At 2017’s Mid-Point, Some Key Cases on Bank Radar Screens

By Chris Bruce

A federal appeals court battle between PHH Corp. and the Consumer Financial Protection Bureau may be the best-known banking case this year but it’s not the only one being watched by bank lawyers as 2017 reaches its midpoint.What follows is a look at some of the other big cases pending throughout the country.

An important robocall case is pending before the U.S. Court of Appeals for the District of Columbia Circuit. At issue in the case, which could be decided by year-end, is a 2015 Federal Communications Commission (FCC) order that takes an expansive view of the Telephone Consumer Protection Act’s definition of “automatic telephone dialing system” ( ACA International v. FCC, D.C. Cir., No. 15-cv-01211).

“This case could have a major impact on the financial industry, especially with regard to debt collection efforts,” Quyen T. Truong, a partner in the Washington offices of Stroock & Stroock & Lavan and a former CFPB assistant director and deputy general counsel of the Consumer Financial Protection Bureau, told Bloomberg BNA.

A host of business groups have urged the U.S. Court of Appeals for the District of Columbia Circuit to overturn the FCC order, saying it sweeps too broadly by counting as autodialers equipment that has “the potential ability” to dial random and sequential numbers.

Banks and financial institutions have joined that chorus. In a brief that urged the D.C. Circuit to review the FCC order at the outset of the case, several trade associations said the order, if upheld, could restrict their communications with customers while posing the risk of “draconian liability” from TCPA class actions.

“This could not have been the intent of Congress when it passed the TCPA,” the brief by the American Bankers Association, the Credit Union National Association, and the Independent Community Bankers of America said.


A pair of cases could test an important fintech initiative by the Office of the Comptroller of the Currency ( Vullo v. Office of the Comptroller of the Currency, S.D.N.Y., No. 17-cv-03574, Conf. of State Bank Supervisors v. Office of the Comptroller of the Currency, D.D.C., No. 17-cv-00763). The Conference of State Bank Supervisors and New York Department of Financial Services Superintendent Maria T. Vullo have sued the Office of the Comptroller of the Currency in separate but similar challenges to a December 2016 OCC fintech-related initiative.

The lawsuits say the plan — which would allow the OCC to consider special-purpose charter applications by fintech companies — is unlawful because it exceeds the OCC’s chartering authority for nonbank companies. They say the agency only has authority to charter institutions that engage in the “business of banking” under the National Bank Act, a standard that they say includes the receipt of deposits.

Acting Comptroller Keith Noreika recently voiced confidence that the OCC has the authority to grant national bank charters that don’t take deposits. Without referring directly to either case, he said he “is developing its litigation response and plans to defend this authority vigorously.”

Elizabeth A. Khalil, a member of Dykema’s government policy practice group in the firm’s Chicago and Washington offices who previously advised officials on emerging technology issues at the Federal Deposit Insurance Corp., said the CSBS and New York cases bear watching.

“It will be fascinating to see what the courts think,” added Khalil, who’s also a former OCC enforcement attorney. “These cases are asking fundamentally what it means to be a national bank.”

Although the OCC has chartered some national banks that don’t accept deposits, she said, “to my knowledge that has always been under specific authority from Congress, like under the Competitive Equality Banking Act of 1987, not the OCC’s general authority under the NBA.”

Marketplace Lending, Preemption

The U.S. District Court for the District of Colorado is a battleground for four court tests in the marketplace lending arena. Two are suits by Colorado regulators who say lending platforms Marlette Funding and Avant of Colorado are violating state interest rate limits ( Meade v. Avant of Colorado LLC, D. Colo., No. 17-cv-00620, Colorado v. Marlette Funding LLC, D. Colo., No. 17-cv-00575). Marlette and Avant, according to Colorado, are the “true lenders,” and not Cross River Bank and WebBank — two federally insured state banks that originate the loans at issue in the suit.

The cases brought by Colorado are important because they could decide whether the Federal Deposit Insurance Act’s preemption provisions apply to bank-originated loans if the loans are sold or assigned to a nonbank.

The other two cases were brought by Cross River and WebBank, which have challenged Colorado’s suits against Marlette Funding and Avant ( Cross River Bank v. Meade, D. Colo., No. 17-cv-00832, WebBank v. Meade, D. Colo., No. 17-cv-00786). Cross River and WebBank are citing federal preemption and saying the suits against Marlette Funding and Avant should be thrown out.

