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3rd Circuit: Arbitration valid despite questions about loan assignment
On September 1, the U.S. Court of Appeals for the Third Circuit concluded that a district court erred in finding that it had the authority to adjudicate the question of arbitrability based on questions concerning the underlying legality of an assignment of a consumer’s loan. The plaintiff took out a personal loan, which included an arbitration clause in the underlying agreement that delegated questions of arbitrability to an arbitrator. The plaintiff’s charged-off debt was assigned to the defendant who filed a lawsuit to recover the unpaid balance but later dismissed the suit rather than litigating. The plaintiff later contended that the defendant reported his loan delinquency to credit agencies in “an unlawful attempt to collect the [l]oan,” and sued, claiming that because the defendant was not licensed in Pennsylvania during the time period at issue it was not lawfully permitted to purchase the debt. The defendant filed a motion to compel arbitration under the purchase agreement with the loan originator. Focusing on the validity of the assignment, the district court denied the defendant’s motion to compel arbitration.
On appeal, the 3rd Circuit concluded that the district court’s only responsibility was to determine whether the parties to the underlying loan “clearly and unmistakably” expressed an agreement to arbitrate the issue of arbitrability, and, if so, the district court was required to send questions about arbitrability to the arbitrator. The appellate court reasoned that even if the underlying assignment is invalidated later, it would not affect whether the initial agreement to arbitrate was valid. The appellate court vacated the district court’s order denying arbitration and remanded with instructions to grant the motion to stay and refer the matter to arbitration. A dissenting judge countered that the plaintiff never signed an arbitration agreement with the defendant, and that because the underlying assignment was invalid, the plaintiff never consented to arbitration with the assignee of the contract.
WA Superior Court: Insurance commissioner overstepped in banning credit scoring in underwriting
On August 29, the Washington State Superior Court entered a final order declaring that the Washington Insurance Commissioner exceeded his authority when he issued an emergency rule earlier this year banning the use of credit-based insurance scores in the rating and underwriting of insurance for a three-year period. As previously covered by InfoBytes, several industry groups led by the American Property Casualty Insurance Association (APCIA) sued to stop the rule from taking effect. The rule was intended to prevent discriminatory pricing in private auto, renters, and homeowners insurance in anticipation of the end of the CARES Act, and specifically prohibited insurers from “us[ing] credit history to place insurance coverage with a particular affiliated insurer or insurer within an overall group of affiliated insurance companies.” The rule applied to all new policies effective, and existing policies processed for renewal, on or after June 20, 2021. Industry groups countered that the rule would harm insured consumers in the state who pay less for auto, homeowners, and renters insurance because of the use of credit-based insurance scores to predict risk and set rates.
According to a press release issued by APCIA, earlier this year the superior court issued a bench decision granting the trade group’s petition for a declaratory judgment and invalidating the rule. The superior court “held that the Commissioner could not rely on the more general rating standard statute that prohibited “excessive, inadequate, or unfairly discriminatory” rates to “eliminate all meaning from the more specific credit history statutes by which the legislature had authorized its use.” Calling the final order “an important victory for Washington consumers, particularly lower risk senior policyholders who were forced to pay more to subsidize higher risk policyholders because the rule eliminated the use of credit,” the trade groups said they were pleased that the court agreed with their position that the Commissioner “exceeded his authority when he acted contrary to the longstanding statute that authorized the use of credit in the property and casualty insurance space.”
