Consumer Compliance Outlook
On the Docket: Recent Federal Court Opinions
REGULATION Z — TRUTH IN LENDING ACT (TILA)
The Seventh Circuit holds that a retailer did not violate TILA by replacing its customers’ store-only credit cards with general purpose Visa credit cards. Acosta v. Target Corp., 745 F.3d 853 (7th Cir. 2014). The retailer Target began a program in 2000 to replace all of its customers’ store-only credit cards with general-purpose Visa credit cards. The store cards were deactivated after the Visa cards were mailed. The plaintiffs’ class-action lawsuit alleged that this program violated Section 132 of the TILA, 15 U.S.C. §1642, which prohibits the mailing of unsolicited credit cards, and Section 127(c), 15 U.S.C. §1637(c), which requires credit card mailings to provide disclosures in a tabular format.
The Seventh Circuit affirmed the district court’s dismissal of the case. While Section 132 generally only permits a credit card issuer to send a card in response to an application, it allows an issuer to substitute or renew an existing card. The court determined that replacing a store card with a general purpose card, provided the store card was deactivated when the general purpose card was issued, constituted a substitution under the common usage of the term and comment 12(a)(2)-2.iii of the Official Staff Commentary to Regulation Z and was therefore permissible. Similarly, Section 127(c) requires a card issuer to make certain disclosures in tabular format for new credit accounts, but the format is not required when changes are made to an existing account. The court determined that the version of Regulation Z in effect during this program did not clearly define “new account.” In the absence of specific regulatory guidance, the court found Target’s reliance on the dictionary definition of “account” was reasonable to support its position that the issuance of the Visa card did not constitute a new account. The court also noted that a 2009 amendment to the Official Staff Commentary for Regulation Z clarified the definition of “new account,” but it was not in effect when Target conducted the program and therefore did not apply.
REGULATION II — ELECTRONIC FUND TRANSFER ACT (EFTA)
The D.C. Circuit reverses decision vacating the Federal Reserve Board’s (Board) interchange fee regulation. NACS v. Board of Governors of the Federal Reserve System, 746 F.3d 474 (D.C. Cir. 2014). The Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, 15 U.S.C. §1693o-2, added a new EFTA Section 920 and directed the Board, among other things, to issue a regulation for debit cards that ensures the following: “The amount of any interchange transaction fee … shall be reasonable and proportional to the cost incurred by the card issuer with respect to the transaction.” In July 2011, the Board issued a final rule establishing a cap for interchange fees of 21 cents per transaction plus an ad valorem component of five basis points based on the transaction’s value for fraud losses. A merchant trade group filed a lawsuit in the federal district court in Washington, D.C., alleging that the Board’s regulation violated the plain language of the statute by allowing debit card issuers to recover certain costs not authorized by the statute and did not properly implement the statute’s limitation on the card issuers’ ability to restrict the use of payment card networks. The district court granted summary judgment to the merchants and vacated the Board’s rule. But on appeal, the D.C. Circuit Court of Appeals reversed the district court’s decision and held that the Board’s rules generally rested on a reasonable construction of the statute, except for a provision allowing issuers to recover transaction monitoring costs. The court found that the Board had not sufficiently explained its rationale for allowing recovery of transaction monitoring costs and remanded the case to the district court to allow the Board to explain its rationale on this point. The banking industry had closely monitored the appeal because of concern that if the district court’s decision were upheld, the Board would have to revise its rule and significantly lower the amount of interchange fees debit card issuers can charge merchants.
REGULATION H — NATIONAL FLOOD INSURANCE ACT (NFIA)
Both the First and Eleventh Circuits affirm dismissal of class-action lawsuits concerning flood insurance requirements for FHA-insured mortgages. Kolbe v. BAC Home Loans Servicing, LP, 738 F.3d 432 (1st Cir. 2013)(en banc) and Feaz v. Wells Fargo Bank, N.A., 745 F.3d 1098 (11th Cir. 2014). Several class-action lawsuits have been filed against Federal Housing Administration (FHA) lenders that required borrowers to obtain more flood insurance than the minimum amount required under the NFIA. Several federal district courts have issued opinions in these cases with conflicting results. Compare Cannon v. Wells Fargo Bank, N.A., 917 F.Supp.2d 1025, 1044 (N.D.Cal. 2013) (dismissing class-action lawsuit because the NFIA and the U.S. Department of Housing and Urban Development’s (HUD) regulation establish the minimum amount of required flood insurance, not the maximum) and LeCroix v. U.S. Bank, N.A.. 2012 WL 2357602, at *4 (D. Minn. June 20, 2012)(similar) with Casey v. Citibank, N.A., 915 F.Supp.2d 255, 262 (N.D.N.Y. 2013) (denying motion to dismiss lawsuit because FHA mortgage agreement could plausibly be construed to establish the maximum amount of flood insurance), Arnett v. Bank of America, N.A., 874 F. Supp.2d 1021, 1032 (D. Or. 2012)(similar), Skansgaard v. Bank of America, N.A., 896 F. Supp.2d 944, 948 (W.D. Wash. 2011)(similar), and Wulf v. Bank of America, N.A., 798 F.Supp.2d 586, 588–89 (E.D. Pa. 2011)(similar).
