Pew article analyzes challenges facing Fed task force for faster payment system

By Thomas G. Wolfe, J.D.

  

In their article for the Pew Charitable Trusts, titled “Faster Payments System Could Give Consumers and Businesses Better Access to Their Money,” authors Thaddeus King and Rachel Siegel report the results of their research. In particular, the March 9, 2018, article outlines the inherent problems and challenges associated with the “ambitious goal” set by the Federal Reserve’s Faster Payments Task Force to create a “real-time system through which funds could be received by any financial institution by 2020.”

 

As observed by the Pew authors, in May 2015, the Fed’s task force brought together “more than 300 stakeholders from financial institutions, payment providers, consumer groups, regulators, businesses, and consultants.” The task force developed seven “effectiveness criteria” to provide guidance on the most important aspects of an improved payments system: “ubiquity, efficiency, safety, security, speed, legal, and governance.” Most recently, the group’s work culminated in two reports, including proposals from various financial firms, regarding the task force’s efforts to establish real-time fund transfers.

 

Problems, challenges. Based on Pew’s research, the authors note that while a “faster, universally accepted payments system would eliminate the wait that many consumers and businesses face before they can access their money,” the system would unlikely be available to those who do not have smartphones or bank accounts. Further, a faster payment system will not end overdraft fees charged by banks on consumers’ accounts.

 

According to Pew’s research:

• 23 percent of U.S. adults did not have a smartphone at the start of 2018;
• 54 percent of U.S. seniors—age 65 and over—did not have a smartphone at the start of 2018;
• among smartphone users, only 32 percent had previously made a purchase with it;
• among smartphone users, only 14 percent indicated having sent or received money using a mobile app;
• overall, 70 percent of respondents cited “loss of funds and identity theft” as concerns that might prevent them from using a mobile payments system;
• nearly 37 million U.S. consumers do not have bank accounts from which to send or receive money; and
• overdraft fees are collected from about 9 percent of all accounts, and 75 percent of “overdrafters” had difficulty paying monthly bills.

Potential solutions. The authors indicate that some companies have proposed models that would allow customers to “make payments at kiosks in brick-and-mortar stores, or with a basic cellphone or an internet-connected device.” Consumers without bank accounts—the “unbanked”—would especially benefit from cash deposits or transfers at kiosks or retail stores.

 

Also, a faster payment system would provide immediate access to funds and could offer some relief for those who overdraw “simply because their deposits are not available quickly enough,” the Pew article notes. At the same time, additional problems that need addressing include: (i) consumers’ poor understanding of overdraft policies and practices; and (ii) consumers’ need to access affordable small-dollar credit. According to the authors, better disclosure of account holders’ legal rights, limits on penalty overdraft fees, and regulatory guidance to allow banks and credit unions to offer safe, small-dollar installment loans would help resolve these problems.

 

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FCC’s treatment of all smartphones as robocallers rejected

By Andrew A. Turner, J.D.

The Federal Communications Commission’s interpretation of the kinds of phone equipment covered by the Telephone Consumer Protection Act’s restrictions on using autodialers to call cellphones has been rejected by the U.S. Court of Appeals for the District of Columbia Circuit. The court viewed the FCC had provided an “unreasonable” interpretation that would have meant that anyone using a smartphone to call or text another wireless phone without consent is violating the Telephone Consumer Protection Act (ACA International v. Federal Communications Commission, March 16, 2018, Srinivasan, S.).

The court also rejected the FCC’s decision to hold callers liable for using an automatic telephone dialing system (ATDS), or autodialer, to call a reassigned phone number for which they received consent to call from a previous subscriber, allowing only for one call after the reassignment, regardless of whether the caller knows about the reassignment.

The court upheld the FCC with regard to two other provisions of its 2015 order addressing its TCPA implementation: the agency’s decision that a called party may revoke previously granted consent "through any reasonable means clearly expressing a desire to receive no further messages from the caller" and its crafting of an exemption from the TCPA consent requirement for time-sensitive health care calls.

