The CFPB announced that it has entered into a consent order with Cash Express, LLC to settle charges that the company engaged in deceptive and abusive acts or practices in violation of the Consumer Financial Protection Act (CFPA).  The CFPB’s press release describes Cash Express as a small-dollar lender offering high-cost, short-term loans, such as payday and title loans, as well as check-cashing services, and that owns and operates approximately 328 retail lending outlets in four states.

The consent order sets forth the following findings and conclusions:

  • Cash Express sent collection letters to consumers owing debts as to which the applicable statute of limitations had expired in which it represented, directly or indirectly, expressly or by implication, that it would take legal action against them if a payment was not made.  It was not, in fact, Cash Express’s practice to file collection lawsuits against consumers with time-barred debts.  The representations made by Cash Express constituted deceptive acts or practices in violation of the CFPA.
  • Cash Express represented in its loan applications, privacy policy disclosures, collection letters, and loan agreements that it may furnish information about borrowers to consumer reporting agencies.  Cash Express did not, in fact, furnish information to CRAs.  The representations made by Cash Express constituted deceptive acts or practices in violation of the CFPA.
  • Cash Express disclosed in its application and deferred presentment and signature agreements that it may deduct funds owed on a previous loan by a customer using its check cashing services and consumers signed acknowledgments that they had received these disclosures.  Cash Express instructed its employees not to disclose at any time during a check cashing transaction that it would deduct previously owed amounts from the check proceeds.  Consumers may not have selected Cash Express to cash their checks if they had been informed at the point of check-cashing about the possibility of a deduction.  The manner in which Cash Express conducted such deductions constituted abusive acts and practices in violation of the CFPA.

The consent order requires Cash Express to pay a $200,000 civil money penalty to the Bureau.  It also requires Cash Express to pay approximately $32,000 in restitution, representing payments made during the relevant period by consumers owing time-barred debts within 90 days of receiving collection letters threatening legal action.  Cash Express is prohibited from deducting debt payments from checks cashed by consumers unless it has provided a clear and prominent disclosure about the deduction to the consumer at the time of the check cashing transaction and the consumer has affirmatively consented in writing to the deduction before the transaction is completed.  It is also prohibited from making misrepresentations about its consumer reporting activities and its intention to file a suit to collect a time-barred debt.

The New York Attorney General, on October 12, 2018, filed a notice of an appeal to the Second Circuit from Judge Preska’s dismissal on September 12, 2018 of all of the NYAG’s federal and state law claims, and her subsequent September 18 order amending the September 12 order to provide that the NYAG’s claims under Dodd-Frank Section 1042 were dismissed “with prejudice.”  (Section 1042 authorizes state attorneys general to initiate lawsuits based on UDAAP violations.)

On September 14, the CFPB filed an appeal with the Second Circuit from Judge Preska’s June 21, 2018 decision, as amended by her September 12 order, in which she 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, and dismissed the CFPB from the case.  That was followed on September 25 by RD Legal Funding’s filing of a cross-appeal with the Second Circuit from Judge Preska’s June 21 decision, as subsequently amended, in which Judge Preska had ruled that the NYAG had stated federal and state law claims against RD Legal Funding.  (Although Judge Preska’s various orders resulted in the dismissal of all of the CFPB’s and NYAG’s claims, RD Legal Funding may have filed the cross-appeal to preserve its ability to challenge Judge Preska’s June 21 ruling that the NYAG had stated claims against RD Legal Funding should the Second Circuit conclude that the CFPB’s structure is constitutional or that the structure is unconstitutional but that the proper remedy is to sever the Dodd-Frank for-cause removal provision rather than strike all of Title X.)

The Bureau’s constitutionality is now before two circuits, the Second and Fifth Circuits.  In April 2018, the Fifth Circuit agreed to hear All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.  Also, a petition for certiorari was recently filed in the U.S. Supreme Court by State National Bank of Big Spring which, together with two D.C. area non-profit organizations that also joined in the petition, had brought one of the first lawsuits challenging the CFPB’s constitutionality.

 

 

The CFPB is proposing to issue a final rule on annual adjustments to the civil penalties within its jurisdiction.  Comments on the proposal must be received by November 13, 2018.

