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Financial Services Law Insights and Observations


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  • Supreme Court keeps TCPA, severs government-debt exception as unconstitutional


    On July 6, the U.S. Supreme Court held in Barr v. American Association of Political Consultants Inc. that the TCPA’s government-debt exception is an unconstitutional content-based speech restriction and severed the provision from the remainder of the statute. As previously covered by InfoBytes, several political consultant groups (plaintiffs) argued that the TCPA’s statutory exemption enacted by Congress as a means of allowing automated calls to be placed to individuals’ cell phones “that relate to the collection of debts owed to or guaranteed by the federal government” is “facially unconstitutional under the Free Speech Clause” of the First Amendment. The plaintiffs argued that the debt-collection exemption to the automated call ban contravenes their free speech rights. Moreover, the plaintiffs claimed that “the free speech infirmity of the debt-collection exemption is not severable from the automated call ban and renders the entire ban unconstitutional.” The FCC, however, argued that the applicability of the exemption depended on the relationship between the government and the debtor and not on the content. The district court awarded summary judgment in favor of the FCC, which the U.S. Court of Appeals for the Fourth Circuit vacated, concluding the exemption violated the First Amendment’s Free Speech Clause.

    In a plurality opinion, the Supreme Court agreed with the 4th Circuit. The Court noted that “a law is content-based if ‘a regulation of speech ‘on its face’ draws distinctions based on the message a speaker conveys’”; and a law that allows for robocalls asking for payment of government debt but does not allow robocalls for political donations, “is about as content-based as it gets.” The Court agreed with the government that the content-based restriction failed to satisfy strict scrutiny, as the government could not sufficiently justify the difference “between government-debt collection speech and other categories of robocall speech.” As for remedy, the Court applied “traditional severability principles,” with seven Justices concluding that the entire TCPA should not be invalidated but that the government-debt exception should be severed from the statute. The Court noted that its cases have “developed a strong presumption of severability,” and its “power and preference to partially invalidate a statute in that fashion has been firmly established since Marbury v. Madison.” Moreover, because the government-debt exception is “relatively narrow exception” to the TCPA’s broad robocall restriction, the Court concluded that severing the exception would “not raise any other constitutional problems.”

    Courts U.S. Supreme Court TCPA Autodialer Debt Collection FCC Appellate Fourth Circuit First Amendment

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  • 4th Circuit holds FDCPA’s limitation period restarts at each new violation


    On July 2, the U.S. Court of Appeals for the Fourth Circuit vacated the dismissal of an action alleging violations of the FDCPA, concluding that each violation of the FDCPA is governed by its own limitation period. According to the opinion, in April 2018, homeowners filed a complaint against a law firm retained by their homeowners’ association for allegedly violating various provisions of the FDCPA for collection actions taken between April 2016 and February 2018. The district court dismissed the action, concluding that the entire complaint was time-barred because the “FDCPA’s limitations period runs from the date of the first violation, and that later violations of the same type do not trigger a new limitations period under the Act.”

    On appeal, the 4th Circuit disagreed with the lower court. Specifically, the appellate court noted that “nothing in the FDCPA suggests that ‘similar’ violations should be grouped together and treated as a single claim for purposes of the FDCPA’s statute of limitations.” And, similar to holdings of other circuits, the 4th Circuit stated that the “FDCPA’s limitations period runs anew from the date of each violation.” While the homeowners did not dispute that several alleged violations fall outside of the FDCPA’s one-year limitations period, the appellate court agreed that the district court erred in dismissing the entire complaint, because it contained at least two potential violations occurring within one-year of the April 2018 filing date.

    Courts Appellate Fourth Circuit FDCPA Statute of Limitations Debt Collection

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  • 3rd Circuit: Filed-rate doctrine precludes borrowers’ fraud claims


    On July 1, the U.S. Court of Appeals for the Third Circuit affirmed the dismissal of a class action challenging the lender placed insurance practices of a mortgage servicer, concluding that the filed-rate doctrine blocked the claims. According to the opinion, borrowers from North Carolina and New Jersey filed suit against their reverse mortgage lender and insurance company, alleging the lender and insurer colluded to overcharge consumers for lender placed insurance in violation of TILA, the federal Racketeer Influenced and Corrupt Organizations Act (RICO), and various state laws. Specifically, the plaintiffs asserted that the insurance company charged an insurance rate, which was appropriately filed with state regulators, that was higher than the mortgage lender paid. The plaintiffs asserted the insurer then returned a portion of the profits back to the lender in order to induce continued insurance business. The district court dismissed the action, holding that the filed-rate doctrine blocked the claims.

