FYI: 9th Cir Holds No NBA Preemption for State Law on Escrow Accounts, TILA Escrow Account Rules Not Retroactive

The U.S. Court of Appeals for the Ninth Circuit recently held that that the National Bank Act did not preempt California's state escrow interest law, which requires financial institutions to pay at least 2 percent simple interest per annum on escrow account funds.

 

In so ruling, the Court also held that the federal Truth In Lending Act provisions for escrow accounts, at 15 U.S.C. § 1639d, did not apply to loans originated before the 2013 effective date of the provisions.

 

A copy of the opinion is available at:  Link to Opinion

 

In July 2008, the plaintiff purchased a home in California with a mortgage loan from a lender.  As a condition for obtaining a mortgage, the plaintiff was required to open a mortgage escrow account into which he paid $250 per month.  A bank purchased the lender and assumed control over the plaintiff's mortgage loan and escrow account. 

 

The plaintiff's mortgage loan provided that it "shall be governed by federal law and the law of the jurisdiction in which the Property is located."  The parties agreed that the terms of the mortgage loan documents required the bank to pay interest on escrow funds if required by federal law or state law that was not preempted.

 

The plaintiff sued the bank on behalf of himself and a putative class of similarly situated customers, alleging that the bank violated the "unlawful" prong of the California Unfair Competition Law ("UCL"), because the bank supposedly violated both California state law, Cal. Civ. Code § 2954.8(a), and federal law, 15 U.S.C. § 1639d(g)(3), by failing to pay interest on his escrow account funds.  The plaintiff also brought a breach of contract claim, alleging that the bank's failure to pay interest violated his mortgage agreement. 

 

The bank filed a motion to dismiss on the ground that California Civil Code § 2954.8(a) was preempted by the National Bank Act ("NBA").  The trial court granted the bank's motion to dismiss, concluding that California's escrow interest law "prevent[ed] or significantly interfere[d] with" banking powers and was preempted by the NBA.  This appeal followed.

 

The central issue for the Ninth Circuit Panel was whether the NBA preempted California Civil Code 2954.8(a).  As you may recall, section 2954.8(a) provides:

 

Every financial institution that makes loans upon the security of real property containing only a one- to four-family residence and located in this state or purchases obligations secured by such property and that receives money in advance for payment of taxes and assessments on the property, for insurance, or for other purposes relating to the property, shall pay interest on the amount so held to the borrower. The interest on such amounts shall be at the rate of at least 2 percent simple interest per annum. Such interest shall be credited to the borrower's account annually or upon termination of such account, whichever is earlier.

 

California Civil Code § 2954.8(a).

 

Section 1639d(g)(3) of the federal Truth in Lending Act, 15 U.S.C. 1601, et seq., ("TILA"), states:

 

(3) Applicability of payments of interest

If prescribed by applicable State or Federal law, each creditor shall pay interest to the consumer on the amount held in any compound, trust, or escrow account that is subject to this section in the manner as prescribed by that applicable State or Federal law.

 

15 U.S.C. § 1639d(g)(3).

 

The plaintiff borrower argued that TILA's plain language -- which requires creditors to pay interest on escrow fund accounts like his if "prescribed by applicable" state law -- made clear that Congress perceived no conflict between state laws like California Civil Code § 2954.8(a) and the powers of national banks, and therefore Congress did not intend for these state laws to be preempted by the NBA.

 

The bank countered that such state laws were preempted because they prevent or significantly interfere with the exercise of its banking powers, and a preempted law cannot be an "applicable" law under section 1639d(g)(3).

 

The Ninth Circuit Panel began its analysis by examining Dodd-Frank's amendments to the NBA preemption framework.  As you may recall, Dodd-Frank addressed the preemptive effect of the NBA in several ways.

 

First, it emphasized that the legal standard for preemption set forth in Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996), applied to questions of whether state consumer financial laws were preempted by the NBA.  12 U.S.C. § 25b(1)(B).

 

Second, it required the Office of Comptroller of the Currency ("OCC"), which regulates national banks, to follow specific procedures in making any preemption determination.  12 U.S.C. § 25b(1)(B), 25b(b)(3)(B).

