Last week, the CFPB filed a lawsuit in Maryland federal court against two commonly-owned debt relief companies, their affiliated payment processor, and three individual principals  for alleged violations of the Telemarketing Sales Rule and the Consumer Financial Protection Act.

According to the CFPB’s complaint, the defendants’ alleged unlawful conduct included the following:

  • Violating the TSR and CFPA by falsely telling consumers that the companies’ debt relief services were approved by the FTC and that the companies were authorized to “review, consult, and prepare consumer protection documents” on the consumer’s behalf.  In addition, the companies used direct mailers displaying a seal that “shared several similarities with the Great Seal of the United States,” thereby creating a false net impression that they were affiliated with the federal government.
  • Violating the TSR by charging advance fees before performing any work or in excess of the amount permitted by TSR and by failing to make required disclosures.
  • Violating the TSR and CFPA by deceptively marketing the companies’ debt relief programs, such as by falsely claiming that the programs would eliminate debt that the companies deemed invalid and increase consumers’ credit scores.

The debt relief industry is currently under seige, facing a barrage of enforcement actions by the CFPB as well as FTC and state AG enforcement actions.

 

Last Friday, as expected, the FTC announced the launch of a coordinated federal-state law enforcement initiative targeting deceptive student loan debt relief companies.  According to the FTC, 11 states and the District of Columbia are participating in the initiative, which is being called “Operation Game of Loans.”  The participating states are Colorado, Florida, Illinois, Kansas, Maryland, North Carolina, North Dakota, Oregon, Pennsylvania, Texas, and Washington,

The initiative includes seven FTC actions, including an action filed by the FTC earlier this month in Florida federal court, and 29 actions by state AGs.

In a recent blog post, we estimated that, as a practical matter, November 16 was the last day on which the Senate could pass a resolution of disapproval under the Congressional Review Act to override the CFPB arbitration rule.  For the reasons explained below, we now think November 13 is a better estimate.

Under the CRA, to be eligible for the “fast track” procedures for Senate consideration that preclude a filibuster and allow the Senate to pass a resolution of disapproval resolution with a simple majority vote, the Senate must act on the resolution during a period of 60 Senate “session days” which begins on the date the rule is received by Congress or published in the Federal Register, whichever is later.  Since the Senate received the CFPB’s report on the arbitration rule on July 13 and the rule was published in the Federal Register on July 19, the 60 Senate “session days” for purposes of the CRA clock began on July 19, 2017.  Including this past Friday (October 13), there have been 40 Senate “session days” since July 19.

Our November 16 estimate was based on two assumptions.  First, we assumed that the Senate would be in regular session Monday through Thursday during the weeks it is not scheduled to be in recess.  Second, we assumed that the Senate would be in pro forma session on each Tuesday and Friday of a recess week.

Since publishing our blog post, we discovered that the Senate’s calendar has not been consistent with our first assumption.  During the first week of October, when the Senate was not scheduled to be in recess, it was in regular session Monday through Friday.  The Senate’s next scheduled recess is November 10-12.  Thus, if we now assume that the Senate will continue to be in regular session every weekday until November 10, the 60th session day for purposes of the CRA clock would be Monday, November 13.

As promised previously, here are further details on the lawsuit filed by industry groups against the CFPB to overturn the final arbitration rule.  The complaint largely mirrors our heavy criticism of the rule.  (For example, see here, here and here.)

The complaint asserts four principal arguments:

