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9th Circuit: No bona fide error defense when relying on creditor to provide information
On August 17, the U.S. Court of Appeals for the Ninth Circuit reversed a summary judgment ruling in favor of a debt collector (defendant) accused of violating the FDCPA, determining the district court erred in concluding that the defendant qualified for the bona fide error defense. According to the opinion, the plaintiff incurred a debt to a medical provider (creditor), who eventually placed the debt with the defendant for collection. The plaintiff alleged that the defendant violated the FDCPA when it miscalculated the interest on the unpaid debt. While the parties did not dispute the issue of whether the defendant unintentionally violated the FDCPA when it miscalculated interest on the debt, the issue remained as to whether the defendant had reasonable procedures in place to qualify for the bona fide error defense. The defendant argued that it has reasonable procedures in place because its agreement with the creditor contained a requirement that the creditor supply it with accurate information for collection. The defendant argued “that this procedure was reasonably adapted to avoid violations of the FDCPA,” and that it should be entitled to the bona fide error defense. The district court agreed with the defendant and granted its request for summary judgment.
On appeal, the 9th Circuit determined that relying on creditor-clients to provide accurate information is insufficient to establish a bona fide error defense. Moreover, a “boilerplate agreement” between the creditor and the defendant “effectively outsourced the defendant’s statutory duty under the FDCPA,” the appellate court held, noting that defendants are not allowed to simply rely on the information they are being provided.
District court: $925 million statutory damages award not constitutionally excessive
On August 14, the U.S. District Court for the District of Oregon refused to reduce a $925 million statutory damages award against a company found to have violated the TCPA by sending almost two million unsolicited robocalls to consumers. The company argued that the statutory damages award violates due process because “it is so severe and oppressive as to be wholly disproportionate to the offense and obviously unreasonable.” The court rejected the company’s argument that the penalty was unconstitutionally excessive, noting that the U.S. Court of Appeals for the Ninth Circuit has not yet answered the question as to “whether due process limits the aggregate statutory damages that can be awarded in a class action lawsuit under the TCPA.” Instead, the district court concluded that the allowance for at least $500 per violation under the TCPA is constitutionally valid and that the penalty’s “large aggregate number comes from simple arithmetic.” Referencing an opinion issued by the U.S. Court of Appeals for the Seventh Circuit, the court reasoned that “[s]omeone whose maximum penalty reaches the mesosphere only because the number of violations reaches the stratosphere can’t complain about the consequences of its own extensive misconduct.” Thus, the court rejected the company’s argument that the aggregate damages award should be reduced, finding that due process does not require the reduction of the aggregate statutory award where the company violated the TCPA nearly two million times.
Arkansas Securities Department extends work-from-home guidance
On August 18, the Arkansas Securities Department further extended interim regulatory guidance previously issued to licensed mortgage companies, mortgage loan officers, and branch managers. The original interim regulatory guidance, previously covered here, and extended in May, permits mortgage loan officers to conduct activities requiring a license from home, provided certain data security provisions are met. This guidance is extended through the duration of the emergency declared by the governor of Arkansas.
FHA releases electronic appraisal technology for single family submissions
On August 18, HUD announced the availability of a new electronic appraisal delivery module on the FHA Catalyst platform. According to the announcement, the “FHA Catalyst: Electronic Appraisal Delivery” module can be used by lenders to electronically submit, track, and manage single family appraisal reports and updates for FHA Single Family Title II forward mortgages. Assistant Secretary for Housing and Federal Housing Commissioner Dana Wade noted that the new electronic appraisal module is “one more way FHA is supporting the housing market with innovative technology during the COVID-19 economic recovery.” Among other details, Mortgagee Letter 2020-26 states that lenders may begin using the new module on or after September 1.
OCC defends fintech charter authority in NYDFS challenge
On August 13, the OCC filed its reply brief in its appeal of a district court’s 2019 final judgment, which set aside the OCC’s regulation that would allow non-depository fintech companies to apply for Special Purpose National Bank charters (SPNB charter). As previously covered by InfoBytes, last October, the U.S. District Court for the Southern District of New York entered final judgment in favor of NYDFS, ruling that the SPNB regulation should be “set aside with respect to all fintech applicants seeking a national bank charter that do not accept deposits,” rather than only those that have a nexus to New York State.
