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  • Florida District Court Allows Litigation Alleging Excessive Overdraft Fees on Debit Card Purchases to Proceed; National Bank Act Does Not Preempt State Law Claims

    State Issues

    On March 11, the U.S. District Court, Southern District of Florida refused to dismiss several consolidated lawsuits against Bank of America, Citibank, JPMorgan Chase, Union Bank, U.S. Bank, Wachovia, Wells Fargo, SunTrust, and Huntington National Bank (the defendant banks) alleging that the defendant banks charged “excessive” overdraft fees on debit card purchases. In re Checking Account Overdraft Litigation, No. 09-MD-02036, 2010 WL 841305 (S.D. Fla. Mar. 11, 2010). The court held that the plaintiffs, who are current or former checking account customers of the defendant banks and who seek to recover for themselves and all other similarly-situated customers allegedly-excessive overdraft fees for charges made to their accounts on debit card transactions, pleaded plausible facts supporting claims for breach of contract, breach of a covenant of good faith and fair dealing, unconscionability, conversion, unjust enrichment, and violation of the consumer protection statutes of various states, and therefore stated claims that survived the defendant banks’ motion to dismiss. The court held that the plaintiffs “set forth a number of … policies and practices,” that would entitle plaintiffs to relief, including manipulating customer accounts by reordering debit transactions on a single day, or over multiple days, from largest to smallest amount, regardless of the actual chronological sequence, thus resulting in more overdrafts than if the transactions were processed chronologically. Importantly, the court rejected the defendant banks’ preemption argument barring state regulation of the activities of national banks under the National Bank Act (NBA). In holding that the claims were not preempted, the court noted that the state law claims only "incidentally affect the exercise of national banks’ deposit taking powers," noting first that Office of the Comptroller of the Currency’s regulations and interpretive letters do not explicitly preempt the state law claims because they do not explicitly (i) authorize banks "to ignore general contract or tort law," or (ii) authorize debit card postings in a high to low order to increase fees. The court further noted that field preemption does not apply to such claims and that state laws of general application, such as those alleged to have been violated in this case, "do not vitiate the purposes of the NBA," and, thus, are not preempted. The multidistrict litigation consolidated 15 legal actions against the defendant banks, and, collectively, the complaints involve individual plaintiffs from 14 states asserting claims under the laws of 21 states.

  • Washington Federal Court Holds State Law Claims Regarding Real Estate Lending Fees Not Preempted by NBA

    State Issues

    On March 9, the U.S. District Court for the Western District of Washington held that the National Bank Act (NBA) and regulations promulgated by the Office of the Comptroller of the Currency (OCC) do not preempt state law claims challenging the legality of fees related to real estate lending. Deming v. First Franklin, No. 09-5418, 2010 WL 891009 (W.D. Wash. Mar. 9, 2010). The plaintiff borrower in Deming alleged that defendants’ "Administration" and "Compliance Review" fees charged in connection with his two mortgage loan transactions were fraudulent, constituted breach of contract, and violated the Washington Consumer Protection Act. The defendants moved to dismiss the complaint, arguing that the borrower’s state-law claims were preempted by the NBA and OCC regulations because the claims sought to impose state-law limitations on the real estate lending activity of a national bank. The court denied the defendants’ motion, holding that “the NBA is not so broad as to cover ‘fees’ in this context.” According to the court, the OCC regulation that the defendants’ argued is controlling law regarding “fees” only involves national bank charges, not real estate loan transactions. Moreover, an OCC regulation permitting national banks to “make real estate loans . . . without regard to state law limitations concerning . . . [p]rocessing, origination, [and] servicing . . . mortgages,” while applicable to real estate lending, does not explicitly define “processing, origination, [and] servicing” to include “fees.” The court found dispositive that, while the NBA regulations are extensive, “the OCC chose not to address fees related to real estate lending specifically,” and therefore federal law did not preempt the borrower’s state-law claims challenging the fees. 

  • Ninth Circuit Affirms Dismissal of RESPA, California UCL Claims Against National Bank

    State Issues

    On March 9, the U.S. Court of Appeals for the Ninth Circuit affirmed that (i) overcharges do not violate Section 8(b) of the Real Estate Settlement Procedures Act (RESPA), and (ii) National Bank Act and Office of the Comptroller of the Currency (OCC) regulations preempt various provisions of the California Unfair Competition Law (UCL). Martinez v. Wells Fargo Home Mortgage, Inc., No. 07-17277, 2010 WL 779549 (9th Cir. Mar. 9, 2010). In Martinez, the plaintiffs claimed that the defendant bank charged excessive fees for the refinancing of their home mortgage loans. The plaintiffs alleged that the overcharges violated RESPA, while the overcharge and mark-up violated the UCL. Regarding the RESPA claim, the court found that “Section 8(b) does not prohibit charging fees, excessive or otherwise, when those fees are for services that were actually performed.” Although the U.S. Department of Housing and Urban Development (HUD) had issued a policy statement interpreting Section 8(b) as prohibiting overcharges, the court noted that weight is given to an agency’s interpretation of a statute only if the court concludes that the statute is “silent or ambiguous with respect to the specific issue.” In rejecting HUD’s interpretation, the court found that “Section 8(b) is unambiguous and does not extend to overcharges,” and that further analysis was not warranted. Regarding the UCL claims, the plaintiffs alleged that the bank (i) “committed ‘unfair’ competition by overcharging underwriting fees and marking up tax service fees,” (ii) “engaged in ‘fraudulent’ practices by failing to disclose actual costs of its underwriting and tax services, and (iii) engaged in “unlawful practices” by overcharging and marking-up the refinancing fees, as well as failing to disclose such costs. As to the allegations of “unfair” and “fraudulent” conduct, the court found that these claims were preempted by the National Bank Act (NBA) and regulations promulgated by the OCC. Under the NBA, federally chartered banks are subject to generally applicable state laws only to the extent such laws do not conflict with the general purposes of the NBA, which include real estate lending powers as part of the general powers of a national bank. OCC regulations provide that national banks have the power to set fees, and that national banks may make real estate loans under the NBA and the regulations without regard to state-law limitations on disclosures, advertising and processing or origination of such loans. As a result, the court held that federal law preempted the plaintiffs’ claims of “unfair” and “fraudulent” practices in connection with overcharges, mark-ups, and disclosure of fees. Finally, the court held that the alleged predicate violation to establish a claim of “unlawful practices” under the UCL – in this case, a failure to disclosed “actual costs” on the HUD-1 Settlement Statement – was either not unlawful or preempted by the NBA.

  • Seventh Circuit Rejects Cramdown Attempt; Holds PMSI Includes Negative Equity

    State Issues

    On March 1, the U.S. Court of Appeals for the Seventh Circuit affirmed a decision from the Bankruptcy Court for the Northern District of Illinois that held that an auto loan creditor’s purchase-money security interest (PMSI) included the financing of negative equity from a trade-in vehicle, and thus rejected the debtor’s attempt to "cramdown" his claim. In re Howard, No. 09-3181, 2010 WL 680974 (7th Cir. Mar. 1, 2010). In this case, the debtor traded in a vehicle in which he held "negative equity" (i.e., the amount owed on the trade-in vehicle exceeded the value of that vehicle) in conjunction with financing a new vehicle purchase. The amount financed to purchase the new vehicle included the "negative equity" from the trade-in vehicle. Several months after purchasing the new vehicle, the debtor filed for Chapter 13 bankruptcy protection. The debtor sought to "cramdown" his Chapter 13 plan by bifurcating the creditor’s claim into (i) a secured portion, and (ii) an unsecured portion (the negative equity from the trade-in vehicle), and the creditor objected to this proposed treatment of its security interest. The bankruptcy judge sustained the creditor’s objection, relying on the "hanging paragraph" of Section 1325(a) of the U.S. Bankruptcy Code, which excludes certain bankruptcy claims from "cramdown" when the creditor has a PMSI. On appeal, the Seventh Circuit relied on the Illinois Motor Vehicle Retail Installment Sales Act’s language indicating that negative equity is part of the “deferred payment price,” and the Illinois Uniform Commercial Code’s definition of PMSI to “join the other courts in ruling that negative equity can be part of a [PMSI] and if thus secured is not subject to the cramdown power of the bankruptcy judge in a Chapter 13 bankruptcy.” The opinion, authored by Judge Posner, noted that, although the statutory language did not necessarily require this finding, including negative equity in the PMSI “may be essential to the flourishing of the important market that consists of the sale of cars on credit” and “Article 9 does not seek to discourage credit transactions.”

  • Missouri Federal Court Certifies Borrower Class in YSP Disclosure Case

    State Issues

    On February 22, the U.S. District Court for the Eastern District of Missouri certified a class representing borrowers in Missouri who received allegedly inadequate disclosures from their mortgage broker. Glen v. Fairway Independent Mortg. Corp., Case No. 4:08CV730, 2010 WL 623675 (E.D. Mo. Feb. 22, 2010). In this case, the plaintiffs alleged that a mortgage broker failed to fulfill a promise to disclose to borrowers all compensation it received from mortgage lenders, in violation of the Missouri Merchandising Practices Act (MMPA). Specifically, the plaintiffs alleged that the broker failed to disclose a yield spread premium (YSP) in its good faith estimates. The court certified the class over the defendant broker’s objections relating to typicality of claims and the predominance of common questions of law and fact. The court agreed with the plaintiffs that the predominant and common issue in the case was whether the broker’s practice of failing to disclose YSPs it received from lenders, after promising to borrowers to make such disclosures, violated the MMPA. The court, however, declined to accept the plaintiffs’ request to extend the relevant time period from five to six years under Missouri’s statute of limitations. In certifying the class, the court noted that whether the broker’s disclosures were consistent with requirements under the Real Estate Settlement Procedures Act (RESPA) was “irrelevant to the question before the Court, which is whether plaintiffs can bring claims under Missouri law.” As such, the court also rejected the broker’s claim that whether its promises to consumers were false required an inquiry into whether the YSP constitutes “reasonable compensation for the goods,” noting that “the ‘reasonableness’ inquiry is only relevant to a determination of whether [the broker] violated RESPA,” which was not at issue in this case.

  • California Federal Court Holds Equitable Tolling Applicable to TILA Damages Claim; HOLA Does Not Preempt Certain State Law Claims

    State Issues

    On February 22, the U.S. District Court for the Eastern District of California held that the doctrine of equitable tolling was applicable to a damages claim under the Truth in Lending Act (TILA) and that the Home Owners’ Loan Act (HOLA) did not preempt claims of fraudulent omissions and certain claims under the California Unfair Competition Law (UCL). Yang v. Home Loan Funding, Inc., No. CV F 07-1454, 2010 WL 670958 (E.D. Cal. Feb. 22, 2010). In this case, the plaintiff borrowers proposed a class of borrowers who obtained Pay Option Adjustable Rate Mortgages (ARMs) from the defendant lenders. According to the borrowers, the ARMs were “designed to, and always would, cause negative amortization” because the margin rate of the loans was always greater than the teaser rate. The borrowers subsequently filed claims against the lenders under TILA and the California UCL, as well as claims under state common law. With respect to the borrowers’ TILA claim, the court held that it could not conclude that the complaint failed to support a claim for rescission. The court further concluded that that the doctrine of equitable tolling was applicable to the TILA damages claims because the borrowers alleged that they “were not informed of the sharp increase in the interest rate [of the ARM], and the fact that their monthly payments were not enough to pay the interest accruing on the loan, until they had made multiple payments following the closing of the loan.” Regarding the borrowers’ common law claim of fraudulent omissions and statutory claim under the UCL, the court held that HOLA did not preempt these claims. However, the court recognized that, to the extent such claims “attempt to impose liability under state law against [the federal thrift] for acts actually committed by [the federal thrift] that fall within the preemptive scope of [HOLA], those claims would be held preempted.” The court further held that TILA does not preempt the plaintiffs’ UCL claims to the extent those claims are based on allegations of oral misrepresentations amounting to fraud, but TILA does preempt those claims based on allegations of written deficiencies in the Truth in Lending Disclosure Statements. Finally, with respect to the plaintiffs’ breach of contract and unjust enrichment claims, the court found that the ambiguity of several terms (e.g., the calculation of the interest rate and the timing of the interest rate changes during at least the first year of the loan) in the loan contract warranted denial of the motions to dismiss.

  • Second Circuit Affirms Dismissal of Sherman Act Claims Against Title Insurers Based on Filed Rate Doctrine

    State Issues

    On February 11, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s dismissal of a case alleging a price-fixing conspiracy in violation of the Sherman Act and deceptive practices in violation of New York state law in connection with title insurance. Dolan v. Fidelity National Title Ins. Co., No. 09-2697, 2010 WL 457318 (2nd Cir. Feb. 11, 2010). In Dolan, the plaintiffs alleged that several title insurance companies conspired (i) to fix title insurance rates, (ii) to include agency commission costs in the rates, (iii) to embed kickbacks in the rates, and (iv) to obscure these supposed costs from regulatory scrutiny by funneling the costs to and through title agents. The district court dismissed the claims based on the “filed rate doctrine,” which holds that any filed rate – i.e., a rate approved by the governing regulatory agency – is “per se reasonable and unassailable in judicial proceedings brought by ratepayers.” In this case, the title insurance rates at issue had been filed with and approved by the New York Insurance Department. The court of appeals, in affirming the dismissal, rejected the plaintiffs’ arguments that the filed rate doctrine did not apply, reasoning that (i) the rates were properly filed, (ii) the doctrine applies “to all filed rates, not merely those rates investigated before their approval,” (iii) New York insurance law did not provide a private right of action for the plaintiffs, (iv) the filed rate doctrine applied to New York’s title insurance system, and (v) the plaintiffs were merely seeking lower title insurance rates, and antitrust law cannot enjoin operation under established rates. The court further noted that decisions invoking the Real Estate Settlement Procedures Act (RESPA) and declining to apply the filed rate doctrine were inapplicable because RESPA provides for rights of action and remedies not invoked by the plaintiffs.

  • California Federal Court Holds FCRA Preempts California State Law Claims

    State Issues

    On February 2 the U.S. District Court for the Northern District of California held that the Fair Credit Reporting Act (FCRA) preempts certain claims under the California Consumer Credit Reporting Agencies Act (CCRAA) and the California Unfair Competition Law (UCL). Wang v. Asset Acceptance, LLC, No. 09-4794-SC, 2010 WL 409848 (N.D. Cal. Feb. 2, 2010). In Wang, the plaintiff consumer brought a putative class action against defendant debt collection agency, stating that the debt collection agency’s alleged practice of reporting debts to credit reporting agencies (CRA) without reporting that the debts are disputed or that the debts are passed their statute of limitations violates CCRAA § 1785.25(a) and UCL § 17200. The debt collection agency moved to dismiss, arguing that the consumer’s claims were preempted by FCRA. The court granted the motion in part and denied it in part. While recognizing that CCRAA § 1785.25(a) is expressly excluded from FCRA preemption, the court held that the claim was, nonetheless, preempted, because the claim should have been brought under Section 1785.25(c) of the CCRAA – prohibiting the reporting of information that is disputed by the consumer without noting that it is disputed – which does not enjoy such exclusion from FCRA preemption. With respect to the consumer’s claim that the debt collection agency failed to report information related to the debt’s statute of limitations, the court held that Section 1785.25(a) of the CCRAA does not expressly impose such a duty, and that implying such a per se duty would not be appropriate because the statute of limitations is an affirmative defense subject to waiver. However, the court held that, in the instant case, the individual the consumer had stated a claim under CCRAA § 1785.25(a) because there was evidence that the consumer had successfully relied on the statute of limitations defense in the past and that the debt collection agency was not actually pursuing his debt because of that defense. However, the court did not decide whether this claim would be a viable class claim. Finally, the court held that the consumer’s UCL § 17200 claims based on the debt collection agency’s alleged failure to report that a debt was in dispute or that a debt was past its statue of limitations are preempted by FCRA because enforcing such a claim “would impose an independent requirement or prohibition on furnishers of information to CRAs.”

  • New York District Court Denies Summary Judgment in Challenge to Electronically-Signed Application

    State Issues

    In a recent case, a New York federal district court denied summary judgment on claims that the online submission of a life insurance policy violated the New York Electronic Signatures and Records Act (ESRA). The Prudential Ins. Co. of America v. Dukoff, No. 07-1080, 2009 WL 4884008 (E.D.N.Y. Dec. 18, 2009). In this case, The Prudential Insurance Company of America (Prudential) challenged the validity of a life insurance policy and alleged, among other things, that the applicant had made materially false statements on the application. The defendants (the spouse and estate of the deceased policy holder) counterclaimed for full payment under the insurance policy and argued that, among other things, the statements made in the application could not be used to rescind the contract because the application failed to comply with the requirements of ESRA. Both parties moved for summary judgment on various claims. In particular, the defendants argued that the purported material misstatements were barred because the application was not a “written instrument” signed by the policy holder, and pointed specifically to an interpretive opinion issued by the Office of General Counsel for the New York Insurance Department (Department), which stated that a checked box on an internet application is a valid electronic signature only if the insurer using the technology “is capable of verifying that the person providing the signature is actually the party to be charged.” The defendants argued that Prudential had no such verification ability. The court considered whether Prudential’s “click-through” electronic submission process satisfied the requirements for an electronic signature. The court first noted that the New York legislature had amended ESRA to remove a requirement that an electronic signature be accompanied by an “identifier,” that is capable verification that is unique to the person signing the electronic record; yet, nevertheless, the court afforded deference to the Department’s opinion. Thus, the court held that Prudential could use statements made in the application only if it could “reasonably identify” the person who made the statements. The court stated that while the final page of the insurance application does not require identifying information, “the applicant nonetheless transmits important identifying information to Prudential—including his or her address, social security number, and physical description—when he or she submits the application.” Consequently, the court denied the motion for summary judgment, finding that there was a triable issue of fact as to whether the application process satisfied the requirements of the Department’s opinion. The court further denied all other motions for summary judgment made by both parties. 

  • California Court Holds FCRA Preempts California’s Confidentiality of Medical Information Act

    State Issues

    On January 29, the California Court of Appeals, Second District, held that the Fair Credit Reporting Act (FCRA) preempts claims regarding the disclosure of medical information under California’s Confidentiality of Medical Information Act (CMIA). Brown v. Mortensen, No. B199793, 2010 WL 324749 (Cal. Ct. App. Jan. 29, 2010). In this case, the plaintiff disputed a medical debt with the defendant debt collector. To verify the existence of the debt, the debt collector disclosed confidential medical information to three consumer credit reporting agencies. The plaintiff subsequently filed suit, arguing that the disclosure of the records violated the CMIA. Holding that FCRA expressly preempted the claim, the court noted that FCRA “preempts state law relating to the duties of furnishers of information to consumer reporting agencies” and reasoned that, because “[the CMIA claims] are rooted in [the debt collector’s] furnishing of information to consumer reporting agencies,” FCRA preempted the consumer’s CMIA claims, regardless of the fact that the CMIA pertains to the disclosure of medical information and not to consumer reporting. In arriving at its decision, the court noted that its approach accorded with several decisions finding for preemption of state law by FCRA, including (i) Pirouzian v. SLM Corp., 396 F.Supp.2d 1124 (S.D.Cal. 2005), which held that FCRA preempted certain claims under the Rosenthal California Fair Debt Collection Practices Act (CFDCPA), (ii) Howard v. Blue Ridge Bank, 371 F.Supp.2d 1139 (N.D.Cal. 2005), which held that FCRA preempted an unfair competition claim brought under section 17200 of the California Business and Professions Code, (iii) Roybal v. Equifax, 405 F.Supp.2d 1177 (E.D.Cal. 2005), which held that FCRA preempted negligence and negligent misrepresentation claims, as well as claims for violations of section 17200 of the California Business and Professions Code, the CFDCPA, and the California Consumer Legal Remedies Act, and (iv) Sanai v. Saltz 170 Cal.App.4th 746 (Cal. Ct. App. 2009), which held that FCRA preempted claims of slander, libel, intentional and negligent interference with prospective economic advantage, intentional and negligent infliction of emotional distress, and violations of the California Consumer Credit Reporting Agencies Act. The court noted that, while the 2003 amendment to FCRA, the Fair and Accurate Credit Transactions Act (FACTA), addresses the use and sharing of medical information in connection with debt collection, the court held that those provisions did not apply in this case because the events in dispute and the filing of the complaint occurred prior to the effective date of FACTA.

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