FYI: OCC Issues Final Rule to Fix Madden, and Clarify the Validity of the "Valid When Made" Doctrine

The Office of the Comptroller of the Currency (OCC) recently issued its final rule clarifying the "Permissible Interest on Loans that are Sold, Assigned, or Otherwise Transferred". 

 

The OCC adopted the rule as proposed.

 

A copy of the Federal Register Notice is available at:  Link to Notice

 

Effective Date:

 

The OCC states that its final rule "applies to all national banks and state and federal savings associations and will take effect 60 days after publication in the Federal Register," which is expected imminently.

 

Parallel FDIC Rulemaking:

 

As we previously reported, in late 2019, the OCC and the Federal Deposit Insurance Corporation (FDIC) both issued a proposed rules to "fix" the potential problems arising from the ruling in Madden v. Midland Funding, LLC, 786 F.3d 246 (2nd Cir. 2015), which called into question the "valid when made" doctrine.

 

The OCC notes that the "FDIC's proposed regulatory text also would address additional subsequent events, including changes in state law and changes in the relevant commercial paper rate."  On this issue, the OCC states its position that "the result would generally be the same for loans made by OCC-regulated banks."

 

DISCUSSION:

 

As you may recall, federal law in part allows national banks and federal savings associations to charge interest at the "most favored lender" rate -- i.e., the maximum rate permitted to any state-chartered or licensed lending institution in the state where the bank is located -- and authorizes national banks and federal savings associations to make contracts and engage in the business of banking, including making, purchasing, and selling loans.

 

FDIC-insured state banks generally have parallel rights under other federal law.

 

However, as we reported in our prior update, the U.S. Court of Appeals for the Second Circuit in Madden essentially held that loans that are completely legal when made by a national bank subsequently become illegal if the national bank sells or assigns them to a non-national bank purchaser or assignee.

 

According to the Second Circuit, the federal banking laws only preempt state usury laws as long as the loan remains in the hands of a national bank, but not if the loan is subsequently sold or assigned to an entity that is not a national bank or a person collecting interest for a national bank.

 

This meant that the loan purchaser defendant in the Madden case, which was not a national bank or a person collecting interest for a national bank, violated the federal Fair Debt Collection Practices Act by charging illegal interest on the loans it purchased from national banks.

 

The Supreme Court of the United States subsequently denied the defendant's petition for a writ of certiorari in June of 2016.  This essentially allowed the Madden ruling to stay in effect.

 

The OCC states that its final rule "clarifies that when a bank transfers a loan, the interest permissible before the transfer continues to be permissible after the transfer."

 

Importantly, in issuing its final rule, the OCC expressly considered -- and rejected -- several issues raised by various commenters, including:

 

-  "[T]he OCC does not have the authority to issue this regulation";

 

-  "[T]he OCC's proposal was subject to, but did not comply with, the substantive and procedural provisions in 12 U.S.C. 25b"; 

 

-  There is no need for the rule, as there is "no evidence that legal uncertainty" under Madden and similar rulings "has had negative effects on banks or markets";

 

-  "[T]he OCC's proposal did not comply with the Administrative Procedure Act (APA)";

 

-  The OCC's rule "would facilitate predatory lending by promoting rent-a-charter relationships and allowing nonbanks to evade otherwise applicable state law".

 

 

 

 

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: 4th Cir Holds Non-Mortgage Office Was Not "Branch Office" Under HUD F2F Rule

The U.S. Court of Appeals for the Fourth Circuit recently held that a mortgagee's office that was located within 200 miles of the mortgaged property, but did not conduct any mortgage-related business, was not a "branch office" of a "mortgagee" under the HUD rule requiring a face-to-face meeting with mortgage borrowers before filing a mortgage foreclosure action unless the mortgagee does not have a branch office within 200 miles of the borrower's home.

 

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

 

The borrower purchased her home in Virginia and fell behind on her mortgage payments. The mortgagee's trustee filed a mortgage foreclosure action.

 

The borrower sued the mortgage holder and the trustee in federal court "seeking damages and rescission of the foreclosure" because the mortgagee "improperly initiated foreclosure without first offering her a face-to-face meeting, as required by regulations promulgated by the Department of Housing and Urban Development ("HUD") and incorporated into [borrower's] deed of trust."

 

The mortgagee defendants moved to dismiss the complaint, arguing that the mortgagee "was exempt from the face-to-face meeting requirement under 24 C.F.R. § 203.604(c)(2), which excuses the meeting  when the 'mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either[,]'" because the mortgagee's "Richmond office — the only one within 200 miles of [borrower's] home — conducted no mortgage-related business and was not open to the public, [and thus] did not qualify as a 'branch office' of a 'mortgagee,' and so the exception applied."

