In case you missed it, here is our list of the most significant financial services rulings in 2017 from the Supreme Court of the United States and major federal appellate courts. While there were no decisions of overwhelming significance to the industry, a number of them were impactful, including a major decision on fair lending that makes it far more difficult for cities to pursue large-scale fair housing discrimination claims against lenders. Here is our list:
Fair lending: Our lead story is Bank of America v. City of Miami, 137 S. Ct. 1296 (May 1, 2017), where the Court held that the City of Miami has standing as an “aggrieved person” to pursue Fair Housing Act (FHA) claims against a national bank arising out of alleged discriminatory conduct in connection with the pursuit of foreclosures in Miami. That said, the Court made it painfully hard for municipalities to prevail in such litigation, requiring that cities establish that the wrongful conduct proximately caused harm, but that a mere showing of reduced property-tax revenue and increased cost of police, fire and other municipal services was insufficient. Instead, said the Court, the FHA requires the city to show “some direct relation between the injury asserted and the injurious conduct alleged.”
Just a few weeks after City of Miami was decided, and without citation to it, the Ninth Circuit held in City of Los Angeles v. Wells Fargo, No. 15-56157 (9th Cir. 2017) that the city failed to meet a similar causation standard in another FHA disparate impact suit Los Angeles brought alleging that banks engaged in discriminatory lending that led to increased foreclosures (and attendant police and fire costs as well as reduced property tax base). The Ninth Circuit affirmed the district court’s ruling that the city failed to establish causation because the only allegations were that (i) the bank’s loan officers were incentivized to increase loan amounts and interest, (ii) the bank targeted low-income borrowers, and (iii) it failed to adequately monitor for discrimination. The Ninth Circuit held the first two were race-neutral and the last was “not a policy at all.”
Federal jurisdiction: In Lightfoot v. Cendant Mortgage Corporation, 137 S. Ct. 553 (Jan. 18, 2017), the Court concluded that Fannie Mae’s status alone does not provide a free ride to the federal courts, concluding that the language in its charter, allowing it to “sue and be sued … in any court of competent jurisdiction, State or Federal,” does nothing to invoke federal jurisdiction. Of mere academic interest to some, the decision provides important lessons in federal jurisdiction for those litigants who attempt to use the mere inclusion of Fannie Mae as a party as a basis for federal removal.
Debt collection: Addressing a much-litigated provision in the Fair Debt Collection Practices Act, the Court, in Midland Funding v. Johnson, 137 S. Ct. 1407 (May 15, 2017), held that the mere filing of a bankruptcy court proof of claim of a stale claim is not false, deceptive, misleading or unconscionable under the FDCPA because even time-barred claims are legitimate in bankruptcy. The plaintiffs’ bar frequently targets debt collectors for merely doing their job (i.e., trying to collect legitimate debts), and this ruling puts to bed one of the more common lines of attack. Another FDCPA case, Henson v. Santander Consumer USA, 137 S. Ct. 1718 (2017) (the first opinion from new Justice Gorsuch), resolved with finality that a company may collect on its own debts without becoming a covered “debt collector” within the meaning of the statute.
In Hart v. Credit Control LLC, No. 16-17126 (11th Cir. Sept. 22, 2017), the court held that a debt collector’s simple dunning voicemail—listing the name of the company, the contact information and that “[t]his call is from a debt collector”—was a “communication” for FDCPA purposes. And since this was the first “communication,” it violated the “mini-Miranda” rule requiring more specific disclosures about the debt in the first communication than the voicemail offered. However, as a matter of first impression, the Eleventh Circuit rejected the consumer’s argument that the individual employee caller’s name must be provided; instead, the “identity” of the caller is properly disclosed for FDCPA purposes so long as the company collecting the debt is identified as the originator of the call.
