InfoBytes Blog

Sixth Circuit Finds State Debt Collection Laws Not Preempted by National Bank Act

On December 14, the U.S. Court of Appeals for the Sixth Circuit, in a plaintiff-garnishors’ lawsuit alleging a defendant bank had improperly garnished funds to satisfy certain service fees, affirmed the dismissal of plaintiffs’ claims (2-1) and held: (i) the National Bank Act ("NBA") does not preempt general state debt collection laws, including laws regulating banks’ rights to collect debts, but (ii) on the other hand, the NBA’s grant of authority to banks to charge and collect fees preempted plaintiffs’ specific state-based conversion claim. See Read Monroe Retail, Inc. v. RBS Citizens, N.A., No. 07-4263 (6th Cir. Dec. 14, 2009). The Court also vacated the district court’s characterization of service fees as setoffs, further holding that the doctrine of setoff "applies only when banks use customers’ funds to satisfy an ‘independent contract’ and external debt to the bank." In dissent, the minority argued that the garnishment law at issue was one of general applicability that only incidentally affects national banks and thus, the NBA should not preempt plaintiffs’ claims.

Florida Law Requires Loan Mod Companies to Obtain License

On December 7, the Florida Office of Financial Regulations issued a reminder that, as of January 1, 2010, individuals and companies providing loan modification services to Florida borrowers must maintain an active Florida mortgage lender, mortgage broker or correspondent mortgage lender license. The requirement is part of a law signed by Florida Governor Charlie Crist on June 29, 2009 that also provided for the licensing of mortgage loan originators under the Nationwide Mortgage Licensing System, as required under the federal Secure and Fair Enforcement for Mortgage Licensing Act (reported in InfoBytes, July 3, 2009). Under the new law, loan modification service providers remain prohibited from charging up-front fees for loan modification services. The law also subjects unlicensed persons or entities that provide loan modification services to Florida borrowers to criminal penalties.

Massachusetts Federal Court Holds FCRA Does Not Preempt Massachusetts Inaccurate Reporting Claim

On December 1, the U.S. District Court for the District of Massachusetts denied a furnisher’s motion to dismiss claims of inaccurate credit reporting brought under Massachusetts state laws that allow claims against furnishers of credit information that fail to follow reasonable procedures to ensure that information given to consumer reporting agencies is accurate. Catanzaro v. Experian Information Solutions, Inc., Civil Action 09-105550, 2009 WL 4363207 (D. Mass. Dec. 1, 2009). The consumer claimed that the defendants – furnishers of credit information a consumer reporting agency – violated the Fair Credit Reporting Act (FCRA) and Massachusetts state law in connection with furnishing and reporting allegedly incorrect credit report information. In rejecting the furnisher’s argument that FCRA preempted the state law claims, the court noted that the Massachusetts requirement to follow reasonable procedures to provide information to a consumer reporting agency that is accurate and complete, M.G.L. c. 93, § 54A(a), is one of two state statutory provisions that is expressly excluded from FCRA’s preemption provision. Although the Massachusetts provision allowing a private right of action, M.G.L. c. 93, § 54A(g), is not mentioned in the FCRA carve-out from preemption, the court held that § 54A(g) is similarly not preempted by the FCRA, as it is “simply a mechanism allowing private litigants to enforce a state standard for credit reporting that Congress deliberately chose not to preempt.” The court held, however, that the consumer’s additional state law claims were in fact preempted by the FCRA, and granted defendants’ motion to dismiss those claims. 

