In Alkan v. Citimortgage Inc., No. C-04-01918, 2004 WL 2125857 (N.D. Cal. Sept. 22, 2004), the United States District Court for the Northern District of California held that the California Rosenthal Fair Debt Collection Practices Act, Cal. Civ. Code §§ 1788 et seq. (“CFDCPA”) is not a “lending regulation” and, thus, is not preempted by the Home Owners’ Loan Act (“HOLA”) or its implementing regulations.

HOLA grants the Office of Thrift Supervision (“OTS”) plenary and exclusive authority to regulate all aspects of the operations of federal savings associations. Pursuant to that grant, the OTS has issued regulations (§ 560.2) preempting state law and occupying “the entire field of lending regulation for federal savings associations.” The CFDCPA, on the other hand, regulates practices used by creditors in attempting to collect a debt once a loan has been made. For example, harassing phone calls, obscene language, or threatening conduct are prohibited by the CFDCPA. See Cal. Civ. Code §§ 1788.10 and 1788.11.

In Alkan, plaintiff Mehmet Alkan obtained a mortgage from Citimortgage, Inc. The loan agreement permitted Alkan to make a full or partial prepayment without penalty. Nevertheless, after Alkan attempted to pay down the remaining balance, Citimortgage placed the funds into an “Unapplied Funds” account, as opposed to acknowledging that the principle balance of the mortgage was satisfied. Later, Citimortgage reported Alkan’s account as past due and assessed a late charge. Citimortgage then, allegedly, proceeded to engage in collection efforts that included threatening letters and harassing phone calls. Citimortgage also allegedly reported false and derogatory credit information about Alkan to the national credit bureaus, such as Experian. Alkan subsequently filed suit against Citimortgage alleging, among other things, various claims under the CFDCPA.

Citimortgage moved to dismiss Alkan’s claim on the basis that the CFDCPA is preempted by OTS Regulation § 560.2(a). It argued that debt collection is an essential part of the lending practice. As a result, any limitations on debt collection constitutes a “lending regulation.” The court rejected this argument, noting that Regulation § 560.2 regulates the manner in which the lender services or maintains a loan, while the CFDCPA does not come into play until after a loan is made or credit is otherwise extended. As a result, the court concluded that CFDCPA was not a “lending regulation” preempted by Regulation § 560.2(a).

Under Alkan, federal savings associations engaging in the collection of consumer loans in California may be required to comply with the collection standards and practices mandated by the CFDCPA.

Banks may not offset governmental benefits directly deposited into bank accounts against charges for overdrafts and nonsufficient fund fees.

On October 13, 2004, the San Francisco Superior Court issued a Tentative Statement of Decision in Miller v. Bank of America, N.T. & S.A., Case No. CGC-99-301917 (Cal. Super. Ct. Oct. 13, 2004), holding that Bank of America’s practice of offsetting overdrafts and bank fees against social security funds directly deposited into its customers’ accounts violated California public policy as articulated by the California Supreme Court in Kruger v. Wells Fargo Bank, 11 Cal. 3d 352 (1974).

In Kruger, the court held that the banking practice of debiting a checking account containing a customer’s government benefits to repay funds owed by the customer on a separate, delinquent credit card account violated California public policy in favor of ensuring that such funds were fully available to meet indigent recipients’ basic needs. The tentative Miller decision would extend the Kruger holding to include a prohibition on debiting government benefits funds within an account.

The tentative decision would award restitution of nonsufficient fund (NSF) fees collected by Bank of America in an amount exceeding $284 million to a class of Bank customers who received directly deposited social security benefits after August 14, 1994 and were affected by the Bank’s actions. The court also agreed with the jury’s determination that elderly and disabled class members should be entitled to $1,000 as “an appropriate award” for the economic and emotional harm they suffered as a result of the Bank’s conduct. Because the number of class members may potentially exceed one million, statutory damages under the Consumer Legal Remedies Act alone potentially could exceed $1 billion dollars. The decision also would grant injunctive relief under California’s Unfair Competition Law, Cal. Bus. & Prof. Code §17200 et seq.

The tentative decision in Miller could set a troubling precedent, since Bank of America’s practice of offsetting bank fees against social security deposits is commonplace in the banking industry and not easily changed. Further, should the holding in Miller be adopted by courts across the state, banks may begin refusing overdraft protection to customers receiving benefits by direct deposit -- or forcing such customers into different, limited or more expensive accounts.

Financial institutions that are currently using direct deposits of Social Security benefits to cover overdrafts and NSF fees should contact legal counsel for advice on the legal ramifications presented by Miller.

Allen M. Lee
Mr. Lee’s practice focuses on business transactions, as well as the registration of copyright & trademarks, licensing, and litigation, before the Trademark Trial & Appeals Board.