On the Docket: Recent Federal Court Opinions
REGULATION B — EQUAL CREDIT OPPORTUNITY ACT (ECOA)
Sixth and Eighth Circuits issue conflicting decisions on the validity of Regulation B’s definition of “applicant” for the purposes of spousal signature rules. RL BB Acquisition, LLC v. Bridgemill Commons Development Group, LLC 
, 754 F.3d 380 (6th Cir. 2014) and Hawkins v. Community Bank of Raymore , 761 F.3d 937 (8th Cir. 2014). The scope of the ECOA is generally limited to credit applicants, except that implementing Regulation B — as promulgated by the Federal Reserve Board and later republished by the Consumer Financial Protection Bureau — defines “applicant” to include “guarantors” solely for the purposes of the spousal signature provisions of 12 C.F.R. §1002.7(d) . Outlook reviewed these provisions in 2008; see Carol Evans and Surya Sen, “Regulation B and Marital Status Discrimination: Are You in Compliance?” (Fourth Quarter 2008 Outlook). In these two recent cases involving alleged spousal signature violations, the creditors argued that Regulation B’s definition of “applicant” to include “guarantors” is contrary to Congress’s definition of “applicant” in Section 702 of the ECOA (15 U.S.C. §1691a(b) ) and its intent when it enacted the statute, and is therefore invalid. The Sixth and the Eighth Circuits issued conflicting decisions on this issue.
In Bridgemill, a husband and wife guaranteed a loan to the husband’s closely held corporation and were later sued in a collection action when the loan went into default. The wife argued that the creditor violated §1002.7(d) by requiring her guaranty and that the violation was an affirmative defense to the collection case against her. The district court held that the wife could not raise violations of the ECOA and Regulation B as an affirmative defense to the creditor’s breach-of-guaranty claim. On appeal, the Sixth Circuit reversed. First, the court addressed the creditor’s argument that the ECOA does not apply to guarantors. The court found that the ECOA’s definition of “applicant” was ambiguous and could “encompass all those who offer promises in support of an application — including guarantors, who make formal requests for aid in the form of credit for a third party.” The court also examined the Federal Reserve Board’s rationale when it included “guarantors” in Regulation B’s definition of “applicant” solely for purposes of §1002.7(d)(5) (which it referred to as the “spouse-guarantor rule”) and found it was reasonable. Accordingly, the court rejected the argument that the spouse guarantor rule is invalid.
The Sixth Circuit also reviewed the district court’s holding that a debtor cannot raise a spousal signature violation as a complete affirmative defense. The court found that the ECOA does not prohibit recoupment — a defense that goes to the foundation of a plaintiff’s claim by deducting from the plaintiff’s recovery all just allowances or demands accruing to the defendant with respect to the same contract or transaction — and that permitting it would further the ECOA’s goal of eradicating credit discrimination because a creditor violating the regulation can lose the guaranty. The case was remanded for further proceedings because the parties disputed whether the creditor required the spouse’s guaranty.
In Hawkins, the Eighth Circuit concluded, to the contrary, that guarantors are not applicants and therefore are not covered by the ECOA. A company obtained a loan for which the creditor required guaranties from the company’s principals and spouses. The business defaulted, and the creditor sought payment from the guarantors. The spouses filed a lawsuit alleging violations of §1002.7(d) and state law. The district court dismissed the case, concluding that guarantors are not applicants under the ECOA. On appeal, the Eighth Circuit affirmed. The court noted that the ECOA defines an applicant as a person who “applies to a creditor directly for … credit, or … indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.” The court found that a “guarantor does not request credit and therefore cannot qualify as an applicant under the unambiguous text of the ECOA.” This decision applies in the states of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.
REGULATION Z — TRUTH IN LENDING ACT (TILA)
Seventh and Ninth Circuits clarify the TILA requirement that consumers seeking rescission must return money or property received. Iroanyah v. Bank of America , 753 F.3d 686 (7th Cir. 2014) and Merritt v. Countrywide Financial Corp. , 759 F.3d 1023 (9th Cir. 2014). Under the TILA (15 U.S.C. §1635; 12 C.F.R. §1026.23 ), if warranted by the circumstances of a particular case, a court may require that a consumer exercising the right of rescission to first tender any money or property received from the creditor as a condition for granting rescission. Such a requirement does not present an issue when rescission is exercised during the regular three-day rescission period because Regulation Z prohibits creditors from disbursing the loan proceeds (other than in escrow) until after this period expires. However, the rescission period can be extended to three years if a creditor fails to provide two copies of the right to rescind or all material disclosures. When rescission is sought during the three-year period, tendering the disbursed funds or property can pose a challenge for consumers because the funds have already been disbursed. These two federal appeals court decisions have addressed whether a court can dismiss a rescission lawsuit if the borrower fails to establish the ability to tender the money or the property received.
