Antitrust and Trade Regulation
Arbitration Clauses
Americans with Disabilities Act
Bankruptcy
Bank Secrecy Act
Breach of Fiduciary Duty
Civil Rights Act
Debt Collection
Defamation
Deposit Account Fraud/UCC Issues
Due On Sale Clauses
Electronic Communications Privacy Act
Encoding Errors
Fair Credit Reporting Act
Fair Lending
Family Medical Leave Act
Federal Preemption
Fees
Financial Privacy
Fraud
Garnishments, Levies, Attachments
ID Theft
Improper Disclosure of Information
Insider Lending
Interest Rates or Usury
IOLTA
Leasing
Lender Liability
Letter of Credit
Overdrafts
Premises Security
Privacy
Reg Z
Regulatory Disputes
RESPA
Secured Transactions
Social Security Offsets
Soldiers' and Sailors' Civil Relief Act
Truth in Lending (TILA)
Truth in Savings (TISA)
Whistleblower Laws
ANTITRUST AND TRADE REGULATION
Wal-Mart Stores, Inc., et al. v. Visa U.S.A. Inc. et al.
On January 4, 2005, the United States Court of Appeals for the Second Circuit handed down its decision on the appeal from the December 19, 2003, decision of the U.S. District Court for the Eastern District of New York, affirming the lower court's order. This was the decision awarding class action status for millions of credit card merchants, involving the largest settlement in the history of antitrust law (more than $3 billion dollars).
ARBITRATION CLAUSES
Green Tree Financial Corporation v. Randolph
The U.S. Supreme Court held that a party resisting arbitration bears the burden of proof that Congress intended to preclude arbitration of statutory claims. The issue of the case was whether a binding arbitration clause in a consumer financing agreement is a violation of the Equal Credit Opportunity Act.
Thompson v. Irwin Home Equity Corp., et al. The 1st Circuit Court of Appeals has handed down a decision in a case where the lender allegedly violated the Truth in Lending Act by failing to notify the plaintiffs of their right to rescind. The lender had simply delivered blank generic notice forms without the pertinent dates filled in, accompanied by "Instructions for Completing the Notice of Right to Cancel." The plaintiffs contend that this "do-it-yourself disclosure scheme" is not adequate under the statute and they therefore have a right to invoke the longer, three-year time limit on the exercise of their right of rescission. Their loan agreement provided that "[a]ny controversy or claim . . . arising out of or relating to this Agreement . . . shall be determined by binding arbitration." Lender sought to compel arbitration. The borrowers balked, arguing that if they rescind, the agreement, including its mandatory arbitration clause would, in effect, no longer exist. The 1st Circuit disagreed and said that "[N]either the statute nor the regulation establishes that a borrower's mere assertion of the right of rescission has the automatic effect of voiding the contract. . . . If a lender disputes a borrower's right to rescind, [which Irwin is doing] the designated decision maker -- here an arbitrator -- must decide whether the conditions for rescission have been met. Until such decision is made, the [borrower has] only advanced a claim seeking rescission."
AMERICANS WITH DISABILITIES ACT
In a retaliation claim against an employer under the Americans with Disabilities Act, are compensatory and punitive damages available as a remedy? A new case of first impression sets forth one court's view.
 Compensatory and Punitive Damages Unavailable in an ADA Retaliation Case
BANKRUPTCY
Keven R. McCarthy, Ttee, v. BMW Bank of North America (see under Secured Transactions)
In Re: Vincent J. Connors
When does a debtor's right to cure a mortgage default end? In its opinion filed on August 3, 2007, the Third Circuit Court of Appeals resolved a long-standing split of opinions between federal bankruptcy and district courts in New Jersey. The controversy revolved around the language of § 1322(c)(1) (11 U.S.C. 1322(c)(1)) of the Bankruptcy Code, and whether it affords the debtor a right to cure a default on a mortgage loan secured by the debtor's principal residence between the time the residence is sold at a foreclosure sale and the time the deed is delivered to the purchaser. The appeals court parsed the wording of § 1322(c)(1) and its legislative history to decide the issue, affirming the lower court ruling that § 1322(c)(1) creates a "gavel rule," ending the right to cure under that section with the fall of the gavel at the foreclosure sale conducted under state law. The court noted that a separate section of the Bankruptcy Code -- § 108(b) -- may extend the period during which a debtor can exercise post-sale remedies afforded under state law.
Dawson v. Washington Mutual Bank, F.A.
Court Reverses Self, Rules Emotional Stress Damages Recoverable in Bankruptcy
In its opinion filed on December 10, 2004, the Ninth Circuit Court of Appeals has opined that emotional stress damages can be awarded if a creditor violates the automatic stay provision in a bankruptcy proceeding. The court had earlier ruled that such damages were not available, but was later convinced that it had erred.
Mann v. Chase Manhattan Mortgage Corp.
In this January, 2003 decision from the 1st Circuit Court of Appeals, the Court considers the debtors' contention that the lender's mere recordation of postpetition, preconfirmation attorney fees incurred by the lender, on its internal books, violated the automatic stay. The Court disagreed, saying such unilateral accruals of amounts assertedly due, but in no manner communicated to the debtor, the debtor's other creditors, the bankruptcy court, nor any third party, plainly are not the sort of "act" Congress sought to proscribe.
In Re: Jan Weilert RV, Inc.
Are Those Payments Preferences?
If your institution finances used vehicle dealers and takes a security interest in the dealer's trade-ins, this case will be of interest to you.
American General Finance, Inc. v. Bassett
Court Gives Tips on Making Reaffirmation Agreement Statements "Clear and Conspicuous"
The 9th Circuit U.S. Court of Appeals held the test of whether or not the language of a reaffirmation agreement is clear and conspicuous is the likelihood that a reasonable person would actually see a term in an agreement.
In re Cardelucci
In this case, the United States Court of Appeals for the Ninth Circuit on April 12, 2002 held that a bankruptcy creditor’s judgment claim would bear interest calculated using the federal judgment rate. The issue before the Court was whether post petition interest is to be calculated using the federal rate or can be determined by the parties’ contract or state law. Now we know!
Jamo v. Katahdin Federal Credit Union
All or Nothing Reaffirmation Discussions Allowed by Federal Court
The U.S. Court of Appeals for the First Circuit held that a lender who is owed both secured and unsecured debts in a bankruptcy proceeding may insist upon the reaffirmation of the unsecured debts as a condition to agreeing to the reaffirmation of the secured obligations.
Stanton v. Harrison Jewell
Advance To Debtor After Guarantor's Bankruptcy Upheld
The U.S. Court of Appeals for the Ninth Circuit held that a bankruptcy trustee could not avoid a home mortgage lien that was created by a guarantor homeowner prior to the filing of bankruptcy. However a lender's claim to the collateral based on advances made to the principal debtor after the guarantor's bankruptcy filing were junior to the claims of the trustee.
Union Planters Bank, N.A. vs. Connors
Inadequate Recordkeeping by Debtor Leads to Denial of Discharge
The Seventh Circuit U.S. Court of Appeals upheld a bankruptcy court decision that a debtor who does not maintain adequate financial records may be denied a discharge even if there is no evidence of fraud or intentional misconduct.
BANK SECRECY ACT
Customer Identification Programs
Sultaana Lakiana Myke Freeman v. Department of Highway Safety and Motor Vehicles
Drivers' Licenses are of particular concern to financial institutions as they follow the dictates of their Customer Identification Programs when new customers establish their banking relationships. This Florida case illustrates the great care that state's courts took in deciding whether a Muslim woman's religious beliefs could trump the state's requirement for a full-face photograph on a driver's license.
Suspicious Activity Reporting
Stoutt, et al v. Banco Popular de Puerto Rico
The 1st Circuit Court of Appeals has held that a bank who filed a CRF, the predecessor of a SAR, was entitled to absolute civil immunity under the safe harbor provisions of the Annunzio-Wiley Anti-Money Laundering Act 31 U.S.C. 5318(g)(3). The Court sided with the 2nd Circuit decision in Lee Case that the statute does not require a good faith element for the immunity to apply. The Court rejected the reasoning of the 11th Circuit in the Lopez Case that immunity should be conditioned upon a finding of good faith on the part of the reporting bank. (Lee & Lopez are below.)
