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Bank agrees to overdraft fee settlement for $1.5M
On July 25, a bank agreed to a class action settlement relating to overdraft fees in a case filed in May 2022. If the court approves, the settlement will provide $1.5 million to the class via a settlement fund. The lawsuit alleged that the bank improperly charged overdraft fees on debit card transactions that were authorized when sufficient funds were in the account but that resulted in a negative account balance when the transactions settled — a practice the bank called “Authorize Positive, Settle Negative” (APSN).
In addition to the $1.5 million award to the settlement class, the bank also agreed to cease its APSN practice for at least five years. The settlement class encompassed all holders of the bank’s consumer checking accounts, specifically on their charged overdraft fees from APSN transactions made on or before April 2020. It excluded the members of a settlement class from another case. The settlement will be subject to final approval by the U.S. SDNY.
8th Circuit blocks Biden’s student loan relief plan while in effect
On July 18, the Eighth Circuit for the U.S. Court of Appeals granted the State of Missouri’s emergency motion for an administrative stay to prevent President Biden’s student loan relief plan from taking effect. The White House released a fact sheet in August 2023 on the President’s SAVE Plan. According to the complaint filed by Missouri and six other states, President Biden’s final rule implementing the SAVE Plan, which would have gone into effect on July 1, allegedly attempted to cancel millions of dollars of student loans improperly. The State of Missouri had taken issue with the President’s plan to “evade the limits Congress set out in [the Higher Education Act] for the [income-based repayment] program” by allegedly hiking the exempt-income threshold from 150 to 225 percent, slashing the payment obligation from 15 to 5 percent for undergraduates, and forgiving loans after as few as ten years instead of 25. The administrative stay will be in place until the 8th Circuit rules on the appellants’ motion for an injunction.
6th Circuit upholds dismissal of credit union’s indemnification suit
Recently, the U.S. Court of Appeals for the Sixth Circuit entered an opinion affirming a district court’s dismissal of a credit union’s lawsuit against a cellphone carrier. In this case, the plaintiff’s customers who were subject to a cellphone scam faced unauthorized electronic fund transfers, which the plaintiff reimbursed as required by the EFTA. The plaintiff claimed the defendant inadequately safeguarded its customers and was therefore liable to the plaintiff for indemnification and contribution. The district court dismissed the plaintiff’s complaint, finding it failed to state a claim for indemnification or contribution under the EFTA or state law.
On appeal, the plaintiff presented three arguments for its indemnification and contribution claims: (i) the EFTA implicitly provided these rights; (ii) the Michigan Electronic Funds Transfer Act (MEFTA) supported these claims because it was not preempted by the EFTA; and (iii) the EFTA did not preempt state common-law indemnification claims.
The 6th Circuit held that Congress enacted the EFTA to benefit consumers, not financial institutions, and did not mention a right to indemnification or contribution for financial institutions. Furthermore, the court stated, “the EFTA creates a cause of action for consumers, not financial institutions,” and sometimes allows consumers to seek treble damages. The court, quoting the U.S. Supreme Court, wrote that “[t]he very idea of treble damages reveals an intent to punish past, and to deter future, unlawful conduct, not to ameliorate the liability of wrongdoers.” The court also stated that the plaintiff selectively cited portions of the EFTA to suggest that Congress intended to establish a right for financial institutions to seek indemnification or contribution but failed to identify any specific provisions, structural elements, or legislative history of the EFTA that demonstrated Congress’s intent to do so.
Finally, the 6th Circuit held that the CFPB determined that the EFTA preempted the relevant portions of the MEFTA, which made customers liable for unauthorized transactions due to their negligence. Because the plaintiff was not liable under MEFTA, the court found that it had no claim for state law indemnification or contribution.
Bank regulators appeal to 5th Circuit to lift district court’s final rule ban
On July 18, the OCC, FDIC, and the Fed (the federal banking agencies or FBAs) submitted a brief requesting that the U.S. Court of Appeals for the Fifth Circuit hold oral argument and reverse the U.S. District Court for the Northern District of Texas’ decision to preliminarily enjoin a recently issued Final Rule implementing the Community Reinvestment Act (CRA). The final rule had set forth processes for the FBAs to assess whether the depository institutions they supervise would be “meeting the credit needs of its entire community.” The CRA’s final rule, announced in October 2023, would modernize the CRA, create a new category of assessment areas, and subject large banks to new development tests, among others (covered by InfoBytes here). In February of this year, and previously covered by InfoBytes, several trade associations (plaintiffs) sued the FBAs, claiming the new final rule created a “wholesale and unlawful change” to the 50-year-old statute. The district court agreed and placed a preliminary injunction on the final rule. The FBAs argued that the district court erred in granting the plaintiffs’ preliminary injunction by accepting the “grafting” of two CRA exclusions found nowhere in the statute. The regulators also argued that the CRA’s final rule was an “appropriate exercise” of their authority. Additionally, the regulators argued the district court erred in its conclusion that “any amount of nonrecoverable costs” should be considered irreparable harm. Last, the regulators averred that the district court failed to consider the equities and the public interest weight against granting the preliminary injunction.
