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West Virginia Federal Court Rejects HOLA Preemption of Certain State Law Claims Pertaining to Late Charges

On April 19, the U.S. District Court for the Northern District of West Virginia held that the Home Owner’s Loan Act (HOLA) does not preempt certain state law claims pertaining to late charges made by a federal thrift. Padgett v. OneWest Bank, FSB, No. 3:10-cv-08, 2010 WL 1539839 (N.D.W. Va. Apr. 19, 2010). In a prior bankruptcy, the plaintiff borrower and his lender filed an agreed order treating the borrower as current and moving his one month arrearage to the end of his loan obligation. The defendant, a federal thrift, acquired that lender and allegedly began to treat the borrower as one month late, charging him late fees and reporting his account as delinquent. The borrower sued the federal thrift for, among other things, violations of the West Virginia Consumer Credit and Protection Act (WVCCPA) and breach of contract for the alleged assessment of late charges and for defamation for the alleged improper credit reporting. The federal thrift argued that HOLA preempted the borrower’s claims, however, the court denied the motion to the extent it sought to preempt the borrower’s WVCCPA and breach of contract claims based on the late charges. According to the court, these claims were not preempted because they did not seek to regulate the terms of the loan agreement – an action that HOLA would preempt – but instead sought to hold the federal thrift to the terms of that agreement. The court also denied the federal thrift’s motion with respect to the claims of defamation. Relying on In re Ocwen Loan Servicing, LLC Mortg. Servicing Litig., 491 F.3d 638 (7th Cir. 2007), the court held that the “common law claim of defamation is ‘a good example of [a] claim that the [HOLA] does not preempt,’” noting that HOLA does not deprive a defamed consumer his basic state common law remedy. According to the court, “prohibiting . . . federal savings banks from defaming consumers certainly has no more than an incidental effect on lending operations.”

Hawaii Enacts Legislation Prohibiting Requirement for Foreclosure Buyer to Use Particular Vendors

On April 19, Hawaii Governor Linda Lingle signed into law S.B. 2910, a bill providing that a foreclosing or acquiring mortgagee may not require a buyer to purchase title insurance or escrow services from a particular vendor in connection with a judicial foreclosure or foreclosure by power of sale. The bill provides that a buyer may agree to use a title insurer or an escrow agent recommended by the foreclosing or acquiring mortgagee if the buyer is first provided with written notice of his or her right to make an independent selection of title insurance or escrow services. The bill becomes effective July 1, 2010.

Maryland Enacts Foreclosure Mediation Law

On April 13, Maryland Governor Martin O’Malley signed a law (H.B. 472) giving homeowners the right to mediate foreclosure with a neutral third party and requiring lenders to conduct loss mitigation analyses before foreclosing home loans. The law applies to 1-4 family residential properties occupied as the borrower’s primary residence and is effective July 1, 2010.

Under the law, a lender must offer a loss mitigation application to a borrower in connection with the statutory notice of intention to foreclose; if mitigation is denied, the homeowner can request foreclosure mediation from the Maryland Office of Administrative Hearings. The lender cannot file for foreclosure until at least 45 days after the notice of intent to foreclose is sent to the borrower with the required loss mitigation application. Following completion of the loss mitigation analysis, the lender cannot foreclose for 30 days. If the borrower requests mediation, the lender cannot foreclose until at least 15 days after mediation.

The law also creates a Housing Counseling and Foreclosure Mediation Fund that will be funded with fees imposed under the new law (the law sets a $300 foreclosure filing fee supplement for lenders and a $50 mediation request fee for property owners). The fund will (i) support housing counselors, (ii) provide legal assistance to homeowners trying to avoid foreclosure, (iii) support nonprofit housing counseling agencies, (iv) help the state advise homeowners facing financial difficulties, and (v) assist in funding the cost of foreclosure mediation.