New York Enacts Foreclosure Legislation

On November 16, New York Governor David Patterson announced the passage of Governor’s Program Bill No. 46, which is aimed to provide protections to New York homeowners and tenants facing foreclosure. The bill expands upon SB 8143, a bill enacted in August 2008 (reported in InfoBytes, Aug. 8, 2008). The new bill, among other things, (i) requires a 90-day pre-foreclosure notice to any borrower facing foreclosure (notice currently is required only to borrowers with subprime loans), (ii) requires lenders who serve such a notice to make a filing with the New York Banking Department within three days, (iii) expands the scope of mandatory settlement conferences from subprime borrowers to all borrowers, (iv) requires that tenants receive written notice of change of ownership of a property and be permitted to remain for the longer of their lease term or 90 days, (v) requires plaintiffs who have obtained a judgment of foreclosure to maintain the foreclosed property, and (vi) prohibits brokers who perform “distressed property consulting services” from accepting upfront fees.

California Federal Court Holds State Law Claims Preempted by FCRA

On October 30, the U.S. District Court for the Central District of California held that a claim brought under California Bus. & Prof. Code § 17200 was preempted by the Fair Credit Reporting Act (FCRA) because it related to the responsibilities of a furnisher of information to credit reporting agencies (CRAs). Forester v. Pennsylvania Higher Education Assistance Agency, No. SACV 09-0930, 2009 WL 3710517 (C.D. Cal. Oct. 30, 2009). The consumer in Forester sued the servicer of his student loans, alleging that the servicer violated FCRA and Cal. Bus. & Prof. Code § 17200 by failing to investigate the accuracy of their credit reporting after the consumer filed a “Notice of Dispute” and that the servicer violated Cal. Bus. & Prof. Code §§ 17200 and 17500 by falsely promising that the consumer’s credit report would not show any derogatory history if the consumer rehabilitated his student loans. The servicer argued that FCRA preempted the state law claims. Acknowledging that FCRA and § 17200 both “relate to the duties of the furnishers of information to CRAs,” and following the recent trend of courts in the Ninth Circuit that hold that FCRA “totally preempts ‘all state statutory and common law causes of action which fall within the conduct proscribed by [15] § 1681s-2 [Section 623 of FCRA],’” the court found that FCRA clearly preempted the consumer’s claims, which relate to the servicer’s responsibilities as furnishers of information to CRAs, the court dismissed the consumer’s state law claims. The court, however, refused to dismiss the consumer’s FCRA claims, rejecting the servicer’s argument that they were time-barred because the alleged violation was a failure to investigate the item raised in the dispute, which occurred during the limitations period. 

Hawaii Federal Court Finds That Preemption Applies to State-Law UDAP Claims Based on Alleged TILA Violations

On October 28, the U.S. District Court for the District of Hawaii held that a plaintiff’s state-law Unfair and Deceptive Acts and Practices (UDAP) claims, which were based on violations of the Truth in Lending Act’s (TILA’s) disclosure requirements, are preempted by federal law. Kauinui v. Citibank (South Dakota), N.A., Civ. No. 09-000258, 2009 WL 3530373 (D. Haw. Oct. 28, 2009). In this case, the plaintiff, a credit-card account holder, filed suit against her credit card company, a national bank, alleging that the bank violated TILA’s disclosure requirements regarding the Annual Percentage Rate (APR) and/or the finance charge, and that the TILA violations constituted unfair and deceptive acts or practices under Hawaii’s UDAP statutes. The defendant bank moved to dismiss the claims and to strike portions of the plaintiff’s complaint. The court declined to grant dismissal on the TILA claims, finding that it is “plausible that the bank had violated the disclosure requirements of TILA,” despite the plaintiff’s failure to attach all pages of her credit card statement to the complaint. However, the court granted dismissal of the state UDAP claims. The court noted that federal preemption “does not apply to claims based on violations of generally applicable duties owed by all businesses, such as fraud and breach of contract.” In this case, the court found that a violation of TILA’s disclosure requirement was not a violation of a general law, but a specific allegation and was therefore preempted when applied to the national bank. The court also granted the defendant bank’s motion to strike the plaintiff’s request for statutory damages under TILA because statutory damages are not available for the type of disclosure violation alleged.

