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Financial Services Law Insights and Observations


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  • Maryland Court of Appeals says inspection fee ban applies to mortgage assignees and servicers


    On August 27, the Maryland Court of Appeals held that the Maryland Usury Law applied to assignees of mortgage loans–and not just lenders as a defendant argued–and that the law’s prohibition on property inspection fees therefore applied to the mortgage servicer, as the agent of the loan’s assignee. The borrower entered into a mortgage loan secured by a deed of trust that was later assigned to Fannie Mae and contracted to the mortgage servicer. After the borrower defaulted, the servicer allegedly threatened foreclosure and assessed “fees for drive-by inspections of the property.”

    The parties entered into a loan modification agreement to resolve the default, but the borrower objected to the inclusion of the property inspection fees. The borrower later filed a complaint claiming the servicer collected property inspection fees prohibited by the Maryland Usury Law (CL §12-121). The borrower also alleged violations of the Maryland Consumer Debt Collection Act (MCDCA). The trial court dismissed the claims concluding, among other things, that neither Fannie Mae nor the servicer were subject to state usury prohibitions because neither entity “fit the definition of ‘lender’ in the law.” An intermediate appellate court later reversed the trial court’s dismissal.

    In a 6-1 holding, the Court of Appeals concluded that “the Maryland Commissioner of Financial Regulation has taken the position that mortgage servicers. . .are subject to the prohibition on inspection fees in CL §12-121 during the life of a mortgage loan,” and that, moreover, CL §12-121 “limits the authority of a person who makes a mortgage loan to charge property inspection fees in connection with that loan.” As such, the Court of Appeals held that the addition of the definition of “lender” to the Maryland Usury Law that made the Usury Law part of the Commercial Law Article, “did not change that rule.” The Court of Appeals also stated that the borrower adequately alleged the elements of an MCDCA claim when she asserted the servicer “attempted to collect an alleged debt by asserting a right to collect inspection fees with knowledge that the right did not exist.”

    Courts State Issues Usury Mortgages Mortgage Origination Debt Collection

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  • Maryland Court of Appeals rejects distinction between “methods” of debt collection and “amounts” of debt to be collected


    On August 27, the Maryland Court of Appeals reversed a circuit court’s dismissal of petitioners’ Maryland Consumer Debt Collection Act (MCDCA) and Consumer Protection Act (MCPA) claims, rejecting a distinction drawn by some courts “between ‘methods’ of debt collection and ‘amounts’ of debts sought to be collected, when assessing a claim under CL § 14-202(8).” At issue is the amount of post-judgment interest charged above the maximum legal rate to individuals who defaulted on their residential leases.

    In reversing, the Court of Appeals disagreed with the circuit court that MCDCA claims were restricted to “methods,” holding that § 14-202(8) should be interpreted “broadly to reach any claim, attempt, or threat to enforce a right that a debt collector knows does not exist,” and in this case, petitioners were not “precluded from invoking § 14-202(8) when the amount claimed by the debt collector includes sums that the debt collector, to its knowledge, did not have the right to collect.” However, the Court of Appeals held that, in contrast to the FDCPA, the MCDCA is not a “strict liability statute,” and although “where the law is settled at the time a collector takes a contrary position in claiming a right, the collector’s recklessness in failing to discover the contrary authority is equivalent to ‘aware[ness]’ (i.e., actual knowledge) of the authority,” such knowledge is a question of fact that could, in some cases, require a jury determination. As a result, the case was remanded to the circuit court to allow the petitioners an opportunity to file a new motion for class certification.

    Courts State Issues Debt Collection Consumer Finance Class Action

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  • Court temporarily stays compliance with CFPB’s payday rule


    On August 31, the U.S. District Court for the Western District of Texas granted summary judgment in favor of the CFPB in an action filed by two trade groups challenging the payment provisions of the Bureau’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (2017 Rule), but stayed the August 19, 2019 compliance date for 286 days after final judgment as requested by the plaintiffs. As previously covered by InfoBytes, the plaintiffs challenged the 2017 Rule’s payment provisions’ compliance date and asked the court to set aside the 2017 Rule and the Bureau’s ratification of the payment provisions of the 2017 Rule as unconstitutional and in violation of the Administrative Procedures Act.

