Banking and Finance Law Daily Split decision on requests to prevent enforcement of California disclosure, licensing laws
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Wednesday, October 11, 2017

Split decision on requests to prevent enforcement of California disclosure, licensing laws

By Thomas G. Wolfe, J.D.

In reviewing requests by Nationwide Biweekly Administration Inc. and its subsidiary, Loan Payment Administration LLC, to prevent the enforcement of two California laws, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit reached a split decision. In upholding the lower court’s denial of injunctive relief, the panel first ruled that Nationwide was unlikely to succeed on its claim that the company’s First Amendment "free speech" rights would preclude California from requiring it, under the California Business and Professions Code, to make disclosures in its mail solicitations to homeowners that Nationwide did not have authorization from lenders concerning mortgage finance information. However, in vacating the lower court’s denial of injunctive relief, the panel also decided that Nationwide was likely to succeed on its separate claim that the Dormant Commerce Clause precludes California, under the California Financial Code’s "prorater" provision, from making in-state incorporation a prerequisite of licensure to engage in interstate commerce (Nationwide Biweekly Administration, Inc. v. Owen, Oct. 10, 2017, Reinhardt, S.).

As a threshold matter, the Ninth Circuit panel determined that the federal courts had jurisdiction, and the "Younger v Harrisabstention doctrine" did not apply because the consolidated cases had proceeded beyond the "embryonic stage" before related state cases were filed. Judge Ann Montgomery of the panel wrote a dissenting opinion on the jurisdiction issue.

As part of its business for which it charges various fees, Nationwide and Loan Payment advertise a "biweekly interest savings" product to homeowners with mortgages. Under the program, Nationwide "debits half of a customer’s monthly mortgage bill from his or her account every two weeks, and then sends payments to the lender on a monthly basis." As observed by the panel, the product essentially is a "refinancing transaction that converts a standard 30-year mortgage into a slightly shorter mortgage."

Generally, Nationwide characterizes the reduction in interest payments by customers over the course of the loan as "savings," and the company’s solicitation letters commonly refer to a "savings guarantee" rather than as a "reallocation of money across time" or something similar. In addition, Nationwide’s solicitation letters state that "savings gained from the biweekly program goes entirely to you the customer and not to the lender." According to the panel’s opinion, "Nationwide’s solicitation letters do not disclose the fee structure, and in fact only mention fees in a fine-print disclaimer that ‘savings is net of all fees’."

Investigation. In 2013, in response to complaints it received about the "marketing and business practices" of Nationwide, certain county district attorneys in California sent a letter to Nationwide suggesting that Nationwide was running afoul of California Business and Professions Code provisions (§14701 and §14702) by including lenders’ names, consumers’ loan numbers, and loan amounts in its solicitations without required disclosures.

Further, the letter also suggested that Nationwide could be running afoul of the California Financial Code provision (§12200) governing the licensing of proraters. Under the law a prorater is defined as a "person who, for compensation, engages in whole or in part in the business of receiving money or evidences thereof for the purpose of distributing the money or evidences thereof among creditors in payment or partial payment of the obligations of the debtor.” Further, the law prohibits a party from "acting as a prorater … without first obtaining a license from the commissioner." The letter also noted that Nationwide, an Ohio company, was required to be incorporated and organized in California to obtain a prorater license.

The county district attorneys also communicated with the California Commissioner of the Department of Business Oversight for the Commissioner’s own investigation and enforcement. In 2014, Nationwide filed two separate federal lawsuits in the Northern District of California seeking declaratory and injunctive relief to prevent the California Commissioner and county district attorneys from enforcing the pertinent California statutes. When the federal trial court dismissed both cases under the Younger abstention doctrine and denied Nationwide’s requests for a preliminary injunction in both cases, Nationwide appealed to the Ninth Circuit.

Business and Professions Code. The Ninth Circuit panel rejected Nationwide’s argument that it was entitled to a preliminary injunction to preclude enforcement of the Cal. Bus. and Prof. Code provisions (§14701 and §14702) to require Nationwide to disclose its lack of authorization from lenders. Despite Nationwide’s contentions to the contrary, the panel determined that a preliminary injunction was not warranted under the circumstances because enforcement of the California provisions would not encroach on the company’s First Amendment rights of commercial speech, and the company did not otherwise meet the state statutory exemptions.

In connection with the First Amendment challenge, the panel determined that the required disclosures "are meant to protect against consumer confusion" and were permissible under the standard set forth in Zauderer v. Office of Disciplinary Counsel of Supreme Court of Ohio (471 U.S. 626, 651 (1985)). As articulated by the panel, the "First Amendment does not generally protect corporations from being required to tell prospective customers the truth."

Financial Code. In contrast, in connection with Nationwide’s challenge under the California Financial Code provision (§12200), the panel determined that Nationwide was likely to succeed on its claim that the Dormant Commerce Clause of the Constitution would prevent California from making in-state incorporation a prerequisite of licensure to engage in interstate commerce.

The panel stated, "This form of discrimination between in-state and out-of-state economic interests is incompatible with a functioning national economy, and the prospect of each corporation being required to create a subsidiary in each state is precisely the sort of "Balkanization" that the Dormant Commerce Clause exists to prevent."

The consolidated cases are No. 15-16220 and 15-16253.

Attorneys: Benjamin M. Flowers (Jones Day) for Nationwide Biweekly Administration, Inc. Amanda R. Parker (Jones Day), Bruce E. H. Johnson, Thomas R. Burke, Nicolas A. Jampol, and Diana Palacios (Davis Wright Tremaine LLP) for Loan Payment Administration LLC, Daniel Lipsky, and Nationwide Biweekly Administration, Inc. Lucy F. Wang, California Department of Justice, Joyce E. Hee, Diane S. Shaw, and Xavier Becerra, California Attorney General’s Office, for Jan Lynn Owen. Brian C. Case, Office of County Counsel for Marin County, William M. Litt and Charles J. McKee, Office of County Counsel for Monterey County, for John F. Hubanks, Andres H. Perez, Monterey County District Attorney’s Office, and Marin County District Attorney’s Office.

Companies: Loan Payment Administration LLC; Nationwide Biweekly Administration, Inc.

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