Lopez v. First Union National Bank
The 11th Circuit Court of Appeals in 1997 held that verbal instructions from government authorities, by themselves, are not enough to form a good faith basis to suspect a violation of a law or statute.
The bank released information regarding a customer's wire transfers to federal law enforcement authorities based solely upon verbal instructions of the authorities. The customer learned of the action (because of a subsequent seizure order and civil forfeiture) and sued the bank for violation of the Right to Financial Privacy Act, among other things.
Lee v. Bankers Trust Company
The 2nd Circuit Court of Appeals interpreted the "safe harbor" protection from liability for institutions filing an SAR and held there exists a broad and unambiguous provision for immunity from any law (except the federal Constitution) for any statement made in an SAR by anyone connected to a financial institution.
There is not even a hint that the statements must be made in good faith in order to benefit from immunity.
BREACH OF FIDUCIARY DUTY
Watson Coatings, Inc., v. American Express Travel Related Services, Inc.
The 8th Circuit Court of Appeals filed its order on January 31, 2006, affirming a district court's ruling in favor of American Express, in a case brought under Missouri's Uniform Fiduciaries Law, the Uniform Commercial Code, and certain common law concepts. The ruling helps clarify when a payee may and may not be held liable for a fiduciary's breach of duty in states, like Missouri, that have enacted a version of the Uniform Fiduciaries Act. It also states that the payee of a check may qualify as a holder in due course under the UCC and therefore be insulated from common law claims, under limited circumstances.
In this case, Watson's trusted employee issued $746 thousand in company checks to American Express over a four-year period, all in payment of amounts owed on her husband's American Express account. Watson alleged that American Express was put on notice of the employee's breach of duty when it accepted corporate checks in payment of the husband's debt.
The court held that Missouri's Uniform Fiduciary's Law limits the common law concept of notice to cases in which there is "actual" notice of the breach or knowledge of sufficient facts to constitute "bad faith." The court then found that Amex had neither actual notice nor knowledge of sufficient facts to be acting in bad faith.
CIVIL RIGHTS ACT
Carla Rodgers v. U.S. Bank
Bank Discharge of Employee Upheld
This case turns on whether the bank had violated the Civil Rights Act of 1964 (and the Missouri Human Rights Act) by firing a minority employee for an infraction of bank policy when it failed to fire a white employee for breaking the same policy. The U.S. Court of Appeals for the Eighth Circuit agreed that the plaintiff was treated less favorably than the white employee, but nonetheless upheld the bank's action. The court found that the bank had reasonably disciplined the plaintiff, whose infraction was much more serious than that of the non-minority employee. Therefore, reasoned the court, there was not disparate treatment.
DEBT COLLECTION
Frank Thomas v. Law Firm of Simpson & Cybak, et al.
Court Summons Ruled an "Initial Communication" Under FDCPA
This case turns on what constitutes an "initial communication" under the Fair Debt Collection Practices Act (FDCPA). The U.S. District Court for the Northern District of Illinois ruled that filing a summons in a debt collection suit is not a "communication" under FDCPA. The Seventh Circuit Court of Appeals disagreed and remanded the case for further consideration.
Thompson v. Mastercard International, Inc., et al.
After losing money through online gambling, two men sued credit card companies and issuing banks, alleging RICO violations and attempted collection of unlawful debt. The dismissal of this suit was upheld by the 5th Circuit Court of Appeals November 20, 2002.
Neilsen v. Dickerson
Creditor Held Liable in FDCPA Class Action
Normally, it is the debt collector which faces liability for wrongful conduct under the Fair Debt Collection Practices Act. In this case, however, it was the creditor which may be liable.
DEFAMATION
The case of Young v. Equifax Credit Information Services, J. C. Penney Co. and Credit Bureau of Lake Charles
Publication of Defamatory Information - Settlement Dos and Don'ts
DEPOSIT ACCOUNT FRAUD/UCC/ACCOUNT ISSUES
J. Walter Thompson, U.S.A., Inc. v. Bank of America Corporation
A check was written to a vendor. Someone intercepted the check, altered the payee, and deposited the check to an account in the name of the new payee. When the drawer of the check realized what had happened, it demanded reimbursement from the payor bank, which in turn made transfer and presentment warranty claims against the depositary bank and an intermediary collecting bank. This decision from the U.S. Court of Appeals for the Second Circuit provides a refreshingly clear illustration of how the UCC is designed to allocate losses from altered checks, and affirms that a payor bank may initiate transfer and presentment warranty claims before actually having reimbursed its customer for the improper payment of an altered item.
One caveat, however: A key finding in this case hinges on the lack of availability of Payee Matching Positive Pay technology in 2001. The result in this case would likely have been different if the events had occurred later, after such technology became available.
Fernando Tatis v. US Bancorp
Bank Deflects Forged Check Claim
The Sixth Circuit U.S. Court of Appeals affirmed a district court's summary judgment in favor of US Bancorp. A depositor had claimed that the bank had wrongfully paid several forged checks on his account. The court found that the depositor had failed to promptly notify the bank, as required by the Ohio UCC and by a provision in the bank's depository contract modifying the UCC requirement for prompt statement examination.
Douglas Companies, Inc. v. Commercial National Bank of Texarkana
Encoding Error Proves Costly
Nearly everything that could go wrong did in this case. A bank under-encoded a large check, shorting its depositor $216,000. The depositor didn't catch the error for several months. The bank sent its adjustment request to the wrong address. The drawer of the check went bankrupt. The result, decided the Eighth Circuit Court of Appeals, is that the depository bank, which created the problem with its encoding error, was liable not only for the underpayment to its depositor, but also for the legal fees incurred by its customer and by the payor bank.
The court's decision points out the limited scope of many banks' attempts to shorten their depositors' timeframes for claiming errors on deposit accounts. The bank in this case had argued that its contractual language required Douglas to report the deposit error in 60 days. The court found that the contract only addressed depositors' responsibilities under UCC section 4-406, which deals with check alterations and unauthorized signatures, not with deposit errors.
Wachovia Bank, N.A. v. Federal Reserve Bank of Richmond
Altered Check: Who Pays?
A large dollar item being mailed by a bank customer to a payee is stolen from the mail. The payee is altered. The item is paid. Who bears the loss? In the latest addition to Court Watch, we tell you about a new 4th Circuit case where the drawee bank was able to successfully pass the loss on to an intermediary bank under a theory of breach of transfer and presentment warranties. The case is of interest on several levels, but it is particularly noteworthy that the court rejected arguments that the drawee bank's failure to examine the item, which had a face amount of more than $500,000, constituted a lack of good faith.
Barki v. Liberty Bank & Trust Company
Doctor writes checks payable to banks for TT&L payments. Accountant embezzles by placing the checks into his own accounts. Years later, the doctor realizes the taxes haven't been paid and sues her bank. Tons of issues, from customer negligence to statutes of limitations are explored. Plus, although the drawee bank relied on the warranty of a depositary bank in paying some of the checks, it couldn't pass on the loss for those because the depositary bank failed in the meantime.
Beshara v. Southern National Bank
After developing a social relationship a bank employee, the customer opened a checking account at the bank. The customer allowed the employee to conduct virtually all his business at the bank including making deposits and withdrawals from the account. Unknown to the customer the employee added herself as an authorized signer on the account and redirected the statements to her home address. Upon the discovery by the bank of the embezzlement, it froze the customer's account pending completion of an internal audit. The account remained frozen for over three year despite the recovery of insurance claims by the bank and a determination that the customer had over $100,000.00 in verified funds remaining in the account. The Supreme Court of Oklahoma held the customer had valid claims against the bank regarding wrongful dishonor of checks, breach of good faith and conversion that should be submitted to a jury for its determination.
