By R. Christian Bruce

When it comes to banking cases, consumer protection is the dominant theme as the U.S. Supreme Court heads into its new term.

High on the list of must-watch cases is First American Financial v. Edwards, a case brought under the Real Estate Settlement Procedures Act (RESPA) that has the potential to impact suits under other federal consumer protection statutes (First American Financial v. Edwards, U.S., No. 10-708argument scheduled 11/28/11).

The case, which is set for argument Nov. 28, comes from the U.S. Court of Appeals for the Ninth Circuit, which allowed Denise P. Edwards to pursue claims that a title insurance firm violated RESPA through referral arrangements with other companies.

The title firm said Edwards never alleged she was charged any additional amounts because of those arrangements, arguing there was no concrete injury that would allow a court to hear the case under Article III of the U.S. Constitution.

But the Ninth Circuit disagreed and held for Edwards in a June 21, 2010, ruling, saying RESPA provides a cause of action even without overcharges.

“Because the statutory text does not limit liability to instances in which a plaintiff is overcharged, we hold that Plaintiff has established an injury sufficient to satisfy Article III,” the Ninth Circuit said.

The justices have limited their review to that question.

Bank Groups Urge Narrow Focus

The case is being watched because it could affect how rights of action are allowed under other consumer protection statutes such as the Truth in Lending Act.

However, a coalition of financial services firms have urged the court to handle the case on a narrow basis. They say the best view is that the Ninth Circuit misunderstood RESPA, which “explicitly permits” referrals.

As a result, the statute only allows plaintiffs to sue if a referral injures them, the brief said.

“When an alleged kickback does not cause an increase in price—as all agree is the case here—the consumer has no injury and no cause of action under RESPA,” said the brief, which was filed by the American Bankers Association, the Consumer Bankers Association, the Financial Services Roundtable, the Mortgage Bankers Association, and others.

Later that day, the justices will hear an appeal on whether federal courts can hear disputes under the Telephone Consumer Protection Act (TCPA) that allow damages of as much as $1500 per violation (Mims v. Arrow Financial Services, Inc., U.S., No. 10-1195, argument scheduled 11/28/11).

The case involves Marcus Mims, who received telephone calls from Arrow Financial Services in its efforts to collect a debt.

Mims filed federal claims against Arrow Financial in Florida, but the Eleventh Circuit held those claims may only be brought in state courts.

The TCPA creates a private cause of action to enforce its provisions and allows state-based suits, but courts are divided on whether federal district courts still have jurisdiction to hear those claims under the federal-question jurisdiction statute found at 28 U.S.C. 1331…

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By Thomas P. Vartanian
and Lawrence K. Nesbitt

The number of formal enforcement actions issued by the federal banking agencies exploded again in 2010, following a record setting year in 2009 in which the federal banking agencies issued more than 1000 formal enforcement actions for the first time. In 2010, the federal banking agencies issued approximately 1500 formal enforcement actions, which was a significant increase over the approximately 1100 formal enforcement actions issued in 2009.

This historic high level of enforcement activity by the federal banking agencies reflects the continuation of a very challenging business environment for the banking industry as a whole, despite the fact that many depository institutions appear to have made significant strides since the depths of the financial crisis to shore up capital, bulk up reserves, and improve liquidity. It may also reflect an increased willingness on the part of the federal banking agencies to issue formal enforcement actions against institutions prior to their failure, following congressional pressure and numerous reports stating that banking regulators were too slow to take such actions against failing institutions in the recent past.

During the past three years, over 3000 formal enforcement actions, including almost 700 assessments of civil money penalties (“CMPs”), have been issued by the federal banking agencies. In addition, more than 2500 informal memoranda of understanding have reportedly been issued by the federal banking agencies during that period of time. While these statistics do not exactly translate into the number of U.S. depository institutions that have recently been subject to an enforcement order, because of repetitive actions at the same institution and orders directed at individuals, they do suggest that a very significant percentage of U.S. depository institutions have been the subject of some form of formal or informal bank regulatory enforcement action during the past three years. As expected, the overwhelming focus of bank enforcement activity since the beginning of the recent financial crisis has been on the fundamental building blocks of safety and soundness, including capital, asset quality, management, earnings and liquidity. With regard to liquidity, we have seen a distinct regulatory shift over the past couple of years that has thrown the internet and wholesale funding model into disrepute with the banking agencies, leading to significant pressure on banking institutions using such funding that are unable to transform overnight into retail banks.

The historic high level of bank enforcement activity is not the only bad news for the banking industry. The federal banking agencies, the Special Inspector General for TARP (“SIGTARP”), the U.S. Department of Justice (“DOJ”), the Federal Housing Finance Agency (“FHFA”), and other state and federal agencies are actively engaged in investigations regarding the mortgage finance industry and are seeking to identify institutions and individuals who played a role in the functional collapse of private financial markets. The principal focus of these inquiries is mortgage fraud, whether it be by the lender, the borrower, or the middleman, and servicing defects, whether they relate to filings, servicing, or foreclosure. In that regard, the “robo-signing” problems in the industry have been well chronicled, as have the attempts by the 50 state attorneys general to investigate and assert claims against the largest mortgage servicers in the country.

At the same time, the increasing number of lawsuits being brought by investors and others asserting fraud in the issuance and sale of mortgage-backed securities and related synthetic derivative instruments is further complicating an already treacherous landscape. In combination with criminal prosecutions that are beginning to appear and more than 140 outstanding investigations by SIGTARP, a perfect storm for bank enforcement has clearly emerged.

Formal Enforcement Actions: 2005 – 2010

Civil Money Penalties: 2005 – 2010

The Treasury Department will designate a date for transferring powers to the new Consumer Financial Protection Bureau by the end of the summer under financial regulatory reform legislation (H.R. 4173) to be signed soon by President Obama…

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Housing experts also expect that…

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