US Supreme Court Briefs
Supreme ( Court U. S
JUN -8 2 0 )
Supreme Court of the 3
GREEN TREE FINANCIAL CORP. - ALABAMA, and
GREEN TREE FINANCIAL CORPORATION,
On Writ Of Certiorari To The
United States Court Of Appeals
For The Eleventh Circuit
BRIEF OF THE CHAMBER OF COMMERCE
OF THE UNITED STATES OF AMERICA AS
AMICUS CURIAE IN SUPPORT OF PETITIONERS
AtAN S. KAPLIN5KY*
DAVID H. PITTINSKY
JEREMY T. ROSENBLUM
THOMAS B. ROBERTS
BALLARD SPAHR ANDREWS & INGERSOLL, LLP
1735 Market Street, 51st Floor
Philadelphia, PA 19103
ROBIN S. CONRAD
NATIONAl CHAMBER LITIGATION
1615 H Street, NW
Washington, D.C. 20062
Counsel of Record
COCKLE LAW BRIEF PRINTING CO. (800) 225-6964
OR CAI~I~ COLLECT (402) ?.42~?83I
Does the inability of Respondent to pursue a federal Truth in Lending Act class action under the arbitration clause in the agreement she executed create a basis for invalidating the arbitration clause?
TABLE OF CONTENTS
TABLE OF AUTHORITIES
STATEMENT OF INTEREST OF AMICUS CURIAE
SUMMARY OF ARGUMENT
I. Respondent Bears The Burden Of Showing
That The Text, Legislative History Or Purpose
Of TILA Conflicts With Arbitration Of Her
II. Nothing In TILA's Language Or Legislative History Supports A Contention That TILA Class Actions Are Entitled To Any Special Protection Against Waiver Of A Judicial Forum
III. Class Actions Are Not Needed To Provide Consumers With An Effective Remedy For TILA Violations
IV. Class Actions Are Not Needed To Deter Violations Of TILA
Adiel v. Chase Fed. S & L Assn.,
630 F. Supp. 131 (S.D. Fla. 1986), aff'd,
810 F.2d 1051 (11th Cir. 1987) 14
Amchem Products, Inc. v. Windsor,
521 U.S. 591 (1997) 13
American Express Co. v. Koerner,
452 U.S. 233 (1981) 16
Anderson Bros. Ford v. Valencia,
452 U.S. 205 (1981) 16
Barlow v. Evans,
992 F. Supp. 1299 (M.D. Ala. 1997) 14
Beach v. Ocwen Fed. Bank,
523 U.S. 410 (1998) 16
Brown v. Surety Finance Service, Inc.,
2000 U.S. Dist. LEXIS 5734 (N.D. Ill. Mar. 23,
Clement v. American Honda Finance Corp.,
176 F.R.D. 15 (D. Conn. 1997) 15
Deposit Guar. Nat'! Bank v. Roper, 445 U.S. 326
Ex Pane Edwards,
601 So. 2d 82 (Ala. 1992) 12
First Nat'! Bank of Council Bluffs, Iowa v. Office of the Comptroller of the Currency, 956 F.2d 1456 (8th
Cir. 1992) 24
Ford Motor Credit Co. v. Cenance,
452 U.S. 155 (1981) 16
TABLE OF AUTHORITIES Continued
Ford Motor Credit Co. v. Milhollin,
444 U.S. 555 (1980)
FTC v. H.N. Singer, Inc.,
668 F.2d 1107 (9th Cir. 1982)
FTC v. Security Rare Coin & Bullion Corp.,
931 F.2d 1312 (8th Cir. 1991) 21
Gilmer v. Interstate/Johnson Lane Corp.,
500 U.S. 20 (1991) 3, 4, 6, 10, 18
Griggs v. Provident Consumer Discount Co.,
459 U.S. 56 (1982)
Graybeal v. American Savings & Loan Ass'n,
59 F.R.D. 7 (D.D.C. 1973)
In the Matter of Guild Mortgage Company,
113 F.T.C. 1183 (1990)
Hoffman v. Grossinger Motor Corp.,
1999 U.S. Dist. LEXIS 4172 (N.D. Ill. Mar. 25,
TABLE OF AUTHORITIES - Continued
Lewis v. Jesse L. Riddle, P.C.,
1998 U.S. Dist. LEXIS 20465 (W.D. La. Nov. 18,
Lopez v. Plaza Finance Co.,
1996 WL 210073 (N.D. Ill. April 25, 1996) S
Lozada v. Dale Baker Oldsmobile,
2000 U.S. Dist. LEXIS 4122 (W.D. Mich. Mar. 27,
2000) 5, 29
Mars!: v. First USA Bank, N.A.,
No. 3:99-CV-0783-T (N.D. Tex. May 24, 2000)... .5, 13
Marx v. Broom,
632 So. 2d 1315 (Miss. 1994) 17
In re Mazda Motor of America, Inc.,
FTC Docket No. C-3714 (FTC Feb. 6, 1997) 21
McCoy v. Salem Mortgage Co.,
74 F.R.D. 8 (E.D. Mich. 1976) 14
James v. Home Constr. Co.,
621 F.2d 727 (5th Cir. 1980) 28
Jefferson v. Security Pac. Fin. Servs.,
161 F.R.D. 63 (N.D. Ill. 1995)
Johnson v. Eaton,
958 F. Supp. 261 (M.D. La. 1997)
Meyers v. Univest Home Loan, Inc.,
1993 WL 307747 (N.D. Cal. Aug. 4, 1993) 5
Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,
Inc., 473 U.S. 614 (1985) 5, 10
Moses H. Cone Mem'! Hospital v. Mercury
Construction Corp., 460 U.S. 1 (1983) 4
Johnson v. Tele-Cash,
82 F. Supp. 2d 264 (D. Del. 1999) 5, 29
Kedziora v. Citicorp National Services, Inc.,
901 F. Supp. 1321 (N.D. Ill. 1995) 8
Kirchberg v~ Feenstra,
450 U.S. 455 (1981) 16
Mourning v. Family Pubs. Serv.,
411 U.S. 356 (1973) 16
Randolph v. Green Tree Financial Corp.,
991 F. Supp. 1410 (M.D. Ala. 1997), rev'd on other grounds, 178 F.3d 1149 (11th Cir. 1999) 5, 7
Ratner v. Chemical Bank,
54 F.R.D. 412 (S.D.N.Y. 1972) 2, 8, 12
TABLE OF AUTHORITIES - Continued
TABLE OF AUTHORITIES - Continued
Rodriguez de Quijas v. Shearson/American Express,
Inc., 490 U.S. 477 (1989) 4, 16
Saga! v. First USA Bank, N.A.,
69 F. Supp. 2d 627 (D. Del. 1999) 5, 12
Shearson/American Express Inc. v. McMahon,
482 U.S. 220 (1987) 4, 12
Stutsman County State Bank v. FD1C,
207 F.3d 464 (8th Cir. 2000) 24
Thompson v. Illinois Title Loans, Inc.,
2000 U.S. Dist. LEXIS 5734 (N.D. Ill. Jan. 6, 2000) 5
Turner v. Beneficial Corporation,
67 F. Supp. 2d 1325 (M.D. Ala. 1999) 11
United States v. Mazda Motor of America, Inc.,
Civil Action No. SACV 99-1213AH5 (EEx) (C.D.
