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NYDFS fintech charter lawsuit survives challenge
On May 2, the U.S. District Court for the Southern District of New York denied the OCC’s motion to dismiss a complaint filed by NYDFS arguing that the agency’s decision to allow fintech companies to apply for a Special Purpose National Bank Charter (SPNB) is a move that will destabilize financial markets more effectively regulated by the state. (See previous InfoBytes coverage here.) The court, however, stated that because the OCC failed to rebut NYDFS’s claims that the proposed national fintech charter posed a threat to the state’s ability to establish its own laws and regulations, the challenge “is ripe for adjudication.” Specifically, NYDFS alleged that granting a national charter to fintech firms would limit its ability to regulate non-depository institutions and could potentially lead to a loss in revenue derived from assessments levied against state licensed institutions. The court rejected the OCC’s preemption arguments, writing that the “threats to New York's sovereignty are so clear that the OCC does not even mention, let alone contest, the state's interests. Instead, OCC focuses exclusively on constitutional and prudential ripeness.” The court further dismissed the OCC’s ripeness argument that it has yet to receive, review, or approve a SPNB application, and referred to NYDFS’ allegations that the OCC has “invited fintech companies . . . to discuss SPNB charters,” which potentially demonstrates “at least some demand for, and interest in, such charters.” While the court concedes that the potential for fintech companies to “flout” New York's laws would only occur once a fintech company has applied and been granted a SPNB charter, “those steps do not stymie [NYDFS’s] standing.”
In addressing NYDFS’s Administrative Procedures Act claim, the court found, among other things, that engaging in the “business of banking” under the National Bank Act (NBA) “unambiguously requires receiving deposits as an aspect of the business.” Furthermore, the court concluded that “absent a statutory provision to the contrary, only depository institutions are eligible to receive [a SPNB] from [the] OCC.” However, the court dismissed NYDFS’s claims that a SPNB charter conflicts with state law in violation of the Tenth Amendment of the U.S. Constitution. According to the court, while NYDFS has standing to raise a Tenth Amendment claim, it has failed to state such a claim “because federal law preempts state law only when ‘Congress has clearly expressed its intent,’” and in this instance, “the operative question is not whether the federal government has the power to take the action challenged in this case, but whether Congress has, in fact exercised that power.”
District Court: Usury claim not preempted by National Bank Act
On April 24, the U.S. District Court for the Western District of Pennsylvania denied in part and granted in part a national bank’s motion to dismiss a complaint alleging violations of, among other things, the Pennsylvania Loan Interest and Protection Act (“Act 6”). The allegations stem from the bank’s servicing of the plaintiffs’ mortgage. Pursuant to a settlement agreement reached between the parties in a separate 2012 lawsuit over alleged misrepresentations made by the bank concerning whether the plaintiffs were in arrears in their mortgage and escrow payments, the mortgage principal was reset. The plaintiffs asserted that although they made timely monthly payments, a 2014 mortgage statement reflected an escrow shortage, including unpaid late charges and outstanding advance/fees. Arguing that because the loan servicers refused their allegedly timely payments, which increased the principal balance, the plaintiffs claimed that the bank breached the terms of the settlement agreement by adding the unauthorized charges without providing notice. However, the bank argued—and the court concurred—that the breach of contract claim was outside the applicable statute of limitations. The plaintiffs further alleged that the bank charged an interest rate that exceed the rate permitted under Act 6, and that the loan servicer charged the plaintiffs “undisclosed, excessive, and retaliatory attorney’s fees ‘from at least one if not two prior lawsuits,’ in violation of the [s]ettlement [a]greement and Act 6,” along with other “unwarranted charges.”
Concerning the bank’s motion to dismiss the Act 6 usurious interest rate claims based upon preemption, the court referred to the loan’s origination and rejected the bank’s argument that the usury claim was preempted by the National Bank Act, explaining that the homeowners’ mortgage was originated by a non-national bank even though a national bank was later assigned the note and mortgage. Additionally, the court rejected the bank’s argument that the Act 6 claim of unlawful attorney fees was barred by the applicable four-year statute of limitations. According to the court, “an Act 6 claim for excessive fees accrues upon payment of said fee; it does not accrue upon charge of the fee or upon the obligor’s knowledge of the fee.” However, the court determined that the plaintiffs failed to adequately allege that they made “the requisite unlawful payments of usurious interest or unlawful attorney’s fees” required to state valid Act 6 claims. As such, the court dismissed the Act 6 claims without prejudice.