 

Third, it clarified that the OCC's preemption determinations were entitled only to Skidmore deference.  12 U.S.C. § 25b(b)(5)(A); Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944) (explaining that an agency 's views were "entitled to respect" only to the extent that they had the "power to persuade").

 

Before Dodd-Frank, as the Ninth Circuit explained, the Supreme Court of the United States held in Barnett Bank that states were not "deprive[d] " of the power to regulate national banks, where "doing so does not prevent or significantly interfere with the national bank's exercise of its powers" under the NBA.  Barnett Bank of Marion County, N.A., 517 U.S. at 33.

 

Following Barnett Bank, the OCC issued in 2004 its interpretation of the NBA preemption standard:  "Except where made applicable by Federal law, state laws that obstruct, impair, or condition a national bank's ability to fully exercise its Federally authorized real estate lending powers to not apply to national banks."  12 C.F.R. § 34.4(a) (effective Jan. 13, 2004).

 

Thus, according to the Ninth Circuit, only the Dodd Frank Act amendment that required the OCC to follow specific procedures in making preemption determinations was a change in the law.  The Court further notes that the other amendments merely codified existing law as set forth by the Supreme Court.

 

Although the Panel had never addressed whether the OCC's interpretation was inconsistent with Barnett Bank, or whether the regulation was owned deference while it was in effect, the Panel acknowledged that the Supreme Court has ruled that the regulations of this kind should receive, at most, Skidmore deference -- and even then, only as to a conflict analysis, and not as to the legal conclusion on preemption.  See, e.g., Wyeth v. Levine, 555 U.S. 555, 576-77 (2009).

 

The Panel determined that under Skidmore, the OCC's regulation was entitled to little, if any, deference in light of Barnett Bank, even before the enactment of Dodd-Frank.  In other words, the OCC simply adopted the Supreme Court's articulation of the applicable preemption standard in prior cases, but did so inaccurately according to the Panel, because it did not conduct its own review of the specific potential conflicts on the ground. 

 

The Ninth Circuit explained that in Dodd-Frank, Congress underscored that Barnett Bank continued to provide the preemption standard; that is, state consumer financial law is preempted only if it "prevents or significantly interferes with the exercise by the national bank of its powers" under the NBA. 12 U.S.C. § 25b(b)(1)(B).  Thus, the Panel determined that the bank must demonstrate that the state law prevented or significantly interfered with its national banking powers.

 

The Court then turned to the issue of whether section 2954.8(a) prevented the bank from exercising its national bank powers or significantly interfered with the bank's ability to do so.

 

The Ninth Circuit noted that TILA requires banks to pay interest on escrow account balances "[i]f prescribed by applicable State [] law."  15 U.S.C. § 1639d(g)(3).  The Supreme Court recently explained that "applicable" meant "capable of being applied: having relevance" or "fit, suitable, or right to be applied: appropriate."  Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 69 (2011). 

 

This language, according to the Ninth Circuit, expressed Congress's view that such laws would not necessarily prevent or significantly interfere with a national bank's operations.  

 

The bank relied on the OCC's pre-Dodd-Frank preemption rule, 12 C.F.R. § 34.4(a) (2004).  The bank argued that state escrow interest law necessarily prevented or significantly impaired its real estate lending authority. 

 

However, the Ninth Circuit noted that the OCC's rule specifically altered the language of section 34.4(b) to clarify that state laws "that [were] made applicable by Federal law" (which would include Dodd-Frank's TILA amendments) "are not inconsistent with the real estate lending powers of national banks -- to the extent consistent with [Barnett Bank]."  12 C.F.R. § 34.4(b)(9)(2011).

 

Thus, the Court rejected the bank's argument based on the pre-Dodd-Frank preemption rule.

 

Additionally, the Ninth Circuit was not persuaded by the bank's cited cases. 

 

Flagg v. Yonkers Savings & Loan Association, 396 F.3d 178, 182 (2d Cir. 2005), concerned the Office of Thrift Supervision's ("OTS") authority to regulate federal savings associations, and the Second Circuit based its ruling on the OTS's field preemption over the regulation of such associations.  Unlike the OTS, as the Panel noted, the OCC did not enjoy field preemption over the regulation of national banks.