Cal. Oct. 7, 1999) 21
United States v. National Financial Services, Inc.,
98 F.3d 131 (4th Cir. 1996) 21
Vimar Seguros y Reaseguros, S.A. v. MA' Sky Reefer,
515 U.S. 528 (1995) 4
Zawikowski v. Beneficial National Bank,
1999 WL 35304 (N.D. Ill. Jan. 11, 1999) 5
STATUTES AND REGULATIONS:
Age Discrimination in Employment Act,
626(b), 29 U.S.C. 262(b) 6
Bank Holding Company Act,
2(o)(9), 12 U.S.C. 1841(o)(9) 27
4(k), 12 U.S.C. 1843(k) 27
4(1), 12 U.S.C. 1843(1) 4(l)(2), 12 U.S.C. 1843(l)(2)
Community Reinvestment Act,
12 U.S.C. 2901 et seq 25
Fair Labor Standards Act,
216, 29 U.S.C. 216 6
Federal Arbitration Act,
9 U.S.C. 1 et seq I
Federal Deposit Insurance Act,
3(u), 12 U.S.C. 1813(u) 20
8, 12 U.S.C. 1818 19
8(b), 12 U.S.C. 1818(b) 20
8(b)(6)-(8), 12 U.S.C. 1818(b)(6)-(8) 9
8(e), 12 U.S.C. 1818(e) 20
8(i), 12 U.S.C. 1818(i) 20
8(i)(2), 12 U.S.C. 1818(i)(2) 9
46(a), 12 U.S.C. 1831iv(a) 27
Federal Trade Commission Act
5, 15 U.S.C. 45 20
5(m), 15 U.S.C. 45(m) 20
13(b), 15 U.S.C. 53(b) 20
19(b), 15 U.S.C. 57b(b) 21
National Bank Act,
12 U.S.C. 24a 27
TABLE OF AUTHORITIES - Continued
Truth in Lending Act,
15 U.S.C. 1601 et seq passim
108, 15 U.S.C. 1607 19
108(a), 15 U.S.C. 1607(a) 19
108(b), 15 U.S.C. 1607(b) 19
108(c), 15 U.S.C. 1607(c) 19, 20
108(e), 15 U.S.C. 1607(e) 9, 23
112, 15 U.S.C. 1611 28
125, 15 U.S.C. 1635 28
130(a), 15 U.S.C. 1640(a) 3
130(a)(1), 15 U.S.C. 1640(a)(1) 7, 11
130(a)(2)(A), 15 U.S.C. 1640(a)(2)(A) 7, 11
130(a)(2)(B), 15 U.S.C. 1640(a)(2)(B) 7, 10
130(a)(3), 15 U.S.C. 1640(a)(3) 7, 8, 12
130(e), 15 U.S.C. 1640(e) 16
28 U.S.C. 2072(b) 13
Fed. R. Civ. P. 23(b)(3) 13, 23
TABLE OF AUTHORITIES - Continued
Federal Financial Institutions Examination Council, Regulation Z: Joint Notice of Statement of Enforcement Policy, 45 Fed. Reg. 48712 (July 21, 1980) 24
Uniform Financial Institutions Rating System
61 Fed. Reg. 67021 (Dec. 19, 1996) 25, 26
H.R. Rep. No. 103-652, 309 (1994) 17
H.R. Rep. No. 104-193, 111 (1995) 14
S. Rep. No. 94-590 (1976) 9
141 Cong. Rec. H4120-04 (daily ed. April 4, 1995) 9
141 Cong. Rec. H9513-01 (daily ed. September 27,
May 15, 2000 Computer Search Results 16
Alan J. Dombrow and Walter E. Zalenski, The
TILA Reimbursement Rules After the Rodash
Amendments, ABA Bank Compliance (March!
April 1998) 24
TABLE OF AUTHORITIES - Continued
Federal Deposit Insurance Corporation,
1998 Annual Report 19
December 31, 1999 Financial Report on Stutsman
County State Bank 24
Federal Reserve Board,
85th Annual Report 1998 19, 24
Federal Trade Commission,
Press Release dated Sept. 30, 1999, Mazda to Pay
$5.25 Million for Violating FTC and State Orders
Regarding Lease Advertisements 21
January 6, 2000 letter from Robert Pitofsky, Chair-man, to the Director of the Federal Reserve Board's Division of Consumer and Community Affairs 22
New York State Attorney General,
Advertising Guidelines for Auto Dealers 28
State of New York Banking Department, Superintendent Announces Landmark Settlement
with Lender (Aug. 19, 1999) 28
BRIEF AMICUS CURIAE
This amicus curiae brief is submitted in support of the Petitioners, Green Tree Financial Corp. Alabama and Green Tree Financial Corporation. By letters filed with the Clerk of the Court, Petitioners and Respondent have consented to the filing of this brief.1
STATEMENT OF INTEREST OF AMICUS CURIAE
The Chamber of Commerce of the United States of America (the "Chamber") is the world's largest business federation. The Chamber represents an underlying membership of nearly three million businesses and organizations, with 140,000 direct members, in every size, sector and geographic region of the country. The Chamber serves as the principal voice of the business community. An important function of the Chamber is to represent the interests of its members by filing amicus briefs in this Court on issues of national concern to American business. The Chamber has a particular interest in this case since it addresses an issue of great concern to its members the enforceability in consumer contracts of pre-dispute arbitration clauses, Which are used by many Chamber members.
SUMMARY OF ARGUMENT
Under the Federal Arbitration Act (the "FAA"), 9 U.S.C. 1 et seq., an arbitration agreement must be
I Pursuant to Supreme Court Rule 37.6, the Chamber of Commerce of the United States of America states that this brief was prepared in its entirety by the Chamber and its counsel. No monetary contribution toward the preparation or submission of this brief was made by any person other than the Chamber, its members or their counsel.
enforced as to a statutory claim unless the language, history or purpose of the statute shows that Congress intended to preclude arbitration. In her Brief in Opposi-tion, Respondent argued that the class action is an indis-pensable mechanism for redressing and deterring violations of the federal Truth in Lending Act ("TILA"), 15 U.S.C. 1601 et seq. She further argued that TILA's alleged policy favoring class actions overrides the pro-arbitration policy of the FAA and therefore allows her to disavow her arbitration agreement by filing a TILA class action. These arguments should be rejected because the language, history and purpose of TILA show that Con-gress did not intend to preclude arbitration.
TILA and its legislative history do not mention arbitration, much less elevate a consumer's after-the-fact desire to bring a TILA class action over the consumer's pre-existing agreement with the creditor to arbitrate such disputes. To be sure, Congress has not eliminated TILA class actions altogether. Rather, in light of concerns about the risk of "horrendous, possibly annihilating punish-ment" in TILA class actions, Ratner v. Chemical Bank, 54 F.R.D. 412. 416 (S.D.N.Y. 1972), Congress has expressly limited the quantum of class action relief available under
Just as Respondent cannot show that the language or history of TILA's class action provisions precludes arbi-tration of TILA claims, she cannot show that TILA's reme-dial and deterrent purposes require class actions. In an individual proceeding, TILA provides the prevailing con-sumer with: (1) any actual damages resulting from the violation; (2) $100 to $1,000 of statutory damages ($200 to $2,000 in connection with a closed-end loan, such as the loan to Respondent, secured by real property or a dwelling); and (3) attorneys' fees and the costs of the
proceeding. 15 U.S.C. 1640(a). Because prevailing consumers are entitled to attorneys' fees and the costs of the proceeding, consumers with valid TILA claims can readily obtain redress in individual actions, particularly proceedings that can be handled with the ease, simplicity and speed characteristic of arbitration.
