We have been following four lawsuits brought by state Attorneys General and a state regulator using their Dodd-Frank enforcement authority. Under Dodd-Frank Section 1042, a state AG or regulator is authorized to bring a civil action for a violation of the Dodd-Frank prohibition of unfair, deceptive or abusive acts or practices (UDAAP). Here’s an update on the lawsuits:
Mississippi. The most recent of the four lawsuits was filed in May 2014 by the Mississippi AG against Experian in Mississippi state court alleging widespread federal and state law violations. (While the AG’s complaint did not expressly allege that his claim of alleged UDAAP violations by Experian was brought under Section 1042, his complaint seeks various remedies under Dodd-Frank Section 1055 (12 U.S.C. 5565).)
In June 2014, Experian removed the case to a federal district court in Mississippi. It filed an answer to the complaint on June 20 and on July 10, the AG filed an amended complaint which includes new allegations regarding deceptive marketing practices by Experian.
Illinois. The Illinois AG has filed two lawsuits using her Section 1042 authority. In March 2014, the Illinois AG filed a state court lawsuit against a small loan lender alleging violations of the Dodd-Frank UDAAP prohibition as well as state law violations. In April 2014, the defendant removed the case to an Illinois federal court and, in May 2014, filed a motion to dismiss which is now pending before the court. The AG filed her response to the motion on July 21, 2014.
The Illinois AG’s second use of Section 1042 was in a lawsuit initially filed in state court against a for-profit college and its owners. In March 2014, the state court granted the AG’s motion to further amend her complaint to add new counts alleging that the defendants’ practices were unfair and abusive under Dodd-Frank and in May 2014, the defendants (as we predicted) removed the case to a federal district court in Illinois.
On June 16, 2014, the defendants filed a motion with the federal district court to dismiss the amended complaint. Among the arguments made by the defendants in the motion is that the AG lacks authority to bring claims under Section 1042 because (1) her purported authority is derived from the CFPB which is an unconstitutional entity, (2) Illinois law does not give the AG authority to enforce federal law, and (3) the Dodd-Frank UDAAP standard is unconstitutionally vague.
Among the defendants’ arguments for why the CFPB is unconstitutional is that the CFPB’s funding is not subject to the Congressional appropriations process. The defendants assert that because Congress lacks control over the CFPB’s funding, Congress cannot exercise meaningful oversight over the CFPB and the absence of such oversight violates the Constitution’s separation of powers.
Such argument was rejected by a California federal district court in its ruling denying Morgan Drexen’s motion to dismiss the CFPB’s enforcement action filed against it. The argument was also made by ITT Educational Services in its pending motion seeking dismissal of the CFPB’s enforcement action against ITT filed in an Indiana federal court. State National Bank of Big Spring, Texas also argued that the CFPB’s funding made it unconstitutional in its lawsuit filed in federal district court in Washington, D.C. which was dismissed for lack of standing and is currently on appeal before the D.C. Circuit.
On June 18, the AG filed a motion asking the court to sever and remand Counts I and II of the amended complaint. In the motion, the AG argues that the facts alleged in Count I, involving alleged misrepresentations and material omissions to students about the defendants’ criminal justice degree program, “do not form a common nucleus of fact” with those alleged in other counts and is therefore outside of the court’s supplemental jurisdiction. With respect to Count II, in which the AG claims that defendants’ in-house financing program was “structurally unfair” under the Illinois Consumer Fraud and Deceptive Practices Act, the AG argues that this claim raises “an issue of first impression in Illinois and should be decided by an Illinois state court.” The defendants have filed a response opposing the remand.
New York. In April 2014, Benjamin Lawsky, the Superintendent of the New York Department of Financial Services (DFS), using his Section 1042 authority, brought a civil action in a New York federal court for a violation of the Dodd-Frank UDAAP prohibition against a large subprime auto lender and its CEO and president. In May 2014, the court entered a preliminary injunction freezing the defendants’ assets and enjoining them from engaging in new loan business and an order appointing a receiver. On June 10, the court denied the defendants’ motion to modify the preliminary injunction. On June 20, an intervenor complaint was filed by the defendants’ secured lender seeking a declaratory judgment as to its lien status and its right to exercise various rights and remedies under its loan agreement with the defendants.