District Court rules non-judicial foreclosure claims fail
On August 30, the U.S. District Court for the District of Oregon granted defendants’ motion for summary judgment in an action concerning an allegedly unlawful non-judicial foreclosure. Plaintiffs obtained a cash-out loan in 2005 and modified their mortgage terms. The plaintiffs stopped making payments after one of the defendant loan servicer’s agents allegedly informed them that “help was only available if they were in default,” and the defendant loan servicer threatened foreclosure. Following several years of bankruptcy proceedings and foreclosure mediation, plaintiffs sued to stop the foreclosure proceedings, claiming “that the deed of trust was void and that defendants committed fraud in attempting to foreclos[e] on the debt.” The initial non-judicial foreclosure proceedings were rescinded after the suit was dismissed with prejudice, and the defendant loan servicer was eventually allowed to proceed with a second non-judicial foreclosure under Oregon law. Plaintiffs sent a dispute letter demanding that the foreclosure be rescinded because the order in which several notices of default showing the amounts due and the amounts necessary to reinstate were sent did not comply with state law. After the notice was rescinded and a new notice of default was issued and recorded, plaintiffs sued again, seeking to enjoin the defendant trustee’s sale and filing several claims, including breach of contract and violations of the Oregon Unfair Trade Practices Act (OUTPA), RESPA, and FDCPA.
In granting summary judgment to the defendants on each of the claims, the court determined that the breach of contract claim fails because plaintiffs acknowledged that because “they have not substantially performed under the relevant contract,” they are precluded from seeking damages. The FDCPA claim against the defendant trustee also fails “because it is based on a perceived lack of authority under the relevant contract, but as explained in the breach of contract claim, that authority was not lacking.” Finally, the OUTPA and RESPA claims both fail “because there is no evidence that they incurred damages arising out of either claim”—a required element under both statutes, the court said. According to the court, plaintiffs failed “to support their drastic allegations with relevant evidence” and failed to “point to specific evidence supporting valid legal claims.”
District Court grants summary judgment for defendant in FDCPA suit
On August 25, the U.S. District Court for the Southern District of Indiana granted a defendant’s motion for summary judgment in an FDCPA case, finding that the plaintiff did not suffer a concrete injury after receiving two collection letters from the defendant’s attorneys on the same day. According to the order, the plaintiff had a medical debt that was placed with the defendant for collection. The defendant sent a bill to the plaintiff, but because the plaintiff was unemployed when she received it, she did not make a payment, and “planned on setting up a payment plan once she obtained a ‘steady income.’” A month after sending the bill, the defendant called the plaintiff, and during the call, the plaintiff noted that she was considering filing for bankruptcy. The plaintiff subsequently retained an attorney to assist with a bankruptcy filing. Later that year, the plaintiff received two letters on the same day from the defendant, from two separate attorneys, both requesting that she pay the bill. The plaintiff sued the defendant, alleging that the collection letters violated the FDCPA because they falsely implied that the defendant’s attorneys were personally involved in the collection of her debt. The plaintiff claimed that she experienced concrete harm after receiving the letters in the form of emotional stress and confusion, which affected her decision whether to repay the debt or file for bankruptcy protection. The court granted the defendant summary judgment, deciding that the plaintiff lacked standing because she did not provide “evidence of specific facts showing that the collection letters caused her to take any action to her detriment, including making a payment on the debt or filing bankruptcy.” The court also found that “’[p]sychological states induced by a debt collector’s letter’—including emotional distress and confusion—are not concrete injuries.”
CFPB examines finances and debt in Appalachia
On September 1, the CFPB released a report detailing family finances and debt in rural Appalachia, intended to provide a starting point in better understanding the needs and challenges of these consumers. The report—which is the first in a series regarding the finances of consumers living in rural areas—focuses on rural Appalachians, who, according to the Bureau, tend to earn less than consumers in other rural areas and have higher rates of subprime credit. According to the report, of the 26 million people living in the Appalachian region, 33 percent live in rural counties. Over 2 million Appalachians live in Persistent Poverty Counties (PPCs), which are defined as counties that have had poverty rates of 20 percent or higher for the past 30 years. Nearly one-in-four Appalachians are carrying some amount of medical debt, according to the report, compared with 17 percent of people nationally. Those people in the region with medical debt have more than double the rate of delinquency on their credit report compared to people without medical debt. Other findings of the report include, among other things, that: (i) 71 percent of rural Appalachians and 63 percent of those living in PPCs have an active credit card, compared to 80 percent of consumers nationally; (ii) auto loan balances equal 31 percent of household annual income for rural Appalachians, compared to 21 percent nationally; (iii) denial rates for mortgage applications in rural Appalachia were almost twice the rate of mortgage applications nationally; and (iv) though the high school graduation rate for individuals in Appalachia is higher than the national average, the percentage of individuals who attended some college is significantly lower than the national average. According to the Bureau, these circumstances have “led to disproportionately high levels of distress in rural Appalachians’ consumer financial lives.”
