Banking & Financial Services Newsletter - Fall 2014
This newsletter published by the Banking and Financial Services practice group of the litigation firm of Starnes Davis Florie LLP is provided as a summary of some of the recent developments and items of interest in the law and regulatory activity in 2014 impacting this practice area.
Encoding Warranty Shifts Liability From Payor Bank To Depository Bank
In addressing an issue of first impression, the Supreme Court of Alabama reversed the granting of a summary judgment against a payor bank for liability for the full face amount of a check ($100,000) when it paid the underencoded amount ($1,000) and failed to dishonor the check by the midnight deadline. The court found that liability for the payor bank’s loss in having to pay the full amount of the check from the payor’s account, which in the interim contained insufficient funds, could be shifted to the depository bank based on its encoding error pursuant to the warranty set forth in Alabama’s UCC provision, § 7-4-209 (1975).
Troy Bank and Trust Co. v. The City Citizen Bank, 2014 WL 4851511 (Sept. 30, 2014)
Bank Avoids Liability For Fraudulent On-Line Wire Transfer From Customer Bank Account
A bank customer cannot recover the monies ($440,000) stolen from its account through a fraudulent wire transfer request when the bank demonstrates that its security procedures, which included password protection, daily transfer limits and device authentication, were commercially reasonable, thus shifting the risk of loss to the customer under Missouri’s UCC fund transfer provision, the customer having declined to use the security procedures requiring two users to confirm the transfer. The bank also was entitled to recover its attorney’s fees pursuant to an indemnification provision in its customer agreement.
Choice Escrow and Land Title, LLC v. BancorpSouth Bank, 754 F.3d 611 (8th Cir. 2014)
Bank Violates Telephone Consumer Protection Act By Utilizing Phone Number Through Autodial Without Consent Of Current Subscriber
Under the Telephone Consumer Protection Act of 1991, autodialing of cell phones without express prior consent of the “called party” is a statutory violation. In this case, the multiple calls were deemed a violation even though the calls were intended for a former customer who had listed the number on the bank’s account application and the bank was not aware that the number was no longer assigned to the former customer. The court concluded that the “called party” for purposes of the Act was the current subscriber to that phone number, not the intended recipient.
Breslow v. Wells Fargo Bank, N.A., 755 F.3d 1265 (11th Cir., 2014)
Federal Reserve Board Final Rule Regarding Debit Card Transaction Interchange Fees Upheld
In our Spring 2013 Newsletter, we reported the decision of U.S. District Judge Richard Leon overturning the Federal Reserve rulemaking regarding restrictions on debit card transaction fees. On appeal, in this action brought by a merchant association against the Board of Governors of the Federal Reserve System, challenging the rule issued pursuant to the Electronic Funds Transfer Act (“EFTA”), and interpreting the provision of the Dodd-Frank Act known as the Durbin Amendment, which set the transaction fees that debit card issuers could charge to merchants’ banks, the court concluded that the card issuers could recover certain costs associated with the card usage under the EFTA through the transaction fee and not just “incremental” ACS costs, thereby affirming the restrictions established by the Federal Reserve on such fees. The court also affirmed that portion of the rule which required issuers to activate at least two unaffiliated networks for each debit card regardless of the method of authentication, pin or signature (known as the “anti-exclusionary rule.”)
NACS v. Board of Governors of the Federal Reserve System, 746 F.3d 474 (D.C. Cir. 2014)
Supreme Court Of U.S. To Decide Issue Of Right To Rescission Of A Mortgage Under Three-Year Statute Of Limitations If No Lawsuit Is Filed
In 2013, the U.S. Court of Appeals for the Eighth Circuit held that a borrower has the right to rescind a mortgage loan transaction based on certain statutory violations within three years of the transaction if notice to creditors is provided by the filing of a lawsuit. Because of the split among U.S. Circuit Courts of Appeal on this issue, the Supreme Court of the United States has heard and is expected to rule in this term on this issue.
Jesinoski v. Countrywide Home Loans, Inc., 729 F.2d 1092 (8th Cir. 2014)
Case Demonstrates How Loan Modification Process Utilized By Borrower Can Effectively Delay Foreclosure And Judgment For Years Following Default
Mortgage loan customer was successful in delaying foreclosure for several years through token efforts to obtain modification of loan without supplying all necessary information and by filing suit against the servicer (Bank of America and SPS) and holders of the mortgage (Bank of New York). However, the borrower failed in his efforts to prove any violation of RESPA based on his failure to submit a valid QWR or prove any damages resulting from any alleged violation. He also failed to demonstrate fraud or deceit in the review process for a loan modification, that the mortgage and note were invalid or unenforceable, or that payments made were not properly credited to his account. Thus, the defendant banks were entitled to summary judgment dismissing all claims made by the borrower.