Cassello v. Allegiant Bank and Royal Banks of Missouri
Court Allows Common Law Negligence Claim to Survive UCC Preemption Challenge
One of the issues that arises in check fraud situations is what type of cause of action can be used. In this case, the customer sued for negligence and the bank argued that the UCC preempted claims for negligence. The United State Court of Appeals for the Eight Circuit held that not all common-law actions of negligence against a bank in connection with its handling of checks are preempted by the UCC.
Dalton & Marberry v. NationsBank
Employee of bank customer embezzled over $100,000 by exchanging over a period of four and one-half years 93 company checks made payable to the bank for blank cashier's checks or money orders. The Supreme Court of Missouri held that a bank could be liable under the common law duty of inquiry for failing to inquire as to the authority of the employee to exchange the checks and the holder in due course defense under Missouri's version of the Uniform Commercial Code was not available to the bank.
National Title Insurance Corporation Agency v. First Union National Bank
Bank Successfully Shortens Time Period for Checking Checks
How long does a customer have to discover a forged signature check? The UCC, in 4-406, says if it's been more than a year, the customer is precluded from passing the loss to the bank. Here's a recent representative case that deals with a reduction, by deposit account agreement, of that time period.
Santucci v. Citizens Bank of Rhode Island</a>
Does a Bank Owe a Duty of Care To Elderly Customers?
How do you respond if the son of an elderly customer asks why the bank let his mother cash her CD early and give the funds to a con artist? Did the bank do anything wrong when it honored the withdrawal requests of the customer who was later declared incompetent?
DUE ON SALE CLAUSES
Fidelity Federal Savings & Loan Association v. De La Cuesta
The issue in this 1982 U.S. Supreme Court case was the pre-emptive effect of a regulation issued by the Federal Home Loan Bank Board (FHLBB) that permitted federal savings and loan associations to invoke "due-on-sale" clauses in mortgage contracts if the property was sold or transferred. The regulation was in conflict with a provision of California state law and a California state court decision that limited a lender's right to exercise such a clause to cases where the lender could demonstrate the transfer of the property would impair the lender's security interest. The Supreme Court held the FHLBB acted within its authority in issuing the regulation and it was the intent of the regulation to pre-empt conflicting state limitations on the due-on-sale practices of federal savings and loans.
The De La Cuesta case was decided in February, 1982. In October, 1982, Congress passed the Garn-St. Germain Depository Institutions Act, legislatively making due-on-sale clauses enforceable. For more on the issue, readd "The Truth About Getting Around Due-on-sale Clauses".
ELECTRONIC COMMUNICATIONS PRIVACY ACT
Fraser v. Nationwide Mutual Insurance Co.
Under federal law, the monitoring of emails by an employer is governed primarily by the Electronic Communications Privacy Act of 1986 (ECPA), 18 U.S.C. §§ 2510 et seq. Under the ECPA, the lawfulness of particular monitoring activities will depend heavily upon whether employees' messages are intercepted during transmission or are retrieved from storage on the company's server.
In Fraser v. Nationwide Mutual Insurance Co., the 3rd U.S. Circuit Court of Appeals ruled that since employee Richard Fraser's emails were stored on Nationwide's system, any search by the company was authorized by an express exemption in the federal ECPA for email service providers. The unanimous three-judge panel rejected Fraser's claim that he was wrongfully discharged in September 1998 in retaliation for his lodging complaints against Nationwide with state authorities and his efforts to get legislation passed that would have protected agents like himself from being fired for anything less than just cause.
3rd Circuit Judge Thomas L. Ambro found Title I of the ECPA prohibits only those "intercepts" that occur at the time of transmission. "Every circuit court to have considered the matter has held that an 'intercept' under the ECPA must occur contemporaneously with transmission," Ambro wrote in an opinion joined by 3rd Circuit Judges Dolores K. Sloviter and Edward R. Becker. Ambro found that Title II prohibits "seizures" of stored emails but includes an exception for seizures authorized "by the person or entity providing a wire or electronic communications service."
ENCODING ERRORS
Who can sue whom for an encoding error?
France v. Ford Motor Credit Company
Arkansas Supreme Court, 1996
This case is almost a comedy of errors, but you can bet none of the parties were laughing. France bought a tractor and obtained financing from Ford Motor Credit Company (Ford Credit) for it. France decided to prepay the debt, but because of encoding errors on the first check and errors in drawing the second check, France's account was only debited for a fraction of the amount due. He refused to pay the balance, Ford Credit sought to replevy the tractor.
Here's the good part. What makes this case really interesting (besides the holding) is its fact situation. It's a classic case of "What can go wrong will go wrong."
The amount owed on the tractor, including finance charges, was $9,845.76. Prior to the due date of the first payment, France decided to pay off the tractor. He would have owed $8,506.19 at that time (after deducting unearned interest, etc.). France's wife, an attorney, wrote out check #2224 on their joint account at Bank of Eureka Springs for that amount and mailed it to the lockbox for Ford Credit which was monitored by Mellon Financial Services (Mellon). Mellon MICR-encoded the amount of the check and sent it to Ford Credit's depositary bank. There was an error in the encoding, however: the amount was shown as $506.19, rather than $8,506.19.
Texas Commerce Bank credited France with a payment of $506.19. The check was forwarded to the payor bank, which debited the France account for $506.19. The encoding error was discovered and the wife wrote a second check, #2313, about a month after the first check was written. Her goal was to pay off the remaining $8,000 balance. Unfortunately, although she wrote $8,000.00 on the check where the numerical amount appears, she wrote "Eight dollars and 00/100" where the amount is spelled out in words.
This time there was another encoding error! Mellon didn't encode the check for $8.00 (which would have been the correct amount, due to the way the check was written.) It didn't encode it for $8,000 (which would have been an easy mistake, considering the fact that the numerical amount was $8,000). Instead, it inexplicably encoded the item for $800. Texas Commerce Bank credited $800 to the France account with Ford Credit and sent the check to the payor bank. The payor bank debited the France account $8.00, then notified Texas Commerce of the error and Texas Commerce reversed the $800.00 credit and substituted $8.00. That meant Ford Credit was still owed $7992, but France thereafter refused to pay the balance.
One of France's arguments was that Ford Credit's remedy is against its agent which made the encoding error and not against Mr.
France. The Trial Court, disagreed, holding replevin was proper. The Arkansas Supreme Court affirmed, saying "The [UCC encoding warranties] statute provides warranties to collecting banks and payors but not to a payee such as Ford Credit."
FAIR CREDIT REPORTING ACT
Stergiopoulos & Castro v. First Midwest Bancorp, Inc.
Shopping Dealer Paper under the FCRA
Car dealers have been "shopping" their deals with multiple lenders for years. Their customers don't necessarily know which lenders will get a shot at these loans, and they usually don't care, if they get the financing they want to buy their cars. But is it legal under the FCRA for a lender to request a credit report if that lender isn't identified to the consumer when the application is signed?
Mary Ruffin-Thompkins v. Experian Information Solutions, Inc.
This case, decided on September 7, 2005, by the U.S. Court of Appeals for the Seventh Circuit, does not directly involve a financial institution, although credit information supplied by US Bank was the trigger that set off the suit. We include it here strictly because of a comment in the court's decision that has little to do with the matters decided, but sends a message to anyone concerned with clear and effective communication.
The case involves a claim by Ruffin-Thompkins that Experian, by failing to properly handle her dispute of information supplied by US Bank, violated the FCRA. Ruffin-Thompkins' appeal failed on several technical grounds. However, the appeals court's opinion includes a suggestion that Experian's communications methods are deserving of scrutiny. After Circuit Judge Kanne offers, "It seems that Experian has a systemic problem in its limited categorization of the inquiries it receives and its cryptic notices and responses," he notes that this potential problem didn't get reviewed in the court's deliberations because Ruffin-Thompkins' appeal was defeated on other grounds.
There's a lesson here for anyone concerned with framing an institution's customer communications: Make sure your message is complete and understandable.
Reynolds v. Hartford Financial Services Group, et al; and Edo v. GEICO Casualty Company et al (cases joined in decision)
Must Insurors Send Adverse Action Notices?
