In response to reports that Acting CFPB Director Mick Mulvaney intends to dispense with routine supervisory examinations of creditors for violations of the Military Lending Act (MLA), Senate Democrats sent a joint letter addressed to Mulvaney in his capacity as Director of the Office of Management and Budget—urging him to reconsider.

The letter, signed by all 49 Democratic Senators, takes the position that the CFPB has statutory authority to conduct examinations for MLA compliance:

We write regarding reports that the Consumer Financial Protection Bureau (CFPB) will no longer protect servicemembers and their families by including the Military Lending Act (MLA) as part of the CFPB’s routine lender examinations due to a purported lack of authority.  These reports are puzzling because the CFPB already possesses the authority to enforce the MLA and examine many types of lenders for the purposes of “detecting and assessing risks to consumers and to markets for consumer financial products and services.”

The apparent statutory basis for this view is the quoted language above, which is from Section 1024(b)(C) of the Dodd-Frank Act (12 U.S.C. § 5514 – Supervision of nondepository covered persons). Reading Section 1024(b) in its entirely, we think the interpretation set forth in the senators’ letter misreads the scope of supervisory authority authorized by Dodd-Frank:

(b) SUPERVISION.—
(1) IN GENERAL.—The Bureau shall require reports and conduct examinations on a periodic basis of persons described in subsection (a)(1) for purposes of—
(A) assessing compliance with the requirements of Federal consumer financial law;
(B) obtaining information about the activities and compliance systems or procedures of such
person; and
(C) detecting and assessing risks to consumers and to markets for consumer financial
products and services.
(emphasis added)

Rather, we believe subpart (C) must be read within the context of (A), which uses the defined term “Federal consumer financial law,” thereby limiting the scope of statutes under which the CFPB has supervisory authority. As we previously wrote, the MLA is not a “Federal consumer financial law” under Dodd-Frank. To read (C) as a standalone authorization for the CFPB to conduct MLA examinations is to infer that the CFPB has statutory authority for proactive oversight relating to any number of federal statutes that could plausibly affect “consumers and markets for consumer financial products and services.” Likewise, if (C) is indeed as broad as the senators are implying, (A) would be superfluous, since (C) would offer a sufficient grant of authority to cover supervision under any “Federal consumer financial law,” as well as under any other law deemed relevant to “detecting and assessing” the risks outlined in (C).

The CFPB’s ongoing approach to the Servicemembers Civil Relief Act (SCRA) is instructive here. Like the MLA, the SCRA is not a Federal consumer financial law, even though it has direct bearing on various “consumer financial products and services,” including personal loans, motor vehicle loans and mortgage loans. However, the CFPB has not published any general SCRA examination procedures, and we are likewise not aware of general SCRA-related supervisory activity on the part of the CFPB.

RD Legal Funding has submitted a letter to Judge Preska indicating that it does not oppose her entry of a Rule 54(b) judgment to allow the CFPB to appeal her June 21 constitutionality ruling to the Second Circuit but renews its request that the proceeding be stayed during the pendency of any appeal.

RD Legal’s letter responds to the CFPB’s August 10 letter to Judge Preska indicating that it plans to file a motion for entry of a judgment pursuant to Rule 54(b).  RD Legal asserts that “implicit in the CFPB’s request…is the understanding that the NYAG’s claims should be stayed during the pendency of the appeal.”

In addition to asking Judge Preska to stay the proceeding, RD Legal asks her, if she enters a judgment against the CFPB pursuant to Rule 54(b), to certify the remainder of her June 21 order for interlocutory appeal under 12 U.S.C. Section 1292(b).  According to RD Legal, “[a]ll aspects of the Court’s constitutionality ruling, including its ruling permitting the NYAG to proceed under the stricken provisions of Title X, should be addressed in one proceeding.”  The “remainder” of Judge Preska’s June 21 order would also include her ruling that the NYAG could proceed with its state law claims against RD Legal.  (While the CFPB would have a right to appeal a judgment entered pursuant to Rule 54(b), if Judge Preska were to certify the remainder of her June 21 order for interlocutory appeal as requested by RD Legal, the Second Circuit would need to agree to hear RD Legal’s interlocutory appeal.)