In November 2016, the CFPB published an interim final rule (IFR) to create 12 C.F.R. Part 1083 which sets forth the penalty amounts as adjusted annually.  The adjustments are required by the Federal Civil Penalties Inflation Adjustment Act of 1990 which, pursuant to a 2015 amendment (2015 Amendment), required federal agencies to adjust the civil penalties within their jurisdiction by July 1, 2016 and then to adjust them by January 15 every year thereafter.  The civil penalties adjusted annually by the CFPB are the Tier 1-3 penalties set forth in Section 1055 of Dodd-Frank, as well as the civil penalties in the Interstate Land Sales Full Disclosure Act, Real Estate Settlement Procedures Act, SAFE Act, and Truth in Lending Act.  The IFR provides that the adjusted penalty amounts “shall apply to civil penalties assessed after July 14, 2016, regardless of when the violation for which the penalty assessed occurred.”  (July 14, 2016 was the IFR’s effective date.)

The CFPB adjusted its civil penalty amounts through rules issued in 2017 and 2018 that amended the maximum civil penalty amounts set forth in the IFR.  In the supplementary information accompanying the proposal, the CFPB states that in 2017, the OMB issued guidance which provided that “[f]or the 2018 annual adjustment, the new penalty amounts should apply to penalties assessed after the effective date of the annual 2018 adjustment—which shall be no later than January 15, 2018—including, if consistent with agency policy, assessments whose associated violations occurred on, or after, November 2, 2015.”  (November 2, 2015 was the date the 2015 Amendment was signed into law.)

Consistent with the OMB guidance, the Bureau is proposing to finalize the IFR to add language specifying that adjusted penalties will apply only to violations that occurred on or after November 2, 2015.  The Bureau is also proposing that the final rule would have an effective date no sooner than January 15, 2019 to coincide with, or occur after, the effective date of a 2019 annual adjustments by the Bureau.  The new language would provide that the 2019 adjustments “shall apply to civil penalties assessed after January 15, 2019, whose associated violations occurred on or after November 2, 2015.”

In this week’s podcast, Ballard Spahr partners Alan Kaplinsky and Chris Willis examine how the CFPB has changed under the leadership of Acting Director Mick Mulvaney and their expectations for future developments.

Alan and Chris discuss the practical impact of Mr. Mulvaney’s leadership on the CFPB’s day-to-day operations in the areas of supervision and enforcement, particularly with regard to how the CFPB’s public statements line up with its actual practices.  With regard to supervision and examinations, they highlight the Bureau’s current approach to UDAAP violations and military lending.

In the area of enforcement, Alan and Chris discuss the volume and nature of the Bureau’s current enforcement activity.  They also report on the status of the Bureau’s rulemaking initiatives and share their expectations for rulemaking under new leadership, including with regard to the Bureau’s payday lending rule and a debt collection rule.  They conclude the podcast by sharing their observations on the current compliance environment and its impact on decision-making by consumer financial services providers.

To listen and subscribe to the podcast, click here.

As we reported previously, in June 2018 Zillow Group (Zillow) announced that it is no longer under investigation by the CFPB for Real Estate Settlement Procedures Act (RESPA) and UDAAP compliance with regard to its co-marketing program. The CFPB investigation triggered a securities lawsuit filed in the United States District Court for the Western District of Washington (C17-1387-JCC). The plaintiffs alleged in a putative class action that they purchased Zillow shares at an inflated price and were damaged by alleged material misrepresentations by the defendants regarding the Zillow co-marketing program and CFPB investigation of the program. The court noted that there was a decline in the price of Zillow stock in the two days after Zillow provided an update in August 2017 regarding the status of the CFPB investigation. Underlying the plaintiffs’ claims were alleged violations of RESPA with regard to the co-marketing program, which are the focus of this blog post.

The court noted that because the plaintiffs alleged securities fraud under section 10(b) of the Securities Exchange Act of 1934 and section 10b-5 of Securities and Exchange Commission rules, in order to survive a motion to dismiss the complaint must satisfy the general standard of setting forth sufficient factual matter, accepted as true, to state a claim for relief that is plausible on its face, and meet additional standards. One additional standard is that that the complaint must state with particularity the circumstances constituting fraud or mistake.