The case stems from the 2015 order and declaratory ruling, in which the FCC responded to 23 petitions for clarification from businesses and other entities that use or want to use robocalling technology by (1) giving wireline and wireless service providers a "green light" to deploy technology to block unwanted robocalls; (2) affirming that text messages, whether they originate from phones or the Internet, constitute "calls" for the purpose of robocall rules; and (3) eliminating what supporters of the action view as a "loophole" for calling numbers after they are reassigned from a customer who consented to automated calls to one who has not.

In an opinion for the unanimous three-judge panel of the D.C. Circuit released today, Circuit Judge Sri Srinivasan, who had presided over the 2016 oral argument, said, "The TCPA cannot reasonably be read to render every smartphone an ATDS subject to the Act’s restrictions, such that every smartphone user violates federal law whenever she makes a call or sends a text message without advance consent."

He added, "It is untenable to construe the term ‘capacity’ in the statutory definition of an ATDS in a manner that brings within the definition’s fold the most ubiquitous type of phone equipment known, used countless times each day for routine communications by the vast majority of people in the country. It cannot be the case that every uninvited communication from a smartphone infringes federal law, and that nearly every American is a TCPA-violator-in-waiting, if not a violator-in fact."

The court noted that the legislative history of the Act indicated that Congress was concerned about a business practice involving 30,000 businesses and 300,000 phone solicitors, adding that "a several-fold gulf between congressional findings and a statute’s suggested reach can call into doubt the permissibility of the interpretation in consideration."

The court also rejected the FCC’s defense that the order "did not reach a definitive resolution on whether smartphones qualify as autodialers." The court said, "It is highly difficult to read the Commission’s ruling to leave uncertain whether the statutory definition applies to smartphones. And any uncertainty on that score would have left affected parties without concrete guidance even though several of them specifically raised the issue with the agency, and even though the issue carries significant implications—including the possibility of committing federal law violations and incurring substantial liability in damages—for smartphone owners."

Leaving that issue unaddressed would render the order "arbitrary and capricious" for failing "to articulate a comprehensible standard," the court said.

"In the end, then, the Commission’s order cannot reasonably be understood to support the conclusion that smartphones fall outside the TCPA’s autodialer definition: any such reading would compel concluding that the agency’s ruling fails arbitrary-and-capricious review. The more straightforward understanding of the Commission’s ruling is that all smartphones qualify as autodialers because they have the inherent ‘capacity’ to gain ATDS functionality by downloading an app. That interpretation of the statute, for all the reasons explained, is an unreasonably, and impermissibly, expansive one," Judge Srinivasan wrote.

As for the one-call safe harbor for calling reassigned phone numbers, the court "set aside the Commission’s interpretation on the ground that the one-call safe harbor is arbitrary and capricious."

Because the FCC "refused to ‘place any affirmative obligation’ on new subscribers to inform callers that a wireless number now belongs to someone else," the order "expressly contemplates that a new subscriber could ‘purposefully and unreasonably’ refrain from informing a good-faith caller about a number’s reassignment ‘in order to accrue statutory penalties.’ … In that regard, the Commission described a reported case in which the new, post-reassignment subscriber waited to initiate a lawsuit until after having received almost 900 text alerts that were intended for the previous subscriber," the court said.

The court said that the FCC "consistently adopted a ‘reasonable reliance’ approach when interpreting the TCPA’s approval of calls based on ‘prior express consent,’ including as the justification for allowing a one-call safe harbor when a consenting party’s number is reassigned. The Commission, though, gave no explanation of why reasonable-reliance considerations would support limiting the safe harbor to just one call or message. That is, why does a caller’s reasonable reliance on a previous subscriber’s consent necessarily cease to be reasonable once there has been a single, post-reassignment call? The first call or text message, after all, might give the caller no indication whatsoever of a possible reassignment (if, for instance, there is no response to a text message, as would often be the case with or without a reassignment)."