The FBAs now, in their appeal to the 5th Circuit, made four arguments based on these alleged errors. First, the FBAs contended they did not exceed their statutory authority by issuing the final rule, which evaluated a bank’s retail lending in facility-based assessment areas because “for certain banks, the bank’s ‘entire community’ includes both the geographic areas where the bank maintained deposit-taking facilities as well as other geographic areas where the bank conducted retail lending.” Second, the regulators emphasized again they did not exceed their statutory authority by including deposit products and digital delivery systems when evaluating whether “credit needs” were being met. Third, the regulators argued that the district court erred in finding that plaintiffs showed “irreparable harm.” Fourth, the FBAs say that the district court’s assessment of the balance of equities and public interest was flawed. For these reasons, it was the regulators’ position that the district court erred in granting the preliminary injunction and that its decision be reversed.
Fed Chair Powell discusses monetary policy
On July 9 and 10, Fed Chair Jerome Powell testified at the respective financial committees under the U.S. Senate and U.S. House of Representatives. Lawmakers asked questions on various Fed initiatives, such as the long-term debt proposal, debit interchange fee cap proposal, reforms to the discount window, potential changes to liquidity requirements, and the incentive-based compensation arrangements proposal.
On long-term debt proposal, Powell stated that he was unsure if it would be “inappropriate” to move forward with finalizing a long-term debt proposal rule before finalizing Basel III. The Fed is currently considering comments on the proposal to correct the issues experienced by banks in Spring 2023. On the debit interchange fee cap proposal, Rep. Ann Wagner (R-MO) pointed out how the Fed seemed to propose a rule, Regulation II, despite the Fed releasing research that found negative consequences of the debit interchange fee cap. Chair Powell stated he would have to review the research. On liquidity requirements and Basel III, Chair Powell alluded that the Fed was “pretty close” to releasing that proposal publicly, noting that the Fed’s liquidity proposals may be released “sometime later this year.”
On the incentive-based compensation arrangements proposal, Sen. Elizabeth Warren (D-MA) questioned Powell on how none of the ten largest banks put in policies to delay annual bonuses to those who engaged in risky behaviors. Warren alleged that the Fed did not join the other financial regulators in implementing Section 956 of Dodd-Frank. Thus, there are “no rules” to stop banks from rewarding executives’ risky behaviors, despite Warren quoting Powell that the Fed would be proposing such a rule. Additionally, the testimonies also included discussions about high housing prices, the Fed’s balance sheet, U.S. fiscal policy, stablecoins, digital assets, and synthetic risk transfers.
Retailer and bank settle credit card servicing suit
Recently, a large retailer (plaintiff) and a bank (defendant) agreed to settle a credit contract dispute. In April 2023, the retailer filed a complaint in the U.S. District Court of the Southern District of New York against the bank regarding the termination of a contract under which the bank would issue branded credit cards for the retailer. The retailer claimed that the bank did not meet important contract requirements, and invoked its right to terminate. The bank denied the retailer’s termination right, prompting the retailer to seek a judicial declaration of its right to terminate the contract. According to the complaint, the contract required the bank to provide “carefully defined levels of service to [the retailer] and its customers.” The retailer claimed, however, that the bank failed to meet certain requirements, such as including mailing a credit card replacement to customers within five business days.
Earlier this year, the court granted partial summary judgement in favor of the retailer because the contract terms “clearly dictate that [the bank’s] repeated customer service failures entitled [the retailer] to invoke Termination Right and terminate the parties’ ongoing partnership.”
In a letter sent to the court, the parties indicated they have agreed to a settlement that will resolve the matter and concurrently filed a stipulation of voluntary dismissal with prejudice as to all claims and counterclaims.
San Francisco Fed sues PPP lender and principals
On July 11, the San Francisco Fed filed a complaint in the U.S. District Court for the District of Puerto Rico, against a Puerto Rico-based PPP lender and its two principals for allegedly defaulting on the terms of loans. According to the complaint, the lender allegedly failed to comply with the terms of the PPP for some portion of outstanding PPP Loans, totaling approximately $4.3 million. The Fed held a first-priority security interest in certain PPP loans and the collateral that defendant pledged to secure these advances. Following the default, the Fed claimed that defendant fraudulently transferred assets, including the collateral pledged to the Fed, to defendant principals. Such transfers had subsequently left defendant with insufficient capital to meet its obligations to the Fed. As a result, the Fed sought to recover its collateral or other assets to settle the outstanding debts. Specifically, the Fed sought damages for breach of contract, collection of money, conversion, and rescission of fraudulent transfers of various assets for almost $67 million and will request the court to rescind the fraudulent transfers and to grant other declaratory and equitable relief as outlined in the complaint.