 

First Federal Savings and Loan Association of Boston v. Greenwald, 591F.3d 417, 425 (1st Cir. 1979), concerned a direct conflict between a state regulation requiring payment of interest on certain escrow accounts and a federal regulation expressly stating that no such obligation was to be imposed on federal savings associations "apart from the duties imposed by this paragraph" or "as provided by contract."  The Panel explained that unlike the regulation in First Federal, there was no federal regulation in this case that directly conflicted with section 2954.8(a).

 

Because the Court held that the bank did not demonstrate that state escrow interest laws prevented or significantly interfered with its exercise of national bank powers, and because Congress in enacting Dodd-Frank indicated that they do not, the Ninth Circuit Panel concluded that the NBA did not preempt California Civil Code § 2954.8(a).

 

Next, the Ninth Circuit examined the plaintiff's two claims for relief. 

 

The bank argued that the plaintiff's UCL claim cannot proceed because his escrow account was created before section 1639d's effective date of January 21, 2013. 

 

As you may recall, section 1639d(a) states that "a creditor, in connection with the consummation of a consumer credit transaction secured by a first lien on the principal dwelling of the consumer … shall establish, before the consummation of such transaction, an escrow or impound account … as provided in, and in accordance with, this section."  15 U.S.C. § 1639d(a).

 

The Ninth Circuit held that the use of the language "shall establish, before the consummation of such transaction" indicated that Congress intended section 1639d to apply to accounts established pursuant to that section after it took effect in 2013. 

 

Because the plaintiff obtained the subject mortgage loan in 2008, the Ninth Circuit Panel concluded that the plaintiff cannot rely on section 1639d to prosecute his UCL claim.

 

However, the Panel found that the plaintiff could still obtain relief under the UCL because California Civil Code § 2954.8(a) was not preempted by the NBA.  Because the bank was required to follow the state law, the Ninth Circuit held that the plaintiff borrower could proceed on his UCL claim based on the theory that the bank violated the UCL by failing to comply with section 2954.8(a).

 

Additionally, the Court also held that the plaintiff may proceed on his breach of contract claim because his mortgage required the bank to pay escrow interest if "Applicable Law requires interest to be paid on the Funds." 

 

Accordingly, the Ninth Circuit Panel reversed the trial court's dismissal of the putative class action.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: SD Fla Rejects Borrower's Effort to Exclude Evidence of Reasonableness of Lender-Placed Insurance Premiums

The U.S. District Court for the Southern District of Florida recently denied a borrower's motion to exclude testimony of an insurer's expert regarding the reasonableness of lender-placed insurance premiums levied upon the borrower's mortgage loan.

 

In so doing, the Court rejected the borrower's argument that the expert testimony failed to address claims that the insurer colluded with its mortgage servicer to inflate insurance premiums, concluding that the borrower's objection goes to the weight, rather than the admissibility of the testimony, and that testimony concerning the Insurer's compliance with applicable rules, regulations and industry standards would assist the trier in fact. 

 

The Court further concluded that the expert's opinions need not rely upon particular methodology, but were admissible based upon his knowledge and experience.

 

A copy of the opinion is available at:  Link to Opinion

 

A borrower's ("Borrower") mortgage loan servicer ("Servicer") obtained lender-placed hazard and flood insurance as to the Borrower's property.  The Borrower sued, alleging that the lender-placed insurer's ("Insurer") policy premiums were considerably higher than comparable premiums through other carriers, and that the Servicer outsourced some of its servicing activities to the Insurer in a scheme to manipulate the lender-placed insurance policies to allot commission to the Insurer. 

 

The Borrower asserted causes of action against the Servicer for alleged violations of the federal Real Estate Settlement Procedures Act (RESPA), and against the Insurer for alleged tortious interference with the Borrower's relationship with the Servicer.

 

To defend the Borrower's claims, the Insurer retained an expert (the "Expert"), who prepared a report which opined that: (1) lender-placed insurance in and of itself means higher risk, meaning a higher premium; (2) the annual premium was reasonable and consistent with the significantly higher risk, and; (3) the premiums were not overpriced and were at levels dictated by statute.