    In granting summary judgment to the Bureau, the court ruled that the ratification “was valid and cured the constitutional injury caused by the 2017 Rule’s approval by an improperly appointed official.” Among other things, the court also concluded that the payment provisions, as a matter of law, “are consistent with the Bureau’s statutory authority and are not arbitrary and capricious,” and that the Bureau properly considered the costs and benefits of such payment provisions. However, in granting the plaintiffs’ request for a longer stay, the court stated it was persuaded by the plaintiffs’ arguments “that they should receive the full benefit of the temporary stay and that a more substantial compliance date allows time for appeal,” consistent with the fact that the “stay was requested with 445 days left until the implementation deadline, and it was entered with 286 days remaining.” 

    Courts Payday Lending Payday Rule CFPB Administrative Procedures Act Agency Rule-Making & Guidance

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  • 2nd Circuit: No contempt sanctions against Chinese banks in $1 billion counterfeit case


    On August 30, the U.S. Court of Appeals for the Second Circuit held that a district court did not err in denying an investment firm’s motion to hold a group of Chinese banks in contempt for failure to implement certain asset restraints. According to the opinion, in 2015, an athletic apparel corporation and one of its subsidiaries won a more than $1 billion default judgment against hundreds of participants in several Chinese counterfeiting networks (counterfeiters). The judgment enjoined the counterfeiters “and all persons acting in concert or in participation with any of them . . . from transferring, withdrawing or disposing of any money or other assets into or out of [the counterfeiters’ accounts] regardless of whether such money or assets are held in the U.S. or abroad.” The investment firm (the corporation’s successor-in-interest) moved to hold the Chinese banks in contempt for failing to implement the asset restraints and asked the district court to impose a $150 million penalty, claiming, among other things, that the Chinese banks allowed the counterfeiters to transfer more than $32 million from their accounts after the Chinese banks were informed of the asset restraints. The investment firm further claimed that the Chinese banks also failed to produce documents during discovery. The district court denied the motion.

    In agreeing with the district court, the 2nd Circuit concluded that (i) until the contempt motion was filed, the corporation and the investment firm never sought to enforce the asset restraints against the Chinese banks; (ii) “there is a fair ground of doubt as to whether, in light of New York’s separate entity rule and principles of international comity, the orders could reach assets held at foreign bank branches”; (iii) “there is a fair ground of doubt as to whether the [b]anks’ activities amounted to ‘active concert or participation’ in Defendants’ violation of the asset restraints that could be enjoined under Federal 16 Rule of Civil Procedure 65(d)”; and (iv) the investment firm failed to provide clear and convincing evidence of a discovery violation.

    Courts Sanctions Of Interest to Non-US Persons Contempt China Appellate Second Circuit

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  • District Court notes distinction between definition of “accounts” and “receivables”


    On August 25, the U.S. District Court for the District of New Jersey denied a defendant debt collector’s motion to compel arbitration in an FDCPA action, ruling that the defendant never purchased the rights to enforce arbitration. In so holding, the Court stated that the words “accounts” and “receivables” mean different things and that purchasing a receivable does not guarantee all the rights assigned to the account. The court originally denied the defendant’s motion to compel arbitration to allow for limited discovery to determine whether a valid arbitration agreement existed between the parties. The defendant argued that the agreements governing the accounts require that all claims be subject to arbitration on an individual basis and that it is entitled to arbitration since it is an agent of the purchasing creditor and the purchasing creditor purchased the rights to enforce arbitration from the original creditor. The plaintiffs countered that the right to compel arbitration was not transferred because the purchase agreements only transferred the rights under the “receivables” and not the “accounts.” The court agreed, noting that under the plain meaning of the purchase agreements, the purchasing creditor did not purchase, and was not assigned, the right to compel arbitration.

