Consumer Compliance Outlook: First Quarter 2010

On the Docket: Recent Federal Court Opinions

REGULATION Z - TRUTH IN LENDING ACT (TILA)

Change-in-terms notice for default pricing. Shaner v. Chase Bank USA, N.A. External Site, 587 F.3d 488 (1st Cir. 2009). The First Circuit held that under the rules applicable in 2006, a credit card issuer does not have to provide a change-in-terms notice before applying a penalty rate increase that was already specified in the account agreement. After the consumer's payment due in mid-December was late, Chase determined on December 24, 2006, to apply the default interest rate to the account as of the beginning of that billing cycle, which began November 25, 2006. After recognizing that there were conflicting decisions on this issue in the Seventh and Ninth Circuits, the First Circuit invited the Federal Reserve Board to file a friend-of-the-court brief. (The previous cases were discussed in the Second Quarter 2009 issue of Outlook.) The First Circuit, agreeing with the Seventh Circuit, treated the Board's interpretation of its own regulation as "controlling" and cited the Board's position that "at the time of the transactions at issue in this case, Regulation Z did not require a change-in-terms notice to be provided when a creditor increased a rate to a figure at or below the maximum allowed by the contract in the event of default." It should be noted, however, that effective August 20, 2009, a credit card issuer must provide written notice 45 days in advance before a rate is increased as a penalty or due to delinquency or default. The new requirement is discussed in the CARD Act article on page 5.

On a related note, Chase petitioned the United States Supreme Court to review the Ninth Circuit's contrary decision, and the Supreme Court recently invited the Solicitor General's office to express its views on whether to grant the petition.

Claim for actual damages requires proof of detrimental reliance. Vallies v. Sky Bank External Site, 591 F.3d 152 (3d Cir. 2009). The Third Circuit ruled that a plaintiff seeking actual damages because of a TILA or Regulation Z disclosure violation must establish detrimental reliance, meaning the plaintiff suffered a loss from relying on an inaccurate disclosure. The plaintiff in this class action obtained a car loan with Sky Bank, and the transaction included a charge of $395 for guaranteed auto protection, a form of debt cancellation coverage. Under Regulation Z, creditors may exclude charges for debt cancellation coverage from the finance charge if the coverage is optional and certain required disclosures are made. (See 12 C.F.R. §226.4(d)(3).) The proper disclosures were made by the automobile dealer but not the creditor, which was Sky Bank. The plaintiff sought both actual damages and statutory damages in light of the Third Circuit's previous ruling that Sky Bank had violated TILA because the disclosures were issued in the name of the car dealer instead of the creditor. (See Vallies v. Sky Bank, 432 F.3d 493, 495 (3d Cir. 2005).) After the bank settled the borrower's claim for statutory damages, the trial court dismissed the remaining claim for actual damages, finding that the plaintiff did not allege and could not establish detrimental reliance. The Third Circuit affirmed, noting that the lower court's ruling is supported by TILA's legislative history and by decisions in the Courts of Appeals for the First, Fifth, Sixth, Eighth, Ninth, and Eleventh Circuits.

Update: Cunningham v. National City Bank (D. Mass. 2009). Outlook previously discussed this case concerning HELOCs and grace periods. The First Circuit External Site recently affirmed the lower court's ruling in Cunningham v. National City Bank, 588 F.3d 49 (1st Cir. 2009).

FAIR HOUSING ACT (FHA)

Standing. City Council of Baltimore v. Wells Fargo Bank, N.A. External Site, 2010 WL 46401 (D. Md. Jan. 6, 2010). A federal district court in Baltimore dismissed a lawsuit filed under the FHA by the Baltimore City Council and the Mayor of Baltimore against Wells Fargo Bank and Wells Fargo Financial Leasing, Inc. The lawsuit alleged that the bank violated the FHA by engaging in reverse redlining against minorities in Baltimore with loans that were likely to fail and end in foreclosure. As a result of the reverse redlining, the city alleged that it sustained millions of dollars in damages in terms of decreased property tax revenues from foreclosures, increased police and fire protection services for vacant buildings, and increased spending for administrative, legal, and social services. The court noted that the number of vacant houses in Baltimore, according to the city's own estimate, ranged from 16,000 to 30,000 but that Wells Fargo made only 163 loans in minority neighborhoods where the property later became vacant after foreclosure. Of the 163 properties, only 80 are currently vacant. The court therefore found that Wells Fargo is only potentially responsible for a negligible portion of the city's vacant housing stock. The court also noted that many other factors could have contributed to the vacancies unrelated to the alleged reverse redlining. The court therefore dismissed the case without prejudice to the plaintiffs' right to refile it if the complaint were narrowed. For example, the court suggested that the complaint could be narrowed to allege a claim for damages sustained with regard to specific houses that became vacant because of Wells Fargo's lending activity or damages caused to specific neighborhoods in which Wells Fargo made a large number of loans.

REGULATION X - REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA)

Standing to litigate §8 violations when there's no monetary harm. Alston v. Countrywide Financial Corp. External Site, 585 F.3d 753 (3d Cir. 2009). The Third Circuit reversed a trial court's ruling that plaintiffs lacked standing to pursue a RESPA class action lawsuit because they did not allege they were overcharged for settlement services. The plaintiffs purchased private mortgage insurance (PMI) for their loans made by Countrywide. They alleged that Countrywide violated RESPA's ban on kickbacks and unearned fees in §§8(a) and 8(b), respectively, because Countrywide had an arrangement under which the PMI carriers agreed to purchase reinsurance from Countrywide's affiliate for PMI policies the carriers issued for Countrywide mortgages. The plaintiffs alleged that the purchase of reinsurance from the Countrywide affiliate was a sham resulting in unearned fees being paid to Countrywide because the affiliate never paid any claims under the reinsurance agreements. The Justice Department intervened in the appeal and filed a brief supporting the borrowers. The trial court dismissed the case, holding that the plaintiffs lacked standing because they did not allege they were overcharged for the PMI. The Third Circuit reversed, finding that an overcharge is not a required element of a private lawsuit. The court noted that RESPA permits plaintiffs to recover three times the amount charged for the service if there is a violation of §8, even if the consumer is not injured by an overcharge.