The NYAG has submitted a letter to Judge Preska in which it challenges RD Legal’s argument that her dismissal of the CFPB from the case and striking of Dodd-Frank Title X necessitates her dismissal of the NYAG’s CFPA claims against RD Legal.  The letter also sets forth the NYAG’s opposition to Judge Preska’s issuance of a stay of the proceeding if she enters a Rule 54(b) judgment against the CFPB.

 

 

According to media sources, the Senate Banking Committee has rescheduled a vote on President Trump’s nomination of Kathy Kraninger to serve as CFPB Director for August 23.

There is little doubt that the Committee will approve Ms. Kraninger.  It remains unclear, however, whether and when the full Senate will consider her nomination.  We continue to believe that it is unlikely that the full Senate will consider her nomination before the mid-term elections.

 

The Senate Committee on Commerce, Science, and Transportation has scheduled a hearing for tomorrow, August 16, titled “Oversight of the Federal Communications Commission.”  The Committee’s website indicates that the hearing will examine policy issues before the FCC and review the FCC’s ongoing duties and activities.

The witnesses scheduled to appear are the four sitting FCC Commissioners (Chairman Pai and Commissioners O’Reilly, Carr, and Rosenworcel).  The FCC’s response to the D.C. Circuit’s ACA International decision, particularly with regard to the TCPA robocall prohibition, is expected to be a significant focus of the hearing.

 

The New York Attorney General has submitted a letter to Judge Preska that responds to RD Legal Funding’s letter asking her to dismiss all of the NYAG’s federal and state claims.

In its letter, RD Legal Funding asserted that the NYAG’s federal claims should be dismissed because they are brought pursuant to Dodd-Frank Section 1042, which authorizes state attorneys general to file civil actions in federal court to enforce the provisions of the CFPA, and Judge Preska struck all of Title X in its entirety in her June 21 decision, including Section 1042.  In addition to asking the court to dismiss the NYAG’s federal claims with prejudice, RD Legal Funding asked the court to dismiss the NYAG’s state law claims without prejudice to their being refiled in state court.

The NYAG, in its letter to Judge Preska, takes the position that her “termination of the CFPB [from the case] does not necessitate the invalidity of the prohibited conduct provisions of the CFPA or the NYAG’s enforcement authority.”  The NYAG appears to argue that in striking Title X, Judge Preska was only “striking down the CFPB” because of its unconstitutional structure and left in place the CFPA’s substantive provisions (e.g. its UDAAP prohibition) and the right of state AGs to bring CFPA claims.

The NYAG also argues that even if the court were to reverse itself and hold that the NYAG cannot bring CFPA claims, the court would still have subject matter jurisdiction “based upon the embedded federal questions in the NYAG’s state law claims.” According to the NYAG, the embedded federal issue is whether the transactions that RD Legal Funding entered into with consumers entitled to benefits under the September 11th Victim Compensation Fund of 2001 were void under the federal Anti-Assignment Act and therefore loans subject to New York usury law.  (We previously observed that the court, after concluding that the assignments before it were void, leaped to the conclusion that, as a result, the transactions were necessarily disguised loans.  The basis for this conclusion was never articulated by the court.  Just because the underlying transactions are problematic does not mean that they meet the New York definition of usurious loans.)

Finally, the NYAG argues that even if the court finds there is no basis for original jurisdiction over the NYAG’s federal or state law claims, it should nevertheless use its discretion to decide the NYAG’s state law claims because “[b]alancing judicial economy, convenience, fairness, and comity argues for retaining jurisdiction of the state law claims.”  The NYAG asserts that dismissal of its state law claims “would require the NYAG to refile in state court and would unnecessarily delay the proceedings, to the detriment of the consumers harmed by RD Legal, particularly those in poor health.”  The NYAG also points to the district court’s familiarity with the issues in the case and observes that “the state laws at issue are not novel and thus concerns of comity are not implicated.”

The NYAG takes no position in its letter as to whether the court should enter judgment against the CFPB pursuant to Rule 54(b) of the Federal Rules of Civil Procedure so the CFPB can file an immediate appeal with the Second Circuit of Judge Preska’s constitutionality ruling.  However, the NYAG restates its opposition to the court’s issuance of a stay of the proceeding if it enters a Rule 54(b) judgment. The CFPB has sent a letter to Judge Preska indicating that it plans to file a motion for entry of a judgment pursuant to Rule 54(b).

