Today is the sixth anniversary of the CFPB. I would be remiss if I didn’t recognize the sixth anniversary of our blog which was launched on the same day that the CFPB became operational. I also want to acknowledge the members in our Consumer Financial Services Group who have contributed to our blog, particularly Barbara Mishkin who manages our blog.
A federal district court recently ruled against the CFPB in a long-standing case under the Real Estate Settlement Procedures Act (RESPA) involving a Louisville, Kentucky law firm Borders & Borders, PLC (Borders). In the case, CFPB v. Borders & Borders, PLC (Civil Action No. 3:13-CV-01047-CRS-DW), the court granted the summary judgment motion of Borders, finding that joint ventures related to Borders satisfied the statutory conditions of the RESPA section 8(c)(4) affiliated business arrangement exemption. The court referred to the exemption as a “safe harbor”. The CFPB had alleged that the joint ventures did not qualify for the safe harbor because they were not bona fide providers of settlement services.
Borders is a law firm that performs residential real estate closings, and also is an agent authorized to issue title insurance policies for a number of title insurers. In 2006, the principals of Borders established nine joint venture title agencies with the principals of real estate and mortgage brokerage companies. In February 2011, the Department of Housing and Urban Development (HUD) notified Borders that it was investigating the firm for potential violations of the RESPA referral fee prohibitions based on the joint ventures. (HUD was the federal agency responsible for interpreting and enforcing RESPA before such authority was transferred to the CFPB.) Upon receipt of the notice, Borders ceased operating all of the joint ventures.
In October 2013 the CFPB filed a complaint against Borders asserting that the firm violated the RESPA referral fee prohibition through the establishment and operation of the joint ventures. The CFPB asserted that Borders paid kickbacks to the principals of the real estate and mortgage brokerage companies that were disguised as profit distributions from the joint ventures, and that the kickbacks were for the referral of customers to Borders by the principals.
The CFPB claimed that the joint ventures were not subject to the affiliated business arrangement safe harbor under RESPA section 8(c)(4), which permits referrals and payments of ownership distributions among affiliated parties if the conditions of the safe harbor are met. The conditions are that (1) when a person is referred to a settlement servicer provider that is a party to an affiliated business arrangement, a disclosure is made to the person being referred of the existence of the affiliated business arrangement, along with a written estimate of the charge or range of charges generally made by the provider to which the person is being referred, (2) the person is not required to use any particular provider of settlement services (subject to certain exceptions), and (3) the only thing of value that is received from the arrangement, other than payments otherwise permitted under RESPA section 8(c), is a return on the ownership interest or franchise relationship.
As noted above, the CFPB argued that the joint ventures did not qualify for the safe harbor because they were not bona fide providers of settlement services within the meaning of RESPA. The statutory safe harbor for affiliated business arrangements contains no such condition. The position that a joint venture must be a bona fide provider of settlement services to qualify for the safe harbor previously was asserted by HUD in statement of policy 1996-2 (the “Statement of Policy”). HUD set forth factors that it would examine in assessing whether or not a particular joint venture is a bona fide provider of settlement services.
Although the CFPB did not expressly reference the Statement of Policy in its complaint against Borders, it addressed many of the same factors that HUD identified in the Statement of Policy. The CFPB asserted that:
- In most instances Borders provided the initial capitalization for the joint ventures, and the capital was comprised of only enough funds to cover a joint venture’s errors and omissions insurance.
- Each joint venture had a single staff member, who was an independent contractor shared by all of the joint ventures and concurrently employed by Borders.
- Borders’ principals, employees and agents managed the affairs of the joint ventures.
- The joint ventures did not have their own office spaces, email addresses or phone numbers, and could not operate independent of Borders.
- The joint ventures did not advertise themselves to the public
- All of the business of the joint ventures was referred by Borders.
- The joint ventures did not perform substantive title work—such work was performed by Borders.
With regard to the disclosure condition of the affiliated business arrangement safe harbor, the CFPB asserted that when Borders referred a customer to a joint venture, Borders “sometimes used a disclosure form intended to notify customers of a business affiliation between the owners of the law firm and [the joint venture].” The CFPB also asserted that the notice did not contain the ownership interest percentages in the joint venture or include a customer acknowledgment section, which are elements of the form of notice in Appendix D to Regulation X, the regulation under RESPA.
