panel or the Supreme Court reviews the standard, the panel finds no error in the lower courts’ decision. “Policy-based arguments do not change this interpretation; the role of this court is to interpret the laws passed by Congress, not to set bankruptcy policy,” the appellate court wrote. Moreover, reducing the test to a “totality of the circumstances” standard would create an “intolerable inconsistency” in decisions on loan discharges, and expand an area of bankruptcy law that Congress has sought to constrict.
1st Circuit asks Massachusetts high court to resolve foreclosure question
On July 29, the U.S. Court of Appeals for the 1st Circuit certified to the Massachusetts Supreme Judicial Court the question of whether a national bank’s foreclosure notice was valid under Massachusetts law. According to the order, the appellate court granted the bank an en banc rehearing of its February decision, which concluded that the bank’s foreclosure notice was defective and therefore, it could not properly foreclose the mortgage. The court had reasoned that the notice, which stated that the homeowners “could avoid foreclosure if, but only if, the [homeowners] paid the balance due on or before the specified foreclosure date,” was defective because the mortgage required the homeowners to pay the amount at least five days before the foreclosure date. In its petition for rehearing en banc, the bank argued that a Massachusetts state banking regulation required it to use the specific language it had in the notice and that the panel erred in its reading of existing state court precedent. The appellate court noted that the position is debatable and that in a diversity jurisdiction action the court “cannot properly overturn governing state precedent.” Therefore, the appellate court withdrew its earlier opinion, vacated the judgment, and certified to the Massachusetts Supreme Judicial Court the question of whether the statement in the foreclosure notice would render the notice inaccurate or deceptive, voiding the subsequent foreclosure sale under Massachusetts law.
2nd Circuit: Consumer plausibly alleged discrepancies between collection letters and mortgage note
On July 22, the U.S. Court of Appeals for the 2nd Circuit affirmed in part and vacated in part a district court’s dismissal of a consumer’s FDCPA claims concerning communications received from a creditor and a collection firm (defendants) related to his defaulted mortgage. The consumer alleged that the letter he received in November 2015 listed an inaccurate amount of debt in violation of FDCPA section 1692g (concerning “initial communications”), and that subsequent letters received were inconsistent because they listed varying amounts of debt. Additionally, the consumer contended that the defendants violated sections 1692e (“false, deceptive, or misleading representations”) and 1692f (“unfair or unconscionable means to collect or attempt to collect any debt”). The district court ruled that the consumer failed to plausibly state a claim or provide factual support for his allegations.
On review, the appellate court agreed that the consumer failed to state a claim under section 1692g, explaining that “the least sophisticated consumer” would not be misled by the various debt collection letters concerning the amount of the debt. The appellate court emphasized that the consumer ignored the creditor’s acceleration of the underlying mortgage loan—which accounted for the core differences in the communications about the outstanding debt—and rejected the consumer’s allegations that the letters were inaccurate and inconsistent. However, the 2nd Circuit disagreed with the district court, holding that the consumer’s claims under sections 1692e and 1692f survived the defendants’ motion to dismiss because the consumer plausibly alleged discrepancies between the collection letters and mortgage note concerning late fees and charges.
9th Circuit upholds CFTC fraud enforcement power
On July 25, the U.S. Court of Appeals for the 9th Circuit held that the Commodity Future Trading Commission (CFTC) had the enforcement authority to bring a $290 million fraud action against a trading platform, concluding that the district court improperly dismissed the action. According to the opinion, the CFTC brought an action against a trading platform alleging that it was an illegal and unregistered leveraged retail commodity transaction market for precious metals. The platform moved to dismiss the action, arguing that the Dodd-Frank Act did not give the CFTC the power to pursue stand-alone fraud claims without allegations of manipulation and that the Commodity Exchange Act’s “registration provisions do not apply to retail commodities dealers who ‘actual[ly] deliver[]’ the commodities to customers within twenty-eight days.” The district court agreed, and dismissed the action.
