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Federal Court Dismisses Second Challenge To California City's Eminent Domain Plan
On November 6, the U.S. District Court for the Northern District of California dismissed without prejudice as not yet ripe for determination a suit by investors seeking to preempt a California city’s plan to use its eminent domain authority to seize certain mortgages. Bank of N.Y. Mellon v. City of Richmond, No. 13-cv-3664-CRB, slip op. (N.D. Cal. Nov. 6, 2013). The court described the suit as “nearly identical” to one the court dismissed in September. Wells Fargo Bank, N.A. v. City of Richmond, No. 13-3663, slip op. (N.D. Cal. Sept. 16, 2013). The court held that the investors’ claims are not ripe under Article III considerations, explaining that allowing the parties to intervene before the city formally implements the program by actually attempting to use its eminent domain power to seize a loan would stretch the role of the judiciary beyond what is reasonable to maintain judicial efficiency. The court was not persuaded by the investor’s argument that, unlike in the prior dismissed action, the investors here requested and briefed declaratory relief, which should be subject to a relaxed standard. Further, the court held the claims are not ripe under a prudential doctrine, reasoning that (i) the case is not fit for review because an actual dispute has not yet materialized and is dependent on a factual scenario that may never play out, and (ii) the investors face no imminent, irreparable harm.
Final Settlement In SCOTUS Fair Housing Case Delayed
On November 6, the Philadelphia Inquirer reported that a final settlement to resolve the underlying claims at issue in Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc., No. 11-1507—an appeal currently pending before the U.S. Supreme Court that could provide the Court an opportunity to rule on whether a disparate impact theory of liability is cognizable under the Fair Housing Act—has been delayed. Last week, the parties reportedly reached a tentative agreement, with the terms of such agreement subject to review and approval by the Mount Holly Township Council. The Council decided to table consideration of the settlement as the parties reportedly work to finalize the agreement.
C.D. Cal. Denies Class Certification In Lender-Placed Insurance Dispute
On November 4, the United States District Court for the Central District of California denied certification of a putative nationwide class that alleges a mortgage servicer and lender-placed insurance (LPI) companies violated California’s Unfair Competition Law (UCL), breached mortgage contracts, and unjustly enriched themselves by improperly charging and overcharging borrowers for lender-placed insurance. Gustafson v. BAC Home Loans Servicing LP, No. 11-00915, 2013 WL 5911252 (C.D. Cal. Nov. 4, 2013). The court held that the named borrowers could not assert a UCL claim nationwide because (i) the UCL claims fell within the mortgage contracts’ choice-of-law provisions, (ii) there are material differences among the states’ consumer protection laws, (iii) foreign states have an interest in regulating conduct that was carried out, in part, within their borders, and (iv) the last event necessary to make the insurers and servicer liable occurred where the insurance premiums were charged to borrowers in their home states. The court also held that the borrowers failed to meet the commonality and predominance requirements of Rule 23 for both their breach of contract and unjust enrichment claims, in part because laws regarding breach of contract, affirmative defenses, and unjust enrichment vary from state to state. Further, the court explained that the unjust enrichment claim required individualized fact determinations as to whether (i) borrowers who are charged for LPI may either not pay for it, or not pay the full rate, and (ii) individual class members’ circumstances could preclude or reduce recovery. BuckleySandler represents lender-placed insurers in this and other similar actions.
Seventh Circuit Affirms Dismissal of Lender-Placed Insurance Claims
On November 4, the United States Court of Appeals of the Seventh Circuit affirmed a trial court’s dismissal of allegations that a lender and insurer fraudulently placed insurance on the borrower’s property after the borrower’s homeowner’s policy lapsed. Cohen v. Am. Sec. Ins. Co., No. 11-3422, 2013 WL 5890642 (7th Cir. Nov. 4, 2013). The court held that the borrower’s claim under the Illinois Consumer Fraud and Deceptive Business Practices Act failed because (i) the loan agreement and the lender’s disclosures, notices, and correspondence conclusively defeat any claim of fraud, false promise, concealment, or misrepresentation, (ii) the borrower did not allege an unfair business practice because “there is nothing oppressive or unscrupulous about giving a counterparty the choice to fulfill his contractual duties or be declared in default for failing to do so,” and (ii) “[the lender] was not subject to divided loyalties; rather, it was subject to an undivided loyalty to itself, and it made this clear from the start.” The court also held that the borrower failed to state a breach of contract claim because nothing in the loan agreement and related documents prohibited the lender and its insurance-agency affiliate from receiving a fee or commission for LPI. To the contrary, the court explained, the loan agreement and related notices and disclosures specifically warned the borrower of this possibility. The court also affirmed the dismissal of the borrower’s fraud, conversion, and unjust enrichment claims for failing to state a claim as a matter of law, but on different grounds than the district court. The district court had ruled in favor of the lender and insurer based on federal preemption and the filed rate doctrine. The Seventh Circuit chose not to address those bases for dismissal in its ruling.