    On appeal, the 3rd Circuit agreed with the lower court. The appellate court emphasized that under the filed-rate doctrine, there is no distinction between “challenging a filed rate as unreasonable and…challenging an overcharge fraudulently included in a filed rate.” Because the plaintiffs sought damages in connection with the alleged overcharge of insurance premiums, the appellate court concluded that the plaintiffs were “functionally challeng[ing] the reasonableness of rates filed with state regulators.” Moreover, the appellate court noted that if the court were to award damages to the plaintiffs, the court would essentially be “giving these borrowers a better price for [lender placed insurance] than other [] borrowers using a different lender,” but the same insurer. Thus, because the insurance rate was appropriately filed with the state regulators, the appellate court had no ability to decide whether the rate was “unreasonable or fraudulently inflated,” because the claims were precluded by the filed-rate doctrine.

    Courts Lender Placed Insurance Mortgages Reverse Mortgages Appellate Third Circuit TILA RICO

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  • Online payday lender settles usury suit for $141 million


    On June 26, the U.S. District Court for the Eastern District of Virginia approved a preliminary settlement to resolve putative class allegations against an online payday lending company and related entities (defendants) accused of issuing high interest loans through a “rent-a-tribe” lending operation. According to the class’s second amended complaint, the defendants’ “rent-a-tribe” operation was an “attempt to circumvent state and federal law by issuing high interest loans in the name of a Native American tribal business entity that purports to be shielded by the principle of tribal sovereign immunity.” The class—which consists of borrowers from throughout the U.S.—alleged that the defendants provided “financing and various lending functions” carrying “extortionately high interest rates for short-term loans” that were “far beyond legal limits,” and that the unlawful interest rates were not disclosed to borrowers during the application process. Additionally, the class alleged that the defendants failed to provide key loan terms or misrepresented the loan terms, including repayment schedules, finance charges, and the total amount of payments due. Under the terms of the settlement, the defendants will pay a $65 million cash payment, cancel $76 million in high-interest loans, and provide other non-monetary relief.

    Courts Payday Lending Settlement Usury Interest Rate Sovereign Immunity

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  • 9th Circuit: Judicial foreclosure not debt collection under FDCPA


    On June 30, the U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal of an FDCPA action, concluding that the FDCPA does not apply when a creditor is enforcing a security interest through a foreclosure, but is not seeking a deficiency judgment. According to the opinion, the plaintiff filed an action against Fannie Mae, Fannie Mae’s loan servicer, the law firm that represented Fannie Mae in the foreclosure proceeding, and the firm’s attorneys (collectively, “defendants”) for, among other things, violating the FDCPA when seeking to foreclose on his residential property. The district court dismissed the action, concluding that the FDCPA did not apply because the defendants had not engaged in any debt collection behavior by initiating the judicial foreclosure. In 2018, the 9th Circuit affirmed the dismissal, but subsequently ordered a supplemental briefing based on the U.S. Supreme Court’s intervening decision in Obduskey v. McCarthy & Holthus LLP (which held that law firms performing nonjudicial foreclosures are not “debt collectors” under the FDCPA, covered by InfoBytes here).

    After the supplemental briefing, the appellate court affirmed the district court’s dismissal of the action. The appellate court rejected the plaintiff’s argument that the letter sent by the defendants when initiating the judicial foreclosure, which included monetary amounts owed, amounted to debt collection activity under the FDCPA. The appellate court noted that the defendants were merely fulfilling a procedural requirement (that has since been amended) of Oregon foreclosure law, and “in no event would a money award have been enforceable against [the plaintiff],” because of Oregon’s anti-deficiency judgment law. Thus, the appellate court concluded that a judicial foreclosure is not considered a debt collection activity when it does not “include a request for a deficiency judgment or some other effort to recover the remaining debt,” and therefore, the district court properly dismissed the action.

    Courts Appellate Ninth Circuit FDCPA Foreclosure Debt Collection

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  • Small business owners previously excluded from PPP granted application extension


    On June 29, the U.S. District Court for the District of Maryland issued a memorandum to address two similar suits, which will provide several small business owners with criminal records three additional weeks to apply for loans through the Paycheck Protection Program (PPP). The court ruled that previous versions of the Small Business Administration’s (SBA) rule that excluded felony convictions of applicants or owners of applicants were “arbitrary and capricious” because the rules contained no explanation for the criminal history exclusion. The ruling extends the PPP application deadline for the business owners to July 21 following the SBA’s issuance of an interim final rule (IFR)—effective June 24 (covered by InfoBytes here)—that, according to the court, “provides a reasoned explanation for a more limited criminal history exclusion.” The court rejected the SBA’s argument that the case is now moot, stating that even though the business owners are now eligible to apply for PPP loans, they “still face difficulties in applying at the last minute either because banks are no longer accepting applications or because banks are still using old forms with the prior criminal history exclusion. Therefore, the plaintiffs continue to face ongoing harm because of the allegedly unlawful prior iterations of the rule.”