California Federal Court Holds FTC Holder Rule Does Not Require Lenders, Creditors to Provide Holder Notice; NBA Preempts Certain California UCL Claims

On April 12, the U.S. District Court for the Northern District of California held that (i) the Federal Trade Commission’s (FTC) Holder Rule does not require lenders or creditors to include the FTC Holder Notice in consumer credit contracts when the seller has failed to do so, and (ii) the National Bank Act (NBA) preempts certain California Unfair Competition Law (UCL) claims in connection with the failure for a national bank to include the FTC Holder Notice. Kilgore v. Keybank, N.A., Case No. C-08-2958, 2010 WL 1461577 (N.D. Cal. Apr. 12, 2010). In this putative class action, the defendant bank was the partner and preferred lender for an educational institution that became bankrupt. The borrowers alleged that they took out loans from the bank to pay for tuition but were unable to complete their studies because the institution declared bankruptcy. The borrowers brought six claims under the UCL and sought to enjoin the bank from collecting on the loans. The borrowers alleged that its service contracts with the educational institution and the promissory notes with the bank were both consumer credit contracts and omitted the Holder Notice, which the borrowers argued was required. The court first held that the bank was not required to provide the Holder Notice because it was the lender, not a seller, in the transaction. The court reasoned that the Holder Rule imposes obligations only on sellers: “[a]lthough a seller violates the Holder Rule by taking a consumer credit contract – or by accepting proceeds of a purchase money loan made pursuant to a contract – that omits the notice, the same cannot be said of a lender or creditor.” The court also dismissed the borrowers’ fraud claim because it did not properly plead that the bank breached a duty to disclose, as required by the UCL. Next, the court held that the NBA and Office of the Comptroller of the Currency (OCC) regulations preempted several remaining UCL claims against the bank. The court concluded that enjoining the lender from enforcing the notes, based on alleged violations of the UCL, because the borrowers would have had a defense to payment if the Holder Notice had been included, would contravene OCC regulations by allowing the plaintiffs to use state law to alter the terms of credit in the bank’s promissory notes. As stated by the court, “[p]laintiffs’ theory would deploy the UCL to require [the national bank] to comply with a federal regulation that does not itself require [the national bank’s] compliance. Abiding by the Holder Rule would directly affect the terms of credit extended by [the national bank], infringing on a power that national banks are meant to exercise free from state authority.”

U.S. Supreme Court Holds Federal Law Restricts State Authority to Limit Availability of Class Actions

On March 31, the U.S. Supreme Court ruled that state laws barring class actions cannot override the Federal Rules of Civil Procedure (FRCP), which determine when a class action lawsuit may be filed in federal court. Shady Grove Orthopedic Associates, P.A. v. Allstate Ins. Co., No. 08-1008, 2010 WL 1222272 (U.S. Mar. 31, 2010). At issue was a New York state law that does not allow class actions that seek a penalty as part of the remedy and its conflict with FRCP Rule 23, which does not impose this restriction; thus, the FRCP and New York state law conflicted as to whether the class action in this case could proceed. The case turned on whether the New York rule was “substantive,” and would therefore apply to federal courts considering cases based on diversity jurisdiction, or “procedural,” and would therefore infringe upon the FRCP to the extent that the state and federal rules conflicted. The lower federal courts held that the state rule controlled and dismissed the suit for lack of jurisdiction, reasoning that Rule 23 is only a procedural rule and that the New York law limiting the remedy is substantive. In a 5-4 decision, the U.S. Supreme Court reversed and remanded, holding that, because the New York law and Rule 23 were directly contradictory and both seek to determine whether a class action lawsuit may be filed in federal court, the New York law did not override Rule 23. Justice Scalia, writing for the court, stated that “Rule 23 unambiguously authorizes any plaintiff, in any federal civil proceeding, to maintain a class action if the Rules’ prerequisites are met. We cannot contort its text, even to avert a collision with state law that might render it invalid.” While a majority of justices held that the New York rule may not bar this particular class action, the opinion was splintered on the issue of whether federal procedural rules would always trump state procedural rules in diversity cases.

