The Democratic attorneys general of 15 states and the District of Columbia have sent a letter to President Trump in which they express their support for the CFPB’s consumer protection mission and criticize the President’s appointment of Mick Mulvaney as CFPB Acting Director.  The 15 states are California, Connecticut, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Mexico, North Carolina, Oregon, Vermont, Virginia, and Washington.  In particular, the AGs contend that various statements made by Mr. Mulvaney about the CFPB “are categorically false, and should disqualify Mr. Mulvaney from leading the agency, even on an acting basis.”

Since the AGs’ presumably realize that their criticism is unlikely to cause President Trump to reconsider his appointment of Mr. Mulvaney, it would appear that the letter’s primary purpose is “saber rattling” by the AGs.  While providing examples of various enforcement matters on which state AGs have worked jointly with the CFPB, the AGs highlight their own “express statutory authority to enforce federal consumer protection laws, as well as the consumer protection laws of our respective states.”  The AGs state that they “will continue to enforce those laws vigorously regardless of changes to the CFPB’s leadership or agenda.  As attorneys general, we retain broad authority to investigate and prosecute those individuals or companies that deceive, scam, or otherwise harm consumers.”

In addition to various federal consumer protection statutes that give direct enforcement authority to state AGs or regulators, Section 1042 of the Consumer Financial Protection Act authorizes state AGs and regulators to bring civil actions to enforce the provisions of the CFPA, most notably its prohibition of unfair, deceptive or abusive acts or practices.  A state AG or regulator, before filing a lawsuit using his or her Section 1042 authority, must notify the CFPB and Section 1042 allows the CFPB to intervene as a party and remove an action filed in state court to federal court.  (AGs and regulators in several of the states joining in the letter to President Trump have already filed lawsuits using their Section 1042 authority.)

On January 11, 2018, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar: Who Will Fill the Void Left Behind by the CFPB?  Click here to register.

The AGs warn that “if incoming CFPB leadership prevents the agency’s professional staff from aggressively pursuing consumer abuse and financial misconduct, we will redouble our efforts at the state level to root out such misconduct and hold those responsible to account.”  They further state that “regardless of the future direction or leadership of the CFPB, we as state attorneys general will vigorously enforce state and federal laws to ensure fairness and deter fraud.”  It is also important to note that CFPB staff, who may feel handcuffed by Mr. Mulvaney, can share information with sympathetic state AGs.

 

As we reported recently, the Government Accountability Office has determined that CFPB Bulletin 2013-02 on dealer pricing in indirect auto finance (“Dealer Pricing Bulletin” or “Bulletin”) is a “rule” subject to review under the Congressional Review Act (“CRA”).  We noted that, if Congress chose to disapprove the guidance, it would severely undermine the basis for any future enforcement or supervisory action based on the legal and factual theories set forth in the Bulletin.

Our friend Professor Adam Levitin at Georgetown Law Center sent one of us the following message on Twitter a few days ago, questioning whether such an override would have any impact at all:

@AlanKaplinsky Trying to puzzle through this.  It’s pretty weird. GAO’s determined that the IAL [indirect auto lending] guidance is subject to CRA. But as far as I can tell, the GAO decision has no force of law, and I don’t see how it could, as the CRA says it’s not subject to judicial review.  If it isn’t actually a “rule,” then a CRA disapproval resolution would have no effect.  But there’s no judicial review allowed to determine this.  And even if it is a rule, what would it mean to void non-binding guidance?  It doesn’t void or change the CFPB’s position or undercut any ECOA or UDAAP suit the CFPB might bring.  All it does it void the guidance communicating the CFPB’s position.  IAC, does it really matter?  Perhaps the CFPB will stop enforcement actions for a while, but the IAL consent decrees presumably have forward looking provisions, and there’s also state AG enforcement risk.  I can’t imagine compliance at most IALs letting them revert to old form.  And given the 5-year SOL on ECOA, even if a Trump confirmed CFPB Director had no interest in bringing ECOA actions, any reversion to old behavior will quickly become chargeable by the AG in the next administration or the CFPB Director after a Trump-confirmed one.  It’s possible that that AG and CFPB Director won’t be interested in pursuing ECOA actions, but if they are, a[n] IAL that reverted to allowing unpoliced markups would be in a most uncomfortable position.  A lot of risk for a few years of allowing unpoliced markups. (emphasis added).

