Consumer Compliance Outlook: Third Quarter 2011

On the Docket: Recent Federal Court Opinions

REGULATION X - REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA)

The U.S. Supreme Court will decide RESPA standing issue for statutory damages. First American Financial Corp. v. Edwards External Site, 131 S.Ct. 3022 (2011). The U.S. Supreme Court agreed to review a Ninth Circuit decision, Edwards v. First American Corp External Site, 610 F.3d 514 (9th Cir. 2010), to determine whether a homeowner alleging a violation of the Real Estate Settlement Procedures Act's (RESPA) anti-kickback provision has standing to sue if the consumer was not overcharged. The plaintiff used Tower City Title Agency (Tower) as her settlement agent, which referred her to First American Title Insurance for title insurance. The plaintiff alleged that First American violated §8 of RESPA by entering into an exclusivity agreement with Tower, under which Tower would refer all title business to First American in exchange for a kickback. The defendants moved to dismiss the case for a lack of standing because the plaintiff sought only statutory damages for the title company's violation but did not allege she was overcharged, as Ohio law requires all title insurers to charge the same price. The Ninth Circuit held that the standing requirement was satisfied because Congress provided a right of action for violations of the referral provisions, including statutory damages, even if the plaintiff was not overcharged. The court cited recent decisions from the Third and Sixth Circuits that reached the same conclusion. See Carter v. Welles-Bowen Realty, Inc., 553 F.3d 979, 989 (6th Cir. 2009) and Alston v. Countrywide Financial Corp., 585 F.3d 753, 755 (3d Cir. 2009). The Supreme Court's opinion in this matter could have wide-ranging implications because many consumer protection laws provide statutory damages for violations, including RESPA, the Truth in Lending Act, the Fair Credit Reporting Act, and the Electronic Fund Transfer Act. The case is scheduled to be decided in the court's 2011 term, which ends in June 2012.

Affiliated business arrangements violate RESPA unless they meet three conditions. Minter v. Wells Fargo Bank,
N.A.
External Link, 274 F.R.D. 525 (D. Md. 2011). Consumers filed suit alleging that Wells Fargo Bank and Long & Foster Real Estate, Inc., along with their joint venture mortgage lender Prosperity Mortgage Company, violated §8 of RESPA, which prohibits the receipt of unearned fees and referral fees. However, §8(c)(4) expressly states that RESPA does not prohibit affiliated business arrangements when the affiliation and related charges are disclosed, the borrower is not required to use the affiliate's services, and there are no prohibited payments between the affiliates. The defendants argued that even if the joint venture did not meet these conditions, it did not necessarily violate the §8 prohibition on unearned fees and referral fees. The court disagreed, holding that to comply with §8 of RESPA, affiliated business arrangements must (1) involve a “bona fide provider of settlement services” and (2) conform to the three conditions in §8(c)(4).

PREEMPTION

Federal Arbitration Act preempts state law restrictions on certain arbitration clauses. AT&T Mobility LLC v. Concepcion External Site, 131 S.Ct. 1740 (2011). In a significant ruling, the Supreme Court held that the Federal Arbitration Act (FAA) prevents a state court from invalidating contract clauses that waive a consumer's right to participate in classwide arbitration proceedings. The plaintiffs sued AT&T for advertising its phones as free with the purchase of telephone service, even though it charged $30.22 in sales tax on the phone. The parties' contract mandated that any disputes would be resolved by individual arbitration, precluding both court litigation and classwide arbitration. The Ninth Circuit found the contract's arbitration provision unconscionable and invalid under California law as formulated in Discover Bank v. Superior Court, 36 Cal. 4th 148, 113 P. 3d 1100 (2005). The Supreme Court reversed the Ninth Circuit's ruling, holding that California law as interpreted by the court in Discover Bank is preempted by the FAA, which supports the enforceability of arbitration clauses. The Supreme Court determined that “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”

The Concepcion case is likely not the final word on the use of mandatory arbitration clauses in the consumer financial services industry. Under §1028 External Site of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the Consumer Financial Protection Bureau (CFPB) is required to conduct a study of the effect of mandatory arbitration clauses on consumers and provide a report to Congress. If supported by the results of the study, the CFPB may prohibit or restrict mandatory arbitration clauses to protect consumers. In addition,§1414(e)(1) External Site of the Dodd-Frank Act prohibits the use of mandatory arbitration clauses in open- and closed-end consumer credit transactions secured by a consumer's principal dwelling.