In this U.S. Court of Appeals case from the Ninth Circuit, the Court determined that adverse action under the Fair Credit Reporting Act can occur when pricing the premium for a newly-issued policy of insurance, and not only when an initial premium cost is increased, as contended by the issuing companies. The court also found that the assignment of a policy to one of a group of companies can constitute adverse action by more than one of the companies, if a premium higher than the best available is charged based on information from a consumer report.
Johnson v. MBNA America Bank, NA
On 2/11/04, the 4th Circuit Court of Appeals handed down its decision in this appeal, affirming a judgment entered against MBNA following a jury verdict in favor of plaintiff Johnson on a claim that MBNA violated the Fair Credit Reporting Act by failing to conduct a reasonable investigation of plaintiff's dispute concerning an MBNA account appearing on her credit report. MBNA's first contention was that the district court made an error when it ruled furnishers of credit information must perform a "reasonable" investigation of consumer disputes. MBNA, in essence, says there isn't a qualitiative component to the investigation provision that would allow a court or jury to assess whether the creditor's investigation was reasonable. The Court went back to the plain meaning of the term "investigation" and concluded it would make little sense to believe that Congress would use the term "investigation" to include superficial, unreasonable inquiries. The court therefore held that creditors must indeed conduct a "reasonable" investigation of their records after receiving notice of a consumer dispute from a credit reporting agency. The next issue, then, was whether the jury's determination that MBNA did not conduct a reasonable investigation was supported by the evidence. The Court looks at the steps MBNA took and finds that a jury could reasonably conclude that MBNA acted unreasonably. Although the disputed credit account was for $17,000, the jury found that Johnson's actual damages stemming from the incorrect information furnished by MBNA totaled $90,300. After finding that MBNA had negligently failed to comply with the FCRA, the jury awarded Johnson $90,300 and that verdict was upheld on appeal. There are many other issues discussed. Read the Court's opinion for complete details.
Phillips v. Grendahl
We have included this case, which does not directly involve a financial institution, because it provides a good opportunity to focus your attention on two factors: the need to guard against abuse of credit report access and the need to do background checks on prospective employees because people are not always what they appear to be.
What is of interest here is the attempt to use information from something like a credit report for a purely personal purpose. Financial institutions have faced liability in the past when employees have pulled credit reports for personal reasons unrelated to the institution. Make sure your employee training on this issue stresses that consumer reports may only be obtained for a "permissible purpose" as defined by the FCRA. The second point of interest is that the individual being investigated looked good on the surface, but may have had hidden flawsin his past, like bad checkwriting and delinquent child support. In the employment context, it is dangerous to make assumptions about background, character, and financial history. You can't believe everything an applicant says - whether orally or in a written application. Do background screening.
The Eighth U.S. Circuit Court of Appeals upheld the dismissal of the plaintiff's claim of violation of the Fair Credit Reporting Act but allowed the tort claim of Invasion of Privacy. A mother was suspicious of her daughter's fiancée and after doing some investigations, she hired a private investigator. The investigator utilized a service that "pulled" a "finder's report" on the suitor and passed the information on to the mother. The boyfriend sued the mother, private eye and the reporting service contending a claim for wrongful disclosure and invasion of privacy. The Court held that non-compliance under the applicable section of the FCRA required knowing and intentional commission of an act by the defendant who knew the act would violate the law.
Employer Liability for Unauthorized Access to Consumer Report by Employee
Jones v. Federated Financial Reserve Corporation
The 6th Circuit Court of Appeals finds that an employer may be subject to vicarious liability for unauthorized access to a credit report by an employee. The Court states that failure to impose vicarious liability on a corporation like Federated would allow it to escape liability for "willful" or "negligent" violations of the statute. Because a corporation can act only through its agents, it is difficult to imagine a situation in which a company would ever be found to have willfully violated the statute directly by obtaining a credit report for an impermissible purpose. And the FCRA's deterrence goal would be subverted if a corporation could escape liability for a violation that could only occur because the corporation cloaked its agent with the apparent authority to request credit reports Thus, vicarious liability is appropriate.
Civil Liability under FCRA for Furnisher of Information
Nelson v. Chase Manhattan Mortgage Corporation
The issue in the case was whether the FCRA creates a cause of action for a consumer against a furnisher of credit information. The 9th Circuit Court of Appeals held that the FCRA is to protect consumers against inaccurate and incomplete credit reporting and Section 1681s-2(b) provides a private remedy to injured consumers. Thus, a consumer can sue a company for furnishing inaccurate and/or incomplete information. In this case, the furnisher allegedly failed to take prompt and appropriate corrective action once it was notified that it had reported inaccurate information.
FAIR LENDING
Meyer v. Holley, et al.
On January 23, 2003, the U.S. Supreme Court handed down a decision in a case where plaintiffs sought to hold an individual who was the realty corporation's president, sole shareholder, and licensed “officer/broker” vicariously liable in one or more of these capacities for the salesman’s unlawful actions under the Fair Housing Act. The Court held that the Fair Housing Act imposes liability without fault upon the employer in accordance with traditional agency principles, i.e., it normally imposes vicarious liability upon the corporation but not upon its officers or owners.
Rowe v. Union Planters Bank of S. E. Missouri
If You Are Sued For Discrimination
In this U.S. Court of Appeals case from the Eighth Circuit, the Court listed the elements required for a plaintiff to establish a violation based on racial discrimination of the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA). The plaintiff contended bad advice from a bank officer, the officer's mishandling of a loan application and the subsequent denial of the loan by the bank were motivated by racial discrimination. The Court ruled the plaintiff did not satisfy all the requirements to constitute an FHA or ECOA claim.
FAMILY MEDICAL LEAVE ACT
Mainor v. Bankfinancial FSB
When Mainor was refused leave under the FMLA she resigned. Bankfinancial released her immediately. She went to the doctor on her own behalf that day. Three issues came about:
- Submitting a resignation and being dismissed immediately means that person is no longer an employee and cannot sue for denial of FMLA leave once she has resigned her position;
- A few visits to the doctor do not meet the FMLA criteria for a "serious health condition"; and
- Telling one's employer that time off is needed to visit her sick grandmother does not qualify as adequate notice.
FEDERAL PREEMPTION
PREEMPTION
The rule of law that allows Congress to pass laws on a subject and make those laws controlling over state laws, or prevent states from enacting laws on the same subject, if Congress specifically states that it has "occupied the field" (assumed control of the subject). The National Bank Act is such a law, but only to the extent that it regulates national banks and their related activities. |
SPGGC, LLP; Metabank; U.S. Bank, N.A. v. Kelly A. Ayotte
The U. S. Court of Appeals for the First Circuit upheld an opinion of the U.S. District Court for the District of New Hampshire that the National Bank Act and the Home Owners Loan Act, and regulations issued under them, preempt a provision of the New Hampshire Consumer Protection Act to the extent that it attempted to regulate the issuance of gift cards by national banks and federal savings associations.
The court cited the Supreme Court's opinion in Watters v. Wachovia Bank, N.A. (below) in its discussion of the case. The gift cards issued in this case were issued by SPGGC, LLP (which operates Simons malls) as agent for U.S. Bank, N.A. and Metabank, under agreements with terms substantially different from those in an earlier agreement for gift card issuance involving Bank of America. On May 30, 2007, the court affirmed the decisions of the district court.
Watters v. Wachovia Bank, N.A.
The U.S. Supreme Court has upheld the OCC's regulation (12 C.F.R. 7.4006) preempting the applicability of state mortgage lending law to operating subsidiaries of national banks.
Wachovia Mortgage Corporation is a North Carolina chartered entity licensed by the OCC as an operating subsidiary of Wachovia Bank, N.A. It does business in Michigan and in other states. Michigan requires bank subsidiaries to register with the state's Office of Insurance and Financial Services (OIFS), and to submit to state supervision. When Wachovia Mortgage became a wholly owned operating subsidiary of Wachovia Bank, it surrendered its Michigan registration. Watters, the OIFS Commissioner, informed Wachovia Mortgage it could no longer operate in Michigan. Wachovia Bank sued for relief based on the National Bank Act and on OCC regulations that preempt state mortgage lending laws' applicability to a national bank's operating subsidiary.
