Iowa Banking Law Blog

The Mighty Sword of Preemption Sheathed; State AGs Can Enforce State Lending Laws

The battle between federal banking regulation and state regulation of national banks has been brewing for years.  It has been primarily a one-sided battle; the OCC has wielded the mighty sword of preemption and consistently vanquished state regulators, with their consumer protection warhorn around their neck, in courtrooms across the country.  The OCC has aggressively maintained its power to preempt state laws that affect national banks’ federally authorized activities.  State regulators have argued that the broad preemption endorsed by the OCC weakens state consumer protection and fair lending laws.  In Cuomo v. Clearing House Association, LLC, the Supreme Court ruled in favor of state regulation, at least partially, forcing the OCC to sheath its mighty sword in state judicial enforcement actions. 

 

In Cuomo, the New York Attorney General sent letters to various national banks requesting nonpublic information regarding their lending practices.  The AG was investigating the banks' residential lending practices for violations of the state fair lending laws.  The OCC and a trade group for the banks brought suit to enjoin the request claiming that the National Bank Act preempts the enforcement of state fair lending laws against national banks.  The Court held that the NBA does not prohibit the ordinary enforcement of state law.  The Court clearly delineated between any purported state “visitorial powers” or general oversight of national banks, which is preempted by the NBA, and the “prosecution enforcement actions,” which is not preempted.  When the state sues to enforce a state law against a national bank, it is not exercising visitorial or oversight powers; it is exercising its power to enforce state law.  Thus, the New York Attorney General could not simply request nonpublic lending information from national banks, but could bring suit or get a judicial search warrant and obtain the information though legal channels.  Under the Court’s ruling, only the OCC can exercise administrative visitorial oversight of national banks.  Substantive state law, on the other hand, can be enforced judicially by state authorities. 

 

This decision levels the playing field between state and national banks.  National banks now must clearly abide by the same fair lending and consumer protection laws as state banks.  The decision also will likely increase the regulatory burden on national banks, as they will have to be sure to comply with the differing consumer protection and lending laws of individual states.  It is unclear at this time how this decision will fit into the Obama administration's planned reform of the banking system.  For the time being, however, the mighty sword of preemption has lost a bit of its shine, and the warhorns of state attorney generals are sounding across the nation.

 

If you have questions, please contact Jeff Andersen at 515-246-4503 or jandersen@dickinsonlaw.com.

Supreme Court Upholds Tax Exemption for In-State Bonds

In Kentucky v. Davis, the United States Supreme Court upheld the long-established practice of many states which tax bond interest from other states but exempt from their state income tax interest on in-state bonds.  The Court’s 7-2 decision, issued on May 19, 2008, has the effect of avoiding disruption of the municipal bond market. 

Kentucky’s income tax law taxed interest on bonds issued by other states and their subdivisions but exempted interest on bonds issued by the State of Kentucky and its political subdivisions.  The issue before the Supreme Court was whether this violated the Commerce Clause found at Article I, §8 of the United States Constitution, which expressly empowers Congress to regulate “Commerce . . . among the several States . . . .”  The Supreme Court has considered that this express grant of power to Congress requires, by implication, a “dormant Commerce Clause” prohibition on state laws that discriminate against interstate commerce.  A “market participant exception” to the restrictions imposed on the states by the dormant Commerce Clause applies when a state or local government actually participates in a market rather than merely regulating other market participants.    

The majority opinion, written by Justice Souter, emphasized that Kentucky’s law favoring in-state bonds related to “a quintessentially public function, with a venerable history” and involved Kentucky’s direct market participation. The majority opinion concluded that no “traditionally forbidden discrimination” against interstate commerce was involved because Kentucky’s law did not create “a commercial advantage for goods or services marketed by local private actors”, but instead involved state government carrying out civic objectives.

By Arthur F. Owens (aowens@dickinsonlaw.com)

Eight Circuit Confirms Blanket Bankers Bond Does Not Cover Bank's Losses

In a recent case, Ohio Savings Bank (“OSB”) sought indemnity for losses under a bankers blanket bond issued by Progressive Casualty Insurance Co. (“Progressive”).  OSB incurred losses after buying loans which went into default as the result of the actions of the party who had sold the loans to OSB.    The Eighth Circuit confirmed this month that the blanket bond did not cover the losses.

