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  • 9th Circuit will not rehear interest on escrow preemption decision

    Courts

    On May 16, a panel of three judges on the U.S. Court of Appeals for the 9th Circuit denied the petition for an en banc rehearing of its March decision, which held that a California law that requires a bank to pay interest on escrow funds is not preempted by federal law. In addition to the national bank’s appeal for a rehearing, the OCC notably filed an amicus brief supporting the rehearing, arguing that the court “comprehensively misinterpreted” the Supreme Court’s 1996 decision Barnett Bank of Marion County v. Nelson. (Previously covered by InfoBytes here.) The panel noted that the full court had been advised of the bank’s petition for rehearing, and no judge had requested a vote on rehearing.

    Courts Ninth Circuit Appellate Mortgages Escrow Preemption National Bank Act Dodd-Frank OCC State Issues

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  • OCC files amicus brief in support of rehearing in 9th circuit preemption decision

    Courts

    On April 24, the OCC filed an amicus curiae brief in support of an en banc rehearing of the U.S. Court of Appeals for the 9th Circuit’s March decision, which held that a California law that requires the bank to pay interest on escrow funds is not preempted by federal law.  As previously covered by InfoBytes, the 9th Circuit held that the Dodd-Frank Act of 2011 (Dodd-Frank) essentially codified the existing National Bank Act (NBA) preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson. 

    In a strongly worded brief, the OCC states that the court “errs in matters of fundamental importance to the national banking system” and “comprehensively misinterpreted” Barnett Bank and the cases upon which that decision rests.  The OCC specifically argues that the court misinterpreted the legal standard for preemption articulated by Barnett Bank, ignored applicable Supreme Court standards prescribing a test for reviewing preemptive regulations, improperly created a burden of proof on national banks to demonstrate Congressional intent as to preemption, and inappropriately imposed a higher bar for “large corporate banks” to show state law interference.  The OCC also argues that the court’s reliance on the effective dates of the Dodd-Frank provisions relied upon by the Court pre-date the transactions that were at issue in the case, and would therefore have no application to the facts of the case.

    This filing supports the national bank’s petition for en banc rehearing filed April 13 and previously covered by InfoBytes here.

    Courts Ninth Circuit Appellate Mortgages Escrow Preemption National Bank Act Dodd-Frank OCC State Issues

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  • Bank petitions for rehearing of 9th Circuit preemption decision; OCC to file amicus brief in support of bank

    Courts

    On April 13, a national bank filed a petition for an en banc rehearing of the U.S. Court of Appeals for the 9th Circuit’s March decision, which held that a California law that requires the bank to pay interest on escrow funds is not preempted by federal law. As previously covered by InfoBytes, the 9th Circuit held that the Dodd-Frank Act of 2011 (Dodd-Frank) essentially codified the existing National Bank Act (NBA) preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson. The panel cited to Section 1639d(g)(3) of Dodd-Frank, which, according to the opinion, expresses Congress’ view that the type of law at issue does not “prevent or significantly interfere with a national bank’s operations” because the law does not “prevent or significantly interfere” with the national bank’s exercise of its power. Additionally, the 9th Circuit concluded that the OCC’s 2004 preemption regulation had no effect on the preemption standard.

    In its petition for rehearing, the bank argues that the 9th Circuit’s decision, if allowed to stand, “will create confusion regarding which state laws apply to national banks and restrict the terms on which they may extend credit” because the decision conflicts with previous decisions by the same court, the Supreme Court, and other circuits. The bank also acknowledges the OCC’s intent to file an amicus curiae brief in support of the petition no later than April 23.

    Courts Ninth Circuit Appellate State Issues Escrow National Bank Act Mortgages OCC Preemption

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  • Student loan servicer seeks declaratory and injunctive relief to resolve dispute concerning preemption of state law

    Courts

    On April 4, a Pennsylvania-based student loan servicer (servicer) that services federal student loans on behalf of the U.S. Department of Education (Department) filed a complaint in the U.S. District Court for the District of Columbia against the Connecticut Department of Banking and its banking commissioner (together, the Connecticut Defendants), and the Department, seeking a judicial determination that the federal Privacy Act of 1974 (Privacy Act) preempts Connecticut law requiring the servicer to disclose certain records containing confidential information about its student loan borrowers to the state, along with data related to borrower complaints, or risk revocation of its state servicer’s license. In addition, the servicer seeks injunctive relief against the Connecticut Defendants to prevent the enforcement of state law in contravention of the Privacy Act and revocation of the servicer’s license.

    In support of the injunctive relief sought, the servicer cites several irreparable harms, including (i) the potential termination of its federal loan servicing contract; (ii) the revocation of its license to service, which would adversely affect approximately 100,000 student borrowers in the state, and (iii) the potential impact on loan servicing arrangements that the servicer has with “dozens of private lenders doing business in Connecticut.”

