Developments of Note
U.S. Court of Appeals Holds Consumer Arbitration Clause Enforceable Even If Arbitration Makes Class Actions Impossible
In the first federal Circuit Court decision of its kind, the U.S. Court of Appeals for the Third Circuit (the "Circuit Court") refused to find a consumer arbitration clause invalid on the grounds that arbitration prevents the bringing of class actions. Terry Johnson v. West Suburban Bank, et al., No. 00-5047, slip op. (3d Cir. Aug. 29, 2000). The consumer in Johnson had brought a purported class action under the Truth in Lending Act, 15 U.S.C. § 1601 et seq. ("TILA"), and the Electronic Fund Transfer Act, 15 U.S.C. § 1693 et seq. ("EFTA"). The federal District Court had refused to enforce an arbitration clause because a class action cannot be pursued in arbitration. The Circuit Court reversed and specifically rejected the argument that in authorizing class actions under TILA, EFTA and the Federal Rules of Civil Procedure, Congress or the courts had created some barrier to arbitration if the parties otherwise had agreed in advance to arbitrate any dispute. The Johnson decision is one of a recent line of cases generally upholding arbitration against various attacks, but it is independently significant because the effect that arbitration clauses have in preventing class actions has been their major appeal to consumer creditors and a major criticism raised by consumer advocates. In its next term, the United States Supreme Court is expected to decide a consumer arbitration case in which the U.S. Court of Appeals for the Eleventh Circuit refused to enforce a clause it found to create too great a burden on the consumer. Randolph v. Green Tree Financial Corp., 178 F.2d 1149 (11th Cir. 1999).
FRB Permits State Member Banks to Own Less than 100% of Corporate Operating Subsidiaries
The FRB issued an Interpretive Ruling (the "Letter") permitting a state member bank to acquire less than 100% of the voting shares of a corporation that would engage in activities permissible for the bank under state and federal law. The Letter notes that since 1968 the FRB has expressly authorized state member banks to establish only wholly-owned operating subsidiaries. However, citing changes arising from the Gramm-Leach-Bliley Act of 1999, the Letter determines that a state member bank may acquire shares of a company that (1) on consummation of the acquisition would be a subsidiary of the bank within the meaning of the Bank Holding Company Act (i.e., the bank generally must own 25% or more of a company’s voting shares), and (2) engages only in activities in which the parent bank may engage, at locations where the parent bank may engage in such activities, and subject to the same limitations as if the parent bank were engaging in the activities directly. As to the approvals required for less than wholly-owned subsidiaries, the Letter states that Regulation Y generally would require a bank holding company to receive FRB approval prior to a state member bank acquiring a less than wholly-owned subsidiary. However, financial holding companies ("FHCs") do not need the prior approval of the FRB to acquire stock in entities that engage in activities that are financial in nature, and thus an FHC only would have to provide the FRB with a notice 30 days after such an acquisition. Aside from the Letter, it should be noted that for several years the FRB has issued interpretive rulings permitting state member banks to own less than all of the interests in a limited liability company, but has never expressly approved a state member bank’s ownership of less than all of the shares of a corporation.
OCC Issues Letter Authorizing Use of MBCA Corporate Governance Provisions to Effect Share Exchange
The OCC issued an interpretive letter (No. 891, the "Letter") authorizing a national bank (the "Bank") to elect the corporate governance provisions of the Model Business Corporation Act (the "MBCA") to effect a share exchange with a newly-formed holding company in which the holding company would be certain to end-up owning the full 100% of the Bank’s outstanding stock. In the Letter, the Bank proposed to effect the share exchange in a multi-step transaction. First, the Bank would form a company to serve as the holding company for the Bank. Subsequently, after receipt of Bank stockholder approval, the holding company would exchange its shares for the Bank’s shares using the provisions of the MBCA. Upon consummation of the exchange, each former Bank stockholder would own shares of the holding company and the holding company, as noted above, would own 100% of the Bank’s outstanding shares. The OCC points out, however, that in adopting the MBCA, the bank may adopt those provisions only to the extent that they are "not inconsistent with applicable federal banking statutes and regulations." Accordingly, to address 3 issues as to which the National Bank Act provides greater protections to stockholders than the MBCA, the Letter noted that the Bank agreed to: (1) pay for any appraisal, even if the stockholder seeking payment through appraisal had acted in bad faith or arbitrarily; (2) pay the costs of arbitration if the appropriate court refused jurisdication of the appraisal action; and (3) require that 2/3 of the Bank’s shareholders approve the exchange (the National Bank Act test) rather than using the less onerous majority approval requirement of the MBCA.