The court noted that the FCC "is already on its way to designing a regime to avoid the problems of the 2015 ruling’s one-call safe harbor. The Commission recently sought comment on potential methods for ‘requir[ing] service providers to report information about number reassignments for the purposes of reducing unwanted robocalls.’ … The Commission is also considering whether to provide a safe harbor for callers that inadvertently reach reassigned numbers after consulting the most recently updated information. … Those proposals would naturally bear on the reasonableness of calling numbers that have in fact been reassigned, and have greater potential to give full effect to the Commission’s principle of reasonable reliance."

Judge Srinivasan was joined in the opinion by Circuit Judge Cornelia T.L. Pillard and Senior Circuit Judge Harry T. Edwards.

Sen. Edward J. Markey (D., Mass.) responded to the court’s decision by saying, "In an era when the onslaught of unwanted and abusive harassing robocalls is on the rise, I am disappointed that the D.C. Circuit Court invalidated core protections that help give consumers reasonable control over their mobile devices. It is now the FCC’s obligation to use its existing authority to reestablish robust, enforceable protections to enhance the precious zone of privacy created by the law. Should the FCC fail to address this matter and preserve the intent of the law, I will work with my Congressional colleagues legislatively to restore these commonsense protections."

In a statement, FCC Chairman Ajit Pai, who had dissented from the 2015 order adopted under his predecessor, welcomed the court’s decision. "Today’s unanimous D.C. Circuit decision addresses yet another example of the prior FCC’s disregard for the law and regulatory overreach. As the court explains, the agency’s 2015 ruling placed every American consumer with a smartphone at substantial risk of violating federal law. That’s why I dissented from the FCC’s misguided decision and am pleased that the D.C. Circuit too has rejected it," he said.

"Instead of sweeping into a regulatory dragnet the hundreds of millions of American consumers who place calls or send text messages from smartphones, the FCC should be targeting bad actors who bombard Americans with unlawful robocalls. That’s why I’m pleased today’s ruling does not impact (and, in fact, acknowledges) the current FCC’s efforts to combat illegal robocalls and spoofing. We will continue to pursue consumer-friendly policies on this issue, from reducing robocalls to reassigned numbers to call authentication to blocking illegal robocalls. And we’ll maintain our strong approach to enforcement against spoofers and scammers, including the over $200 million in fines that we proposed last year," Chairman Pai added.

Commissioner Mike O’Rielly, who also dissented from the 2015 order, said, "I am heartened by the court’s unanimous decision, which seems to reaffirm the wording of the statute and rule of law. This will not lead to more illegal robocalls but instead remove unnecessary and inappropriate liability concerns for legitimate companies trying to reach their customers who want to be called. In effect, it rejects the former Commission’s misguided interpretation of the law, inappropriate expansion of scope, and irrational view of reassigned numbers. While I disagree with the court’s decision on the revocation issue, I believe there is an opportunity here for further review in order to square it with the Second Circuit’s more appropriate approach."

The third Republican Commissioner, Brendan Carr, who was nominated and confirmed last year, said, "In the Telephone Consumer Protection Act (TCPA), Congress enacted provisions to help combat the unwanted robocalls that have become a far too common nuisance for far too many Americans. Unfortunately, the prior FCC exceeded the scope of the TCPA and reached a decision of ‘eye-popping sweep,’ as today’s D.C. Circuit decision states. Rather than focusing our efforts on combatting illegal robocalls, the 2015 FCC decision opted to subject consumers and legitimate businesses to liability. Thankfully, the D.C. Circuit, in a unanimous decision, has now corrected that error. In the meantime, this FCC has elevated robocalls to our top enforcement priority, and we have already taken a number of important steps to combat those unlawful calls."

He added, "Going forward, I welcome the chance to continue working with my colleagues and all stakeholders to ensure that our rules protect consumers and legitimate businesses while targeting unlawful scammers and robocallers."

