Recaps of the long day and night of negotiations and the final bill are available from Poltico, the Wall Street Journal, and American Banker, among many others.

With regard to certain of the issues we have been following closely here, in the end, auto dealers will be exempt from the purview of the new Consumer Financial Protection Bureau, but payday lenders and other non-bank financial service providers will be subject to the new regulator. In addition, the Federal Reserve will be permitted to cap interchange fees, except for those on cards issued by governments.

The bill includes myriad other important provisions related to mortgage lending, the activities of banks, insurance regulation, corporate governance, and more. The Wall Street Journal provides an overview of some of the “major” provisions. Over the coming weeks and months we will be taking a closer look at certain aspects of the final bill and their implications, for example, increased litigation risk for financial service providers, including merchants and retailers.

According to U.S. Department of Education, approximately 95 million FFELP loans, including the Stafford Loan, the unsubsidized Stafford Loan, the PLUS Loan and the Consolidation Loan, were made from 2001-2009 for about $436 billion. (Click here for a listing of the top 100 originators of FFELP loans for FY09 AND FY08). The federal government serves as the ultimate guarantor of payment on FFELP loans. See, e.g., 34 C.F.R. § 682.100. In certain instances, interest that accrues on FFELP loans can be capitalized. See, e.g., 34 C.F.R. § 682.202(b).

To date, the exposure of companies participating in FFELP to lawsuits by loan borrowers has been limited by repeated holdings that the federal Higher Education Act (“HEA”), as amended, 20 U.S.C. §§ 1001-1155, of which FFELP is a part, does not provide borrowers with a private right of action. See College Loan Corp. v. SLM Corp., 396 F.3d 588, 593 (4th Cir. 2005) (cataloging decisions). Second, it has recently been held that the HEA preempted a FFELP borrower’s state breach of contract and statutory claims. See Chae v. SLM Corp., 593 F.3d 936 (9th Cir. 2010). It is expected that both propositions will be tested in Cheslow.

It is also anticipated that Wells Fargo, relying on Chae, will contend that the HEA preempts the plaintiff’s claims. The plaintiff may counter that Chae is inapplicable because her state law claims differ from those in Chae. The plaintiffs in Chae, FFELP borrowers, asserted California state law claims against their loan servicer for allegedly improperly calculating interest, assessing late fees and setting their loan repayment start-date. While the Ninth Circuit in Chae distinguished the Fourth Circuit’s decision in College Loan Corp., the plaintiff in Cheslow may attempt to argue that College Loan Corp. should steer the outcome on the preemption issue, not Chae. In College Loan Corp., 396 F.3d at 599, the Fourth Circuit held that the HEA and regulations promulgated thereunder regarding FFELP did not preempt the breach of contract and other state law claims brought by a FFELP loan originator against other FFELP loan originators and servicers and that the plaintiff could rely on violations of the HEA and related regulations to establish its state law claims against the defendants.

Wells Fargo may also try to limit the scope of the class by arguing that non-California residents cannot sue Wells Fargo on California state law claims in light of the restriction imposed by the Due Process Clause on the extraterritorially reach of a state’s laws.

Wells Fargo has not yet responded to the complaint; its response is due May 10th. We intend to monitor the docket and report on any developments.

The consent order requires AIG FSB and WFI to pay $6.1 million to compensate roughly 2,500 African American borrowers who were overcharged, and to contribute at least $1 million towards programs designed to provide financial education to consumers. AIG FSB and WFI also represented that they have exited the wholesale-lending business and agreed that if they seek to return, they must notify the government and change their business practices.

The AIG settlement is the largest monetary settlement ever obtained by DOJ for the compensation of victims of lending discrimination. Thomas Perez, the DOJ assistant attorney general for civil rights, stated that this is the first time DOJ has held a lender accountable for allegedly discriminatory conduct by its affiliated brokers, and warned that if need be, this will not be the last time. He further remarked that the prior administration made no meaningful effort to crack down on racially discriminatory lending, which contributed to the current national housing and economic crisis. Mr. Perez announced that there are 45 pending cases along the same lines, and that "lenders who ignored the discriminatory practices of brokers must be held accountable."