With regard to RESPA, the plaintiffs asserted that the co-marketing program (1) acted as a vehicle to allow real estate agents to make illegal referrals to lenders in exchange for the lenders paying to Zillow a portion of the agents’ advertising costs, and (2) facilitated RESPA violations by allowing lenders to pay to Zillow a portion of their agents’ advertising costs that was in excess of the fair market value of the advertising services that the lenders received from Zillow. The court found that the plaintiffs failed to sufficiently plead either theory of RESPA liability.

In support of the theory that when lenders pay a portion of the real estate agent’s advertising costs to Zillow they are effectively paying to receive unlawful mortgage referrals from the agent, the plaintiffs cited the CFPB enforcement action against PHH Mortgage Corporation regarding mortgage reinsurance arrangements. We have extensively reported on the matter, in which the CFPB deviated from prior government interpretations of RESPA by effectively reading out of RESPA the section 8(c)(2) safe harbor that permits payments for goods and services between parties even when there are referrals of settlement services business between the parties. The U.S. Court of Appeals for the D.C. Circuit rejected the CFPB’s interpretation of RESPA. Summarizing the holding of the D.C. Circuit, the court in the Zillow case stated the “D.C. Circuit held that RESPA’s safe harbor allows mortgage lenders to make referrals to third parties on the condition that they purchase services from the lender’s affiliate, so long as the third party receives the services at a “reasonable market value.””

The court in the Zillow case determined the plaintiffs’ assertion that the co-marketing program violates RESPA because it allowed agents to make referrals in exchange for lenders paying a portion of their advertising costs “is neither factually nor legally viable.” The court first noted that the complaint does not contain particularized facts demonstrating that real estate agents participating in the co-marketing were actually providing unlawful referrals to lenders. The court then stated that, even if it “draws an inference that co-marketing agents were making mortgage referrals, such referrals would fall under the Section 8(c) safe harbor because lenders received advertising services in exchange for paying a portion of their agent’s advertising costs.”

Addressing the plaintiffs’ second theory of liability—that the co-marketing program facilitated RESPA violations by allowing lenders to pay more the than fair market value for advertising services they received from Zillow—the court states that the plaintiffs failed to provide particularized facts that demonstrate that the lenders actually paid more than the fair market value of the advertising services they received from Zillow.

While the mortgage industry will welcome the favorable decisions on the RESPA issues, industry members should be mindful that the context is a securities fraud case with specific pleading standards.

 

In this week’s podcast, Ballard Spahr attorneys Alan Kaplinsky and James Kim discuss the implications of the CFPB’s first enforcement action under Acting Director Mulvaney and analyze the amendments proposed by the CFPB to its trial disclosure policy (TDP).  Alan chairs Ballard’s Consumer Financial Services Group and James, a partner in the CFS Group, was formerly a CFPB Senior Enforcement Attorney.

James provides background on the prior litigation between the CFPB and the target of the enforcement action and reviews the allegations in the CFPB’s complaint.  He also provides observations on the action’s significance for the industry it targets and for the CFPB’s approach to UDAAP enforcement actions under its new leadership and shares his expectations for how the action is likely to proceed.

With regard to the proposed TDP amendments, James discusses the procedural and substantive changes contained in the proposal and how such changes would address the current policy’s shortcomings.  He also analyzes the effect that a trial disclosure waiver obtained under the amended policy would have on a company’s potential liability in federal and state enforcement actions and private litigation and discusses the proposal’s state sandbox option, the availability of waivers to companies offering traditional consumer financial products or services, and the relationship between the TDP and the CFPB’s no-action letter policy.

To listen and subscribe to the podcast, click here.

All American Check Cashing has filed its reply brief in its interlocutory appeal to the U.S. Court of Appeals for the Fifth Circuit from the district court’s ruling upholding the CFPB’s constitutionality.

All American and the other appellants sought the interlocutory appeal after the district court denied their motion for judgment on the pleadings in a lawsuit filed by the CFPB that alleges the appellants engaged in abusive, deceptive, and unfair conduct in connection with making certain payday loans, failing to refund overpayments on those loans, and cashing consumers’ checks.  Citing the D.C. Circuit’s en banc PHH decision, the district court rejected the defendants’ argument that the CFPB is unconstitutional based on its single-director-removable-only-for-cause structure.  It subsequently agreed to certify the constitutionality issue for interlocutory appeal to the Fifth Circuit which accepted the appeal.