1st Circuit: “Sustained Overdraft Fees” are not interest under the National Bank Act
On March 26, the U.S. Court of Appeals for the 1st Circuit affirmed a district court’s decision to dismiss putative class action allegations that a bank charged usurious interest rates on its overdraft products, finding that the bank’s “Sustained Overdraft Fees” are not interest under the National Bank Act (NBA). The plaintiff filed a lawsuit against the bank in 2017, alleging that sustained overdraft fees should be considered interest charges subject to Rhode Island’s interest rate cap of 21 percent, and that because the alleged annual interest rates exceeded the cap, the fees violated the NBA. The district court, however, dismissed the case, ruling that the sustained overdraft fees were service charges, not interest charges.
On appeal, the split three-judge panel held that, because the sustained overdraft fees did not constitute interest payments under the NBA and the OCC’s regulations interpreting the NBA, the class challenges cannot move forward. The panel stated that the agency’s interpretation in its 2007 Interpretive Letter is due “a measure of deference.” The panel found the agency’s interpretation persuasive because “[f]lat excess overdraft fees (1) arise from the terms of a bank’s deposit account agreement with its customers, (2) are connected to deposit account services, (3) lack the hallmarks of an extension of credit, and (4) do not operate like conventional interest charges.”
In dissent, Judge Lipez noted that, while the OCC interpretive letter laid out a clear case for overdraft fees as service, not interest charges, it was silent on the question of “Sustained Overdraft Fees.” He wrote that “[s]ilence, however, is not guidance, and we would thus need to infer a ruling on a debated issue from between the lines of the Letter.” Furthermore, he could “not see how we can defer to an interpretation that the OCC never clearly made on an issue that it previously described as complex and fact-specific.”
Proposed settlement would resolve claims in Madden v. Midland Funding, LLC
On March 1, plaintiffs filed a proposed class action settlement agreement with a debt collection firm in the U.S. District Court for the Southern District of New York, which would potentially end litigation dating back to 2011 concerning alleged violations of state usury limitations. The proposed settlement would resolve claims originally brought by the plaintiffs alleging that the defendants violated the FDCPA and New York state usury law when it attempted to collect charged-off credit card debt, purchased from a national bank, from borrowers with interest rates above the state’s 25 percent cap. As previously covered by InfoBytes, in 2015, the 2nd Circuit reversed the district court’s 2013 decision, and held that a nonbank entity taking assignment of debts originated by a national bank is not entitled to protection under the National Bank Act from state-law usury claims. This ruling contradicted the “Valid-When-Made Doctrine,” which is a longstanding principle of usury law that if a loan is not usurious when made, then it does not become usurious when assigned to another party. Following the U.S. Supreme Court’s decision to decline to hear the case, the district court issued a ruling in 2017 (covered by InfoBytes here) holding that New York’s fundamental public policy against usury overrides a Delaware choice-of-law clause in the plaintiff’s original credit card agreement. The court granted the plaintiff’s motion for class certification, and allowed the FDCPA and related state unfair or deceptive acts or practices claims to proceed. However, the court did not allow the plaintiff’s claims for violations of New York’s usury law to proceed, as it held that New York’s civil usury statute does not apply to defaulted debts and that the plaintiff cannot directly enforce the criminal usury statute.
Under the terms of the proposed settlement, the defendants are required to, among other things, (i) provide class members with $555,000 in monetary relief; (ii) provide $9.2 million in credit balance reductions; (iii) pay $550,000 in attorneys’ fees and costs; and (iv) agree to comply with all applicable laws, regulations, and case law regarding the collection of interest, including the collection of usurious interest.
District Court rejects dismissal bid for California interest on escrow class action
On December 7, the U.S. District Court for the Northern District of California denied a bank’s motion to dismiss a putative class action alleging the bank violated the California Unfair Competition Law (UCL) by not paying interest to residential mortgagors on funds held in escrow accounts, as required by California law. The three plaintiffs filed the complaint against the bank after the March decision by the U.S. Court of Appeals for the 9th Circuit in Lusnak v. Bank of America, which 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. (Previously covered by InfoBytes here.) The plaintiffs argued that the 9th Circuit decision requires the bank to comply with the California law requiring interest on funds held in escrow.