The bond did not cover losses resulting from normal lending activities, but there were two exceptions to the exclusion.  OSB argued that the losses were covered under a rider entitled, “Fraudulent Mortgages Insuring Agreement (‘FMIA’),” and that the losses were covered by “Insuring Agreement (E).”  The Eighth Circuit rejected both arguments.

Regarding FMIA, the Eighth Circuit limited application of FMIA to cover losses from a mortgage “defective by reason of the signature thereon,” which failed to provide a security interest because the mortgagor was tricked or defrauded as to the nature of the document signed.  As the borrowers admitted that they understood they were signing mortgages to encumber their property, the mortgages were not defective.  Thus, OSB was not covered for losses which resulted simply by the borrowers’ refusal to pay their mortgage notes.

With regard to Insuring Agreement (E), this provision was held to cover losses resulting when an instrument is lost or stolen from its rightful owner and then used to persuade a bank to extend credit.  As the mortgages in question were the borrowers’ mortgages, and the original documents were not lost until after OSB relied on what was assigned in extending credit to the borrowers, OSB’s losses were not covered.  The Eighth Circuit held that losing collateral documents after a loan was made is precisely the sort of practice that is excluded from coverage by a bankers blanket bond.

Court Holds State Licensing Laws Not Preempted By Federal Law

In State Farm Bank, F.S.B. v. John B. Reardon, a case out of the Southern District of Ohio, a federal judge ruled that a thrift's independent contractors are subject to state licensing laws.  State Farm Bank ("SFB") used independent contractors to sell insurance and commercial retail bank products.  It sought to have these agents market mortgages.  In 2004, State Farm Bank was issued a formal opinion from OTS counsel stating that federal law preempts state laws relating to the banking activities of SFB's independent contractors.  SFB notified the Ohio Superintendent of this opinion, but the Superintendent maintained that state law requiring mortgage broker licenses was not preempted.

The court concluded that "while the OTS may have the authority to extend federal preemption to agents of federal depository institutions, it has failed to comply with the Administrative Procedures Act in its efforts to do so."  It held that the OTS could only extend preemption to independent third parties through a formal regulation issued after publication and public hearing.  The letter signed by OTS counsel was insufficient.  The court went on to state that the "mortgage foreclosure crisis" underscores the need to follow the Administrative Procedure Act and that the OTS's proposal would create a situation in which certain mortgage brokers are not licensed by state or federal law.  In sum, the court stated that the OTS may have the authority to preempt the state licensing statutes at issue, but did not take the necessary Administrative steps necessary to effect such preemption.   

The court distinguished Watters v. Wachovia on the basis that Watters dealt with operating subsidiaries of national banks.  While these subsidiaries are supervised and regulated by the OCC to the same extent as the parent bank, wholly independent contractors are not. 

This case is contrary to a 2006 case out of Connecticut with very similar facts.  In State Farm Bank, F.S.B. v. Burke, the court held that OTS regulations preempted state licensing laws.  That court declined to address the argument that the Opinion Letter had not followed the Administrative Procedure Act.  State Farm Bank appealed the decision. 

The facts in these two cases exemplify the delicate nature of many Opinion Letters -- is it an interpretation of existing laws and regulations or is it an improper change in the law?  Also, the Ohio case shows that the preemption tug-of-war is far from over.   

For more information on this case contact Jeffrey Andersen.

LARGEST JUDGMENT IN FTC HISTORY FOR DEBT COLLECTIONS VIOLATIONS

The United States District Court in the District of New Jersey awarded the Federal Trade Commission a $10.2 million judgment and an injunction against a debt collection company earlier this month.  According to the FTC, this judgment constitutes the largest in FTC history for violations of the Fair Debt Collections Practices Act (FDCPA). 