Eighth Circuit Holds State Law Claims Regarding Document Preparation Fees is Preempted for Federal Savings Associations

On October 20, the U.S. Court of Appeals for the Eighth Circuit affirmed a district court finding that state laws purporting to restrict lenders from charging document preparation fees are preempted by Office of Thrift Supervision (OTS) regulations issued under the Home Owners’ Loan Act. Casey v. Federal Deposit Ins. Corp., No. 09-1096, 2009 WL 3349950 (8th Cir. Oct. 20, 2009). In Casey, the initial claim was brought by seven homeowners against four lenders that were all federal savings associations (FSAs). The homeowners claimed that the FSAs’ practice of charging fees for the preparation of loan documents violated two Missouri laws–one prohibiting the unlicensed practice of law, and another prohibiting fraudulent conduct in commerce. The FSAs moved for dismissal of the claims based on preemption of the Missouri laws by OTS regulations. Under Section § 560.2(b) of the OTS regulations, among the types of preempted state laws are those purporting to impose requirements regarding “loan-related fees, including, without limitation, initial charges.” The homeowners argued that, because the Missouri state laws ”[made] no mention of lending,” they “necessarily fall[] outside the scope of the § 560.2(b) examples,” and are preempted only if they “purport[] to regulate or otherwise affect” credit activities without regard to § 560.2(b). The court concluded that “a state law that either on its face or as applied imposes requirements regarding the examples listed in § 560.2(b) is preempted. A generally applicable state law that imposes no such requirements will not be preempted if, as applied, it ‘only incidentally affect[s] the lending operations of [FSAs] or [is] otherwise consistent with the purposes of [§ 560.2(a)].” In dismissing the homeowners’ claims, the Eighth Circuit stated that the Missouri laws at issue, as applied, would impose requirements regarding loan-related fees and were thus preempted by § 560.2(b) of the OTS regulations.

California Passes Slate of Mortgage Laws

On October 11, in addition to S.B. 36, California Governor Arnold Schwarzenegger signed into law a collection of bills designed to protect the interests of California homebuyers.

• A.B. 260, among other things, (i) prohibits “steering” borrowers into higher-priced loans that are more risky than lower-interest, fixed-rate loans for which the borrower had actually qualified, (ii) bans negative amortization loans where the loan gets larger the longer the borrower holds the loan, and (iii) establishes strict caps on prepayment penalties. A.B. 260 also imposes a fiduciary duty for all mortgage brokers and banks acting as mortgage brokers, and prohibits lenders and brokers from making false or misleading statements relative to the terms of a subprime loan. 

• A.B. 329 requires reverse mortgage lenders to provide additional, clear information to senior consumers interested in reverse mortgage products. Among its specific provisions are requirements that a lender provide a prospective borrower with (i) a list of at least ten HUD-approved reverse mortgage counseling agencies, and (ii) a written checklist of issues to discuss with the reverse mortgage counselor. 

• A.B. 957 prohibits the seller of certain foreclosed residential real property from conditioning the sale of such property on a buyer’s purchase of title insurance from a particular insurer or title company and/or escrow services from a particular provider. The bill took immediate effect, and remains in effect until January 15, 2015. 

• A.B. 1160 provides that a lender that negotiates a mortgage loan primarily in Spanish, Chinese, Tagalog, Vietnamese, or Korean is required to deliver to the borrower a specified form in that same language. The form, to be created by the Department of Corporations and the Department of Financial Institutions, will provide a summary of the terms of the loan contract or agreement. A.B. 1160 becomes effective July 1, 2010, or 90 days after the Department of Corporations and the Department of Financial Institutions create the specified form, whichever is later.

• S.B. 237 requires appraisal management companies to register with the California Office of Real Estate Appraisers, and provides that an appraisal management company is prohibited from improperly influencing or attempting to improperly influence an appraisal. 