Check Cashing Company, Executives Plead Guilty To AML Charges
On November 5, the DOJ announced that a New York check cashing company and its owner pleaded guilty to violating the Bank Secrecy Act in connection with more than $19 million in check-cashing transactions by willfully failing to maintain an effective anti-money laundering program. The plea agreement requires the company to forfeit over $3 million and the owner to pay nearly $1 million in restitution for related tax violations; neither party has yet been sentenced. The DOJ alleges that over a two-year period the company cashed checks written on accounts of shell corporations. The shell corporations and the corresponding bank accounts on which the checks were written were established in the names of foreign nationals, many of whom were no longer in the United States. The check cashing company and its owner allegedly failed to obtain any identification documents or information from the individuals presenting the checks, filed false currency transaction reports (CTRs) that stated the checks were cashed by the foreign nationals who set up the shell corporations, and in certain CTRs, failed to indicate the full amount of cash provided to the individuals. Related charges remain pending against additional defendants. These cases are being prosecuted by, among others, the DOJ’s Money Laundering and Bank Integrity Unit, which investigates and prosecutes complex, multi-district and international criminal cases involving financial institutions and individuals who violate the money laundering statutes, the Bank Secrecy Act and other related statutes.
S.D.N.Y. Holds TILA Short-Form Credit Card Notice Violations Subject to Statutory Damages
On November 4, the U.S. District Court for the Southern District of New York held that credit card holders may pursue statutory damages for alleged violations of Regulation Z’s short-form credit card notice requirement, even though the short-form notice requirement is contained in a section of Regulation Z that is not enumerated under TILA’s statutory damages section. Zevon v. Dept. Stores Nat’l Bank, No. 12-7799, 2013 WL 5903024, (S.D.N.Y. Nov. 4, 2013). A credit card holder filed a putative class action alleging that the monthly short-form notice provided by the issuer was incomplete and omitted provisions required by Regulation Z’s model form provision. The court rejected the card issuer’s argument that because TILA only provides card holders with a cause of action for statutory damages for specifically enumerated statutory provisions, and because the short-form notice provision is not enumerated in the statute but is set only by Regulation Z, the card holder is not entitled to statutory damages. The court explained that following the card holder’s reasoning would immunize card issuers from statutory damages for even the most egregious short-from notice violations. Instead, the court held that because the allegedly violated Regulation Z provision was promulgated pursuant to an enumerated statutory provision—TILA’s long-form notice requirement—card holders are permitted to bring claims for statutory damages for short-form violations. The court rejected the card issuer’s motion to dismiss for these reasons, but granted its motion to limit statutory damages to $500,000, holding that the Dodd-Frank Act’s increase to a $1 million cap cannot be applied retroactively to violations that allegedly occurred prior to the Act’s passage.
Alabama State Appellate Court Upholds Electronically Executed Agreement
Recently, the Court of Civil Appeals of Alabama upheld an agreement executed electronically, overturning a trial court’s order invalidating a divorce agreement on the grounds that the agreement filed with the court was executed electronically. Ex parte Mealing, No. 2120973, 2013 WL 5776053 (Ala. Civ. App. Oct. 25, 2013). In this case, a husband asked the trial court to vacate a divorce agreement he had willingly entered without legal representation, claiming that his wife’s attorney orchestrated an agreement more favorable to the wife. The trial court decided that the divorce agreement was invalid because it was signed electronically. The appellate court disagreed and held that the trial court erred in relying on an alternative basis—one not even presented by the husband—in an attempt to create for itself an opportunity to render equitable judgment of the matter. The court explained that relevant court rules allow for electronic signatures, and that there was no contention from the husband that the electronic signatures were shams or false. The appellate court directed the trial court to set aside its order and reinstate the electronically signed divorce agreement.
CFPB Considers New Debt Collection Rules
On November 6, the CFPB announced an advance notice of proposed rulemaking (ANPR) to solicit input on a wide array of issues related to consumer protection in the debt collection market. With the release of the ANPR, the CFPB also announced the publication of approximately 5,000 debt collection complaints in its consumer complaint database.
The ANPR marks the Bureau’s first step toward exercising its rulemaking authority under the Fair Debt Collection Practices Act (FDCPA). Notably, although the FDCPA generally applies only to third-party debt collectors, the CFPB’s regulations could extend to original creditors as well. In addition to the CFPB’s express authority to make substantive rules under the FDCPA, the Bureau made all creditors subject to debt collection guidance issued earlier this year pursuant to its general authority to regulate unfair, deceptive, and abusive practices.
