On the Docket: Recent Federal Court Opinions
Fifth Circuit holds that the Consumer Financial Protection Bureau’s funding structure is unconstitutional and vacates the payday lending rule.
Community Financial Services Ass’n of Am. v. CFPB, 51 F.4th 616 (5th Cir. 2022). In 2017, the Consumer Financial Protection Bureau (Bureau) issued a final rule to impose underwriting requirements and payment restrictions on payday, vehicle title, and certain high-cost loans using its authority to regulate unfair, deceptive, or abusive acts or practices.
The Bureau later rescinded the underwriting requirements but retained the payment provisions, which prohibit a lender’s attempt to initiate a payment transfer for covered loans after two previous consecutive failed attempts, unless the lender obtains the consumer’s new and specific authorization. Two trade groups filed a lawsuit alleging this provision was invalid because the Bureau’s structure of a sole director and funding outside the congressional appropriations process is unconstitutional and because the final rule exceeded its statutory authority and violated the Administrative Procedure Act (APA).
The court upheld the Bureau’s finding that initiating a payment transfer was unfair after two failed, consecutive attempts. The plaintiffs argued the Bureau had not established unfairness because the consumer’s banks, rather than the plaintiff lenders, charge failed-payment fees or close accounts, and therefore the lenders are not the cause of the injury. But the court found the fees or closures would not be assessed but for the lenders’ payment requests, and such requests are also a proximate cause. Since the court found the practice was unfair, it did not address the Bureau’s finding that it was also abusive.
The court also rejected arguments the rulemaking was arbitrary and capricious under the APA. Furthermore, the court noted that even though previous case law has held that the Bureau’s sole director structure was unconstitutional, the director’s insulation from removal, by itself, did not render all agency action taken under the director void and did not cause the plaintiff’s constitutional harm. The court also rejected the plaintiff’s arguments that the Bureau’s rulemaking authority violates the nondelegation doctrine under the Constitution.
However, the court found the Bureau’s funding structure outside of the congressional appropriations process was unconstitutional. The appropriations clause of the Constitution provides: “No money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law …” Section 1017(a) of the Dodd–Frank Act (12 U.S.C. §5497(a)) funds the Bureau outside of the appropriation process by directing the Federal Reserve to pay the Bureau’s annual budget request provided it does not exceed 12 percent of the Federal Reserve’s operating expenses. The court determined this funding mechanism, which the court stated was double-insulated because the funding was drawn from a source (the Federal Reserve) that is itself outside the appropriations process, deprives Congress of the power of the purse and thus violates the separation of powers doctrine and the appropriations clause. While the court acknowledged other federal regulatory agencies are funded outside of the appropriations process, it distinguished the Bureau because of its unique powers, including a single director answerable to the President and broad rulemaking and enforcement authority. Furthermore, the court made further distinctions by noting that the Federal Reserve, unlike the Bureau, is still “tethered” to the Treasury, based on a requirement to remit funds above a statutory limit. Because the court found the Bureau’s funding structure was unconstitutional, it vacated the payday lending rule. In November 2022, the Bureau petitioned the Supreme Court to review this decision, which conflicts with other federal court cases on this issue.
Second Circuit holds the National Bank Act preempts a New York law requiring that interest be paid on residential mortgage escrow accounts.
Cantero v. Bank of America, 49 F.4th 121 (2d Cir. 2022). At issue in this case was the New York General Obligations Law (NY GOL) §5-601 that required lenders to pay a minimum of 2 percent interest on mortgage escrow accounts. Two separate class-action lawsuits alleged Bank of America (BOA) violated this New York law by not paying interest on the plaintiffs’ escrow accounts. BOA filed a motion to dismiss, arguing the National Bank Act (NBA) preempts NY GOL §5-601 for national banks, which the lower court denied.
On appeal, the Second Circuit reversed and remanded the case finding that the NBA preempts NY GOL §5-601 because it exerts control over the power of national banks to create and fund mortgage escrow accounts. The court noted its conclusion is consistent with prior statements of New York bank regulators stating that NY GOL §5-601 is preempted, as well as the Office of the Comptroller of the Currency, which had issued an administrative rule in 2004 purporting to preempt state interest on escrow account laws. The court also found that a Dodd–Frank Act provision requiring mandatory escrows for higher-priced mortgage loans mortgages — and allowing such accounts to be subject to state escrow interest laws — did not mean that Congress intended to subject all mortgage lenders to state escrow interest laws.
Eighth Circuit affirms dismissal of Fair Credit Reporting Act lawsuit because plaintiff failed to establish damages.
Peterson v. Equifax Info. Services, 44 F.4th 1124 (8th Cir. 2022). The plaintiff filed a Chapter 7 bankruptcy in March 2019 and obtained a discharge order several months later. Her bankruptcy included a credit card debt of $2,349. On August 30, 2019, the plaintiff obtained her Experian credit report, which showed her bankruptcy and discharge but still listed the credit card debt with an outstanding balance of $2,481 that was 90 days late. In October 2019, Experian updated her report to list the debt as discharged with a zero balance.