• S.B. 239 makes it a felony to commit fraud in connection with a mortgage loan application, where the value of the fraud meets the threshold for grand theft under California law (currently, $400).

California Enacts Law Prohibiting Up-Front Fees for Foreclosure Relief Services

On October 11, California Governor Arnold Schwarzenegger signed into law S.B. 94, a bill that, until January 1, 2013, prohibits any person who offers to perform residential mortgage loan modifications or other forms of mortgage loan forbearance for compensation paid by a borrower from (i) demanding or receiving any pre-performance compensation, (ii) requiring any security as collateral for final compensation, or (iii) taking a power of attorney from a borrower. A violation of these prohibitions constitutes a misdemeanor or is subject to specified fines. The new law does not apply to certain actions taken by a person who offers loan modification or other loan forbearance services for a loan owned or serviced by that person, including, but not limited to, collecting principal, interest, or other charges under the terms of a loan before the loan is modified, including charges to establish a new payment schedule for a non-delinquent loan. The new law also requires any person who offers to perform residential mortgage loan modifications or other forms of mortgage loan forbearance, as specified, for compensation paid by a borrower, to provide a specified 14-point bold type statement regarding loan modification fees, and makes a violation of this prohibition a misdemeanor or subject to specified fines. Lastly, the new law adds to the California Finance Lenders Law a prohibition on making a materially false or misleading statement or representation to a borrower about the terms or conditions of that borrower’s loan, when making or brokering a loan. The new law became effective immediately upon signing.

The court evaluated each of the plaintiff’s claims in the context of a motion to dismiss filed by the defendant and a motion for leave to file a second amended complaint filed by the plaintiff. With respect to the plaintiff’s claims that the defendant violated FCRA’s adverse action provisions by furnishing inaccurate credit information concerning the plaintiff to CRAs and by failing to notify the plaintiff of the adverse action, the court held that the plain language of FCRA expressly reserves the right to enforce FCRA’s adverse action provisions to state and federal agencies. However, the court explained that FCRA does provide a private right of action with respect to § 1681-2(b), which sets forth a furnisher of information’s duty to reinvestigate disputed information upon receipt of a notice of dispute from a CRA. Accordingly, the court dismissed each of the plaintiff’s FCRA claims, with the exception of the plaintiff’s claim stated pursuant to § 1681s-2(b).

Additionally, the court did not dismiss the plaintiff’s claim that the defendant violated the CCCRA by providing information concerning the plaintiff to CRAs that the defendant knew or should have known was inaccurate, holding that FCRA does not preempt a plaintiff’s private right of action to enforce the CCCRA. However, the court dismissed the plaintiff’s claim that the defendant violated the CCCRA by failing to notify her that it had reported negative information to CRAs, noting that the defendant, as an insurance company, was expressly exempt from the requirement. Finally, the court found that the plaintiff’s allegation of defamation with malice overcame FCRA’s qualified preemption of state law defamation claims.

North Carolina Identity Theft Legislation Becomes Effective

On October 1, the operative provisions of North Carolina SB 1017, an Act enhancing protections available to victims of identity theft, went into effect (SB 1017 was initially reported in InfoBytes, Aug. 7, 2009). In general, the Act creates new legal obligations for credit reporting agencies (CRAs), creditors, businesses, and credit monitoring services. Under the Act, CRAs must notify a North Carolina consumer who requests a security freeze that, in order to obtain a freeze from another CRA, he or she must make a separate, individual request to that CRA because only it can obtain the consumer authorization necessary to freeze its own files. The Act also mandates that CRAs lower their response times to a consumer’s request to add or remove a freeze. With respect to creditors, the Act prohibits any communication about a debt to a CRA during the pendency of a consumer’s application for an award from the North Carolina Crime Victims Compensation Fund. The Act also requires credit monitoring services to notify consumers that they have the right to one free credit report per year before charging the consumer a fee to obtain or monitor the consumer’s credit report on behalf of the consumer.