On appeal, the 9th Circuit concluded the district court erred in dismissing the CFTC’s claims, holding that the CFTC had the authority under Section 6(c)(1) of the CEA to take action against the entity for fraudulently deceptive activity. Specifically, the appellate court held that the CFTC could bring an action for “fraudulently deceptive activity, regardless of whether it was also manipulative,” concluding the district court erred when it interpreted the use of the word “or” in the CEA’s prohibition of the use of “any manipulative or deceptive device or contrivance” to mean “and.” Moreover, the appellate court rejected the platform’s “actual delivery” argument, concluding that the platform’s practice of storing the goods in depositories, and “maintain[ing] total control over accounts,” with the ability to liquidate at any time, amounts to “sham delivery, not actual delivery.” The appellate court looked to the legislative history of Dodd-Frank and observed that, “[i]f Congress wanted only to ensure enough inventory it could have said so. It did not; it required ‘actual delivery,’” which would require some “meaningful degree of possession or control by the customer.”
9th Circuit affirms district court’s ruling in FCRA dispute
On July 24, the U.S. Court of Appeals for the 9th Circuit affirmed a district court’s ruling that the FCRA did not require a consumer reporting agency (defendant) to examine disputed items on an individual’s credit report because the credit repair company—and not the individual—submitted the request to the defendant. Under the FCRA, consumer reporting agencies are required to assess disputed credit file items when a consumer notifies the agency directly. However, the court stated that the plaintiff did not play a part in drafting, finalizing, or sending the letters that the credit repair company sent to the defendant on his behalf, and therefore granted summary judgment in favor of the defendant, ruling that the defendant’s duty to reinvestigate the claims relied upon the plaintiff himself submitting the dispute notifications.
On appeal, the 9th Circuit agreed with the district court that the defendant “did not act unreasonably” and was correct in entering summary judgment. “This case does not involve a letter sent to a consumer reporting agency by a consumer’s attorney,” the appellate court wrote in clarifying that the holding was limited to the facts of the specific case. “Nor does it involve one family member assisting another by sending a letter on the other’s behalf. It does not even involve a letter sent by a credit repair agency that a consumer reviewed and approved before it was submitted. We do not decide whether, in any of these circumstances, a consumer reporting agency would have a duty to reinvestigate. We only hold that, in this case, where [the plaintiff] played no role in preparing the letters and did not review them before they were sent, the letters sent by [the credit repair company] did not come directly from [the plaintiff].”
HUD suspends downpayment assistance mortgagee letter following injunction
On July 23, HUD issued Mortgagee Letter 2019-10, announcing the official suspension of the effective date of the agency’s April guidance (Mortgagee Letter 2019-06), which changed the downpayment assistance (DPA) guidelines. The suspension comes just a week after the U.S. District Court for the District of Utah granted an American Indian band and its mortgage company (collectively, “plaintiffs”) a preliminary injunction halting the enforcement of the April changes, and ordering that HUD “shall not deny insurance nor cause insurance to be denied based on non-compliance with Mortgagee Letter 19-06 and shall provide public notice that the effective date of Mortgagee Letter 19-06 is suspended until after a final determination on the merits of the case.” Buckley is co-counsel in the pending litigation.
The suspended guidance, Mortgagee Letter 2019-06 (Mortgagee Letter), issued on April 18, imposed new documentation requirements purportedly aimed at confirming that Governmental Entities operate their DPA programs within the scope of their governmental capacity when providing any portion of a borrower’s Minimum Required Investment (MRI). The letter updated Handbook 4000.1 to specify that when any portion of a borrower’s MRI comes from a Governmental Entity, a mortgagee must obtain the following documentation: (i) proof that the Governmental Entity has authority to operate in the jurisdiction where the property is located; (ii) a legal opinion from the Governmental Entity’s attorneys, signed and dated within two years of closing, establishing the Governmental Entity’s authority to operate in the jurisdiction where the property is located, which in the case of a federally recognized Indian Tribe means the entity is operating on tribal land in which the property is located, or offering DPA to enrolled members of the tribe; and (iii) evidence that the Governmental Entity is providing DPA and is doing so in its governmental capacity. The Mortgagee Letter went on to require documentation indicating that the provision of DPA is not contingent upon the future transfer of the insured mortgage to a specific entity.