  1. The rule is the product of  “the unconstitutional structure that Congress gave the CFPB” in the Dodd-Frank Act, which gives the Director “an extraordinary degree of authority that is virtually unique in the federal system, and insulates the Director from control by either the President or Congress.”  (A similar argument is presently pending before the D.C. Circuit Court of Appeals in PHH v. CFPB).
  2. The rule violates the Administrative Procedure Act (“APA”) because “the CFPB failed to observe procedures required by law when it adopted the conclusions of a deeply flawed study that improperly limited public participation, applied defective methodologies, misapprehended the relevant data, and failed to address key considerations.”  In directing the CFPB to study the use of arbitration in consumer financial contracts and base any regulation of arbitration on the results of that study, Congress necessarily required the CFPB to conduct a fair, unbiased, and thorough study that that would produce reliable and accurate results.  Instead, the CFPB  “misstated or disregarded key data, reaching palpably invalid conclusions that understate the demonstrated effectiveness of arbitration and overstate the value of class-action litigation.”
  3. The rule also violates the APA because “it runs counter to the record before the [CFPB]” and is “the very model of arbitrary and capricious agency action.”   In particular, the CFPB “failed to address key considerations—among them, whether effectively eliminating arbitration in contracts subject to the CFPB’s jurisdiction would injure consumers.”  Moreover, the rule “is premised on conclusions that run counter to the administrative record before the [CFPB], which establishes that arbitration is effective in providing relief to consumers and that class-action litigation generally is not.
  4. The rule violates the Dodd-Frank Act because “it fails to advance either the public interest or consumer welfare: it precludes the use of a dispute resolution mechanism that generally benefits consumers (i.e., arbitration) in favor of one that typically does not (i.e., class-action litigation).”  The rule “effectively precludes use of an arbitration mechanism that provides the only realistic method by which consumers may obtain relief for the types of individualized claims that they typically regard as most important.  And it does so in the interest of encouraging class-action litigation, a procedure that provides substantial rewards to class-action lawyers but almost never produces meaningful relief for individual consumers.”

The complaint alleges that the CFPB reached a “preordained conclusion” to ban class action waivers which “ignored the data before it that demonstrated both the benefits of arbitration to consumers and the failure of class-action lawsuits to provide consumers with meaningful benefits.”  In addition, the CFPB failed to address “key policy questions,” including whether a rule mandating the availability of class-action litigation would lead to the complete abandonment of arbitration,” and made no serious effort “to weigh the comparative costs and benefits of implementing a regime that substitutes costly class-action litigation for efficient arbitration.”  The “inevitable practical consequence” of the rule, plaintiffs allege, is that businesses will abandon arbitration altogether” since they will face “the certainty of high litigation costs associated with class-action suits and therefore will not go to the expense of creating an alternative arbitration mechanism—for which business shoulders the lion’s share of the costs.”

The complaint seeks entry of a judgment vacating the arbitration rule and entry of orders staying the rule’s implementation pending the conclusion of judicial review and enjoining the CFPB and Director Cordray from enforcing the rule.  If the rule goes into effect, plaintiffs aver, “it will inflict immediate, irreparable injury” because “[p]roviders of consumer financial products and services will incur significant legal and compliance costs in adapting their businesses to the new rule,” and “the vast majority of these costs will be wasted, and not recoverable, if the [r]ule ultimately is deemed to be contrary to law.”  Moreover, “so long as the effects of the [r]ule are being felt, providers of such services will both be denied the benefits of arbitration and exposed to expensive class-action litigation.”

We will be following this litigation very closely and will provide updates on important developments.  We are also continuing to monitor whether the Senate will vote on the pending resolution to overturn the arbitration rule under the Congressional Review Act.

The Consumer Financial Protection Bureau has issued a second version of the Home Mortgage Disclosure Act (Regulation C) Small Entity Compliance Guide.  The updated version incorporates various changes to the HMDA rule that were issued in August 2017 and published in the September 13, 2017 Federal Register, which we reported on previously.  One of the main changes incorporated in the revised Guide is the temporary increase in the threshold to report home equity lines of credit (HELOCs) from 100 to 500 transactions in each of the two proceeding calendar years.  Based on the temporary increase, financial institutions originating 100 or more HELOCs but fewer than 500 in 2018 or 2019 would not be required to begin collecting and reporting HELOC data until January 1, 2020.  However, the CFPB may take further action to amend the threshold.

A recent flurry of FTC enforcement activity targeting companies offering student loan debt relief services suggests such companies could be the subject of the announcement scheduled for tomorrow “of a major coordinated consumer fraud enforcement initiative” between the FTC and state attorneys general.

The announcement was originally scheduled to be made on October 11 at a press conference in Chicago, Illinois featuring Thomas Pahl, Acting Director of the FTC’s Bureau of Consumer Protection, and Illinois Attorney General Lisa Madigan.  However, after postponing the press conference and rescheduling it for October 13, the FTC issued an update stating that the FTC “and attorneys general in 11 states and the District of Columbia will issue an announcement” on October 13 that “will be posted on FTC.gov.”  The FTC also indicated that “[s]enior officials from the FTC and the offices of the state attorneys general will be available for telephone interviews upon request.”

