Consumer Compliance Outlook: Fourth Issue 2021

On the Docket: Recent Federal Court Opinions

Fifth Circuit stays the effective date of the Consumer Financial Protection Bureau’s (Bureau) payday regulations, in latest step in litigation, until 286 days after the appeal challenging them is decided.

Community Financial Services Assoc. of America, Ltd. v. Consumer Financial Protection Bureau, No. 21-50826 (5th Cir. October 14, 2021). In 2017, the Bureau issued a final rule to regulate payday, vehicle title, and certain high-cost installment loans. See 82 Federal Register 54472 (November 17, 2017). The rule addressed two discrete topics. First, it imposed ability-to-repay (ATR) and associated recordkeeping and reporting requirements on covered short-term and longer-term balloon-payment loans (mandatory underwriting provisions). Second, the rule established certain requirements and limitations on attempts to withdraw payment from a consumer’s account for a covered short-term loan, longer-term balloon-payment loan, or high-cost installment loan after the second consecutive attempt if the prior attempts failed because of insufficient funds (payment provisions). The rule exempted certain loans from coverage, including accommodation loans when a lender and its affiliates make 2,500 or fewer covered loans in a calendar year and meet certain other requirements. On April 9, 2018, a trade group filed a legal challenge to the rule in the U.S. District Court for the Western District of Texas.

On June 17, 2019, the Bureau issued a final rule to delay the August 19, 2019, mandatory compliance date to November 19, 2020, and subsequently amended the rule to revoke the mandatory underwriting provisions, while the payment provisions remained in place. See 85 Federal Register 44382 (July 22, 2020). The district court then issued orders to stay the compliance date until finally granting summary judgment in favor of the Bureau in September 2021 and setting June 13, 2022, as the compliance date for the payment provisions. The trade group appealed and asked the Fifth Circuit to grant a temporary stay pending the outcome of the appeal. On October 14, 2021, the Fifth Circuit stayed compliance with the payment provisions until 286 days after the appeal is resolved.

Eleventh Circuit vacates its decision holding debt collectors sharing private consumer information with their vendors violates the Fair Debt Collection Practices Act and agrees to have the entire court review the appeal (en banc).

Hunstein v. Preferred Collection & Management Services, Inc., 17 F.4th 1103 (11th Cir. 2021)(en banc). In April 2021, the Eleventh Circuit held that a debt collector transmitting private debtor information to a third-party mail vendor violates the privacy protections of the Fair Debt Collection Practices Act (FDCPA). Hunstein v. Preferred Collection & Management Services, Inc., 994 F.3d 1341 (11th Cir. 2021). The defendant and several trade groups petitioned the court to rehear the case, arguing among other reasons that the Supreme Court’s subsequent decision on standing in TransUnion LLC v. Ramirez, 141 S. Ct. 2190 (2021) affected the ruling. In October, the court granted the petition and issued a new decision, Hunstein v. Preferred Collection & Management Services, Inc., 2021 WL 4998980 (11th Cir. October 28, 2021) that analyzed the standing issue in light of Ramirez and concluded, with one judge dissenting, that the plaintiff had standing and the debt collector violated the FDCPA by sharing private medical information about a debtor’s son with the debt collector’s third-party mail vendor (in effect, affirming its original decision). The Eleventh Circuit has now vacated the panel’s decision, and the entire court will hear the case en banc.

District court denies motion to dismiss class-action lawsuit alleging the way the available balance method in the opt-in notice disclosing the institution’s practices for overdraft fees violated Regulation E.

Grenier v. Granite State Credit Union, 2021 U.S. Dist. LEXIS 215349 (D.N.H. November 8, 2021). Regulation E prohibits a financial institution from imposing a fee on a consumer account to pay an overdraft for an ATM or one-time debit card transaction unless the consumer is provided with an opt-in notice describing the institution’s overdraft practices, and the consumer opts in. See 12 C.F.R. §1005.17(b). Institutions use either the actual or available balance method to assess overdraft fees. The actual balance (aka, the ledger balance) is based on a consumer’s actual account balance when an ATM or debit card transaction is initiated, while the available balance method examines the current balance and pending transactions and holds that could affect the balance. An overdraft is more likely to occur when the available balance method is used. In this case, the institution used the available balance method and disclosed its overdraft practices using Model Form A-9 of Regulation E, which states in relevant part: “An overdraft occurs when you do not have enough money in your account to cover a transaction, but we pay it anyway.” The institution’s account agreement disclosed its use of the “available balance” method.