FCC Commissioner Jessica Rosenworcel, who had voted for the provisions of the 2015 order that the court overturned today, said, "Robocalls are already out of control. One thing is clear in the wake of today’s court decision: robocalls calls will continue to increase unless the FCC does something about it. That means that the same agency that had the audacity to take away your net neutrality rights is now on the hook for protecting you from the invasion of annoying robocalls. It’s past time for the American public to get a serious response from the FCC—and a reprieve from the unrelenting nuisance these calls have become for so many of us." Attorneys who practice in the TCPA space viewed the court’s decision as an important precedent and a victory for telemarketers.

"Today’s unanimous decision is a major victory for good-faith callers that have long-supported reasonable interpretations of the statute and clear rules of the road to protect consumers," said Mark Brennan, a partner at Hogan & Lovells US LLP.

"Importantly, the court also recognized that the TCPA is not the blunt policy-shaping tool that the prior FCC majority took it for and that Congress’ decades-old autodialer restrictions may be ‘increasingly inapplicable’ to ‘modern phone equipment,’" Mr. Brennan said.

He added, "Importantly, the court also recognized that the TCPA is not the blunt policy-shaping tool that the prior FCC majority took it for and that Congress’ decades-old autodialer restrictions may be ‘increasingly inapplicable’ to ‘modern phone equipment.’"

Eric Troutman, a partner at Dorsey & Whitney LLP, said, "Notably the FCC looks very different than it did in 2015 when the Omnibus was decided. Trump’s appointed Chairman—Ajit Pai—has expressed his support for industry-friendly reforms to the TCPA. The ACA ruling should, therefore, result in real change here. This is exciting stuff and very promising for TCPA defendants."

Megan Brown, a partner at Wiley Rein LLP, said, "Well-meaning companies have labored for too long trying to comply with a patchwork of confusing agency rules, orders and declaratory rulings. The Court rebuffed the FCC’s justifications. The issues now go back to the FCC, which has a chance to bring much needed clarity to an area of the law that has become little more than a trap, sprung by lawyers who make millions and do not benefit consumers. The FCC should seize the moment, and address TCPA reform."

Scott Delacourt, also a partner at Wiley Rein, said, "Today’s long-awaited decision is welcome news for businesses seeking clarity on how to lawfully communicate with their customers without exposing themselves to ruinous class action damages. The decision is a win, too, in removing a judicial cloud that will enable the FCC to act on a number of important TCPA issues now before they agency."

David Schultz, a partner at Hinshaw & Culbertson, said, "This is a significant ruling. The scope of the FCC Order was so broad as to cover almost any phone device, including smartphones. The impact of this ruling on litigation is that it will make it much harder for people to sue under the TCPA because the scope of what is an ATDS has been significantly narrowed."

Consumer groups have called on the FCC to act to protect consumers. "What the DC Court of Appeals decision really means is that consumers, already inundated by robocalls, will be hit with even more unwanted calls," said Maureen Mahoney, policy analyst for Consumers Union. "We believe that the FCC acted within its authority when it passed the rules in 2015 to provide necessary consumer protections for a growing problem. Consumers should have the right to control the calls that they receive and they deserve the strongest possible protections. Chairman Pai has said that he's committed to fighting robocalls, so the FCC needs to follow through on those promises and ensure that consumers aren't the losers in this decision.

"We call upon the FCC to recognize that the TCPA is an essential shield for consumers to protect themselves from the scourge of unwanted automated calls," said Margot Saunders, senior counsel at the National Consumer Law Center. "Chairman Pai understands that robocalls are a big problem and he has proposed several initiatives, such as a reassigned number database, to help stop them. But now all eyes will be on him to see if he will maintain the viability of the only law that allows consumers to protect themselves against uninvited and illegal calls."

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Senate passes ‘regulatory relief’ bill

By J. Preston Carter, J.D., LL.M.