Illinois Federal Court Holds Federal Law Preempts State Law Claims Pertaining to Forced Insurance

On March 30, the U.S. District Court for the Northern District of Illinois held that the Home Owners Loan Act (HOLA) and Office of Thrift Supervision (OTS) regulations preempted certain state law claims against a savings and loan association. Schilke v. Wachovia Mortgage, FSB, No. 09-cv-1363, 2010 WL 1252688 (N.D. Ill. Mar. 30, 2010). In Schilke, the plaintiff borrower obtained a home mortgage from the defendant savings association (the S&L). The loan terms required the borrower to maintain hazard insurance on her home and provided that, if she failed to maintain such insurance, then the S&L would purchase hazard insurance to protect its rights in the property. The S&L disclosed to the borrower that, if it purchased hazard insurance on behalf of the borrower, which it did, it would adjust the borrower’s mortgage payment to cover the insurance premiums, and that the premiums included compensation to the S&L. The borrower then brought this action, asserting claims for violations of the Illinois Consumer Fraud and Deceptive Business Act (ICFA), common law fraud, conversion, and unjust enrichment. These claims were premised on the allegation that the insurance premiums included undisclosed fees.

The S&L moved to dismiss, arguing that HOLA and OTS regulations preempted the borrower’s claims. The court stated that, while OTS has promulgated two preemption regulations under HOLA, certain state laws are not preempted to the extent they are laws of general applicability that only incidentally affect banking activities. The court found that the borrower’s claims were based on laws of general applicability, but that federal law may still preempt the claims if “the state law as applied would regulate lending activities of federal savings associations.” The court found that borrower’s state law claims were at least partly premised on the allegation that the S&L did not disclose that the insurance premium included fees paid to the S&L for the placement, maintenance, and servicing of the insurance. Thus, the court concluded, the borrower sought to use state laws to regulate the S&L’s ability to require private mortgage insurance, impose loan-related fees, and disclose loan terms. Therefore, the court held that federal law preempted the borrower’s claims. The court noted that, while the borrower’s claims of misrepresentations about the amount of fees might not be preempted, there were no actionable misrepresentations here because the loan agreement and S&L’s letters accurately represented the amount of the fees and that premiums would include payments to the S&L. Finally, with respect to the insurer, the court dismissed all claims under the filed rate doctrine – which forbids courts from invalidating or altering rates that were filed with regulatory agencies – except for the ICFA injunctive relief claim, which was dismissed because borrower failed to show that the insurer was the proximate cause of her alleged injuries.

Ohio Federal Court Holds Bank Subsidiaries Not Exempt from Ohio Consumer Sales Practices Act

On March 30, the U.S. District Court for the Southern District of Ohio held that subsidiaries of national banks are not exempt from the requirements of Ohio’s Consumer Sales Practices Act (OCSPA). Kline v. Mortgage Elec. Registration Sys., Inc., No. 3:08cv408, 2010 WL 1267809 (S.D. Ohio Mar. 30, 2010). In Kline, the plaintiff borrowers sued their mortgage lender and other defendants, alleging (among other claims) that the mortgage lender engaged in deceptive and misleading practices and violated the OCSPA by seeking to collect illegal service of process fees, late fees, and property inspection fees in connection with the foreclosure of their mortgage. The mortgage lender argued that, as a subsidiary of a national bank, it was exempt from liability under the OCSPA. According to the court, however, “financial institutions” exempt from the OCSPA’s provisions include national banks, but not subsidiaries of national banks. The court therefore rejected the mortgage lender’s argument that it was entitled to judgment on the pleadings on the borrowers’ OCSPA claims.

Eleventh Circuit Holds FDCPA Private Right of Action May Be Premised on Violation of Corresponding State Law That Provides No Private Right of Action