In response, the bank filed a motion to dismiss, or in the alternative to stay the case, on the basis that the plaintiffs failed to provide the bank with notice and an opportunity to cure alleged misconduct prior to judicial action as required by the mortgage deed, and that the plaintiff’s claims were preempted by the Home Owners Loan Act (HOLA). The court rejected these arguments, finding that the plaintiff’s failure to comply with the ambiguous provisions in the mortgage deed do not foreclosure their claims, concluding “[t]o deprive Plaintiffs of recourse to their statutory rights based on an ambiguous contractual provision would also frustrate the consumer protection purposes of those statutes.” As to the HOLA argument, the court acknowledged that HOLA preempted the state interest law as to the originator of the mortgages, a now-defunct federal thrift, but disagreed with the bank’s assertion that the preemption attached throughout the life of the loan, including after the loan is transferred to a bank whose own lending is not covered by HOLA. Specifically, the court looked to the legislative intent of HOLA and noted it was unclear if Congress intended for preemption to attach through the life of the loan, but found a clear goal of consumer protection. Therefore, the court concluded that “[a]llowing preemption may run contrary to HOLA's purpose and could result in a gross miscarriage of justice” by depriving homeowners of state law protections.
Additionally, the court rejected as moot the alternative request to stay the case pending the Supreme Court’s resolution of Lusnak, because the Supreme Court denied the petition of writ in that case in November (covered by InfoBytes here).
Supreme Court will not hear 9th Circuit interest on escrow preemption decision
On November 19, the U.S. Supreme Court declined to review the U.S. Court of Appeals for the 9th Circuit’s March decision, which held that a California law requiring banks to pay interest on mortgage escrow funds is not preempted by federal law. As previously covered by InfoBytes, a national bank petitioned for writ of certiorari in August, arguing the 9th Circuit’s decision—holding that the Dodd-Frank Act of 2011 codified the existing National Bank Act preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson—warranted further review “because it creates significant uncertainty about whether national banks must comply with similar laws in other states” and whether other state banking laws also apply to national banks. Additionally, the petition argued the uncertainty is exacerbated by the fact that the appellate court “disregarded and refused to enforce longstanding OCC regulations” and that the court interpreted the Barnett decision incorrectly.
CSBS files lawsuit over OCC’s fintech charter decision, arguing agency exceeds it authority under the National Bank Act
On October 25, the Conference of State Bank Supervisors (CSBS) filed a lawsuit against the OCC arguing that the agency exceeded its authority under the National Bank Act (NBA) and other federal banking laws when it allowed non-bank institutions, including fintech companies, to apply for a Special Purpose National Bank Charter (SPNB). As previously covered by InfoBytes, the U.S. District Court for the District of Columbia dismissed CSBS’s challenge last April on ripeness grounds because the OCC had not yet issued a fintech charter to any firm. But CSBS renewed its challenge in light of the OCC’s July announcement welcoming non-depository fintech companies engaging in one or more core-banking functions to apply for a SPNB (previously covered by Buckley Special Alert here), and statements indicating the OCC is currently vetting several companies and expects to make charter decisions mid-2019.
Among other things, the complaint argues that the SPNB program (i) exceeds the OCC’s statutory authority because the OCC may not “redefine the business of banking” to include non-depository institutions; (ii) is “arbitrary, capricious, and an abuse of discretion” because it inadequately addresses, without explanation, “the myriad policy implications and concerns raised by the public” and the “cost-benefit” tradeoffs; (iii) did not include the proper notice and comment period for preemption interpretations under the NBA; and (iv) is an improper invasion of “state sovereign interests.”
