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2nd Circuit: Payment demand in debt collection letter overshadows validation notice
On November 5, the U.S. Court of Appeals for the Second Circuit reversed a district court’s dismissal of an FDCPA action, concluding that warnings in a defendant’s debt collection letter “could have created the misimpression that immediate payment is the consumer’s only means of avoiding a parade of collateral consequences, thereby overshadowing the consumer’s validation rights.” The defendant sent a debt collection letter to the consumer warning that it was instructed to commence litigation in order to collect a debt. The plaintiff was told he could avoid consequences such as paying attorneys’ fees if he made a payment or made suitable payment arrangements. The letter also contained a validation notice, which apprised the plaintiff of his right to dispute the debt within 30 days. The plaintiff filed a complaint alleging the letter violated the FDCPA because it included language that overshadowed the required disclosure of his right to demand that the debt be validated. The district court granted the defendant’s motion to dismiss, ruling that the plaintiff failed to adequately allege an FDCPA violation based on either (i) “the interaction between the letter’s payment demands and its validation notice,” or (ii) the letter’s statement that the plaintiff may be liable for attorneys’ fees in the event of litigation.
On appeal, the 2nd Circuit disagreed with the district court’s conclusions, holding that the complaint stated an FDCPA violation because, among other things, the letter’s payment demand overshadowed its validation notice. The appellate court found that the complaint also adequately stated an FDCPA violation based on the letter’s statements that the plaintiff “may be liable for attorneys’ fees where no such fees could be recovered.” Furthermore, the appellate court determined that the defendant’s introduction of an unsigned form contract supporting its claim to attorneys’ fees “at most raises a factual dispute about whether [the plaintiff] ever signed a contract providing for attorneys’ fees,” and concluded that this factual dispute should not have been resolved at the motion to dismiss stage.
Maryland appeals court reverses dismissal of property inspection fee case
On October 1, the Court of Special Appeals for Maryland reversed in part and affirmed in part a dismissal of an action alleging that a mortgage servicer and Fannie Mae (collectively, “defendants”) violated Maryland state law by charging improper property inspection fees. According to the opinion, after defaulting on her mortgage, a consumer was charged $180 for twelve property inspections ordered by her mortgage servicer. After accepting a loan modification, the property inspection fees were rolled into the balance of the consumer’s loan. The consumer subsequently filed a complaint against the defendants alleging violations of, among other things, (i) Section 12-121 of the Maryland Commercial Law Article, “which prohibits a ‘lender’ from imposing a property inspection fee ‘in connection with a loan secured by residential property’”; (ii) the Maryland Consumer Debt Collection Practices Act (MCDCA), with a derivative claim under the Maryland Consumer Protection Act (MCPA); and (iii) the Maryland Mortgage Fraud Protection Act (MMFPA). The defendants moved to dismiss the action, alleging that they were not “lenders” as defined in Section 12-121. The district court dismissed the action.
On appeal, the appellate court disagreed with the defendants’ narrow interpretation of “lender” under Section 12-121, finding that such interpretation is “inconsistent with the structure and purpose of the legislation enacting it.” Specifically, the appellate court held that the lower court erred in finding the defendants not liable as a lender under Section 12-121, as it would be “inconsistent with the purpose of Subtitle 12 to allow an assignee of a note or its agents to charge fees that the originating lender cannot.” The appellate court further held that the lower court erred in determining the property inspection fees were waived through the course of the modification and therefore erred in dismissing the MMFPA claim. However the appellate court upheld dismissal of the MDCPA claim and its derivative MCPA claim, rejecting, among other arguments, the consumer’s argument that the filing of a deed of trust qualified as a communication that “purports to be ‘authorized, issued, or approved by a government, governmental agency, or lawyer’” under state law. Lastly, the appellate court affirmed dismissal of the MMFPA claim, concluding the consumer failed to connect elements of the theory, such as intent to defraud, with any alleged facts in the complaint.