Watters argued that the OCC exceeded its authority in issuing the preemptive regulations, and on other grounds. Watters' arguments were rejected by the Federal District Court, and by the U.S. Court of Appeals for the Sixth Circuit. On April 17, 2007, the U.S. Supreme Court affirmed the decisions of the lower courts.
FEES
Wells Fargo Bank of Texas, et al. v. James
The Fifth Circuit U.S. Court of Appeals held that the National Bank Act preempted a state law that prohibited a national bank from charging a fee for cashing an on-us check for a payee who no account at the bank.
The Plaintiffs in the case were five national banks that do business in the state of Texas and the defendant was the Texas State Banking Commissioner. The Texas Legislature enacted a par value statute that provided "a payor bank shall pay a check drawn on it against a sufficient balance at par, without regard to whether the payee holds an account at the bank". The Plaintiffs contended the statute was preempted by the National Bank Act and 12 C.F.R. 7.4002(a) which provides that a national bank may "charge its customers non-interest charges and fees". The OCC has interpreted the word "customer" to include any person who presents a check for payment and issued identical opinion letters to three of Plaintiffs that they were authorized to charge a checking-cashing fee to non-account holders.
The Plaintiffs initiated this action seeking a permanent injunction and a declaration that the statute was null and void. The district court issued a permanent injunction, found the statute was preempted by the National Bank Act, and declared it null and void. The Defendant appealed.
The Court noted a state statute may regulate national banks, where doing so does not prevent or significantly interfere with the national bank's exercise of its powers. When a state statute interferes with a power which national banks are authorized to exercise, the state statute irreconcilably conflicts with federal law and is preempted by the Supremacy Clause of the U.S. Constitution.
The Court held that the OCC interpretation of the word "customer" was controlling and included payees who presented checks for payment. In addition, 12 C.F.R. 7.4002(a) authorized a national bank to charge non-account holding payees a check cashing fee. The state law, which prohibited such a fee, was in irreconcilable conflict with the federal regulatory scheme and was preempted.
The decision of the district court was affirmed.
FINANCIAL PRIVACY
Flowers v. First Hawaiian Bank
Bank Trapped in RFPA Violation Through Army Subpoena
The 9th Circuit Court of Appeals held 7/2/2002 that a bank violated the federal Right to Financial Privacy Act when it turned over customer financial records pursuant to a subpoena in connection with a Section 32 Army proceeding. The bank believed an exception to the RFPA applied because the records were sought in connection with a proceeding to which the Army (a government authority) and the customer whose records were sought were parties. The liability resulted from the fact that no exception to the RFPA was applicable (because the subpoena was not a subpoena issued "under the Federal Rules of Civil or Criminal Procedure or comparable rules of other courts"), and the bank was not protected from liability when it turned over the records because it had not obtained a certificate of compliance from the Army.
FRAUD
BancInsure, Inc. v. Marshall Bank, N.A.
Coverage under your standard financial institution bond can protect you from various types of losses, including forged guarantees, but you have to do your part, too. That's a lesson Marshall Bank learned the hard way.
The litigation between BancInsure and the bank arose out of a $2.56 million loan Marshall Bank made to allow borrowers to purchase one minor league hockey team and refinance another. The bank required personal guarantees from two individuals. The loan documents were executed before the guarantees were obtained, however, and the bank disbursed the proceeds after receiving what appeared to be faxed copies, not originals, of the guaranty documents. Ultimately, the loan went bad and the bank discovered the personal guarantees had been forged.
After the bank suffered a significant loss on the loan, it made a claim for coverage under its bond with BancInsure. BancInsure denied coverage and sought a declaratory judgment that the loss was not covered. The district court granted summary judgment to BancInsure and, on appeal, the 8th Circuit Court of Appeals has affirmed. The courts ruled that the bank should have had the originals of the guarantees before they disbursed proceeds and that protection afforded by the policy is against forgery, but not forgery committed by use of faxed documents, accepted by the bank without perusal of the originals.
United States v. Thomas
Court Casually Criticizes Bank Personnel's Inaction
What should a financial institution do if an employee suspects that a caregiver is taking advantage of an elderly customer? If the customer is contacted and repeatedly does not object to questionable withdrawals, is any additional action necessary?
This is a criminal case involving the construction of the bank fraud statute, but it's not the holding in the case that is of interest here. What we found interesting was the Court's criticism of bank personnel for not alerting the authorities to the possibility of unauthorized withdrawals from an elderly customer's account.
SEC v. Sharp Capital (Janvey v. Fernandez)
Misuse of Your Logo and Name Could Lead to Liability
How is your institution's name and logo being used by third parties? If it's used in a way that appears to connote you have a different or larger role in a transaction than you actually have undertaken, you could find yourself the target of a lawsuit. Here's a case where individuals involved in a fraudulent investment scheme tried to hold the custodial bank liable.
Travelers v. Baptist Health System
Fraudulent transactions continue to plague businesses. Make sure you have sufficient internal controls over invoice payments to make sure you can avoid the loss like the one suffered by one company who lost over $875,000 due to fraudulent invoices submitted by a scammer.
Your internal controls should include training against social engineering. Con artists attempt to gain information through apparently harmless telephone calls to employees, sometimes posing as another banker or as an equipment salesperson. They ask questions regarding the type of printers and copiers utilized by the institution, who is in charge of ordering supplies, and what procedures are followed. With this information, they can easily prepare fake invoices which are submitted for payment. The invoices appear to be legitimate because they contain information that an insider is unlikely to know. Now would be a good time to review your invoice payment procedures, training schedule and insurance policies.
- Match all invoices to orders;
- Centralize your purchasing function and have the purchasing person/department approve all invoices before payment;
- Don't utilize something simple like an "OK to pay" stamp or other method that could easily be duplicated;
- Alert your employees to the fact that a caller may attempt to social engineer them into divulging information about the type of equipment your institution uses in order to later dummy-up invoices. A common ploy is for the scammer to call, pretending to be selling copiers, for example. They'll say, "Are you happy with your current copier? Are you thinking about making a change in the near future?" Typically, the person will say they're happy with the existing equipment. The "salesman" will then say, "I'm just curious. Would you mind telling me the make and model you currently use?" They will then politely thank the bank employee for their time and promise to call again in the future. A call like that barely registers as a blip on the banker radar because it seems so innocuous, but the whole purpose is to gain vital information that will aid the con artist in making legitimate-looking invoices that will be paid without question.
In this case, the fact that the claim was not covered by insurance means the company bore the entire loss - nearly a million dollars!
The case involved a heath care provider and an insurance company. The vendor learned that the company's invoice payment procedures involved the payment of all invoices marked "ok to pay". Instead of submitting invoices to the appropriate department for approval, the vendor marked them "ok to pay" and delivered them directly to the accounting department of the health care provider for payment. When the fraud was discovered, the company filed a claim with its insurer, but the claim was refused. The Fifth Circuit U.S. Court of Appeals held that the provisions of the insurance contract only covered forgeries or alterations of certain instruments and did not include invoices.
GARNISHMENTS, LEVIES, ATTACHMENTS
Southwestern Glass Company, Inc v. Waelder Oil and Gas, Inc.
Zero Balance Accounts and Garnishments
Learn the reasoning behind the Eighth Circuit's decision which held a bank liable for over $500,000 for failure to properly answer a garnishment involving a line of credit and a zero balance account.
INTEREST RATES OR USURY
Jessup v. Pulaski Bank
Court Allows Credit Card Loan Interest Rate to Exceed State Usury Rate
What interest rate usury laws apply to a financial institution that solicits and issues credit cards? Is it bound by the laws of its home state or the state of its customers or neither? The Eighth Circuit Court of Appeals has answered the question for financial institutions located in its jurisdiction. The answer may surprise you.