Moreover, TILA's powerful administrative and criminal enforcement mechanisms serve to deter TILA violations without the necessity of any resort to class actions. Both the Federal Trade Commission (the "FTC") and the federal banking agencies are authorized to issue cease and desist orders and to obtain ancillary relief against creditors that violate TILA. These agencies can impose substantial monetary penalties against such creditors and can order them to make restitution to consumers for finance charge and annual percentage rate ("APR") dis-closure errors. Indeed, these agencies are required to order class-wide restitution to consumers whenever a creditor systematically discloses a finance charge or APR that is materially lower than the actual figure. Creditors can also be fined and jailed for knowing and willful violations of the statute.
Since Respondent cannot show that TILA's language, history or purpose manifests a congressional intent to preclude the waiver of a judicial forum, "the fact that [TILA] provides for the possibility of bringing a collective action does not mean that individual attempts at conciliation were intended to be barred." Gilmer v. Interstate! Johnson Lane Corp., 500 U.S. 20, 32 (1991) (approving mandatory arbitration of a claim under the Age Discrimination in Employment Act (the "ADEA"), even though the ADEA, unlike TILA, expressly authorizes class actions) (citation omitted). Accordingly, this Court should hold that the unavailability of class action relief neither
vitiates nor excuses the enforcement of an agreement to arbitrate a TILA claim.
I. Respondent Bears The Burden Of Showing That The Text, Legislative History Or Purpose Of TILA Conflicts With Arbitration Of Her TILA Claim.
In Gilmer, this Court enforced under the FAA mandatory arbitration of an ADEA claim. While it acknowledged in theory that "all statutory claims may not be appropriate for arbitration," this Court went on to affirm that the burden is on the party opposing arbitration]
to show that Congress intended to preclude a waiver of a judicial forum for [statutory] claims
See [Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 227 (1987)1. If such an intention exists, it will be discoverable in the text of the [statute], its legislative history, or any "inherent conflict" between arbitration and the [statute's] underlying purposes. See ibid. Throughout such an inquiry, it should be kept in mind that "questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration." [Moses H. Cone Mem'! Hospital v. Mercury Construction Corp., 460 U.S. 1, 24 (1983)].
500 U.S. at 26.
Under the rule enunciated in Gilmer and elsewhere, this Court has repeatedly held that federal statutory claims are subject to arbitration.2 In Moses H. Cone, this
2 See, e.g., Vimar Seguros y Reaseguros, S.A. a M/V Sky Reefer,
515 U.S. 528 (1995) (Carriage of Goods by Sea Act); Gilmer
(ADEA); Rodriguez de Quijas v. Shearson/American Express, Inc.,
490 U.S. 477 (1989) (securities laws); Shearson/American Express,
Court held that the FAA "requires piecemeal resolution when necessary to give effect to an arbitration agree-ment." 460 U.S. at 20 (emphasis in original). Repeatedly, lower federal courts have held that TILA claims subject to an arbitration agreement must be arbitrated even if they have been asserted in putative class actions.3 While two district courts have now accepted the unfounded argu-ment that TILA's supposed purpose to promote class actions is incompatible with an arbitration clause that precludes relief in a class action,4 as demonstrated below there is no federal policy favoring TILA class actions, and arbitration of TILA claims is fully compatible with TILA's purposes.
Inc. v. McMahon, 482 U.S. 220, 232-233 (1987) (RICO and securities laws); Mitsubishi Motors Corp v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) (antitrust laws).
~ See, e.g., Marsh v. First USA Bank, N.A., No. 3:99-CV-0783-T (N.D. Tex. May 24, 2000) (Lodging. Exh. A); Brown v. Surety Finance Service, Inc., 2000 U.S. Dist. LEXIS 5734 (N.D. Ill. Mar. 23, 2000); Thompson v. Illinois Title Loans, Inc., 2000 U.S. Dist. LEXIS
5734 (N.D. Ill. Jan 6, 2000); Sagal v. First USA Bank, N.A., 69 F.Supp.2d 627 (D. Del. 1999); Zawikowski v. Beneficial National Bank, 1999 WL 35304 (ND. Ill. Jan. 11, 1999); Randolph v. Green Tree Financial Corp., 991 F. Supp. 1410 (M.D. Ala. 1997), rev'd on other grounds, 178 F.3d 1149 (11th Cir. 1999); Lopez v. Plaza Finance Co., 1996 WL 210073 (N.D. Ill. April 25, 1996); Meyers v. Univest Home Loan, Inc., 1993 WL 307747 *5 n.8 (N.D. Cal. Aug. 4, 1993) (in compelling arbitration of claim of named plaintiff in TILA and state consumer protection act class action, court observed that contrary holding would carve a "gaping exception" into the FAA, allow circumvention of the FAA and "plainly undermine Congress's policy to promote the enforceability of such agreements").
~ Lozada v. Dale Baker Oldsmobile, 2000 U.S. Dist. LEXIS 4122 (W.D. Mich. Mar. 27, 2000); Johnson v. Tele-Cash, 82 F~ Supp. 2d 264 (D. Del. 1999).
II. Nothing In TILA's Language Or Legislative History
Supports A Contention That TILA Class Actions
Are Entitled To Any Special Protection Against
Waiver Of A Judicial Forum.
In Gilmer, 500 U.S. at 32 (citation omitted), this Court flatly concluded:
[Elven if the arbitration could not go forward as a class action or class relief could not be granted by the arbitrator, the fact that the [statutel pro-vides for the possibility of bringing a collective action does not mean that individual attempts at conciliation were intended to be barred.
This Court endorsed mandatory arbitration of the ADEA claim in Gilmer even though the ADEA unlike TILA expressly authorizes class actions. Section 626(b) of the ADEA, 29 U.S.C. 626(b), provides that the ADEA shall be enforced in accordance with Section 216 of the Fair Labor Standards Act, 29 U.S.C. 216. In turn, Section 216 provides that "an action to recover the liability . . . may be maintained against any employer (including a public agency) in any Federal or State court of competent juris-diction by any one or more employees for and in behalf of himself or themselves and other employees similarly situated." 29 U.S.C. 216(b) (emphasis added).
TILA does not contain a single reference to arbitra-tion, either in its language or history. By contrast to the ADEA, it does not authorize class actions. As the district court in this case correctly noted:
1640 does not create a "statutory right" to pur-sue class action litigation or other judicial redress, as plaintiff contends. Section 1640 merely provides for jurisdictional requirements and liability limitations. Providing for class action litigation does not necessarily preclude any other type of dispute resolution or provide Plaintiff with a substantive "right".
Randolph, supra, 991 F. Supp. at 1418 (emphasis in origi-nal).
TILA's only reference to class actions is contained in Section 130(a)(2)(B), 15 U.S.C. 1640(a)(2)(B), which limits the relief that would otherwise be available. Conversely, under Section 130(a)(2)(A), 15 U.S.C. 1640(a)(2)(A), a plaintiff who establishes a TILA violation in an individ-ual action is entitled to statutory damages of $100-$1,000 ($200-$2,000 in a case involving a closed-end loan, such as the loan to Respondent, secured by real property or a dwelling).5 Under Section 130(a)(2)(B) of TILA, 15 U.S.C. 1640(a)(2)(B), statutory damages are capped in a class action, without regard to indeed, in derogation of the minimum recovery that class members could obtain in individual actions:
[The class may recover] such amount as the court may allow, except that as to each member of the class no minimum recovery shall be appli-cable, and the total recovery under this subpara-graph in any class action or series of class actions arising out of the same failure to comply by the same creditor shall not be more than the lesser of $500,000 or I per centum of the net worth of the creditor.