North Carolina Appeals Court: Original creditors’ intent required for assignment of arbitration rights
On November 3, the Court of Appeals of North Carolina issued a pair of orders (see here and here) affirming lower courts’ decisions denying a debt collector’s (defendant) motion to compel arbitration. According to the orders, the defendant purchased charged-off accounts belonging to the plaintiffs and filed individual lawsuits in several state courts seeking to collect on the debt. Default judgments were obtained against the plaintiffs in each of the actions. The plaintiffs filed suit, alleging the defendant violated certain sections of North Carolina’s Consumer Economic Protection Act by “not comply[ing] with certain statutorily enumerated prerequisites to obtain default judgments.” The defendant eventually moved to compel arbitration pursuant to an underlying agreement between the plaintiffs and the original creditor. The lower court denied the motion, ruling that the defendant—“as a nonsignatory to the credit card agreements”—had not shown it was assigned the right to arbitrate claims when it purchased the charged-off accounts. The defendant appealed the decision.
The Appeals Court considered whether there was a valid arbitration agreement between the plaintiffs and the defendant and agreed with the trial court, holding that “without any showing of the additional intent by the original creditors to assign to [the defendant], at the very least, ‘all of the rights and obligations’ of the original agreements, the right to arbitrate was not assigned in the sale and assignment of the Plaintiffs’ Accounts and Receivables as set forth in the Bills of Sale.” Moreover, the Appeals Court determined that the “trial court correctly concluded [the defendant] has not met its burden of showing a valid arbitration agreement between each Plaintiff and [the defendant] and did not err” by denying the defendant’s motion to compel arbitration.
CFPB and South Carolina settle with loan broker for veteran pension loans
On October 30, the CFPB and the South Carolina Department of Consumer Affairs filed a proposed final judgment in the U.S. District Court for the District of South Carolina to settle an action alleging that two companies and their owner (collectively, “defendants”) violated the Consumer Financial Protection Act and the South Carolina Consumer Protection Code by offering high-interest loans to veterans and other consumers in exchange for the assignment of some of the consumers’ monthly pension or disability payments. As previously covered by InfoBytes, in October 2019, the regulators filed an action alleging, among other things, that the majority of credit offers that the defendants broker are for veterans with disability pensions or retirement pensions and that the defendants allegedly marketed the contracts as sale of payments and not credit offers. Moreover, the defendants allegedly failed to disclose the interest rate associated with the offers and failed to disclose that the contracts were void under federal and state law, which prohibit the assignment of certain benefits.
If approved by the court, the proposed judgment would require the defendants to pay a $500 civil money penalty to the Bureau and a $500 civil money penalty to South Carolina. The proposed judgment would permanently restrain the defendants from, among other things, (i) extending credit, brokering, and servicing loans; (ii) engaging in deposit-taking activities; (iii) collecting consumer-related debt; and (iv) engaging in any other financial services business in the state of South Carolina. Additionally, the proposed judgment would permanently block the defendants from enforcing or collecting on any contracts related to the action and from misrepresenting any material fact or conditions of consumer financial products or services.
Court orders SBA to release more PPP and EIDL information
On November 5, the U.S. District Court for the District of Columbia ordered the U.S. Small Business Administration (SBA) to release the names, addresses, and precise loan amounts of all Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) borrowers. According to the opinion, national-news organizations filed an action against the SBA seeking disclosure of the loan recipient information, after the rejection of their Freedom of Information Act (FOIA) requests. In July, the SBA released the business information of certain PPP loan recipients (covered by InfoBytes here). For any loan over $150,000, the SBA data release included business names, addresses, NAICS codes, zip codes, business type, demographic data, non-profit information, name of lender, jobs supported, and a loan amount range. For loans under $150,000, the SBA withheld the business names and addresses in the release. Additionally, the SBA did not release the names and addresses of sole proprietorships and independent contractors receiving EIDL loans. The parties filed cross-motions for summary judgment as to the propriety of SBA’s withholdings.