    Courts FDCPA Debt Collection Class Action

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  • District Court rules in defendants’ favor regarding third-party disclosure


    On August 25, the U.S. District Court for the Eastern District of Missouri granted a motion for judgment on the pleadings in favor of a defendant debt collector over a plaintiff alleging FDCPA violations. The plaintiff, a bankruptcy attorney who represents consumers in connection with discharging their debts, received a letter from defendant that disclosed a debt for a consumer he did not represent and has never represented. The plaintiff sued under the FDCPA, claiming that the defendant, among other things, engaged in abusive, deceptive, and unfair debt collection practices when defendant disclosed the existence of this third-party debt to the plaintiff by contacting him via letter. The plaintiff alleged that he was injured and suffered damages “due to the time Plaintiff had to spend trying to learn why he was being contacted and whether he had ever represented Plaintiff.” However, the court held that because the plaintiff was not a “consumer” under the FDCPA, he did not have standing to bring the FDCPA case. In so ruling, the court noted that the U.S. Court of Appeals for the Eighth Circuit has not yet ruled on whether the FDCPA “applies to persons other than a consumer[‘]” but agreed “with the greater weight of authority that concludes” only consumers have standing to bring such actions.

    Courts Third-Party Debt Collection FDCPA

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  • District Court denies bank’s motion to dismiss class action regarding overdrafts


    On August 23, the U.S. District Court for the District of Connecticut denied a motion to dismiss a putative class action case, in which the plaintiff alleged that a national bank’s (defendant) overdraft opt-in notice failed to satisfy Regulation E of the Electronic Funds Transfer Act (EFTA), and that the bank’s assessment of overdraft fees in light of such failure violated the Connecticut Unfair Trade Practices Act (CUFTA). The plaintiff alleged that she and other members of the putative class “opted into [the defendant’s] overdraft program for debit card and ATM transactions,” and were charged overdraft fees on an “available” balance policy multiple times. However, the defendant’s opt-in disclosure agreement states that an overdraft only happens “when you do not have enough money in your account to cover a transaction, but we pay it anyway,” which is a description of the “actual” balance of an account. Accordingly, the defendant “charge[d] overdraft fees even at times when there [was] a sufficient amount of money in a consumer’s account.” The plaintiff alleged that the defendant continued this system with knowledge of EFTA’s requirements and “that its opt-in agreement did not provide an accurate, clear, and easily understandable definition of an overdraft.”

    In its motion to dismiss, the defendant argued that the plaintiff failed to state a claim alleging violations of the EFTA because, among other things: (i) when the opt-in agreement is considered together with other documents provided to the customer upon opening an account, the policies are clearly explained; and (ii) the defendant is shielded from liability under the safe harbor provisions of the EFTA, because the opt-in language utilized is identical to the CFPB’s model form. The defendant also argued that it complied with Regulation E, “because the opt-in notice it used, when read together with an ‘Account Agreement’ and ‘Overdraft Disclosure’ it says were provided to [the plaintiff] when she opened her account, made clear that it would charge overdraft fees when her ‘available balance’ fell below zero.”

    The court found that the defendant’s argument regarding compliance with Regulation E “relies on documents that are not attached to, incorporated in, or otherwise ‘integral’ to the complaint” and that Regulation E requires that the notice itself be a “segregated” document, which utilizes “clear and readily understandable” language. The court also ruled that though the defendant utilized language from the CFPB model form, the plaintiff plausibly alleges that use of the form was not “an appropriate model” since the language did not disclose the defendants overdraft program in a “clear and readily understandable” manner.

    Courts Class Action Overdraft Regulation E EFTA State Issues Disclosures CFPB

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  • CFPB to issue Section 1071 NPRM by September 30

    Federal Issues

    On August 23, the CFPB filed its sixth status report in the U.S. District Court for the Northern District of California as required under a stipulated settlement reached in February 2020 with a group of plaintiffs, including the California Reinvestment Coalition. The settlement (covered by InfoBytes here) resolved a 2019 lawsuit that sought an order compelling the Bureau to issue a final rule implementing Section 1071 of the Dodd-Frank Act, which requires the Bureau to collect and disclose data on lending to women and minority-owned small businesses. The newest status report follows a July court order, which requires the Bureau to issue a notice of proposed rulemaking on small business lending data by September 30 (covered by InfoBytes here). Among other things, the Bureau notes in its status report that it expects to meet the September deadline and that it “is continuing to work on the significant legal and policy issues that must be resolved to implement the Section 1071 regulations.”