 

While acknowledging that the Expert was sufficiently qualified to prepare the report, the Borrower moved to exclude the Expert's testimony, arguing that the Insurer failed to meet its burden to demonstrate that its expert's opinions were based upon reliable methodology, would not assist the triers of fact, and did not comply with the requirements of Rule 26.  Fed. R. Evid. 702;  McDowell v. Brown, 392 F.3d 1283, 1298 (11th Cir. 2004).

 

As you may recall, federal courts apply the Daubert standard for admitting scientific expert testimony, wherein judges are tasked with a "gatekeeping," role concerning the admission of expert testimony under Rule 702.  Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 592-593 (1993)).

 

Applying the Daubert methodology, the Court first addressed the Borrower's argument that the Expert's opinions were not based on any methodology, and did not use either of the methodologies endorsed by the National Association of Insurance Commissioner. 

 

The Court rejected the Borrower's argument, and held that the Expert need not use a particular methodology in arriving at his conclusions, and were reliable based upon his knowledge and experience.   See, e.g., Am. Gen. Life Ins. Co. v. Schoenthal Family, LLC, 555 F.3d 1331, 1338 (11th Cir. 2009) ("Standards of scientific reliability, such as testability and peer review, do not apply to all forms of expert testimony. . . . A district court may decide that nonscientific expert testimony is reliable based upon personal knowledge or experience.") (citations omitted).

 

Next, the Borrower argued that the Expert's testimony would not assist the trier of fact because his report does not "address [] Plaintiff's contention that collusion between the defendants inflated the premium." The insurer argued that the proffered testimony would be helpful to the trier of fact to establish that the Insurer "complied with the applicable rules, regulations, and industry standards." 

 

Again, the Court rejected the Borrower's argument, holding that the Borrower's objection goes to the weight, rather than the admissibility of the Expert's testimony, and is more appropriately the subject of cross-examination.

 

Lastly, the Court concluded that the Expert report's appendix listing all materials used in arriving at his conclusions met the standard under Federal Rule of Civil Procedure 26 that an expert report disclose the "facts and data considered by the witness."

 

Accordingly, the Borrower's motion to exclude the proposed expert testimony proffered by the Insurer was denied.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 6th Cir Rules "No Standing" for FDCPA Plaintiff

The U.S. Court of Appeals for the Sixth Circuit held that a plaintiff asserting only a bare violation of the federal Fair Debt Collection Practices Act ("FDCPA") failed to identify a cognizable injury traceable to the defendant's alleged conduct, and therefore failed to demonstrate Article III standing. 

 

In so ruling, the Sixth Circuit reversed the trial court, and dismissed the appeal and underlying case for lack of jurisdiction.

 

A copy of the opinion is available at:  Link to Opinion

 

After the borrowers ("Borrowers") defaulted on their mortgage loan, the loan servicer ("Servicer") initiated foreclosure proceedings against them.

 

Subsequently, an attorney ("Attorney") for the law firm representing the Servicer ("Law Firm") sent a letter to the Borrowers on June 8, 2010 containing a Warranty Deed-in-Lieu of Foreclosure and stating that if the Borrowers executed the deed, the Servicer "has advised me that it will waive any deficiency balance."  The Borrowers executed the deed on June 24, 2010.

 

On June 30, 2010, the Attorney sent a letter to the Borrowers' attorney confirming receipt of the executed deed and reaffirming that the Servicer "will not attempt to collect any deficiency balance which may be due and owing after the sale of the collateral." 

 

Three weeks later, the Servicer dismissed the foreclosure complaint.  Thereafter, the Servicer began calling the Borrowers again to collect on debt they no longer owed.  The Borrowers stated that they did not have to pay anything in light of the deed.  The Servicer realized it made a mistake and the Borrowers owed nothing more. 

 

The Borrowers then filed a lawsuit in 2011 against the Servicer, an employee of the Servicer, the Law Firm, and Attorney. 

 

The Attorney and Law Firm moved to dismiss the claims against them.  The trial court dismissed the claim based on the June 8 letter because it was time barred but denied dismissal as to the remaining claims. 

 

After discovery, the Attorney and the Borrowers each moved for summary judgment, and the trial court ruled in favor of the Borrowers, reasoning that the Attorney's June 30 letter to the Borrowers' attorney "fail[ed] to disclose" that it was a "communication . . . from a debt collector" in violation of 15 U.S.C. § 1692e(11). 