Student loans: Ruling in the context of a bid protest over the award of a government contract, the Federal Circuit appears poised to permit federal student loans to be placed with private debt collection companies. Continental Service Group, Inc. et al. v. United States, et al., No. 17-2155, Dkt. No. 308 (Fed. Cir. Dec. 8, 2017). While a final decision is yet to come, the appeals court refused to grant an injunction preventing the private debt collection companies from proceeding with collection at least as to existing contracts. The CFPB submitted an amicus brief in favor of allowing private collections.
RMBS: In the world of post-recession residential mortgage-backed securities litigation, the Second Circuit made a major ruling affirming a district court’s judgment following a bench trial awarding the Fair Housing Finance Agency (FHFA) over $800 million relating to loans that allegedly breached marketing statements made about the quality of mortgage loans in the prospectus. FHFA v. Nomura, No. 15-1872-cv (2d Cir. Sept. 28, 2017). Our annual review of key RMBS decisions appears in the Spring 2018 edition of The Business Lawyer.
Telemarketing calls: The Eleventh Circuit reversed a district court ruling and held that a consumer who has granted full consent to automated calls may “partially” revoke it by, for example, stating certain times of day he or she does not wish to be called. Schweitzer v. Comenity Bank, No. 16-10498 (11th Cir. Aug. 10, 2017). But the Second Circuit held that consumers lack this flexibility if they have signed a global consent in writing if such consent was granted as “part of a bargained-for exchange.” Reyes v. Lincoln Automotive Financial Services, No. 16-2104 (2d Cir. Aug. 21, 2017). These issues are not expressly covered by FTC guidance, and the circuits now appear to be in the early stages on splitting with regard to consent and revocation issues. Look for the Supreme Court to take up a case on this topic in the next few years.
Credit card receipts: FACTA truncation litigation—once hot but waning of late—may now be truly dead as a result of the Second Circuit’s recent application of Spokeo to a pair of typical FACTA suits. While rare these days, with merchants having updated their credit card machines years ago in most cases (the FACTA truncation requirements have been in place since 2003), plaintiffs still occasionally sue merchants for printing more than the last four digits of a credit card or the expiration date on a consumer receipt. The Second Circuit held that, absent some actual damage to the consumer, such as actual identity theft (as opposed to increased risk of it), the consumer lacked standing under Spokeo. Katz v. The Donna Karan Company, L.L.C., No. 15-464 (2d Cir. Sept. 19, 2017) (six digits); Crupar-Weinmann v. Paris Baguette America, Inc., No. 14-3709 (2d Cir. June 26, 2017) (expiration date).
Overdraft fees: The Seventh Circuit affirmed a lower court ruling that denied insurance coverage for a bank’s class action settlement based on improper overdraft fees. The Seventh Circuit stated it would create a “moral hazard” if it were to allow banks to experiment with exotic and potentially improper fees knowing they could easily secure insurance coverage should they be held unlawful. BancorpSouth, Inc. v. Federal Insurance Company, No. 17-1425 (7th Cir. Oct. 12, 2017).
What to Look for in 2018
The Supreme Court has likewise heard oral argument in a number of cases that are now awaiting ruling. Look for at least the following cases of interest to the financial services industry:
Bankruptcy issues: In Merit Management Group, LP v. FTI Consulting, No. 16-784 (argued Nov. 6, 2017), the Court faces the question of whether the Bankruptcy Code’s safe harbor at 11 U.S.C. § 546(e) allows the avoidance by a bankruptcy court of a transfer merely because a financial institution was used as a conduit for payment. In oral argument, the justices appeared hostile to preventing a bankruptcy court from recovering assets that were fraudulently transferred, and thus we expect the Court to adopt the position already taken by the Seventh Circuit, but contrary to that taken by the Second Circuit and several other circuits.
Credit cards: In an important case for merchants in credit card transactions, the Court will address in Ohio v. American Express Co., No. 16-1454, whether the government’s showing that an antisteering provision in Amex’s merchant agreements stifles price competition is sufficient to shift the burden to Amex to establish its pro-competitive aspects. Oral argument is scheduled for late February 2018.