Consumer Compliance Outlook: Second Quarter 2011

On the Docket: Recent Federal Court Opinions


Change-in-terms notice. Chase Bank USA, N.A. v. McCoy External Site, 131 S. Ct. 871 (2011). The U.S. Supreme Court resolved a split among the federal appeals courts as to whether, under the version of Regulation Z in effect before August 2009, a card issuer must provide a change-in-terms notice for a rate increase if the cardholder agreement permitted the issuer to increase the rate because of delinquency or default. In Shaner v. Chase Bank USA, N.A., 587 F. 3d 488 (1st Cir. 2009), the First Circuit concluded that a rate increase in this circumstance does not constitute a change in terms requiring a notice under the version of §226.9 then in effect. In Swanson v. Bank of America, N.A., 559 F.3d 653 (7th Cir. 2009), the Seventh Circuit reached the same conclusion for a rate increase imposed because the borrower continued to exceed her credit limit. To the contrary, the Ninth Circuit, in McCoy v. Chase Manhattan Bank, U.S.A., N.A., 559 F.3d 963 (9th Cir. 2009), cert. granted, 130 S. Ct. 3451 (2010), held that §226.9 required a change-in-terms notice in this circumstance. The Supreme Court invited the Board of Governors of the Federal Reserve System (Board), the agency charged with implementing TILA, to submit a friend-of-the-court brief. The Board's brief stated that the Ninth Circuit “erred in concluding that, at the time of the transactions at issue in this case, Regulation Z required credit card issuers to provide a change-in-terms notice before implementing a contractual default-rate provision.” The Supreme Court found that the regulation was ambiguous on this issue and deferred to the Board's interpretation, reversing the Ninth Circuit's decision. Since August 2009, §226.9(c)(2)(i), as amended, requires creditors to provide a change-in-terms notice 45 days in advance before applying a penalty rate increase, even if the possibility of the rate increase had previously been disclosed.

Rescission lawsuit must be filed within three years of consummation. Williams v. Wells Fargo Home Mortgage, Inc. External Site, 2011 WL 395978 (3d Cir. 2011). The Third Circuit affirmed the dismissal of a lawsuit to rescind a mortgage loan that was filed more than three years after consummation. The plaintiff consummated her mortgage on November 14, 2002, and notified her lender more than two years later that she was exercising her right of rescission. However, she did not file a lawsuit seeking rescission until more than three years after consummation. Under TILA and Regulation Z, a consumer has three business days to rescind certain mortgages, but the period can be extended to three years if the creditor fails to provide the rescission notice or the TILA material disclosures. The issue on appeal was whether the consumer exercises the right by sending notice to the creditor within three years of consummation or whether a lawsuit must be filed within that period. Relying on the Supreme Court's decision in Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998), the Third Circuit concluded that “a legal action to enforce the right must be filed within the three-year period or the right will be completely extinguished.” Because the plaintiff's lawsuit was filed more than three years after consummation, the court affirmed the dismissal of the case.


Retroactive application of amended SCRA permitted. Gordon v. Pete's Auto Service of Denbigh, Inc. External Site, 637 F.3d 454 (4th Cir. 2011). The Fourth Circuit reversed the dismissal of a service member's lawsuit because of a recent amendment to the SCRA permitting a private cause of action for damages for SCRA violations. While the plaintiff was away on deployment, the apartment complex where he lived had his car towed because of a flat tire. The towing company later sold the vehicle. The plaintiff had previously notified the landlord that he was subject to deployment and listed his wife as an emergency contact, but neither was notified of the towing. The plaintiff sued the towing company for violating the SCRA, which prohibits creditors from foreclosing or enforcing a lien on the property of a service member during military service and 90 days thereafter without a court order. The trial court dismissed the case because the SCRA did not provide for a private cause of action for damages when the suit was filed. However, in October 2010, while the appeal was pending, Congress enacted the Veterans' Benefits Act of 2010 (VBA), which amended the SCRA to permit recovery of damages and attorney's fees. The Fourth Circuit had to determine whether the amended SCRA could retroactively be applied to the plaintiff's case. The court noted that if a statute does not expressly allow retroactive application, a law cannot be applied retroactively if doing so would attach “new legal consequences to events completed before its enactment.” The court found that the right to compensatory and punitive damages for a wrongful asset execution was already available under Virginia's conversion laws, so allowing the plaintiff's case to proceed under the amended SCRA was not adding a new legal consequence but simply permitting a federal forum. The court therefore reversed the dismissal of the lawsuit and remanded the case to the trial court for further proceedings. The VBA allows civil damages of up to $55,000 for the first SCRA violation and up to $110,000 for subsequent violations.


Furnishers' duties for disputed information. Anderson v. EMC Mortgage Corp. External Site, 631 F.3d 905 (8th Cir. 2011). The Eighth Circuit affirmed the dismissal of a lawsuit under the FCRA against a furnisher of credit information. The plaintiff made timely payments to EMC, his mortgage lender, but EMC lost his December 2006 check and waited four months before presenting it. By the time the check was presented, the plaintiff had closed the account. In May 2007, the plaintiff made an extra payment that brought his account up-to-date. EMC reported the account as more than 30 days late to the consumer reporting agencies (CRAs) because of the dishonored check. As a result of the negative reporting, the plaintiff lost favorable financing for a real estate purchase and filed suit against the furnisher for damages. The trial court determined, and the Eighth Circuit agreed, that the plaintiff's claim under §1681s-2(b) of the FCRA was deficient because the plaintiff did not allege that he disputed EMC's reporting to the CRAs. A furnisher's duty to investigate is triggered when a consumer files a dispute with a CRA and the CRA notifies the furnisher. Moreover, EMC produced evidence that it responded to automated consumer dispute verification forms from the CRAs about the account and accurately indicated the account was past due. The court also noted that the plaintiff did not challenge the trial court's determination that the account was past due as a matter of state law. Based on this, EMC properly reported to the CRAs that the plaintiff's account was past due for more than 30 days.

Effect of the Red Flag Program Clarification Act of 2010 (Clarification Act) on scope of red flag rules. American Bar Association v. Federal Trade Commission External Site, 636 F.3d 64 (D.C. Cir. 2011). In 2007, the Federal Trade Commission (FTC) enacted the Identity Theft Rules, 16 C.F.R. 681 et seq., to implement requirements of the Fair and Accurate Credit Transactions Act of 2003. The regulations require financial institutions and creditors to establish a program to protect consumers from identity theft. The FTC later published an extended enforcement policy indicating that professionals who bill their clients after services are provided, such as attorneys and doctors, qualify as creditors and are therefore subject to the regulations. The American Bar Association (ABA) successfully sued the FTC to challenge the regulations as applied to attorneys and the FTC appealed. While the appeal was pending, Congress passed the Clarification Act in December 2010 to exclude service professionals from the definition of creditors subject to the FCRA's red flag rules. “Creditor” is now defined in §615(e) of the FCRA as someone who not only regularly extends, renews, or continues credit but also regularly uses or obtains consumer reports, furnishes information to consumer reporting agencies, or advances funds with an obligation of future repayment. The definition excludes a creditor “that advances funds on behalf of a person for expenses incidental to a service provided by the creditor to that person.” Because Congress specifically passed the Clarification Act to exclude service professionals, including attorneys, from the scope of the red flag rules, the court dismissed the appeal as moot.