About a month after the CFPB filed its complaint, the US Court of Appeals for the Sixth Circuit issued a decision in Carter v. Wells Bowen Realty, Inc., 736 F.3d 722 (6th 2013). It appears the opinion of the court presented a hurdle that the CFPB could not clear in its case against Borders. In the Carter case, private plaintiffs asserted that certain joint ventures did not qualify for the affiliated business arrangement safe harbor based on the bona fide settlement service provider requirement that HUD set forth in the Statement of Policy. The court determined that the defendants satisfied the three statutory conditions of the affiliated business arrangement safe harbor, and based on this determination the court ruled in favor of the defendants. The court refused to apply what it considered a fourth condition to the safe harbor asserted by HUD—that the entity receiving referrals must be a bona fide provider of settlement services. The court stated that “a statutory safe harbor is not very safe if a federal agency may add a new requirement to it through a policy statement.”
The court in the Borders case stated that the joint ventures each had an operating agreement, were authorized to conduct business in Kentucky, were approved by a title insurer to issue title insurance policies, were subject to audit, had a separate operating bank account, had a separate escrow bank account, maintained an errors and omission insurance policy, issued lender’s and owner’s title insurance policies, had operating expenses, generated revenue, made profit distributions, filed tax returns, issued IRS K-1 forms and were solvent. The court also stated that each of the joint ventures were staffed by the same individual, who worked from her home office and was categorized as an independent contractor.
Citing the Carter case, the court set forth the three statutory conditions of the affiliated business arrangement safe harbor. The court determined that the joint ventures satisfied the three conditions. With regard to the disclosure condition, the court determined that the provision of the disclosure by Borders to its customers at the closing of a real estate transaction was sufficient, because it was the first contact that Borders had with the customers, and that the customer then decided at the closing whether to accept the referral of title insurance to one of the joint ventures. (The court had earlier noted in its opinion that customers had 30 days from the date of closing to decide whether to purchase owner’s title insurance from the joint venture.) With regard to the deviation of the notice from the form notice in Regulation X, the court found the content of the Borders’ notice to be sufficient to meet the statutory notice condition.
The decision of the court that the delivery of the notice at closing was sufficient is raising more than a few eyebrows in the industry. In any event, based on the determination that the three statutory conditions of the affiliated business arrangement were satisfied, the court granted Borders’ motion for summary judgment. The court did not impose the fourth condition asserted by the CFPB that the joint ventures had to be bona fide settlement service providers. It interesting that the court nonetheless decided to note various aspects of the joint ventures in an apparent attempt to demonstrate their legitimacy.
The CFPB can appeal the decision to the Sixth Circuit, but if it does so the CFPB will have to face the hurdle of the Carter decision. So the CFPB would need to assert one or more theories supporting why the Carter decision does not preclude a finding of a RESPA violation in the Borders case.
The CFPB’s Spring 2017 rulemaking agenda has been published as part of the Spring 2017 Unified Agenda of Federal Regulatory and Deregulatory Actions. The preamble indicates that the information in the agenda is current as of April 1, 2017. Accordingly, the agenda does not reflect the issuance of the CFPB’s final arbitration rule on July 10 or other rulemaking actions taken since April 1 such as the proposed changes to the CFPB’s prepaid account rule and various recent mortgage-related developments. In addition, the agenda and timetables are likely to be significantly impacted should Director Cordray leave the CFPB this fall to run for Ohio governor as has been widely speculated.
The agenda sets the following timetables for key rulemaking initiatives:
Payday, title, and deposit advance loans. The CFPB released its proposed rule on payday, title, and high-cost installment loans in June 2016 and the comment period ended on October 22, 2016. The Spring 2017 agenda gives a June 2017 date for completing the initial review of comments (which the CFPB states in the preamble numbered more than one million) but does not give an estimated date for a final rule. There has been considerable speculation that a final rule will be issued by the end of next month.