 

All American Check Cashing has filed an Unopposed Petition for Initial Hearing En Banc in which it asks the Fifth Circuit to hear its interlocutory appeal as an initial matter en banc.  The petition states that it is not opposed by the CFPB.

In April 2018, the Fifth Circuit agreed to hear All American’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.  Last month, in Collins v. Mnuchin, a Fifth Circuit panel found that the Federal Housing Finance Agency (FHFA) is unconstitutionally structured because it is excessively insulated from Executive Branch oversight.

All American’s petition is filed pursuant to Rule 35 of the Federal Rules of Appellate Procedure which establishes the standard for seeking an initial en banc hearing or a rehearing en banc.  The rule provides that “[a]n en banc hearing or rehearing is not favored and ordinarily will not be ordered unless: (1) en banc consideration is necessary to secure or maintain uniformity of the court’s decisions; or (2) the proceeding involves a question of exceptional importance.”

In its petition, All American argues that the question of the CFPB’s constitutionality is one of exceptional importance and that if its appeal is heard under the normal panel process, the Fifth Circuit “will likely be asked to rehear that panel’s decision en banc, as occurred in the D.C. Circuit’s PHH case.”

Noting that the plaintiffs in Collins have filed a petition for rehearing en banc with the Fifth Circuit, All American argues that hearing its appeal through the normal panel process “could be a waste [of] judicial resources, especially if this Court votes to rehear Collins en banc.”  It also argues that initial consideration of its appeal en banc “would eliminate any possibility of intra-circuit inconsistency and guarantee that the Fifth Circuit speaks with one voice regarding the constitutionality of [the FHFA’s and the CFPB’s] structures.”

All American asks the Fifth Circuit, if it agrees to hear the appeal en banc as an initial matter, to set oral argument in the Fifth Circuit’s January 2019 en banc sitting, or if it also votes to rehear Collins en banc, to coordinate oral argument for both cases.  All American suggests the following schedule for en banc briefing, which it states the CFPB does not oppose:

  • All American’s en banc brief: Due September 11, 2018
  • CFPB’s en banc brief: Due October 11, 2018
  • All American’s en banc reply: Due November 1, 2018
  • Amicus Curiae en banc briefs: Due the same day as the supported party

The question of the CFPB’s constitutionality could soon reach the Second Circuit in the RD Legal Funding case.  In that case, the CFPB has indicated that it will seek approval for a motion asking the district court to enter a final judgment under Rule 54(b) to allow the CFPB to immediately appeal from the court’s June 21 order which held that that the CFPB’s structure is unconstitutional.

 

 

 

 

Last week the CFPB announced an initiative to create a Global Financial Innovation Network (GFIN) with 11 other financial regulators and related organizations across the globe. The GFIN sprang from a previous proposition by the UK Financial Conduct Authority (FCA) to create a “global sandbox” for innovative financial services firms to be able to test new financial services and products such as artificial intelligence and blockchain based solutions in different financial markets. Feedback provided in response to that proposition indicated a need for more comprehensive collaboration among regulators to expand the innovation activities currently undertaken by financial services regulators around the world.

The GFIN, as described within the Consultation Document announcing its creation, is intended to serve three main functions:

  1. Facilitate information and knowledge sharing among financial services regulators on emerging innovation trends and best practices and to share appropriate regulatory contact information with financial services firms;
  2. Provide a forum for joint policy work and regulatory trials; and
  3. Develop a “global sandbox” for business to consumer (B2C) or business to business (B2B) firms to trial and scale new technologies in multiple jurisdictions.

In the press release announcing the initiative, CFPB Acting Director Mick Mulvaney stated that joining the GFIN “demonstrates the Bureau’s commitment to promoting innovation by coordinating with state, federal and international regulators. We look forward to working closely with other regulatory authorities—whether in the United States or abroad—to facilitate innovation and promote regulatory best practices in consumer financial services.”

