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8th Circuit: Bank that discharged employees as a “business necessity” did not violate Section 19 of the FDI Act
On August 29, the U.S. Court of Appeals for the 8th Circuit affirmed a lower court’s order granting summary judgment in favor of a national bank, holding that the bank did not violate the Federal Deposit Insurance Act’s Section 19 employment ban when it discharged African-American and Latino employees who previously had been convicted of crimes involving dishonesty. Under Section 19, individuals who have been convicted of a crime “involving dishonesty or a breach of trust” cannot be employed by a financial institution covered by federal deposit insurance. A bank that violates the ban is subject to criminal penalties, although an individual may request a waiver from the FDIC. According to the order, the bank screened all home mortgage division employees in 2012 and discharged anyone who was found to have a conviction without providing the option to apply for a waiver. The class members—who brought discrimination claims based on a disparate impact theory—complained that the bank’s automatic discharge of all affected employees impacted African Americans and Latinos at a higher rate than white employees, and contended that the bank could have prevented this result with an alternative such as giving employees “advance notice of the need for a Section 19 discharge, granting leave time to seek a waiver, and/or sponsoring a waiver.” The appellate court relied on data showing that approximately half of waiver applications are approved by the FDIC, and class members presented no data to show that sponsored waivers would ameliorate any racial disparity. In addition, the appellate court held that the bank’s decision to comply with the statute was a business necessity in light of the possibility of a $1 million-per-day fine “even if [the bank’s] policy of summarily terminating or not hiring any Section 19 disqualified individual creates a disparate impact.” Moreover, the appellate court stated that the class members “failed to establish a prima facie case of disparate impact,” and did not present a less discriminatory alternative that would serve the bank’s interests in compliance with the statute.
Court finds no ECOA violation with credit union’s dispute-free credit report requirement
On August 28, the U.S. District Court for the Eastern District of Wisconsin dismissed an action against a credit union, holding that the credit union’s decision to consider only dispute-free credit reports of all applicants does not amount to a “prohibited basis” under the Equal Credit Opportunity Act (ECOA). According to the opinion, the credit union required the consumer to remove his disputed debts from his credit report in order for his application for a home equity loan to move forward. After the disputes were removed, the consumer’s credit score dropped below the minimum required by the credit union, and his application was denied. In December 2017, the consumer brought an action against the credit union, alleging that he was discriminated against in violation of ECOA for exercising his dispute rights under the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA). The court rejected the consumer’s arguments, concluding that the FDCPA and the FCRA do not give a consumer a right to dispute debts, but rather a right to ensure that disputed debts are accurately reported as such. The court also rejected the consumer’s theory of recovery under ECOA, finding that his arguments were inconsistent with ECOA’s implementing regulation, Regulation B. The court determined that Regulation B allows a creditor to restrict the types of credit history that it will consider if the restrictions are applied to all applicants without regard to a prohibited basis. Because the dispute-free restriction was applied to all applicants of the credit union equally, the consumer’s claim failed.
8th Circuit holds a garnishment notice sent after receiving a “cease” letter does not violate the FDCPA
On August 27, the U.S. Court of Appeals for the 8th Circuit affirmed summary judgment for a law firm, holding that a garnishment notice sent after a consumer requested the company cease communication did not violate the Fair Debt Collection Practices Act (FDCPA). The court held that sending a notice of garnishment was permissible because a “creditor may communicate with a debtor after receiving a cease letter to notify the consumer that the debt collector or creditor may invoke specified remedies which are ordinarily invoked by such debt collector or creditor.” The court further held that the notice’s inclusion of a contact phone number did not “transform” the notice into a communication regarding the debt because, while the notice was a “communication regarding the debt in a general sense . . . it still fits within the remedy exception” and it would have been “odd” for the notice not to provide contact information. The court also rejected the claim that the law firm violated the FDCPA by discussing possible resolution of the debt in a subsequent phone call initiated by the consumer, noting that the consumer had asked about the debt, and agreeing with the district court that the phone call was “an unsubtle and ultimately unsuccessful attempt to provoke [the law firm] into committing an FDCPA violation.” The court added that prohibiting debt collectors from responding to a consumer’s inquiries after a cease letter would often force debt collectors to file suit in order to resolve debts, which is “clearly at odds with the language and purpose of the FDCPA.”
