Consumer Compliance Outlook: Third Quarter 2008

On the Docket: Recent Federal Court Opinions

Regulation Z - Truth in Lending Act (TILA)

Right of rescission. McMillian v. AMC Mortgage Services, Inc. External Link, 2008 U.S. Dist. Lexis 45519 (S.D. Ala. June 10, 2008). The plaintiffs sought to rescind their mortgage loan more than three years after the closing date based on a technical violation of TILA in the rescission notice. The defendant moved to dismiss based on TILA's statute of limitations. The court had to decide whether the rescission period was suspended because of a pending class action against the lender and whether the loan was subject to TILA's three-day or three-year rescission period. The court refused to suspend the statute of limitations because the three-year period for rescission claims in §1635(f) of TILA cannot be suspended under the Supreme Court's decision in Beach v. Ocwen Federal Bank External Link, 523 U.S. 410, 419 (1998). The court also held that the borrowers were subject to a three-day rescission period. The borrowers argued that the three-year period applied because the rescission notice contained errors by referencing a "one week cancellation period" and by failing to identify the last date on which the borrowers could rescind. However, the court rejected these arguments because, in the Eleventh Circuit, the three-day period is not enlarged as long as the lender provides a "clear and conspicuous notice of rescission." Because the lender's notice conspicuously stated that the borrower had "THREE BUSINESS DAYS" to rescind, the rescission notice was sufficient.

Regulation X - Real Estate Settlement Procedures Act (RESPA)

RESPA does not cover markup claim for excessive fees. Friedman v. Mortgage Street Mortgage Corporation External Link, 520 F.3d 1289 (11th Cir. 2008). The Eleventh Circuit joins the Second, Third, Fourth, Seventh, and Eighth External Link circuits in holding that RESPA does not permit a claim that a settlement service fee is excessive relative to the services provided because RESPA is not a price-control statute. This case concerns a class action challenging an escrow waiver fee, which the lender imposed on borrowers who opted out of the escrow for taxes and property insurance. The trial court, after a prior appeal and remand, certified a class action under §8(b) of RESPA of borrowers who had paid the fee. The lender appealed, arguing that RESPA does not apply to an excessive fee claim. The Eleventh Circuit agreed with the lender, concluding that the language of §8(b) specifically prohibits charging a fee when no services are performed but does not regulate the amount of a fee when services are provided.

Fair Lending: Regulation B (Equal Credit Opportunity Act) and Fair Housing Act

Court dismisses redlining claim. JAT, Inc. v. National City Bank of the Midwest External Link, 2008 U.S. Dist. Lexis 45059 (E.D. Mich. June 10, 2008). Several churches with predominantly minority congregations and several minority-owned businesses joined together to sue the National City Bank of the Midwest, alleging that the bank had a policy of redlining African-American commercial borrowers in the city of Detroit, in violation of the Equal Credit Opportunity Act, the Fair Housing Act, and the Civil Rights Act of 1866 and 1870. The bank moved to dismiss the case. In reviewing the legal framework for analyzing this claim under these statutes, the court identified a plaintiff's initial burden of proof to establish a prima facie case of discrimination based on circumstantial evidence. Each plaintiff must establish that: 1) it is a member of a protected class; 2) it applied for and was qualified for a loan; 3) the loan application was rejected despite its qualifications; and 4) the lender continued to approve loans for applicants with qualifications similar to those of the plaintiff. The court reviewed each of the plaintiffs' claims and concluded that all failed to establish the fourth requirement, namely, that the lender continued to approve loans for applicants with similar qualifications. As a result, the court dismissed the case. The court also refused to hear expert testimony to show that the lender engaged in a pattern or practice of discrimination because that type of evidence is limited to government cases and class actions. The docket indicates that the plaintiffs have appealed to the U.S. Court of Appeals for the Sixth Circuit.

Fair Credit Reporting Act (FCRA)

Fourth Circuit affirms punitive damages award against furnisher of credit information for failing to notify consumer reporting agencies that consumer disputed a debt. Saunders v. Branch Banking & Trust Co. of Virginia External Link, 526 F.3d 142 (4th Cir. 2008). The Branch Banking & Trust Co. of Virginia (BB&T) appealed a jury verdict of $81,000 in punitive and statutory damages for violating §1681s-2(b)(1) of the FCRA. BB&T obtained a consumer car loan from a dealer but failed to book it in its system and provide the borrower with a payment book to repay it. The borrower contacted BB&T to request repayment information, but BB&T employees repeatedly said no amount was due. BB&T finally recorded the loan eight months later and notified the borrower that he was in default and accelerated the balance due. BB&T said it would reinstate the loan if the consumer paid late fees and penalties. When the borrower refused, BB&T repossessed the car and reported it to the consumer reporting agencies. The borrower disputed BB&T's debt with TransUnion, which triggered BB&T's duty to investigate the debt and report if the information was incomplete or inaccurate. The Fourth Circuit found that BB&T violated the FCRA by failing to note the consumer's ongoing dispute about the debt. BB&T also challenged the amount of punitive damages, arguing that the ratio of $80,000 in punitive damages to the $1,000 in statutory damages was unconstitutional under State Farm Mutual Auto Ins. Co. v. Campbell External Link, 538 U.S. 408 (2003). But the Fourth Circuit held that a challenge to a punitive damage based on a large ratio is not valid when, as here, a jury awards a small amount of nominal damages. The court examined punitive damages in other FCRA cases and found that $80,000 was consistent with the awards in those cases.

The First, Seventh, and Eighth circuits significantly narrow claims for "firm offer of credit." Sullivan v. Greenwood Credit Union External Link, 520 F.3d 70 (1st Cir. 2008), Dixon v. Shamrock Financial Corporation External Link, 522 F.3d 76 (1st Cir. 2008), Murray v. New Cingular Wireless Services, Inc. External Link 523 F.3d 719 (7th Cir. 2008), and Poehl v. Countrywide Home Loans, Inc. External Link, 528 F.3d 1093, 2008 WL 2445966 (8th Cir. June 19, 2008). Under the FCRA, creditors cannot access consumer credit reports without consent unless an exception applies. One exception is for a "firm offer of credit" under §1681b(c)(1)(B) of the FCRA, which allows a creditor to engage the consumer reporting agencies to identify consumers who meet a specified credit profile based on information in their credit reports (a process known as prescreening). As a condition for prescreening, §1681b(c)(1)(B) requires that creditors make a firm offer of credit to all consumers who meet the criteria specified. Many creditors became concerned about liability under this section after the Seventh Circuit's decision in Cole v. U.S. Capital, Inc., 389 F.3d 719 (7th Cir. 2004), which held that a firm offer of credit "must have sufficient value for the consumer to justify the absence of the statutory protection of his privacy." Cole spawned numerous "firm offer of credit" class actions. However, these new decisions significantly limit Cole's scope and will make it difficult to file lawsuits alleging a credit offer is invalid because it lacks value or fails to include all necessary credit terms. Murray rejected the plaintiffs' argument that a firm offer of credit must have "value." Murray limited Cole's value requirement to its facts, where the creditor was accessing credit report information to sell merchandise (which the FCRA does not permit). Murray further clarified that in a pure offer of credit, where the sale of merchandise is not involved, the FCRA requires only that the offer be "firm," not that it have "value." The court also addressed whether a credit offer must contain all material terms and concluded that the FCRA does not impose this requirement. The decisions in Sullivan, Dixon, and Poehl reached similar conclusions.