California Small Loans

Further westward, the California Supreme Court is considering whether interest rates on consumer loans of $2,500 or more may be unconscionable under California law, even when those loans aren’t subject to statutory rate limits ( De La Torre v. CashCall, Cal., No. S241434). The U.S. Court of Appeals for the Ninth Circuit has asked the California court for a ruling on that question, saying there’s no controlling precedent.

The request came in an appeal from a class suit alleging that Orange, Calif.-based CashCall Inc. charged “unconscionable interest rates” of 90 percent or more. A district court agreed with CashCall, which said California lawmakers removed rate limits on those loans in 1985.

The Ninth Circuit already has committed to “accept and follow” the California court’s decision. If the California Supreme Court says rates on such loans may be challenged as unconscionable, that could open the door to more lawsuits against lenders under California’s Unfair Competition Law.

Cases Test FHFA

Four federal appeals courts are weighing the ability of investors in Fannie Mae and Freddie Mac to challenge a controversial 2012 contract change that they say illegally shifted the two companies’ future earnings and retained capital into the hands of the U.S. government.

Also at issue in the litigation is whether Fannie and Freddie’s conservator, the Federal Housing Finance Agency, can beat back claims that its CFPB-like single-director leadership structure is unconstitutional.

The suits against the FHFA and the Treasury Department say Treasury lacked authority to initiate the so-called net worth sweep in 2012, and that the FHFA exceeded its powers as conservator by agreeing to it. In a February ruling just recently amended and reissued, the D.C. Circuit held the Housing and Economic Recovery Act of 2008, which created the FHFA, bars judicial review of several statutory claims in connection with the net worth sweep.

Attention is now turning to four other federal appeals courts that are reviewing rulings by district courts that also said they didn’t have jurisdiction to weigh certain challenges. One of those cases, Robinson v. FHFA (No. 16-cv-06680), will be argued in the Sixth Circuit July 27. The other cases are in the Fifth Circuit, which is hearing Collins v. Mnuchin (No. 17-20364), the Seventh Circuit, which is home to Roberts v. FHFA (No. 17-01880), and the Eighth Circuit, which has before it Saxton v. FHFA (No. 17-01727).

The cases are important for investors who call the net worth sweep and its aftermath an example of the Treasury Department seizing companies and running them for its own benefit, while insulating itself from the legal consequences of its actions.

For the FHFA, Treasury, and their lawyers, the cases test a basic proposition — whether the FHFA may fulfill its role to conserve the assets of companies under its wing and protect U.S. taxpayers without second-guessing by courts and litigants.

Fair Housing Act

The Eleventh Circuit is the next likely testbed for a collection of lawsuits by cities and local governments that say banks engaged in discriminatory loan practices that violated the Fair Housing Act.

The court will take up again Miami’s claims against Bank of America ( Miami v. Bank of Am. Corp., 11th Cir., No. 14-cv-14543) and Wells Fargo ( Miami v. Wells Fargo & Co., 11th Cir., No. 14-cv-14544) following a mixed U.S. Supreme Court ruling in May. The Supreme Court said Miami and other cities have standing to allege lending bias under the Fair Housing Act, but said cities must plead that their injuries were “proximately caused” by the alleged discrimination. The suits say discrimination led to defaults, property vacancies, and lower tax revenues.

The Eleventh Circuit’s handling of the proximate cause question could mark the first direct application of the Supreme Court’s May decision and an important signal for other such suits. That question is also front and center in a July 21 motion by Wells Fargo to dismiss a Fair Housing Act suit brought by Philadelphia, which Wells Fargo says is a “copycat” complaint of lawsuits by other cities.

ABA Mounts Challenges

The American Bankers Association has several important challenges on its plate. Among others, one says the U.S. government wrongfully breached a contract that guaranteed 6 percent dividend payments to certain Federal Reserve System member banks ( Am. Bankers Ass’n v. United States, Fed. Cl., No. 17-cv-00194). The other ABA suit says a National Credit Union Administration regulation goes too far by expanding the field of membership for community-based credit unions ( Am. Bankers Ass’n v. Nat’l Credit Union Adm’n Board, D.D.C., No. 16-cv-02394).