    As previously covered in InfoBytes, on March 12 Department Secretary Betsy DeVos published an Interpretation that asserted the position that state “regulation of the servicing of Direct Loans” is preempted because it “impedes uniquely Federal interests,” and state regulation of the servicing of loan under the Federal Family Education Loan Program “is preempted to the extent that it undermines uniform administration of the program.” However, last month—as discussed in InfoBytes—a bipartisan coalition of 30 state Attorneys General released a letter urging Congress to reject Section 493E(d) of the Higher Education Act reauthorization—H.R. 4508, known as the “PROSPER Act”—which would prohibit states from “overseeing, licensing, or addressing certain state law violations by companies that originate, service, or collect on student loans.” The states expressed a concern that, if enacted, the law would preempt state consumer protection laws for student borrowers and constitute “an all-out assault on states’ rights and basic principles of federalism.”

    Courts Department of Education Student Lending State Issues Preemption Congress Federal Legislation

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  • Colorado judge rules FDIA does not completely preempt state usury claims against a non-bank

    Courts

    On March 21, the U.S. District Court for the District of Colorado held that the Federal Deposit Insurance Act (FDIA) does not completely preempt a Colorado state regulator’s claims that a non-bank lender violated state law and remanded the case back to state court. The underlying action results from charges brought by the administrator of Colorado’s Uniform Consumer Credit Code against a non-bank lender – which the administrator argues is the “true lender” of loans issued by a New Jersey-chartered bank – for allegedly overcharging interest and other fees in violation of state law. In granting the motion to remand, the court noted that the administrator sufficiently alleged the non-bank was the “true lender” of the loans in question as the non-bank provided the website through which customers apply for the loans, determined the criteria for marketing the loans, decided which applications receive loans, and purchased the loans within two days after they were made by the New Jersey bank. The district court concluded that while courts are split as to banks, because the true lender of the loans was a non-bank, complete preemption by FDIA does not apply even though the non-bank lender has a “close relationship” with a state or national bank. The district court also stated that whether the non-bank is a “true lender” is “not relevant to the issues of complete preemption, which determine whether remand is warranted.”

    Courts Preemption State Issues Usury Interest Rate Nonbank True Lender FDIA

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  • Department of Education: states do not have the authority to regulate student loan servicers

    Federal Issues

    On March 12, the U.S. Department of Education published an Interpretation in the Federal Register, which takes the position that state regulation of servicers of loans made under the William D. Ford Federal Direct Loan Program (Direct Loans) and the Federal Family Education Loan Program (FFEL Program Loans) is preempted by Federal law. Specifically, the Department noted that state “regulation of the servicing of Direct Loans” is preempted because it “impedes uniquely Federal interests,” and state regulation of the servicing of FFEL Program Loans “is preempted to the extent that it undermines uniform administration of the program.” The Interpretation was issued in response to several states having recently enacted regulatory regimes, or sought to apply existing consumer protection statutes, imposing additional requirements on such student loan servicers. The Ranking Member of the House Committee on Education and the Workforce, Representative Bobby Scott, D-VA, issued a statement following the notice of publication on March 9, disagreeing with the Department’s Interpretation: “Congress has not given the Secretary the authority to preempt state consumer protection law for student borrowers. . . . I urge the Secretary to reverse this egregious overreach of Federal authority to rescind states’ ability to protect student borrowers and hold unscrupulous servicers accountable.”

    Federal Issues Department of Education Student Lending Preemption Federal Register

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  • 9th Circuit holds California's interest on escrow requirements is not preempted by federal law

    Courts

    On March 2, the U.S. Court of Appeals for the 9th Circuit held that a national bank must comply with a California law that requires mortgage lenders to pay interest on the funds held in a consumer’s escrow account because the law does not “prevent or significantly interfere” with the national bank’s exercise of its power. The case results from a 2014 lawsuit in which a consumer sued the national bank for refusing to pay interest on the funds in his mortgage escrow account as required by a California state law. The district court dismissed the action, holding that the California state law interfered with the bank’s ability to perform its business making mortgage loans and therefore, was preempted by the National Bank Act (NBA).

    In reversing the district court’s decision, the 9th Circuit held that the Dodd-Frank Act of 2011 (Dodd-Frank) essentially codified the existing NBA preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson. The panel cited to Section 1639d(g)(3) of Dodd-Frank (“if prescribed by applicable State or Federal law, each creditor shall pay interest to the consumer on the amount held in any . . . escrow account that is subject to this section in the manner as prescribed by that applicable State or Federal law”), which, according to the opinion, expresses Congress’ view that the type of law at issue does not “prevent or significantly interfere with a national bank’s operations.” Moreover, the panel disagreed with the national bank’s reliance on the OCC’s 2004 preemption regulation, which interpreted the standard more broadly, by concluding that the regulation had no effect on the preemption standard. This decision could have significant implications for the rise of preemption by federally chartered banks.