The Senate passed the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155), which would modify provisions of the Dodd-Frank Act and related laws governing financial services. The measure passed by a vote of 67 to 31 with two senators not voting. It will now move to the House for consideration. A statement from the White House Press Secretary noted that the President supports the bill, and, as recently noted in a Statement of Administration Policy, he would sign it into law.

Senators opposed. In prepared remarks made on the Senate floor, Senate Banking Committee Ranking Member Sherrod Brown (D-Ohio) said S. 2155 “weakens stress tests for all large banks” and “opens the door to weaker oversight of foreign mega banks operating in the U.S,” among other problems he saw with the bill. In a separate statement released after the bill was passed, he said that in passing the bill, the Senate had “rolled back accountability measures for some of the biggest domestic and foreign banks at the expense of taxpayers.”

Similarly, House Financial Services Committee Ranking Member Maxine Waters (D-Calif) issued a statement saying the bill “takes our financial system in the wrong direction, and serves as a giveaway to banks that are already posting record profits.” And House Minority Leader Nancy Pelosi (D-Calif) said the Senate had taken “a giant leap backward towards the freewheeling days of the financial crisis.”

Treasury statement. But Treasury Secretary Steven Mnuchin issued a statement saying the Senate had taken “an important step today toward achieving common sense financial regulation” and that the bill would “safeguard American consumers through proper and effective oversight.”

In support. In floor remarks prior to the vote, Senate Majority Leader Mitch McConnell (R-Ky) said the Dodd-Frank Act has become “far too blunt an instrument for regulating our financial system,” Also, Sen. Richard Shelby (R-Ala) voted in support of S. 2155 and said it “brings relief to community banks and credit unions throughout the country.”

Senator Tim Scott (R-SC) said his provisions in the regulatory relief package would “help increase financial security for many low-income and minority families, as well as protect children and families across the country from synthetic identity theft and fraud.”

Senator Heidi Heitkamp (D-ND) said the bill would provide “needed relief for community banks and credit unions so they can support consumers in rural areas like North Dakota, where regulations designed for big banks are making it harder for small lenders to provide mortgages or loans to expand small businesses and family farms.”

Representative Scott Tipton (R-Colo) welcomed the inclusion of his MOBILE Act (H. 1457) in the bill, which, he said, would allow consumers to authorize their bank to use their personal information on their driver’s license or identification card in order to open a bank account on a mobile device. Also, he said the bill “protects consumer privacy information and upholds state privacy laws by requiring a financial institution to delete all copies of the driver’s license after using them for the allowed purpose.”

Advocacy groups. Rob Nichols, American Bankers Association president and CEO, praised passage of the bill, saying it is an “important step in right-sizing the rules for America’s banks.” The Financial Services Roundtable called the bill “a major first step to boost economic growth and help expand opportunity for more Americans.” Independent Community Bankers of America President and CEO Camden R. Fine said, “S. 2155 includes common-sense regulatory relief for our nation’s nearly 5,700 community banks while preserving vital consumer protections and effective regulatory supervision.”

However, according to a U.S. PIRG statement, “There is a strong chance this bill will increase mortgage fraud, racial discrimination, and risky banking practices.” A Public Citizen press release said, “Masquerading as aid for community banks, this legislation reduces oversight of 25 of the largest 38 banks, a group guilty of misconduct and recipients of some $48 billion in bailout money after the 2008 crash. In addition to setting the stage for another taxpayer-funded bailout, this bill also reduces safeguards against discriminatory, predatory lending for some of the most vulnerable consumers.” Also, the Center for Responsible Lending states that S. 2155 “lifts commonsense safeguards, designed to stop banks from again tanking the economy, while also making it easier for financial companies to sell risky mortgages, discriminate against communities of color, and steer manufactured-home owners into more expensive mortgages.”

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English argues Dodd-Frank’s succession plan for CFPB leadership is exclusive, mandatory

By Thomas G. Wolfe, J.D.

