Litigation Roundup: Preemption, Ability to Repay Violations, Arbitration and Takeaways From it All
Federal Judge Questions Whether FCUs May Bring Preemption Cases
The Illinois Interchange Fee Prohibition Act (IFPA) was passed by the Illinois Legislature and scheduled to take effect this July. The Act prohibits interchange fees from being charged on that portion of a debit or credit card transaction that reflects the cost of a gratuity or state or local taxes. The bill mandates that issuers reimburse merchants for the unauthorized charges based on information merchants would provide to issuers. If the bill is upheld, it would obviously place a huge operational mandate on banks and credit unions that issue debit and credit cards. It would also result in enormous expenses for issuers who buy technology to comply with this mandate.
Against this backdrop, both America’s Credit Unions and the American Bankers Association filed a joint legal action seeking to block the legislation from being applied to federally chartered credit unions and banks. On December 20th, the court issued a ruling holding that the statute was preempted as applied to federal banks and Savings and Loan Associations. The court refused to extend this to credit unions. It questioned whether the Federal Credit Union Act empowered federal credit unions to bring a lawsuit seeking to preempt state law. As a result, it declined to rule on the case's merits as applied to credit unions. It gave lawyers until Wednesday to submit briefs explaining why credit unions could challenge the applicability of the Illinois law.
The outcome of this case has implications for credit unions throughout the country. First, the statute is a model for merchants to use in advocating for similar legislation in other states. Secondly, if the court rules that credit unions cannot challenge state-level legislation in court, it creates a precedent that would make preemption determinations even more challenging. At this point, the judge isn’t questioning the authority of NCUA to preempt state-level legislation. Still, if, in fact, the court’s logic is adopted, it would raise practical questions as to how and when federal credit unions would be subject to state legislation that they could otherwise argue was preempted as applied to federal institutions.
CFPB Brings Lawsuit Alleging Non-Bank Lender Violated Ability to Repay Requirements
When the Dodd-Frank Act was initially enacted, one of its key provisions was that mortgage lenders be able to document a good faith determination that a borrower could repay a mortgage loan. Credit unions and traditional lenders who comply with the safe harbor provisions of the CFPB’s mortgage lending regulations have largely addressed this provision. Consequently, I think it is note-worthy that as the CFPB rushes to take legal action before power is transferred to the Trump administration, one of the cases it chose to highlight this week is an enforcement action alleging that a non-bank lender specializing in making loans for the purchase of mobile homes violated the TILA and Regulation Z by disregarding borrowers’ ability to repay loans for the purpose of manufactured housing. According to the CFPB, the lender is a unit of a company ultimately owned by Berkshire Hathaway.
The 10-page complaint outlines examples of what the CFPB alleges are unrealistic assumptions regarding the financial resources available to loan applicants. For example, one example highlighted in the accompanying press release describes a loan that was given even though the borrower would have only $57.78 of disposable income left after making the requisite payment.
Court of Appeals Rules in Favor of Arbitration Clauses and Broad Delegation Clauses in Web-Based Contracts
In a manner of first impression for New York’s highest court, the Court of Appeals upheld the legality of a broad arbitration clause included in amendments made to Uber’s customer use agreement. The decision is a must-read for any New York based credit union that has or is considering amending its membership and account agreement to include an arbitration clause. The court ruled that;
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This case involved a woman who sued Uber for negligence after one of its drivers made her get out of her ride in the middle of a busy New York City street, where she was almost immediately hit by a car. Approximately two months after she filed the suit, she received an electronic notice from Uber, as did millions of other customers, informing them that, in the coming days, she would be prompted to agree to updated terms of use in order to continue using the service. The three-paragraph email recommended that users review the updated terms, which included changes to the arbitration agreement and the procedures that members could use in filing a dispute against the company. The updated terms were available in any of three hyperlinks appearing in the email. Subsequently, the member received what the court described as a “in-app blocking pop up screen with the headline ‘We’ve updated our terms.’” Users were encouraged to review the new terms and were given access to a hyperlink underlined in blue to review the terms of the agreement, as well as a checkbox that stated in bold that by checking the box, users were agreeing to the updated terms.
