On August 3, the U.S. District Court for the District of Columbia dismissed a putative class action brought under the Fair and Accurate Credit Transactions Act for lack of subject matter jurisdiction and Article III standing, relying on the 2016 U.S. Supreme Court ruling in Spokeo Inc. v. Robins. As is commonplace in FACTA litigation, the class complaint alleged that the defendant had printed the plaintiff’s entire 16-digit credit card number and expiration date on receipts.

U.S. District Judge Colleen Kollar-Kotelly ruled that plaintiff Doris Jeffries lacked standing to bring her FACTA suit since the few facts alleged in her case failed to show she suffered an injury in fact that is fairly traceable to the defendants’ challenged conduct and that could likely be redressed by a favorable judicial decision. The court also rejected Jeffries’ argument that she was at an increased risk of identity theft when the defendants handed her the receipt with her information printed on it.

In relevant part, the court held:

The receipt containing prohibited information allegedly was provided to plaintiff, and she does not allege any further disclosure of that receipt to anyone else. …  Nor does plaintiff cite any history to support any notion that additional inconvenience associated with review and disposal of an infringing receipt rises to the level of a concrete harm.

The case is Jeffries v. Volume Services America, Inc. et al., Civil Action No. 1:17-cv-01788, in the U.S. District Court for the District of Columbia.  A copy of the memorandum opinion and order can be found here.

Troutman Sanders will continue to monitor these developments and provide any further updates as they are available.

Currently, some courts allow borrowers to bring Fair Debt Collection Practices Act claims for non-judicial foreclosures while other courts do not, but that is about to change. On June 28, the Supreme Court agreed to hear the appeal of Dennis Obduskey, a Colorado borrower arguing that the FDCPA should apply to non-judicial foreclosures.  

In the Tenth Circuit’s decision, a borrower sued his mortgage servicer and McCarthy & Holthus LLP, the law firm hired to process the non-judicial foreclosure, for failing to comply with certain requirements of the FDCPA. Specifically, Obduskey alleged that the law firm failed to respond to his request for a validation of the debt. The Tenth Circuit held that Wells Fargo was not a debt collector under the FDCPA since it began servicing the loan before it went into default. That holding will stand and will not be heard by the Supreme Court.         

Significantly, the Tenth Circuit further held that the law firm was not a debt collector under the FDCPA because non-judicial foreclosure proceedings are not covered by the FDCPA. In doing so, the Tenth Circuit sided with the Ninth Circuit, holding that compliance with the FDCPA is not required during non-judicial foreclosure proceedings, contrary to the position of the Fourth, Fifth, and Sixth Circuits. This is the holding that the Supreme Court will consider.   

The Tenth Circuit explained that its reasoning was based on its interpretation of the FDCPA, but went further and explained that permitting FDCPA claims for non-judicial foreclosures creates a compliance dilemma for firms like the one in this case. For example, direct communications to a borrower represented by an attorney would be prohibited by the FDCPA but required by Colorado statute. Similarly, communications to third parties would be banned by the FDCPA but required by Colorado statute.  

While many states require judicial foreclosures, a majority of states permit non-judicial foreclosures. Non-judicial foreclosures may proceed pursuant to a power of sale clause in the loan agreement. The borrower is given due notice and the auction takes place, without court oversight. Given the large number of non-judicial foreclosures that take place nationally, this Supreme Court ruling will have a far-ranging effect. 

In conclusion, the Supreme Court’s holding in Obduskey will significantly change the law while creating consistency across the country as to whether the FDCPA applies to non-judicial foreclosures. FDCPA compliance includes ceasing communications with the borrower on request and providing debt validation letters to the borrower on request, among other things. Penalties for violations can include up to $1,000 in statutory damages per lawsuit, plus attorneys’ fees and costs.

On July 31, 2018, the Office of the Comptroller of the Currency (“OCC”) announced its intent to accept applications for special purpose national bank charters from eligible non-depository financial technology (“Fintech”) companies.[1] This announcement coincides with the release of a Treasury Department report supporting financial innovation and the regulation of nonbank financial entities.[2]  These announcements signal a significant shift in the current banking marketplace. On the one hand, the announcements are good news for Fintech disrupters, as it opens an avenue to reaching a nationwide market despite sometimes hostile state laws. On the other, for traditional banks, the announcements are a further harbinger, if any is needed, of the emerging new competition from Fintech.