In Federal Trade Commission v. Check Enforcement, et al., the FTC filed a complaint in 2003 alleging, among other things, that Defendants’ debt collection practices on NSF checks violated the FDCPA and the Federal Trade Commission Act.  According to the complaint, Defendants purportedly routinely sent collection letters that failed to identify the face value of the NSF check and merely stated the total amount due without noting the additional charges they were attempting to impose.  Defendants also allegedly threatened consumers with arrest and prosecution through collection letters and harassing telephone calls.  Those who attempted to assert their rights under the FDCPA were further abused and harassed. 

Among Defendants’ arguments were that the check writers’ actions were tantamount to criminal conduct and thus, they should not be afforded the protections of the FDCPA.  Since the FDCPA did not apply, according to the Defendants, then the Defendants could not be considered “debt collectors” subject to the FDCPA.  The Court rejected these arguments and stated, among other things, that Defendants satisfied the FDCPA definition of “debt collector” in that they used “any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts” and they regularly collected or attempted to collect “directly or indirectly, debts owed or due or asserted to be owed or due another.”  The Court further reasoned that there was insufficient evidence that the check writers intentionally wrote checks on accounts with insufficient funds or on closed accounts with the intent to steal the service or merchandise provided.

To read a full copy of the opinion and final order of the Court, as well as other pleadings filed in this case, click here.

For further information contact Mary A. Zambreno.

Companies May be Partially Shielded from Data Breach Class Action Suits

            The Seventh Circuit dismissed a class action lawsuit against Old National Bancorp, ruling consumers had no right to recover for a 2005 data breach.  The plaintiffs accused Old National Bancorp of failing to properly secure personal data collected through its web site after a hacker obtained access to a 2005 online customer application.  The breach exposed financial data and personal information, including social security numbers, of thousands of customers.

            The plaintiffs believed they should be compensated for the credit monitoring services they needed after the breach.  The Court ruled that Indiana law did not provide recovery for plaintiffs’ mere “allegations of increased risk of future identity theft.”  The Court stated the consumers “have not suffered a harm that the law is prepared to remedy.” 

            In sum, victims of data breaches cannot recover until they can show the breach actually led to identity theft.  At least according to this Court's determination, no remedy exists for an increased likelihood of identity theft, or for the expenses of credit monitoring.

For other articles on this see Wired, and Computerworld. 

Valuation Issues and Reverse Stock Splits

It is important to read the footnotes when considering how a minority interest in your bank or bank holding company might be valued. Iowa Code §524.1406(3) permits the use of minority and marketability discounts in determining fair value in connection with appraisal rights for banks and bank holding companies. We have successfully represented a client in a district court case in which this provision was recognized and upheld against a constitutional challenge. At first glance it might appear that the Iowa Supreme Court’s July 13 2007 decision in Northwest Investment Corp. v. Wallace reaches a different result. In that new reverse stock split case an appraised value was approved that not only did not apply such discounts but added a control premium. The critical distinction is found in footnote 3 which indicates that the corporation involved was not a "bank holding company" within the meaning of Iowa Code §524.1801. Therefore, the generally applicable corporate standards for determining fair value set forth in Iowa Code §490.1301 applied, rather than the special rule for banks and bank holding companies found in Iowa Code §524.1406(3).

For more information contact Arthur F. Owens, who practices primarily in business and corporate law.

Iowa Supreme Court Dismisses Antitrust Class Action Against Visa and MasterCard

In Southard et. al. v. Visa USA Inc. and MasterCard Int’l Inc. the plaintiffs in a class action alleged that Visa and MasterCard violated Iowa antitrust laws and were unjustly enriched as a result of Visa and MasterCard’s tying arrangement whereby merchants who accepted credit cards were required to accept debit cards.  As discussed in an earlier article, Visa and MasterCard entered into a multi-billion dollar settlement with merchants as a result of this alleged tying arrangement.

The plaintiff class members claimed that under this arrangement merchants were forced to pay inflated fees which were passed on to consumers.  They asserted that they were indirect purchasers under Comes v. Microsoft, in which the Iowa Supreme Court rejected the application of the federal rule prohibiting indirect purchaser antitrust suits to Iowa’s antitrust laws. 

