Consumer Law & Policy Blog

Ann Graham on the Surprises in Watters v. Wachovia

Professor Ann Graham, a banking law scholar, focuses on a few of the surprises in today's decision in the Watters v. Wachovia case:

1.  Justice Ginsburg authored the majority opinion, joined by Justices Kennedy, Souter, Breyer, and Alito.  In oral argument, Justice Ginsburg asked few questions of either party.  The Dissenting Opinion was written by Justice Stevens, joined by Chief Justice Roberts and Justice Scalia.  All these dissenting justices were active participants in the oral argument, displaying clear concern for the impact of this case on preemption jurisprudence.

2.  This is perhaps the biggest surprise:  The majority opinion did not examine Chevron deference at all.  According to the majority, the National Bank Act preempts the Michigan statute affecting state-chartered mortgage lending corporations which are structured as operating subsidiaries of national banks.  The majority opinion cannot point to any National Bank Act language for this preemption and does not examine Congressional intent.

3.  As Justice Stevens points out in the dissenting opinion, "the Court's eagerness to infuse congressional silence with preemptive force threatens the vitality of most state laws as applied to national banks -- a result at odds with the long and unbroken history of dual state and federal authority over national banks, not to mention our federal system of government.  It is especially troubling that the Court so blithely preempts Michigan laws designed to protect consumers.  Consumer protection is quintessentially a 'field which the States have traditionally occupied.' [citations omitted]"

4.  Here's the concluding statement of the dissent regarding the impact of this decision:  "Never before have we endorsed administrative action whose sole purpose was to preempt state law rather than to implement a statutory command."

(cross-posted from the Banking Law Prof Blog)

Supreme Court Decides Watters v. Wachovia

by Deepak Gupta

SCOTUSblog is reporting that the Supreme Court has ruled that federal law, not state law, controls the regulation of mortgage lending activity by national banks, even when that is carried on by an operating subsidiary of the bank. The vote was 5-3.  Ginsburg, joined by Kennedy, Souter, Breyer, and Alito, announced the opinion of the Court.  Stevens, joined by Roberts and Scalia, dissented.  Thomas took no part in the decision.  The opinions are available here.

Announcing the ruling in Watters v. Wachovia Bank (05-1342), Justice Ruth Bader Ginsburg said: "Where a national bank engages in real estate lending through an operating subsidiary, the subsidiary is subject only to the same terms and conditions as those that would govern the bank itself" -- that is, federal regulation under the National Bank Act. ""Though state law, in this case North Carolina law, governs matters pertaining to an operating subsidiary's incorporation, state regulators cannot interfere with the 'business of banking' by subjecting national banks or their [federal]-licensed subsidiaries to rival oversight regimes."   

Much of the debate and briefing over this case concerned the interaction between preemption and the power of federal administrative agencies--a dicey and dangerous can of worms. Did Congress confer authority on the agency to preempt state law? Can Congress do that? Should the courts defer to the agency under these circumstances?    The Court avoided that can of worms today:

Watters disputes the authority of OCC to promulgate this regulation and contends that, because preemption is a legal question for determination by courts, [the regulation] should attract no deference. . . . This argument is beside the point, for under our interpretation of the statute, the level of deference owed to the regulation is an academic question. Section 7.4006 merely clarifies and confirms what the NBA already conveys: A national bank has the power to engage in real estate lending through an operating subsidiary, subject to the same terms and conditions that govern the national bank itself; that power cannot be significantly impaired or impeded by state law.