Now two federal appeals courts have addressed this issue. In Kolbe, the plaintiff sued its loan servicer, BAC Home Loans Servicing (BAC), after it required the plaintiff to obtain an additional $46,000 in flood insurance over the minimum requirements under the NFIA (the lesser of $250,000 or the loan balance) for an FHA-insured loan. The lawsuit alleged that BAC violated a standard covenant in the FHA’s mortgage agreement that required the borrower to obtain flood insurance to the extent required by HUD. A HUD regulation for FHA loans, 24 C.F.R. §203.16a, specifies that flood insurance must be maintained in an amount at least equal to the lesser of the loan balance or the maximum available under the NFIA. BAC filed a motion to dismiss the lawsuit based on additional language in the covenant, stating that the lender can specify the amount of hazard insurance required. The district court dismissed the lawsuit, finding that HUD’s implementing regulation refers to the minimum amount of flood insurance that must be obtained, not the maximum, and that the other language in the covenant clarified that the lender could require more than the minimum to protect its collateral. On appeal, the First Circuit affirmed the dismissal.
The Eleventh Circuit faced the same issue in Feaz. The plaintiff’s FHA lender required her to obtain $63,000 in flood insurance for her loan of $61,928. The loan was later sold to Wells Fargo, which notified the borrower that she must obtain flood insurance in the amount of $250,000 or the replacement value of the property, whichever is less, or Wells Fargo would force-place it. When the borrower did not comply, Wells Fargo force-placed flood insurance. (The opinion does not indicate the amount of insurance that was forced-placed.) The borrower responded with a class-action lawsuit. The district court granted Wells Fargo’s motion to dismiss. On appeal, the Eleventh Circuit affirmed. First, the court noted that when a federal regulatory scheme requires standard contractual language, the language must be interpreted in light of the goals of the federal policy being implemented. The court found that the borrower’s interpretation limiting flood insurance to the maximum amount required under the NFIA was inconsistent with the FHA’s policy goals. The court also noted that HUD’s regulation states that flood insurance must be purchased in an amount “at least equal to” the NFIA’s requirements, indicating that HUD wanted to establish the minimum amount of required flood insurance — not the maximum. The court therefore affirmed the dismissal of the case. The Kolbe and Feaz decisions are the first two federal appellate courts to address this issue.
REGULATION V — FAIR CREDIT REPORTING ACT (FCRA)
The Third Circuit clarifies furnisher’s duties with respect to certain federally backed education loans. Seamans v. Temple University, 744 F.3d 853 (3d Cir. 2014). In an issue of first impression, the Third Circuit reversed a district court’s dismissal of a lawsuit alleging that Temple University violated the FCRA in the way it furnished information to the consumer reporting agencies (CRAs) about a delinquent student loan and the way it investigated the student’s dispute of the furnished information. The plaintiff defaulted on a Federal Perkins Loan from Temple in 1992 but repaid it in 2011. When the loan was repaid, Temple for the first time reported some of the account history to the CRAs but did not include the date that the borrower was first delinquent or that the loan was turned over for collections. Under Section 623(a)(5)(A) of the FCRA, 15 U.S.C. §§1681s–2(a)(5)(A), furnishers must report this information to allow the CRAs to determine when to remove stale negative information from a consumer’s report (which generally must be removed after seven years, except for a bankruptcy filing, for which the period is 10 years).1 See 15 U.S.C. §1681c(a). However, the Higher Education Act (HEA) instructs CRAs to disregard the aging-off provisions of the FCRA when reporting data on certain federally backed education loans, including Perkins Loans. See 20 U.S.C. §1087cc(c)(3). Despite the student filing several disputes, Temple did not revise its reporting to include the missing information nor did it indicate that its failure to report the information was under dispute. Accordingly, the negative history remained on the student’s credit report.
The lawsuit alleged that Temple violated the FCRA by not reporting the date the loan was delinquent and turned over to collections (thus preventing the CRAs from knowing when to remove the information under §605(a)) and by not reporting the student’s continued dispute of the furnished information after investigation. Temple argued that the HEA exempted it from compliance with the FCRA because the credit instrument at issue was an HEA-qualified Perkins Loan. The Third Circuit found that the exemption only applies to CRAs and that furnishers must report the collection history and date of delinquency of student loans. The court also examined whether Temple could be liable for conducting an inadequate postdispute investigation, which could give rise to damages. The court found that a furnisher must conduct a reasonable investigation and remanded the case for further proceedings on several issues of material fact, including whether Temple’s conduct was reasonable. Finally, the court held that a private right of action arises when a furnisher receives notice from a consumer of a potentially meritorious dispute and subsequently fails to report to the CRAs that the claim is disputed. The court remanded the issue of whether Temple violated this duty to the district court.