The court agreed with the plaintiffs, concluding that the SBA’s claimed FOIA exemptions do not cover the requested information disclosures. Specifically, the court determined that SBA’s invocation of Exemption 4 of FOIA, which “shields from disclosure ‘commercial or financial information obtained from a person and privileged or confidential,’” was not applicable because the SBA did not give borrowers the assurance of privacy. In fact, according to the court, the government explicitly told the borrowers that the information would be disclosed in a form disclaimer. The court further rejected the SBA’s claim of Exemption 6 of FOIA, concluding that the “weighty public interest in disclosure easily overcomes the far narrower privacy interest of borrowers who collectively received billions of taxpayer dollars in loans.” Thus, the court ordered the SBA to supplement the earlier disclosure and release the “names, addresses, and precise loan amounts of all individuals and entities that obtained PPP and EIDL COVID-related loans by November 19, 2020.”
Another district court dismisses TCPA action for lack of jurisdiction
On October 29, the U.S. District Court for the Northern District of Ohio dismissed a TCPA action against an energy service company and “ten John Doe corporations” (collectively, defendants), concluding that the court lacked jurisdiction over cases involving unconstitutional laws. According to the opinion, the plaintiff filed the putative class action against the defendants alleging the companies violated the TCPA by placing pre-recorded calls to the plaintiff’s cell phone without consent. While the action was pending, on July 6, the U.S. Supreme Court concluded in Barr v. American Association of Political Consultants Inc. (AAPC) that the government-debt exception in Section 227(b)(1)(A)(iii) of the TCPA is an unconstitutional content-based speech restriction (covered by InfoBytes here). The defendants moved to dismiss the action for lack of subject matter jurisdiction and the court agreed. Specifically, the court agreed with the defendants that the severance of Section 227(b)(1)(A)(iii) must be applied prospectively, thus, the statute can only be applied to robocalls made after July 6 and prior to 2015 (when the now unconstitutional government-debt exception in Section 227(b)(1)(A)(iii) was enacted). Because “the statute at issue was unconstitutional at the time of the alleged violations,” the court concluded it lacked subject-matter jurisdiction over the matter and dismissed the action.
As previously covered by InfoBytes, the U.S. District Court for the Eastern District of Louisiana was the first known court to dismiss a TCPA action based on lack of jurisdiction over calls occurring after the exception’s enactment but prior to the Supreme Court’s decision on July 6.
2nd Circuit vacates dismissal of CFPB action following Seila
On October 30, the U.S. Court of Appeals for the Second Circuit summarily vacated a 2018 district court order that had dismissed CFPB and New York attorney general claims against a New Jersey-based finance company accused of misleading first responders to the World Trade Center attack and NFL retirees about high-cost loans mischaracterized as assignments of future payment rights (covered by InfoBytes here). The district court found that the Bureau’s single-director structure was unconstitutional, and that, as such, the agency lacked authority to bring deceptive and abusive claims under the Consumer Financial Protection Act (CFPA). The district court also rejected an attempt by then-acting Director Mulvaney to salvage the Bureau’s claims, concluding that the “ratification of the CFPB’s enforcement action against defendants failed to cure the constitutional deficiencies in the CFPB’s structure or otherwise render defendants’ arguments moot.”
The 2nd Circuit remanded the case to the district court, determining that the U.S. Supreme Court’s ruling in Seila Law LLC v CFPB (covered by a Buckley Special Alert, holding that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau) superseded the 2018 ruling. Following Seila, Director Kathy Kraninger also ratified several prior regulatory actions (covered by InfoBytes here), including the enforcement action brought against the defendants. “In light of these developments, we affirm the district court's holding that the for-cause removal provision is unconstitutional, we reverse the district court's holding that the for-cause removal provision is not severable from the remainder of the CFPA, and we remand for the district court to consider in the first instance the validity of Director Kraninger’s ratification of this enforcement action,” the appellate court wrote.