As discussed in its opening brief filed in April appealing the final judgment (covered by InfoBytes here), the OCC reiterated that the case is not justiciable until it actually grants a fintech charter, that it is entitled to deference for its interpretation of the term “business of banking,” and that the court should set aside the regulation only with respect to non-depository fintech applicants with a nexus to New York. Following NYDFS’s opening brief filed last month (covered by InfoBytes here), the OCC argued, among other things, that the case is not ripe and NYDFS lacks standing because its alleged injuries are speculative and “rely on a series of events that have not occurred: OCC receiving and approving an SPNB charter application from a non-depository fintech that intends to conduct business in New York, and then does so in a manner that causes the harms [NYDFS] identifies.”
The OCC further argued that NYDFS “cannot show the statutory term ‘business of banking’ is unambiguous, or that it requires a bank to accept deposits to receive an OCC charter.” Highlighting the evolution of the “business of banking” over the last 160 years, the OCC contended that the National Bank Act does not contain a requirement “that an applicant for a national bank charter accept deposits if it can present the OCC with a viable business model that does not require it,” and that its regulation interpreting the ambiguous phrase “business of banking” is reasonable as it is consistent with U.S. Supreme Court case law. Lastly, the OCC argued that NYDFS’s claim that it is entitled to nationwide relief afforded under the Administrative Procedure Act (APA) is inconsistent with another 2nd Circuit decision, “as well as principles of equity and the APA’s text and history.” The OCC stated that even if the appellate court were to conclude that NYDFS’s claims are justiciable, the regulations should be set aside only with respect to non-depository fintech applicants with a nexus to New York.
District Court dismisses usury claim against New York lender
On August 12, the U.S. District Court for the Western District of New York dismissed usury claims against a lender, concluding that lenders licensed in New York can charge interest rates up to 25 percent on loans under $25,000. According to the opinion, a consumer received a check in the mail in the amount of $2,539 from a licensed lender under Article IX of New York Banking Law, with terms requiring repayment at an annual interest rate of 24.99 percent, if the consumer cashed the check. The consumer cashed the check, agreeing to the loan terms. After failing to repay the debt in full, the consumer filed a complaint against the lender asserting various claims, including that the interest rate is unenforceable under New York General Obligations Law (GOL) § 5-511 because it exceeds 16 percent. The lender moved to dismiss the action.
The court agreed with the lender on the usurious claim, concluding that as a licensed lender in New York, the lender is “authorized to extend loans of $25,000 or less with interest rates up to 25[percent]” which is “the limit set by New York’s criminal usury statute, New York Penal Law § 190.40.” The court cited to NYDFS interpretations, stating that unlicensed nonbank lenders may not charge more than a 16 percent annual interest rate, but lenders that “obtain an Article IX license [] may charge interest up to 25[percent] per annum on the small loans.” Because the lender was licensed under Article IX in the state of New York, the lender “was permitted to loan $2,539.00 to [the consumer] at an agreed-upon annual interest rate of 24.99[percent] without violating GOL § 5-511.”
District court applies OCC’s valid-when-made final rule but raises true lender question
On August 12, the U.S. District Court for the District of Colorado reversed in part a bankruptcy court judgment, concluding that the OCC’s valid-when-made rule applied but that discovery was needed to determine whether a nonbank entity was the true lender. According to the opinion, a debtor corporation commenced an adversary proceeding against a creditor in their bankruptcy, alleging, among other things, that the interest rate of the underlying debt’s promissory note is usurious under Colorado law. The promissory note was executed between a Wisconsin state-charted bank and a Colorado-based corporation, with an interest rate of nearly 121 percent. The note included a choice of law provision dictating that federal law and Wisconsin law govern. A deed of trust, dictating that Colorado law (the property’s location) governs, was pledged as security on the promissory note and incorporated by referencing the terms of the note. Subsequently, the Wisconsin bank assigned its rights under the note and deed of trust to a nonbank entity registered in New York with a principal place of business in New Jersey. The bankruptcy court denied the debtor’s claims, concluding that the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) applied, which dictated the application of Wisconsin law, making the interest rate valid.