 

The trial court dismissed the complaint, concluding that the "Richmond office was not a mortgagee's 'branch office' within the meaning of 24 C.F.R. § 203.604(c)(2)[,]" reasoning that "the 'proper interpretation of a mortgagee's branch office is one where some business related to mortgages is conducted.'"

 

The borrower appealed the dismissal of her complaint.

 

On appeal, the Fourth Circuit addressed "only one question: Does a bank office qualify as a 'branch office' of a 'mortgagee' under 24 C.F.R. § 203.604(c)(2) if it does not conduct any mortgage-related business?"

 

The Court answered "no," explaining that "the regulations generally require that a mortgagee 'must have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting, before three full monthly installments due on the mortgage are unpaid,' and in any event, 'at least 30 days before foreclosure is commenced.'"

 

However, "there are exceptions, and the one that is relevant here applies when '[t]he mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either.'"

 

Although the mortgagee's Richmond office was less than 200 miles from the borrower's home, the Fourth Circuit reasoned that "[w]e do not think the text of § 203.604(c)(2) can be read to encompass an office at which no mortgage-related business is conducted."

 

The Court explained that this is because the words "branch office" do not "stand alone" and must be read together with the words of a 'mortgagee,' … for purposes of a regulation governing face-to-face meetings between mortgage lenders and their borrowers. In that context, we think it is clear that what is contemplated, at a minimum, is an office at which some business related to mortgages is done."

 

The Fourth Circuit also noted that its "reading also is fully consistent with the purpose of the regulatory scheme" because "[t]he face-to-face meeting regulation was promulgated under 12 U.S.C. § 1715u(a), which requires mortgagees holding federally insured loans … to 'engage in loss mitigation actions' in order to 'provid[e] an alternative to foreclosure.' The regulation advances that statutory objective by making in-person meetings available, where reasonably feasible, to facilitate the discussion of loss-mitigation options. But an office that does no mortgage-related business at all, even if within 200 miles of a mortgagor's home, will be poorly positioned to discuss the mortgage-specific loss-mitigation options by statute, such a special forbearance, loan modification, preforeclosure sale, support for borrower housing counseling, subordinate lien resolution, borrower incentives, and deeds in lieu of foreclosure.'"

 

The Court added in closing that "defining a mortgagee's 'branch office' as one that conducts mortgage-related business is broadly consistent with the functional approach taken in other banking statutes to the 'branch office' question."  For example, "[i]n Cades v. H & R. Block, Inc. we considered 12 U.S.C. § 3, which governs 'branch banks,' and recognized that an office will not qualify unless it transacts 'branch business by accepting deposits, paying checks, or lending money.'"

 

The Fourth Circuit concluded that even though the regulation at issue does define "branch office," it agreed with the trial court "that applying the same functional analysis to § 203.604(c)(2) produces a 'common sense' definition of 'branch office' consistent with the regulatory text and purpose" and affirmed "the trial court's judgment granting the defendants' motions to dismiss." 

 

 

 

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: 7th Cir Holds Putative Class Plaintiff Had Standing On "Private" Rights Claim, But Not "Public" Rights Claim

The U.S. Court of Appeals for the Seventh Circuit recently reversed a trial court's order remanding a plaintiff's claims under the Illinois Biometric Information Privacy Act (BIPA) back to state court for lack of subject-matter jurisdiction because she lacked standing under Article III.

 

In so ruling, the Seventh Circuit concluded that the plaintiff's claims that a vending machine operator's collection and retention of her fingerprints without obtaining written release or proper written disclosure in violation of section 15(b) of BIPA established an invasion of personal rights both concrete and particularized to establish a concrete injury-in-fact necessary to confer standing under Article III. 

 

However, because the plaintiff's claims under section 15(a) for failure to provide a retention schedule and guidelines for permanently destroying the stored biometric information constituted a duty owed to the public generally, no particularized harm resulted to establish standing for this claim under Article III.

 

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

 

A call center employee ("Consumer") utilized a vending machine at her place of employment that did not accept cash, instead requiring users to establish an account to accept payment using fingerprints.  Fingerprints are "biometric identifiers" under the Illinois Biometric Information Privacy Act, 740 ILCS 14 (BIPA), which requires collectors of this material to obtain the written informed consent of any person whose data is acquired.

 

The Consumer filed a putative class action complaint in state court against the owner and operator of the vending machines ("Vendor") alleging violations of section 15(a) of the BIPA for never making a retention schedule and guidelines for permanently destroying the biometric identifiers and stored information publicly available, and; section 15(b) of the BIPA for never informing Plaintiff in writing that her biometric identifier (fingerprint) was being collected or stored, the specific purpose and length of term for which it was being collected, stored, and used, or obtaining a written release to collect, store, and use her fingerprint. 

