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.
Eleventh Circuit Holds Federal Law Preempts Florida’s Check-Cashing Fee Restriction For Out-Of-State Banks
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.
Fourth Circuit Holds State Auto Debt Cancellation Requirements Not Preempted for Certain Assigned Loans
On December 26, the U.S. Court of Appeals for the Fourth Circuit held that federal law does not preempt Maryland’s debt cancellation requirements for an auto retail installment sales contract (RISC) when a national bank is the assignee, and not the originator, of the loan. Decohen v. Capital One, N.A., No. 11-2161, 2012 WL 6685767 (4th Cir. Dec. 26, 2012). In this case, a dealer sold and financed a used vehicle and subsequently assigned the loan to a national bank. The financing included a charge for a debt cancellation agreement in the RISC, which under the Maryland Credit Grantor Closed End Credit Provisions (CLEC) requires a lender to cancel any remaining loan balance when a car is totaled and insurance does not cover the full loss. After the buyer totaled his car and was left with a loan balance, he sought to enforce the debt cancellation agreement. In dismissing the case, the district court held, in relevant part, that the agreement at issue was a “debt cancellation contract” covered by the National Bank Act, and that because such contracts are governed by federal law and regulations, including regulations regarding debt cancellation agreements, state regulation of such contracts is preempted. The district court also found that the purchaser failed to state a claim for breach of contract because the bank did not agree to cancel the remaining debt. The appeals court disagreed and held that because the OCC regulations regarding debt cancellation agreements apply only to agreements entered into by national banks, “the CLEC provisions regarding debt cancellation agreements are not expressly preempted by federal law when the agreements are part of credit contracts originated by a local lender and assigned to a national bank.” The court also held that the purchaser stated a claim for breach of contract because the parties voluntarily elected to be governed by the CLEC in the RISC, which cannot be undone by assignment of the loan. The court vacated the district court’s judgment and remanded the case for further proceedings.
Ninth Circuit Vacates Restitution Order in Overdraft Ordering Case, Allows State Fraud Claims to Proceed
On December 26, the U.S. Court of Appeals for the Ninth Circuit held that a national bank’s practice of posting payments to checking accounts in a particular order is a federally authorized pricing decision, and that federal law preempts the application of state law to dictate a national bank’s order of posting. Gutierrez v. Wells Fargo Bank, No. 10-16959, 2012 WL 6684748 (9th Cir. Dec. 26, 2012). In this case, after trial the district court enjoined the bank’s practice of ordering withdrawals from “high-to-low” and ordered the bank to pay $203 million in restitution. The court agreed with customers who had sued the bank on behalf of a class that the bank’s ordering practice was designed to maximize the number of customer overdrafts and related fees and as such violated the California Unfair Competition Law (UCL). On appeal, the court held that the bank’s ordering practice is a pricing decision the bank can pursue under federal law, and that the National Bank Act (NBA) preempts the unfair business practices prong of the UCL. The court also held that both the imposition of affirmative disclosure requirements and liability based on failure to disclose are preempted. However, the court held that the NBA does not preempt the customers’ claim of affirmative misrepresentations under the fraudulent prong of the UCL. The court also considered as an issue of first impression the effect of the Supreme Court’s intervening ruling in Concepcion on a judgment on appeal after trial. The court declined to grant arbitration, reasoning that the bank’s post-judgment arbitration request was contrary to its conduct throughout the litigation, and that granting the request would prejudice the plaintiff and frustrate the purposes of the Federal Arbitration Act. The court vacated the district court’s injunction and its $203 million restitution order, and directed the district court to determine appropriate relief on the state fraud claims.
California Federal District Court Affirms Lender’s Sole Discretion to Change Rate Index for ARM Loan
On October 3, the U.S. District Court for the Northern District of California held that a lender had no duty to abandon the index to which certain adjustable rate mortgage rates were tied when the index experienced an unprecedented jump. Haggarty v. Wells Fargo Bank, N.A., No 10-02416, 2012 WL 4742815 (N.D. Cal. Oct. 3, 2012). The borrowers, who had entered into two adjustable rate mortgages, sued the lender when their rates increased substantially following a jump in the index to which the adjustable rates were tied. On behalf of themselves and a putative class, the borrowers claimed that the bank breached an implied covenant of good faith and fair dealing by failing to substitute a new index under a clause in the Notes that allowed the lender to choose a new index if the original index was “substantially recalculated.” The court held that the Note language granting the lender ”sole discretion” to determine whether the index had been substantially recalculated insulated the lender from claims that it was required to reach a certain conclusion about the index and the need to substitute a new index. Further, the court held that the borrowers’ attempt to use implied covenants to add contract terms or establish a breach was preempted by the Home Owners’ Loan Act, which in relevant part was intended to avoid inconsistent obligations for lenders regarding interest rate adjustments. The court granted summary judgment in favor of the lender.
On August 16, the CFPB issued a Notice that it intends to make a preemption determination with regard to two state gift card laws. The CFPB is seeking public comment to inform its response to requests that the CFPB address conflicts between the EFTA’s gift card expiration provisions and those in Maine’s and Tennessee’s laws. The Notice explains that Maine’s and Tennessee’s laws presume gift cards to be “abandoned” and release businesses from the obligation to honor the gift cards after two years of inactivity, while federal law generally prohibits the sale of a gift card with an expiration date under five years. The CFPB requests public comment on whether there is any inconsistency between the identified state and federal expiration date provisions and, if so, on the nature of the inconsistency. The CFPB also seeks comment on whether card issuers could comply with the federal and state laws as they currently exist, and whether the Maine and Tennessee laws provide greater consumer protection than the federal law.
On June 21, the California Supreme Court held that the National Bank Act (NBA) preempts California Civil Code section 1748.9, which requires that certain disclosures accompany preprinted checks provided by a credit card issuer to its cardholders. Parks v. MBNA Am. Bank, N.A., No. S183703, 2012 WL 2345006 (Cal. June 21, 2012). In a unanimous decision, the court concluded that the NBA preempts section 1748.9 because the law is an obstacle to the broad grant of power given to national banks to conduct the business of banking. The court held that the specific disclosure obligations imposed by section 1748.9, including precise language and placement of the disclosures, exceeded any federal law requirements. In addition, the court recognized that the NBA was intended to prevent banks from complying with a patchwork of local disclosure requirements like section 1748.9.