Finally, the court rejected the argument that the garnishment notice deceived consumers into contacting the law firm to discuss the legal aspects of the garnishment process, when in fact they would be subjected to debt collection efforts. Applying the unsophisticated consumer standard, the court held that the garnishment notice was not deceptive because it did not state that phone calls would be answered by attorneys prepared to answer questions solely about garnishment, and the consumer’s belief to the contrary was “the exact sort of peculiar interpretation against which debt collectors are protected by the objective element of the unsophisticated consumer standard.”
1st Circuit holds homeowners who defaulted on an allegedly unlicensed mortgage loan cannot escape time bars for their claims
On August 23, the U.S. Court of Appeals for the 1st Circuit held that homeowners who defaulted on a refinance loan on their Massachusetts property could not void the transaction or enjoin their property’s foreclosure sale. The appellate court determined that the homeowners’ claims that the lender violated the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act, the Truth in Lending Act, and the Massachusetts consumer protection statute were all time-barred. The homeowners argued that the statute of limitations never began to run because the lender was not licensed to lend money in the state, making the original note and mortgage “akin to forgeries and thus ‘void ab initio,’” but the court held that there was “no authority for this unusual proposition.” The court also refused to toll the limitations period under the doctrine of fraudulent concealment, which requires the plaintiff “to make a threshold showing of due diligence,” because the homeowners filed their claims more than five years after they retained counsel and ten years after they granted the mortgage at issue.
6th Circuit holds that failing to report a trial modification plan can constitute incomplete reporting under FCRA
On August 23, the U.S. Court of Appeals for the 6th Circuit held that a borrower met the requirements necessary for a Fair Credit Reporting Act (FCRA) claim to proceed when two mortgage servicers failed to report the existence of a trial modification plan when reporting the borrower was delinquent to reporting agencies. In 2014, a borrower brought an action against three credit reporting agencies and two mortgage servicers alleging, among other claims, violations of the FCRA due to payments being reported as past due while successfully making payments under a trial modification plan (also referred to as a Trial Period Plan, or “TPP”) and working towards a permanent modification. Regarding the FCRA claim, the 6th Circuit reversed the lower court’s decision granting the servicers’ motion for summary judgment, finding that the borrower met the statutory requirements for an FCRA claim because failing to report the existence of a TPP can constitute “incomplete reporting” in violation of the statute. The 6th Circuit rejected the servicers’ argument that the Home Affordable Modification Program guidelines “encouraged, but did not require” that they report a TPP. The court acknowledged this distinction but noted that “[r]eporting that [a borrower] was delinquent on his loan payments without reporting the TPP implies a much greater degree of financial irresponsibility than was present here.” The court remanded the case to the district court to determine whether the servicers conducted a reasonable investigation after the borrower disputed the reporting.
8th Circuit rules Fannie Mae, Freddie Mac net worth sweep payments acceptable under FHFA statutory authority
On August 23, the U.S. Court of Appeals for the 8th Circuit affirmed a lower court’s dismissal of claims brought by shareholders of Fannie Mae and Freddie Mac (GSEs) against the GSEs’ conservator, the Federal Housing Finance Agency (FHFA), alleging that FHFA exceeded its powers under the Housing and Economic Recovery Act (HERA) and “acted arbitrarily and capriciously” when it entered an agreement with the Treasury Department requiring the GSEs to pay their entire net worth, minus a small buffer, as dividends to the Treasury every quarter. In so holding, the 8th Circuit joined the 5th, 6th, 7th, and D.C. Circuits, each of which has previously “rejected materially identical arguments” presented by other GSE shareholders. (See previous InfoBytes coverage on the 5th Circuit decision here.) The shareholders sought an injunction to set aside the so-called “net worth sweep,” asserting that “HERA’s limitation on judicial review does not apply when FHFA exceeds its statutory powers under the Act . . . [and] that the net worth sweep exceeds, and is antithetical to, FHFA’s statutory powers.” However, the appellate court agreed with the lower court and found, among other things, the net worth sweep payments to be acceptable because HERA “grant[s] FHFA broad discretion in its management and operation of Fannie and Freddie” and permits, but does not require, the agency “to preserve and conserve Fannie’s and Freddie’s assets and to return [them] to private operation.” The court also noted that HERA “authorize[d] FHFA to act ‘in the best interests’ of either Fannie and Freddie or itself,” thus affording FHFA more discretion than common law conservators. Finally, the appellate court held that HERA’s anti-injunction provision, which states that “no court may take any action to restrain or affect the exercise of powers or functions of the [FHFA] as a conservator or a receiver,” also precludes enjoining the Treasury Department from participating in the net worth sweep because doing so would “restrain or affect” FHFA.