The plaintiffs filed suit against HUD on April 22 arguing that the Mortgagee Letter was unlawful and discriminatory, and unfairly targeted American Indian tribes by “requiring them, for the first time, to confine their DPA programs to the geographic boundaries of their reservations and to enrolled members of the tribes, literally driving them out of the national marketplace and back onto the reservation.” Additionally, the complaint argued that HUD failed to execute these changes in accordance with the protections of the Administrative Procedures Act (APA) by providing a notice and comment period—purporting the Mortgagee Letter to be an “informal ‘guidance’ document that merely ‘clarifies’ existing law.” The decision to grant the preliminary injunction was announced by the court at the conclusion of a July 16 hearing. In the written order released the following week, the court concluded that the plaintiffs were likely to succeed on claims that the agency violated the APA because the Mortgagee Letter was actually a legislative rule with the force and effect of the law, not merely an interpretive rule. Moreover, the court rejected HUD’s argument that the Mortgagee Letter merely reiterates jurisdictional limitations that were already present, and stated the plaintiffs sufficiently demonstrated irreparable harm caused by the new jurisdictional limitations in the Mortgagee Letter.
Housing discrimination lawsuit against national bank can proceed
On July 18, the U.S. District Court for the District of Maryland denied defendants’ motion to dismiss claims that they violated the Fair Housing Act’s anti-discrimination provisions by allegedly failing to properly maintain bank-owned properties in African American and Latino neighborhoods. According to the plaintiffs—a group of private fair housing organizations along with three individual homeowners—the bank and its maintenance contractor regularly maintained similar bank-owned properties in white neighborhoods, while properties in minority neighborhoods were allowed to fall into disrepair. The plaintiffs cited claims for discrimination under both disparate treatment and disparate impact theories, and asserted that the conduct allegedly depreciated the property values of current residents, discouraged buyers from purchasing homes in a particular neighborhood, and limited available housing. The defendants argued, however, that the fair housing organizations do not have standing to sue because they failed to trace their alleged injury to the conduct at issue or to sufficiently demonstrate they were harmed by the alleged conduct. Moreover, the defendants asserted that the Maryland court does not have jurisdiction over the dispute and that the claims were untimely.
The court found that the plaintiffs did sufficiently plead an injury-in-fact, stating, “[h]ere the scope and specificity of the plaintiffs’ investigation and the alleged precision with which its proffered regression analysis can attribute the plaintiffs’ injuries to the defendants’ actions, provide plausible proximate cause.” The court also reasoned that it had jurisdictional authority because, even though none of the fair housing organizations are Maryland entities, some of the alleged conduct has occurred in Maryland and state residents have alleged harm. As to the question of timeliness, the court noted that the statute of limitations concerns are “obviated by the continuing violation doctrine.”
7th Circuit holds collection fee was authorized by contract, did not violate FDCPA
On July 19, the U.S. Court of Appeals for the 7th Circuit affirmed the district court’s determination that a percentage-based collection fee was expressly authorized by the contractual agreement and therefore, did not violate the FDCPA. According to the opinion, a consumer entered into a contract with an amusement park for a monthly pass, which stated the consumer would “be billed for any amounts that are due and owing plus any costs (including reasonable attorney’s fees) incurred by [the park] in attempting to collect amounts due.” After the consumer fell behind on payments for the pass, he received a collection letter from a collection agency, seeking the principal amount owed, plus $43.28 in costs to be paid directly to the collection agency or to the amusement park. The consumer filed a class-action lawsuit alleging that the debt collector “charged a fee not ‘expressly authorized by the agreement creating the debt’” in violation of the FDCPA. The district court held a bench trial and found that the collection fee was expressly authorized by the language in the consumer’s contract.
On appeal, the 7th Circuit agreed with the district court, but noted its decision was in contrast to previous decisions by the 11th and 8th Circuits (both of which have held that percentage-based fees do violate the FDCPA when the underlying contract uses the term “costs.”) The appellate court noted that the contract “allows for ‘any costs,’ and the most reasonable reading of that term is to include fees paid in attempting to collect.” Moreover, the contract “explicitly provided that the term ‘costs’ includes attorney’s fees,” and therefore, the appellate court declined “to hold that the term ‘costs’ bears such a narrow meaning when the contract explicitly tells [the court] that the term is broad enough to include more.” Therefore, the collection fee, according to the appellate court, fell within the contract’s language authorizing “any costs” of the collection and did not violate the FDCPA.