Consumer Financial Services Alert - March 24, 2009 March 24, 2009
In This Issue

Massachusetts Supreme Judicial Court Issues Decision Limiting Banks’ Liability in Check Collection Process

The Supreme Judicial Court of Massachusetts issued a decision in favor of Fleet National Bank (now Bank of America) in the case of Gossels v. Fleet National Bank, SJC-101186.  The case called into question core principles governing the vast check collection system in the United States, including the duty of care owed by collecting banks to customers who submit foreign checks for collection, the disclosures that collecting banks are required to make, and the appropriate allocation of risk for currency fluctuations between customers and collecting banks. The case had been tried before the Superior Court and argued on appeal at the Massachusetts Court of Appeals, with differing results. The Appeals Court decision, if left standing, likely would have undone over 175 years of settled banking law.

Given the potential effect on all banks doing business in Massachusetts, the Massachusetts Bankers Association retained Goodwin Procter LLP to prepare a comprehensive amicus curiae brief. Litigation partners Brenda Sharton and Dahlia Fetouh worked with Consumer Financial Services partner Lynne Barr to analyze the key issues and draft a comprehensive brief that succinctly highlighted for the Court the important policy concerns raised by the case. Goodwin’s brief outlined how the Appeals Court decision ran contrary to the Uniform Commercial Code and settled banking law and further argued that, if left standing, the decision would threaten the operation of the check collection system to the detriment of banks that do business in Massachusetts and their customers. Goodwin also worked with the MBA’s and the bank’s lawyers to help streamline the myriad issues raised by the case into a concise and clear presentation of the critical issues for the Court.

The Court heard oral argument on November 3, 2008. In the Court’s opinion, it specifically acknowledged the MBA’s amicus brief in one of its lead footnotes and directly adopted many of the arguments advanced by Goodwin on behalf of the MBA. The Court led its written decision by describing one of the primary themes stressed in Goodwin’s brief: the importance of the national, uniform system of check collection adopted by the UCC and the need to enforce that uniform system lest “banks . . . face a motley patchwork of liability standards from State to State.”

The Court then re-affirmed two critical principles, advanced by the MBA and the bank, governing the liability of collecting banks in the check collection system that the previous decisions in this case had called into question: (1) the bank customer remains the owner of the check through the collection process and bears the risk of collection, including the risk of currency fluctuation, and (2) the collecting bank is only held to a standard of ordinary care in making the collection. Because these bedrock principles had been thrown into question following the earlier decisions in this case, as explained in Goodwin’s brief, the Court’s decision will provide useful guidance and support for banks going forward.

The Court then examined each of the plaintiff’s individual claims against the bank and the following is a summary of some of the key holdings. Most importantly, the Court provided guidance and clarity on the disclosure obligations of collection banks. Specifically, the Court concluded that the lower courts had ruled incorrectly when they imposed disclosure obligations on the bank that are not required by the UCC.

The Court solidified the critical standard of care set by the UCC for collecting banks. Under the lower court decisions, collecting banks were threatened with being required to meet heightened standards of care for every check collected. The Court stated clearly that the “UCC only requires that collecting banks use ordinary care as they seek to collect settlements on instruments.” Adopting an argument advanced by the MBA and the bank, the Court stated that elevating a bank’s internal manuals to a set of affirmative disclosure requirements on par with the disclosure requirements of the UCC “would vitiate the goal of mak[ing] uniform the law amount the various jurisdictions.”

In another ruling important for banks in the Massachusetts, the Court also made clear that banks are not liable for conversion (the wrongful exercise of control over specific personal property of another) when they fail to pay funds that they owe to a customer, and that bank accounts cannot be the subject of a claim for conversion.

This decision closes the door on the uncertainty raised by the lower court’s decision and re-affirms bedrock principles governing the check collection system. Goodwin’s brief in this case highlights the collaborative relationship between Goodwin’s Litigation Department and Financial Services Group on behalf of our financial services clients. If you have questions about the decision and its effect on the check collection system in Massachusetts, please contact Brenda Sharton at or 617-570-1214, or Lynne Barr at or 617-570-1610. Click here for the decision.

FRB Proposes Regulation Z Amendments for Private Student Loans

The FRB proposed amendments to Regulation Z that would revise the disclosure requirements for private education loans.