 

Believing that Ohio law incorporates federal requirements, the trial court also ruled that the Attorney violated Ohio statute by failing to make the section 1692e(11) disclosure in the June 8 and June 30 letters and by failing to provide the notice required by section 1692g(a) within five days of the initial communication with the consumer.

 

The Borrowers were awarded $1,800 in statutory damages, $312 in costs, and $74,196 in attorney's fees.

 

After claims with the remaining defendants were resolved, the Attorney and Law Firm appealed.

 

On appeal, the Attorney and Law Firm argued: (1) the trial court lacked jurisdiction because the Borrowers did not have standing to assert their claims, (2) the June 30 letter sent to the Borrowers' attorney did not violate the FDCPA because it was not a "communication with a consumer," (3) they did not violate Ohio law because it does not incorporate the requirements of federal law and the case did not involve a "consumer transaction" or "supplier" as required under Ohio law, and (4) the trial court abused its discretion in awarding disproportionate attorneys' fees.

 

The Sixth Circuit only addressed the first issue, as it ultimately determined that it lacked jurisdiction because the Borrowers did not demonstrate Article III standing.

 

In analyzing the issue, the Court noted that the "'irreducible constitutional minimum' for standing requires the [Borrowers] to show (1) a particular and concrete injury, (2) caused by [the Attorney] and (3) redressable by the courts."  The Sixth Circuit held that the Borrowers did not meet this burden. 

 

In so ruling, the Court acknowledged that the Borrowers made allegations with respect to each element of the cause of action under the FDCPA: (1) the Borrowers received a letter from the Attorney about a debt implicating a duty established by the FDCPA, (2) the letter failed to include the required disclosure, and (3) they sought statutory damages. 

 

"These kinds of allegations usually eliminate any doubts about Article III standing and usually allow the parties and the court to move on to the merits.  But usually is not always."

 

Citing Spokeo, the Sixth Circuit determined that "[w]hat makes this case different is that [the Attorney] challenges Congress's authority to create this injury – to create an injury in fact that involves no harm of any sort that could satisfy the injury-in-fact requirements of Article III." 

 

Notably, the Borrowers admitted that what the Attorney said in his letter "turned out to be true."  Moreover, "[f]ar from causing [the Borrowers] injury . . . the June 30 letter gave them piece of mind, and they have never testified otherwise," and "no one plausibly argues (or even alleges) that the [Borrowers] suffered any actual injury or damages from the letter."  Instead, the letter "had nothing to do with the true source of [the Borrowers'] anxiety," which was the Servicer's phone calls seeking a deficiency.

 

Under these facts, the Sixth Circuit determined that the only thing left was "the possibility that Congress's creation of a statutory injury and damages suffices to satisfy Article III's standing imperative." 

However, again relying on Spokeo, the Sixth Circuit ruled that the Borrowers "must point to some harm other than the fact of 'a bare procedural violation,'" because "[n]ot all procedural violations, not even all inaccuracies, cause real harm." 

 

Further citing Spokeo, the Sixth Circuit stated that "[a]lthough Congress may 'elevate' harms that 'exist' in the real world before Congress recognized them to actionable legal status, it may not simply enact an injury into existence, using its lawmaking power to transform something that is not remotely harmful into something that is." 

 

Here, the relevant provision of the FDCPA requires debt collectors to disclose in their "communications [with consumers] that the communication is from a debt collector," and entitles individuals to sue for failure to comply with that requirement.  15 U.S.C. § 1692e(11). 

 

The Court held:

 

-"Nowhere in the Act (or for that matter the legislative record) does Congress explain why the absence of such a warning always creates and Article III injury." 

 

-"Because Congress made no effort to show how a letter like this would create a cognizable injury in fact and because we cannot see any way in which that could be the case, we must dismiss this claim for lack of standing." 

 

-"For the same reason that the [Borrowers] lack standing to bring the federal claim, they lack standing to bring the state-law claims, which rely on incorporating the federal law wholesale."

 

Accordingly, the Sixth Circuit reversed the trial court's ruling finding subject matter jurisdiction, vacated its order entering summary judgment for the Borrowers, and dismissed the case for lack of jurisdiction.  

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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