Consumer Compliance Outlook
On the Docket: Recent Federal Court Opinions
REGULATION Z — TRUTH IN LENDING ACT (TILA)
The Tenth Circuit rules that borrowers are not required to allege their ability to repay loan proceeds in a rescission lawsuit. Sanders v. Mountain America Federal Credit Union, 689 F.3d 1138 (10th Cir. 2012). The borrowers filed a lawsuit to exercise the right of rescission, and the trial court dismissed it because the borrowers did not allege that if the court granted rescission, they had the ability to repay the loan proceeds to the creditor. On appeal, the Tenth Circuit reversed this ruling. The court noted that when a borrower seeks rescission after the normal waiting period of three business days (the right of rescission can be extended up to three years in certain circumstances), the creditor faces the risk of releasing its security interest without adequate assurance that the borrower can return the loan proceeds. The court found that it may be proper in some cases to require debtors to demonstrate that they can repay the loan proceeds before rescinding a loan. However, the lower court erred by requiring all borrowers filing lawsuits seeking rescission to allege their repayment ability in their complaint, whether or not the lender had demonstrated that this was necessary. The court noted that neither TILA nor Regulation Z requires borrowers to allege repayment ability in rescission cases. The case was remanded for further proceedings.
REGULATION B — EQUAL CREDIT OPPORTUNITY ACT (ECOA)
The Ninth Circuit reverses dismissal of ECOA case against two auto dealers. U.S. v. Union Auto Sales, Inc., 2012 WL 2870333 (9th Cir. 2012). In 2007, the Federal Reserve Board referred a bank under its supervision to the U.S. Department of Justice (DOJ) for fair lending issues involving indirect auto lending. The referral alleged that the bank and two automobile dealers discriminated against non-Asian borrowers, many of whom were Hispanic, by charging them overages more frequently and in higher amounts. The DOJ subsequently settled with the bank and proceeded against two of the automobile dealers, Union Auto Sales, Inc. and Han Kook Enterprises, Inc. in federal court. The trial court dismissed the lawsuit. The Ninth Circuit reversed the dismissal of the case against Union Auto Sales, holding that the complaint adequately alleged facts sufficient to establish a plausible claim under ECOA at the pleading stage. In particular, the complaint alleged that the dealer charged overages of approximately 35 to 155 basis points higher than those of Asian borrowers and that the differences were statistically significant and could not be explained by nondiscriminatory factors such as differences in the customers’ creditworthiness. The case was remanded for further proceedings consistent with the decision.
REGULATION E — ELECTRONIC FUND TRANSFER ACT (EFTA)
Two federal courts rule in class action cases seeking statutory damages for inconspicuous or missing fee notice on automated teller machines (ATM). Brown v. Wells Fargo & Co., 284 F.R.D. 432 (D. Minn. July 25, 2012) and Charvat v. First National Bank of Wahoo, 2012 WL 2016184 (D. Neb. June 4, 2012). The EFTA and Regulation E require ATM operators to provide two fee notices: one on the ATM itself and one on the ATM screen that must be displayed before a fee can be imposed. Several class action lawsuits have been filed when operators failed to display the fee notice on the machine or placed it in an inconspicuous location. In Brown, the plaintiff alleged that Wells Fargo Bank and its holding company, Wells Fargo & Co., violated the EFTA and Regulation E by posting an inconspicuous fee notice on the ATM. The court dismissed Wells Fargo & Co. from the case because the notice requirements apply only to ATM operators and the holding company is not an operator. As to Wells Fargo Bank, the operator of the ATM, the court examined the factors relevant to conspicuousness and prominence, including the location of the disclaimer, the type size used, whether the notice was set off in some way (e.g, capital letters), and the location of the warning, and found a violation because Wells Fargo’s notice “did not stand out relative to other information on or near the ATM.” However, the court denied the plaintiff’s motion for class certification because of the plaintiff’s claim for actual damages, which are available under the EFTA only if a plaintiff suffers harm by relying on a violation. Because the ATM screen displayed the fee notice and required the plaintiff’s consent to the fee to complete the transaction, he could not establish any damages resulting from the inconspicuous on-machine fee notice. He therefore did not satisfy the class certification requirements under Rule 23(a) of the Federal Rules of Civil Procedure that his claim is typical of the class and that he would be an adequate representative of the class.
In Charvat, the plaintiff alleged EFTA and Regulation E violations because the bank failed to post a fee notice on an ATM. The bank moved to dismiss the case for lack of standing because the plaintiff conceded that he saw the second fee notice on the ATM screen and thus was not harmed by the violation. The EFTA allows a plaintiff to recover any actual damages resulting from a violation as well as statutory damages in the minimum amount of $100 and the maximum amount of $1,000. The district court considered whether a plaintiff who suffers no actual harm from a violation of a statute or regulation has standing to proceed because Congress has provided a minimum recovery for a violation through statutory damages. The court concluded that to satisfy the constitutional standing requirement necessary for filing a lawsuit, the plaintiff must have suffered an actual injury resulting from the ATM operator’s failure to post the fee notice on the ATM. Because the plaintiff did not satisfy this requirement, the court dismissed the lawsuit. On a related note, the House of Representatives passed HR 4367 in July 2012, which would amend the EFTA to eliminate the requirement that ATM operators must post a fee notice on ATMs. ATM operators would still be required to display a fee notice on the ATM screen that must be read and consented to before an ATM fee could be imposed. On December 11, 2012, the Senate unanimously passed HR 4367 and sent it to the President for signature.
FEDERAL ARBITRATION ACT (FAA)
The Eleventh Circuit upholds a bank’s arbitration agreement but finds the cost and attorney’s fee provision unconscionable and unenforceable. Barras v. Branch Banking & Trust Co., 685 F.3d 1269 (11th Cir. 2012). Beginning in 2009, the federal Judicial Panel on Multidistrict Litigation consolidated more than 30 lawsuits on overdraft fees into a single case, In re: Checking Account Overdraft Litigation (MDL No. 2036), for purposes of resolving common pre-trial issues. The lawsuits allege that the banks’ overdraft fee practices, including some banks’ practice of processing checks and debit transactions from highest to lowest, violate consumer protection laws. Branch Banking & Trust Company (BB&T), one of the defendants, filed a motion to enforce the mandatory arbitration clause in its account agreement. The trial court found that the arbitration agreement was unconscionable and unenforceable because it required the customer to pay the costs and fees of the arbitration, including attorney’s fees, regardless of whether the customer lost. BB&T appealed, and the Eleventh Circuit directed the trial judge to reconsider his decision in light of the new arbitration decision from the Supreme Court in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). On remand, the trial judge again found that the arbitration agreement was unenforceable, and BB&T appealed. The Eleventh Circuit agreed with the trial court’s ruling that the costs-and-fees provision was unconscionable under South Carolina state law because it appeared on page 14 of the agreement and was not included with the arbitration information at the beginning of the agreement. The court also found that requiring customers to pay the bank’s costs and attorney’s fees, even if the customers prevail, was unreasonable and contrary to well-established doctrine that losing parties cannot collect costs and attorney’s fees from the prevailing party. However, the arbitration agreement contained a severability clause stating that if any provision in the agreement was struck down, all other provisions remained in effect. Accordingly, the court ordered the parties to arbitrate their dispute but struck down the provision requiring the consumer to pay the bank’s fees and costs.