Federal Judicial Center Issues Third Interim Report on CAFA

By Brian Wolfman

The Federal Judicial Center has just issued its third iterim report on the Class Action Fairness Act of 2005.  I have asked its principal author, Tom Willging, to post his impressions in some detail, and I hope he has a chance to do so soon.  Meanwhile, here is how Tom synopsized the report in a cover e-mail:

Here is a copy of our recent report on the impact of CAFA on the federal courts. This report is based on cases filed in or removed to federal court from July 1, 2001 through June 30, 2006 and includes a full 16 months of CAFA activity. We found that CAFA is bringing new diversity cases into the federal courts at a rate of approximately 315 to 360 cases per year. The report also indicates that many of the new cases are original actions filed in the federal courts, not removals from state courts. This suggests that plaintiffs are choosing to file actions in federal court rather than face the removals that CAFA facilitates. The impact of the Act thus far has been felt throughout the federal system, with particularly strong impacts show in district courts in the 9th circuit, particularly in California. District courts in seven of the twelve circuits experienced a doubling of their diversity class action caseloads.

Tom also notes that you may want to print out the full report in living color because some of the figures are easier to interpret in color.  And he is eager for comments or suggestions.

D.C.'s New Attorney General on the High Cost of Being Poor

Linda Singer is the District of Columbia's new Attorney General.  In yesterday's Washington Post, she spelled out what sounds like a promising new agenda on predatory lending issues.  Her target list includes payday lending, check-cashing fees, refund-anticipation loans and rent-to-own arrangements:

It goes without saying that it's hard to be poor -- hard to find affordable housing, hard to pay for health care, hard to make ends meet. But it can be expensive to be poor, too.

In the District, the high cost of being poor is most evident in financial services. While moderate- to upper-income people commonly use credit cards if they are short of cash, many poor people turn to deferred-deposit check-cashing services for short-term loans.

These check-cashers charge an extra fee for agreeing to postpone depositing a customer's check. Customers often pay these fees again and again over many months to keep deferring the deposit. The fees for these "payday loans" are subject to a legal cap, but charging the maximum allowable fees enables a check-casher to earn the equivalent of 336 percent annual interest, 14 times the District's usury law ceiling of 24 percent. Many states, including Maryland, do not allow payday lending that exceeds usury limits.

In addition, poor people without checking accounts are likely to use check-cashing services whose fees, on average, skim about 2.5 cents per dollar off a payroll or government benefit check.

Economists Express Reservations About Net Neutrality Proposals

Sixteen economists have issued a statement expressing concerns about proposals to provide for network neutrality.  The abstract of their statement is as follows:

Network neutrality is a policy proposal that would
regulate how network providers manage and price the use of their
networks. Congress has introduced several bills on network
neutrality. Proposed legislation generally would mandate that
Internet service providers exercise no control over the content
that flows over their lines and would bar providers from charging
more for preferentially faster access to the Internet. These
proposals must be considered carefully in light of the underlying
economics. Our basic concern is that most proposals aimed at
implementing net neutrality are likely to do more harm than good.

Mark Moller Responds to Steve Gardner

by Mark Moller

In a recent post, Stephen Gardner makes some interesting comments about my recent article, Class Action Lawmaking: An Administrative Law Model.  Before I respond, let me quickly summarize what the article is, and isn't, trying to do: Stephen says I am advocating "turning federal courts into little more than administrative agencies that defer to the Legislative Branch as much as possible." That's not quite what I'm arguing and my apologies if I wasn't clearer.

To clarify, my article tries to draw out some parallels between class actions and agency proceedings in the field of statutory interpretation. In particular the article makes the following related claims: First, federal courts in the class context often assume far more discretion to "play" with the meaning of statutes passed by Congress than they would consider appropriate if the interpretive liberties were taken by an agency. These courts assume this extra interpretive "play" or "license" when the interpretive dispute affects the discretion of the court to certify a class; trial courts often play with the statute's meaning in these questionable ways in order to pave the way for certification.

If, however, federal courts followed the interpretive guidelines that apply to agencies, they would act with more restraint when interpreting such statutes, by hewing to the probable or "clear" meaning of the statute, even if selecting that meaning would mean rejecting certification and even if there's a plausible but not probable contrary reading that would permit the class action to go forward. That's how a good agency, one that follows the rules of interpretation that the Supreme Court commands agencies to follow, would do things.