There is much that can (and ultimately may) be said in response to each of these assertions, but given the likelihood of a joint resolution of disapproval being introduced shortly, we wanted to focus today on the suggestion that the enactment of a disapproval measure would be inconsequential.  More specifically, we wanted to take the opportunity to explain why, as suggested in our blog post, we believe an override of the Dealer Pricing Bulletin should put a permanent end to this theory of assignee liability for so-called dealer “markup” disparities and make it impossible for the CFPB to pursue supervisory or enforcement actions based upon it.

Let’s begin by remembering that the legal and factual theories on which the CFPB’s indirect auto fair lending cases were based are very shaky, to say the least.  We wrote a blog post about this a couple of years ago, but just to refresh your recollection:

  • There is a significant question, especially after Inclusive Communities, about whether disparate impact claims are cognizable under the Equal Credit Opportunity Act in the first place (see “The ECOA Discrimination and Disparate Impact – Interpreting the Meaning of the Words that Actually Are There,” 61 Business Lawyer 829 (2006));
  • The Supreme Court decision in Dukes v. Wal-Mart stands for the proposition that a policy of “allowing discretion” is not a specific, identifiable policy subject to disparate impact analysis (seeAuto Finance and Disparate Impact: Substantive Lessons Learned from Class Certification Decisions);
  • The Regulation B multiple creditor liability rule (12 C.F.R. § 1002.2(l)) provides that an assignee (i.e., an “indirect auto finance company” in the parlance of the Bureau) is not liable for an ECOA violation by the original creditor unless the assignee knew or had reasonable notice of the act, policy or practice constituting the violation before becoming involved in the credit transaction – meaning in our view that the government should need to prove that the assignee knew or had reasonable notice of disparate treatment by a dealership prior to purchasing a retail installment sale contract (“RISC”);
  • The legal theory on which the discrimination claim ultimately is based – that discretionary pricing by dealerships has a discriminatory effect due to disparate treatment by dealerships – would require a dealer-level analysis rather than a portfolio-wide one;
  • The use of a portfolio-wide analysis manufactures statistical evidence of discrimination that does not exist by aggregating the RISCs of different dealerships to the assignee level, thereby comparing different auto dealers to one another; and
  • The use of a continuous-regression model over BISG proxy results creates the appearance of disparities when none exist, and inflates any that may exist.

In subsequent blogs posts, we discussed reports prepared by the House Financial Services Committee Majority Staff titled “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending” and “Unsafe at Any Bureaucracy, Part III: The CFPB’s Vitiated Legal Case Against Auto Lenders.”  We also reported previously on the AFSA study titled “Fair Lending: Implications for the Indirect Auto Finance Market,”an Executive Summary of which is available here.  In short, the subject of alleged assignee liability for asserted dealer “mark-up” disparities has been highly controversial and a lightning rod for Congressional, media and industry criticism of the Bureau.

Now let’s assume for the moment that Congress enacts a joint resolution disapproving the Dealer Pricing Bulletin articulating the Bureau’s theories of assignee liability for so-called dealer “markup” disparities, and the President of the United States signs it into law.  In that event, we believe that it should become impossible for a federal governmental agency to pursue the theory of liability in enforcement and, therefore, anywhere else.  We further believe that such a Congressional override would cause the federal judiciary to be even more hostile to the CFPB’s theory of liability than Supreme Court decisions like Wal-Mart and Inclusive Communities would require.  Here’s why.

The salient question is, “what would be the import of the enactment of a joint resolution of disapproval?”  A Congressional override of the guidance would not represent, as Professor Levitin suggests, merely a disapproval of the agency’s statement of its position.  It is, rather, a disapproval of the position itself pursuant to a law enacted by the democratically-elected representatives of the People of the United States declaring that “such rule shall have no force and effect.”  The “position” is embodied in the “statement” and cannot be disassociated from it; they are indivisible.