    Courts U.S. Supreme Court Appellate Ninth Circuit Mortgages Escrow Preemption National Bank Act Dodd-Frank OCC

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  • 2nd Circuit Reinstates Consumer Class Action Against National Debt Buyer Through Preemption Decision

    Consumer Finance

    On May 22, the U.S. Court of Appeals for the Second Circuit ruled against a debt collection firm, holding that “non-national bank entities are not entitled to protections under the National Bank Act (“NBA”) from state-law usury claims merely because they are assignees of a national bank.” Madden v. Midland Funding, LLC, No. 14-2131-cv, 2015 WL 2435657 (2nd Cir. May 22, 2015).  The Second Circuit’s holding reversed the Southern District of New York’s decision, which held that it was permissible for the firm to charge a consumer an interest rate of 27%—a rate exceeding New York’s 25% usury limit—because the firm was an assignee of a national bank.  The Second Circuit vacated the District Court’s judgment “[b]ecause neither defendant is a national bank nor a subsidiary or agent of a national bank, or is otherwise acting on behalf of a national bank, and because application of the state law on which [the plaintiff’s] claim relies would not significantly interfere with any national bank’s ability to exercise its powers under the NBA.”  Id. at *1.  According to the court, extending “NBA preemption to third-party debt collectors such as the defendants would be an overly broad application of the NBA” which “would create an end-run around usury laws for non-national bank entities that are not acting on behalf of a national bank.”  Id. at *5.  The Second Circuit also vacated the District Court’s judgment as to the plaintiff’s FDCPA claim and the denial of class certification because those rulings were predicated on the District Court’s preemption analysis.  The case, which has been argued on the premise that New York state usury law applies, has been remanded back to the district court to determine choice-of-law based on a Delaware choice-of-law clause in the original debt agreement.

    FDCPA Debt Collection Preemption Madden

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  • Eleventh Circuit Holds Federal Law Preempts Florida's Check-Cashing Fee Restriction For Out-Of-State Banks

    Consumer Finance

    On May 30, the U.S. Court of Appeals for the Eleventh Circuit held that with regard to out-of-state state banks, federal law preempts Florida’s prohibition on financial institutions settling checks for less than par value. Pereira v. Regions Bank, No. 13-10458, 2014 WL 2219166 (11th Cir. May 30, 2014). The ruling broadens a prior ruling that federal law preempts the same restriction with regard to national banks. Plaintiffs in this case filed suit on behalf of a putative class after the bank charged them a fee for cashing a check, claiming they received less than par value because of the bank’s fee. Florida law prohibits a financial institution from settling “any check drawn on it otherwise than at par.” The court explained that 12 U.S.C. 1831a(j) provides that the laws of a host state apply to any branch in the host state of an out-of-state state bank to the  same extent as such state laws apply to a branch in the host state of an out-of-state national bank. The court held that, based on 12 U.S.C. 1831a(j) and the court’s prior ruling regarding national bank preemption, the plaintiffs’ claims were clearly preempted. The court explained that assuming the relevant Florida law would prohibit Florida branches of out-of-state state banks from charging a fee to cash a check presented in person, that law would apply “to the same extent” that it applies to out-of-state national banks, and as such, is preempted.

    Preemption Check Cashing Deposit Products

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  • Ninth Circuit Affirms Dismissal of Unfair Competition Claims over Teaser Rates

    Lending

    On January 9, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s dismissal of a putative class action against a national bank over its adjustable rate mortgage disclosure and payment application. O’Donnell v. Bank of Am., N.A., No. 11-16351, slip op. (9th Cir. Jan. 9, 2013). On appeal, the borrowers argued that the district court erred in holding that their California state-law claims for common law fraud and violations of the Unfair Competition Law based on the lender’s alleged concealment of material facts about the loans’ escalating principal balances and interest rates are preempted by the National Bank Act and OCC regulations. The borrowers also challenged the district court’s dismissal of their state-law breach of contract claim based on allegations that the lender improperly applied payments solely toward satisfying part of the interest owed while adding the remaining interest to the principal balance. In affirming the dismissal, the appeals court held that the fraud and unfair competition claims are expressly preempted because they would force the lender to make additional disclosures not required by federal law. The appeals court also affirmed the district court’s holding that the FTC Act does not provide a private right of action and therefore cannot be employed as a premise for the borrowers’ unfair competition claim. With regard to the borrowers’ breach of contract claim, the court held that the mortgage contract did not include any representation that the lender would apply payments to principal if the payment failed to cover the accrued interest, and, therefore, the borrowers failed to state a plausible claim.

    Mortgage Origination Mortgage Servicing Preemption National Bank Act

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