Davis v. Bank of America, N.A., 2014 WL 5090692 (U.S.D.C. N.D. Ala. 2014)
Supreme Court Of The U.S. Likely To Hear Case Involving Use Of Disparate Impact To Prove Intentional Discrimination Under Fair Housing Act, Thereby Potentially Impacting Enforcement Under Equal Credit Opportunity Act
U.S. District Court for the District of Columbia found that the U.S. Department of Housing and Urban Development exceeded its statutory authority under the Fair Housing Act (“FHA”) by promulgating a rule allowing disparate impact (facially neutral practices with discriminatory effects) in addition to disparate treatment (intentional discrimination) claims. Based upon a thorough analysis of the FHA, the court concluded that the Act prohibits disparate treatment only. As the court stated, “This is yet another example of an administrative agency trying desperately to write into the law that which Congress never intended to sanction.”
This decision sets the stage for the same arguments to be presented in a case involving a similar challenge under the FHA now pending before the Supreme Court of the U.S. between a fair housing group and the Texas Department of Housing and Community Affairs. A ruling by the high court could directly impact the use of the disparate impact theory by the Consumer Financial Protection Bureau (“CFPB”) under the ECOA.
American Ins. Association v. U.S. Dept. of Housing and Urban Development, 2014 WL 5702711 (D.D.C. 2014).
The Dodd-Frank Act & Consumer Financial Protection Bureau
The impact of the Dodd-Frank Act and the regulatory empowerment of the Consumer Financial Protection Bureau (CFPB) began to be felt intensely in 2014 when regulations controlling virtually every aspect of home and other consumer financing became effective.
The complete impact of the “Ability to Repay” rule applicable to certain mortgage loans has yet to be determined. However, concerns still exist over how this rule will impact the availability of credit and the effects of the expanded consumer right to sue creditors for miscalculating a borrower’s financial fitness for a loan. This risk exists even though the “qualified mortgage” safe harbor exists.
The CFPB also issued its final rules in 2014, allowing mortgage lenders 210 days to fix errors in their calculation of points and fees and to reimburse borrowers for any overages. This rule also gives mortgage aggregators time to review and rectify any errors in loans they buy from other lenders and allows secondary market entities to pay refunds for errors made by the originator. The rule, however, allows borrowers to cut-off the ability to cure by taking legal action or by notifying the lender of their belief that they were overcharged.
In addition to the CFPB regulations, the FDIC approved a final rule requiring lenders to retain at least a 5% stake in loans that are securitized unless they meet the definition of “qualified residential mortgages,” which matches the CFPB “qualified mortgage” rule relating to loan underwriting.
Concern also still exists for potential higher penalties for even minor errors made on the new mortgage disclosure forms which are to go into effect in August 2015. These forms are to combine the RESPA and TILA disclosures and replace the HUD-1. Therefore, lenders could face enforcement actions and even class action lawsuits and damages under TILA for any violations.
The CFPB continues to take enforcement action under the Act based on its new mortgage servicing rules, as well as the Act’s provision allowing the CFPB to target unfair, deceptive and abusive practices. One such enforcement action was taken against Michigan based Flagstar Bank which was required to pay $37.5 million in restitution and fines for allegedly blocking homeowners from receiving foreclosure relief. The actions cited included taking too long to process applications for foreclosure relief and finalizing permanent loan modifications, failing to inform borrowers when applications were incomplete and denying loan modifications to alleged qualified borrowers.
On December 12, 2013, the CFPB issued its arbitration study preliminary results which were required under Section 1028(a) of the Dodd-Frank Act. The study focused on the use of pre-dispute arbitration contract provisions in connection with consumer financial products or services. The study points out the various arguments for and against the use of mandatory arbitration. The study also provides statistical data regarding the use of arbitration clauses, including arbitration filings. The Bureau also outlines what it intends to accomplish with further study, including a survey of consumers and their awareness and perceptions about arbitration, a comparison of the disposition of cases in arbitration and litigation, how outcomes are impacted by the presence of arbitration and the impact of arbitration clauses on the price of consumer products, among others.
The debate is likely to continue until the CFPB issues its findings and regulations regarding the use of mandatory arbitration provisions in consumer finance contracts. It is widely believed that the CFPB will propose the curtailment of mandatory arbitration in its findings and new regulations. As pointed out in our Spring 2013 newsletter, a decision to preclude or seriously limit the use of arbitration provisions could fly in the face of the Supreme Court’s ruling in Compucredit Corp. v. Greenwood, 1325 S.Ct. 665 (2012), which found that there must be an express command from Congress in order to deny arbitration rights under the FAA.