District Court denies request to reverse summary judgment in FDIA suit
On August 29, the U.S. District Court for the Eastern District of Pennsylvania denied a consumer plaintiff’s request to reconsider its summary judgment order against him in a Federal Deposit Insurance Act (FDIA) suit. According to the opinion, the plaintiff accrued debt to a federally-insured, state-chartered bank, which had then assigned that debt to defendants, who were not state-chartered, federally-insured banks. The plaintiff’s debt included interest charges that had accrued at an annual rate between 24.99 percent and 25.99 percent, which the plaintiff argued could not be collected by defendants because the interest exceeded the six percent allowed under Pennsylvania's usury law. The court ruled in favor of the defendants, relying on a recently promulgated FDIC rule that determined that state usury laws are preempted by section 27 of the FDIA in cases where state usury law interferes with state-chartered, federally-insured banks' ability to make loans or when they interfere with a state-chartered, federally-insured bank’s assignee’s efforts to collect on those loans. The plaintiff requested the reconsideration of the district court's summary judgment decision and filed a notice of appeal to the U.S. Court of Appeals for the Third Circuit. In his motion for reconsideration, the plaintiff argued that the court’s previous summary judgment decision was “erroneous” because: (i) the 3rd Circuit held in In re: Community Bank of Northern Virginia that “the FDIA unambiguously excludes non-bank purchasers of debt from its coverage and that deference to the FDIC’s contrary interpretation would, therefore, be inappropriate”; (ii) the FDIC’s rule cannot apply to his debts because such an application would be impermissibly retroactive; and (iii) LIPL fits within the FDIC rule’s exception for “licensing or regulatory requirements.”
The court denied the plaintiff’s motion for reconsideration, holding that the plaintiff “failed to identify an appropriate basis for reconsideration,” as the consumer’s arguments are “either a new argument that could have been presented before judgment was entered or a reprisal of an argument that the Court addressed in its original decision.” The court further noted that it would be “inappropriate for the Court to grant a motion to reconsider under either of those circumstances.” The court went on to determine that the new arguments advanced by the plaintiff were unpersuasive in any event, finding that the 3rd Circuit had not held section 27 of the FDIA to be unambiguous in its meaning and that application of the FDIC’s rule did not create an impermissible retroactive effect.
HUD updates HECM program
On August 31, HUD issued Mortgagee Letter (ML) 2022-15, which updates the Home Equity Conversion Mortgage (HECM) program. The ML, among other things, modifies the requirements for mortgagees to provide notice to a borrower’s estate following an HECM becoming due and payable due to the death of the last surviving borrower. The ML may be implemented immediately but must be implemented no later than 90 days from the date of this ML for HECMs that become due and payable on or after the publication date of this ML. Additionally, comments are due within 30 days after the date of issuance.