    However, the court disagreed with one of the business owner’s claim that the criminal history exclusion violates the CARES Act, finding that the SBA is within its rights to consider borrowers’ ability to repay PPP loans. “While the court agrees that the PPP functions differently than the SBA’s other loan programs, it is not unreasonable to consider ability to repay, because if the loans are not used for specified purposes, then they are not forgivable,” the court wrote. The court also declined to extend the PPP application deadline to all newly eligible individuals who were previously excluded, stating that “past harm cannot justify an injunction extending the application deadline,” since it is unclear “what harm to [the business] resulting from prior iterations of the criminal history exclusion will continue past June 30.”

    Courts Covid-19 SBA CARES Act Small Business Lending

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  • Community coalitions file complaint to block OCC CRA final rule

    Federal Issues

    On June 25, two community coalitions filed a complaint in the U.S. District Court for the Northern District of California asking the court to block the OCC’s final rule to modernize the regulatory framework implementing the Community Reinvestment Act (CRA). The complaint claims that the OCC failed to provide for meaningful public input on key revisions to the agency’s final rule, and argues that the May 20 rule (covered by a Buckley Special Alert) failed to consider the impact of the Covid-19 pandemic and is in violation of the Administrative Procedures Act. Notably, neither the FDIC nor the Federal Reserve Board joined in promulgating the final rule, the complaint notes. Among other things, the complaint argues that the final rule “guts the [CRA] and eviscerates the backing it provides to the [low- and moderate-income (LMI)] communities and communities of color that have long suffered from discrimination by financial institutions,” and will dilute benefits for these communities. The complaint also alleges that the final rule “will allow banks to claim credit for massive projects that they undoubtedly would have financed anyway; whose benefit to LMI people is questionable and speculative; and that are so costly that they will allow banks to fill up their CRA credits without making real investments in LMI communities as the CRA intended.” Additional arguments include that the final rule limits the coalitions’ ability to advocate for greater access to credit for LMI communities, issue evidence-based reports on banks’ CRA activity, and negotiate CRA funding increases with banks for specific communities. The complaint further alleges that the final rule includes definitions of “CRA deserts”—areas where banking services are not available—that were not part of the proposal, and fails to provide supporting data for many of the provisions. The coalitions seek injunctive and declaratory relief that would block the final rule from taking effect.

    Federal Issues Courts OCC CRA Administrative Procedures Act Covid-19 FDIC Federal Reserve

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  • 11th Circuit vacates punitive damages award against CRA for FCRA violation


    On June 19, the U.S. Court of Appeals for the Eleventh Circuit vacated a magistrate judge’s final judgment in an FCRA action, concluding that there was no competent proof of a willful violation of the Act on the part of a consumer reporting agency (CRA). According to the opinion, a consumer brought an action against the CRA and other defendants alleging, among other things, that the CRA “negligently and willfully” violated the FCRA by not reinvestigating an item on his credit report he alleged was reported in error. Approximately 75 days after a small claims debt against the consumer was dismissed with prejudice, the consumer and his attorney ran his credit report and finding the debt still reported, wrote to the CRA with the dismissal order and requested that it reinvestigate the debt listing and remove it. The CRA diverted the letter under its suspicious mail policy for unknown reasons (since the CRA did not have a system to record the reason a letter was marked as suspicious), and sent a letter to the consumer informing him that it had determined the letter was suspicious and was not sent by him, but suggesting he call if he believed his credit report was in error. Less than two months later, the CRA removed the credit line after receiving a communication from the debt holder, but the consumer had already filed the action five days prior to that time. A jury trial found that the CRA’s “negligent failure to reinvestigate” caused harm to the consumer and awarded $5,000 in compensatory damages and further concluded that the violation of the FCRA was willful, assessing $3 million in punitive damages. Subsequently, the magistrate judge remitted the punitive damages to $490,000 on due process principles.

    On appeal, the 11th Circuit vacated the magistrate judge’s final judgment on the willfulness claim, noting that the consumer “offered no evidence of a broad or systemic problem with [the CRA]’s suspicious mail policy,” and that the consumer did not establish by clear and convincing evidence that the CRA “ran an unjustifiably high risk of violating its duties under the FCRA.” Moreover, the actions of the CRA “had a foundation in the statutory text,” even if the policy’s application was negligent when applied to the consumer. Because the appellate court concluded the violation was not willful, the punitive damages judgment was eliminated.