Utah Supreme Court reverses foreclosure ruling, states OCC interpretation of “located” is reasonable
On October 5, the Utah Supreme Court revisited a 2013 decision in which it held that federal law does not preempt Utah state law that limits the ability of national banks to foreclose on real property in the state. In a unanimous opinion, the court wrote that it was overruling its “clearly erroneous” decision in a case stemming from a borrower’s challenge to the validity of a nonjudicial foreclosure sale of her Utah home by a Texas-based national bank. According to the opinion, the borrower argued that the sale of her home at auction was invalid because Utah state law “does not permit a bank to act as a trustee on a trust need.” Fannie Mae, which won the auction, secured an eviction order and argued that under the National Bank Act (NBA), the bank had the authority to conduct the sale. The court, however, reversed the eviction order after deciding that the bank did not have the authority under Utah law to act as a trustee under a deed of trust.
In overruling its 2013 decision, the court held that whether a national bank has the authority to act as a trustee to foreclose on property in Utah depends on the OCC’s regulation implementing the NBA, not on Utah state law. According to the OCC’s interpretation of Section 92a of the NBA, a bank is located in the state where it “accepts the fiduciary appointment, executes the documents that create the fiduciary relationship, and makes discretionary decisions regarding the investment or distribution of fiduciary assets.” Previously, the court had found this interpretation to be unreasonable and not entitled to Chevron deference. However, when reconsidering the issue, the court determined that the OCC had the authority to implement the NBA and that the agency’s interpretation of the word “located” was reasonable. “Whatever located means, Congress has instructed that a state has to permit a national bank to act as a fiduciary if institutions that compete with the national bank in the state where it is located can act as a fiduciary,” the court wrote. “This expresses a federal intent to clomp into an area of traditional state concern.” The question, however, remained whether the bank performed its actions in a fiduciary capacity in Texas—a point on which the two parties to the litigation disagreed. “Because the district court has not had the opportunity to address this issue and because of the potential need for factual findings, we remand for the district court to consider this argument,” the opinion stated.
Court approves final class action settlement; previously ruled that extended overdrawn balance charge fees are “interest” under National Bank Act
On August 31, the U.S. District Court for the Southern District of California granted final approval to a class action settlement, resolving a suit alleging that a national bank’s overdraft fees exceeded the maximum interest rate permitted by the National Bank Act (NBA). According to the order, the settlement ends a putative class action concerning the bank’s practice of charging a $35 “extended overdrawn balance charge” fee (EOBCs) on deposit accounts that remained overdrawn for more than five days when funds were advanced to honor an overdrawn check. Class members argued that the fee amounted to interest and—when taken into account as a percentage of an account holder’s negative balance—exceeded the NBA’s allowable interest rate. The bank countered, stating that “EOBCs were not ‘interest’ and therefore cannot trigger the NBA.” A 2016 order denying the bank’s motion to dismiss, which departed from several other district courts on this issue, found that “covering an overdraft check is an ‘extension of credit’” and therefore overdraft fees can be considered interest under the NBA. The bank appealed the decision to the 9th Circuit in April 2017, but reached a settlement last October with class members.
Under the terms of the approved settlement, the bank will refrain from charging extended overdraft fees for five years—retroactive to December 31, 2017—unless the U.S. Supreme Court “expressly holds that EOBCs or their equivalent do not constitute interest under the NBA.” The bank also will provide $37.5 million in relief to certain class members who paid at least one EOBC and were not provided a refund or a charge-off, and will provide at least $29.1 million in debt reduction for class members whose overdrawn accounts were closed by the bank while they still had an outstanding balance as a result of one or more EOBCs applied during the class period. The bank also will pay attorneys’ fees.
National bank petitions for cert in 9th Circuit preemption decision
On August 14, a national bank filed a petition for writ of certiorari with the U.S. Supreme Court requesting review 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 mortgage escrow funds is not preempted by federal law. As previously covered by InfoBytes, the 9th Circuit held that the Dodd-Frank Act of 2011 essentially codified the existing National Bank Act preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson. In May, a panel of three judges on the U.S. Court of Appeals for the 9th Circuit denied the petition for an en banc rehearing. In its petition, the bank argues that the appeals court decision warrants further review “because it creates significant uncertainty about whether national banks must comply with similar laws in other states” and whether other state banking laws also apply to national banks. The petition argues the uncertainty is exacerbated by the fact that the appellate court “disregarded and refused to enforce longstanding OCC regulations.” The bank contends that the 9th circuit interpreted the decision in Barnett incorrectly, and when a state law limits “a national bank’s federal authority to set the terms for their products and services, it is preempted by the National Bank Act.”