Court denies law firm’s request for judgment on Texas debt collection claim
On August 14, the U.S. District Court for the Southern District of Texas entered judgment in favor of a bank, mortgage loan servicer, and servicer’s law firm (defendants) on all but one Texas Debt Collection Practices Act (TDCPA) claims, among others, brought by homeowner plaintiffs, but determined the law firm was not entitled to judgment as a matter of law regarding its attempted foreclosure on the property despite an attorney exemption provision in the TDCPA. The court agreed with the defendants that the plaintiff failed to allege material facts that support the majority of the claims brought, but disagreed with the law firm as to the remaining TDCPA claim. According to the opinion, the plaintiffs alleged the law firm violated the TDCPA by operating as a third-party debt collector in Texas without the surety bond required by law. The law firm moved for judgment, arguing, among other things, that it was not subject to the TDCPA bond requirement because it simply “assisted” the mortgage servicer with the foreclosure, which is not considered debt collection absent a collection attempt on a deficiency judgment. The court rejected this argument as a matter of law. The court also rejected the law firm’s argument that it was not a “third-party debt collector,” concluding there was a genuine dispute about whether the law firm was a debt collector under the TDCPA despite the attorney exemption, due to whether the letters sent were in its capacity as attorneys for the servicer or as a debt collector.
Court opens door for CFPB to appeal constitutionality determination to 2nd Circuit
On August 23, the U.S. District Court for the Southern District of New York granted the CFPB’s request for entry of final judgment with respect to the court’s June decision to terminate the CFPB as a party to an action. The court has previously concluded that the CFPB could not proceed with its claims under the Consumer Financial Protection Act (CFPA). The entry of final judgment will allow the CFPB to appeal the court’s constitutionality determination to the U.S. Court of Appeals for the 2nd Circuit. As previously covered by InfoBytes, the CFPB brought the action with the New York Attorney’s General office (NYAG) against a New Jersey-based finance company and its affiliates (defendants). Although the court dismissed the CFPB’s claims, it determined that the NYAG had plausibly alleged claims under New York law and the CFPA and had the independent authority to pursue those claims.
The court also granted the defendants’ request to stay the NYAG case during the pendency of the CFPB’s appeal to the 2nd Circuit.
7th Circuit holds, without written appearance by attorney, law firm did not violate FDCPA by serving debtor directly
On August 21, the U.S. Court of Appeals for the 7th Circuit held that a law firm did not violate the FDCPA by serving a debtor a default motion because his attorney had not yet become the “attorney of record” under Illinois Supreme Court Rule 11 (Rule 11). According to the opinion, after being sued by the law firm on a creditor’s behalf, the debtor appeared pro se and later retained an attorney to represent her. The law firm moved for summary judgment and served the motion to the debtor and to the debtor’s new attorney, who had not yet filed a written appearance. The debtor alleged the law firm violated the FDCPA by contacting her while represented by counsel. The lower court entered summary judgment in favor of the debtor. Disagreeing with the lower court, the 7th Circuit reversed, finding that Rule 11 gave “‘express’ judicial ‘permission’ to serve the default motion directly on [the debtor]” from “a court of competent jurisdiction” as required by the FDCPA— which prohibits a debt collector from directly contacting a debtor who is represented by counsel absent “express permission” ." The panel noted that Illinois precedent makes it clear that under Rule 11, a lawyer can only become an attorney of record by filing a written appearance or other pleading with the court. Because a written appearance had not yet been made, the panel reasoned, Rule 11 expressly permitted the law firm to serve the debtor directly and therefore, the firm did not violate the FDCPA.
Court preliminarily approves $30 million settlement for post-payment interest charges on FHA mortgages
On August 22, the U.S. District Court for the Northern District of California preliminarily approved a $30 million settlement resolving allegations that a national bank improperly collected post-payment interest on FHA-insured mortgages but did not use the FHA-approved form to provide the disclosures to consumers before doing so. The settlement covers a nationwide class of borrowers who, between June 1996 and January 2015, obtained an FHA-insured mortgage loan. The settlement requires the bank to pay $30 million.