The National Bank Act does not preempt claims brought by the Mississippi Attorney General based on a violation of the state consumer protection act in a suit against Capital One Financial Corp., Citigroup, Discover Financial Services, HSBC Holdings, Bank of America and JPMorgan Chase, the Fifth U.S. Circuit Court of Appeals has determined.
Alleging that each of the six defendants violated the Mississippi Consumer Protection Act by charging consumers for products they did not want or need, Attorney General Jim Hood filed suit in state court. The defendants removed the case to federal court and filed a motion to dismiss, arguing that the state claims were preempted by the federal National Banking Act.
A U.S. district judge agreed, but the federal appellate panel reversed and remanded for the district court to determine whether “substantial federal question jurisdiction” existed outside of the National Banking Act or the Class Action Fairness Act.
At issue in the appeal: Payment Protection Plans offered by the defendants to customers. The state of Mississippi claimed that the defendants committed unfair and deceptive practices by “marketing, selling, and administering” the Plan as an ancillary product to “unwitting” credit card holders. The Plans, as explained by the court, are “an amendment to the credit card loan agreement that suspends or cancels a customer’s obligation to repay credit card debt under certain circumstances – such as death, disaster, disability, unemployment, marriage, divorce, or hospitalization – without adverse consequences to the customer.”
If the repayment obligation is suspended and the customer does not have to make minimum payments, interest charges and late fees are also relieved. Charges for the Plans are based on a percentage of the customer’s outstanding card balance, and the service is charged as a separate fee each month. The Attorney General estimated that the annual charges for the services were between $68.40 to $162 per customer.
Importantly, the complaints did not challenge the interest rates charged by the defendants and did not allege that an illegal rate of interest was charged. And the state specifically disclaimed that any federal question subject matter jurisdiction existed over the complaints.
The defendants raised a number of arguments to remove the case, including a characterization of the suit as a Class Action Fairness Act mass action and the existence of a federal question because the NBA preempted what were really disguised usury claims.
Removal was inappropriate, the Fifth Circuit said. CAFA provides federal jurisdiction over a “mass action” involving the claims of 100 or more persons and either $75,000 for an individual or an aggregate amount in controversy of at least $5 million – but neither of those requirements was met.
Individual customers who paid for the Plans are not the real parties in interest, the panel said, as the state is the only plaintiff. “The State expressly denies representing individual customers, and asserts that it does not know how much these individual credit card holders have paid in fees,” although it estimated the range of annual fees to be under $200 for an individual. “Based on the State’s contentions, it would take an individual customer hundreds of years to reach the individual amount in controversy requirement,” the court said.
Even assuming that the customers were the real parties in interest, the defendants did not present evidence to show that any one of the customers satisfied the individual amount in controversy of $75,000, the court noted. “Defendants have failed to prove that even a single plaintiff here satisfies this requirement.”
As the defendants – who have ready access to information regarding their own customers and could assert that just one satisfies this requirement – failed to present any evidence, the court declined to require the state to prove a negative.
Turning to the issue of preemption, the Fifth Circuit again concluded that removal was not required. Although state law usury claims against nationally chartered banks are completely preempted by the NBA, the panel said the defendants failed to conclusively establish that the fees were “interest” and that the state had not made any allegations that the defendants were charging illegal rates.
Looking for guidance on whether the fees are “interest,” the court said the NBA does not indicate that the Plan fees are interest while regulations from the Office of the Comptroller of the Currency offer a broad definition of interest to include “any payment compensating a creditor or prospective creditor for an extension of credit, making available a line of credit, or any default or breach by a borrower of a condition upon which credit was extended.”
Not all fees associated with loans are interest, the panel said, and sided with the Attorney General that the charges are better viewed as fees associated with providing a separate credit service, rather than fees for the extension of credit. “Customers can receive the loan without signing up for the Protection Payment Plans, and may continue to use the line of credit even if they stop participating in the Plans,” the panel wrote. “Customers pay a separate monthly fee in order to receive this service. Thus, the fees for the Payment Protection Plans can be viewed as charges specifically assigned to cover an ancillary service, rather than general charges for the extension of credit.”
Adopting the defendants’ line of thinking would essentially include all fees associated with ancillary products or plans affecting the repayment terms of the loan as interest, the court said. “At best, defendants have only shown that the Payment Protection Plan fees could conceivably fit within the definition of ‘interest.’ Defendants have failed to show that a clear rule demands removal, and remand is therefore appropriate.”
Further, the state failed to make “any assertions about Defendants’ rate of interest,” the court said, instead complaining about unfair and deceptive practices. “Indeed, the gravamen of the State’s complaints is that the customers do not actually understand that they have agreed to purchase these services and are charged without their consent, not that they are being charged too much.”
To read the decision in Hood v. JPMorgan Chase, click here.
Why it matters: The Fifth Circuit opinion is the latest in a circuit split over whether state attorneys general parens patriae actions constitute “mass actions” that are removable under the Class Action Fairness Act. For state attorneys general, the Fifth Circuit’s narrow reading of the National Banking Act and the Class Action Fairness Act may inspire more suits under state consumer protections laws, particularly in the financial services area.