The Iowa Supreme Court affirmed the lower court’s dismissal of the plaintiffs’ claim.  It reasoned that the plaintiffs’ alleged injuries were too remote to occasion antitrust standing.  As to the plaintiffs’ contention that they were indirect purchasers with antitrust standing under Comes v. Microsoft the court stated that the plaintiffs were not purchasers at all.  In Comes, the “indirect purchasers” ultimately bought the Microsoft software in question.  In this case, the consumers did not purchase the product subject to the alleged anticompetitive behavior—debit processing services.  The merchants were the end-purchasers of the debit processing services; the consumers merely bought consumer goods.    

Therefore, the court made it clear that the expansive language of Comes (stating that Iowa law creates a cause of action for “all consumers regardless of one’s status as a direct or indirect purchaser) does not give standing to all consumers injured by anticompetitive behavior.  Even if adversely affected by anticompetitive behavior, consumers will not have antitrust standing under Iowa law unless they are direct or indirect purchasers of the product in question.  Being charged a higher price for other goods, even if the higher price is the result of anticompetitive behavior, will not give a potential plaintiff standing as an indirect purchaser.

If you have any questions or comments, contact Jeffrey Andersen.   

Supreme Court Holds that SEC Regulation Immunized Investment Banks from Certain Antitrust Suits

In Credit Suisee Securities v. Billing, the United States Supreme Court held that antitrust laws do not apply to certain areas subject to SEC regulation. The plaintiffs in the case alleged that the syndication and marketing techniques of a dozen investment banks and underwriters, including alleged “tying” and “laddering,” violated antitrust laws and artificially influenced the market for dot-com boom IPOs.  In denying the plaintiffs’ claim, the Court showed a broad deference to the SEC, reasoning that the alleged conduct fit squarely within SEC regulation and that the SEC had authority to regulate the conduct.  On this basis, the Court held that the SEC regulations precluded the application of antitrust laws.

The Court emphasized the SEC’s superior ability to handle these types of complex line-drawing cases.  The Court also expressed a lack of faith in courts, stating that in this type of situation “antitrust courts are likely to make unusually serious mistakes.” 

This decision could be indicative of a broader surge in regulatory empowerment.  Surely other agencies that regulate banks, telecommunications, or other complex fields also have more expertise than courts.  This case raises several questions.  To what other regulatory agencies will this reasoning be applied?  Do regulatory agencies provide a safe harbor from certain civil court suits?  What other civil actions could arguably be precluded by federal regulation?

First Circuit Holds that Federal Law Preempts State Regulation of Gift Cards

       SPGGC, LLC v. Ayotte is the first case to apply the Supreme Court’s decision in Watters v. Wachovia Bank, N.A.  In Watters, the Court held that federal law preempts state regulation of national bank operating subsidiaries.  Specifically, the Michigan Mortgage Brokers, Lenders and Services Licensing Act and the Michigan Mortgage Loan Act were preempted by National Bank Act provisions protecting national banks from significant state interference in the “business of banking.”  Thus, the power of an operating subsidiary of a national bank to engage in real estate lending could not be significantly impaired or impeded by state law. 

       SPGGC, LLC v. Ayotte takes Watters a step further.  It applies federal preemption to state regulation of third parties when such regulation impedes a power conferred on national banks by the National Bank Act.  In Ayotte a New Hampshire statute prohibited the sale of gift cards when the cards contained an expiration date and administrative fees diminishing the value of the card.  Even though it does not specifically regulate banks, the court held that National Bank Act and OCC regulations giving national banks the power to issue gift cards preempted the statute.  Citing to Watters, the court stated that it “is not whom the New Hampshire statute regulates, but rather, against what activity it regulates.”  Therefore, because federal law allows national banks to issue gift cards through a third party with an expiration date and certain administrative fees, the New Hampshire statute curtailing this power is preempted—even though as applied in this case, the statute only regulated a third party non-bank entity.

       This case shows that post-Watters, federal preemption will apply beyond the bounds of state banking codes into any state statute that could hamper permitted activities of a national bank.  As the scope of preemption for national banks broadens, the state charter faces yet another challenge as to the equal playing field for its products and services.  The ruling also illustrates some of the interesting issues that can arise from the growing gift card/stored value card industry. 

For further information contact Howard O. Hagen or Jeffrey J. Andersen of Dickinson, Mackaman, Tyler & Hagen, P.C.