 

Although the Consumer did not assert that she did not know that her fingerprint was being collected and stored, as she voluntarily created an account and regularly used the vending machines, she alleged that failure to make the requisite disclosures denied her the ability to give informed written consent as required by section 15(b) and resulted in the loss of the right for her, and others similarly situated, to control their biometric identifiers and information.

 

The Vendor removed the action to federal court under the Class Action Fairness Act (CAFA), 28 U.S.C. § 1332(d), on the basis of diversity of citizenship and an amount in controversy exceeding $5 million.  The Consumer moved to remand the action back to state court on the basis that the trial court did not have subject-matter jurisdiction because she lacked the concrete injury-in-fact necessary to satisfy the federal requirement for Article III standing, but not required under Illinois state law. Rosenbach v. Six Flags Entm't Corp., 432 Ill. Dec. 654 (Ill. 2019). 

 

The trial court found that Vendor's alleged violations of sections 15(a) and (b) of the BIPA were bare procedural violations that caused the Consumer no concrete harm, and remanded the action to the state court for lack of standing. The Vendor's petition to appeal the remand order was accepted by the Seventh Circuit and the instant appeal ensued.

 

In a role reversal from arguments typically seen in such statutory violation cases, the Vendor assumed the burden of establishing the Consumer's Article III standing as the party invoking federal jurisdiction. 

 

As you may recall, to confer federal standing under Article III, a plaintiff must satisfy three requirements: (1) she must have suffered an actual or imminent, concrete and particularized injury-in-fact; (2) there must be a causal connection between her injury and the conduct complained of; and (3) there must be a likelihood that this injury will be redressed by a favorable decision. Lujan v. Defs. of Wildlife, 504 U.S. 555, 560–61 (1992). 

 

Here, only the first element was at issue on appeal. As the Supreme Court explained in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), a "concrete" injury must actually exist but need not be tangible.  Spokeo at 1548-49.  While a legislature may "elevate to the status of legally cognizable injuries concrete, de facto injuries that were previously inadequate in law," "a bare procedural violation, divorced from any concrete harm," does not "satisfy the injury-in-fact requirement of Article III." Id.

 

The Vendor argued that the BIPA elevated a person's inherent right to control their body, including associated biometric identifiers and information, and that a violation or trespass upon this right is a concrete injury-in-fact for standing persons.  Although the Illinois Supreme Court did not consider federal Article III standing requirements, the Vendor argued that its analysis and holding in Rosenbach – that section 15(b) of BIPA confers a right to receive certain information from an entity that collects, stores, or uses a person's biometric information, and the violation of that right is a "real and significant" injury – also constitutes a "concrete" injury to confer federal standing under Article III here. Rosenbach, 432 Ill. Dec. at 663. 

 

Considering the Consumer's Article III standing under BIPA as a question of first impression, the Seventh Circuit looked to Spokeo, where the Supreme Court of the United States examined Article III standing for claims raised under the federal Fair Credit Reporting Act.  Although the SCOTUS in Spokeo did not rule one way or the other on the plaintiff's standing, instead finding that the Ninth Circuit used the wrong test for injury-in-fact and remanding for application for the proper test (Spokeo at 1548), Justice Thomas's concurrence drew a useful distinction between two types of injuries: the first arising when a private plaintiff asserts a violation of her own rights, and the second when a private plaintiff seeks to vindicate public rights.  Spokeo at 1551-52.

 

Applying this rubric, the Seventh Circuit found that the Consumer's claims that the Vendor's failure to comply with section 15(b) violated her personal privacy and rights was sufficient to show injury-in-fact without further tangible consequences, and confer Article III standing. 

 

Moreover, in analyzing the Consumer's section 15(b) claims as a type of "informational injury" — where information required by statute to be disclosed to the public is withheld — the Seventh Circuit reached the same result. 

 

Because the Vendor's alleged failure to provide obligatory Section 15(b) disclosures "deprived [Consumer] of the ability to give the informed consent section 15(b) mandates" this deprivation was a concrete injury.  See Bensman v. U.S. Forest Serv., 408 F.3d 945, 955–56 (7th Cir. 2005) (injury inflicted by nondisclosure is concrete if the plaintiff establishes that the withholding impaired her ability to use the information in a way the statute envisioned).

 

However, the Seventh Circuit reached a different conclusion as to the Consumer's claims under section 15(a), which obligates private entities that collect biometric information to make publicly available a data retention schedule and guidelines for permanently destroying collected biometric identifiers and information.  Because this duty is owed to the public generally, the Seventh Circuit concluded that the Consumer suffered no concrete and particularized injury as a result of the violation, and therefore lacked standing under Article III to pursue her section 15(a) claim in federal court.

 

Accordingly, the Seventh Circuit reversed the judgment of the trial court remanding the action to state court, and remanded the case to federal trial court for the Consumer's claim under section 15(b) of BIPA to proceed consistent with its opinion.

 

 

 

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

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

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