Challenging President Donald Trump’s appointment of Mick Mulvaney as “Acting Director” of the Consumer Financial Protection Bureau, CFPB Deputy Director Leandra English filed her reply brief with the U.S. Court of Appeals for the District of Columbia Circuit on March 6, 2018. Addressing Mulvaney’s recent brief, which invokes the Federal Vacancies Reform Act (FVRA) in support of his presidential appointment, English argues that the Dodd-Frank Act’s succession plan for the CFPB’s leadership position is “exclusive and mandatory.” Further, English contends that Mulvaney’s appointment as acting director is “separately foreclosed” by the Dodd-Frank Act requirement of Bureau independence, and that equitable factors weigh in her favor to obtain the injunctive relief she requests.

In January 2018, English filed her initial brief with the D.C. Circuit (English v. Trump, Docket No. 18-5007), requesting a preliminary injunction in support of her claim to be recognized as acting director of the CFPB. English has maintained that the Dodd-Frank Act, not the FVRA, controls the position of acting director at the Bureau when a CFPB director resigns.

In response, Mulvaney filed his brief in February 2018, and asked the federal appellate court to affirm the lower court’s ruling denying English a preliminary injunction concerning Mulvaney’s appointment as acting director of the CFPB. Among other things, Mulvaney has contended that the comprehensive scheme provided by the FVRA applies at any executive agency and is, by default, the exclusive means to select an acting officer. According to Mulvaney, the Dodd-Frank Act’s deputy director provision relied upon by English does not displace the FVRA. Mulvaney also has contended that significant practical consequences and constitutional concerns counter English’s interpretation of the Dodd-Frank Act.

Reply brief highlights. The CFPB Deputy Director’s reply brief contests Mulvaney’s appointment as acting director on three fronts.

First, English argues that the Dodd-Frank Act’s succession plan for Bureau leadership is “exclusive and mandatory.” Section 5491of the Dodd-Frank Act provides that the CFPB’s deputy director “shall … serve as acting Director” in the event of a vacancy. According to English, the statutory provision is mandatory, not permissive, and displaces the FVRA through operation of the canon that “a more specific statute will be given precedence over a more general one.” Similarly, English argues that the Dodd-Frank Act provision’s displacement of the FVRA is “confirmed by a related interpretive principle: in the event of an apparent conflict between two laws, the later of the two enactments prevails over the earlier.”

Moreover, English’s brief states that Congress was aware of the existing FVRA process when it created the specific CFPB succession plan, and Congress “sought to achieve a particular goal when it enacted §5491(b)(5)(B): protecting the CFPB’s independence from direct presidential control even when the Senate-confirmed Director was not at the helm.”

Second, English argues that the presidential appointment of Mulvaney is “separately foreclosed by Dodd-Frank’s requirement of independence.” According to English, the Dodd-Frank Act’s establishment of the CFPB as an “independent bureau” under section 5491(a) is not “mere window dressing.” In addition, because Mulvaney was already Director of the Office of Management and Budget at the White House when President Trump appointed him as “Acting Director” of the CFPB, it is “no exaggeration to say that this appointment transformed the CFPB from an ‘independent bureau’ into an executive department of the White House,” the brief asserts.

Third, the reply brief argues that, in connection with the question of whether English is likely to succeed on the merits of her request for a preliminary injunction, equitable factors weigh in her favor. Noting that “this is no everyday employment dispute,” the brief emphasizes that the core issue in the case is “who gets to claim the mantle of ‘the government’.” Underscoring that English is “asking this Court to decide who is lawfully in charge of an independent federal agency,” the reply brief points to case law for the proposition that government officials may invoke “the deprivation of their statutory right to function” as an “injury worthy of preliminary relief.”

Oral argument. Presently, the D.C. Circuit has scheduled oral argument for April 12, 2018, in the expedited appeal.

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GAO report looks at effects of derisking on Southwest border banks

By Andrew A. Turner, J.D.