In Iroanyah, the borrowers sought rescission because the lender allegedly only provided one copy of the notice of the right to rescind and was missing information in the TILA payment schedule. After the parties filed motions for summary judgment, the court ordered the borrowers to tender the money advanced to them within 90 days as a condition of granting rescission. When the borrowers failed to do this, the district court dismissed their rescission claim. On appeal, the borrowers argued that the district court erred in conditioning rescission upon their repayment, claiming that even if they were unable to tender the unpaid loan amount, they were still entitled to rescission because of the TILA violations. But the Seventh Circuit rejected this argument, indicating that “rescission is an equitable remedy involving mutual obligations” and holding that if a borrower cannot tender the money or property, rescission may not take place: “Tender is inherently part of rescission, not an occasional effect of it … a borrower’s inability to satisfy his tender obligations may make rescission, even if based on a TILA violation, impossible.” The court therefore affirmed the dismissal of the rescission claim.
In Merritt, the borrowers alleged they were entitled to rescission, nearly three years after consummation, because Countrywide provided a TILA disclosure statement in which the material disclosures were left blank. The district court granted Countrywide’s motion to dismiss at the pleading stage because the borrowers did not tender the rescindable value of their loan to Countrywide prior to filing suit or allege their ability to tender its value in their complaint. On appeal, the Ninth Circuit reversed, holding that a borrower seeking rescission does not have to state in the complaint the ability to tender the money or property. The court held that rescission requires a court to consider equitable factors, which can only be done on a fully developed evidentiary record. At the pleading stage (i.e., before discovery), some critical facts relevant to a rescission claim may not be known to the borrower. Thus, the court held that a creditor can raise the tender requirement as a defense to the rescission claim at the summary judgment stage, when the factual record will be complete and a court can evaluate equitable considerations, but a creditor cannot do so at the pleading stage, when the lawsuit is initially filed. The case was remanded for further proceedings.
U.S. Supreme Court agrees to review statute of limitations issue for filing rescission cases. Jesinoski v. Countrywide Home Loans, Inc., 134 S.Ct. 1935 (April 28, 2014). Pursuant to the TILA (15 U.S.C. §1635(a); 12 C.F.R. §1026.23(a) ), if a creditor fails to provide a consumer with two copies of the notice of the right to rescind or all material disclosures in a transaction in which a security interest is or will be retained or acquired in a consumer’s principal dwelling, the consumer’s right to rescind the credit transaction is extended from three business days to three years. The Supreme Court has agreed to resolve a split among the federal appeals courts as to whether a consumer exercises and thus preserves the right of rescission during the three-year period by notifying the creditor in writing within three years of consummation of the transaction, as the Third, Fourth, and Eleventh Circuits have held, or instead must file suit within three years of consummation of the transaction, as the First, Sixth, Eighth, Ninth, and Tenth Circuits have held. The case will be decided during the Supreme Court’s 2014–2015 term.
FAIR CREDIT REPORTING ACT (FCRA)
Eighth Circuit affirms dismissal of FCRA class-action lawsuit because violation was not willful. Hammer v. Sam’s East, Inc. , 754 F.3d 492 (8th Cir. 2014). The Fair and Accurate Credit Transactions Act (FACTA) amended the FCRA to prohibit persons accepting credit or debit cards from printing more than the last five digits of the card number or expiration date provided on an electronically printed receipt provided at the point of sale (15 U.S.C. §1681c(g)(1) ). The plaintiffs’ class-action lawsuit alleged that the defendant retailer violated this prohibition by printing membership numbers on receipts that included 10 digits of members’ credit card numbers. The district court dismissed the case. Although the court determined that the defendant violated the FCRA, it found the violation was not willful, a necessary requirement to impose statutory damages, and dismissed the case. On appeal, the Eighth Circuit affirmed, finding that the defendant’s interpretation of the relevant FCRA requirements was not objectively unreasonable, which is the legal standard for determining willful behavior under the FCRA pursuant to the Supreme Court’s FCRA decision in Safeco Ins. Co. v. Burr, 551 U.S. 47 (2007). The defendant interpreted the relevant FCRA requirements to prohibit printing more than five digits of a credit card number that is labeled as a credit card number but not apply to a membership number (even though it included 10 digits of a credit card number). Although the defendant’s interpretation was erroneous, the court found that it was not objectively unreasonable, especially because no authoritative guidance from a court or regulatory agency was available when the violation occurred. The court therefore affirmed the dismissal of the case.