ID THEFT
Luciano Pisciotta et al v. Old National Bancorp
Info Breach: No Harm, No Foul
On August 23, 2007, the U.S. Court of Appeals for the Seventh Circuit agreed with a lower court that there is no claim for damages for costs of past and future credit watch services subscribed to because of a data security breach. The case involved a bank whose website was hacked. The bank informed 101,000 customers or potential customers the breach could result in the theft of those customers' identities. But the court ruled that the costs of credit watch services aren't recoverable. At least that's the way the federal court decided that Indiana courts would rule when interpreting Indiana law.
Could this ruling benefit your bank in a similar situation? Read our analyis -- Info Breach, No Harm No Foul.
Private Bank & Trust Company v. Progressive Casualty Insurance Company
This case provides an illustration of what we refer to as double-layer identity fraud. An individual using a false identity for himself took two stolen checks made payable to a corporation into a bank and, using the name of a sham entity which was nearly identical to the name of the check payee and bogus corporate documents, set up an account, deposited the checks, and made away with more than $400,000. After the bank suffered the loss, it attempted to make a claim against its insurer for an "on premises loss" under its financial institution bond. The trial court and the 7th Circuit Court of Appeals granted summary judgment in favor of the insurance company, holding that because the on premises clause covered "theft, false pretenses, common-law or statutory larceny committed by a person present in an office or on the premises of the Insured ..." (emphasis supplied) and this particular loss occurred when the crook made a telephone transfer from the fraudulently opened account to the account of another bank customer from whom he made a purchase of gold coins, the loss was not an "on premises" loss and the insurer wasn't required to pay. Obviously, the best way to avoid a loss like this is to have strong, effective CIP procedures that would enable you to spot the fake ID and bogus corporate papers and block the opening of an account.
IMPROPER DISCLOSURE OF INFORMATION
Orr v. Bank of America
Even though the bank prevailed in this case from the 9th Circuit regarding allegations of improper disclosure of information concerning a former employee, it provides a good laundry list of the possible causes of action that might be raised by a former employee including slander, fraudulent misrepresentation and violations of both RICO and the Employee Polygraph Protection Act.
INSIDER LENDING
Roque De La Fuente II v. FDIC
In this case, the Ninth Circuit U.S. Court of Appeals reviewed an appeal of an FDIC Enforcement Order regarding alleged Reg O violations from a former bank director who was removed from banking for life.
Bankers will find this case of interest because it sheds light on the analysis to be applied in determining whether an entity (whether a trust, corporation, etc.) should be deemed a "related interest" of an insider. It explores the various facets of the test for "control".
In this instance loans were made to trusts created by the director, his relatives and associates. The Court reviewed each transaction and indicated how Reg O came into play with each.
IOLTA
Brown et al. v. Legal Foundation of Washington et al.
In recent years, the legality of IOLTA (Interest on Lawyers' Trust Accounts) has been called into question in several court cases. The matter has now been resolved by the U.S. Supreme Court in a five to four decision that upholds the legality of IOLTA. The Court held that a state law which required an attorney or a real estate escrow agent to place client funds that would not otherwise generate net interest earnings into an IOLTA account was not a "regulatory taking" under the Fifth Amendment. As a side note, if an attorney mistakenly places into an IOLTA account client funds which would have generated net interest earnings after payment of the expenses of the account, the client has a claim against the attorney and not the state. No claim was made against the financial institution where the IOLTA account was maintained.
LEASING
Bescos v. Bank of America
We're Not Liable, We're the Assignee!
This California case involves the issue of whether a lending
institution, which finances a vehicle lease but is not an agent of the automobile dealer in
the lease transaction, may be responsible as a lessor for misrepresentations made by the
dealer in violations of when the misrepresentations were unknown to the lending institution and not apparent on
the face of the leasing agreement.
LENDER LIABILITY
National Market Share, Inc. et al v. Sterling National Bank
Bank Breaches Duty, But Damages Set At One Dollar
Can you imagine losing a law suit and breathing a sigh of relief? That's undoubtedly what happened when Sterling National Bank ("Sterling") lost in a suit brought by former loan clients in the U.S. District Court for the Southern District of New York. That court found that Sterling had breached its duty of good faith and fair dealing, but the plaintiffs had failed to show that the breach caused the demise of their business. The U.S. Court of Appeals for the Second Circuit affirmed that ruling, which awarded only $1 in damages, in its December 23, 2004, decision.
But there is an important lesson for lenders in this case that should cause them to think about promises made and broken!
Sallee v. Fort Knox National Bank
Two Bad Loans Don't Equal One Good Loan
The U.S. Court of Appeals for the 6th Circuit held that a bank was liable to a loan customer for actual and punitive damages for failing to reveal a negative appraisal and misleading the customer into executing a release of all claims against the bank.
LETTER OF CREDIT
Voest-Alpine Trading USA Corporation v. Bank of China
Letter of Credit Refusal Notice Defects Lead to Liability
The 5th Circuit U.S. Court of Appeals held an issuing bank who fails to give timely and proper notice of refusal of payment of a letter or credit is liable to the beneficiary for the entire amount of the letter of credit even if the presentment was flawed.
OVERDRAFTS
Also see Social Security Offsets for related cases.
Chirou Sola and Nadine Viseth v. Washington Mutual Bank
Sola and Viseth initiated a class action case under the Truth in Lending Act and maintained that the fees charged for the processing of withdrawals against nonsufficient funds were finance charges. The United States Court of Appeals for the Ninth Circuit said these fees do not meet the definition of "finance charges" under TiLA. This affirmed a lower court ruling that neither TiLA nor the Home Owners Loan Act are applicable. Overdrafts are not extensions of credit for these purposes. You can also read the California Bankers Association and American Bankers Association Amicus Curiae brief.
PREMISES SECURITY
Pinsonneault v. Merchants & Farmers Bank & Trust Company
The bank won this premises liability suit that stemmed from a deadly attack on a night deposit customer by escapees from a local jail. The case is worth reading because it shows the types of facts that a court will examine in this type of suit, from statistics regarding similar incidents to lighting, use of security guards, hedge trimming and more.
PRIVACY
Taylor v. Nationsbank, NA
How upset would you be if your paycheck was accidentally deposited into someone else's account? If you are a banker and that happens to one of your customers, your natural inclination is to want to try to help. As this case shows, however, it's important to not harm one customer while trying to help another.
Garfield Taylor and Walter Scott worked for Fannie Mae and signed up for direct deposit of their paychecks. Scott's pay stub showed an account number that wasn't his. He checked with his bank and learned that his pay had not been received. In talking with a representative of his bank, he learned the number on his stub was an actual account number that belonged to someone else, his direct deposit had been erroneously sent to that account, and since it was Saturday, the bank couldn't correct the error until Monday. Scott discussed with the bank employee what steps he could take to protect himself and retrieve the funds. In the course of that conversation, the bank employee revealed l) who owned the account the funds had been deposited into; and the unlisted phone number for that individual (Garfield Taylor). The banker suggested Scott call Taylor and discuss the situation. Scott made the call. The bank got sued, alleging that, as a “private person by nature” the ensuing unexpected conversation
“caused him a great deal of mental anguish and mental pain, and a severe shock to his nervous
system,” the petitioner filed suit against the bank. The trial court granted summary judgment for the bank. The appellate court reversed, holding the summary judgment was improper because the bank's voluntary disclosure of the depositor’s name and unlisted telephone number, which identified that
depositor’s checking account number to another depositor, constituted a violation of both the
depositor’s contract with the banking institution and the common law, and there was therefore a
genuine dispute as to material facts.
REGULATORY DISPUTES
Sinclair v. Hawke
Can a stockholder or assignee of the assets of a failed financial institution assert claims in a civil action against the Comptroller and other OCC personnel who made the decision to close the institution? In this case, the major stockholder claimed violations of his First and Fifth Amendment rights, his Federal civil rights and RICO.
Aggressive Regulators Are Not Racketeers -- The 8th Circuit U. S. Court of Appeals held that Congress had not authorized wide ranging judicial review in personal damage actions of regulators' motives regarding regulatory decisions that might have a chilling effect on their willingness to aggressively attack unsafe and unsound banking practices. In addition, the Court rejected allegations of RICO claims against OCC employees regarding the closing of a national bank and stated "bank regulators do not become racketeers by acting like aggressive regulators".