Debt collection. In November 2013, the CFPB issued an Advance Notice of Proposed Rulemaking concerning debt collection. In July 2016, it issued an outline of the proposals it is considering in anticipation of convening a SBREFA panel. The coverage of the CFPB’s SBREFA proposals was limited to “debt collectors” that are subject to the FDCPA. When it issued the proposals, the CFPB indicated that it expected to convene a second SBREFA panel in the “next several months” to address a separate rulemaking for creditors and others engaged in debt collection not covered by the proposals. However, Director Cordray announced last month that the CFPB has decided to proceed first with a proposed rule on disclosures and treatment of consumers by debt collectors and thereafter write a market-wide rule in which it will consolidate the issues of “right consumer, right amount” into a separate rule that will cover first- and third-party collections.
In the Spring 2017 agenda, the CFPB gives a September 2017 date for a proposed rule. Presumably, that date is for a proposal that will deal with disclosures and treatment of consumers by debt collectors. The new agenda gives no estimated dates for the convening of a second SBREFA panel or a proposed second rule. In the preamble to the new agenda, the CFPB states only that it “has now decided to issue a proposed rule later in 2017 concerning FDCPA collectors’ communications practices and consumer disclosures. The Bureau intends to follow up separately at a later time about concerns regarding information flows between creditors and FDCPA collectors and about potential rules to govern creditors that collect their own debts.”
Larger participants. The CFPB states in the Spring 2017 agenda that it “expects to conduct a rulemaking to define larger participants in the markets for consumer installment loans and vehicle title loans for purposes of supervision.” It also repeats the statement made in previous agendas that the CFPB is “also considering whether rules to require registration of these or other non-depository lenders would facilitate supervision, as has been suggested to the Bureau by both consumer advocates and industry groups.” (Pursuant to Dodd-Frank Section 1022, the CFPB is authorized to “prescribe rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person.”) The new agenda estimates a June 2017 date for prerule activities and a September 2017 date for a proposed rule.
Overdrafts. The CFPB issued a June 2013 white paper and a July 2014 report on checking account overdraft services. In the Spring 2017 agenda, as it did in its Fall 2015 agenda and Fall and Spring 2016 agendas, the CFPB states that it “is continuing to engage in additional research and has begun consumer testing initiatives related to the opt-in process.” Although the Fall 2016 agenda estimated a January 2017 date for further prerule activities, the new agenda moves that date to June 2017. As we have previously noted, the extended timeline may reflect that the CFPB feels less urgency to promulgate a rule prohibiting the use of a high-to-low dollar amount order to process electronic debits because most of the banks subject to its supervisory jurisdiction have already changed their processing order.
Small business lending data. Dodd-Frank Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses. Such data includes the race, sex, and ethnicity of the principal owners of the business. The new agenda estimates a June 2017 date for prerule activities. The CFPB repeats the statement made in the Fall 2016 agenda that it “is focusing on outreach and research to develop its understanding of the players, products, and practices in business lending markets and of the potential ways to implement section 1071. The CFPB then expects to begin developing proposed regulations concerning the data to be collected and determining the appropriate procedures and privacy protections needed for information-gathering and public disclosure under this section.”
Mortgage rules. Earlier this month, the CFPB issued a proposed rule dealing with a lender’s use of a Closing Disclosure to determine if an estimated charge was disclosed in good faith. The Spring 2017 agenda gives a March 2018 estimated date for issuance of a final rule. This past March, the CFPB issued a proposal to amend Regulation B requirements relating to the collection of consumer ethnicity and race information to resolve the differences between Regulation B and revised Regulation C. The Spring 2017 agenda gives an October 2017 estimated date for a final rule.
Acting Comptroller of the Currency Keith Noreika, in remarks on July 19 to the Exchequer Club, confirmed that the OCC is continuing to consider its proposal to allow financial technology (fintech) companies to apply for a special purpose national bank (SPNB) charter. Since the departure of the SPNB proposal’s architect, former Comptroller Thomas Curry, who Mr. Noreika replaced, there has been considerable speculation as to what position the OCC would take on the proposal.