Court dismisses FCA action against national bank
On October 29, the U.S. District Court for the Eastern District of Missouri dismissed a False Claims Act (FCA) suit against a national bank, concluding the relator failed to prove the inapplicability of the public disclosure bar. According to the opinion, the relator filed an action against the national bank alleging that from 2009 to 2013, as an employee of the bank, she witnessed “numerous violations of [the bank]’s obligations under [government] loan modification programs.” The bank moved to dismiss the action on five separate grounds, including statute of limitations and public disclosure bar. The court first addressed the statute of limitations claims, applying the six-year limitation after the violation and holding that because the relator filed her action against the bank on June 2, 2018, any claims occurring before June 2, 2012 are barred as untimely.
The court then addressed the public disclosure bar, which requires courts to dismiss an action under the FCA “if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed….” The bank argued, and the relator did not contest, that the relator’s allegations “had already been publicly disclosed through the news media, a federal lawsuit, and federal reports.” The court rejected the relator’s claims that she should qualify as an original source of the information. Specifically, the court concluded that while the relator may have independent knowledge of the information provided in her complaint by virtue of her employment, she did not “materially add[] to” the public disclosures and thus, did not carry “her burden to prove the inapplicability of the public disclosure bar.” Accordingly, the court dismissed all remaining allegations postdating July 2, 2012.
Trade group sues CFPB over payday repeal
On October 29, a national community advocate group filed a complaint against the CFPB challenging the Bureau’s repeal of the underwriting provisions of the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (Rule). As previously covered by InfoBytes, in July, the CFPB issued a final rule revoking, among other things, the Rule’s (i) provision that makes it an unfair and abusive practice for a lender to make covered high-interest rate, short-term loans or covered longer-term balloon payment loans without reasonably determining that the consumer has the ability to repay the loans according to their terms; (ii) prescribed mandatory underwriting requirements for making the ability-to-repay determination; and (iii) the “principal step-down exemption” provision for certain covered short-term loans.
The complaint alleges that the Bureau’s repeal of the underwriting provisions of the Rule was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law.” Specifically, the complaint asserts that the Bureau invented a “new evidentiary standard” when it required that evidence supporting the need for the underwriting provisions be “robust and reliable,” which, according to the complaint, is a standard “custom-designed” to repeal the provisions. The complaint further argues that the CFPB “failed to consider the harms that consumers suffer from no-underwriting lending” and relied on analysis and data that was not “previously made available for comment.” The complaint seeks a declaration that the repeal was unlawful and an order requiring the Bureau to “take necessary steps to ensure prompt implementation of the 2017 Payday Lending Rule’s Ability-to-Repay Protections.”
Online bank reaches settlement with customers over service disruption
On October 28, the U.S. District Court for the Northern District of California issued an order granting preliminary approval of a putative class action settlement concerning allegations that an online bank’s service disruption prevented customers from accessing their account, including through card purchases and ATM withdrawals. The plaintiffs also claimed that after the service disruption, “some customers reported incorrect account balances and unauthorized charges.” The plaintiffs alleged, among other things, claims for negligence, unjust enrichment, breaches of contract and fiduciary duty, conversion, and violations of several state laws. Following a series of settlement negotiations, the parties entered into an amended settlement identifying the settlement class as “[a]ll consumers who attempted to and were unable to access or utilize the functions of their accounts with [the defendant], as confirmed by a failed transaction or locked card as recorded in [the defendant]’s business records, beginning on October 16, 2019 through October 19, 2019, as a result of the Service Disruption.” Under the settlement, tier one customers who are unable or choose not to provide documentation substantiating their alleged losses can receive up to $25 for verified claims. Tier two customers who can show “‘reasonable documentation’ to substantiate their loss” can receive their verified loss, up to $750. The defendant has agreed to set aside $4 million to cover tier one claims and $1.5 million to cover tier two claims. The defendant is also required to make a minimum payment of $1.5 million in addition to the nearly $6 million it already paid to active customers in connection with the service disruption in the form of $10 “courtesy” payments, as well as credits the defendant issued to customers “who incurred ‘certain transaction fees’” during the service disruption.