The OCC’s Response to Technological Innovation in Banking

Over the past several years, Fintech has caused meaningful disruption in the financial services industry. Working with banks and non-bank businesses, Fintech companies have introduced new approaches to traditional banking products and services, and entirely new products and services, by leveraging technology, data, and connectivity. Typically, Fintech avoids the expense of extensive brick-and-mortar physical presence, while reaching broad markets, by using the internet to provide products and services.

The OCC has expanded special-purpose national bank charters (“SPNBCs”) to eligible Fintech companies to bring these companies within the U.S. bank regulatory system, which in turn will increase consumer protection, foster healthy competition, and encourage technological innovation in the banking industry. Also, by granting SPNBCs to Fintech companies, the OCC will expand its oversight of technology-based products and services that are reshaping the banking industry. In exchange, OCC-chartered Fintech companies will be able to conduct business throughout the U.S. under a uniform set of regulations and supervisory standards without the need to seek multi-state licensing or partner with insured depository institutions, while enjoying the significant benefits of federal preemption of many state laws under the National Bank Act.

Only Certain Fintech Companies May Qualify for the OCC’s Special Purpose National Bank Charter

Historically, a special-purpose national bank has been an entity “that engages in a limited range of banking or fiduciary activities, targets a limited customer base, incorporates nontraditional elements, or has a narrowly targeted business plan.”[3] The OCC has for many years issued SPNBCs for trust institutions and credit card banks with little to no fanfare. In the current context, the OCC will make SPNBCs available to those Fintech companies engaged in one of the two core banking functions of paying checks or lending money (including activities interpreted by the OCC as the equivalent thereto[4]), subject to the OCC’s approval of a charter application (discussed below). However, the OCC will not consider applications from Fintech companies involving proposals to engage in deposit-taking activities.[5]  Those Fintech companies must apply to the Federal Deposit Insurance Corporation (“FDIC”) for deposit insurance and seek a full-service bank charter.

The Benefits of the SPNBC

As with a national bank, a Fintech company that obtains a SPNBC will be subject to the corporate licensing, organization and structure provisions of the National Bank Act. In addition, the same statutes, regulations, examination and reporting metrics, and ongoing supervisory requirements applicable to national banks, such as legal lending limits, will apply to SPNBC Fintech companies.[6] Fintech companies that operate as special purpose national banks will also be subject to other federal statutory schemes such as the Bank Secrecy Act and federal anti-money laundering regulations, as well as prohibitions against unfair, deceptive or abusive acts or practices.[7] A Fintech company that obtains a SPNBC that engages in consumer lending will also continue to be subject to federal consumer lending laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, and the Fair Credit Reporting Act.

For a Fintech company that obtains a SPNBC, burdensome state-by-state licensing, regulatory and supervisory requirements – including state usury laws – will be preempted by the National Bank Act.[8] These companies will not need to be licensed under state law to engage in any activity permissible pursuant to the National Bank Act. However, a Fintech company that obtains a SPNBC should expect that some consumer protection and other state laws will continue to apply. Examples of state laws generally applicable to national banks include laws on anti-discrimination, fair lending, debt collection, and foreclosure.

The SPNBC Application Process

To obtain a SPNBC, a Fintech company must submit to the same de novo application review process as national banks, including an assessment of whether the Fintech company has a reasonable chance of success and will (i) be operated in a safe and sound manner, (ii) provide fair access to financial services, (iii) promote the fair treatment of customers, (iv) ensure compliance with applicable laws and regulations, and (v) foster healthy competition in the marketplace. [9]

The OCC’s approval of a Fintech company’s application to obtain a SPNBC will depend on the applicant:

    • presenting a comprehensive business plan that articulates why a SPNBC is being sought with significant detail about proposed activities; [10]
    • demonstrating the ability to meet minimum and ongoing capital and liquidity levels proportionate to the risk and complexity of the activities proposed in the business plan;[11]
    • committing to provide fair access to financial services and fair treatment of customers commensurate with the high standards imposed on traditional banks by the Community Reinvestment Act;[12] and
    • developing and committing to adhere to a contingency plan that includes various scenarios that could threaten the viability of the Fintech company.[13]

If approved for a SPNBC, the OCC will subject the recently chartered Fintech company to a scheduled supervisory cycle, including on-site examination and periodic off-site monitoring (as it would any de novo bank).[14] This means rigorous ongoing supervisory oversight to ensure that management and the board of directors are properly executing their business strategy and the Fintech company is meeting its performance and compliance goals.