    Courts Appellate Eleventh Circuit FCRA Consumer Reporting Agency

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  • U.S. Supreme Court upholds SEC’s disgorgement authority with limits


    On June 22, in an 8-1 ruling, the U.S. Supreme Court vacated the U.S. Court of Appeals for the Ninth Circuit’s judgment in Liu v. SEC, holding that the SEC may continue to collect disgorgement in civil proceedings in federal court as long as the award does not exceed a wrongdoer’s net profits, and that such awards for victims of the wrongdoing are equitable relief permissible under §78u(d)(5). The ruling impacts petitioners who were ordered by a California federal court to disgorge $26.7 million in money collected from investors for a cancer treatment center that was never built, with the related SEC investigation finding that more than $20 million was spent on ostensible marketing expenses and salaries, far in excess of what the offering memorandum permitted. As previously covered by InfoBytes, the Court examined whether the SEC’s statutory authority to seek “equitable relief” permits it to seek and obtain disgorgement orders in federal court. The petitioners asked the Court to bar the SEC from seeking court-ordered disgorgement (covered by InfoBytes here), arguing that Congress never authorized the SEC to seek disgorgement in civil suits for federal securities fraud as a form of equitable relief or otherwise. The petitioners pointed to the Court’s 2017 decision in Kokesh v. SEC, in which the Court reversed the ruling of the U.S. Court of Appeals for the Tenth Circuit when it unanimously held that disgorgement operates as a penalty under 28 U. S. C. §2462, which establishes a 5-year limitations period for “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture.”

    The Court rejected the petitioners’ argument, noting that equity practice has “long authorized courts to strip wrongdoers of their ill-gotten gains,” although “to avoid transforming an equitable remedy into a punitive sanction, courts restricted the remedy to an individual wrongdoer’s net profits to be awarded for victims.” As such, the Court determined that the SEC’s disgorgement remedy must be limited in various ways. The Court discussed three limits: (i) the “profits remedy” must return the defendant’s wrongful gains to those harmed by the defendant’s actions, as opposed to depositing them in the Treasury; (ii) disgorgement under the statute requires a factual determination of whether petitioners can, consistent with equitable principles, be found liable for profits as partners in wrongdoing or whether individual liability is required; and (iii) disgorgement must be limited to “net profits” and therefore “courts must deduct legitimate expenses before ordering disgorgement” under the statute. The Court vacated the judgment against the petitioners and remanded to the lower court to examine the disgorgement amount in light of its opinion.

    Justice Clarence Thomas dissented, however, stating that he would have barred the SEC from seeking disgorgement in federal court under the statute rather than limiting the remedy, because while 15 U. S. C. §78u(d)(5) allows the SEC to seek equitable relief that may be appropriate or necessary for the benefit of investors, “disgorgement is not a traditional equitable remedy.”

    Courts U.S. Supreme Court Appellate Liu v. SEC SEC Disgorgement

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  • New Jersey Supreme Court holds that state fiduciary law does not permit affirmative cause of action against bank


    On June 17, the New Jersey Supreme Court reversed an appellate division’s judgment and dismissed a complaint against a bank after concluding that the New Jersey Uniform Fiduciaries Law (UFL) does not permit an affirmative cause of action against banks but rather provides them with limited immunity for failing to take notice of and action on the breach of a fiduciary’s obligation. In 2015, the plaintiff filed a complaint on behalf of himself and his dental practice against two of his employees who allegedly took insurance company checks issued to the plaintiff and his practice totaling “several hundred thousand dollars,” forged his endorsement on them, and deposited the checks into personal accounts held by a bank who was sued in the same lawsuit for common law claims of conversion and negligence. The trial court dismissed the cause of action against the bank for failure to state a claim, reasoning that “‘common law negligence is not such a remedy’ in the absence of a ‘special relationship’ between [the plaintiff] and the bank.” The trial court also rejected the plaintiff’s argument that the UFL provided the basis for a cause of action, concluding that the individuals acted as “errant employees”—not as fiduciaries—and that the bank had no fiduciary relationship with the plaintiff who was not a bank customer. The appellate division partially reversed, concluding that plaintiff should be allowed to plead a UFL claim. Among other things, the plaintiff argued that the employees were acting in a fiduciary capacity as “constructive trustees” of the funds and the bank met a bad faith requirement under the UFL in depositing the checks.

    The New Jersey Supreme Court disagreed, holding that “[n]othing in the plain language of the UFL suggests that the UFL is itself the basis for an affirmative cause of action.” Moreover, the “UFL does not provide for a recovery through a private action or set forth remedies or a statute of limitations—all indicia of a statutory cause of action.” According to the New Jersey Supreme Court, “[w]hen an action is brought against a bank, the UFL provides that a bank’s liability depends on whether the bank acted with actual knowledge or bad faith in the face of a fiduciary’s breach of his obligations.”

    Courts State Issues Fiduciary Duty

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