In his remarks, Acting Comptroller Noreika referenced the lawsuits filed by the New York Department of Financial Supervision and the Conference of State Bank Supervisors challenging the OCC’s authority to grant SPNB charters to fintech companies. He indicated that in these lawsuits, the OCC plans to “vigorously” defend its authority to rely on its regulation at 12 C.F.R. section 5.20(e)(1) to grant SPNB charters to nondepository companies. He also countered arguments that granting SPNB charters to fintech companies would disadvantage banks and create consumer protection risks. (As we have previously observed, both lawsuits present a lack of ripeness and/or no case or controversy problem.)
At the same time, referring to the proposal as “a good idea that deserves the thorough analysis and the careful consideration we are giving it,” Mr. Noreika was noncommittal about what the OCC’s ultimate position would be. Despite his statement that the OCC plans to defend its charter authority in the lawsuits, Mr. Noreika also stated that “the OCC has not determined whether it will actually accept or act upon applications from nondepository fintech companies for special purpose national bank charters that rely on [section 5.20]. And, to be clear, we have not received, nor are we evaluating, any such applications from nondepository fintech companies. The OCC will continue to hold discussions with interested companies while we evaluate our options.”
Acting Comptroller Noreika suggested that fintech companies consider seeking a national bank charter by using other OCC authority “to charter full-service national banks and federal savings associations, as well as other long-established special purpose national banks, such as trust banks, banker’s banks, and other so-called CEBA credit card banks.” According to Mr. Noreika, the state plaintiffs in the lawsuits had conceded that the OCC has such other authority. Observing that many fintech business models may fit into the established categories of special purpose national banks “that do not rely on the contested provision of regulation, section 5.20,” he stated that “we may well take [the states] up on their invitation to use these [other] authorities in the fintech-chartering context.” (emphasis included).
Many years ago, we were successful in converting a consumer finance company to a national bank and had no difficulty in obtaining OCC approval. Nonbanks engaged in interstate consumer lending should consider conversion as an option since it enables the converted bank to (1) export throughout the country “interest” (as broadly defined under the OCC’s regulations) as permitted by its home state, (2) disregard non-interest state laws that impair materially the exercise of national bank powers, and (3) accept FDIC-insured deposits, which generally are the lowest cost source of funds. Nonbanks engaged in non-financial activity or with affiliates engaged in such activity may be limited to SPNB conversions due to activity restrictions in the Bank Holding Company Act.
The OCC’s proposal to create a fintech charter would, if finalized, help some companies partially avoid the negative impact of the Second Circuit’s decision in Madden v. Midland Funding. (In Madden, the Second Circuit ruled that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge.) It would also help some fintech companies deal with the risk of a court or enforcement authority concluding that the fintech company, and not its bank partner, is the “true lender.” Treating a nonbank as the “true lender” would subject the nonbank to usury, licensing, and other limits to which its bank partner would not otherwise be subject.
The “true lender” risk, which is not confined to the fintech space but can arise in many bank-partner-model arrangements, is a live issue. In litigation currently ongoing in federal district court in Colorado, two state-chartered banks are seeking to enjoin enforcement actions brought by the Colorado Uniform Consumer Credit Code Administrator against the banks’ nonbank partners that market and service loans originated by the banks and purchase loans from the banks. The Administrator has alleged that because the banks were not the “true lenders” on the loans sold to the banks’ partners, the loans are subject to Colorado law regarding interest, not the law of the states where the banks are located.
Unfortunately, as set forth in Alan Kaplinsky’s article for American Banker’s BankThink, the possibility that the OCC might charter SPNBs (or deposit-taking fintech national banks) does not fully address the Madden and “true lender” risks facing fintech companies, their bank partners, or other entities involved in “bank-model” lending programs. The SPNB proposal has not been adopted and may be overturned in litigation. It does not extend to non-fintech companies. In many respects, it includes burdensome provisions. And Madden risks would remain for loan purchasers.