On appeal, the district court applied the OCC’s valid-when-made rule (which was finalized in June and covered by a Buckley Special Alert), concluding that “a promissory note with an interest rate that was valid when made under DIDMCA § 1831d remains valid upon assignment to a non-bank.” However, the district court noted that DIDMCA § 1831d does not apply to promissory notes “with a nonbank true lender” and the parties did not “conduct discovery on the factual question of whether [the nonbank entity] was the true lender.” Thus, the court reversed and remanded to the Bankruptcy Court to determine whether the nonbank entity was the true lender.
Final CCPA regulations approved
On August 14, the California attorney general announced that the Office of Administrative Law (OAL) approved the final regulations under the California Consumer Privacy Act (CCPA). As previously covered by InfoBytes, the CCPA—enacted in June 2018 (covered by a Buckley Special Alert) and amended several times—became effective January 1. The proposed final regulations were submitted to OAL on June 1 and were “nonsubstantially changed” during OAL’s review process for “accuracy, consistency, and clarity.” The final regulations are effective as of August 14.
The final regulations set forth guidance regarding compliance with the CPPA, including requirements related to the various required notices under the CCPA (e.g., Notice at Collection, privacy policy, etc.), business practices for handling consumer requests (e.g., methods for submitting and responding to requests to know and requests to delete), service providers, training and recordkeeping, verification of requests, special rules for minors, and nondiscrimination requirements.
For a detailed overview of the regulations, see here (the InfoByte details an earlier version of the regulations, which remain substantially unchanged). Details discussing the nonsubstantial changes available by InfoBytes here.
Kansas issues executive order temporarily prohibiting certain foreclosures and evictions
On August 17, the Kansas governor issued Executive Order No. 20-61, which imposes restrictions on foreclosures and evictions. Banks and lending entities are prohibited from foreclosing on residential properties in Kansas where all defaults or violations of the mortgage are substantially caused by a financial hardship resulting from the Covid-19 pandemic, subject to certain exemptions. Landlords are similarly prohibited from evicting a residential tenant when all defaults or violations of the rental agreement are substantially caused by a financial hardship resulting from the pandemic. Banks, financial lending entities, or landlords initiating judicial foreclosure or eviction proceedings after August 17, 2020, bear the burden of pleading and proving that the foreclosure or eviction is not solely based on defaults or violations resulting from financial hardships resulting from the pandemic. The order does not apply to foreclosures initiated by the U.S. government.
District court: Lender does not owe PPP fees to accountant without contract
On August 17, the U.S. District Court for the Northern District of Florida dismissed an action alleging an accounting firm is entitled to a portion of the fees paid by the Small Business Administration (SBA) to lenders making loans under the Paycheck Protection Program (PPP). According to the order, an accounting firm filed an action against a lender alleging the lender did not pay “agent fees” reportedly due to it under the PPP. The accounting firm argued that the PPP and its implementing regulation require lenders to pay agent fees “irrespective of whether there is an agreement between the agent or borrower and the lender to do so.” Moreover, the accounting firm asserted the fees were required based on “equitable principles [] under state common law,” because the lender was “aware of and benefitted from the work [the accounting firm] did on the borrowers’ PPP loan applications.”
The district court dismissed the action, concluding that the CARES Act—which created the PPP—and its implementing regulation do not “require lenders to pay the agent’s fees absent an agreement to do so.” According to the court, the CARES Act establishes a ceiling on fees an agent may collect in preparing an application for a borrower and the applicable interim final regulation (IFR) “simply explains that, if an agent is to be paid a fee, the fee must be paid by the lender from the fee it receives from the SBA.” The court noted that the SBA’s existing Section 7(a) lending requirements establish that fees charged by an agent require a “compensation agreement” to be provided to the SBA, and because these existing Section 7(a) program requirements “do not conflict with the IFR, they apply to agents who assist borrowers in obtaining loans under the PPP.” Because there was no contractual agreement between the parties, the court concluded that the financial institution had no legal obligation to pay the accounting firm agent fees. Lastly, the court rejected the state common law claims, concluding that the accounting firm did not establish that it directly conferred a benefit on the financial institution, noting that the SBA fees were “merely an incidental benefit of [the accounting firm]’s work for the borrowers.”