The Fed also filed a motion to intervene in a separate case in which another plaintiff sought to collect against the same PPP collateral.
District Court hears whether FINRA’s claims must be litigated in the courts
On July 10, the U.S. District Court for the Eastern District of Pennsylvania received a complaint from a plaintiff suing FINRA for allegedly putting forth disciplinary hearings that took place “in an improper forum, before an arbitrator whose selection was made in blatant violation and disregard of [the individual’s] Seventh Amendment right to a trial before a jury in an Article III court.” The individual countersued after receiving a 2023 FINRA complaint for allegedly violating FINRA Rules 2010, 2111, and 4511, where FINRA initiated in-house proceedings. The plaintiff averred these allegations were assertions of common law fraud and should have been brought before an Article III court. The 2023 FINRA complaint alleged the plaintiff failed to file certain required documents, failed to ensure clients received benefits, and exercised improper discretion.
In its complaint, plaintiff noted the recent U.S. Supreme Court decision, SEC v. Jarkesy, that the SEC may no longer pursue legal claims through in-house enforcement proceedings when levying civil penalties (covered by InfoBytes here). The complaint further noted that to receive Seventh Amendment protection pursuant to the Jarkesy holding, a two-part test from Granfinanciera v. Nordberg case must be applied. According to the plaintiff, this case met both the first and second parts of the Granfinanciera test, arguing that the plaintiff should receive the Seventh Amendment right to a jury trial, and as a second cause of action also request a permanent injunction.
SAVE Plan partially blocked by 2 federal judges
Recently, two district court judges partially blocked President Biden’s student debt relief program, known as the Saving on a Valuable Education (SAVE) plan. The judges from Missouri and Kansas ruled that the program lacks clear authorization from Congress as required under the Higher Education Act. Judge John Ross of Missouri issued a preliminary injunction to prevent the Department of Education from forgiving loans under the program. Similarly, Judge Daniel Crabtree of Kansas prohibited the plan from fully launching on July 1. The judges’ decisions came after state attorneys general filed lawsuits, arguing that the SAVE Plan presents a “major question” of economic and political significance, which demands explicit congressional approval. Despite the government’s claim that the Higher Education Act authorizes the plan, both judges found the arguments insufficiently persuasive to demonstrate clear congressional authorization.
7th Circuit reverses district court, holds ECOA prohibits discouragement of prospective applicants for credit
On July 11, the U.S. Court of Appeals for the Seventh Circuit reversed a district court’s decision to dismiss the CFPB’s claims that a Chicago-based nonbank mortgage company and its owner violated ECOA by engaging in discriminatory marketing. As previously covered by an Orrick Insight, the CFPB initiated a redlining enforcement action against the company in 2020, alleging defendants discouraged African Americans from applying for mortgage loans from the company and redlined African American neighborhoods in Chicago. Last year, the U.S. District Court for the Northern District of Illinois dismissed the CFPB’s action (covered by InfoBytes here). On appeal, the CFPB argued that its interpretation of ECOA is supported by the historical context of Regulation B and has not been contested by Congress (covered by InfoBytes here).
The 7th Circuit noted that Congress intended to allow for penalties in cases where prospective applicants are discouraged. Therefore, the court stated that Regulation B's rule against deterring prospective applicants aligns with both the text and the intent of the ECOA. In determining whether Regulation B’s prohibition on the discouragement of prospective applicants is consistent with ECOA, the court reasoned that it “cannot constrain artificially the ECOA to a single provision” and rather, must review it as a whole. Applying this standard, the court held that ECOA prohibits “not only outright discrimination against applicants for credit, but also the discouragement of prospective applicants for credit.” In remanding the case, the 7th Circuit left it to the district court to determine whether the defendants’ alleged conduct was prohibited discouragement under ECOA, in addition to whether defendants’ argument that their allegedly unlawful conduct is protected by the First Amendment’s guarantee of free speech.
Of note, while the parties’ briefing before the 7th Circuit addressed the then-effective Chevron doctrine, the 7th Circuit noted that its decision treated the ECOA issue as “a question of statutory interpretation subject to our de novo review” and took into account the recent Supreme Court ruling in Loper Bright Enterprises v. Raimondo, No. 22-451, 603 U.S. ___ (2024) overturning Chevron (covered by InfoBytes here).