To make this a little more concrete, say, for example, that a plaintiff's lawyer, we'll call him Joe Wheat, brings a class of hundreds of thousands of statutory fraud claims against Acme Corporation under a federal consumer protection statute. Acme argues this statute envisions case by case inquiries into the subjective reliance of individual class members. Wheat argues, instead, that the court should adopt a presumption of reliance that excuses plaintiffs from meeting such a burden. The courts I'm criticizing might, for example, pick Wheat's version based on a policy preference in favor of class certification-even if Acme's contrary version would be selected as the "clear" meaning under the interpretive rules that govern in administrative law.

Lawmakers, Lenders Target Subprime-Loan Issue

Today on NPR's Morning Edition:

Efforts are under way on several fronts to forestall a wave of home foreclosures due to problems in the mortgage market. Legislative solutions are one option, but non-profits and many smaller lenders are also stepping up efforts to help borrowers.

Listen here.

Foreclosure Scam Artists

by Jeff Sovern

The Christian Science Monitor reports here about so-called "mortgage consultants" who purport to rescue consumers from foreclosure and the laws designed to prevent foreclosure rescue fraud.  Apparently the rise in foreclosures is leading to a corresponding rise in such scams.  [Disclosure: the article mentions the St. John's University Elder Law Clinic and quotes two St. John's professors, Ann Goldweber and Gina Calabrese.]

Eleventh Circuit Issues Ruling on CAFA's "Mass Action" Provision

by Brian Wolfman

Yesterday, the Eleventh Circuit issued Lowery v. Honeywell Int'l, Inc., No. 06-16324, a treatise on CAFA, and, in particular, its "mass action" provisions.  CAFA crazies can read the whole thing by clicking above.  But, first, why not just digest the court's own synopsis of its 77-page opinion?  Here ya go:

First, we hold that any one defendant authorized under CAFA to remove the plaintiffs’ claims against that defendant to federal court may remove the action as a whole, regardless of whether other defendants in the action would be authorized to remove their claims.

Second, we hold that CAFA sets forth at least four threshold requirements for a federal court to have subject matter jurisdiction over a removed mass action. Where the parties are minimally diverse, the action consists of 100 plaintiffs or more, the plaintiffs’ claims share common questions of law or fact, and the potential aggregate value of all the claims exceeds $5,000,000, the action may be removed to federal court as a mass action.

Consumer Groups Express Disappointment with Proposed DoD Regs

by Deepak Gupta

Three consumer groups -- Consumer Federation of America, Center for Responsbile Lending, and National Consumer Law Center -- issued a statement today expressing disappointment with the Pentagon's new proposed rules on predatory lending to servicemembers.  According to the groups' statement, loopholes in the proposed rules would inexplicably exempt some types of high-cost loans, such as military installment loans, that were specifically criticized by the Defense Department and covered by the legislation.

The statement gives the following examples of predatory loans that would be allowed under the proposed regs:

• Advance America offered an open-end loan in Pennsylvania that included a $149 monthly “participation fee” plus a nominal interest of 6 percent. The effective annual interest on a $500 loan is 364 percent. This would be permitted under the proposed rules.

• Most payday lenders in Illinois now structure their triple-digit interest loans with terms that exceed the 120-day definition of Illinois law. This would be permitted under the proposed rules.

• A sailor reported getting a subprime credit card from a South Dakota bank that imposed $294.60 in fees for $84.85 in purchases after just two months. This open-end credit card cost over 2,000 percent interest. This would be permitted under the proposed rules.

• First Bank of Delaware offers 350 percent internet installment loans through PurposeLoans.com. These loans could be offered to Service Members if the payment period is extended from 6 to 13 weeks under the proposed rules.

• In asking Congress for action last fall, Admiral Charles Abbot, director of the Navy- Marine Corp Relief Society, testified before the Senate Banking Committee that an installment loan from a California company cost a Service member $30,000 to repay $5,000 over a ten year period.