California bankruptcy court says a forbearance that modifies the original loan is subject to state usury laws in certain instances
Earlier this year, the United States Bankruptcy Court for the Northern District of California granted in part and denied in part cross-motions for summary judgment in an action concerning “piecemeal exemptions” to California’s usury law. Plaintiffs entered into a loan agreement secured by their residence carrying an interest rate of 11.3 percent and a default interest rate of 17.3 percent (plus late fees) with a then-unlicensed lender. They also signed a promissory note, which stated that should they fail to make a monthly payment within 10 days of the due date they would be assessed a late charge equal to 10 percent of the monthly payment. After plaintiffs struggled to make payments, the parties entered into an extension agreement to supplement and amend the original loan (but not replace it), which slightly lowered the initial interest rate but increased the monthly payments and default interest rate. The extension also included language adding a charge on the final balloon payment that was not part of the original loan. Plaintiffs again began to miss loan payments and sought to refinance the loan with a different lender. A payoff quote provided by the defendant included what was originally called a “prepayment penalty” but was later changed to represent a late charge on the principal balance in line with the extension.
Plaintiffs sued the defendant and related parties in state court, seeking damages and alleging claims related to breach of contract, fraud, and intentional interference. After the court denied plaintiffs’ motion for preliminary injunction, plaintiffs filed an appeal on the same day one of the plaintiffs filed for bankruptcy. The defendant eventually filed a motion for summary judgment on the claims in the amended complaint, whereas plaintiffs sought partial summary judgment on several new claims, including that (i) the extension violated state usury law; (ii) the defendant “demanded an illegal acceleration penalty” from plaintiffs; and (iii) the defendant illegally charged multiple late fees on a single loan payment.
In a case of first impression, the court held that under California law, a loan extension that modifies the original loan, including by extending the maturity date, is considered a forbearance subject to state usury laws because there was no other sale, lease, or other transaction involved. The court noted that the statute “provides a restricted definition of the term ‘arranged’ in relation to a forbearance,” and that it also “painstakingly sets forth the instances in which a forbearance negotiated by a real estate broker would be exempt under usury law: when that broker was previously involved in arranging the original loan and that loan was in connection with a sale, lease, or other transaction, or when that broker had previously arranged for the sale, lease or other transaction for compensation.” The court further stated that “[c]onspicuously absent from those instances is a scenario in which a forbearance is arranged on a simple loan of money secured by real estate, with no other sale, lease, or other transaction involved,” adding that it “cannot create an exemption here to save [the defendant].” In the subject transaction, the real estate broker involved when the original loan was made was not involved in the extension, the court said.
The court also held that the loan forbearance violated California usury laws although the original loan was exempt from usury laws, disagreeing with the defendant’s position that “an originally non-usurious transaction cannot be transformed into a usurious transaction at a later point.” The court pointed out the distinction in this case from others cited by the defendant, stating that the “difference between a non-usurious loan and a loan subject to an exemption is slight but distinct. . . . Once the exemption (no real estate broker involved) ceased to apply, the exemption disappeared, and the transaction became subject to the full consequences of the usury law.” Because the extension’s interest rate and default interest rate both violated state usury law, the defendant is entitled only to the principal balance of the extension minus the amount of usurious interest paid.
Additionally, the court determined that under California law, the liquidated damages provision of the loan extension was separate from the interest charged by the extension, and a late charge on top of a balloon payment under extension was an unenforceable penalty provision instead of a valid provision for liquidated damages. The court also declined to consider punitive or other damages and said it will make a determination in the future as to what the defendant is entitled to by way of reimbursements or costs, as well as any interest accrued and owed after the extension’s maturity date.
District Court dismisses EFTA claims concerning fraudulent transactions
On August 18, the U.S. District Court for the Eastern District of Michigan dismissed a class action alleging violations of the EFTA brought against a national bank on behalf of consumers who were issued prepaid debit cards providing Covid-19 pandemic unemployment insurance payments. Two of the plaintiffs alleged they experienced fraudulent transactions on their accounts. According to the plaintiffs, the bank froze one of the defendant’s accounts but failed to credit his account for the allegedly fraudulent transaction. In response to a second plaintiff’s fraud report, the bank allegedly froze her account and informed her that she had “to contact the unemployment agency because an unauthorized person had ‘gained access to the card and was using the unemployment benefits.’” The third plaintiff alleged that the bank froze her account based on suspected fraud and was informed that she would have to contact someone else to unfreeze the account. Plaintiffs sued for violations of the EFTA and raised several breach of contract and negligence claims.
