In this 2021 year-end summary, the Financial Services Law Blog analyzes several of the most impactful financial services decisions and regulatory developments at both the national and local state level. 2021 was a year marked by several significant United States Supreme Court and other federal court decisions affecting financial servicing issues and legislation across the country and closer to home. Additionally, the impact of the CARES Act on mortgage servicing continued to play out, while the CFPB issued the important 2021 COVID Serving Rule amending Regulation X.
Split Supremes Hold Concrete Injury Was Required in FCRA Class Action Case
In June, the United States Supreme Court, in a split 5-4 decision reversing the Ninth Circuit Court of Appeals, affirmed the once fundamental – yet at one point, seemingly eroding – legal principle that a plaintiff must actually suffer harm before being able to sue on a federal statutory claim. The decision (TransUnion LLC v. Ramirez, 141 S. Ct. 2190, 210 L. Ed. 2d 568 (2021)) reversed a $40 million class action judgment award based upon a finding that thousands of class members had demonstrated “no concrete harm” and therefore no standing for two of three Fair Credit Reporting (“FCRA”) claims.
Ramirez originated from the named plaintiff’s visit to a local car dealer. Mr. Ramirez had negotiated a price and even selected a color, the Court noted, before he was told that he was being denied financing because his name had showed up on an OFAC advisor “terrorist list.” He contacted TransUnion and was told that he in fact was listed as a “prohibited Specially Designated National (SDN).” Such designation was completely erroneous and was removed when Mr. Ramirez disputed it.
He sued on behalf of 8,185 class members, asserting claims that TransUnion failed to follow reasonable procedures to ensure the accuracy of credit files and also failed to provide consumers with complete credit files and a summary of rights upon request. The class was certified based on all of the class members having been falsely listed as prohibited SDNs, although only 1,853 of them had had their credit reports furnished to potential creditors. The Ninth Circuit found all of them had standing on these claims, disturbing the jury’s verdict and the magistrate’s judgment only insofar as to cut in half (as excessive) the $6,300-per-class-member punitive damages award.
But the Supreme Court reversed the judgment entirely, finding on the “reasonable procedures” claim that only the 1,853 class members whose credit reports had been provided to third parties actually suffered a concrete harm necessary for Article III standing. The Court also found that the class members other than Mr. Ramirez had failed to demonstrate any concrete harm with respect to the other claims.
The majority decision, penned by Brett Kavanaugh, contained the sound bite phrase, “No concrete harm, no standing.” The dissenting opinion, authored by Clarence Thomas, was grounded in disagreement on whether the class members had actually suffered a concrete harm, positing that a consumer’s receipt alone of an erroneous credit report should give rise to standing to sue on a FCRA claim.
Ramirez Decision Applied to Find No Sufficient Concrete Injury Allegation
The Ramirez decision was applied just weeks later in Grauman v. Equifax, No. 20-cv-3152, 2021 U.S. Dist. LEXIS 142845 (E.D.N.Y. July 16, 2021). In Grauman, although the plaintiff’s mortgage payments were suspended for a 2.5-month period in 2020, plaintiff continued to make his monthly mortgage payments on time. But his credit score suffered a 16-point drop, which he attributed to Well Fargo’s alleged improper reporting of his mortgage payment suspension.
Applying Ramirez, the court dismissed plaintiff’s FCRA claim for lack of subject matter jurisdiction, finding that plaintiff had failed to allege any concrete injury where there was no allegation of dissemination of his credit report to third parties.
Moratoriums and Modified Loss Mitigation Procedures under the CARES Act
Early in the COVID-19 pandemic in 2020, the CARES Act became law and established a foreclosure and eviction moratorium on federally backed mortgage loans. Section 4022 of the Act also provided for loan forbearance for borrowers on such loans “experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency.”
The federal foreclosure and eviction moratorium sunset at the end of July 2021. When Congress did not act to extend the eviction moratorium, the Centers for Disease Control purported to stand in for Congress and issue its own extension of the eviction moratorium. But that action was struck down by SCOTUS in August in Ala. Ass’n of Realtors v. HHS, 141 S. Ct. 2485, 210 L. Ed. 2d 856 (2021), on grounds that the CDC lacked the authority to issue such an extension. However, financial institutions and their counsel are advised to continue monitoring state-and-local-level limitations on evictions and foreclosures relating to the pandemic.
FHFA Structure Not Up to Constitutional Muster, Holds SCOTUS
Another significant but unsurprising Supreme Court decision came down in May – Collins v. Yellen, 141 S. Ct. 1761, 210 L. Ed. 2d 432 (2021). This decision held that the single-director, terminable only-for-cause structure of the Federal Housing Finance Agency (FHFA) was unconstitutional under the separation of powers clause, similar to last year’s CFPB decision.