Other federal and state regulators are expected to take similar steps. For example, Robb Adkins, executive director of the Obama Administration's Financial Fraud Enforcement Task Force (FFETF), stated that the settlement should be seen as a "warning shot" to those who would engage in fraud or discrimination, and that the FFETF, comprised of representatives from a variety of federal and state regulatory and law enforcement bodies, is redoubling its efforts to prosecute similar conduct.

This dispute arose following the New York State Attorney General’s attempt to investigate several banks’ residential real-estate lending practices in 2005. The Attorney General’s office had suspected discriminatory lending practices after reviewing reports that showed minority borrowers received a larger percentage of high-interest home loans than white borrowers. As part of that probe, the Attorney General sent letters to several national banks, in lieu of a subpoena, requesting that they provide certain non-public information regarding their mortgage lending practices. In response, the federal Office of the Comptroller of the Currency (“OCC,” the chartering authority and federal regulator of national banks) and the Clearing House Association (a banking trade group) sued to block the Attorney General’s investigation, claiming that an OCC regulation promulgated under the National Bank Act pre-empted any state regulation or enforcement against national banks.

The U.S. District Court for the Southern District of New York enjoined the Attorney General from enforcing state fair-lending laws through demands for records or judicial proceedings, and the Second Circuit affirmed. The United States Supreme Court granted certiorari to determine whether the OCC’s regulations could be upheld as a reasonable interpretation of the National Bank Act, which provides that national banks are not subject to any “visitorial powers,” except as provided by federal law.

The Supreme Court concluded, in a 5-4 decision, turning on statutory construction, that the OCC’s regulation – and its reading that the exclusive grant of “visitorial powers” can preclude state enforcement of state law – was not a reasonable interpretation of the Act. Indeed, the Court noted, the OCC’s regulation was in conflict with Supreme Court precedent that clearly upheld state enforcement of banking laws. Accordingly, state attorneys general are permitted to prosecute judicial enforcement actions against all banks, regardless of charter, for violations of state consumer protection laws. States, however, are pre-empted from “overseeing” national banks, which the Supreme Court viewed as separate and apart from “enforcing” the laws.

This decision comes at an important time, when the Obama administration is looking to overhaul federal regulation of the financial services industry in response to the nation’s economic crisis. The decision is already being lauded as a way for state attorneys general to play a larger role in protecting local consumers from discriminatory bank practices. The banks, on the other hand, now face the challenge of complying with a patchwork of conflicting federal and state laws. Banks should consult with counsel to discuss potentially conflicting fair-lending laws, as well as ways to avoid being the subject of a state enforcement action.

If you answered E, “All of the above,” you are CORRECT. However, many companies do not realize their businesses are subject to consumer financial services laws. Consequently, their businesses may not be compliant and may be subject to litigation risk.

The focus of the Consumer Finance Law Blog is to keep – all on one site – traditional and non-traditional financial service providers subject to consumer financial services laws abreast of recent developments in:

• State consumer protection statutes and regulations
• State privacy statutes
• Privacy and consumer protection litigation
• Card Association Rules
• Equal Credit Opportunity Act
• Electronic Funds Transfer Act
• Fair Credit Reporting Act
• Fair Credit Transactions Act
• Fair Debt Collection Practices Act
• Payment Card Industry Data Security Standard
• State Money Transmitter Statutes
• State Retail Installment Sales Act
• State and Federal Unfair and Deceptive Trade Practices Acts
• TILA, RESPA, and related federal and state consumer disclosure and notice requirements
• Insurance coverage issues
• Legislation that may impact company compliance or create new litigation risk.

We welcome you and hope that you find our posts interesting, educational, and thought provoking. We also welcome your feedback and invite you to suggest topics or recent decisions of interest that you would like us to address.