RESPA
Eddie Watt & Susan Watt v. GMAC Mortgage Corporation
Does RESPA forbid the charging of a fee to provide a payoff amount? The United States Court of Appeals for the Eighth Circuit says it does not. Specifically, the court found, in its August 4, 2006, ruling, that a response to a qualified written request from a borrower is not among the statements for which the law and HUD's Regulation X prohibit the imposition of a fee. The court noted that Congress had a second chance to prohibit a payoff statement fee when it amended RESPA in 1990, and did not do so. The court opined that, by omitting a fee from a list of prohibited fees, Congress intended to exclude it from the prohibition.
Before mortgage servicers rush off to start imposing such a fee, they should note that two other questions mentioned in the court's ruling were not decided.
First, the Watts argued that, if the payoff fee was not prohibited by RESPA, GMAC's $20 fee for preparation of a payoff statement was unreasonable, and should therefore be disallowed. The appellate court refused to consider this question on procedural grounds, leaving the issue undecided.
Second, the court noted that the lower court had declined to hear the Watts' claim that GMAC breached its contract with the Watts by imposing the fee. We presume the District Court determined that question should be a matter for state court jurisdiction.
Hardy vs. Regions Mortgage, Inc.
Can a borrower bring suit under RESPA when escrow account disclosures are inaccurate? The United States Court of Appeals for the Eleventh Circuit says no, ruling that §10 of RESPA (addressing escrow account disclosures) does not provide for a private right of action against a mortgage lender/servicer. Actions and penalties for violations must instead be assessed by the Secretary in the form of civil money penalties.
The background of the case is as follows: Mr. and Mrs. Hardy joined a retail shopping program through Regions which added $5 to each mortgage payment. The fee for the shopping program was not reflected on their annual escrow statements, and over time they had forgotten about the membership. After seven years, when they realized the fee had been omitted from the escrow statement, they attempted to bring suit against Regions and have it certified as a class action.
They filed the complaint under §10 or the Real Estate Settlement Procedures Act which requires annual escrow statements and specific content concerning monies paid in and distributed (§3500.17(o)). The United States District Court for the Northern District of Alabama held, and the U.S. Court of Appeals for the 11th Circuit affirmed, that §10 does not allow for the consumer to seek damages for errors in escrow statements. The Hardy's maintained that §6 of RESPA does, and they argued that escrow statements are related to that.
§6 addresses the servicing of mortgage loans and the administration of escrow accounts. The court held that Sections 6 and 10 of RESPA regulate two different aspects of mortgage lending. §6 requires disclosures relating to servicing transfer notices and timely payments of escrowed funds for taxes, insurance and other charges. That is not the basis for the complaint in this case. The complaint deals with the ongoing disclosure of the monthly payments and distribution of those funds. The regulations explicitly state that failure to comply with §3500.17 is a violation of RESPA §10, not a violation of RESPA §6, and §10 doesn't provide for a private right of action.
The Hardy's claim for damages was denied, which made the request for class action status moot. The court noted this decision does not address actions between the lender and their regulatory agency.
Santiago et al v. GMAC Mortgage Group, Inc., et al
RESPA: Private Suits for Markups
The Third District Court of Appeals found, in a decision filed August 4, 2005, that RESPA Section 8(b) provides consumers a cause of action for illegal markups, but not for overcharges, and provided definition for when a lender's markups may violate the law.
The question of whether the specific markups in the Santiago case violated RESPA was remanded to the U. S. District Court for the Eastern District of Pennsylvania, but the Court of Appeals outlined three criteria to use in determining whether markups are legal under the law:
- Does the lender itself provide a service that is ancillary to that supplied by the third party provider?
- Is the ancillary service more than nominal in nature?
- Does the ancillary service justify the added cost?
Snow et al v. First American Title Insurance Company
Chenault et al. v. Mississippi Valley Title Insurance Company and Old Republic National Title Insurance Company
(cases consolidated on appeal)
The underlying cases involved allegations that RESPA's anti-kickback and fee-splitting provisions were violated by title insurance companies whose compensation plans rewarded agents for generating high volumes of sales. The plaintiff alleged that the agents who sold them title insurance received additional compensation in violation of the RESPA provisions.
The appeal involved the issue of when RESPA's statute of limitations begins to run.
Both suits were filed more than one year after the plaintiffs' real estate closings and the defendants argued that the claims arose at closing and were barred by RESPA's one-year statute of limitations. The district courts agreed and entered judgment for the defendants. The plaintiffs appealed. The cases were consolidated on appeal to the 5th Circuit U.S. Court of Appeals.
On appeal, the plaintiffs acknowledged the applicability of the one year statute of limitations but argued the time started running not at closing, but when the agents received the additional compensation.
The 5th Circuit Court held that the one year statute of limitations started running at closing and affirmed the decision of the lower courts.
YIELD SPREAD PREMIUM CASES UNDER RESPA
Hirsch v. BankAmerica Corporation
11th Circuit, April 23, 2003
This is another decision relating to the legality of the payment of Yield Spread Premiums (YSPs) by mortgage lenders to mortgage brokers. Applying the 2001 HUD Statement of Policy on YSPs, the Court first determined whether the broker has provided goods or services of the kind typically associated with a mortgage transaction. [A recitation of the services provided appears in a footnote to the court's decision.] Finding that the broker had done so, the court then moved on to the second step, which is determining whether the total compensation paid to the broker is reasonably related to the total value of the goods or services actually provided." The Court found that, indeed, it was reasonable. The 11th circuit therefore affirmed the district court's grant of summary judgment in favor of BankAmerica Corp. and the other defendants after finding that the district court had correctly determined that both elements of HUD's test were met.
Heimmerman v. First Union
First Union Mortgage Corporation appealed the district court's grant of class certification to a class of plaintiffs seeking damages for First Union's alleged violation of Section 8 of RESPA. On September 18, 2002, the 11th Circuit Court of Appeals vacated the district court's grant of class certification and remanded the case for further proceedings. In so doing, the 11th Circuit took the position that HUD's 2001 Statement of Policy (SOP) on yield spread premiums may be retroactively applied to this case, that the SOP is entitled to deference, and that the SOP's interpretation of RESPA is contrary to and, in effect, overrules Culpepper III. The 11th Circuit held that the district court abused its discretion in granting class certification because the 2001 SOP demonstrates that the district court applied the wrong legal standard.
Schuetz v. Bank One Mortgage Corporation
9th Circuit Applies HUD's 2001 Statement of Policy Regarding Yield Spread Payments
Kickbacks
Culpepper v. Irwin Mortgage Corporation
This update was provided by Howard Lax of Lipson, Neilson, Cole, Seltzer & Garin, P.C.
Culpepper Case Nears an End - July 19, 2007
The case of Culpepper v. Irwin Mortgage Corporation was one of the first of many decisions questioning the legitimacy of lender paid broker fees (aka yield spread premiums). These cases died a quiet death, for the most part, after HUD issued RESPA Statements of Policy 1999-1 and 2001-1. The class action lawsuit filed by the Culpeppers in 1996 was reviewed four times by the Court of Appeals for the Eleventh Circuit, and hopefully will end with the latest decision. The procedural history of the case, and a summary of the prior decisions, is found in Culpepper IV (you may read this on your own when you are having a hard time falling asleep). It is sufficient to note that the Culpeppers won in the prior decisions, only to see the Court reverse and overrule the principles favoring the Culpeppers in decisions rendered after HUD issued its Statements of Policy. The Culpeppers argued that the Court's subsequent decisions overruling the holding in Culpepper III could not be applied to case, since the Court of Appeals was bound to follow its prior holding, right or wrong (the "law of the case doctrine"). The Court of Appeals disagreed. First, the HUD Statements of Policy were the controlling law binding the Court, not the Court's prior decisions. Second, the approach to RESPA liability taken in Culpepper III was "clearly erroneous," such that continuing to apply it "would work manifest injustice."
