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Financial Services Law Insights and Observations


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

    State Issues

    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.

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

    State Issues

    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

    State Issues

    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.

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

    State Issues

    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

    State Issues

    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.

  • FTC, California, Missouri Announce Settlement with Mortgage Foreclosure Rescue Services Companies

    State Issues

    On March 22, the Federal Trade Commission (FTC) and the states of California and Missouri announced a settlement with two mortgage foreclosure “rescue” businesses and three related individuals alleged to have made false claims regarding the services that they provided and offered to consumers, and who allegedly violated state laws by charging advance fees for foreclosure consulting services. The settlement agreement (i) broadly prohibits the defendants from making misrepresentations regarding goods and services, (ii) bars the defendants from enforcing contracts with their customers or selling their customers’ personal information, and (iii) bans the defendants from selling mortgage loan modification and foreclosure relief services. The court order approving the settlement also imposes civil money penalties on each individual defendant, respectively. Two additional defendants remain and have been charged with falsely claiming that a lawyer would negotiate the terms of any loan modification and falsely promising a refund in the event of failure.

  • Illinois Appellate Court Upholds Default Interest Clause in Mortgage Note

    State Issues

    On March 19, an Illinois Appellate Court held that a default interest provision in a mortgage note does not violate Illinois law. Inland Bank & Trust v. Knight, No. 1-09-0262, 2010 WL 1033652 (Ill. App. Ct. Mar. 19, 2010). In Knight, the borrower refinanced a mortgage loan on a multifamily apartment complex. The note for the new loan included an “interest after default” clause that permitted the lender to increase the variable rate on the loan upon default. After the borrower defaulted and the lender sued to foreclose, the borrower argued that the clause violated Illinois law, including the Illinois Interest Act, and constituted an unenforceable penalty. The lower court ruled for the lender and the borrower appealed. According to the appellate court, “default interest serves to balance the risk of lending to a defaulted borrower whereas late charges are more akin to a one-time penalty for missing or delaying a scheduled payment.” The court therefore held that the Illinois Interest Act was inapplicable to the default interest clause, which “affected the stated interest rate of the Note itself,” rather than providing for late payment penalties. The court also found that the provision for higher interest following default was not unreasonable given (i) that it was negotiated and agreed upon by both parties, (ii) the losses sustained by the lender due to the default, (iii) the difficulties involved in proving default losses, and (iv) Illinois case law supporting the lender’s position that the clause was valid and enforceable. The court therefore held that the default interest clause did not constitute an unlawful penalty.

  • California Federal Court Holds RESPA, TILA Not Necessary Elements of California UCL Claims

    State Issues

    On March 16, the U.S. District Court for the Northern District of California remanded state law claims made against a servicer because, though referenced in the complaint, the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) were not necessary elements of the claims. Briggs v. First Nat’l Lending Servs., No. C 10-00267, 2010 WL 962955 (N.D. Cal. Mar. 16, 2010). In Briggs, the plaintiff borrowers applied for a loan to refinance their residence and alleged that the company that completed their loan application on their behalf misrepresented the loan by, among other things, leading them to believe that the new loan was in their best interest and not disclosing a kickback payment to the company from the lender. The borrowers subsequently filed suit, alleging claims of fraud, unjust enrichment, and violations of California’s Unfair Competition Law (UCL) against several defendants, including the loan servicer. The servicer removed the action to federal district court, arguing that removal was proper because the state law claims were based on and incorporated alleged violations of TILA and RESPA. The court, however, remanded the claims to state court, reasoning that (i) although the borrowers’ UCL claim was based on TILA, the complaint pleaded alternative theories based solely on state law, and (ii) while a section of the complaint alleged that the loan purchaser was subject to TILA, RESPA, and their respective enabling regulations and that the remaining sections of the complaint “stat[ed] that all preceding paragraphs of the complaint are incorporated as though fully set forth herein,” the complaint did not therefore incorporate by reference TILA or RESPA as a necessary element of the complaint.