The court dismissed the EFTA claim on several grounds, including that (i) the second plaintiff’s claim is time-barred; (ii) the other two plaintiffs’ claims stem from the bank’s alleged errors related to unauthorized transactions, yet neither requested information or clarification about an electronic funds transfer; (iii) one of the plaintiffs never actually experienced fraud (the court emphasized that the EFTA does not regulate account freezes; it regulates electronic funds transfers); and (iv) one of the plaintiff’s failed to plausibly plead that he complied with the EFTA’s notification requirements that must be met before a defendant conducts an investigation. The court also determined that the breach of contract claims failed, citing, among other things, that if an account did not have an unauthorized transaction a defendant cannot breach its reimbursement duties. Nor did the other two plaintiffs provide proper notice to trigger the bank’s duty to investigate, the court wrote, adding that the negligence claims also failed because the plaintiffs failed to respond to a request asking them to show how the bank’s actions caused them injury.
District Court grants defendant’s motion to compel arbitration in electronic signature case
On August 22, the U.S. District Court for the District of Nevada granted a defendant credit union’s motion to compel arbitration regarding a consumer’s signature on bank-owned equipment. According to the order, the plaintiff alleged that the defendant violated 42 U.S.C. § 407 by transferring Social Security benefits from his savings account to his checking account to pay a debt. In March, a magistrate judge determined “that given ‘the liberal construction courts are to afford pro se complaints, it appears Plaintiff states a claim against [the defendant] at least for purposes of surviving screening’ and ordered that the case would proceed against [the defendant]” who filed the motion to compel arbitration. The order further noted that in support of their assertion, defendant provided documentation evidencing the plaintiff’s agreement to arbitrate all claims regarding his account. The defendant submitted an affidavit, a copy of the signature card that the plaintiff executed when he opened his account with the credit union, all subsequent signature cards executed by the plaintiff, and a copy of the “Important Account Information for Our Members,” among other things. According to the affidavit, the signature card the plaintiff executed when he opened his account included the “agreement to the terms and conditions outlined in the Important Account Information for Our Members,” and further indicated that the “[w]ritten notice we give you is effective when it is deposited in the United States Mail with proper postage and addressed to your mailing address we have on file.” The order noted that the “Notice of Change to the Terms and Conditions of Your Account was provided,” and “[t]hat document included a mandatory arbitration provision and the ability to opt out of arbitration.” The defendant argued “that by not exercising his right to opt-out, the agreement necessitates the action be moved into arbitration.” The plaintiff asserted that his signature was collected on an electronic device and because the signature was collected electronically, it was incorporated by fraud. The plaintiff also contended that he did not explicitly sign a document setting forth an arbitration clause because he only electronically input his signature to obtain a debit card.
According to the district court, the plaintiff “does not assert that he did not sign the signature card when he initially opened his account and received the debit card. He asserts that he never agreed to arbitrate his claims because he never received or signed an arbitration agreement.” The district court granted the defendant’s motion to compel arbitration determining that a valid arbitration agreement existed between the parties and that the agreement encompasses the plaintiff’s claims. Among other things, the district court explained that “a valid arbitration agreement exists,” because the “signature card signed by [the plaintiff] certifies ‘[a]greement to the terms and conditions outlined in the Important Account Information For Our Members disclosure and any other material pertaining to the account.’” The district court further wrote that such “statement plainly refers to an external document, and plainly states that the [plaintiff] agreed to be bound by the terms contained therein. Moreover, [the plaintiff’s] assertion that he did not actually receive the Important Account Information For Our Members disclosure does not defeat the signature card’s statement that [the plaintiff] bound himself to the terms contained therein.” Additionally, by signing the signature card, the plaintiff agreed to arbitrate every claim arising from or relating in any way to his account.