Earlier this month, the FTC filed a complaint in a Florida federal court for a permanent injunction and other equitable relief against Student Debt Doctor LLC and its individual principal alleging that the defendants conducted a deceptive student loan debt relief operation.  At the FTC’s request, the court entered an ex parte order temporarily freezing the company’s assets and appointing a receiver.  The FTC filed at least two other actions in federal courts in September 2017 against companies and individuals also alleged to have conducted deceptive student loan debt relief operations.

The CFPB recently released a revised version of the TILA-RESPA Integrated Disclosure Rule Small Entity Compliance Guide.

The revised version incorporates the recent amendments to the rule that became effective on October 10, 2017.  Compliance with the amendments will be required for applications received on or after October 1, 2018.

The amendments also clarified that the separate escrow cancellation notice and partial payment disclosure requirements under Regulation Z will apply to all covered loans on October 1, 2018, regardless of when the application is received.

An Assistant Illinois Attorney General, in a letter sent to Experian’s CEO on behalf of the Illinois AG and the AGs of 35 other states and the District of Columbia, has asked Experian not to charge any credit freeze-related fees.

In the letter, which references the recent Equifax data breach, the Assistant Illinois AG notes that seven states currently prohibit consumer reporting agencies from charging fees to place a credit freeze and at least two others have introduced legislation that would require CRAs to offer free credit freezes.

In addition to Illinois, the other states joining the letter were: Arkansas, Colorado, Delaware, Florida, Hawaii, Idaho, Iowa, Kansas, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Virginia, Washington, Wisconsin, and Wyoming.

 

The CFPB has filed an amicus brief in Regions Bank v. Legal Outsource PA, a case on appeal to the Eleventh Circuit that involves two important issues under the Equal Credit Opportunity Act (ECOA): whether the ECOA provides a cause of action to loan guarantors and whether a business entity can assert a marital status discrimination claim under the ECOA.

The ECOA defines an ”applicant” as someone who ”applies to a creditor directly for an extension … of credit, or … indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.”  In 1985, the Federal Reserve Board amended the Regulation B definition of ”applicant” to include a guarantor ”[f]or purposes of section 202.7(d)” (as adopted by the CFPB, now Section 1002.7(d)).  Section 1002.7(d) of Regulation B specifies when a creditor may require the signature of a spouse or other person (Additional Signature Rule).

Only a few U.S. Courts of Appeal have addressed whether the ECOA provides a cause of action to guarantors.  The Seventh Circuit, in a 2007 decision, interpreted the ECOA’s plain language in a straightforward manner and found that there was “nothing ambiguous about ‘applicant’ and no way to confuse an applicant with a guarantor.”  The court went on to explain that interpreting the term “applicant” to include guarantors would “open[] vistas of liability that the Congress that enacted [the ECOA] would have been unlikely to accept.”

In mid-2014, two other circuits ruled on the same issue.  The Sixth Circuit, rejecting the Seventh Circuit’s reasoning, found that the ECOA’S  definition of “applicant” was ambiguous and that the Federal Reserve Board’s definition of the same term in Regulation B–modified to expressly include guarantors–was entitled to Chevron deference.  Shortly thereafter, the Eighth Circuit, in Hawkins v. Community Bank of Raymore, came to precisely the same result as the Seventh Circuit.  The Eighth Circuit found it patently clear that “assuming a secondary, contingent liability does not amount to a request for credit,” and thus concluded that guarantors are not “applicants” within the plain meaning of the statutory definition provided in the ECOA.”

Last year, an equally divided U.S. Supreme Court affirmed the Eighth Circuit’s decision in Hawkinsthereby upholding the Eighth Circuit’s ruling that the ECOA does not provide a cause of action to loan guarantors.  The affirmance by a 4-4 vote meant that the Eighth Circuit’s ruling had no precedential effect in any other circuit.  (The CFPB, jointly with the Solicitor General, filed an amicus brief in the Supreme Court supporting the plaintiffs’ position in Hawkins.)