Moreover, the maximum statutory damages award is not assured. Rather, the court must consider the amount of any actual damages; the frequency and persistence of compliance violations; the resources of the creditor; the number of persons adversely affected; and the extent to
~ The recovery of statutory damages in an individual or class action is in addition to any actual damages the plaintiff can establish under Section 130(a)(1) of TILA, 15 U.S.C. 1640(a)(1). and is also in addition to the right to attorneys' fees and costs of the proceeding under Section 130(a)(3) of TILA, 15 U.S.C. 1 640(a)(3).
which violations were intentional. 15 U.S.C. 1640(a)(3). See Kedziora v. Citicorp National Services, Inc., 901 F. Supp. 1321 (N.D. III. 1995) (applying statutory factors and awarding $37,600 to class in lieu of maximum award of
The legislative history of TILA's class action provisions is also wholly compatible with the arbitration of individual TILA claims. When originally enacted, TILA contained no specific provisions relating to class actions. Plaintiffs pursued TILA class actions under Rule 23 but the courts expressed grave concerns that permitting class-wide recovery of the statutory $100 minimum provided by TILA "would be a horrendous, possibly annihilating punishment, unrelated to any damage to the purported class or to any benefit to defendant, for what is at most a technical and debatable violation of the Truth in Lending Act." Ratner v. Chemical Bank, 54 F.R.D. at 416.
To address this problem and to balance protection of financial institutions from disproportionate and windfall awards for technical TILA violations with competing enforcement objectives, Congress enacted specific limita-tions on statutory damages recoveries in TILA class actions. In 1974, the limit was initially set at the lesser of $100,000 or 1% of the creditor's net worth and, in 1976, it was adjusted to the lesser of $500,000 or 1% of net worth. While Congress did not elect to eliminate TILA class actions, it continued to express concern about the poten-tial mischief of such proceedings:
The committee is aware of the many difficulties surrounding the use of class actions for civil penalties or punitive damages. . . . We are hopeful that there may be workable and effective substitutes for the class action as a consumer enforcement device not only for this Act but also for other similar legislation.
S. Rep. No. 94-590. at 8 (1976) (footnotes omitted; emphasis added).6
Congress again addressed problems with TILA class actions two decades later, when it found it necessary to declare a moratorium on certain TILA class actions due to an avalanche of class actions "filed because of technical violations of disclosure requirements provided in the Truth in Lending Act." 141 Cong. Rec. H4120-04, H4122 (daily ed. April 4, 1995) (Statement of Rep. Vento). One House member explained the purpose behind the class action moratorium as follows: "Certainly when lawyers start lining their pockets based on technicalities to keep people from having to pay rborrowedl funds back, then it is time for the Congress to come forward." Id. Another House member asserted: "We should not even have a piece of legislation like this" permitting class actions. Id. at 4122. In addition, in supporting the moratorium, sev-eral House members specifically recognized that halting class actions would not defeat the remedial or policing
6 Many of the agency enforcement powers discussed infra in Section IV were adopted by Congress after the time S. Rep. No. 94-590 (1976) called for "workable and effective substitutes for the class action." In 1978, Congress afforded the federal banking agencies the power to impose civil penalties for violations of the law, including TILA. Pub. L. 95-630, 107(e)(1), adding 12 U.S.C. 1818(i)(2). In 1980. as part of the Truth in Lending Simplification and Reform Act, Congress expressly authorized the TILA enforcement agencies to order restitution for specified TILA violations and mandated that they order restitution for any such violations resulting from a clear and consistent pattern or practice of violations. Pub. L. 96-221, 608(a), adding 15 U.S.C. 1607(e). And in 1989, as part of the Financial Institutions Reform, Recovery, and Enforcement Act, Congress substantially enhanced the cease and desist powers of the federal banking agencies. Pub. L. 101-73, 902(a)(2)(A), adding 12 U.S.C. 1818(b)(6)-(8).
functions of TILA because the moratorium "does not prevent individual consumers from bringing suit." Id. at
In short, TILA's legislative history shows that Con-gressional concern about TILA class actions has led to the enactment of a series of limitations on such actions. It does not show that TILA class actions must be permitted to move forward at the expense of the fundamental pub-lic policies embedded in the FAA. Indeed, there is noth-ing in TILA or its legislative history that evidences any hostility to an arbitral forum.
III. Class Actions Are Not Needed To Provide Consumers With An Effective Remedy For TILA Violations.
"So long as the prospective litigant effectively may vindicate [his or her] statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function." Gilmer, 500 U.S. at 28, quoting Mitsubishi Motors, 473 U.S. at 637 (emphasis added). Without question, individual arbitration of a TILA claim provides an effective remedy to a prospective litigant, without the necessity of any resort to a class action.
Congress itself does not believe that class action pro-ceedings are necessary to vindicate the rights of prospec-tive litigants. In 1980, Congress enacted Pub. L. 96-221, 615(a)(1), amending Section 130(a)(2)(B) of TILA, 15 U.S.C. 1640(a)(2)(B). Prior to the amendment, the maxi-mum recovery of statutory damages in a single class action was limited to the lesser of $500,000 or 1% of the creditor's net worth.7 After the amendment, this same
~ In both individual and class actions, consumers have the right to any actual damages they can prove, in addition to
limitation was extended to a "series of class actions aris-ing out of the same failure to comply by the same credi-tor."8 Accordingly, Congress has effectively denied all consumers who are not included in the class that first recovers the available relief the opportunity to utilize class action procedures to obtain statutory damages. See Turner v. Beneficial Corporation, 67 F. Supp. 2d 1325, 1330 (M.D. Ala. 1999) ("[B]ecause the Defendants have already paid the statutory maximum in statutory penalties to a class of plaintiffs pursuant to the state court settlement approved by, enforced, and affirmed upon review by the state courts, [plaintiff] may not proceed on her class claims for statutory damages for the same TILA violation in this court."). In doing so, Congress clearly recognized that TILA's individual remedies are fully adequate to compensate consumers.
In an individual proceeding, TILA's civil liability provision specifically requires the award of: (1) any "actual damage sustained by [a consumer] as a result of the failure [to comply with TILA]," 15 U.S.C. 1640(a)(1);
(2) statutory damages equal to twice the finance charge, but not less than $100 or more than $1,000 (or $200 and $2,000 for closed-end loans, such as the loan to Respon-dent, secured by real property or a dwelling), 15 U.S.C. 1640(a)(2)(A); and (3) attorneys' fees and the costs of the
statutory damages. As explained infra (pp. 13-14), it is virtually impossible to obtain actual damages in a class action because the issue of individual reliance destroys commonality, typicality and predominance.
~ The situation where a creditor is subjected to multiple class actions alleging the same TILA violation is most likely to arise in the context of a series of state-wide class actions.
action (including, of course, arbitration fees), 15 U.S.C. 1640(a)(3).9
By mandating an award of attorneys' fees and costs of the proceeding to a prevailing consumer, Congress distinguished TILA claims (and claims under many other federal consumer credit statutes) from most common law claims, ensuring that individual TILA actions remain via-ble. In conformity with the statute, substantial attorneys' fees have frequently been awarded under TILA, even in the absence of actual damages. See, e.g., Ex Parte Edwards, 601 So. 2d 82 (Ala. 1992) (directing lower court to award
$43,000 in attorneys' fees); Ratner ($20,000 attorney fee in case awarding minimum statutory damages of $100). Cf. Johnson v. Eaton, 958 F. Supp. 261, 264 (M.D. La. 1997) (award of $13,410, "nearly 27 times greater than the dam-age award," in a case under the Fair Debt Collection Practices Act (the "FDCPA"), a statute whose civil lia-bility provisions were patterned after TILA's).