FTC Settles with Parent Company of Former Subprime Mortgage Lender
The Federal Trade Commission ("FTC") entered into a consent agreement with FirstPlus Financial Group, Inc. ("FirstPlus"), the parent company of a now-bankrupt, high loan-to-value mortgage lender, to settle charges that the lender engaged in deceptive advertising and marketing of "debt consolidation" loans, including high loan-to-value loans (i.e., home mortgage loans in which the loan was not fully secured by the collateral). According to the FTC’s complaint, FirstPlus’s advertisements violated the prohibition in the Federal Trade Commission Act against deceptive practices by misleading consumers about the amount they would save through a debt consolidation loan. The FTC alleges that "[f]or many types of existing debts, . . . consumers will pay more per month and/or pay more over time when consolidating existing debts into a FirstPlus loan." The complaint also alleges that FirstPlus violated TILA’s requirement that an advertisement that shows certain "trigger" terms, such as the monthly payment, also show the other major terms of the loan, such as the annual percentage rate and the length of the loan. Under the proposed settlement, FirstPlus would be prohibited from, among other things, misrepresenting the savings or benefits of a debt consolidating loan and violating the TILA trigger term rules. Of particular note is the FTC’s apparent position that it is deceptive to assert that a consumer will save on monthly payments if he or she will pay more over time than under the existing debts that are being refinanced. The order does not make clear whether complying with the TILA trigger term rules would be sufficient to eliminate this problem or additional disclaimers would also be required. Public comments on the order may be submitted to the FTC until September 18, 2000, after which time the consent agreement may be made final.
Mortgage Insurers Achieve Dismissal of RESPA Claims in Federal District Court
A federal judge in the District Court for the Southern District of Georgia (the "District Court") entered judgment in favor of several mortgage insurers sued under the anti-referral fee section of the Real Estate Settlement Procedures Act, 12 U.S.C. § 2601 et seq. ("RESPA"). Marie Pedraza, et al. v. United Guaranty Corp., et al., No. 99-239, slip op. (S.D. Ga. Aug. 14, 2000). Plaintiffs in these cases alleged that over the last four years, and continuing through the present, every mortgage insurer violated RESPA in selling certain products and services to lender clients. The products and services at issue included so-called agency pool insurance, captive reinsurance arrangements, performance notes, and contract underwriting. The District Court granted summary judgment to the defendants, based on the McCarran-Ferguson Act, 15 U.S.C. § 1012, which preempts federal law to the extent that it conflicts with state regulation of the business of insurance. The District Court found that because state anti-rebate statutes already regulate the alleged conduct at issue, a RESPA claim against the mortgage insurers was not permissible. The cases were the first ever filed against mortgage insurers under RESPA, and have been widely covered and closely watched in the mortgage insurance and mortgage industries. GPH represented United Guaranty, one of five mortgage insurers whose practices these putative nationwide class actions challenged.
OTHER ITEMS OF NOTE
Recent Goodwin, Procter & Hoar LLP Corporate Client Memorandum
The Corporate Group at GPH has prepared a client memorandum regarding SEC Regulation FD which concerns selective disclosure. A copy of that memorandum is available upon request.
The contents of this publication are intended for informational purposes only and should not be construed as legal advice or legal opinion, which can be rendered properly only when related to specific facts.