  • New Jersey Federal Court Holds Sale-Leaseback Transaction Can Create Equitable Mortgage

    State Issues

    On March 15, the U.S. District Court for the District of New Jersey held that a sale-leaseback transaction can create an equitable mortgage under New Jersey law, thus granting the equitable mortgagor standing to sue as a consumer under the Truth in Lending Act (TILA). Johnson v. NovaStar Mortgage, Inc., Civ. No. 09-1799 (D.N.J. Mar. 15, 2010). In this case, the plaintiff was involved in an alleged foreclosure rescue scam involving two sale-leaseback transactions, wherein the plaintiff first "sold" her home to her daughter, who obtained a loan to fund the purchase, and then "sold" her home to a third-party investor, who also obtained a loan to fund the purchase. After the plaintiff stopped making payments in connection with the second loan transaction, the defendant lender initiated foreclosure proceedings against the third-party investor, who then evicted the plaintiff. The plaintiff brought suit against the defendant lender for violation of, among other laws, TILA. The lender moved to dismiss for lack of standing, arguing that the plaintiff was not a "consumer," as required by TILA, because the lender did not engage in a consumer credit business transaction with her, and for failure to state a claim. In determining whether the plaintiff was involved in a consumer credit business transaction with the defendant, and thus whether the plaintiff had standing to sue the lender, the court looked at the two alleged transactions in light of New Jersey’s doctrine of “equitable mortgage.” The court noted that New Jersey courts have found in the past that sale-leaseback arrangements made to avoid foreclosure are equitable mortgages. Relying on In re O’Brien, 2010 Bankr. LEXIS 171, 2010 WL 251660, the court considered a number of factors to conclude that (i) the plaintiff sufficiently alleged that both sale-leaseback arrangements in this case were equitable mortgages, and (ii) the lender was the plaintiff’s equitable mortgagee. As such, the court held that the plaintiff sufficiently alleged that she engaged in a consumer credit business transaction with the defendant, and that she has standing under TILA. With regard to the lender’s motion to dismiss for failure to state a claim, the court held that the plaintiff’s TILA damages claim was untimely because it was brought outside the one year statute of limitations; however, the plaintiff’s TILA rescission claim was timely because it was brought within the three year statute of limitations.

  • California Federal Court Dismisses State Law Claims Against National Bank on Preemption Grounds

    State Issues

    On March 15, the U.S. District Court for the Northern District of California held that federal law preempts several state law claims brought against a national bank. O’Donnell v. Bank of America, N.A., Case No. C-07-04500 (N.D. Cal. Mar. 15, 2010). In this putative class action, the plaintiff borrowers alleged that the defendant bank “did not adequately disclose the ‘actual’ interest rate and the certainty of negative amortization” in its adjustable rate mortgage (ARM) loan agreements, and brought claims of breach of contract, as well as fraud and unfair competition under the California Unfair Competition Law (UCL). Regarding the UCL claims, the court held that the claims were preempted because they impermissibly “regulate [the bank’s] disclosures for its ARM loans and to require it to make additional disclosures about negative amortization, applicable interest rates, and payment schedules.” The court further noted that the Office of the Comptroller of the Currency (OCC) has promulgated regulations authorizing national banks to make ARM loans secured by interests in real estate without interference from state law, and to make real state loans without regard to state law with respect to (i) “[t]he terms of credit, including schedule for repayment of principal and interest, amortization of loans, balance, payments due, [and] minimum payments,” (ii) “[d]isclosure and advertising,” (iii) “origination…of…mortgages,” and (iv) “[r]ates of interest on loans.” Hence, the court explained that the “OCC’s regulations…expressly preempt plaintiffs’ ability to use state law to reach [the defendant’s] ‘disclosures’ about its Option ARM loans and the ‘amortization of [the Option ARM] loans,’ including how the amortization and interest rate features are disclosed.” In dicta, the court clarified that its “holding does not mean that state laws of general application…are necessarily preempted if applied to a national bank;” instead, “a state law is preempted only if it requires affirmative action by a national bank in an area covered by a national bank regulation,” as in this case where the borrowers sought “to impose disclosure obligations other than those mandated by” federal law. In addition to its preemption analysis, the court also dismissed breach of contract claims against the bank on the theories that (i) the bank failed to apply monthly payments to both principal and interest on a fully-amortizing basis – because the note stated that "[e]ach monthly payment will be applied as of its scheduled due date and will be applied first to current interest, then to prior unpaid interest, and the remainder to Principal,” and (ii) the bank "switched the interest rate charged on the loans to a much higher rate than the one they promised” and “demanded payments in amounts that exceeded those permitted by the Notes” – because “[a]lthough the interest rates that could be charged were arguably not ‘clearly and conspicuously’ set forth as required by TILA, a careful reading of the loan documents reveals that they did explain how interest rates would be charged and payments credited.”


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