Time and again, courts have concluded that TILA rights can be enforced effectively in individual proceed-ings. See, e.g., Saga! v. First USA Bank, N.A., 69 F. Supp. 2d at 632 (even though "Congress recognized class action suits as a useful way to enforce the TILA . . . [b]ecause Congress has not provided for a statutory right to pursue class actions under the TILA, and because there are alter-native means to bring suit thereunder, this court does not find that the TILA amounts to a 'congressional command' to preserve class action suits at the expense of the FAA. See McMahon, 482 U.S. at 226."); Ratner (concluding that an individual action was superior to a class proceeding);
~ In the proceedings below, either the Eleventh Circuit ignored TILA's command that a prevailing consumer is entitled to the costs of the proceeding or it assumed, incorrectly and without analysis, that this substantive right would not be available in arbitration.
Graybeal v. American Savings & Loan Ass'n, 59 F.R.D. 7, 16 (D.D.C. 1973) (because "an individual plaintiff will recover a minimum of $100, plus attorneys' fees and costs . . . the incentive offered by a class action is not necessary to enforce the provisions of the Act").
While unnecessary to support arbitration of TILA claims, we note that individual, actions will frequently be superior to class actions in enforcing a prospective liti-gant's rights under the statute.10 Actual damages are virtually impossible to prove in the context of a TILA
10 TILA class actions have been certified under Fed. R. Civ. P. 23(b)(3), suggesting that the courts in question viewed a class action to be superior to individual actions on the facts of the particular case. However, in determining arbitrability of a claim, the question under the FAA and this Court's precedent is not whether a class proceeding or an individual action is preferable in a given case. Such a rule would directly conflict with Gilmer because it would effectively preclude individual arbitration whenever a case, whether founded on an alleged statutory violation, breach of contract or tort, would otherwise be appropriate for class certification. It would also conflict with the Rules Enabling Act by elevating the procedural right to bring a class action over the substantive right to arbitration created by the FAA. See Deposit Guar. Nat'! Bank v. Roper, 445 U.S. 326, 332 (1980) ("the right of a litigant to employ Rule 23 is a procedural right only, ancillary to the litigation of the substantive claims"); Marsh v. First USA Bank, NA., Lodging, Exh. A, slip op. at 25 ("Emanating from Federal Rule of Civil Procedure 23, class actions are just that: procedural. Rules of procedure are established to facilitate the just resolution of substantive rights. As the Supreme Court has explained, courts should be 'mindful that Rule 23's requirements must be interpreted in keeping with Article III constraints, and with the Rules Enabling Act, which instructs that rules of procedure "shall not abridge, enlarge or modify any substantive right." Amchem Products. Inc. v. Windsor, 521 U.S. 591, 612 (1997), citing 28 U.S.C. 2072(b). Accordingly, Plaintiffs are not entitled as a matter of right to proceed as a class.").
class action since a "plaintiff claiming actual damages must establish a causal connection between the inaccu-rate disclosure and his injury by demonstrating that he relied on the inaccurate disclosure and thereby was effec-tively prevented from obtaining better credit terms else-where." Adiel v. Chase Fed. S & L Assn., 630 F. Supp. 131, 133 (S.D. Fla. 1986), aff'd, 810 F.2d 1051 (11th Cir. 1987).11
As a result of the need to prove individual reliance to establish a claim for actual damages, practically all courts that have considered the issue have refused to certify TILA classes seeking actual damages. See, e.g., Barlow v. Evans, 992 F. Supp. 1299, 1310 (M.D. Ala. 1997); Hoffman v. Grossinger Motor Corp., 1999 U.S. Dist. LEXIS 4172 (N.D. Ill. Mar. 25, 1999); McCoy v. Salem Mortgage Co., 74 F.R.D. 8, 12 (E.D. Mich. 1976).
Moreover, a consumer can almost always recover more statutory damages in an individual TILA action than in a class action. In a lawsuit against a large lender, with $50 million or more of net worth, the total class action recovery is capped at $500,000. With merely 5,000 class members, the maximum recovery of statutory dam-ages by each class member would be only $100. This amount represents the minimum statutory damages in an individual proceeding. In many cases for example, a
11 See also H.R. Rep. No. 104-193, 111 (1995) ("To recover actual damages, consumers must show that they suffered a loss because they relied on an inaccurate or incomplete disclosure."); 141 Cong. Rec. H9513-01, H9516 (daily ed. September 27. 1995) (statement of Rep. McCollum) ("To recover actual damages, consumers must show that they suffered a loss because they relied on an inaccurate or incomplete disclosure. A number of lawsuits have been filed in which plaintiffs have claims as actual damages the amount of the fees or charges that have been misdisclosed. This is not the meaning of actual damages. The proper meaning of damages is discussed in [Adiel].").
typical credit card program there may be tens of thou-sands or even millions of class members. Thus, the pros-pect of a meaningful recovery for a prospective litigant in a TILA class action may be virtually nonexistent. In the words of one court:
[I]f this class action suit went to trial and resulted in the maximum $500,000 cash award available under the [Consumer Leasing Act, a part of TILAJ, each class member would be enti-tled to less than one dollar of the total settlement. ... Each class member would unquestion-ably fare better by bringing an individual action . . . [because] an individual plaintiff would be entitled to a minimum of $100 and a maximum of $1,000. . . . This recovery is sub-stantially greater than the de minimus recovery that the class member would receive under 1640's $500,000 damages cap.
Clement v. American Honda Finance Corp., 176 F.R.D. 15, 23-24 (D. Conn. 1997).
In Lewis v. Jesse L. Riddle, P.C., 1998 U.S. Dist. LEXIS 20465 (W.D. La. Nov. 18, 1998), an FDCPA case, the court noted that several courts have certified class actions despite the argument that each class member could obtain more in an individual lawsuit. Nevertheless, the court held that an individual proceeding was superior to a class action. It observed:
Concerns about equity and the fair administra-tion of justice must extend beyond this single case. The certification of this class action is guar-anteed to result in substantial delays in the reso-lution of the merits of other cases in this division. This court has experienced its share of class actions, each of which has consumed countless hours of conference, courtroom and consideration time. Undoubtedly, similar efforts would have to be put into this case. After it is all
said and done several people who wrote bad checks will each receive a check that might be enough to buy lunch. Will they feel vindicated? More likely, they will be angered at the fact that the attorney's fees at issue are thousands of times the amount of their paltry compensation.
Id. at *24*25
Nor is the right to bring an individual lawsuit under
TILA merely theoretical. This Court has encountered
individual TILA cases on a number of occasions. See, e.g.,
Beach v. Ocwen Fed. Bank, 523 U.S. 410 (1998); Griggs v.
Provident Consumer Discount Co., 459 U.S. 56 (1982); American Express Co. v. Koerner, 452 U.S. 233 (1981); Anderson
Bros. Ford v. Valencia, 452 U.S. 205 (1981); Ford Motor
Credit Co. v. Cenance, 452 U.S. 155 (1981); Kirchberg v.
Feenstra, 450 U.S. 455 (1981); Ford Motor Credit Co. v.
Milhollin, 444 U.S. 555 (1980); Mourning v. Family Pubs.
Serv., 411 U.S. 356 (1973).
