What's New in the World?

by Richard Alderman

I recently returned from South Africa where I attended the 11^th Annual Conference of the International Association of Consumer Law. It was a wonderful, well attended, event with representatives from around the world. It was also an eye opening look at how consumerism is viewed around the world.

Everyone in attendance seemed to share a real concern for protecting consumers, but what struck me the most was what so many countries are doing, and the United States is not.  Mandatory pre-dispute arbitration clauses are prohibited in most countries, and there seems to be universal recognition that denying access to the civil justice system through a boiler-plate form contract is not right.  Abusive lending practices are under attack in many countries.  For example, South Africa recently enacted a new National Credit Act that prohibits the granting of “reckless credit,” and has proposed a law that limits the recovery of interest and fees, including attorney's fees, to the amount of the outstanding balance on the loan.  There is also a new Commission that was described as the “new sheriff in town,” and which seems to take its job very seriously.  Other countries, such as Australia, have consumer ombudsmen assisting consumers, and take financial education seriously.  While many countries around the world are experimenting with various forms of a the class action device to provide redress when the is a small injury to many consumers.

Meanwhile, back at the ranch, we embrace arbitration, defend payday lending, try to eliminate class actions, and deregulate credit terms, including interest rates, to the end of glorious profits for the consumer lending industry.  I was asked by one attendee at the Conference why American consumers put up with some of these things, and I realize he had asked the million dollar question.  Why do we?

Elizabeth Renuart on Line-Drawing and the Practical Effects of Watters v. Wachovia

by Elizabeth Renuart (National Consumer Law Center)

Rather than discussing why the majority may be legally wrong (the dissent does an excellent job of that), my thoughts focus on the lines drawn by the decision and its potential practical effects.

    One line that arguably became brighter is that between operating subsidiaries and other entities that are hired by or act as agents for national banks. The majority focuses on the legal relationship between operating subsidiaries and the banks, the OCC's position that it oversees both entities in a similar fashion, and the added "support" it found in the Gramm-Leach-Bliley Act for Congressional recognition of these closely related companies. The specificity with which the majority details its view of the legal support in federal statutes for its conclusion weighs against the authority of the OCC to extend preemption rights to agents or third party contractors who work closely with national banks, even if the OCC claims it can examine them. (The OCC put its foot in this pool a few years ago when it issued an opinion letter related to car dealers acting on behalf of banks in Michigan). Where an entity is not the equivalent of a national bank (see slip op. at 13), preemption ought not to extend to that business.

As for practical consequences, the decision should cause those remaining independent mortgage companies to reconsider whether they will seek federal charters to parent them in a bank holding structure. Any doubt about whether to go this route, at least as far as the regulatory playing field goes, is now eliminated. The OCC should be careful what it prays for: it is now crystal clear that it must examine and enforce all preempted state laws against all of the operating subsidiaries of national banks in all 50 states (and to know the ins and outs of those state laws). It has not hired scores of new examiners or enforcement attorneys. Its public record in enforcement has been weak over the last few years since it decided to take on this job.

Finally, the pressure now will build on the FDIC to create a similar playing field for state-chartered banks and their operating subsidiaries even though the legal infrastructure to do so is much weaker than the National Bank Act (arguably non-existent). Attempts to pressure the FDIC along these lines occurred 2 years ago but the FDIC shelved the industry's petition. I expect that pressure to resurface in light of this decision.

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.]