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State Debt Collection Notice Requirements

May 21, 2012

Notice Provisions of State Debt Collection Laws Present Liability Risk to Federally Chartered Banks That Acquire Loans, Pursuant to Recent Decisions by the 9th and 4th Circuit Courts of Appeal

The Issue: Banks may no longer be able to rely on federal pre-emption to override the applicability of state debt collection notice requirements.

In Aguayo v. U.S. Bank, 653 F.3d 912 (9th Cir. 2011) (available here) and Epps v. JP Morgan Chase Bank, N.A., 675 F.3d 315 (4th Cir. 2012) (available here), the Fourth and Ninth Circuits overturned lower court decisions recognizing federal pre-emption of state law debt collection notice requirements. The two banks had acquired auto financing loans, and after the borrower became delinquent the banks repossessed the cars without providing notices required by state law. The District Courts ruled that these state laws were pre-empted by the National Bank Act. But the two Appellate Courts overruled these decisions, holding that the state notice requirements did not affect the banks’ lending operations and therefore were not pre-empted under 12 C.F.R. §7.4008.

In addition, the automobile dealer in the Fourth Circuit case chose to incorporate the particular state law into the contract. Such voluntary incorporation created additional breach of contract liability for the bank.

Implication: At least in the area of automobile repossession, federally chartered banks should consider the applicability of state debt collection notice requirements, and particularly those commonly incorporated by reference in the loans they acquire.

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