Moreover, according to a May 15, 2000 computer search of the CaseStream database, 167 TILA cases, of which only 22 were class actions, were filed in the federal courts from January 1, 2000 through May 15, 2000 and 539 TILA cases, of which only 44 were class actions, were filed in the federal courts in 1999. Lodging, Exh. B. These figures may significantly understate the actual volume of individual TILA litigation since CaseStream search results do not include TILA claims: (1) filed under a civil docket sheet that labels a non-TILA claim as the principal claim in the case; (2) filed in state court, as permitted by 15 U.S.C. 1640(e);'2 (3) filed in one of the (small number
12 The "grant of concurrent jurisdiction constitutes explicit authorization for complainants to waive [federal procedural] protections by filing suit in state court." Rodriguez de Quijas, supra, 490 U.S. at 482. Among the federal procedures a plaintiff
of) federal judicial districts that is not covered by Case-
Stream; (4) threatened but settled or withdrawn before a
formal filing; (5) initiated as an arbitration rather than a
judicial proceeding; or (6) filed as a counterclaim in a
In many cases without substantial actual damages, a consumer may conclude that the statutory damages avail-able under TILA do not justify litigating a perceived technical violation of TILA. The consumer's decision to eschew litigation (or arbitration) is entirely voluntary, however, since Congress assured that the opportunity to vindicate an individual TILA claim for statutory damages and any actual damages remains viable. Of course, if individual judicial proceedings suffice to vindicate con-sumer rights, individual arbitration proceedings, with their relative simplicity, speed and cost-effectiveness,13 provide an even better mode of enforcement.'4
may waive by filing a case in state court is the right to pursue a class action under Rule 23. See, e.g., Marx v~ Broom, 632 So. 2d 1315, 1322 (Miss. 1994) (noting that Mississippi courts do not allow class actions).
13 "[Alternative dispute resolution] has been used in the private sector for many years and has proven to be quicker, less costly, and more efficient than litigation in resolving disputes." H.R. Rep. No. 103-652, 309 (1994) (explaining the rationale for adoption of 12 U.S.C. 4806, providing for the use of alternative dispute resolution for disputes involving the federal banking agencies). See also Brief of American Bankers Association, American Financial Services Association, and Consumer Bankers Association as Amici Curiae in Support of Petitioners ("Trade Association Brief"), Section II.B.
14 Not only can consumers obtain redress for TILA violations directly in individual proceedings, they can obtain relief indirectly by lodging complaints with the FTC or the appropriate federal banking agency. Each such agency provides convenient mechanisms for consumers to submit complaints in
IV. Class Actions Are Not Needed To Deter Violations of TILA.
Under Gilmer, the proper focus in determining whether to enforce an agreement providing for arbitra-tion of a statutory claim is whether the prospective litigant should be able to vindicate his or her substantive rights in arbitration. As explained above, consumers have an excellent opportunity to enforce their rights through indi-vidual arbitrations.
Respondent argued in her Brief in Opposition (Opp. 19-21), however, that TILA is incompatible with the arbitration clause in this case because enforcement of the clause would lessen the incentive for TILA compliance. This argument would apply equally indeed, with greater force to virtually any other statute that could give rise to class actions, including the Carriage of Goods by Sea Act, the ADEA, the federal securities laws, the federal antitrust laws and RICO. Of course, this Court has previously enforced agreements to arbitrate claims under each of these statutes. See n. 2, supra.
In Gilmer, 500 U.S. at 32, this Court emphasized that enforcement of the parties' arbitration agreement "will not preclude the [administrative agency] from bringing actions seeking class-wide and equitable relief." By the same token, enforcement of arbitration agreements for TILA claims will have no effect on the powerful deterrent force of agency and criminal enforcement mechanisms provided by TILA. These enforcement mechanisms make
writing, by telephone or by e-mail. See Lodging, Exh. C (collecting web site materials of TILA enforcement agencies).
class actions unnecessary to ensure a high level of TILA compliance. 15
A discovery by the FTC or a banking agency that a regulated institution may be in violation of TILA carries with it a direct and substantial risk to the institution. Under Section 108 of TILA, 15 U.S.C. 1607, the FTC and the federal banking agencies are afforded sweeping enforcement powers with respect to TILA violations com-mitted by creditors within their jurisdiction. Violations of TILA by banking and savings institutions are treated as violations of Section 8 of the Federal Deposit Insurance Act, 12 U.S.C. 1818, and violations of TILA by most other creditors are treated as violations of the Federal Trade Commission Act (the "FTC Act").'6 15 U.S.C. 1607(a)-(c).
If a bank violates TILA, the appropriate agency may initiate cease and desist proceedings and obtain an order that requires the offending institution, among other
15 The Federal Deposit Insurance Corporation ("FDIC") reports that fully 96% of approximately 2,000 banks it examines had either satisfactory or outstanding legal compliance ratings at the end of 1998, leaving only 4% (or about 80) of these banks with less than satisfactory ratings. See FDIC, 1998 Annual Report 34 (Aug. 1999). Lodging, Exh. D. Significantly, the FDIC formally required a total of 161 banks to reimburse consumers for TILA violations. This figure doubles the 4% of FOIC supervised banks that failed to achieve satisfactory or outstanding compliance ratings in 1998. Id. The Federal Reserve Board ("FRB") reports that 74% of the institutions it examined during the 1998 reporting period were in full compliance with Regulation Z (which implements TILA) and that 62% of the noncompliant institutions had only one to five violations. FRB, 85th Annual Report 1998 223. Lodging, Exh. E.
16 TILA compliance is also enforced in certain limited cases by the National Credit Union Administration, the Secretary of Transportation or the Secretary of Agriculture.
things, to: (1) cease and desist the unlawful conduct; (2) make restitution or provide reimbursement against loss in the case of unjust enrichment or reckless disregard for the law; (3) rescind the underlying agreement; or (4) take such other action as the agency determines to be appro-priate.17 12 U.S.C. 1818(b). In addition, the agency can remove from office any institution-affiliated party who has directly or indirectly violated TILA including any officer, director and employee, as well as any attorney or other independent contractor who has knowingly or reck-lessly participated in any TILA violation and can pro-hibit such person from further participation in the affairs of any insured depository institution. 12 U.S.C. 1813(u), 1818(e). The agency can also obtain civil penalties of not more than $25,000 per day during the continuation of any TILA violation that is reckless or part of a pattern of misconduct (or $5,000 per day for any other TILA viola-tion).'8 12 U.S.C. 1818(i).
Like the federal banking agencies, the FTC has authority to issue cease and desist orders and seek resti-tution in the event of a TILA violation by a creditor under its jurisdiction. 15 U.S.C. 45, 1607(c). See, e.g., In the Matter of Guild Mortgage Company, 113 F.T.C. 1183 (1990). In addition, the FTC can commence a civil proceeding to obtain: (1) a civil penalty of up to $10,000 for each viola-tion, Section 5(m) of the FTC Act, 15 U.S.C. 45(m); (2) an injunction and ancillary relief, Section 13(b) of the FTC Act, 15 U.S.C. 53(b); and/or (3) "such relief as the court finds necessary to redress injury to consumers
17 The authority to order restitution, reimbursement, resclsslon and other appropriate action was created in 1978. See n. 6, supra.
18 This authority was created in 1978. See n. 6, supra.
[including] rescission or reformation of contracts, the
refund of money or return of property, [and] the payment
of damages..." Section 19(b) of the FTC Act, 15 U.S.C.
57b(b). See, e.g., United States v. National Financial Ser--
vices, Inc., 98 F.3d 131, 139 (4th Cir. 1996) (affirming
award of $500,000 in civil penalties pursuant to Section
5(m) of the FTC Act for a violation of the FDCPA); FTC v.
H.N. Singer, Inc., 668 F.2d 1107, 1113 (9th Cir. 1982) (hold--
ing that, in an injunction proceeding, a court has the
authority to grant any ancillary relief that is "necessary to
accomplish complete justice," including the power to
grant rescission); FTC v. Security Rare Coin & Bullion
Corp., 931 F.2d 1312 (8th Cir. 1991) (following Singer and
affirming award of monetary equivalent of rescission).