The GFIN working group is encouraging responses and feedback from interested parties to 10 questions posed within the Consultation Document by October 14, 2018. Commenters can submit responses to the Bureau’s representative, Paul Watkins in the recently-established Bureau’s Office of Innovation. Responses and input are particularly sought from innovative financial services firms, technology companies and providers, accelerators, academia, consumer groups, financial services regulators, and other entities or individuals interested in helping to develop the GFIN. After October 14 the working group will review feedback and agree on next steps, including a timeline for when to launch the GFIN.

On August 10, the New York Times reported that Mick Mulvaney, the CFPB Acting Director, intends to dispense with routine supervisory examinations of creditors for violations of the Military Lending Act (MLA).  According to the report, Acting Director Mulvaney has argued in a two-page draft change to the CFPB’s policies that “proactive oversight is not explicitly laid out in the legislation.”

We agree with Acting Director Mulvaney that the CFPB lacks statutory authority to examine creditors for MLA compliance.  Sections 1024(b)(1)(A) and 1025(b)(1)(A) of the Consumer Financial Protection Act (CFPA) provide that the CFPB shall conduct examinations of covered persons to assess compliance with the requirements of “Federal consumer financial laws.”  Section 1002(14) of the CFPA defines the term “Federal consumer financial law” to mean generally the provisions of the CFPA and the “enumerated consumer laws.”  Section 1002(12) lists the “enumerated consumer laws.”  There are 18 federal statutes listed in Section 1002(12).  Noticeably absent is the MLA.

Although supervisory examinations for MLA compliance are expected to come to a halt, the Times reports that the CFPB will continue to pursue cases against creditors for violations of the 36 percent interest rate cap.  (The 36% cap is on the Military Annual Percentage Rate (MAPR), which is an “all-in” APR that includes interest and other fees such as application fees and annual fees that are not finance charges under Regulation Z.)

While the CFPB does not have statutory authority to examine creditors for MLA compliance, it does have MLA enforcement authority.  The MLA authorizes the CFPB to enforce the MLA against the same persons as to whom it has Truth in Lending enforcement authority (i.e. any person subject to TILA.)

The CFPB will also continue to supervise creditors under other consumer protection statutes.  According to the Times report, “the rule change came from a top-to-bottom review of the bureau’s procedures geared at curtailing what the administration, along with lending industry executives, have criticized as overly aggressive enforcement by the bureau’s first director, Richard Cordray.”

In place of supervisory examinations, it appears the CFPB will rely exclusively on complaints reported by service members through the CFPB’s website and hotlines.  Christopher L. Peterson, a University of Utah law professor who participated in the drafting of the Department of Defense’s regulations implementing the MLA, observed that enforcement “will go from a proactive system to something that is completely reactive.”  At the same time, Acting Director Mulvaney is urging Congress to pass legislation amending the MLA to expressly permit supervisory examinations.  A spokesman for Mr. Mulvaney, John Czwartacki, stated “we are 100 precent committed to seeing that happens.”

 

The CFPB announced that it has settled a lawsuit that it filed in 2014 in a Missouri federal district court alleging that the defendants engaged in unlawful online payday lending schemes.  The CFPB had sued Richard Moseley Sr., two other individuals, and a group of interrelated companies, some of which were directly involved in making payday loans and others that provided loan servicing and processing for such loans.  The CFPB alleged that the defendants had engaged in deceptive and unfair acts or practices in violation of the Consumer Financial Protection Act as well as violations of the Truth in Lending Act and the Electronic Fund Transfer Act.  According to the CFPB’s complaint, the defendants’ unlawful actions included providing TILA disclosures that did not reflect the loans’ automatic renewal feature and conditioning the loans on the consumer’s repayment through preauthorized electronic funds transfers.  A receiver was subsequently appointed for the companies.

In November 2017, Mr. Moseley was convicted by a federal jury on all criminal counts in an indictment filed by the DOJ, including violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and the TILA.  In its indictment of Mr. Moseley, the DOJ claimed that the loans made by the lenders controlled by Mr. Moseley violated the usury laws of various states that effectively prohibit payday lending and also violated the usury laws of other states that permit payday lending by licensed (but not unlicensed) lenders.  The indictment charged that Mr. Moseley was part of a criminal organization under RICO whose crimes  included the collection of unlawful debts.

