Consumer Compliance Outlook: First Quarter 2009

On the Docket: Recent Federal Court Opinions

REGULATION Z - TRUTH IN LENDING ACT (TILA)

Flat finance charge is not unearned interest under §1615 of TILA. Davis v. Pacific Capital Bank, 550 F.3d 915 (9th Cir. 2009). The Ninth Circuit held that a flat finance charge assessed on a tax refund anticipation loan (RAL) does not constitute unearned interest under §1615 of TILA. The plaintiff obtained a RAL in the amount of $1,115 from Pacific Capital Bank, for which she was assessed a flat finance charge of $85. The loan agree-ment provided that if she repaid the loan early, she would not receive a refund of any part of the prepaid finance charge. The plaintiff repaid the loan 10 days early and sought a pro rata refund of the finance charge. When the bank refused, the plaintiff filed suit alleging a violation of §1615 of TILA, which provides that "if a consumer prepays in full the financed amount under any consumer credit transaction, the creditor shall promptly refund any unearned portion of the interest charge to the consumer." After examining TILA's legislative history, the court concluded that §1615's refund requirement applies only to interest charges and not to finance charges. Because the bank's finance charge was a flat fee that did not vary with the amount borrowed, it was not an interest charge. The court therefore affirmed the dismissal of the case.

Intent to breach credit agreement with accurate disclosures does not violate TILA. Hauk v. JP Morgan Chase Bank USA, 552 F.3d 1114 (9th Cir. 2009). The Ninth Circuit held that a creditor's intent to act inconsistently with its TILA disclosures does not state a claim under TILA but may be actionable under state law. The plaintiff accepted a credit card balance transfer offer from Chase with a low promotional rate. Chase's TILA disclosures reserved the right to increase the rate because of a late payment. Chase raised the rate the following month because of a prior late payment. The plaintiff filed suit for TILA and state law violations, alleging that Chase had actual or constructive knowledge of the late payment when it made the offer and intended to increase the rate once the offer was accepted. The Ninth Circuit affirmed dismissal of the TILA claim, holding that Chase's intent was irrelevant as long as its disclosures were accurate. Chase's disclosures accurately stated that a past late payment could trigger a rate increase. The court acknowledged that Chase might have waived the right to raise the rate for a late payment if it knew about the late payment when it accepted the offer and did not raise the rate. The court nevertheless concluded that even if Chase had breached the cardholder agreement, the breach would not be actionable under TILA because TILA regulates disclosures and does not substantively regulate consumer credit. The court noted that its approach conflicted with a Third Circuit decision but disagreed with that court's analysis. However, the court reversed and remanded the trial court's dismissal of the plaintiff's California state law claims for consumer protection and false advertising violations because of unresolved fact issues that could potentially allow the plaintiff to prevail on those claims.

Effect of grace period for late fee on payment due date. Cunningham v. National City Bank, (No. 08-10936 D. Mass. January 7, 2009). This case examines whether a 10-day grace period for a home equity line of credit (HELOC) to avoid late fees implicitly extends the payment due date by 10 days for determining TILA disclosures about the timing of payments. The borrowers in this case had obtained a $100,000 HELOC from National City Bank (National). In January and February 2008, they made two draws against the HELOC. Because their payment for the first draw was nine days late, National terminated the HELOC. The borrowers filed a class action against National, alleging that its termination of the HELOC violated §226.5b(d)(5)(ii) of Regulation Z, regarding the HELOC disclosure for the timing of payments. They relied on the late fee provision in the note, which provided that late fees would not be assessed if payment were received within 10 days of the due date. They argued that the 10-day grace period to avoid late fees implicitly created a 10-day grace period for the payment due date. The court rejected this argument based on the plain language in the note that clearly defined the due date without any exceptions.

REGULATION X — REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA)

Standing to file RESPA claim. Carter v. Welles-Bowen Realty, Inc. 553 F.3d 979 (6th Cir. 2009). The Sixth Circuit ruled that a plaintiff alleging RESPA violations for kickbacks or referral fees has standing to file a lawsuit, even though the plaintiff did not suffer a concrete injury such as an overcharge. The plaintiffs in this class action used the services of WB Realty, a real estate agency, in connection with their real estate purchase. WB Realty referred the plaintiffs to its affiliate, WB Title, to perform settlement services. The plaintiffs sued WB Realty and WB Title, alleging that WB Title was a sham company and that all title work was referred to Chicago Title in exchange for a kickback or fee-splitting in violation of §§8(a) and 8(b) of RESPA. The trial court dismissed the case, finding that the plaintiffs lacked standing because they failed to allege a specific injury. After examining the statute's purpose, its legislative history, its implementing regulations, and general standing principles, the court concluded that Congress intended to confer standing on consumers to file lawsuits for section 8 violations, even if they did not suffer a specific injury. The court therefore reversed the trial court's dismissal of the case.

FAIR CREDIT REPORTING ACT (FCRA)

Furnisher's reporting duty to consumer reporting agencies for disputed debt. Gorman v. Wolpoff & Abramson, LLP, 552 F.3d 1008 (9th Cir. 2009). This case examines a furnisher's obligation under §1681s-2(b) of the FCRA to respond to notices from consumer reporting agencies (CRAs) that a consumer disputes a debt. The CRAs notified MBNA that the plaintiff disputed MBNA's listing of his account as charged off. MBNA investigated and responded that the delinquency was not an error. The plaintiff sued MBNA, alleging that it violated §1681s-2(b), which requires a furnisher, after receiving a CRA notice of a consumer's dispute of an account, to investigate and to report the results of the investigation to the CRAs. If the furnisher finds that the information is incomplete or inaccurate, it must report those results to the CRAs. The court affirmed the dismissal of the investigation claim, finding that MBNA's investigation was reasonable. However, the court found that MBNA's failure to notify the CRAs that the consumer continued to dispute the charged-off account could violate §1681s-2(b). The court placed limitations on this claim by stating that simply failing to report a meritless dispute does not give rise to liability "because reporting an actual debt without noting that it is disputed is unlikely to be materially misleading. It is the failure to report a bona fide dispute, a dispute that could materially alter how the reported debt is understood, that gives rise to a furnisher's liability under §1681s-2(b)." The court reversed and remanded the dismissal of the claim.

Permissible purpose for use of consumer report for a closed account. Levine v. World Financial Network National Bank, 554 F.3d 1314 (11th Cir. 2009). The Eleventh Circuit held that a CRA's sale of a consumer credit report to a creditor in connection with a closed account did not constitute a willful violation of §1681b of the FCRA. A credit card issuer purchased the credit report of a former customer whose account was closed from Experian. The plaintiff sued Experian and other involved parties, alleging that the sale of a report in connection with a closed account was a willful violation of §1681b, concerning permissible purposes for furnishing a consumer report. The Eleventh Circuit affirmed the dismissal of the case. Under the Supreme Court's decision in Safeco Ins. Co. of America v. Burr, 127 S.Ct. 2201, 2208-09 (2007), a plaintiff alleging a willful violation must establish that a company has acted in an objectively unreasonable manner. A company has not committed a willful violation if its interpretation of the FCRA is erroneous but not objectively unreasonable. The court found that the FCRA's text is not a model of clarity and that Experian's interpretation of the FCRA to permit the sale of a consumer report in connection with a closed account was not objectively unreasonable. The plaintiff also argued that Experian subjectively knew that the FCRA did not permit the sale of a consumer report in connection with a closed account. The court rejected this argument because subjective bad faith is not relevant to a willful violation if the company's interpretation of the statute is reasonable.