We believe that recent developments, both in Colorado and elsewhere, highlight the need for the OCC to confront true lender and Madden risks directly. This could (and should) be accomplished through adoption of a rule: (1) providing that loans funded by a bank in its own name as creditor are fully subject to Section 85 and other provisions of the National Bank Act for their entire term; and (2) emphasizing that banks that make loans are expected to manage and supervise the lending process in accordance with OCC guidance and will be subject to regulatory consequences if and to the extent that loan programs are unsafe or unsound or fail to comply with applicable law. (The rule should apply in the same way to federal savings banks and their governing statute, the Home Owners’ Loan Act.) In other words, it is the origination of the loan by a supervised bank (and the attendant legal consequences if the loans are improperly originated), and not whether the bank retains the predominant economic interest in the loan, that should govern the regulatory treatment of the loan under federal law.
According to news reports yesterday, Ohio Supreme Court Justice Bill O’Neill has told media sources that he was informed by an unnamed mutual friend that Director Corday plans to enter the 2018 Democratic primary for Ohio governor.
Judge O’Neill indicated that the mutual friend had called him to ask whether the Judge planned to abide by prior statements that he would not enter the race if Director Cordray decided to run. Judge O’Neill stated that he did plan to abide by his prior statements.
There is also speculation that Director Cordray will announce his candidacy on September 4 at the Cincinnati AFL-CIO annual Labor Day picnic where he is a scheduled speaker. Should Director Cordray resign in September, plenty of time will remain for a new Director to take a fresh look at the CFPB’s arbitration rule and move forward on the steps necessary to prevent the rule from becoming operational on March 19, 2018 as currently scheduled.
The National Council of Higher Education Resources (NCHER), a national trade association representing higher education finance organizations, has written to the Department of Education urging the ED to issue preemption guidance.
In its letter, NCHER urges the ED “to issue regulatory guidance that clearly states that federal student loan servicers and guaranty agencies are governed by the Department’s rules and requirements and those of other federal agencies, and preempt state and local laws and actions that purport to regulate the activities of participants in the federal student loan programs, including federal contractors.” Earlier this month, the Education Finance Council, another national trade group representing higher education finance organizations, wrote to the ED requesting similar guidance.
In its letter, NCHER discusses the broad coverage of recently-enacted state laws requiring servicers of student loans to be licensed and the need for covered entities, which can include guaranty agencies, to comply with varying state-specific requirements that, in some cases, are contrary to the Higher Education Act (HEA). NCHER also discusses the resulting compliance costs of such requirements and their potential to create borrower confusion.
In addition, NCHER observes that a number of state attorneys general have begun to take action against student loan servicers for activities governed by the HEA, federal regulatory requirements, and the terms of federal contracts. It urges the ED to take “a leadership role” with regard to federal contractors, which could include intervening with an AG’s office on behalf of an agency or working with both parties to achieve a resolution. According to NCHER, state AGs “should not be permitted to make an end run around the Department by intimidating its contracted loan servicers.” Also discussed in NCHER’s letter is an attempt by Connecticut to apply its registration requirement for collection agencies to guaranty agencies that have agreements with the ED.
House and Senate Republicans announced today that they are sponsoring Congressional Review Act resolutions to override the CFPB’s final arbitration rule, which was published in yesterday’s Federal Register.
In the House, a press release published on the House Financial Services Committee’s website announced that a joint resolution (H.J. Res. 111), sponsored by Committee member Keith Rothfus and co-sponsored by all other Republican Committee members, has been introduced to disapprove the arbitration rule.
In the Senate, a press release on the Senate Banking Committee’s website announced that Committee Mike Crapo and Republican colleagues “will file” a CRA resolution to disapprove the arbitration rule. The resolution has 23 co-sponsors in addition to Mr. Crapo, several of whom are not Banking Committee members. Only one Republican Banking Committee member, Louisiana Senator John Kennedy, is not listed as a co-sponsor.
Neither press release includes or links to the resolution text.
In an opinion article published by The Hill entitled “The ‘consumer’ financial bureau chooses lawyers over consumers,” Rob Nichols, President and CEO of the American Bankers Association, explains why the CFPB’s final arbitration rule gives “a regulatory windfall to trial lawyers at consumers’ expense.” Mr. Nichols urges Congress to use the Congressional Review Act to override the rule.
Click here to read the full article.