In the dividend case, a class action that seeks more than $1 billion in damages, the ABA and a Seattle-based bank say that Congress, in a 2015 transportation measure, diverted funds from the Federal Reserve Surplus Fund to help pay highway costs.

As a result, banks with more than $10 billion in assets were paid dividends at a roughly 2 percent rate—less than the fixed 6 percent rate paid in previous years, according to the ABA. Washington Federal N.A., the Seattle bank, said in 2016 it received $502,400 in dividends, though it should have received $1.44 million. The case is set for argument July 27 in the U.S. Court of Federal Claims in Washington.

The other suit against the NCUA says the field of membership rule, published in December, goes far beyond the limits imposed by Congress and even those previously recognized by the NCUA. The ABA has asked the U.S. District Court for the District of Columbia to hold that the final rule is arbitrary and capricious and outside the scope of NCUA’s statutory authority, and to block the NCUA from approving expansion of any community credit union’s field of membership.

RMBS Decision Pending

An appeal in the Second Circuit will determine whether the FHFA can hold on to an $839 million judgment in a residential mortgage-backed securities case. The case is one of 16 brought by the Federal Housing Finance Agency in 2011 seeking damages against banks and related companies on behalf of Fannie Mae and Freddie Mac, which took losses on mortgage-backed securities underwritten or issued by banks and financial firms. It was the only one of those cases to go to trial.

In 2015, the U.S. District Court for the Southern District of New York said Nomura Holdings Inc. (sued as issuer) and Royal Bank of Scotland Group Plc (sued as underwriter) “did not correctly describe” home mortgages in documents for a securities offering, and ruled in favor of the FHFA.

Although RMBS litigation is no longer at the intensity it was just a few years ago, the size of the verdict — if it’s upheld — could affect ongoing cases by encouraging plaintiffs to seek higher settlement amounts. The appeal was argued in November 2016.

State, Local Action

One theme that’s gotten more attention since the election is whether federal regulators will pull back on some consumer protection matters, and if so, whether states and local governments will step into the gap.

Two cases in California offer a window on what some of those actions might look like and how they might be handled. Trinity County, Calif., District Attorney Eric Heryford has sued Discover Financial Services ( 16-cv-00468) and Citigroup ( 16-cv-00469) in the Eastern District of California, saying they engaged in deceptive marketing and sales practices in connection with ancillary credit card products.

The case is unusual because Heryford has brought on private counsel on a contingency fee basis. Discover and Citigroup have sought to disqualify Heryford’s private counsel, saying Heryford is acting as a “state officer” under California Government Code Section 11042. They say that means he has to obtain consent of the California Attorney general before retaining the firms. He didn’t do so, according to Discover and Citigroup, which have asked the court to void the arrangement.

That makes the case another one to watch, according to Truong. “These cases are important because they raise the question of whether the District Attorney can hire contingency fee counsel to litigate cases about ancillary products against financial institutions,” she said. “That’s a question that’s going to be more important over time as we see state and local governments become more active in response to changes in federal policy under the Trump administration.”

The cases have been quiet since last summer, when Heryford said in a brief that he’s not the real party in interest. Instead, the people of the state of California are, he said, saying that as a result, he doesn’t have to obtain the Attorney General’s consent for the fee arrangement.

More Than PHH

Though any list of “must-watch” cases will differ from lawyer to lawyer, the D.C. Circuit’s consideration of an appeal by PHH Corp. Mount Laurel, N.J., from a 2015 CFPB enforcement order is an easy call for most. The D.C. Circuit’s full bench is considering whether the CFPB’s single-director leadership structure violates the U.S. Constitution, making it one of the most important separation of powers cases in recent times.

Statutory questions in the case also have huge practical importance for financial services providers. The underlying case involves CFPB claims that PHH’s relationships with mortgage insurers violated the Real Estate Settlement Procedures Act (RESPA). Even at this advanced phase of the case, lawyers say, critical RESPA compliance questions are still up in the air — matters that they say are in some ways more important on a day-to-day business basis than the high-profile constitutional questions.

To contact the reporter on this story: Chris Bruce in Washington at

To contact the editor responsible for this story: Michael Ferullo at

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.