    Find continuing Section 1071 coverage here.

    Federal Issues Courts CFPB Section 1071 Small Business Lending Dodd-Frank Agency Rule-Making & Guidance SBREFA

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  • District Court prevents disposal of cryptocurrency linked to hack


    On August 23, the U.S. District Court for the Southern District of New York preliminarily enjoined defendants “from selling, transferring, assigning, encumbering, or otherwise disposing of cryptocurrency transferred in [] transactions” following a July attack on a cryptocurrency exchange network with New York-based operations. According to the cryptocurrency exchange plaintiff’s petition for a temporary restraining order (TRO), the defendants allegedly hacked the network in order to make fraudulent transfers and defraud U.S. users by generating fake bitcoin in violation of the Commodities Exchange Act. The plaintiff contended that the defendants “transferred the cryptocurrency to other exchanges serving New York customers with the intent to sell them,” adding that if the defendants “are permitted to undertake such sales, they will almost certainly transact with New York-based counterparties.” The plaintiff urged the court to issue an injunction, arguing that because the defendants are foreign and it is “impossible to identify hackers intent on fraud, there is almost no likelihood that they would pay a damage award. Short of receiving an injunction of already-identified, fraud-begotten cryptocurrency, there is no way for Petitioner to secure ultimate recovery.” The court’s order also kept in place other third-party exchanges’ existing freezes on accounts thought to hold any of the cryptocurrency at issue. The order is intended to aid the plaintiff in its impending arbitration with the defendants.

    Courts Cryptocurrency Commodity Exchange Act Of Interest to Non-US Persons

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  • Former officials agree SEC usurped FinCEN’s BSA enforcement authority


    On August 20, former FinCEN officials filed an amicus brief in support of a petition for certiorari filed by penny stock broker-dealer (petitioner) against the SEC claiming the agency usurped FinCEN’s Bank Secrecy Act (BSA) enforcement authority. The petition seeks to reverse a U.S. Court of Appeals for the Second Circuit decision, which upheld a $12 million penalty and concluded the SEC has the authority to bring an action under Section 17(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 17a-8 promulgated thereunder for failure to comply with the Suspicious Activity Report (SAR) provisions of the BSA. As previously covered by InfoBytes, the appellate court rejected the broker-dealer’s argument that the SEC is attempting to enforce the BSA, which only the U.S. Treasury Department has the authority to do. The appellate court noted that the SEC is enforcing the requirements of Rule 17a-8, which requires broker-dealers to adhere to the BSA in order to comply with requirements of the Exchange Act, which does not constitute the agency’s enforcement of the BSA. Moreover, the appellate court concluded that the SEC did not overstep its authority when promulgating Rule 17a-8, as SARs “serve to further the aims of the Exchange Act by protecting investors and helping to guard against market manipulation,” and that the broker-dealer did not meet its “‘heavy burden’ to show that Congress ‘clearly expressed [its] intention’ to preclude the SEC from examining for SAR compliance in conjunction with FinCEN and pursuant to authority delegated under the Exchange Act.”

    The former officials’ brief states that they “have no interest in the facts” of the petitioner’s dispute with the SEC, but rather “are concerned that the Second Circuit’s misunderstanding of FinCEN’s delegated enforcement authority will lead to confusion among the financial institutions that must comply with the BSA; create multiple, conflicting BSA regulatory regimes; decrease American influence over global financial regulators; and hamper U.S. law enforcement and national security efforts by diminishing the value of BSA data.” They further pointed out that the appellate court “erred in conflating delegated compliance examination efforts with the exercise of enforcement authority and let stand SEC and lower court decisions applying materially different legal standards with a lower level of judicial oversight and review than that established by Congress.” The former officials stressed that the appellate court’s decision fails “to appreciate the nature of the AML regime and therefore FinCEN’s unique expertise and central role,” adding that the decision “threatens to undermine the BSA statutory regime and harm U.S. efforts to fight money laundering and terrorist financing” and may affect other regulators and regulated entities.

    Courts U.S. Supreme Court Appellate Second Circuit SEC Financial Crimes Bank Secrecy Act SARs FinCEN Securities Exchange Act Of Interest to Non-US Persons

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