On March 30, the U.S. Court of Appeals for the Eleventh Circuit held that a federal cause of action under the Fair Debt Collection Practices Act (FDCPA) is cognizable when premised upon a failure to comply with a state consumer protection statute, even where the state statute is analogous to the FDCPA and itself provides no private right of action. LeBlanc v. Unifund CCR Partners, No. 08-16031, 2010 WL 1200691 (11th Cir. Mar. 30, 2010). In LeBlanc, the plaintiff debtor ceased making payments on a credit card. The defendant debt collector purchased the charged-off account and endeavored to collect the debt by, among other things, sending a letter to the debtor advising that it "may refer this matter to an attorney in your area for legal consideration." The debt collector subsequently filed suit in state court to collect the debt. The debtor filed suit in federal court, alleging violations of the FDCPA and the Florida Consumer Collection Practices Act (CCPA). The district court granted partial summary judgment to the debtor, finding that the debt collector violated the FDCPA by failing to register as an "out-of-state consumer collection agency" with the State of Florida, as required by the CCPA, and therefore could not legally sue to collect the debt. Because the district court also viewed the letter as a threat to take legal action, it held that the debt collector violated the FDCPA’s prohibition on any "threat to take action that could not be legally taken" and for using "unfair or unconscionable means to collect a debt." On appeal, the debt collector argued that, because the CCPA provision requiring registration does not itself provide a private right of action, premising a federal cause of action upon the same conduct and legal theory under the FDCPA would undermine or circumvent the state’s consumer protection scheme. The Eleventh Circuit, however, found that (i) the CCPA’s goal of providing consumers with the most protection possible must favor enforcement in the event of any inconsistency between federal and state statutes; (ii) in deeming the CCPA’s remedies cumulative, the legislature contemplated dual enforcement; and (iii) the fact that a debt collector’s failure to register is a misdemeanor criminal act in Florida demonstrates the seriousness of CCPA violations. Therefore, the Eleventh Circuit held that a violation of the CCPA for failure to register may support a federal cause of action under the FDCPA for threatening to take an action not legally available. As to the merits of the claims, the court found that (i) whether the letter constituted a threat for purposes of Section 1692e(5) of the FDCPA and (ii) whether the letter constituted an unfair or unconscionable means to attempt to collect a debt presented genuine issues of material fact for resolution by a jury, and precluded summary judgment.

New York State Court Enforces Subpoenas Issued by New York Agency Regarding Marketing of RALs

On March 23, the First Appellate Division of the New York Supreme Court affirmed an order requiring certain H&R Block entities (Respondents) to comply with a subpoena served by the New York State Division of Human Rights (DHR) in connection with the DHR’s investigation of the marketing of refund anticipation loans (RALs). New York State Div. of Human Rights v. H&R Block Tax Servs., Inc., No. 4237N, 1726/07, 2010 NY Slip Op 2413, 2010 WL 1031854 (N.Y. App. Div. Mar. 23, 2010). In this case, DHR subpoenaed the Respondents to obtain information related to the alleged targeting of minorities and military families for RALs. The Respondents moved to quash the subpoenas and DHR moved to compel responses. The motions court granted DHR’s motion and denied the Respondents’ motion. The Respondents appealed, arguing that DHR lacked subpoena power because the Respondents are not “creditors” within the meaning of the statute that DHR was seeking to enforce. The Appellate Division rejected this argument, holding that there was sufficient evidence that the Respondents were agents of a national bank with respect to the RAL products, and therefore covered by the statute. Alternatively, the court noted, even if the Respondents were not agents of a national bank, DHR’s subpoena power is not limited to “creditors” or agents of a creditor, but, rather, extends to any recipient that DHR has a factual basis to believe possesses information relevant to its investigation. The Appellate Division found that independent reports regarding the targeting of RALs to minorities or military families were such a requisite factual basis. The Respondents also argued that, assuming that they were agents of a national bank, DHR’s investigation into the marketing of RALs was preempted by the National Bank Act. Applying the preemption analyses set forth in Watters v. Wachovia Bank, N.A., 550 U.S. 1 (2007), the Appellate Division held that the DHR subpoenas did not interfere with a national bank’s powers. According to the court, the subpoenas sought information about whether Respondents’ marketing of RALs violates New York’s Human Rights Law, not into the conduct of the national bank or its ability to originate RALs. Thus, the court affirmed the decision of the lower court and ordered the Respondents to comply with the subpoenas.

Oregon Bill Subjects Banks, Credit Unions, Licensees to Oregon’s Unlawful Trade Practices Act

On March 23, Oregon Governor Ted Kulongoski signed HB 3706, a bill that subjects banks and credit unions, as well as entities licensed under the Oregon Mortgage Lender Law (including mortgage bankers, mortgage brokers, and loan originators) and the Oregon Consumer Finance Act (including consumer finance lenders), to the unlawful trade practices provisions of Oregon’s Unlawful Trade Practices Act (UTPA). Such entities were previously exempted from the UTPA. The bill limits the Oregon Attorney General’s ability to take action against state regulated lenders under several of the UTPA provisions without prior request from the Director of the Oregon Department of Consumer and Business Services, and also limits the Attorney General’s ability to adopt rules with respect to certain UTPA provisions.