Cost-Benefit Approach to the SPNBC

Whether a Fintech company should pursue a SPNBC from the OCC requires a tailored cost-benefit analysis. If the OCC processes Fintech applications for SPNBCs as rigorously as traditional de novo national bank charter applications, the SPNBC process could take several months from prefiling to approval. The OCC has stated that proposals from Fintech companies without an established business record will be subject to more scrutiny to evaluate the likelihood of long-term success.

Challenges from State Banking Regulators

In response to the OCC’s preliminary proposal regarding SPNBCs and Fintech issued in 2016, the New York Department of Financial Services and the Conference of State Bank Supervisors filed separate lawsuits challenging the OCC’s authority to issue SPNBCs to Fintech companies. Those suits were both dismissed on the basis that OCC had yet to issue any special purpose national bank charters. The OCC’s announcement of its intent to accept Fintech SPNBC applications paves the way for those parties to renew their opposition as soon as the first SPNBC is issued to a Fintech company, if not before.

Conclusion

The OCC’s decision to accept SPNBC applications from Fintech companies presents an opportunity for Fintech participants and the financial industry. Whether you are an established Fintech company or contemplating a new business, Troutman Sanders is ready to help you navigate the SPNBC process.


[1] OCC Press Release NR 2018-74 (July 31, 2018).

[2] U.S. Department of the Treasury, Press Release:  “Treasury Releases Report on Nonbank Financials, Fintech, and Innovation” (July 31, 2018).

[3] OCC Licensing Manual Suppl., Considering Charter Applications from Financial Technology Companies, p. 2 (July 2018).

[4] The OCC has indicated that it views “facilitating payments electronically” as the “modern equivalent of paying checks” and that the scope of qualifying activities would be determined on a case-by-case basis. See OCC White Paper, Exploring Special Purpose National Bank Charters, p. 4 (Dec. 2016).

[5] Id.

[6] Id. at 2 n.4 (internal citations omitted).

[7] Such prohibitions will continue to apply as required either by Section 5 of the Federal Trade Commission Act or Section 1036 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

[8] See generally Barnett Bank of Marion County v. Fla. Ins. Comm’r, et al., 517 U.S. 25 (1996) (federal law preempts state financial laws that prevent or significantly interfere with exercise of powers by national bank).

[9] OCC Licensing Manual Suppl. at 5.

[10] Id. at 6-8. See also 12 C.F.R. § 5.20(h) (detailing specific items to be addressed in business plans).

[11] Id. at 8-10. This may include an OCC-specified minimum capital level – and, if applicable, a commitment from the applicant’s parent company.

[12] Id. at 10. See also OCC Policy Statement on Financial Technology Companies’ Eligibility to Apply for National Bank Charters, p. 3 (July 31, 2018).

[13] The contingency plan must outline strategies for restoring the Fintech company’s financial strength and options for selling, merging, or liquidating the entity if the recovery strategies are ineffective. See OCC Licensing Manual Suppl. at 10.

[14] Id. at 13.

With debts rising faster than new graduates’ starting salaries, a student debt crisis has the potential to haunt the nation much in the way the mortgage crisis did 10 years ago. In general, the roots of this problem lie, in part, in the private student loan, or PSL, market created by and in response to the Higher Education Act of 1965, or the HEA. The federal government’s commitment to funding post-secondary education spawned new lenders, borrowers and servicers, all operating within a regulatory regime administered by the U.S. Department of Education for more than 50 years. In the last decade, as borrowers assumed more unsustainable debts, federal actors, from the DOE to the Consumer Financial Protection Bureau, turned their attention to the behavior of private lenders and servicers of both federal and private loans. In this pursuit, federal authorities relied upon numerous consumer protection statutes and aligned themselves with many state-level agencies, including state attorneys general, from across the country.

Beginning in 2016, a new mood dampened the federal bureaucracy’s regulatory pace. The DOE, led by Secretary Elisabeth DeVos displayed decreased enthusiasm for regulation and litigation. Once John Michael “Mick” Mulvaney arrived at the CFPB, he brought a similar wariness for administrative and legal activism, one sure to be continued by any likely successor.