Because the branch closures and service limitations in that region could be linked to derisking behavior, the Government Accountability Office recommends that federal banking regulators perform a thorough review of Bank Secrecy Act/Anti-Money Laundering rules to determine whether changes to the rules are needed to ensure access to banking services The GAO report, “Derisking along the Southwest Border Highlights Need for Regulators to Enhance Retrospective Reviews” examines the impact of derisking on access to banking services along the Southwest border region .

The Southwest border region has a high volume of cash and cross-border transactions, which can lead to more intensive account monitoring and investigation to meet BSA/AML requirements. Some Southwest border residents and businesses have reported difficulty in accessing banking services in the region. GAO was asked to undertake a review to determine if the access problems are due to derisking, the practice of banks limiting certain services or ending their relationships with customers to avoid perceived regulatory concerns about facilitating money laundering. 

Results of investigation. The GAO reviewed data from 2016 on suspicious activity reports (SARs) and found that the average number of SARs filed (per billion dollars in deposits) in the Southwest border region was two and a half times the number for high risk counties outside the region. The survey also found that 80 percent of banks in the region had terminated accounts for BSA/AML risk reasons and 80 percent limited or did not offer accounts to customers who were considered high risk for money laundering, because those customers drew heightened regulatory oversight. In addition, money-laundering related risks were a more important driver of branch closures in the region than elsewhere.

The GAO concluded that some account terminations and limitations were consistent with BSA/AML purposes, but some raised concerns about derisking, such as the practices of denying accounts to money service businesses. The account terminations and limitations, along with branch closures, have raised concerns that Southwest border communities will suffer from reduced economic growth and lack of access to banking services.

Recommendations. The GAO noted that although regulators have produced some guidance on derisking, they have taken few steps to determine how banks’ regulatory concerns and BSA/AML compliance efforts may be influencing banks to engage in derisking or to close branches. The report recommends that the Financial Crimes Enforcement Network, Federal Deposit Insurance Corporation, Federal Reserve Board, and Office of the Comptroller of the Currency should jointly conduct a retrospective review of BSA/AML regulations and their implementation. The review should focus on the extent to which banks’ regulatory concerns may be influencing their willingness to provide services. The FDIC, Fed, OCC, and FinCEN should then revise the BSA regulations to ensure that BSA/AML regulatory objectives are being met in the most efficient and least burdensome way.

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National Bank Act does not preempt California’s mortgage-escrow interest law

By Thomas G. Wolfe, J.D.

Recently, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit ruled that the National Bank Act does not preempt California’s mortgage-escrow interest law. The federal appellate court was called to address a borrower’s proposed class action against Bank of America, N.A., claiming the bank violated both California and federal law by failing to pay interest on funds in the borrower’s mortgage escrow account. In its March 2, 2018, decision (Lusnak v. Bank of America, N.A.), the panel noted that the Dodd-Frank Act essentially codified the existing preemption standard enunciated by the Supreme Court in its 1996 Barnett Bank of Marion County, N.A. v. Nelson decision, and the panel applied that Barnett Bank standard. Further, the panel held that although the borrower could not rely on federal Truth in Lending Act amendments that took effect after his mortgage escrow account had been established, the borrower was not prevented from seeking relief under the theory that the bank violated California’s Unfair Competition Law by failing to comply with the state’s mortgage-escrow interest law.

As a result, the Ninth Circuit panel reversed the rulings of the lower federal trial court and remanded the matter, allowing the borrower to proceed with his California Unfair Competition Law and breach-of-contract claims against Bank of America.

Backdrop. In keeping with the terms of a 2009 mortgage refinancing agreement and a 2011 loan modification agreement between the borrower and Bank of America, both federal and state law governed the contracts. The borrower and the bank agreed that the mortgage required Bank of America to pay mortgage interest on escrow funds if required by federal law, or by state law when not preempted. As a condition for obtaining his mortgage, the borrower was required to open and maintain an escrow account, and he paid $250 per month into this account.