The updated terms included a bold-faced summary informing users that, by agreeing to these new terms, they were agreeing to resolve all disputes on an individual basis through binding arbitration. Users were also informed that the issues to be arbitrated included incidents or accidents resulting in personal injury and whether the accident occurred before the date they agreed to the new terms. Finally, Uber users were notified that the arbitrator “has exclusive authority to resolve most threshold disputes concerning the interpretation and enforceability of arbitration agreements,” consistent with the consumer rules of the American Arbitration Association. The plaintiff checked the agreement box, subsequently explaining that she would not have done so had she known that the arbitration clause retroactively applied. Two lower courts upheld Uber’s arbitration clause.
In analyzing the case, the Court of Appeals first noted that New York has a long history of upholding arbitration provisions in contracts, so long as the party seeking to enforce the arbitration proves that a contract was formed. The court declined to depart from this principle even though it was dealing with a so-called click-wrap internet agreement.
Against this backdrop, the court noted that whether two parties intended to enter into a contract is an objective test, pursuant to which the courts must determine whether the terms of the agreement included clear arbitration language and whether a reasonably prudent consumer would be put on notice of the contract changes. In other words, so long as a contract’s terms are clear and a party signals agreement with its terms, whether the party actually read the contract is irrelevant.
To determine whether members were notified of important changes in a web-based contract, the court held that judges should examine the design and content of the relevant web-based interface. For example, when a link to a website’s terms of use is buried at the bottom of a page or “tucked away in obscure corners of the website,” the courts will not find that a member was given adequate notice of a contract’s terms. In contrast, in this case, members were provided two separate notices and hyperlinks containing additional information that were provided in large text, which the consumer did not have to scroll down to be able to see. Furthermore, members were notified that the agreement contained changes to an arbitration agreement. Finally, members were clearly informed that they were agreeing to these updated terms by continuing to use the service. In short, a contract was validly agreed to.
The plaintiff argued that, even if a contract was validly formed, arbitrators could not be given the exclusive right to rule on the legality of specific contract provisions. Most importantly, the plaintiffs argued that the courts had the right to determine whether the new arbitration provisions could be retroactively applied to someone who had already commenced a lawsuit. The court disagreed, holding that, consistent with Supreme Court precedent, a provision in an arbitration clause giving an arbitrator exclusive authority over any disputes relating to the applicability or enforcement of the agreement will be enforced to the same extent as the courts would enforce any other provisions in a valid contract.
Last but not least, the plaintiffs argued that since Uber sent the arbitration notice directly to the plaintiff even though she was already suing the company and represented by counsel, its attorneys were violating the rules of ethics barring communication with the represented plaintiff without the opposing attorney’s permission. Whereas much of the decision is firm and unequivocal, the same cannot be said for portions of it addressing this issue. First, the plaintiffs did not explicitly request that the arbitration clause be invalidated in the event the attorneys violated the ethics rules. Furthermore, Uber did not have actual knowledge that the plaintiff had obtained counsel since its own employees had neglected to forward the complaint initiating the lawsuit to the legal department for several weeks.
Key Takeaways for Your Credit Union
Most importantly, the Court of Appeals declined to impose a higher standard for the enforceability of contracts entered with consumers than other types of contracts. Consequently, provided you give your members adequate notice, this case strongly suggests that arbitration clauses in amended membership and account agreements will be upheld. Secondly, don’t bury the lead when informing your members about arbitration clauses. Give them clear, easy-to-spot notice of pending arbitration clause language and give them easy access to additional information about these changes. Finally, ensure members know the steps they must take if they choose not to agree to the arbitration language. Some credit unions allow members to opt out of the arbitration language, while others take a more aggressive approach and only give members the option of ending their membership with the CU. When deciding which approach to take, your credit union should discuss the pluses and minuses of each approach with legal counsel.
As important as this case is, courts analyzing membership and account agreements could decide not to follow it. Most importantly, it appears that Uber already had an arbitration clause in its member use agreement before expanding the clause to many other situations. In contrast, most credit unions are implementing arbitration agreements for the first time. Consequently, an argument can be made that these members are entitled to even more protections than other types of contracting parties (see Badie v. Bank of America).?
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