In the Regions Bank case, the Bank made a loan to Legal Outsource, a company owned by Charles Phoenix.  It subsequently made a loan to Periwinkle Partners, a company indirectly owned by Lisa Phoenix, the wife of Charles Phoenix.  Legal Outsource, Charles Phoenix, and Lisa Phoenix guaranteed the loan to Periwinkle Partners.  After Legal Outsource defaulted on its loan, the Bank declared a default on its loan to Periwinkle Partners because, under the terms of that loan, a default on the Bank’s loan to Legal Outsource constituted an event of default on its loan to Periwinkle Partners.

Additional defaults occurred over the the course of more than a year prior to the Bank’s decision to commence suit, including the obligors’ failure to pay ad valorem taxes due on the collateral or provide required financial reports and the transfer of equity interests in Periwinkle Partners to third parties without the Bank’s knowledge or consent.  While under no obligation to do so, the Bank spent over a year attempting to negotiate an out-of-court resolution with the borrower and guarantors, to no avail.

The Bank thereafter sued Periwinkle Partners, Legal Outsource, and Lisa and Charles Phoenix in a Florida federal district court to foreclose on collateral securing its loan to Periwinkle Partners.  All of the defendants asserted counterclaims alleging that the Bank had violated the ECOA’s prohibition against discrimination on the basis of marital status and the Additional Signature Rule.  According to the defendants, the Bank required Charles Phoenix to guarantee the loan to Periwinkle Partners solely because he was married to Lisa Phoenix.

The district court dismissed the counterclaims of Legal Outsource and Lisa and Charles Phoenix “to the extent that defendants are asserting their counterclaims for violation of the ECOA in their capacities as guarantors.”  In dismissing the counterclaims, the district court relied on the Eighth Circuit’s Hawkins decision in which the Eighth Circuit concluded that ”the plain language of the ECOA unmistakably provides that a person is an applicant only if she requests credit.  But a person does not, by executing a guaranty, request credit.”  The Eighth Circuit also ruled that Regulation B’s definition of ”applicant” was not entitled to Chevron deference because the definition contradicted the text’s unambiguous statutory definition.

In a subsequent decision, the district court dismissed the ECOA counterclaim asserted by Periwinkle Partners on the grounds that, although it was an “applicant,” it could not assert an ECOA claim for discrimination based on marital status.  According to the district court, “Periwinkle Partners cannot avail itself of the protections of the Act because it is a company, not an individual, and it cannot have a marital status.”

In its amicus brief filed in support of the defendants, the CFPB argues that:

  • Under the plain text of the ECOA and Regulation B, a company can be an “applicant” protected against discrimination “on the basis…of marital status” because the ECOA does not require the alleged discrimination to “be on the basis of the applicant’s marital status.” (emphasis provided).
  • Under the Regulation B commentary, the ECOA prohibits discrimination based on the characteristics of corporate officers and of “individuals with whom an applicant is affiliated or with whom the applicant associates.”  Because the owner of a company is an officer, affiliate, or associate of the company, an applicant company can bring an ECOA claim “if it suffers discrimination on the basis of its owner’s marital status.”
  • The Regulation B definition of ”applicant” is a reasonable interpretation of the ECOA’s text that is entitled to Chevron deference.

 

Hours after the CFPB released its final payday/auto title/high-rate installment loan rule on October 5, 2017, the OCC rescinded its guidance on deposit advance products.  That guidance, entitled Supervisory Concerns and Expectations Regarding Deposit Advance Products published in November 2013 (OCC Bulletin 2013-40), and substantially identical guidance issued by the FDIC on the same day, had effectively precluded banks subject to OCC and FDIC supervision from offering deposit advance products.  We were sharply critical of the prior guidance and applaud the OCC’s action.

Acting Comptroller Keith Noreika, in his statement about the OCC’s action, mentioned the CFPB and the risk of “potentially inconsistent regulatory direction and undue burden as they prepare to implement the requirements of the CFPB’s final [payday loan] rule.”  The Acting Comptroller went further, explaining that the OCC guidance “may even hurt the very consumers it is intended to help, the most marginalized, unbanked and underbanked portions of our society.”  The OCC, therefore, appears to invite banks to consider offering the product.  It remains to be seen whether the FDIC will follow suit.

We think that national banks and federal savings banks (and perhaps other financial institutions) have an opportunity to structure deposit advance products that will fall outside the new CFPB rule, meet supervisory expectations, produce substantial revenues, and provide badly needed credit to consumers whose options may be sharply constrained by the CFPB rule.

We will continue to monitor any developments as they unfold.