State statute banning check-cashing fee is preempted by National Bank Act (NBA). Baptista v. JPMorgan Chase Bank, N.A. External Site, 640 F.3d 1194 (11th Cir. 2011). The plaintiff's class-action lawsuit alleged that JPMorgan Chase violated a Florida state statute by charging a check-cashing fee. Chase argued that the plaintiff's claims were preempted by the NBA. The Dodd-Frank Act amended the NBA to state that “State consumer financial laws are preempted, only if …the State consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers.” The Eleventh Circuit interpreted this language to mean that a state law is preempted only when it presents a significant conflict with federal law. Applying this standard, the court concluded that a Florida ban on check-cashing fees significantly conflicts with a regulation of the Office of the Comptroller of the Currency (OCC), 12 C.F.R. §7.4002(a), which provides that a national bank may “charge its customers non-interest charges and fees, including deposit account service charges,” and defines a customer to include “any person who presents a check for payment.” Because Congress intended the OCC to have the power to regulate banking and the OCC regulation specifically authorizes a practice banned by the state statute, the court held that the state statute is preempted.

FAIR HOUSING ACT

Disparate impact claim examined. Greater New Orleans Fair Housing Action Center v. U.S. Department of Housing & Urban Development External Site, 639 F.3d 1078 (D.C. Cir. 2011). The Court of Appeals for the District of Columbia Circuit reversed a trial court decision granting injunctive relief to plaintiffs on their disparate impact claim. African-American homeowners and two fair housing organizations filed a lawsuit alleging that Louisiana's Office of Community Development (OCD), a state agency, violated the Fair Housing Act because its formula for awarding grants provided by Congress to rebuild homes damaged or destroyed by Hurricanes Katrina and Rita had a disparate impact on African-American homeowners. HUD was also sued because it approved the grants and the formula used in awarding them. The amount of the state agency's grant was based on the lesser of the home's pre-hurricane value and the cost to rebuild or repair the home. The plaintiffs argued this formula had a disparate impact because African-American homeowners are likely to live in neighborhoods with lower property values than in predominantly white neighborhoods. To prove disparate impact, a plaintiff must show “proof of disproportionate impact, measured in some plausible way,” which usually requires a plaintiff to “demonstrate with statistical evidence that the practice or policy has an adverse effect on the protected group.” The plaintiffs' claim relied on a study showing a “resource gap” between white and African-American grant recipients, based on the difference between total resources available to homeowners for rebuilding and the cost of rebuilding. The court found that the “resource gap” was an inappropriate benchmark for measuring the effect of the grant formula and that a more appropriate benchmark, such as the total value of OCD grants, showed African-American homeowners received more funding than white homeowners. The court reversed the trial court's injunction and remanded the case for further proceedings.

REGULATION Z - TRUTH IN LENDING ACT (TILA)

Effect of technical violations on right of rescission. In re: Fuller External Site, 642 F.3d 240 (1st Cir. 2011). After Deutsche Bank initiated foreclosure proceedings on the plaintiffs' residence, plaintiffs sued to rescind their mortgage transaction under a Massachusetts state law similar to TILA. The plaintiffs argued that the lender incorrectly identified the loan closing date in the rescission notice and failed to identify the date by which they would be allowed to rescind the mortgage. The First Circuit, relying on its prior cases, reiterated that “technical deficiencies do not matter if the borrower receives a notice that effectively gives him notice as to the final date for rescission and has the three full days to act.” The court noted that the plaintiffs signed the right to cancel forms and dated them August 12, 2003, and thus knew the correct closing date. Further, the rescission notice disclosed their right to cancel within three business days of the date of the transaction. The court therefore determined that the plaintiffs received adequate notice of their right to cancel. This case reflects a continued split between the First and Seventh Circuits about the effect of technical violations on the right of rescission. In the Seventh Circuit, technical violations of the rescission requirements can trigger the three-year rescission period.