In its opposition brief, the CFPB argued (1) because Acting Director Mulvaney is removable at will by the President and ratified the CFPB’s decision to bring the lawsuit against the appellants, any constitutional defect that may have existed with the CFPB’s initiation of the lawsuit was cured, (2) the CFPB’s structure is constitutional under existing U.S. Supreme Court precedent, and (3) if the Fifth Circuit concludes that the CFPB’s structure is unconstitutional, the proper remedy is to strike the for-cause removal provision.

Responding to these arguments in its reply brief, All American makes the following principal arguments:

  • Not only is the CFPB’s structure unconstitutional under existing U.S. Supreme Court precedent, it is also unconstitutional under “any reasonable reading” of the Fifth Circuit’s decision in Collins v. Mnuchin which found that the Federal Housing Finance Agency (FHFA) is unconstitutionally structured because it is excessively insulated from Executive Branch oversight.  To support this argument, All American applies to the CFPB each of the five factors used by the Fifth Circuit in Collins to determine whether an agency is excessively insulated.  In ruling that the FHFA is unconstitutionally structured, the Fifth Circuit acknowledged the D.C. Circuit’s en banc PHH decision finding the CFPB’s structure to be constitutional but distinguished the CFPB based on its view that the Financial Stability Oversight Council’s (FSOC) can directly control the CFPB’s actions because it holds veto-power over the CFPB’s policies.  All American observes that the Fifth Circuit’s discussion of FOSC was dicta and that the Fifth Circuit did not appear to have the benefit of adversarial briefing on the issue.  In addition, it  argues that FSOC “has very little influence over the CFPB,” noting that FSOC’s veto power requires a two-thirds vote and, because it only applies to formal regulations, that such “narrow authority has no relevance here, because no regulation is at issue.”
  • Acting Director Mulvaney’s purported ratification did not cure the constitutional violation with the CFPB’s structure because the CFPB continues to be unconstitutionally structured (with All American noting that once Kathy Kraninger is confirmed as CFPB Director, “All American will undeniably be subject to an ongoing proceeding by an invalid entity.”)  It further contends that actions of an invalid agency (as distinguished from actions taken by an invalidly appointed officer) cannot be ratified and that even if the lawsuit could be ratified, the 3-year statute of limitations for bringing CFPB enforcement actions would have run by the time of the alleged ratification.
  • Severing the for-cause removal provision is not the appropriate remedy for the CFPB’s unconstitutionality because Congress would not have wanted the CFPB’s Director to be removable at will while leaving the CFPB independent from congressional appropriations and oversight.  In support of their argument that the proper remedy is to strike the CFPA rather than sever the for-cause removal provision, All American cites the decision of Judge Preska of the Southern District of New York in RD Legal Funding.  Judge Preska ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional and struck Title X of Dodd-Frank in its entirety.  The CFPB has filed an appeal with the Second Circuit.  (In Collins, the Fifth Circuit determined that the appropriate remedy for the constitutional violation was to sever the for-cause removal provision from the Housing and Economic Recovery Act of 2008, the statute that created the FHFA.  In its reply brief, All American notes that the severability analysis in Collins “was undertaken without the benefit of the adversarial process” because the appellants in Collins had conceded that severance might be appropriate.)

In August 2018, All American Check Cashing filed a petition asking the Fifth Circuit to hear their interlocutory appeal as an initial matter en banc.  The petition remains pending, with the Fifth Circuit perhaps having waited for briefing in the appeal to be concluded before ruling on the petition.  The Fifth Circuit is also considering petitions for rehearing en banc in Collins filed by both the plaintiffs and the FHFA.

 

 

 

We have been following very closely the lawsuit filed by the CFPB and the New York Attorney General against RD Legal Funding.  We earlier reported that on June 21 Judge Preska dismissed the CFPB’s claims based on the unconstitutionality of the CFPA. We subsequently reported that on September 12 Judge Preska dismissed the claims brought by the New York Attorney General under Section 1042 of Dodd -Frank (i. e., the provision authorizing state attorneys general to initiate lawsuits based on UDAAP violations) and also dismissed the Attorney General’s state law claims for lack of subject matter jurisdiction as a result of there being no remaining federal questions in the case.

