Consumer Compliance Outlook: Fourth Quarter 2011

On the Docket: Recent Federal Court Opinions

REGULATION Z - TRUTH IN LENDING ACT (TILA)

Borrower may rebut TILA presumption of receiving rescission notice through testimony. Cappuccio v. Prime Capital Funding LLC External Site, 649 F.3d 180 (3d Cir. 2011). For loans subject to rescission, creditors must provide borrowers with TILA disclosures and two copies of the notice of the right to cancel. Failure to comply can extend the right of rescission from three business days to three years. Under §1635(c) of TILA, a borrower's signature acknowledging receipt of TILA disclosures and the right to cancel creates a legal presumption that the borrower received them. In an important ruling, the Third Circuit held that a borrower's testimony can overcome this presumption. The plaintiff sought to rescind two mortgages she obtained from a mortgage broker that were funded by Countrywide and First Magnus Financial. The plaintiff testified that at the loan closing, she signed the acknowledgment form but did not receive the notice until several days later after the funds were disbursed. The trial court instructed the jury that something more than the plaintiff's testimony was required to rebut the presumption that she properly received the notice of the right to cancel. As a result, the jury ruled in favor of the lenders on the TILA claim. The Third Circuit reversed the ruling, holding that the presumption of receipt can be rebutted through the borrower's testimony, leaving it to the jury to assess credibility. The case was remanded for further proceedings.

Consumer may obtain damages for Fair Credit Billing Act (FCBA) violations without showing detrimental reliance. Lyon v. Chase Bank USA External Site, N.A., 656 F.3d 877 (9th Cir. 2011). The plaintiff notified Chase Bank (Chase) that his credit card was stolen and disputed several charges resulting from the theft. In violation of the FCBA, Chase failed to respond in writing, treated a disputed amount as delinquent, assessed finance charges on the disputed amount, and reported a delinquency to the consumer reporting agencies. (The FCBA is a section of TILA, 15 U.S.C. §1666-1666j, governing billing disputes for open-end consumer credit accounts.) The plaintiff filed suit for damages. Chase admitted that its actions violated the FCBA but argued that a plaintiff alleging TILA violations must establish reliance on inaccurate disclosure and resulting harm. The Ninth Circuit held that the requirement to prove detrimental reliance does not apply to FCBA violations because the FCBA addresses billing disputes, so there is no disclosure or conduct involved on which the plaintiff could have relied. The case was remanded for further proceedings.

FAIR HOUSING ACT AND EQUAL CREDIT OPPORUNITY ACT

Claims that discretionary pricing had a disparate impact on mortgage loan applicants cannot be resolved on a class-wide basis. Rodriguez v. National City Bank External Site, --- F. Supp. 2d ----, 2011 WL 4018028 (E.D. Pa. Sept. 8, 2011). The plaintiffs sued National City Bank and National City Corporation alleging that they violated the Fair Housing Act and the Equal Credit Opportunity Act by allowing loan officers pricing discretion for mortgages that had a disparate impact on minority loan applicants. The parties had reached a proposed settlement agreement. However, while the trial court was considering the settlement, the Supreme Court decided Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), a landmark class-action case. The trial court noted that under Dukes, allegations of employment discrimination on the basis of gender could not be resolved on a class-wide basis but would have to be made on a supervisor-by-supervisor basis because each supervisor at Wal-Mart exercised discretion in employment decisions. Applying Dukes, the court found each loan officer would likely have different explanations of how pricing discretion was exercised for loan applications. Because the issues in the case would vary by loan officer, the case could not be resolved on a class-wide basis and class certification was denied.

FAIR CREDIT REPORTING ACT (FCRA)

Lawsuit against lender for furnishing inaccurate credit information is dismissed because consumer did not initiate dispute through consumer reporting agency. Simmsparris v. Countrywide Financial Corp. External Site, 652 F.3d 355 (3d Cir. 2011). The Third Circuit affirmed the dismissal of a lawsuit alleging that a furnisher of credit information violated the FCRA by failing to correct the inaccurate information it furnished to four consumer reporting agencies. The plaintiff obtained a mortgage loan from Countrywide Home Loans. Countrywide reported to four agencies that the plaintiff had made two late payments. The plaintiff asked her counsel to send letters to Countrywide disputing the late payments. Countrywide continued to report the payments as late, and the consumer filed a lawsuit alleging FCRA violations and state law claims. The Third Circuit affirmed the dismissal of the lawsuit. Under §1681s-2(a) of the FCRA, a furnisher has a duty to report accurate information to the consumer reporting agencies. However, there is no private cause of action for a §1681s-2(a) violation; this section is subject only to administrative enforcement. Another provision of the FCRA, §1681s-2(b), permits a consumer to file a lawsuit when inaccurate information is furnished, but this section requires the consumer to initiate the dispute with the consumer reporting agencies to which the disputed information was furnished. The agencies then notify the furnisher, which must investigate the dispute and report the results of its investigation to the agencies. Because the plaintiff did not file a dispute with the four consumer reporting agencies, Countrywide's duty to investigate was not triggered for purposes of filing a lawsuit under §1681s-2(b).

It should be noted that Congress amended §1681s-2(a)(1) to require the federal banking agencies to issue regulations allowing consumers to file direct disputes with furnishers. In July 2009, the agencies issued those regulations, which became effective July 1, 2010. The Third Quarter 2010 issue of Outlook discussed the obligations of furnishers under the new direct dispute rules. The federal banking agencies enforce compliance with the new direct dispute rules, but there is no private cause of action. In other words, even under the new law, the consumer's lawsuit would have been dismissed.

FAIR DEBT COLLECTION PRACTICES ACT (FDCPA)

Debt collector may not imply that it will report debts over seven years old to a credit bureau. Gonzales v. Arrow Financial Services, LLC External Site, 600 F.3d 1055 (9th Cir. 2011). The Ninth Circuit affirmed a jury award of $225,500 finding that Arrow Financial Services violated the FDCPA and a similar state law. Arrow, a debt buyer and collector, sent letters to 40,000 consumers stating: “Upon receipt of the settlement amount and clearance of funds, and if we are reporting the account, the appropriate credit bureaus will be notified that this account has been settled.” The letters also make several other references to credit bureaus. Because the nearly 40,000 debts in question were all more than seven years old, they could not be reported to a credit bureau under the Fair Credit Reporting Act. The Ninth Circuit upheld the verdict, holding that the use of conditional language (“if we are reporting the account”) did not insulate Arrow from the charge that the letter misled consumers into believing that Arrow could report an obsolete debt to a credit bureau.