Consumer Compliance Outlook
On the Docket: Recent Federal Court Opinions
REGULATION Z - TRUTH IN LENDING ACT (TILA)
Rescission lawsuit must be filed within three years and cannot be extended by agreement. McOmie-Gray v. Bank of America Home Loans , 667 F.3d 1325 (9th Cir. 2012). The Ninth Circuit affirmed the dismissal of a lawsuit seeking rescission of a mortgage loan because the case was filed more than three years after consummation. The plaintiff obtained a mortgage loan in April 2006 and sought to rescind it in January 2008 because the lender allegedly failed to disclose when the right to cancel expired, which would extend the rescission period for up to three years under §1635(f) of TILA. The lender responded that its rescission notice was proper and rejected the rescission request. The parties continued to discuss the issue, and the plaintiff alleged that the lender agreed to extend the rescission period. On August 28, 2009, more than three years after consummation, the plaintiff filed a lawsuit seeking to rescind the loan. The Ninth Circuit found that “rescission suits must be brought within three years from the consummation of the loan, regardless of whether [the] notice of rescission is delivered within that three-year period” and that the parties cannot extend this period by agreement. Because the lawsuit was filed after the three-year period, the court affirmed the dismissal of the case.
On a related note, a similar issue is pending before the Tenth Circuit in Rosenfield v. HSBC Bank, USA . The Consumer Financial Protection Bureau (CFPB) filed a friend-of-the-court brief in support of the consumer in this appeal. The brief argues that when the right of rescission is extended to three years because the creditor failed to provide the notice of right to cancel or material disclosures, the consumer effectuates rescission under TILA's statutory language and Regulation Z by sending written notice to the creditor and is not required to file a lawsuit within three years to preserve the right. The brief specifically mentions the Ninth Circuit's decision in McOmie-Gray and says the case was wrongly decided. The brief also indicates that this issue is pending before the Third, Fourth, and Eighth Circuits and that the CFPB intends to file briefs with those courts, too.
Creditors must allow mortgage borrowers to retain a signed copy of the rescission notice. Balderas v. Countrywide Bank, N.A. , 664 F.3d 787 (9th Cir. 2011). The Ninth Circuit reversed the dismissal of a lawsuit seeking to rescind a mortgage loan because the lender showed the borrowers a notice of the right to cancel with inaccurate and incomplete information and did not allow them to retain a copy. The non-English-speaking immigrant plaintiffs alleged that they were pressured by a mortgage broker to sign documents printed in English that they could not understand for a $50,000 cash-out mortgage. They also alleged that after signing the documents, they were allowed to view the rescission notice but not allowed to retain a copy. They attempted to rescind the loan a few days later, but the creditor said it was too late. The trial court dismissed the lawsuit because the plaintiffs signed a form acknowledging receipt of the rescission notice. The Ninth Circuit reversed, holding that the acknowledgment form only creates a rebuttable presumption that the borrowers received the required disclosures. In particular, the court noted that if the plaintiffs' allegation were true that they were shown the rescission notice and asked to sign it but not allowed to retain two copies, the creditor would have violated 12 C.F.R. §1026.23(b)(1) by failing to deliver two copies of the rescission notice, thus extending the rescission period for up to three years from consummation. The case was remanded for further proceedings.
FEDERAL ARBITRATION ACT (FAA)
The Eleventh Circuit upholds arbitration clauses of two banks in the overdraft fee litigation. Hough v. Regions Financial Corp. , 672 F.3d 1224 (11th Cir. 2012) and Buffington v. SunTrust Bank, Inc. , 2012 WL 660974 (11th Cir. Mar. 1, 2012). In two separate decisions, the Eleventh Circuit ordered the named plaintiffs in class-action lawsuits concerning overdraft fees against Regions Bank (Regions) and SunTrust Bank (SunTrust) to arbitrate their claims. Beginning in 2009, the federal Judicial Panel on Multidistrict Litigation consolidated more than 30 overdraft fee lawsuits into a single case, In Re: Checking Account Overdraft Litigation (MDL No. 2036), for purposes of resolving common pre-trial issues. The lawsuits challenge overdraft fee practices, including the practice of processing checks and debit transactions from highest to lowest to maximize overdraft fees. Regions and SunTrust each filed separate motions to compel arbitration, which were denied, but the banks renewed their motions after the Supreme Court's arbitration decision in AT&T Mobility LLC v. Concepcion , 131 S. Ct. 1740 (2011). The district court denied the renewed motions, and the banks appealed.
In the Regions case, the district court ruled that the arbitration clause was substantively unconscionable because it allowed Regions to recover its arbitration expenses if it prevailed without providing a similar right to its customers. The district also ruled that the clause was procedurally unconscionable because it was not conspicuous and did not allow customers to opt out of the arbitration. On appeal, the Eleventh Circuit reversed the district court and upheld the arbitration clause. The Eleventh Circuit determined that the clause was conspicuously displayed on the second page of the account agreement in uppercase letters that were in bold and underlined and that the other provisions noted by the district court did not render the arbitration provision unconscionable under state law. Similarly, in the SunTrust appeal, the Eleventh Circuit held that the provisions in SunTrust's arbitration clause allowing it to recover its attorney's fees if it prevailed and to collect that amount as a set-off against the customer's account were not unconscionable under state law. Both cases were remanded to the lower court with instructions to compel arbitration.
FAIR CREDIT REPORTING ACT (FCRA)
A receipt displaying a credit card's expiration month violates the FCRA but did not constitute an intentional violation justifying statutory and punitive damages. Long v. Tommy Hilfiger U.S.A., Inc. , 671 F.3d 371 (3d Cir. 2012). The Third Circuit affirmed the dismissal of a class-action lawsuit seeking statutory and punitive damages for a violation of the Fair and Accurate Credit Transactions Act of 2003 (FACT Act). Under the FACT Act, which amended the FCRA, merchant credit and debit card receipts cannot display a card's expiration date or more than the last five digits of the card number. See 15 U.S.C. §1681c(g)(1). The plaintiff purchased clothes at a Tommy Hilfiger store and received a receipt that displayed the month (but not the year) in which his card expired. The Third Circuit determined that printing the month in which a card expires, even if the year is not displayed, violates §1681c(g)(1) because had Congress intended to allow for the disclosure of partial expiration date information, it would have specified this as it did by allowing partial disclosure of the card number on receipts. However, the plaintiff did not allege any actual damages as a result of this violation and was instead seeking statutory and punitive damages, which are available only for a willful FCRA violation. Under the Supreme Court's decision in Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007), only an “objectively unreasonable” interpretation of the FCRA qualifies as a willful violation. The Third Circuit found that while it rejected Hilfiger's defense that printing a card's expiration month without the expiration year does not violate §1681c(g)(1), this interpretation was not objectively unreasonable because the statute does not define “expiration date” and no authoritative court decisions have addressed this issue.