The FTC's exercise of its power to redress violations
of lILA and the FTC Act is illustrated by a recent consent
decree obtained by the FTC in United States v. Mazda
Motor of America, Inc., Civ. Action No. SACV 99-1213 AHS
(EEx) (C.D. Cal. Oct. 7, 1999). Lodging, Exh. F. This
consent decree has its roots in 1997, when the FTC
charged that the leasing advertising of Mazda and four
other motor vehicle manufacturers did not comply with
the Consumer Leasing Act (a part of TILA) and the FTC
Act. Mazda and the other manufacturers consented to
orders requiring clear and conspicuous disclosure of
specified information in connection with any advertise--
ment of payments due at lease inception. In re Mazda
Motor of America, Inc., FTC Docket No. C-3714 (FTC Feb.
6, 1997). Lodging, Exh. G. "The FTC found, however, that
Mazda's television leasing ads continued making dis--
closures that were in small and unreadable print, offset
by distracting images or sounds, or that appeared on the
screen for too short a time." FTC Press Release dated
Sept. 30, 1999, Mazda to Pay $5.25 Million for Violating FTC
and State Orders Regarding Lease Advertisements (the "Mazda Release"). Lodging, Exh. H. As a result of these practices, Mazda ultimately agreed to pay $4.05 million in civil penalties at the direction of the U.S. Department of Justice and a total of $1.2 million in fines and costs to 24 states. Id. The FTC observed: "This substantial penalty should not only deter future violations of the Commis-sion s order by Mazda, but send a strong signal to every-one in the automobile industry manufacturers, dealers and advertising agencies that important leasing infor-mation cannot be buried in fine print." Id.'9
In 1980, as part of the Truth in Lending Simplification and Reform Act, Congress added a critical additional weapon to the agency enforcement arsenal.20 Pub. L.
19 Further examples of recent FTC enforcement activities under TILA include: (1) a consent order requiring a mortgage lender to pay $1.3 million of consumer redress and administrative costs; (2) consent judgments against seven subprime mortgage lenders and their owners, requiring consumer redress aggregating $572,500, imposing injunctive relief, requiring performance bonds and, in one case, banning any future involvement with high-cost home loans; (3) an ongoing lawsuit against a mortgage company in the Washington, DC area and its owner, seeking refunds of monies paid by consumers, disgorgement of improper gains, rescission of contracts and permanent injunctive relief; (4) orders imposing both general and specific requirements with respect to the leasing advertisements of two major computer manufacturers; and (5) consent agreements with six Philadelphia-area vehicle dealerships imposing general and specific requirements with respect to lease and credit advertisements. See January 6, 2000 letter from the Chairman of the FTC to the Director of the FRB's Division of Consumer and Community Affairs. Lodging, Exh. I.
20 In the Truth in Lending Simplification and Reform Act, Congress simultaneously enhanced the enforcement powers of
96-221, 608(a), adding Section 108(e) of TILA, 15 U.S.C. 1607(e). Under Section 108(e) of TILA, whenever a credi-tor discloses a finance charge or APR that is materially inaccurate, the appropriate TILA enforcement agency is authorized to order restitution, based upon the difference between the actual and disclosed finance charges (or dollar equivalent thereof, in the case of an improper APR disclosure). Moreover, subject to limited exceptions, the agency is required to order restitution whenever the viola-tion results from either a clear and consistent pattern or practice of violations (as will inevitably be the case for violations suitable for private class certification), gross negligence or willful violation intended to mislead the consumer. This powerful enforcement mechanism is not available to private litigants, who must show reliance under Adiel and its progeny in order to obtain actual damages and thus are not entitled to recover the differ-ence between the disclosed finance charge and the actual finance charge (or the dollar equivalent thereof, in the case of an improper APR disclosure).2'
The agencies have shown that they are fully prepared to exercise their restitution authority. The FRB reports that the FDIC, the Office of Thrift Supervision ("OTS") and the FRB required a total of 205 financial institutions to refund $2.3 million to consumers in 1998 because of
the TILA enforcement agencies and limited the relief available in a series of similar TILA class actions, thereby placing greater relative reliance on TILA's administrative enforcement mechanisms.
21 The TILA enforcement agencies can (and do) order class-wide relief without regard to the procedural requirements of Fed. R. Civ. P. 23 and the numerous difficulties and legal costs associated with implementing compliance with the Rule.
improper TILA disclosures. FRB, 85th Annual Report 1998 223. Lodging, Exh. E.
On occasion, an enforcement agency has needed to enforce a restitution order in court. See, e.g., Stutsman County State Bank v. FDIC, 207 F.3d 464 (8th Cir. 2000) (failure to properly disclose processing fees ranging from $27 to $59 on 25,640 accounts resulted in required restitu-tion of almost $1.5 million despite disclosure of fees in telephone script and/or written credit approval letters);22 First Nat'! Bank of Council Bluffs, Iowa v. Office of the Comptroller of the Currency, 956 F.2d 1456 (8th Cir. 1992) (restitution order addressing improper APR disclosures affecting 691 discounted variable rate loans affirmed in part and reversed and remanded in part for further con-sideration of statute of limitations issues). Reported resti-tution cases and orders represent the "tip of the iceberg," however, since the TILA enforcement agencies ordinarily do not need to resort to formal restitution actions when they discover TILA violations. Rather:
The agencies anticipate that most financial insti-tutions will voluntarily comply with the restitu-tion provisions of section 608 [sic] as part of the normal regulatory process. If a creditor does not voluntarily act to correct violations, the agencies will use their cease and desist authority to require correction.
Federal Financial Institutions Examination Council, Regulation Z: Joint Notice of Statement of Enforcement Policy, 45 Fed. Reg. 48712, 48713 (July 21, 1980). See, also, Alan J.
~ Based on the $8,780,000 of equity capital reported by this bank to the FDIC as of December 31, 1999, Lodging, Exh. J' the maximum private TILA class action recovery against the bank would have been only $87,800.
Dombrow and Walter E. Zalenski, The TILA Reimburse-ment Rules After the Rodash Amendments, ABA Bank Compliance, p. 9 (March/April 1998) ("[T]he intent of the agencies is to lessen the adversarial nature of the process by explaining why reimbursement is necessary and requesting the institution to take voluntary action to avoid being told to do so under a C&D order. As a result, most reimbursement actions since 1980 have been made 'voluntarily.' "). Lodging, Exh. K.
Moreover, all of the federal banking regulatory agencies conduct regular examinations to determine whether the institutions within their supervisory jurisdiction are operating in a safe and sound manner and are complying with the Community Reinvestment Act (the "CRA"), 12 U.S.C. 2901 et seq., TILA and other applicable laws. The agencies then assign numerical safety and soundness and general compliance ratings and descriptive ("outstand-ing"; "satisfactory"; "needs to improve") CRA ratings on the basis of these examinations. An institution's non-compliance with TILA can adversely affect the ratings the institution receives on its safety and soundness examina-tion for both management quality and overall quality, and could also adversely affect its CRA rating.