View full article published on Law360

 Under the Fair Credit Reporting Act, a potential employer generally may not procure a consumer report on an applicant unless the employer provides a disclosure, in a document that consists “solely of the disclosure,” informing the applicant that a consumer report may be obtained.  In Williams v. TLC Casino Enters., the District Court for the District of Nevada has joined a growing chorus of courts finding that a plaintiff cannot bring a “solely of the disclosure” claim in federal court when he or she has suffered no actual harm separate from the perceived failure to properly format the disclosure.

Specifically, in Williams, the plaintiff alleged (on a class basis) that TLC Casino Enterprises violated the FCRA by obtaining a consumer report on her without providing her with a “stand-alone document of a legal disclosure.” According to Williams, TLC only provided her “with a written conditional offer to hire that included, inter alia, the following statement: ‘Continuation of this position and your employment is dependent upon your passing any Background Check or Drug Screen that may be required for your position.’” This document, in Williams’ view, was not a disclosure that consisted “solely of the disclosure” that a consumer report may be obtained for employment purposes.

TLC Casino Enterprises moved to dismiss Williams’ complaint for lack of standing, arguing that her claim amounted to nothing more than a bare procedural violation of the FCRA. According to the defendant, Williams could not state a claim in federal court because the bare procedural violation of a statute alone does not satisfy the injury-in-fact requirement for Constitutional standing.

The Court agreed with TLC Casino Enterprises. In its decision, it drew on the Supreme Court’s decision in Spokeo, Inc. v. Robins to conclude that Williams must allege a “concrete injury in fact” separate from the procedural violation of a statute in order to demonstrate standing.  Williams could not do that here. According to the Court, Williams framed TLC Casino Enterprises’ alleged FCRA violation as having “failed to provide the disclosure in a format required by the FCRA.” But “[a] formatting error such as this is a procedural issue that does not satisfy the requirement that plaintiff demonstrate a concrete, particularized injury.”

Although plaintiffs’ counsel often argue that disclosure claims are straightforward and easily certifiable as a purported class action, the Williams decision demonstrates that this is not the case. Indeed, courts are increasingly dismissing disclosure claims when plaintiffs allege nothing more than the violation of a procedural FCRA requirement.

We will continue to track this and other developments regarding the intersection of FCRA claims and standing to sue in federal court.

 

The Southern District of West Virginia recently held that the reporting of an account being paid through a Chapter 13 bankruptcy plan as having an outstanding balance or past due payments does not violate the Fair Credit Reporting Act.

Plaintiffs Angela and Robert Barry alleged that Farm Bureau Bank FSB continued to report their account as having an outstanding balance with past due payments after they had disputed the account with the credit bureaus. Specifically, the Barrys alleged that their account is being paid through their confirmed Chapter 13 bankruptcy plan; thus, the account “should be showing paid on time through a Chapter [13] plan or it should stop as of the date of the filing [of] the Chapter 13 [confirmation], and indicate it is being paid through the plan.”

The Court granted Farm Bureau’s motion for summary judgment, answering the question of whether the FCRA prohibits the reporting of historically accurate information of a delinquent account after a Chapter 13 bankruptcy plan is confirmed but before the debt is discharged.

Farm Bureau argued the information it provided to the credit bureaus before and after the credit disputes was accurate. The Court agreed, ruling that the confirmation of a Chapter 13 bankruptcy plan does not change the debt’s legal status. For example, a Chapter 13 bankruptcy plan allowing payments “at a lower monthly rate does not concurrently insinuate that the account cannot become delinquent” because under the bankruptcy plan, payments are no longer being made according to the loan’s terms.

The Court relied on previous decisions from the Northern District of California in finding that a confirmed Chapter 13 bankruptcy plan does not absolve a debt owed to a financial institution because a bankruptcy petition could be dismissed if the debtor does not comply with the plan, resulting in the debt owed as if the bankruptcy was never filed. Therefore, the Court concluded that “it would not be inaccurate to report a debt’s balance as outstanding or the account as delinquent subsequent to a Chapter 13 plan’s confirmation, but before the debt has been discharged, if the debtor no longer makes the payments required under the loan schedule.”

Additionally, the Court rejected the proposition that the failure to report an account as included in a Chapter 13 bankruptcy proceeding is incomplete for purposes of the FCRA, holding that “even if Plaintiff is correct that Plaintiff’s credit report did not reflect the terms of Plaintiff’s Chapter 13 bankruptcy plan, this would not be an inaccurate or misleading statement that could sustain a FCRA claim … .”