The plaintiff’s class-action lawsuit alleged that disclosing the available balance method using the language from the model form violated Regulation E because it did not comply with the regulation’s requirement that disclosures be made in a “clear and readily understandable” way. See 12 C.F.R. §1005.4(a)(1). The institution argued its use of Form A-9 provided a safe harbor, but the court noted that under the Electronic Fund Transfer Act, which Regulation E implements, the safe harbor only applies to “any failure to make disclosure in proper form if a financial institution utilized an appropriate model clause issued by the Bureau or the Board.” See 15 U.S.C. §1693m(d)(2) (emphasis added). The court denied the motion to dismiss, which procedurally allows the lawsuit to proceed but does not decide the ultimate legal issues.

The Ninth Circuit, sitting en banc, rejects the city of Oakland’s Fair Housing Act (FHA) claim that it lost property tax revenue and had increased municipal expenses because of predatory mortgage loans.

City of Oakland v. Wells Fargo & Co., 14 F.4th 1030(9th Cir. 2021)(en banc). The city of Oakland, California’s lawsuit alleged Wells Fargo violated the FHA by targeting minority borrowers with predatory loans that harmed Oakland because of decreased property tax revenue and increased municipal expenditures when the loans disproportionately defaulted and went into foreclosure. Under the FHA, a person injured by a discriminatory housing practice has standing to file a suit for damages. A prior panel of the Ninth Circuit held that Oakland had sufficiently pleaded proximate cause for the decreased property tax revenue claim. But the court dismissed the municipal expenditure claim because Oakland had failed to plead proximate cause for the claim. The court reasoned that Oakland had not sufficiently accounted for other factors that could have increased its expenditures and remanded Oakland’s claim for injunctive relief to the district court to determine if Oakland satisfied the proximate cause requirement for this claim. See City of Oakland v. Wells Fargo & Co., 972 F.3d 1112, 1137 (9th Cir. 2020). Wells Fargo petitioned the court to rehear the case en banc, and the court granted the petition and vacated the panel’s decision. See 993 F.3d 1077 (9th Cir. 2021).

The en banc court noted that the U.S. Supreme Court clarified in a similar case that a municipality’s claim for lost tax revenue for an FHA violation was only actionable if it could establish “the harm alleged has a sufficiently close connection to the conduct the statute prohibits.” See Bank of America Corp. v. City of Miami, 137 S. Ct. 1296, 1305 (2017). The court therefore focused on whether Wells Fargo’s alleged lending practice proximately caused Oakland’s damages. The court noted the plaintiffs’ claims that “Wells Fargo’s discriminatory lending practices caused higher default rates, which in turn triggered higher foreclosure rates that drove down the assessed value of properties, and which ultimately resulted in lost property tax revenue and increased municipal expenditures. These downstream ‘ripples of harm’ are too attenuated and travel too ‘far beyond’ Wells Fargo’s alleged misconduct to establish proximate cause.”

Oakland argued that the City of Miami opinion upheld legal standing for Miami to assert claims similar to the ones Oakland is alleging here, and “[i]t would be illogical for Oakland to have standing under the FHA to pursue lost property taxes and increased municipal expenses, but still be unable to state a claim for those very same injuries under the FHA’s causation standard.” But the court said the standard for establishing legal standing is different from the standard for establishing proximate cause. Regarding proximate cause, the court noted the challenge in attributing Oakland’s damages to Wells Fargo’s lending practice. For example, a borrower could default on a loan for reasons unrelated to Wells Fargo’s lending practices “such as job loss, a medical hardship, a death in the family, a divorce, a fire or other catastrophe, Covid-19, broader economic trends, or any number of other unpredictable causes not present when the loan was made.”