The 162 questions contained in the ANPR focus primarily on the accuracy of information used by debt collectors, how to ensure consumers know their rights, and the communication tactics collectors employ to recover debts.
- Information Accuracy—Due to concern over how information is transferred, the CFPB seeks input on current processes for transferring records and ensuring the integrity of information transmitted. Specifically, the CFPB inquires about how account holders are identified and verified, how claims of improper identification are handled, how amounts of indebtedness are confirmed, and how claims of indebtedness are supported.
- Informed Consumers—Based on its belief that consumers may not sufficiently understand debt collection processes, the CFPB seeks input on the quality of information and disclosures provided to debtors. Specifically, the CFPB inquires about the information and disclosures provided with respect to the specific debt being collected and the debtors’ legal rights, including the rights to dispute debt and limit certain communications.
- Communication Tactics—Based on its concern that harmful communication tactics continue in the debt collection market, the CFPB seeks input on tactics not addressed by the FDCPA. Specifically, the CFPB inquires about frequency of contact with debtors, the means of communication employed, and the use and prevalence of threats by collectors.
The deadline for comments is 90 days from publication of the ANPR in the Federal Register.
CFPB Files Brief In Long-Running RESPA Case
On October 30, the CFPB filed an amicus brief in Edwards v. First American, a long-running case concerning the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA) that is currently pending in the U.S. Court of Appeals for the Ninth Circuit. The case revolves around allegations that the defendant-title insurer purchased interests in title insurance agencies in order to secure referrals of insurance business from those agencies. The consumer-plaintiffs alleged that these arrangements constituted illegal kickback agreements under Section 8 of RESPA, even though they did not suffer any actual damages.
At issue before the Ninth Circuit is whether a private plaintiff must specifically allege an overcharge in order to have standing under RESPA. The district court held that (i) to constitute a “thing of value” exchanged for a referral in violation of RESPA, the putative class must show that the defendant overpaid for the interests in the title insurance agencies in exchange for referrals of settlement service business, and (ii) all members of the class must prove not only that they were referred to the title company but also that the referral influenced their selections of a settlement service provider.
The Bureau disagrees that proof of an overpayment for the interests in the title companies is required to establish that the referrals violated RESPA. Instead, the CFPB’s brief argues that the “thing of value” exchanged includes the value of the transaction itself and that the plaintiffs need only show that the defendant-company purchased the ownership interests in order to ensure the referral of future settlement business, even if the price paid was fair. The CFPB also disputes the district court’s conclusion that violations require proof of referral and influence on a plaintiff-by-plaintiff basis, arguing that under the plain language of the statute, the level of influence on a consumer is irrelevant in cases of explicit referrals.
The CFPB filed an amicus brief in the same case in October 2011, when a separate standing issue was appealed to the U.S. Supreme Court. The Supreme Court heard the case but declined in June 2012 to issue an opinion, stating that certiorari was “improvidently granted.”
CFPB Begins Taking Payday Loan Complaints
On November 6, the CFPB announced that it now will formally accept borrower complaints regarding payday loans through its online complaint portal and by phone. The CFPB’s complaint taking process launched with the Bureau in July 2011, and the CFPB began publishing complaints through its online complaint database in June 2012. The CFPB started with credit card complaints and has since expanded the complaint program and public database to cover mortgages, debt collection, credit reporting, student and other consumer loans, and other products and services.
For purposes of complaint collection, the CFPB defines a payday loan as a “small loan, generally for $500 or less, that is typically due on [the borrower’s] next payday or the next time [the borrower] receive[s] income.” The CFPB adds that a payday loan also may be known as a “cash advance” or a “check loan.” The complaint categories offered by the CFPB include: (i) unexpected fees or interest, (ii) unauthorized or incorrect charges to a bank account, (iii) failure to credit a payment, (iv) problems contacting a lender, (v) receiving a loan not applied for, and (vi) failure to provide borrowed funds. Separately, the CFPB highlighted servicemember payday loan protections provided by the Military Lending Act and encouraged servicemembers to submit payday loan complaints.
These announcements are the most recent from the CFPB in connection with its sustained and expanding interest in short-term, small dollar products. Indeed, as we’ve reported here in the past, federal and state authorities more generally have increased their scrutiny of companies that offer these products and affiliated parties like payment processors. For its part, earlier this year the CFPB issued a white paper on payday loans and deposit advance products, and the CFPB has repeatedly ranked high on its enforcement agenda short-term products it believes have the potential to trap consumers in a “cycle of debt.” In addition, based on the CFPB’s most recent rulemaking agenda, the CFPB may publicly begin certain rulemaking activities with regard to payday loans and deposit advance products.