The Court of Appeals then reviewed the District Court's holding that Culpepper had not shown any evidence that the yield spread premium was unreasonable compensation for the services provided by the mortgage broker. The Court of Appeals compared the compensation paid to the Culpeppers' broker with the compensation paid to brokers in other cases, and found that the yield spread premium paid to the Culpeppers' broker was less than the yield spread premium paid in other cases that were held to be acceptable by the Court. The Court of Appeals stated:
"The Borrowers do not present any evidence demonstrating that these compensation amounts were unreasonable in light of the total array of services performed. Instead, they argue that the fact that the YSP payment did not in any way reduce their up-front closing costs establishes that they were unreasonable under RESPA. This contention fails, for two reasons. First, as discussed previously, in deciding the question of reasonableness we are instructed to assess the "total compensation" the broker received, which "includes direct origination fees and other fees paid by the borrower, indirect fees, including those that are derive from the interest rate paid by the borrower, or a combination [thereof] . . . ." 66 Fed. Reg. 53055. Second, as the district court concluded, the fact that the Borrowers’ up-front closing costs were not reduced is not sufficient, standing alone, to establish that the brokers’ compensation was unreasonable in light of the services that they performed. This is especially so where the services they performed otherwise appear to have aided and benefited the Borrowers in closing their mortgage transactions.
"Nor are we convinced by the Borrowers’ contention that the YSP was per se unreasonable because under federal regulations a broker’s compensation is limited to an origination fee of 1%. See 24 C.F.R. § 203.27(a)(2)(i). Other circuits that have considered that argument have rejected it, concluding that the limitation on mortgage broker fees set forth in 24 C.F.R. § 203.27(a)(2)(i) only applies to fees "directly collected [from the mortgagor], not indirectly collected [from the lender]." See Bjustrom v. Trust One Mortgage Corp., 322 F.3d 1201, 1205 (9th Cir. 2003). Because we agree with the Ninth Circuit that 24 C.F.R. § 203.27(a)(2)(i) does not preclude a mortgage broker from collecting a YSP indirectly from a mortgage lender, we cannot accept the Borrowers’ blanket contention that any compensation in excess of the 1% origination fee is per se unreasonable under RESPA. Such an approach would flout HUD’s case-by-case inquiry to YSP payments.
"In summary, the Borrowers bear the burden of demonstrating, with specific evidence, that the total remuneration that their brokers received was unreasonable, see Hirsch, 328 F.3d at 1309, in light of both objective market standards and the subjective facts of their mortgage transactions. 66 Fed. Reg. 53055. This is a burden they have failed to satisfy. Because neither of the Borrowers has submitted evidence sufficient to demonstrate that the total compensation paid to their respective brokers was somehow "unreasonable" under HUD's RESPA analysis, summary judgment was appropriate for Irwin."
Finally, the Court of Appeals held that the District Court did not abuse its discretion by deciding to decertify the class action lawsuit, essentially stripping away all of the potential claims of other borrowers. The Court of Appeals, citing the HUD Statements of Policy and the majority of other decisions holding that RESPA kickback claims must be decided on a case by case basis, agreed that the case should not have been certified as a class action in the first instance. The Culpeppers may appeal the decision to the US Supreme Court; however, the prior denial of certification of Culpepper III by the Supreme Court makes it unlikely that the Supreme Court will review the decision in Culpepper IV.
Culpepper v. Irwin Mortgage Corporation RESPA Updates - Dec. 10, 2001
The U.S. 11th Circuit Court of Appeals held that whether or not payments made by a lender to a mortgage broker who handles loan applications are considered illegal fees or kickbacks prohibited by section 8 of RESPA rather than bona fide fees for services, depends on the terms and conditions under which they are paid.
Haug v. Bank of America, NA
On January 23, 2003, the 8th Circuit Court of Appeals rendered an opinion in a putative class action suit in which plaintiffs claimed that, "based on Defendant’s nondisclosures, or false
and misleading disclosures, they unknowingly paid charges for credit reports or other
loan related services for federally related mortgage loans that exceeded Defendant’s
actual costs for those services." According to Plaintiffs, those charges violated
RESPA and a Missouri state statute. The bank argued that the Section 8(b) of RESPA requires that
one party must give and another party must receive an unearned portion, split, or
percentage of a settlement service fee. The bank moved to dismiss the case on the grounds that Plaintiffs failed to state
a RESPA claim because they did not allege a third party kickback or fee split with
respect to the overcharges. The district court denied Defendant’s
motion to dismiss, citing a 2001 HUD Policy Statement which states that Section 8(b)
proscribes all unearned portions or percentages of settlement fees as well as splits,
meaning a single settlement service provider violates Section 8(b) whenever it
receives an unearned fee.
On appeal to the 8th Circuit, however, the appellate court reversed the denial of the motion to dismiss. It said:
We therefore hold that Section
8(b) prohibits only transactions in which the defendant shares a “portion, split, or
percentage of any charge” with a third party.
As for HUD's Policy Statement, and whether the district court should have considered it, the 8th Circuit Court said: "Because
the language of Section 8(b) unambiguously requires the giving or receiving of an
unearned portion of a settlement fee, the district court’s inquiry should have ended
with the plain language of the statute."
Notice of transfer issue
Wagner v. EMC Mortgage Corporation
The Fifth District California Court of Appeal held that the Notice of Servicing Transfer Requirements of RESPA and Regulation X were violated when the notice was mailed to the address shown on the note and deed of trust and not to the current address of the borrower. The Court noted the provisions of RESPA and Reg. X do not define the terms .notify. or .notice. and stated a servicer must exercise reasonable care and diligence in determining the correct address of the borrower when mailing a notice of transfer. The Court also held that actual damages recoverable under RESPA are not limited to claims for wrongful foreclosure. An alleged violation based upon separate and distinct wrongful acts a part from the foreclosure may result, if proven, in an award of actual damages. A recovery of actual damages is not dependent upon proving the foreclosure was wrongful.
Giving notice of claim under RESPA
If the customer's suit is based upon an alleged violation of RESPA, the petition/complaint needs to say so. In Gardner, et al v. First American Title Insurance Company, et al, the Eighth Circuit U. S. Court of Appeals held that a compliant alleging a RESPA violation must specifically note that it relates to a federally related mortgage loan, thus bringing RESPA into play. The claimant need not set out in detail the facts upon which the claim is based but must give the defendant fair notice of what the claim is and the grounds upon which it rests.
Upcharges
Boulware v. Crossland Mortgage Corporation
In this 4th circuit case decided 5/22/02, Boulware sought to certify a class to challenge Crossland Mortgage Corporation's alleged overcharge for credit reports. Crossland was charging $65 for the credit report when it cost Crossland $15 or less to obtain it. Boulware claimed that Crossland kept the $50 over-charge for itself without performing additional services. She did not
allege that the credit reporting agency or any other third party
received payment from Crossland beyond that owed to it for services
actually performed.
The district court found
that Boulware did not allege any split or kickback of the overcharge
from Crossland to a third party. It thus dismissed Boulware's com-
plaint and denied class certification. The 4th Circuit agreed with the Seventh Cir-
cuit that § 8(b) is a prohibition on kickbacks rather than a broad price
control provision. It therefore affirmed the judgment.
The court says § 8(b) only prohibits overcharges when a "portion" or "percentage" of
the overcharge is kicked back to or "split" with a third party. Compen-
sating a third party for services actually performed, without giving the
third party a "portion, split, or percentage" of the overcharge, does not
violate § 8(b). By using the language "portion, split, or percentage,"
Congress was clearly aiming at a sharing arrangement rather than a
unilateral overcharge.
Echevarria v. Chicago Title & Trust Company
RESPA Updates
The U.S. 7th Circuit Court of Appeals held that a recorder of mortgages who retains excess recording fees and does not share them with a third party is not in violation of section 8(b) of RESPA which prohibits the splitting of fees with a third party. The Court held portion of the fees paid to the county recorder of deeds did not constitute payment to a third party.
SECURED TRANSACTIONS
Keven R. McCarthy, Trustee, v. BMW Bank of North America
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