Mr. Moseley was charged with committing a criminal violation of TILA by “willfully and knowingly” giving false and inaccurate information and failing to provide information required to be disclosed under TILA.  The DOJ’s TILA count was particularly noteworthy because criminal prosecutions for alleged TILA violations are very rare.  The other counts against Mr. Moseley included wire fraud and conspiracy to commit wire fraud by making loans to consumers who had not authorized such loans.  Mr. Moseley has appealed his conviction.

Pursuant to the Stipulated Final Judgment and Order (Order), a judgment is entered in favor of the Bureau in the amount of $69,623,658 “for the purpose of redress” to consumers.  The Order states that this amount represents the Defendants’ gross profits from January 1, 2008 through August 1, 2018.  The Order extinguishes all consumer debt related to loans originated by the defendants during that period.

Based on the defendants’ financial condition, the Order suspends the full amount of the judgment subject to the defendants’ forfeiture of various assets and “the truthfulness, accuracy, and completeness” of the financial statements and supporting documents that the defendants submitted to the Bureau.  According to the CFPB’s press release, the forfeited assets, which consist of bank accounts and other assets, are worth approximately $14 million. The Order also requires the defendants to pay a $1 civil money penalty.

The Order permanently bans the defendants from marketing, originating, collecting, or selling consumer credit or debt, permanently enjoins them from continuing to engage in the unlawful conduct alleged in the CFPB’s lawsuit, and prohibits them from disclosing any customer information that was obtained in connection with the loans made by the defendants.

 

 

The CFPB has filed a letter with Judge Preska in which it asks “for a pre-motion conference with the Court for approval to file a motion under Rule 54(b) for entry of a final judgment with respect to the Bureau” in the RD Legal Funding case.

Under Rule 54(b) of the Federal Rules of Civil Procedure, a district court can certify a final judgment where “(1) there are multiple claims or parties, (2) at least one of the claims or the rights and liability of at least one party has been finally determined, and (3) ’there is no just reason for delay.’”  In her June 21 order, Judge Preska ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, struck the CFPA (Title X of Dodd-Frank) in its entirety, dismissed the CFPB from the case, and allowed the New York Attorney General to proceed with its CFPA and state law claims.

In its letter, the CFPB argues that the three conditions of Rule 54(b) are satisfied.  It asserts that in addition to involving two plaintiffs (the CFPB and NYAG), by dismissing the CFPB from the case while allowing the NYAG to proceed with its CFPA claims, her order “finally resolved the Bureau’s claims.”  It also asserts that her dismissal of the CFPB “deprives the Bureau of its statutorily-assigned right to participate in the litigation of CFPA claims brought by state regulators.”  The CFPB also argues that the issues of its constitutionality and whether the for-cause removal provision is severable from the CFPA are “separable” from the other issues in the case that remain to be decided.  According to the CFPB, the court’s “resolution of New York’s claims will not render the court of appeals’ decision advisory or moot, and the appeals court would not have to reach the merits of New York’s claims in resolving the Bureau’s appeal.”

RD Legal Funding previously submitted a letter to Judge Preska in which it asserted that having struck all of Title X in its entirety (including Section 1042 on which the NYAG relies for its authority to bring the CFPA claims), Judge Preska should dismiss the federal claims with prejudice and dismiss the state law claims without prejudice to their being refiled in state court.  It also asked the court to then enter judgment against the CFPB and NYAG “allowing the Court’s June 21, 2018 Order to be appealed, if appropriate, in its entirety.”  The NYAG has indicated to Judge Preska that it does not take a position on her entry of a Rule 54(b) judgment against the CFPB but that, if the court were to do so, it would oppose any request by RD Legal Funding for a stay of the district court proceeding.

Should Judge Preska enter a final judgment under Rule 54(b) from which the CFPB appeals to the Second Circuit, two circuits will be actively considering the CFPB’s constitutionality, thereby increasing the likelihood of this issue coming before the U.S. Supreme Court in the next year or so.  The issue of the CFPB’s constitutionality is currently before the Fifth Circuit in the interlocutory appeal of All American Check Cashing from the district court’s ruling upholding the CFPB’s constitutionality.