The end result of the legislative process thus would be a Public Law effectively branding this theory of liability as, in the parlance of Inclusive Communities, a disparate impact claim that is “abusive” of sales finance companies and banks engaged in the automobile sales finance business.  (Inclusive Communities emphasized the importance of safeguards against disparate impact claims that are abusive of defendants, such as the requirement to identify a specific policy or practice of the defendant causing asserted statistical disparities, and directed district courts to enforce this “robust causality requirement” promptly by “examin[ing] with care whether a plaintiff has made out a prima facie case of disparate impact” by “alleg[ing] facts at the pleading stage or produc[ing] evidencing demonstrat[ing] a causal connection” between the alleged policy and the disparity.)

Pursuant to the CRA, the enactment of a disapproval measure would preclude the CFPB from subsequently reissuing the rule or adopting a new rule that is substantially the same as the disapproved rule unless “the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.”

If the CFPB’s “rule,” as expressed in its Dealer Pricing Bulletin, is invalid, and the CFPB cannot issue a similar rule in the future, how can it possibly turn around and apply the disapproved “rule” in supervision and enforcement?  We don’t believe it can because doing so would disregard the clear import of an act of Congress.  Rather, we are confident that a Court would conclude that the Congressional override is an expression of disapproval of the legal and factual theories of liability expressed in the Bulletin.

By Professor Levitin’s logic, even though Congress nullified the CFPB arbitration agreements rule, the CFPB would be free to commence UDAAP enforcement actions or administrative proceedings against companies simply for using arbitration agreements with class action waivers, even though the rule prohibiting them was invalidated.  We think this result not only would defy the Canon of Common Sense, but it also would fail to give effect to the will of the People as reflected in an act of Congress that was approved by the President of the United States.

In Professor’s Levitin’s formulation, an administrative agency can continue to apply, in the enforcement (and apparently in the supervisory) contexts, the substance of a “rule” that has been disapproved by an act of Congress.  We respectfully disagree.  This being a representative Democracy in which the government is subordinated to the will of the People as expressed in laws enacted by their elected representatives, we think it makes common sense to answer the salient question in the manner we suggest, rather than in a manner that leaves an agency free to do as it pleases, insulated from the clear import of what Congress (and derivatively the People) have instructed by enacting a disapproval measure into law.  We thus urge Congress to disapprove CFPB Bulletin 2013-02, because we believe that congressional disapproval should have a permanent preclusive effect on the ability of federal regulators to pursue this deeply flawed theory of liability.

We do not appear to be alone in this view.  Professor Levitin himself, in testimony submitted to the House Financial Services Committee in 2015, noted that a provision of the Financial CHOICE Act that would repeal the Dealer Pricing Bulletin would “shield discriminatory lenders from legal repercussions.”  Although we would eliminate the word “discriminatory” from that sentence, we believe that a CRA override of the Dealer Pricing Bulletin would have that effect.  Suggesting that the CFPB could pursue these cases against “indirect auto lenders” after a Congressional override of the Bulletin strikes us as wishful thinking.

On December 12, the Credit Union National Association (“CUNA”) filed an amicus brief in D.C. Federal District Court opposing Leandra English’s motion for a preliminary injunction to block President Trump’s appointee for Acting CFPB Director, Mick Mulvaney, from exercising the powers of that office. The Court has already denied English’s motion for a temporary restraining order.

CUNA is the largest organization representing the nation’s 6,000 credit unions, which are heavily regulated by the CFPB. As such, it has a significant interest in the outcome of preliminary injunction hearing.

In its brief, CUNA argues that Mulvaney’s appointment was entirely proper under the Vacancies Reform Act of 1998 (“VRA”). CUNA further argues that the language in Dodd-Frank stating that the Deputy Director shall become the Acting Director in the “absence or on availability” of the Director covers temporary situations, like an accident requiring long term hospitalization of the Director. It does not cover a vacancy in the office of the Director, including one resulting from a resignation.

Under the VRA, when an office is vacant, the President has the power to appoint an acting officer to fill the post, subject to certain limitations. