The Arbitration Study issued last month by the Consumer Financial Protection Bureau revives a long-standing policy debate over consumer arbitration.
The CFPB Arbitration Study, mandated by Dodd-Frank, analyzes the prevalence of consumer arbitration, consumer knowledge and understanding of arbitration provisions, procedural rules in arbitration, and empirical data on arbitration experiences as compared to federal and state court. The Study also compares alternatives, including small claims court, class actions, public enforcement actions, and analyzes credit pricing in the context of pre-dispute arbitration clauses. The stated purpose of the Study is to provide empirical, not evaluative, analysis of consumer arbitration issues.
In Hawaii v. HSBC Bank Nevada, NA, the 9th Circuit reversed the district court's denial of motions to remand in several suits brought against credit card issuers by the Hawaii Attorney General, holding that there was no federal court subject matter jurisdiction under the doctrine of complete preemption and no jurisdiction under the Class Action Fairness Act (CAFA).
The Attorney General of Hawaii sued six credit card issuers in separate complaints in Hawaii state court, alleging unfair and deceptive practices under state law and unjust enrichment related to marketing and enrolling customers in debt protection products such as payment protection plans, extended warranties, identity theft protection plans, and similar products. Defendants removed the cases to the district court. The Attorney General moved to remand each case. The district court denied the motions to remand, holding that although there was no CAFA jurisdiction, there was federal court jurisdiction based on the doctrine of complete preemption. The Attorney General sought leave to file an interlocutory appeal, and the district court certified questions to the 9th Circuit, which granted permission to appeal.
California Supreme Court: Unconscionability Rule Is Valid If It Does Not Interfere with "Fundamental Attributes of Arbitration"
Though the case arose in the context of an employment contract, Sonic-Calabasas A, Inc. v. Moreno (Sonic II), issued on October 17, 2013, potentially has implications for all arbitration agreements. In its lengthy decision, discussed in more detail below, the California Supreme Court took the opportunity to explicate the state of California's unconscionability doctrine in light of the Supreme Court's 2011 decision in AT&T Mobility LLC v. Concepcion (more on Concepcion here) and its more recent 2013 decision in American Express Co. v. Italian Colors Restaurant (more on Italian Colors here). The California high court reiterated that the unconscionability doctrine is viable under the Federal Arbitration Act's savings clause, and determined that Concepcion only requires that it not "interfere with fundamental attributes of arbitration" or be applied in any way that discriminates against arbitration. The fact that even-handed application of an unconscionability rule would have a disproportionate impact on arbitration agreements is not enough to implicate the limits of the FAA, according to the Court's opinion.
Specifically, the Court held that an arbitration agreement's requirement to waive statutorily-afforded Berman protections, while not per se unconscionable, is one factor that a court may consider in determining whether the arbitration agreement as a whole is unconscionable. It is reasonable to presume that courts will soon be entertaining arguments that Sonic II's logic should be extended.Continue Reading...
Ninth Circuit En Banc Panel Upholds Arbitration Provision, Declines to Consider Whether Concepcion Preempts Broughton-Cruz.
Last year, in Kilgore v. Keybank, a three judge panel held that the Federal Arbitration Act (FAA) preempted California's Broughton-Cruz rule, which exempts a public injunction claim from arbitration. (See Broughton v. Cigna and Cruz v. Pacificare). In Kilgore, former students of Silver State, a now-defunct private helicopter school, filed a putative class action case against Key Bank and other defendants for violations of California's Unfair Competition Law after the school closed its doors and filed for bankruptcy, leaving plaintiffs without a diploma, certificate, or other accreditation. Plaintiffs each borrowed between $50,000 and $60,000 from KeyBank to finance their vocational education and signed loan contracts containing an arbitration clause which stated that plaintiffs waived their rights to litigate any claim in court or proceed with any claim on a class basis unless the plaintiffs opted out of the arbitration clause by a date certain. The three judge panel held that the Broughton-Cruz rule did not survive the Supreme Court's landmark decision in AT&T Mobility LLC v. Concepcion because the Rule "prohibits outright the arbitration of a particular type of claim" and reversed the district court's denial of the plaintiffs' motion to compel arbitration.
The en banc panel, however, declined to rule on the issue of whether Concepcion preempts Broughton-Cruz. Instead, the Court found that it did not need to reach the broad issue of whether or not Broughton-Cruz remains viable because the plaintiffs' claims in this instance did not fall within Broughton-Cruz' purview. (See Kilgore v. Keybank.) Specifically, the Court held that plaintiffs' claims did not fall within the "narrow exception to the rule that the FAA requires state courts to honor arbitration agreements" because the requested prohibitions against reporting defaults or seeking enforcement of the subject notes would only benefit approximately 120 putative class members. The Court noted that the central premise of Broughton-Cruz is that "the judicial forum has significant institutional advantages over arbitration in administering a public injunctive remedy, which as a consequence will likely lead to the diminution or frustration of the public benefit if the remedy is entrusted to arbitrators." The Court found that the concern for the public at large was inapplicable here because, by plaintiffs' own admission, the class affected by the alleged practices is small, the alleged statutory violations have ceased, and there is no real prospective benefit to the public at large from the relief sought by plaintiffs.
The Court also held that the requested injunction against disbursing loans to sellers who do not include Holder Rule language in their contracts fell outside of the Broughton-Cruz rule because it only related to past harms. As alleged in the plaintiffs' complaint, KeyBank has since completely withdrawn from the private school loan business and is not engaging in other comparable transactions.
Consequently, the en banc panel reversed the denial of defendants' motion to compel arbitration and remanded with instructions to compel arbitration.Continue Reading...
In Gutierrez, et al. v. Wells Fargo Bank, NA, the Ninth Circuit Court of Appeals recently held that the National Bank Act preempts California’s Unfair Competition Law (“UCL”) insofar as the UCL’s unfair business practices prong bars a national bank’s practice of posting debit card transactions in a particular (i.e., high-to-low) order. The Court held, however, that federal law does not preempt California’s consumer protection laws with respect to claims that a bank’s representations concerning the posting order were fraudulent or misleading.
The Gutierrez plaintiffs filed suit against Wells Fargo upon learning that the bank posts debit card transactions (from the previous day) to its customers’ accounts in high-to-low order, regardless of the order in which the transactions actually occurred. This practice has the potential to turn a single overdraft fee into many overdrafts. The plaintiffs contended that the bank’s posting practice violates the UCL as an unfair business practice and that Wells Fargo also violated the fraudulent prong of the UCL by representing to customers that debit card purchases were deducted “immediately,” reinforcing their natural expectation that transactions would be processed chronologically.
The 9th Circuit recently ordered that the case of Kilgore v. KeyBank be reheard en banc.
In Kilgore v. Key Bank, the plaintiffs brought a putative class action against Key Bank and other defendants for violations of California's Unfair Competition Law in connection with private student loans that KeyBank extended to plaintiffs for flight instruction at a private helicopter vocational school. Plaintiffs each borrowed between $50,000 and $60,000 from KeyBank to finance their vocational education and signed loan contracts which contained an arbitration clause which informed plaintiffs that they could opt out of the arbitration cause, but that if they did not, they would waive their rights to litigate any claim in court and proceed with any claim on a class basis. The plaintiffs filed suit after the flight school closed its doors and filed for bankruptcy, leaving plaintiffs without a diploma, certificate, or other accreditation.Continue Reading...
In Parks v. MBNA America Bank, N.A., the California Supreme Court held that the National Bank Act (NBA) preempts California Civil Code section 1748.9, which requires that credit card issuers make certain disclosures on so-called convenience checks.
In Parks, plaintiff sued MBNA in a putative class action alleging a violation of California's unfair competition law, Bus. and Prof. Code section 17200 et seq., because it had failed to make the disclosures required by section 1748.9 on convenience checks tied to his credit card. MBNA renewed a Motion for Judgment on the Pleadings after the Ninth Circuit decided Rose v. Chase Bank USA, N.A., which held that the NBA and former regulation 12 C.F.R. 7.4008(d) preempt section 1748.9. The Superior Court granted MBNA's renewed Motion for Judgment on the Pleadings.
The Court of Appeal reversed, holding that the NBA does not preempt section 1748.9 because it does not significantly impair the power of national banks. The Court of Appeal also held that "national banks claiming preemption must make a factual showing that the disclosure requirement significantly impairs the exercise of the relevant power or powers." The California Supreme Court granted review.Continue Reading...
Following the U.S. District Court for the Northern District of California's decision in El-Aheidab v. Citibank, the Southern District of California recently adopted the "No Conflict Exists" approach to federal preemption under the Fair Credit Reporting Act.
In Miller v. Bank of America, 2012 WL 871321 (S.D. Cal. March 14, 2012), the plaintiff filed suit in California state court alleging numerous causes of action against defendant Bank of America and the credit reporting agencies (CRAs) after Bank of America allegedly reported the short sale of plaintiff's property as a foreclosure on his credit report, resulting in plaintiff being unable to refinance his home loan. One of the CRAs removed the case to federal court, and defendant Bank of America subsequently filed a motion to dismiss, arguing, among other things, that the plaintiff's claims for violations of California's Unfair Competition Law (UCL) and plaintiff's common law claims for negligence and intentional and negligent infliction of emotional distress were each preempted by the FCRA.
In granting the defendant's motion to dismiss, the Court agreed that the plaintiff's UCL and common law claims were preempted by the FCRA. Regarding the plaintiff's UCL claim, the court held that the FCRA preempts claims brought under California's UCL insofar as they relate to the responsibilities of furnishers of credit information regulated by Section 1681 s-2 of the FCRA. The Court reasoned that plaintiff's UCL claim was preempted because plaintiff's allegations against Bank of America related exclusively to the responsibilities of furnishers of credit information.
With regard to plaintiff's common law claims, the Court likewise held that they should be dismissed because they also related exclusively to the duties set forth under section 1681s-2. The Court also specifically rejected the plaintiff's contention that his negligence claim survived preemption because he had adequately pled "willful intent to injure" as required under section 1681h(e). In its reasoning, the Court discussed how district courts have grappled with defining a workable relationship between section 1681t(b)(1)(F), which preempts all statutory and common law causes of action, and 1681h(e), which exempts certain state tort claims from preemption. The Court found the rationale set forth by the Northern District of California in El-Aheidab in reconciling sections 1681h(e) and 1681t(b)(1)(F) to be persuasive. In El-Aheidab, the court held that section 1681t(b)(1)(F) completely preempts all state law causes of action, despite the exceptions noted in 1681h(e). The court in El-Aheidab explained that 1681s-2 is not inconsistent with section 1681h(e) because 1681t(b)(1)(F) only preempts state common law and statutory claims against furnishers of credit information while 1681 s-2 applies to other parties in other circumstances.
In adopting the "no conflict exists" approach to FCRA preemption, the court dismissed plaintiff's statutory UCL claim, along with plaintiff's common law claims for negligence and intentional/negligent infliction of emotional distress, as preempted by 1681t(b)(1)(F) of the FCRA.
In its first post-Concepcion case involving the enforceability of arbitration clauses, the U.S. Court of Appeals for the Ninth Circuit reversed the district court's denial of the plaintiffs' motion to compel arbitration, holding that the Federal Arbitration Act (FAA) preempts California's exemption of public injunctive relief for arbitration.
In Kilgore v. KeyBank, the plaintiffs brought a putative class action against KeyBank and other defendants for violations of California's Unfair Competition Law (UCL) in connection with private student loans extended to plaintiffs for flight instruction at Silver State Helicopters, LLC (SSH), a private helicopter vocational school. The Plaintiffs filed suit against KeyBank after SSH closed its doors and filed for bankruptcy, leaving plaintiffs without a diploma, certificate, or other accreditation for their training.
Plaintiffs and each putative class member borrowed between $50,000 and $60,000 from KeyBank and signed loan contracts which contained an arbitration clause informing plaintiffs that they could opt out of the clause and if they did not, that they would waive their rights to litigate any claim in court and proceed with any claim on a class basis. The Notes also contained several conspicuous statements warning plaintiffs of the consequences of signing the agreement and cautioning them to read it thoroughly.Continue Reading...
The "no conflict exists" approach to reconciling sections 15 U.S.C. § 1681t(b)(1)(F) and §1681h(e) of the Fair Credit Reporting Act adopted by the Seventh Circuit in Purcell v. Bank of America and the Second Circuit in Macpherson v. JP Morgan Chase Bank continues as the emerging trend in federal preemption analysis under the FCRA.
In El-Aheidab v. Citibank, the plaintiff filed suit in California Superior Court alleging causes of action for negligence and statutory violations of Section 17200 of the California Business & Professions Code and Section 1785.25 of the California Civil Code.
Specifically, plaintiff alleged that defendant Citibank wrongfully reported to credit reporting agencies that he owed an outstanding loan balance, even though no such balance was in fact owed, which ruined plaintiff's credit and prevented him from purchasing a home at favorable terms. Defendant Citibank removed the action to federal court and then moved to dismiss plaintiff's complaint on the basis that plaintiff's statutory and common law claims were preempted by the FCRA.Continue Reading...
The Second Circuit Court of Appeals is the latest court to weigh in on the issue of federal preemption under the Fair Credit Reporting Act. The Second Circuit’s decision in Macpherson v. JP Morgan Chase Bank comes on the heels of the Seventh Circuit’s opinion in Purcell v. Bank of America, which upheld significant federal preemption under the Fair Credit Reporting Act.
In Macpherson, the plaintiff filed suit in Connecticut state court alleging that defendant JP Morgan Chase furnished false information about his finances to a consumer credit reporting agency which caused a reduction of his credit score. Defendant removed the case to federal court and then moved to dismiss on the basis that the plaintiff’s claims were preempted by the FCRA. The district court agreed with defendant and found that the plaintiff’s claims were preempted by § 1681t(b)(1)(F). The plaintiff appealed.Continue Reading...
The Seventh Circuit Court of Appeals issued an opinion this month upholding significant federal preemption under the Fair Credit Reporting Act. In Purcell v. Bank of America, the Court held that 15 U.S.C. 1681t(b)(1)(F) does not conflict with 15 U.S.C. 1681h(e) and therefore FCRA preempts all state law causes of action, whether based on statute or common law.
In Purcell, plaintiff filed a complaint in Indiana state court alleging that defendant Bank of America incorrectly reported that she was behind on loan payments. Defendant removed the case to federal court, then moved to dismiss. The district court held that plaintiff had no private right of action under 15 U.S.C. 1681s-2(a) and that plaintiff had not properly stated a cause of action under 15 U.S.C. 1681-2(b). Among other things, the district court rejected defendant's argument that 15 U.S.C. 1681t(b)(1)(F) preempts both statutory and common law claims arising out of credit reporting, and instead applied the statutory approach to FCRA preemption. Defendant appealed.Continue Reading...
The Office of the Comptroller of the Currency (OCC) recently issued a final rule regarding amendments to its regulations, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). With respect to the provisions affecting preemption and visitorial powers, the OCC concluded that Dodd-Frank does not create a stand-alone preemption standard but incorporates the Supreme Court’s Barnett Bank conflict preemption standard and the reasoning that supports it.
Earlier this Summer, the OCC issued a proposed rule that Dodd-Frank’s preemption provision be read to include “the whole of the conflict preemption analysis” in Barnett Bank. In response, the Department of the Treasury issued a comment letter, addressing concerns with the OCC’s interpretation of Dodd-Frank preemption.
The new Consumer Financial Protection Bureau has issued a Notice and Request for Comment on the proposed scope of its Dodd-Frank supervisory authority for certain non-depository institutions. The CFPB's Notice outlines potential criteria for defining the scope of this supervisory authority and identifies six potential other markets that CFPB may supervise: (1) debt collection; (2) consumer reporting; (3) consumer credit and related activities; (4) money transmitting; (5) check cashing and related activities; (6) prepaid cards; and (7) debt relief services.
Section 1024 of Dodd-Frank grants supervisory authority to the CFPB for "covered persons" in the residential mortgage, private education lending, and payday lending markets. In other markets, CFPB would have supervisory authority only over a "larger participant." Dodd-Frank assigned CFPB the task of issuing a rule on or before July 21, 2012, to identify these other markets and to define "larger participant."
CFPB seeks public comment on the criteria and threshold to define a "larger participant" and on the data to be used in measuring these criteria. CFPB also seeks public comment on the consideration of whether the six "other markets" should be included in the initial rule and/or whether additional markets should be included.
The impact from the U.S. Supreme Court's decision last week in AT&T Mobility v. Concepcion has begun in California cases. In two orders issued after Concepcion, California federal courts have granted motions to compel arbitration on an individual basis where the subject arbitration provision contained a class action waiver. Each of these courts also held that the Federal Arbitration Act preempts California's exemption of claims for public injunctive relief from arbitration. See Arrellano v T-Mobile USA, Inc. (N.D. Cal., May 16, 2011 Order Granting Motion to Compel Arbitration and Stay Claims for Injunctive Relief); Zarandi v. Alliance Data Systems Corp. (C.D. Cal., May 9, 2011 Order Granting Defendants' Motion to Compel Arbitration and Stay Proceedings).
The Office of the Comptroller of the Currency last week released an important interpretive letter with a comprehensive overview of the OCC's views on how Dodd-Frank affects preemption, including visitorial powers.
The OCC also provided its view on possible confusion related to the Dodd-Frank preemption provision. Although Dodd-Frank specifically references the Barnett Bank preemption standard, it also references an apparent stand-alone conflict preemption standard: whether state law "prevents or significantly interferes with the exercise by the national bank of its powers." This provision mirrors language in Barnett Bank, but the statute's separate reference to it raised the question of whether Congress intended to create a new statutory preemption regime, or whether it simply intended to incorporate the Barnett Bank standard. The OCC concluded that Dodd-Frank's preemption provision should be read to include "the whole of the conflict preemption analysis" in Barnett Bank, along with its judicial and regulatory progeny.
In one of the first cases to analyze the preemption standard contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, in Baptisa v. JPMorgan Chase Bank, NA, the Eleventh Circuit affirmed the district court's dismissal of plaintiff's Florida state law claims as preempted by the National Bank Act.
In Baptista, plaintiff, a non-accountholder at Chase, presented a check for $242.48 to be cashed at a Chase branch. Chase cashed the check and charged her a $6.00 fee. Plaintiff filed a putative class action asserting that Chase's imposition of a fee for cashing the check violated Florida law and alleging two causes of action: (1) violation of Florida Statute § 655.85, a so-called par-value statute, which prohibits a bank from "settl[ing] any check drawn on it otherwise than at par"; and (2) unjust enrichment.
The Consumer Financial Protection Bureau has a new website, and is making significant personnel additions, creating its internal structure, and otherwise preparing for the commencement of its official authority in July. The CFPB is also blogging, tweeting, facebooking, youtubing, and hiring.
Among many other things, the CFPB's website defines the scope of its "Core Functions" as follows:
* Conduct rule-making, supervision, and enforcement for Federal consumer financial protection laws;
* Restrict unfair, deceptive, or abusive acts or practices;
* Create a center to take consumer complaints;
* Promote financial education;
* Research consumer behavior;
* Monitor financial markets for new risks to consumers; and
* Enforce laws that outlaw discrimination and other unfair treatment in consumer finance.
In December, the U.S. Treasury announced the creation of a new Consumer Inquiry and Complaint database, to be maintained by the CFPB, to track, collect, analyze, and refer consumer inquiries and complaints about consumer financial products and services, scheduled to take effect today. The CFPB has also announced the creation of a future Consumer Response Center to receive consumer complaints and inquiries related to consumer financial services.
As the scope and content of the Dodd-Frank Wall Street Reform and Consumer Protection Act is shaped in the regulatory process, follow the latest developments on the Federal Reserve's website tracking financial regulatory reform. The Fed is publicly reporting on meetings will taking place between the Board and the public--representatives of bank organizations, consumer groups, trade associations, researchers and academics on regulatory reform issues, including systemic risk, derivatives trading, interchange fees, and consumer financial protection, and related proposals for comment.
The Fed is also reporting on current and future milestones in the regulatory process. Among other significant events, the Fed, OTS, Office of the Comptroller of the Currency, and FDIC will issue a joint report to Congress and the Inspectors General of the participating agencies on the agencies' plans to implement the transfer of OTS authorities by March 2011.
In Carvalho v. Equifax Information Services, LLC, the U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal of plaintiff's claim under California's Consumer Credit Reporting Agency Act (CCRAA), Civil Code 1785.1 et seq., as preempted by the Fair Credit Reporting Act (FCRA), 15 U.S.C. 1681t(b)(1)(F).
In Carvalho, plaintiff incurred medical bills of $118. Plaintiff's carrier denied coverage for the bills, plaintiff failed to pay, and the provider sent the balance to a collection agency. After collection efforts, plaintiff refused to pay the invoice, and the collection agency reported the debt to the CRAs. Plaintiff disputed the debt with the CRAs in a series of letters. The CRAs reinvestigated various times and the furnisher verified the debt after each reinvestigation.
Plaintiff filed a putative class action complaint against the furnisher and the CRAs in Monterey County Superior Court alleging violation of the California CCRAA. The Superior Court granted the furnisher's demurrer based on preemption of the CCRAA by the FCRA. The CRAs then removed the case to federal court based on the Class Action Fairness Act, 28 U.S.C.1332(d) (CAFA). Plaintiff moved to remand; the district court denied the motion. Plaintiff moved for class certification and for leave to amend her complaint; the district court denied plaintiff's motions and granted the CRAs' motions for summary judgment. Plaintiff appealed.Continue Reading...
President Obama today signed the "Wall Street Reform and Consumer Protection Act," which will bring comprehensive changes to consumer financial services, and to consumer finance litigation, including mortgages, credit cards, retail credit, debt collection, arbitration, preemption, and auto finance. See details about the changes coming, as seen by the White House, and the President's signing remarks.
The U.S. Senate voted 60-39 yesterday to pass the Wall Street Reform and Consumer Protection Act, which the White House says President Obama will sign into law next week. While consumer finance attorneys digest the massive changes coming with this comprehensive bill (in mortgages, credit cards, retail credit, debt collection, arbitration, preemption, and auto finance), the scope of the changes will likely depend on the implementing regulations, and how these regulations are interpreted by Courts.
A few things are clear now. First, the OTS is fading away. Second, consumer arbitration may be too. Third, federal preemption is likely to be more difficult to obtain in consumer finance litigation.
The House-Senate Conference to reconcile financial regulatory reform reached a final agreement on the legislation on Friday. The "Dodd-Frank Wall Street Reform and Consumer Protection Act" calls for the creation of the Consumer Financial Protection Bureau, an independent agency to be housed at the Federal Reserve, with a broad mandate to regulate consumer financial services of virtually all types.
The Consumer Financial Protection Bureau will have an independent director appointed by the President and confirmed by the Senate, with an independent budget and independent rule writing, examination, and enforcement authority. The CFPB consolidates consumer protection responsibilities of the OCC, OTS, FDIC, Federal Reserve, NCUA, HUD, and the FTC. Among other things, the legislation also creates a new Office of Financial Literacy to disseminate information to consumers and a new consumer hotline for consumer questions.Continue Reading...
The House-Senate Conference to reconcile financial regulatory reform legislation begins today. Track the conference with the House Financial Services Committee or the Senate Banking Committee. The hearing also will be broadcast live on C-SPAN and webcast live at the House Financial Services Committee site.
The U.S. Senate yesterday passed the financial regulatory bill, S.3217, the "Restoring American Financial Stability Act." The comprehensive bill includes broad new regulation of derivatives, executive compensation, systemic risk, investor rights, mortgages, credit-rating agencies, hedge funds and private equity, insurance, and consumer financial protection.
Significantly, this Senate version of financial regulation calls for a new, quasi-independent Bureau of Consumer Financial Protection within the Federal Reserve. The House version of financial regulation, passed in December, would create an independent, free-standing Consumer Financial Protection Agency. Both the House and Senate bills would limit federal preemption of consumer finance laws in certain ways. The Senate bill includes a detailed preemption provision.
The Senate Banking Committee unveiled its version of financial regulatory reform yesterday, including issuing a summary of highlights of the bill as well as the proposed bill. The 1336-page bill differs in substantial respects from the House version passed in December.
Most significantly with regard to consumer finance regulation, the Senate version does not include an independent Consumer Financial Protection Agency, but would house that function at the Federal Reserve. Specifically, Title X of the Senate Version calls for the creation of a "Consumer Financial Protection Bureau" to operate independently within the Federal Reserve.
A number of significant legislative changes occurred in 2009 related to consumer finance regulation.
The most significant potential change—the Consumer Financial Protection Agency Act—is still in flux as it moves through the U.S. Senate. However, the version of the CFPA passed by the U.S. House contains several provisions of which every practitioner should be aware. New regulations governing credit card products and overdraft fees will also significantly impact consumer finance practice.
See a summary of recent developments in consumer finance regulation.
On December 11, 2009, the U.S. House of Representatives passed the “Wall Street Reform and Consumer Protection Act of 2009,” H.R. 4173. This sweeping legislation—a combination of several bills, including a modified version of the Consumer Financial Protection Agency Act, formerly HR 3126—includes broad new regulation of derivatives, executive compensation, systemic risk, investor rights, mortgages, credit-rating agencies, hedge funds and private equity, insurance, and consumer financial protection.
Title IV of the Act (sections 4001 – 4901) provides for the creation of a Consumer Financial Protection Agency (section 4101 – 4703), a new, independent federal agency to oversee virtually every aspect of consumer financial services, including mortgages, credit cards, debit cards, car loans, gift cards, credit reporting agencies, debt collectors, and financial advisers. Certain merchants, such as auto dealers and pawnbrokers, would be exempted.Continue Reading...
The legislation is changing in significant ways as it moves through the legislative process. Among the revisions from the administration's original plan, the Committee's approved version would vest authority over the proposed Consumer Financial Protection Agency in a single director, as opposed to a 5-member board. The approved version of the legislation also includes a compromise on federal preemption, which permits the federal regulator to preempt state consumer financial protection laws only after a written finding that the state law “prevents or significantly interferes” with a federally regulated bank or thrift’s exercise of its powers.
Subpart F, sections 161 through 166, of the Consumer Financial Protection Agency Act of 2009 (HR 3126, July 8, 2009) provides for the transfer of broad areas of power to regulate consumer financial protection functions from a variety of federal agencies and the Federal Reserve to the proposed Consumer Financial Protection Agency.
In general, the CFPA would have the authority and accountability to supervise, examine, and enforce consumer financial protection laws, including mortgages, credit cards, student loans, auto loans, payday loans, and more. The Act would transfer functions and personnel to the new CFPA and provide for interim powers for the Secretary of Treasury pending the establishment of the CFPA and the completion of the transfer of powers and people.
Legislation for federal financial regulatory reform, introduced by the Obama administration in June, is moving forward through the legislative process. Treasury Secretary Geithner testified before the House Financial Services Committee on September 23.
The proposed financial regulatory reform legislation in the U.S. House is the Consumer Financial Protection Agency Act of 2009 in the House (HR 3126). The Financial Services Committee has issued a section-by-section summary of the proposed legislation as well as a September 25 discussion draft.
Track the progress of the legislation at the administration's Financial Stability website.
In Cuomo v. Clearing House Association, LLC, former New York Attorney General Elliot Spitzer sent requests to several national banks, in lieu of subpoenas, seeking non-public information regarding whether the banks had violated the state's fair-lending laws. The U.S. Office of the Comptroller of the Currency ("OCC"), the federal regulator of national banks, and Clearing House Association, a banking trade group, sued to enjoin the New York Attorney General (later Andrew Cuomo, the petitioner here.)
The district court entered an injunction prohibiting the enforcement of state fair-lending laws against national banks through information requests or judicial proceedings. The Second Circuit affirmed. The U.S. Supreme Court granted certiorari to determine whether the OCC's regulations preempting state law enforcement against national banks (12 C.F.R. § 7.400) are a reasonable interpretation of 12 U.S.C. § 484(a), the National Bank Act of 1864.Continue Reading...
Last month, the White House released a Memorandum for the Heads of Executive Departments and Agencies regarding federal preemption, with specific instructions about how and when federal agencies may assert preemption of state laws through agency regulations. The memo states a general policy that "preemption of State law by executive departments and agencies should be undertaken only with consideration of full prerogatives of the States and with a sufficient legal basis for preemption."
More specifically, the memo provides: (1) heads of federal departments and agencies should not include preemption provisions in regulatory preambles, unless preemption is also a provision in the codified regulations; (2) preemption provisions should only be included in codified regulations if justified under "legal principles governing preemption," including Executive Order 13132 (1999); and (3) heads of federal departments and agencies must undergo a review of regulations issued in the last 10 years to ensure compliance with these preemption principles, and amend any regulations not in compliance.
Last week, President Obama announced sweeping proposed changes in federal financial regulation. U.S. Treasury Secretary Timothy Geithner and Director of the National Economic Council Lawrence Summers wrote an op-ed piece describing the new regulatory structure, called "A New Foundation: Rebuilding Financial Supervision and Regulation."
The Final Report of the proposed comprehensive plan has five stated goals: (1) to promote robust supervision and regulation of financial firms; (2) to establish comprehensive supervision of financial markets; (3) to protect consumers and investors from financial abuse; (4) to provide the government tools to manage the financial crisis; and (5) to raise international regulatory standards and to improve international cooperation.Continue Reading...
In Miller v. Bank of America, N.A. (USA), the Third District California Court of Appeal has held that California's holiday statutes, which extend the time to perform an act if the performance would fall on a holiday, does not extend the time for a credit card payment, because the holiday statutes are preempted by federal law.
In Miller, a putative class action, plaintiffs were credit card customers of Bank of America, a national bank. Plaintiffs alleged that so-called holiday statutes in California and Arizona prohibited Bank of America from charging late fees or interest on payments posted after a holiday, where the payment would not have been late absent the holiday. Plaintiffs alleged three violations of California Business and Professions Code §17200, one violation for each holiday statute at issue: California Civil Code §§9 and 11; and Arizona revised statutes §1-303. The trial court sustained Bank of America's demurrer without leave to amend, holding the holiday statutes are preempted by federal law. Plaintiffs appealed.Continue Reading...
In Liceaga v. Debt Recovery Solutions, LLC, the First District California Court of Appeal has held that the federal Fair Credit Reporting Act, 15 U.S.C. §1681 et seq. ("FCRA"), preempts the private right of action provision of California's Credit Reporting Agencies Act, Civ. Code §1785.1 et seq. ("CRAA").
Plaintiff Rebecca Liceaga was the apparent victim of identity theft. Her identity was used to open a Sprint cell phone account without her knowledge. When the account became delinquent, Sprint assigned the debt to defendant Debt Recovery Solutions, LLC, which eventually reported the delinquency to credit reporting agencies, despite plaintiff's protests that the debt was the result of identity theft. Plaintiff sued, alleging a violation of California's CRAA. The trial court granted defendant's motion for judgment on the pleadings on the grounds that FCRA preempts any private right of action under CRAA. Plaintiff appealed.Continue Reading...
On October 6, 2008, the U.S. Supreme Court heard oral argument in Vaden v. Discover Bank, an appeal from Discover Bank, Discover Financial Services v. Vaden, 489 F.3d 594 (4th Cir. 2007), which will have a significant impact on arbitration and the doctrine of complete preemption.
Vaden arises out of a dispute between credit cardholder and a card issuer. In 2003, Discover Financial Services, a servicing subsidiary of Discover Bank, filed suit against cardholder Vaden in Maryland state court to collect a $10,000 delinquent debt. Vaden filed a putative class action counterclaim in state court, alleging, among other state law causes of action, violation of Maryland's usury laws. Discover Financial Services and Discover Bank filed a free-standing petition to compel arbitration in the U.S. District Court of Maryland, pursuant to Section 4 of the Federal Arbitration Act ("FAA"). Discover asserted that Vaden's state law claims were completely preempted by the Federal Deposit Insurance Act, 12 U.S.C. §1811 et seq. ("FDIA"). The district court granted Discover's motion to compel arbitration. Vaden appealed.Continue Reading...
The Supreme Court heard opening day oral arguments in a preemption case that could have far-reaching effects for financial institutions. The case, involving a suit against tobacco company Altria, presents the question whether state law challenges to FTC-authorized statements in advertising are expressly or impliedly preempted by federal law. The Court's opinion could significantly impact the preemption landscape generally, including the balance between state and federal consumer protection statutes.
The Ninth Circuit has partially revived a part of California's erstwhile Financial Information Privacy Law. In American Bankers Association v. Lockyer, the Court held California Financial Code §4053(b)(1) has non-preempted applications and reformed that section to sever its preempted portions.
American Bankers v. Lockyer is a preemption dispute that is as old as the 2003 California Financial Information Privacy Act, California Financial Code §4050 et seq., commonly known as SB1. In American Bankers Association v. Gould, 412 F.3d 1081 (9th Circuit 2005), plaintiffs alleged that the federal Fair Credit Reporting Act ("FCRA") preempted SB1's regulation of information sharing between financial institutions and their affiliates. The Ninth Circuit held that the regulation of nonpublic personal information in 15 U.S.C. 1681t(b)(2) preempted any application to consumer report information in section 4053(b)(1).
The Court remanded for a determination whether any portion of SB1's affiliate sharing regulations in section 4053(b)(1) survived preemption and whether any preempted section was severable. On remand, the district court held that no portion of section 4053(b)(1) survived preemption and that the preempted applications were not severable. Defendants appealed.Continue Reading...
Defendant Omni, a Nevada corporation with its principal place of business in Nevada, provided a personal loan to plaintiff borrower Joshua Brack, a nonresident member of the military stationed at California's Camp Pendleton. Omni's loan agreement contained a choice of law provision in favor of Nevada law. Brack repaid the loan in full in 2002.
In 2003, Brack filed a class action against Omni, alleging violations of the California Finance Lenders Law (Fin.Code §22000 et seq.), the Consumers Legal Remedies Act ("CLRA") (Civ. Code §1750 et seq.) and California's Unfair Competition Law (Bus. and Prof. Code §17200). After a trial on Omni's Nevada choice of law defense, the trial court entered judgment in favor of Omni. Brack moved to set aside the judgment. The trial court denied the motion and Brack appealed.
The Act would expressly invalidate arbitration agreements—retroactively—in employment, consumer or franchise disputes and in any "dispute arising under any statute intended to protect civil rights or to regulate contracts or transactions between parties of unequal bargaining power." Specifically, in the context of a "consumer dispute," broadly defined, the Act would make a "predispute arbitration agreement" invalid and unenforceable. Continue Reading...
Preston involved a fee dispute between Alex Ferrer, more commonly known as TV's "Judge Alex," and Los Angeles entertainment attorney Arnold Preston. The fee contract contained a provision providing that the parties would arbitrate “any dispute ... relating to the terms of [the contract] or the breach, validity, or legality thereof ... in accordance with the rules [of the American Arbitration Association].” The Court held that this arbitration provision preempts California law to the extent that it placed primary jurisdiction for the dispute in the California Labor Commission.