Consumer Compliance Outlook
On the Docket: Recent Federal Court Opinions
REGULATION Z — TRUTH IN LENDING ACT (TILA)
The Eighth Circuit holds that a borrower must file a lawsuit to exercise the right of rescission. Hartman v. Smith, 734 F.3d 752 (8th Cir. 2013) and Jesinoski v. Countrywide Home Loans, Inc., 729 F.3d 1092 (8th Cir. 2013). If a creditor fails to provide a borrower with a rescission notice or accurate material disclosures for certain residential mortgage loans, the rescission period is extended from three business days to three years. The federal appeals courts are divided on whether a borrower timely exercises this right by sending the creditor a rescission notice within three years of consummation or whether the borrower must also file a lawsuit within three years. The Eighth, Ninth, and Tenth Circuits hold that a rescission claim is untimely if a borrower fails to file a lawsuit within three years of consummation, even though the borrower previously sent the creditor a timely rescission notice. See Keiran v. Home Capital, Inc., 720 F.3d 721 (8th Cir. 2013); Rosenfield v. HSBC Bank, USA, 681 F.3d 1172 (10th Cir. 2012); and McOmie-Gray v. Bank of America Home Loans, 667 F.3d 1325 (9th Cir. 2012). The Third and Fourth Circuits hold that a borrower is only required to send a rescission notice within three years. See Sherzer v. Homestar Mortgage Services, 707 F.3d 255 (3d Cir. 2013) and Gilbert v. Residential Funding LLC, 678 F.3d 271 (4th Cir. 2012).
Two new decisions from the Eighth Circuit in Hartman and Jesinoski reiterate, based on the court’s earlier precedential decision in Keiran, that borrowers must file a lawsuit to preserve the statute of limitations. However, one judge in Hartman dissented, and two judges in Jesinoski stated in concurring opinions that if they were not bound by the Keiran case, they would hold that a borrower’s rescission notice to a creditor within three years of consummation is sufficient to preserve the statute of limitations. The split among the circuit courts of appeals and within one circuit suggests that this issue might ultimately have to be resolved by the U.S. Supreme Court, which often accepts appeals for issues on which the federal appeals courts are divided.
REGULATION E — ELECTRONIC FUND TRANSFER ACT (EFTA)
The Eighth Circuit holds that a plaintiff alleging an EFTA violation for a missing fee notice on an ATM machine has legal standing to file a lawsuit. Charvat v. Mutual First Federal Credit Union, 725 F.3d 819 (8th Cir. 2013). Regulation E, until it was recently amended, required operators of automatic teller machines (ATMs) to display two fee notices: one on or at the ATM, and one on the ATM screen that must be displayed before the consumer is committed to paying a fee. The plaintiffs alleged a violation of the EFTA in this class-action case because the financial institution failed to display the fee notice required on the ATM machine. The lower court dismissed the case on standing grounds, finding that because the plaintiff saw the second fee notice on the screen before incurring a fee, the plaintiff was not injured and therefore lacked standing to pursue a lawsuit. On appeal, the Eighth Circuit reversed, finding that the failure to display the required fee notice and the statute’s provision allowing the award of statutory damages to the plaintiffs provided standing. The court also rejected the argument that the injury of paying a $2.00 ATM fee was not traceable to the defendant’s conduct. In December 2012, Congress enacted legislation that eliminated the requirement that ATM owners provide a fee notice on or at an ATM to supplement the onscreen notice.
REGULATION B — EQUAL CREDIT OPPORTUNITY ACT (ECOA)
The Sixth Circuit dismisses an ECOA lawsuit because the plaintiffs failed to plausibly indicate that the lender denied their request for a loan restructuring for a discriminatory reason. 16630 Southfield Ltd. Partnership v. Flagstar Bank, F.S.B., 727 F.3d 502 (6th Cir. 2013). The plaintiffs, including a naturalized U.S. citizen from Iraq, obtained a loan for a real estate venture. The loan was later restructured when the plaintiffs had difficulties making payment. When the restructured loan was coming due, the plaintiffs asked for an extension and offered additional collateral and a guarantor, but the bank denied the request. The lawsuit alleged that the bank discriminated against the plaintiffs because of their national origin in denying the second restructuring request. On appeal, the Sixth Circuit affirmed the dismissal of the lawsuit, relying on the Supreme Court’s decisions in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009). Those cases held that a plaintiff responding to a motion to dismiss cannot simply respond with conclusory allegations but must instead offer specific facts that plausibly support the plaintiff’s legal theory. In this case, the court found that the plaintiffs’ mere allegation that other unidentified borrowers were more favorably treated was insufficient to explain how their national origin played a role in the bank’s decision to deny their second restructuring request. The court also noted that it was reasonable for the bank to deny the restructuring request after the bank had already extended one repayment deadline.
The Third Circuit holds that a discrimination lawsuit cannot be certified as a class action based solely on lender pricing discretion. Rodriguez v. National City Bank, 726 F.3d 372 (3d Cir. 2013). The plaintiffs filed a class-action lawsuit against National City Bank alleging that its policy of providing pricing discretion to loan officers had a disparate impact on minority applicants because a larger percentage of minority borrowers were surcharged points and fees unrelated to credit risk than similarly situated Caucasian borrowers. The parties agreed to settle the case and received tentative approval from the lower court. But after the U.S. Supreme Court issued its landmark class-action decision in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), the lower court reconsidered its approval and denied class certification. On appeal, the Third Circuit affirmed the decision not to certify the case as a class action based on the Dukes case.
In Dukes, the plaintiffs alleged that the local Wal-Mart store managers’ discretionary authority over employees’ pay had a disparate impact on female employees, whose salaries were lower on average than similarly situated male employees. The Supreme Court held that the managers’ discretion over salaries that resulted in disparities did not, by itself, satisfy the class-action requirement of a common issue affecting all class members. Under Dukes, plaintiffs must also identify the challenged practice causing the disparities and demonstrate that each class member was subjected to the challenged practice in the same manner. The Third Circuit found that “as in Dukes, the exercise of broad discretion by an untold number of unique decision-makers in the making of thousands upon thousands of individual decisions undermines the attempt to claim, on the basis of statistics alone, that the decisions are bound together by a common discriminatory mode.” The court therefore affirmed the denial of class certification.
FEDERAL ARBITRATION ACT (FAA)
The Seventh Circuit orders arbitration of a TILA case even though the arbitration forum specified in the agreement was unavailable. Green v. U.S. Cash Advance Illinois, LLC, 724 F.3d 787 (7th Cir. 2013). The plaintiff sued a payday lender, alleging that the defendant’s loan disclosures misstated the annual percentage rate (APR). The lender asked the court to stay the lawsuit and refer the matter to arbitration under a clause in the loan agreement requiring disputes to “be resolved by binding arbitration by one arbitrator by and under the Code of Procedure of the National Arbitration Forum.” However, the National Arbitration Forum (NAF) had previously stopped accepting arbitrations under a settlement agreement with the Minnesota attorney general. The lower court denied the request to compel arbitration because the NAF was unavailable and the court deemed that to be integral to the agreement. But on appeal, the Seventh Circuit reversed, finding that the parties selected arbitration, and Section 5 of the FAA allows a party to petition the court to appoint an arbitrator if the agreement does not specify a method for appointing one. The case was remanded with instructions to appoint an arbitrator to hear the case. One judge dissented.