Consumer Compliance Outlook: Fourth Quarter 2008

On the Docket: Recent Federal Court Opinions

Regulation Z - Truth in Lending Act (TILA)

Seventh Circuit rules that TILA does not allow class actions seeking rescission. Andrew v. Chevy Chase Bank External Link, 545 F.3d 570 (7th Cir. 2008). In a significant ruling for lenders, the Seventh Circuit held that the right of rescission under TILA cannot be pursued in a class action. The case represents a reversal of last year's decision by a federal court in Wisconsin. The Wisconsin court made headlines when it certified a class action of borrowers seeking a rescission remedy against Chevy Chase Bank because of Regulation Z violations in the bank's disclosure statement. Lenders were concerned about their exposure to large rescission class action judgments because the $500,000 limit on class action awards in §130 External Link of TILA does not apply to rescission claims. The Seventh Circuit found that it was not plausible that Congress capped damages in class actions at $500,000 to protect lenders from ruinous judgments for technical errors while allowing unlimited class action damages for rescission violations. The court also found that the right of rescission involves many individual issues that cannot easily be adjudicated in the context of a class action.

Right of rescission because of lender's failure to identify payment due date on disclosure statement. Lippner v. Deutsche Bank National Trust Co. External Link, 2008 Lexis 14135 (N.D. Ill. Feb. 26, 2008) and Ware v. Indymac Bank External Link, FSB, 534 F.Supp2d 835 (N.D. Ill. 2008). The second-quarter issue of Outlook discussed Hamm v. Ameriquest Mortgage Co External Link., 506 F.3d 525 (7th Cir. 2007), which held that a lender's failure to state expressly on the TILA disclosure statement that payments were due “monthly” violates §18(g)(1) External Link of Regulation Z. These two cases applied the ruling in Hamm to allow borrowers to rescind their loans because the payment period was not identified in their disclosure statements. TILA violations involving “material disclosures” extend the rescission period from three business days up to three years. The payment schedule is a material disclosure under §23(a)(3) External Link of Regulation Z, so rescission was allowed. Ware also addressed the argument made by co-defendant CitiMortgage that the claim against it should be dismissed based on its assignee status. The court rejected this argument because the violation was apparent on the face of the disclosure statement.

Regulation E - Electronic Fund Transfer Act (EFTA)

Sixth Circuit upholds sufficiency of on-screen ATM fee notice. Clemmer v. Key Bank, N.A., External Link 539 F.3d 349 (6th Cir. 2008). In a class action filed against Key Bank, a consumer alleged that the bank violated the EFTA and Regulation E, its implementing regulation, because the bank's ATM fee notice on its screens stated that the bank “may charge a fee” when the bank always imposed a fee on noncustomers. The Sixth Circuit affirmed the dismissal of the case, finding that the use of the phrase “may charge a fee” complied with EFTA and Regulation E because neither the statute nor the regulation prescribes the words that must be used. In addition, the customer was specifically asked, after the fee was disclosed on the ATM screen, whether he wanted to continue with the transaction, and he selected “yes (to accept fee).” This language provided notice that a fee would be imposed, and accordingly, the court affirmed the dismissal of the case.

Arbitration Clauses

Enforceability of arbitration clause. Pleasants v. American Express Co External Link., 541 F.3d 853 (8th Cir. 2008). A consumer sued American Express and American Express Incentive Services (AEIS) because she did not receive TILA disclosures when she purchased a preloaded, stored-value card. The claim against American Express was dismissed because it is not a creditor under TILA. AEIS filed a motion to compel arbitration. The issue for the court was whether an arbitration clause in the consumer's account agreement was enforceable. The plaintiff relied on a Missouri state appellate court decision that struck down an arbitration clause as substantively unconscionable. However, the Eighth Circuit distinguished that case because the clause there prevented the plaintiff from obtaining attorney's fees if she won the lawsuit, which would make a lawsuit very impractical because the amount of attorney's fees to pursue the case would likely exceed the amount of damages. The arbitration clause from AEIS did not place any such limitations on the plaintiff's remedies if she won the lawsuit. The court found this distinction crucial in upholding the arbitration clause.

Identity Theft

Court dismisses lawsuit alleging increased risk of identity theft. Kidman v. Wells Fargo & Co External Link., (N.D. Oh., July 28, 2008). Wells Fargo notified a home mortgage customer that computer disks containing his account information were stolen. The customer responded by filing a class action seeking damages for himself and class members because of their increased risk of identity theft. Significantly, the plaintiff did not allege that he suffered damages because his confidential information had been used improperly. He alleged only that an increased risk of identity theft existed. Wells Fargo filed a motion to dismiss the case, arguing that merely alleging an increased risk of identity theft does not present a cognizable injury and therefore the plaintiff lacked standing to pursue the lawsuit. The court agreed with Wells Fargo and dismissed the case.

Fair Credit Reporting Act (FCRA)

FCRA violation to obtain a credit report on behalf of a third party. Hernandez v. Lamboy Furniture, Inc External Link., 2008 WL 4061344 (E.D. Pa. Sept. 2, 2008). This case examines violations of §1681b(f) External Link of the FCRA when a user of consumer credit reports obtains a report not for its own permissible purpose but at the request of a third party. Lamboy Furniture, a business with a subscription to a consumer reporting agency, obtained a credit report on Hernandez, a consumer, at the request of Diaz, a Lamboy Furniture customer who claimed to have a permissible purpose but did not, in fact, have one. Hernandez filed suit under §1681b(f) against Diaz, Lamboy Furniture, its principal, and the consumer reporting agency. The court, in deciding a motion for summary judgment, held that Lamboy Furniture and Diaz violated §1681b(f) because they obtained a credit report without a permissible purpose. However, the court held that whether compensatory and punitive damages could be awarded must be decided by a jury because it involved factual and credibility issues about whether the violations were negligent or willful. The court ruled in favor of the reporting agency because it relied on a certification from Lamboy Furniture that it had a permissible purpose in requesting the credit report.