The underlying lawsuit came from Texas and was brought by shareholders of Fannie Mae and Freddie Mac who alleged injury from a recent action of the FHFA Director that amended a purchase agreement in which the Treasury provided billions in capital in exchange for shares of Fannie and Freddie. Addressing, inter alia, the shareholder’s constitutional claim, the Court found the FHFA unconstitutional in its current form, particularly in light of the restriction in the 2008 Housing and Economy Recovery Act (which created the FHFA to oversee Fannie and Freddie) upon the President’s removal powers with respect to the FHFA Director.
Citing its 2020 Seila Law opinion regarding the unconstitutional structure of the CFPB,the Court reasoned that even “modest restrictions” on the President’s power to remove the head of an agency with a single top officer/director (here, of the FHFA) were unconstitutional. The case was affirmed in part, but reversed in part, and remanded to the district court for proceedings addressing whether the unconstitutional structure of the FHFA caused the shareholders’ alleged injury. Within hours, President Biden served walking papers on the previous FHFA Director Calabria and named Sandra Thompson as the new acting Director.
Kansas Ban on Credit Card Transaction Surcharges Found Unconstitutional
A February decision of the United States District Court for the District of Kansas found, for purposes of the plaintiff and transactions at issue in that case, that the 35-year-old Kansas “no-surcharge” statute was unconstitutional as a violation of plaintiff CardX, LLC’s First Amendment right to commercial speech. The statute, K.S.A. 16-a-2-403, provides that “no seller or lessor in any sales or lease transaction or any credit or debit card issuer may impose a surcharge on a card holder who elects to use a credit or debit card in lieu of payment by cash, check or similar means.”
In CardX, LLC v. Schmidt, 522 F. Supp. 3d 929 (D. Kan. 2021), the court found the statute violative of the First Amendment and all three factors of the United States Supreme Court’s test (as set forth in Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n of New York, 447 U.S. 557, 561 (1980)) for determining the constitutionality of a statute restricting commercial speech. The court further (1) cited the need for surcharges to protect businesses with small profit margins from bearing the cost and burden of transaction fees imposed by credit card providers and (2) reasoned that the restriction placed an undue burden on merchants given the heightened demand for contact-free transactions in the COVID era.
While CardX was being decided, Kansas HB 2316 was introduced and would lift the statutory surcharge ban. That bill has since passed the Kansas House and has been referred to a Kansas Senate committee, where it currently sits. As noted in our April 2021 blog post, in the event that this bill does not pass the Kansas legislature, additional challenges to the current no-surcharge statute can be fully expected.
In an impactful and split Opinion, the United States Supreme Court has reversed a $40 million class action judgment award in light of its finding that thousands of class members had no standing for two of three Fair Credit Reporting Act (“FCRA”) claims, and that the majority of those class members lacked standing for the remaining claim.
As we advised in our December 2020 Financial Services Law Blog post, the Ramirez case, filed in the Northern District of California, arose when Mr. Ramirez faced an alarming situation at a car dealership: he was denied financing for a car loan due to an erroneous credit report alert indicating that he was listed on an OFAC advisor “terrorist list.” Although Mr. Ramirez’ wife was able to obtain approval to purchase the car, Mr. Ramirez later received a letter from TransUnion indicating that he was listed as a “prohibited Specially Designated National (SDN).” TransUnion removed the alert after Mr. Ramirez disputed the designation.
It was later learned that 8,185 other individuals had been falsely labeled as prohibited SDNs. Although only 1,853 of those individuals’ credit reports were furnished to potential creditors during the relevant time period, all 8,185 individuals were certified as class members and found by the lower courts to have Article III standing.
Mr. Ramirez filed suit on behalf of himself and the 8,185 class members, asserting that TransUnion failed to follow reasonable procedures to ensure the accuracy of credit files, and that it failed to provide consumers with complete credit files and a summary of rights upon request of the consumer. At trial, the jury awarded approximately $1,000 in statutory damages and $6,300 in punitive damages per class member. The Ninth Circuit Court of Appeals held that the class members all had standing but reduced the punitive damages award by roughly 50% on the basis that it was excessive. Now, the Supreme Court has reversed the judgment altogether.
The Supreme Court began its Opinion by citing the longstanding principle that, in order to have standing, claimants must have suffered a “concrete harm” that resulted from the defendant’s conduct and that is capable of being redressed by the Court.