We are pleased to announce that Troutman Sanders attorney David Anthony will be presenting during the Consumer Data Industry Association Inaugural Law Symposium at the One CityCenter in Washington, D.C. CDIA wants to focus heavily on trending topics in credit reporting, including state regulatory initiative, key litigation developments, investigation and enforcement activities, and cybersecurity.  David will be providing information on a panel discussing “Key Litigation Developments” on July 17, 2018.

Attendees will:

  • Gain valuable tips and advice for Credit Reporting
  • Discuss and Learn top issues that are happening now
  • Network with highly talented individuals in the legal and legislative department
  • Stay up to date with ongoing Credit reporting and regulatory compliance

This conference will focus heavily on trending topics in credit reporting, including state regulatory initiative, key litigation developments, investigation and enforcement activities, and cybersecurity.

To register or obtain additional information, visit the CDIA website.

On July 13, 2018, in Dutta v. State Farm Mutual Automobile Insurance Company, the Ninth Circuit affirmed the district court’s decision granting summary judgment to State Farm in a putative Fair Credit Reporting Act class action. The decision presents another helpful application of the U.S. Supreme Court’s 2016 Spokeo decision. The Dutta decision highlights the importance of continuing to challenge standing at all stages of a case even in the face of a statutory violation.

Background

In Dutta v. State Farm, the plaintiff Bobby S. Dutta alleged that State Farm violated section 1681b of the FCRA, by failing to provide him with a copy of his consumer report, notice FCRA rights and an opportunity to challenge inaccuracies in the report before State Farm denied his employment application. As background, Dutta applied for employment with State Farm through the company’s Agency Career Track, or ACT, hiring program. State Farm examines the 24-month credit history of every ACT applicant, and if an applicant’s credit report indicates a charged-off account greater than $1,000, the applicant is automatically disqualified.

View full article published on Law360.

On June 21, 2018, the U.S. District Court for the District of Oregon dismissed a putative class action complaint alleging that a potential employer violated the disclosure and pre-adverse action notification requirements of the Fair Credit Reporting Act in Walker v. Fred Meyer Inc.[1] The Walker decision highlights several key lessons associated with FCRA class actions, particularly related to the disclosures employers must provide to prospective employees.

Background

Daniel Walker applied for a job with Fred Meyer Inc. As part of the application process, Fred Meyer provided Walker with separate disclosure and authorization forms regarding its intent to procure a background report on Walker. Fred Meyer presented the disclosure and authorization forms together, each in separate documents. The disclosure form mentioned both a general consumer report and an investigative consumer report.

View full article published on Law360.

On July 17, the Missouri Court of Appeals affirmed a ruling of the Cole County Circuit Court dismissing a putative class action under the Fair Credit Reporting Act against multinational staffing company, Kelly Services, Inc.

A three-judge panel of the Missouri Court of Appeals issued a one-page order and eleven-page memorandum opinion upholding the lower court’s ruling that the plaintiff lacked standing to pursue his claim since he alleged only bare procedural violations without the requisite concrete injury.

The panel held: “Not even the most liberal construction of his pleading would support a construction favorable to finding that Mr. Boergert pleaded a concrete and actual injury. …  Because Mr. Boergert did not plead an invasion of a legally protected interest that is concrete and particularized and actual or imminent, not conjectural or hypothetical, the trial court did not err in dismissing his complaint for lack of standing.”

Plaintiff Cott Boergert claimed Kelly Services violated the FCRA when it fired him from a job placement based on information in his consumer report indicating that he had been on probation in 2009 for commission of a felony. Boergert had previously indicated that he had not been on probation for a felony in the preceding seven years when he filled out the employment application.

He then filed the class action in Cole County Circuit Court, claiming that Kelly Services violated the FCRA by including more information in its disclosure form than was allowed and by not providing him with either the report or a summary of his rights. Interestingly, the case was removed to federal court but was dismissed in 2016 under the U.S. Supreme Court’s Spokeo v. Robins decision. That federal district court, however, rethought its decision and the case was remanded back to state court.

The panel’s ruling added: “While alleging that Kelly Services knowingly violated the FCRA by using a disclosure form that contained extraneous information – a bare procedural violation – and that he was therefore entitled to statutory damages for these violations, Mr. Boergert did not plead any concrete or actual injury. … Although he testified during a deposition that the form confused him, he did not plead that it did so or that he did not see the disclosure or authorize Kelly Services to obtain a consumer report.”

Troutman Sanders will continue to monitor these developments and provide further updates as they are available.