Complaint. In his class-action complaint, the borrower alleged that the bank was able to “enrich itself by earning returns on funds in his account” without paying him interest, as required under California’s escrow interest law and the federal Truth in Lending Act (TILA). The borrower also claimed that the bank breached the underlying mortgage agreement. In response, Bank of America acknowledged not paying any interest on the escrow account, but argued that it was not required to do so under federal law and that any state interest-usury law requirements were preempted by the National Bank Act.

The lower federal court agreed with Bank of America’s assessment and granted the bank’s request to dismiss the borrower’s complaint. From the trial court’s perspective, California’s escrow interest law was preempted by the National Bank Act because the state law prevented or significantly interfered with the “banking powers” of Bank if America. The borrower appealed that decision to the Ninth Circuit.

State, federal law. Under the pertinent provision of the California Civil Code, every financial institution is required to pay “at least 2 percent simple interest” per year on escrow account funds. Meanwhile, under Dodd-Frank Act amendments to TILA covering the “applicability of payment of interest,” every creditor, if prescribed by applicable state or federal law, “shall pay interest to the consumer on the amount held in any impound, trust, or escrow account that is subject to this section in the manner as prescribed by that applicable State or Federal law.”

The borrower argued that the Dodd-Frank Act provision made it clear that Congress did not perceive any conflict between the California state law and the powers of national banks and did not intend for these types of state laws to be preempted by the National Bank Act. In contrast, Bank of America argued that such state laws are preempted because they still “prevent or significantly interfere” with the exercise of a national bank’s banking powers, and a preempted law could not be construed to be “an applicable law” under the Dodd-Frank Act amendments to TILA.

Preemption decision. After reviewing the guiding principles of federal preemption and the National Bank Act’s preemption framework, the Ninth Circuit panel stated that “Congress underscored that Barnett Bank continues to provide the preemption standard; that is, state consumer financial law is preempted only if it prevents or significantly interferes with the exercise by the national bank of its powers.” Notably, the panel also indicated that to the extent that the Office of the Comptroller of the Currency “has largely reaffirmed its previous preemption conclusions without further analysis under the Barnett Bank standard, … we give it no greater deference than before Dodd-Frank’s enactment, as the standard applied at that time did not conform to Barnett Bank.” Moreover, other regulatory changes under the Dodd-Frank Act requiring the OCC to make determinations on a “case-by-case basis,” evaluating state consumer laws, and consulting with the Consumer Financial Protection Bureau, “have no bearing here where the preemption determination is made by this court and not the OCC.”

In holding that the NBA does not preempt California’s mortgage-escrow interest law, the panel determined that “no legal authority establishes that state escrow interest laws prevent or significantly interfere with the exercise of national bank powers, and Congress itself, in enacting Dodd-Frank, has indicated that they do not.” In reaching its conclusion, the panel asserted: (i) minor interference with federal objectives is not enough; (ii) the California state law governing mortgage-escrow interest accounts does not significantly interfere with Bank of America’s exercise of its banking powers; (iii) while the Dodd-Frank Act does not define “applicable law,” the dictionary definition of “applicable” law “would appear to include any relevant or appropriate state laws that require creditors to pay interest on escrow account funds;” and (iv) the pertinent legislative history supported the court’s decision.

State claims for relief. Turning to the borrower’s claims for relief under California’s Unfair Competition Law, the panel further determined that the borrower could not rely on the Dodd-Frank Act amendments to TILA because the borrower’s escrow interest account was set up before those amendments took effect. However, that determination did not prevent the borrower from obtaining relief under the state’s Unfair Competition Law on the theory that the bank failed to comply with California’s escrow interest law. Likewise, according to the panel, in connection with the borrower’s breach-of-contract claim, a jury could find that the “Applicable Law provision of the contract also requires that Bank of America pay interest on funds in [the borrower’s] escrow account.”

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