The proposal implement provisions of the Higher Education Opportunity Act. Under the proposal, creditors that extend private education loans would provide disclosures about loan terms and features on or with the loan application and would also have to disclose information about federal student loan programs that may offer less costly alternatives. Additional disclosures would have to be provided when the loan is approved and when the loan is consummated. The FRB is also proposing model disclosure forms that creditors could use to comply with the new disclosure requirements.

The new disclosure requirements would apply to loans made expressly for postsecondary educational expenses but would not apply where educational expenses are funded by credit card advances, or real-estate-secured loans. In addition, the proposal does not apply to education loans made, insured, or guaranteed by the federal government, which are subject to disclosure rules issued by the Department of Education.

The proposal also implements the Higher Education Opportunity Act’s restrictions on using the name, emblem, or mascot of an educational institution in a way that implies that the institution endorses the creditor’s loans.

The public comment period ends 60 days after publication of the proposal in the Federal Register, which is expected shortly. Click here to access the proposal and the model forms.

Seventh Circuit Rules Separate Notice Not Needed For Pre-Authorized Rate Increase

The Seventh Circuit affirmed the dismissal of a class action alleging that a bank violated Regulation Z by applying an interest rate change to the billing cycle in which the change occurred. Under plaintiff’s contract, if she exceeded her credit limit at the end of two months in any rolling 12-month period, the bank could increase her interest rate. The bank later amended the terms to provide that the “penalty interest rate” would take effect at the beginning of the billing cycle to which it applied. Plaintiff agreed to these terms by continuing to use her credit card. When plaintiff exceeded her credit limit at the close of the billing cycles in August, November, and December 2007, the bank raised her interest rate effective at the start of the November-December billing cycle. Plaintiff argued that this violated Regulation Z’s 15-day notice provision as to changes to terms that require disclosure. Finding the regulation ambiguous and the contract clear, the Court rejected plaintiff’s argument and joined other federal courts in ruling that “banks may apply higher, penalty rates of interest to the entire billing cycle in which the consumer’s default occurs.” The Court noted, however, that effective July 1, 2010, the regulation will be amended to prevent retroactive changes and require a 45-day notice of higher interest rates, which would override any contractual language to the contrary. Click here for Swanson v. Bank of America, N.A., No. 08-3322 (7th Cir. Mar. 19, 2009).

Fourth Circuit Affirms Damages Award Under FCRA; Reverses Award of Attorney’s Fees

The Fourth Circuit affirmed an award of actual damages under the Fair Credit Reporting Act while reversing the district court’s award of attorney’s fees. Plaintiff contended that the defendant had violated FCRA by repeatedly placing incorrect information on her credit reports, despite her attempts to correct that information. The jury awarded plaintiff $200,000 in actual damages, and the court awarded statutory attorney’s fees in excess of $260,000. The Fourth Circuit concluded that the jury’s damages award was justified by evidence showing that as a result of the incorrect reports, plaintiff had been denied loans or offered loans on less advantageous terms than she would have otherwise received, that she had suffered severe emotional distress, and that she had lost income due to time missed from work attempting to correct the information. The Court reversed the attorney’s fee award, however, concluding that plaintiff had failed to meet her burden of showing that the hourly rate charged by her attorneys was reasonable in light of the market rate for such work. The case was remanded for the district court to recalculate the fee award after taking additional evidence. Click here for Robinson v. Equifax Information Services, LLC, No. 07-2094 (4th Cir. Mar. 16, 2009).

Ninth Circuit Rules that TILA Requires Creditors to Give Contemporaneous Notice of Discretionary Interest Rate Increases

The Ninth Circuit recently interpreted the Truth in Lending Act and Regulation Z to require creditors to provide contemporaneous notice of discretionary interest rate increases to consumers. Plaintiff alleged that the creditor violated TILA by increasing his interest rate retroactively to the beginning of his payment cycle after his account was closed following a late payment. The Court held that including disclosures of possible interest rate increases in the Cardmember Agreement is not sufficient to meet TILA’s disclosure requirements. Thus, the Court concluded, upon default or delinquency, a creditor must notify the consumer of an interest rate increase contemporaneously with the change in interest rate and may not retroactively apply the interest rate even if the creditor previously disclosed both the potential rate increase and the highest rate that could apply. Click here for McCoy v. Chase Manhattan Bank, USA, N.A., 9th Cir. No. 06-56278 (Mar. 16, 2009).