Eighteen states and the District of Columbia have filed suit against Secretary of Education Betsy DeVos seeking an injunction of the Department of Education’s indefinite postponement of the Obama Administration’s Borrower Defense Rule. While generally providing for loan forgiveness for borrowers deceived by postsecondary institutions, the Borrower Defense Rule also created a joint state-federal enforcement scheme by providing that any judgment obtained by a government agency against a postsecondary institution under state law would give rise to a borrower defense to loan repayment. The Rule also established that a state civil investigative demand against a school whose conduct resulted in a borrower defense qualifies as notice permitting the Secretary to commence a collection action against the school.
As part of her promise to conduct a “regulatory reset” Secretary DeVos announced last month that the Department of Education was postponing the July 1, 2017 effective date of the Rule “until further notice” and establishing a negotiated rulemaking committee to revise the Rule. The announcement came on the heels of a California Association of Private Postsecondary Schools (CAPPS) lawsuit to bar implementation of the Rule. CAPPS additionally filed, but later withdrew, a motion for preliminary injunction against the Rule’s prohibition on mandatory arbitration and class action waiver agreements. Eight states and the District of Columbia, each also a party to the latest lawsuit, previously filed a motion to intervene in the CAPPS lawsuit in support of the Rule. Secretary DeVos and CAPPS have entered memorandums in opposition to the states’ motion. The states must file their replies by July 26, 2017.
In a press release, the Department stated the indefinite postponement was “[d]ue to pending litigation challenging the [Borrower Defense Rule] regulations,” and lawful under Section 705 of the Administration Procedures Act (APA), which provides that an agency “may postpone the effective date of action taken by it, pending judicial review.” In the suit they have filed, the AGs claim that the postponement of the Rule injures their residents by depriving state authorities of increased enforcement powers, eliminating improved remedies for violations of law, and removing deterrence of misconduct by educational institutions.
The four causes of action generally allege that the postponement operates as a summary rescission of the rule in violation of Section 706 the APA. More specifically, the AGs assert that:
- The Department failed to follow the APA’s formal notice and comment process, which is required when the Department delays the effective date of a final regulation for the purpose of substantive rulemaking, amendment, or rescission of the final regulation.
- The Department’s Delay Notice does not comply with or even acknowledge the legal test applicable when the Department seeks a stay of its own regulations pending litigation, which requires: 1) a likelihood of prevailing on the merits; 2) an absence of delay will irreparably harm the Department; 3) that others will not be harmed by the delay; and 4) that the public interest requires a delay.
- The Department has failed to provide justification for the postponement adequately related to the existence or consequences of the pending litigation. Specifically, the Department’s notice published in the Federal Register indicates a complete reconsideration of the rule (while the CAPPS litigation only challenges a few provisions) and the Department claims federal cost-savings which are unrelated to the CAPPS litigation.
- The Department has failed to offer a reasoned analysis for reversing or departing from a previous policy position, which is required when a Delay Notice operates as an amendment or rescission to an existing rule.
Section 706 of the APA requires a reviewing court to set aside agency action, findings, and conclusions found to be “without observance of procedure required by law” or “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”
As part of a previous post, we discussed the ability of a successor administrator to unilaterally stay the compliance date of a final rule under the APA. In Clean Air Council v. Pruitt, the D.C. Circuit vacated an EPA stay of its rule concerning methane and other greenhouse gas emissions. Before a final compliance date of June 3, 2017, several industry associations filed a petition with the EPA seeking reconsideration. The new EPA administrator issued a 90-day stay of the compliance date and announced that the Agency was reconsidering the rule. The D.C. Circuit found that the stay was “tantamount to amending or revoking a rule” and rejected the Agency’s reliance on its broad discretion to reconsider its own rules without complying with the APA’s formal notice and comment requirements.
The Department of Education also recently announced its plan to establish a negotiated rulemaking committee to revise the Gainful Employment Rule. This Obama Administration rule became effective in July 2015 and required that schools make disclosures such as graduation rates, earnings of graduates, and student debt amounts. The press release criticized the rule for “unfairly and arbitrarily limit[ing] students’ ability to pursue certain types of higher education and career training programs.” The effective date has been delayed one year to July 1, 2018. The Department has also provided a six-month extension—to January 1, 2018—for compliance with disclosure requirements for fees associated with school-sponsored debit cards and other financial products marketed on their campuses.