The lawsuit alleged Experian violated §607e(b) of the Fair Credit Reporting Act (FCRA) by not timely updating her report, which caused her credit card application to be denied. The district court dismissed the lawsuit because she failed to establish any damages. On appeal, the Eighth Circuit affirmed. The court noted she testified at deposition that her credit card application was denied because of the bankruptcy. But when Experian filed a motion for summary judgment, she submitted an affidavit indicating her application was denied because of the erroneous information in her credit report. The court indicated a litigant cannot contradict prior sworn testimony with a subsequent contradictory affidavit. “If testimony under oath. … can be abandoned many months later by the filing of an affidavit, probably no cases would be appropriate for summary judgment.”
The court also noted that she applied for a credit card again with the same issuer after her report was corrected, but her application was still denied. The plaintiff also alleged she suffered emotional distress, but the court said she failed to produce evidence of a genuine injury, such as a physical injury, medical treatment for psychological or emotional injury, or witnesses to corroborate emotional distress. The court therefore affirmed the lower court’s dismissal of the case.
Sixth Circuit reviews standards for reasonable procedures to ensure accuracy of consumer reports.
Hammoud v. Experian Information Services, LLC,Ahmed Hammoud filed for Chapter 7 bankruptcy in 2009, and his father, Mohamad Hammoud (also known as Ahmed Mohamad Hammoud) filed for bankruptcy with his wife in 2010. The father’s petition inadvertently used the son’s Social Security number (SSN).
LexisNexis, a data collector, reported the bankruptcies to Experian. Because Experian’s systems rely on SSNs, both bankruptcies were populated in the son’s credit report history. The error was corrected with the bankruptcy court the next day, but it remained on the son’s credit report for nine years. When the son attempted to refinance his mortgage loan in 2019, he learned that his credit report listed both bankruptcies.
On August 13, 2019, he disputed the second bankruptcy, and Experian removed it on August 28, 2019. The son’s lawsuit alleged Experian violated §607e(b) of the FCRA by including inaccurate information in his credit report from LexisNexis. The court noted that consumer reporting agencies are permitted to gather information from reliable third parties. LexisNexis is known to be reliable, and Experian periodically audits the information LexisNexis provides.
The son also argued that Experian should have reviewed the docket entries to see that the father’s SSN on his bankruptcy had been updated. But the court held that “ Section 1681e(b) does not require credit reporting agencies to investigate information to that degree, unless and until the consumer has alerted it to an inaccuracy.” Once the son disputed the information, his credit report was promptly corrected. Accordingly, the court concluded that “Experian’s processes strike the right balance between ensuring accuracy and avoiding ‘an enormous burden’ on consumer credit reporting agencies.”
Seventh Circuit holds that a bank’s account agreement permitted it to use the available balance method to calculate nonsufficient funds fees.
Page v. Alliant Credit Union, 52 F.4th 340 (7th Cir. 2022). The plaintiff’s class-action lawsuit alleged the credit union’s use of the available balance method to determine if a nonsufficient funds (NSF) fee will be applied to a debit transaction for insufficient funds violated the account agreement, which the plaintiff alleged requires use of the ledger balance.
An account balance can be calculated using either the available balance or ledger balance method. The ledger balance is calculated based on the balance at the time a transaction is submitted and does not consider transactions that are authorized but have not yet settled, while the available balance “calculates a customer’s balance by considering holds on deposits and transactions that have been authorized but not yet settled.” The lawsuit alleges the plaintiff was charged multiple NSF fees improperly for the same transaction because her account had sufficient funds available based on the ledger balance. The lower court dismissed the case, which the Seventh Circuit affirmed on appeal.
The plaintiff asserted that the agreement’s use of different phrases in describing withdrawal restrictions (sufficient available funds) and fee provisions (insufficient funds) meant that the available balance is relevant only for purposes of the withdrawal restrictions, while the ledger balance is used for purposes of assessing fees. However, the court noted that the agreement permits a fee when it restricts withdrawals in stating that “Checks or other transfer or payment orders which are drawn against insufficient funds may be subject to a service charge as set forth in the Fee Schedule.” (Emphasis in original).
The court stated that the contract should be construed based on how a reasonable person would understand it and that it was implausible for a reasonable person to think that the agreement used two different methods of calculating the account balance in consecutive sections without the agreement expressly saying so.
The plaintiff also argued it was ambiguous whether her agreement disclosed the use of the available balance method because other institutions more clearly disclose its use in their account agreements. But the court disagreed, finding “that some institutions disclosed that they used the available balance method differently or more clearly does not prove that the Agreement promised to use the ledger-balance method or that the Agreement is ambiguous.”
Finally, the plaintiff argued that the agreement did not permit multiple NSF fees when one transaction is represented multiple times. The court noted that the fee schedule includes $25 per nonsufficient funds “item.” The plaintiff argued that an item means a payment order that a member draws against insufficient funds, and since the plaintiff member made only one payment, Alliant could only charge one fee.
However, the court noted that the agreement refers to “checks, ACH debits, debit card transactions, fees or other posted items,” which showed that items can include ACH debits where a payee, rather than the member, debits the member’s account. Consequently, the court held that the fee schedule permits a fee each time a payee attempts to make an ACH debit from an account with insufficient funds and the district court correctly dismissed the plaintiff’s multiple-fees theory.