In adopting its "Uniform Financial Institutions Rat-ing System," the Federal Financial Institutions Examina-tion Council, a body composed of the Office of the Comptroller of the Currency (the "0CC"), FRB, FDIC, OTS and National Credit Union Administration, explained the significance of the institution's compliance with applica-ble law. 61 Fed. Reg. 67021 (Dec. 19, 1996). Under this rating system, each institution is assigned a composite safety and soundness rating based on an evaluation and rating of six essential components: (1) capital adequacy;
(2) asset quality; (3) management; (4) earnings performance; (5) adequacy of liquidity; and (6) sensitivity to market risk, with composite and component ratings being assigned numerical ratings from 1 (best) to 5 (worst). Id. at 67025. "tT]he management component is given special consideration when assigning a composite rating." Id. "The capability of the board of directors and manage-ment . . . to ensure . . . compliance with applicable laws and regulations is reflected in this rating." Id. at 67027. Top rated institutions, with composite 1 and 2 ratings, "are in substantial compliance with laws and regulations" while lower rated institutions, with composite 3 and 4 ratings, "may be in significant noncompliance with laws and regulations" Id. at 67026.
By the same token, non-compliance with the law, including TILA, also adversely affects an institution's CRA compliance rating. See 12 C.F.R. 25.28(c) (evidence of illegal credit practices adversely affects OCC's evalua-tion of bank's CRA performance); 12 C.F.R. 228.28(c) (same for FRB); 12 C.F.R. 345.28(c) (same for FDIC); 12 C.F.R. 563e.28(c) (same for OTS). Each of the federal banking agencies has adopted a regulation providing that an institution's record of CRA performance will be taken into account and may serve as the basis of denial for specified applications, including applications for: (1) a new charter or deposit insurance; (2) the establishment of a branch or the relocation of a home office or branch; (3) a merger, consolidation, branch acquisition or similar transaction; or (4) the acquisition of shares or assets of a regulated financial institution.23 Moreover, adverse management, composite and/or CRA ratings can preclude a financial institution and its affiliates from exercising
~ 12 C.F.R. 25.29 (0CC); 12 C.F.R. 228.29 (FRB); 12 C.F.R. 345.29 (FDIC); 12 C.F.R. 563e.29 (OTS).
powers otherwise authorized by the recently enacted Gramm-Leach-Bliley Act, Pub. L. 106-102 (1999). Section 4(1) of the federal Bank Holding Company Act (the "BHCA"), 12 U.S.C. 1843(1), enacted as part of the Gramm-Leach-Bliley Act, prohibits a bank holding com-pany from conducting certain activities, directly or indi-rectly through subsidiaries, that are "financial in nature" (which includes under Section 4(k) of the BHCA, 12 U.S.C. 1843(k), insurance and securities underwriting; insurance agency activities from outside small towns; merchant banking; and other activities) if any insured depository institution subsidiary of such holding com-pany is not "well managed" or has received in its most recent CRA examination a rating of less than satisfac-tory.24 Similar prohibitions apply to any insured deposi-tory institution that seeks to undertake activities that are "financial in nature" through subsidiaries if the institu-tion or any of its affiliated insured depository institutions receives a less than satisfactory CRA rating. See 12 U.S.C. 24a, 1831w(a) and 1843(l)(2).
The reality and threat of agency enforcement actions by the FTC and the federal banking regulators, and the prospect of poor examination results, while fully suffi-cient of themselves to deter non-compliance with TILA, are by no means the only public mechanisms available to deter violations. State authorities also enforce TILA com-pliance, generally through state unfair trade practices or "mini-FTC" statutes that broadly proscribe unfair and deceptive acts and practices. For example, as reflected in
24 In order to be "well managed," an institution must receive a composite safety and soundness rating of 1 or 2 and at least a satisfactory rating for management. 12 U.S.C. 1841(o)(9).
the Mazda Release, Lodging, Exh. H, 24 states obtained $1.2 million of fines and costs arising from Mazda's alleged lease advertising violations. Also, the New York State Banking Department recently announced the settle-ment for $12 million of a case involving, among other things, alleged violations of the Home Ownership Equity Protection Act provisions of TILA. Superintendent Announces Landmark Settlement with Lender (Aug. 19, 1999). Lodging, Exh. L. By the same token, the New York Attorney General has warned New York automobile dealers that violations of TILA in the credit sale or lease of motor vehicles are considered "deceptive" practices that may give rise to enforcement actions. New York State Attorney General's Office Advertising Guidelines for Auto Dealers. Lodging, Exh. M.
TILA violations are further deterred by TILA's crimi-nal liability provision. Under Section 112 of TILA, 15 U.S.C. 1611, any person who willfully and knowingly violates TILA is criminally liable and subject to a $5,000 fine, a year in prison or both. Moreover, TILA violations are deterred by the threat of delayed loan rescission, an individual remedy provided by TILA with respect to specified loans secured by the consumer's principal resi-dence.25 Under Section 125 of TILA, 15 U.S.C. 1635, consumers have the right to rescind these loans at any time within three years after loan closing if the creditor fails to provide materially accurate TILA disclosures. A valid rescission results in the creditor's loss of its security
2~ See James v. Home Constr. Co., 621 F.2d 727, 730-31 (5th Cir.
1980) ("the rescission remedy [isi a purely personal remedy");
Jefferson v. Security Pac. Fin. Sews., 161 F.R.D. 63, 69 (N.D. Ill.
1995) ("Under Section 1635, individuals must choose to assert
the right to rescind, on an individual basis and within
individual time frames before filing suit").
interest in the dwelling and an obligation to refund all charges incurred by the consumer in connection with the loan (e.g., interest, points, application fees, appraisal costs, title insurance premiums, etc.). Accordingly, this remedy can result in draconian potential exposure to creditors,26 providing creditors with a powerful addi-tional incentive to ensure that TILA violations do not infect their home loan portfolios.
In sum, despite Respondent's protestations in her Brief in Opposition to the contrary, the unavailability of class action relief under a consumer arbitration agree-ment does not conflict with the purposes of TILA by eliminating or even significantly reducing the incentive for creditors to comply with the statute.27
26 For a home loan of $100,000, originated for three points and $500 of additional loan costs at a 7% interest rate, the amount in controversy if the consumer purports to rescind the loan on the eve of its third anniversary would approximate $24,500 ($3,000 in points; $500 of additional loan costs; and approximately $21,000 of interest, ignoring the effects on interest charges of any principal amortization). Clearly, this type of exposure, when applied to more than a handful of loans, can lead to catastrophic liability.
27 In refusing to enforce arbitration of a TILA claim based on their conclusion that the elimination of class action exposure would eliminate any meaningful incentive for creditors to comply with TILA, the district courts in Lozada v. Dale Baker Oldsmobile, 2000 U.S. Dist. LEXIS 4122 (W.D. Mich. Mar. 27, 2000), and Johnson v. Tele-Cash, 82 F. Supp. 2d 264 (D. Del. 1999), did not mention, let alone analyze, the effect of TILA's administrative and criminal enforcement provisions. Nor did either court consider economic and other mechanisms promoting TILA compliance. Such mechanisms would include, without limitation, creditor concerns about: (1) the potential loss of customer goodwill and reputation (see the Trade Association Brief, Section II.C); and (2) the necessity of
For the foregoing reasons, this Court should hold that the unavailability of class action relief neither viti-ates nor excuses the enforcement of an agreement to arbitrate a TILA claim.
ALAN S. KAPLINSKY*
DAVID H. Pn-rINsKY
JEREMY T. ROSENBLUM
THOMAS B. ROBERTS
BALLARD SPAHR ANDREWS & INGERSOLL, LLP
1735 Market Street, 51st Floor
Philadelphia, PA 19103
ROBIN S. CONRAD
NATIONAL CHAMBER LITIGATION CENTER, INC.
1615 H Street, NW
Washington, D.C. 20062
*Counsel of Record
demonstrating TILA compliance to potential loan purchasers, agencies rating potential loan securitizations and entities considering corporate mergers with or acquisitions of the creditor.