On July 5, 2017, the U.S. District Court for the District Columbia, in the lawsuit filed in 2014 challenging “Operation Choke Point” — a federal enforcement initiative involving various agencies, including the Consumer Protection Branch of the Department of Justice (DOJ), the Federal Depository Insurance Corporation (FDIC), the Federal Reserve (Fed), and the Office of the Comptroller of the Currency — denied the agencies’ motions to dismiss and/or for summary judgment and permitted the payday lender-plaintiffs’ due process claims to proceed.
Initiated in 2012, Operation Choke Point targeted banks serving online payday lenders and other companies that have raised regulatory or “reputational” concerns. In June 2014, the national trade association for the payday lending industry and Advance America, a payday lender, initiated the action against the FDIC, Fed, and the OCC. The lawsuit alleged that certain actions taken by the agencies as part of Operation Choke Point violated the Administrative Procedure Act (APA) and that Operation Choke Point violated their due process rights. The court granted the agencies’ motion to dismiss the defendants’ APA claim and, although ruling that the due process claim could proceed, subsequently dismissed the trade association as a party for lack of standing. Following the addition of six new payday lenders to the complaint, the agencies moved to dismiss the new payday lenders’ due process claim for lack of standing and failure to state a claim, and moved for summary judgment as to all plaintiffs on the basis that they cannot show that they suffered a deprivation of liberty without due process.
The Court rejected the agencies’ arguments, holding that the newly-added plaintiffs had established both standing and a plausible claim for relief, and concluding that the agencies were not entitled to judgment on any of the plaintiffs’ due process claims. First, the Court rejected the agencies’ attempt to challenge the new plaintiffs’ allegations of future harm — i.e., their potential for future loss of access to the banking system, and potential preclusion from the payday lending industry — finding that they demonstrated the requisite elements of standing, and stated a plausible claim for relief, by alleging that they previously lost bank accounts as a result of Operation Choke Point, and that they will continue to do so if the agencies’ actions continue.
The Court also held that the agencies’ were not entitled to summary judgment on any of the plaintiffs’ due process claims. The court rejected the agencies’ argument that plaintiffs could not show a due process violation where they “continue to access the banking system and remain quite profitable.” According to the court, the agencies had not definitively demonstrated that plaintiffs would “not be put out of business by the continued regulatory pressure from Federal Defendants.”
The Court was also unmoved by the agencies’ argument that plaintiffs “are able to pursue other lines of business.” In support of that argument, the agencies cited cases finding no due process violation where the plaintiffs were barred from conducting business with the government, but remained free to transact with private individuals and entities. The court held that these cases, which distinguished between a person’s ability to sell services to the government versus one’s ability to sell services at all, did “little to support [the agencies’] argument that the Due Process Clause tolerates the destruction of an entire line of Plaintiffs’ business, so long as there are other lines of business they can pursue.” Citing to the Plaintiffs’ Opposition, the Court observed that “it would be of little consolation to an attorney, driven from his practice by improper governmental stigma, that McDonalds is still hiring.”
Despite the change to a Republican Administration, lawmakers continue to raise concerns that Operation Choke Point remains in operation. In a letter to Attorney General Jeff Sessions dated July 6, 2017, Republican Senators Mike Crapo and Thom Tillis stated that “[w]hile many would claim that this program has ceased to operate, this does not appear to be the case as we continue to receive complaints that indicate the program is still in effect.” The Senators asked “that DOJ review all options available to ensure lawful businesses are able to continue to operate without fear of significant financial consequences, which should include taking the additional step of issuing a Statement of Enforcement Policy that Operation Choke Point is no longer in effect and that administrative subpoenas issued pursuant to DOJ’s civil investigative authority under [FIRREA] may be issued only where there is an articulable suspicion of illegal activity being conducted or facilitated by the intended recipient of the subpoena.”
Legislation has also been proposed in the House, with Republican Congressman Blaine Leutkemeyer (R-Mo.) introducing a bill (H.R. 2706) that seeks to prevent future recurrences of Operation Choke Point by limiting the authority of banking regulators and the DOJ.