The most recent development is that yesterday Judge Preska amended her September 12 order to provide that her dismissal of the New York Attorney General’s 1042 claims are “with prejudice”. That means that the New York Attorney General should not be able to re-file her 1042 claims in state court unless and until a higher court reverses Judge Preska’s order. The CFPB has already filed an appeal with the Second Circuit and it seems likely that the New York Attorney General will do the same.

The BCPB has historically taken the position that it can use investigations to conduct compliance “sweeps” of entire industries. Indeed, a version of the BCFP’s Enforcement Policies and Procedures Manual made available to the public through a FOIA request in 2016 stated that: “It is not necessary to have evidence that a law has in fact been violated before opening a formal investigation. That means, for example, that the Bureau could conduct a ‘compliance’ sweep to investigate whether industry participants are complying with a law or regulation.”

The BCFP has historically used CIDs and investigations to supervise industries over which it otherwise lacked supervisory authority—imposing huge costs on industry participants without justification.  On September 6, 2018, the Fifth Circuit took a dim view of that tactic. In its opinion in the The Source for Public Data, L.P. case, the Fifth Circuit struck down a CID apparently issued as part of such an industry sweep. “Simply put,” the court held, “the CFPB does not have the ‘unfettered authority to cast about for potential wrongdoing.’”

Dodd-Frank requires the BCFP to include a “Notification of Purpose” in every CID stating “the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation.” The BCFP has historically read this requirement very loosely. Paraphrasing, most Notifications of Purpose said no more than: “The purpose of this investigation is to determine whether anybody did anything wrong.”  They generally gave CID recipients no information whatsoever as to the conduct under investigation. Sometimes it was possible to guess based on the document requests and interrogatories included in the CIDs, but the Notifications of Purpose were not generally specific enough to allow recipients to meaningfully negotiate the scope of the CID or to know whether they were targets of an investigation or only third-party witnesses. The BCFP has taken and endorsed this approach even under Mulvaney, who recently denied a request to modify or set aside a CID containing a broad Notification of Purpose.

The Fifth Circuit acknowledged this as a real problem. It found that such broad Notifications of Purpose did not allow courts to meaningfully evaluate whether the information requested by the BCFP was “reasonably relevant” to the matter under investigation—the standard courts apply to government requests for information. As a result, the Fifth Circuit found that it could not enforce the CID and, reversing the lower court, struck the CID down entirely. In doing so, the Fifth Circuit joined with the D.C. Circuit which, in 2017, rejected a similarly broad Notification of Purpose in the ACICS case. In striking the CID, the Fifth Circuit held that “[t]here are consequences to ‘the absurdity of giving a notification that notifies of no purpose whatsoever.”

As expected, following Judge Preska’s dismissal on September 12 of all of the New York Attorney General’s federal and state law claims, the CFPB filed an appeal with the Second Circuit from Judge Preska’s June 21 ruling in the RD Legal Funding case in which she held that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, struck the CFPA (Title X of Dodd-Frank) in its entirety, and dismissed the CFPB from the case.

In its Notice of Appeal filed on September 14, the CFPB gives notice that it “appeals to the United States Court of Appeals for the Second Circuit from this Court’s June 21, 2018 Order (ECF No. 80), as amended by its September 12, 2018 Order (ECF No. 105), dismissing the Bureau’s claims against Defendants, and this Court’s Judgment (ECF No. 106) entered on September 12, 2018.”

Since Judge Preska dismissed all of its claims, the NYAG can also appeal to the Second Circuit.  Alternatively, the NYAG can refile its CFPA and state law claims in New York state court (although a state court might stay the case pending a decision by the Second Circuit in the CFPB’s appeal, particularly if the NY AG decides to appeal the dismissal of its claim brought under Dodd-Frank Section 1042.  If the NYAG appeals the jurisdictional dismissal of its state law claims, then RD Legal should be able to file a cross-appeal of Judge Preska’s June 21 decision ruling on the merits of the state law claims and denying RD Legal’s motion to dismiss.

The CFPB’s appeal means that the Bureau’s constitutionality is now before two circuits, the Second and Fifth Circuits.  In April 2018, the Fifth Circuit agreed to hear All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.  Also, a petition for certiorari was recently filed in the U.S. Supreme Court by State National Bank of Big Spring which, together with two D.C. area non-profit organizations that also joined in the petition, had brought one of the first lawsuits challenging the CFPB’s constitutionality.