Applying this standard to the “reasonable procedures” claim, the Court first found that the 1,853 plaintiffs whose credit reports were provided to third parties did suffer a concrete harm similar to the type of reputational harm that would be caused by a defamatory statement. The remaining 6,332 class members, on the other hand, suffered no such harm because the false information was not “published,” or furnished, to any third parties. The Court reasoned that the harm suffered from false information stored in a credit file would be similar to an insulting letter that sat in the author’s desk drawer – nonexistent.
The Court then considered whether any of the 8,185 unnamed class members had standing to assert their claims for failure to provide complete credit files and a summary of rights upon request. Plaintiffs did not demonstrate that TransUnion’s potentially faulty mailings caused any harm at all to plaintiffs. Therefore, the Court found there was no standing under Spokeo because these mere technical violations were “divorced from any concrete harm.” The Court rejected any argument by plaintiffs that there was a threat of future harm for any of the asserted claims.
The Opinion was bookended with this simple phrase, penned by Justice Kavanaugh: “No concrete harm, no standing.” And with that, the $40 million judgment out of the Ninth Circuit is reversed, and the case is remanded for proceedings consistent with the Supreme Court’s findings concerning standing.
The Court was split 5-4, and Justice Thomas authored the dissenting opinion.
The Ramirez case will, no doubt, have a reach far beyond FCRA claims. Baker Sterchi will continue to monitor for subsequent litigation interpreting the Ramirez decision.
In an action initiated by certain shareholders of Fannie Mae and Freddie Mac, the United States Supreme Court issued its Opinion holding that the single-director, terminable only-for-cause structure, violated the separation of powers clause of the United States Constitution.
The Federal Housing Finance Agency (FHFA) was created in 2008 and instilled with authority to oversee Fannie Mae and Freddie Mac under the 2008 Housing and Economy Recovery Act. The underlying action relates to a Purchasing Agreement wherein the Treasury provided billions of dollars in capital in exchange for shares of Fannie and Freddie, following the 2008 housing and financial crisis. The lawsuit originated in the United States District Court for the District of Texas, where certain shareholders of Fannie and Freddie brought an action seeking relief following recent action by the FHFA Director that the shareholders alleged exceeded the Director’s authority and caused them financial injury. Two of the shareholder claims were analyzed by the Supreme Court in its recent holding.
First, the Supreme Court dismissed the shareholders’ statutory claim seeking to reverse the FHFA Director’s third amendment to the Purchasing Agreement. The shareholders claimed the FHFA Director exceeded his authority in amending the Purchase Agreement, but the Supreme Court held this statutory claim must be dismissed, noting that the Recovery Act (12 U.S.C. § 4617(f)) prohibited any court from restraining or affecting the powers or functions of the FHFA as a conservator or receiver.
Second, with respect to the shareholders’ constitutional claim, the Supreme Court first addressed the issue of standing, finding that the Fannie and Freddie shareholders had standing because they had suffered an injury in fact where their property rights in Fannie and Freddie were transferred by the FHFA Director to the Treasury. Moving on to the merits, the Supreme Court cited to its year-old opinion in Seila Law concerning the unconstitutional structure of the CFPB in holding that the FHFA was likewise unconstitutional in its current form, particularly because the Recovery Act restricted the President’s removal powers as to the Director. More information regarding the Seila Law holding may be found in our July 2020 blog post.
In its Opinion, the Supreme Court rejected an argument that the CFPB was somehow distinguishable from the FHFA due to the relative breadth of each agency’s authority. The Court also soundly rejected the argument that the “for cause” removal restriction gave the President more removal authority than some other provisions reviewed by the Court; for instance, the CFPB director had been removable only for “inefficiency, neglect of duty, or malfeasance in office.” This distinction did not matter to the Supreme Court, which noted that it had already held that even “modest restrictions” on the President’s power to remove a single-director were unconstitutional. The case was affirmed in part, reversed in part, and remanded to the lower court to address whether the unconstitutional structure of the FHFA caused the shareholders’ alleged injury.
Just hours after the ink was dry on the Supreme Court’s Opinion, President Biden fired previous FHFA Director Calabria and named the new acting director, Sandra Thompson. Ms. Thompson has previously served as the FHFA deputy director of the Division of Housing and Mission Goals.
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Baker Sterchi's Financial Services Law Blog explores current events, litigation trends, regulations, and hot topics in the financial services industry. This blog informs readers of issues affecting a wide range of financial services, including mortgage lending, auto finance, and credit card/retail transactions. Learn more about the editor, Megan Stumph-Turner, and our Financial Services practice.
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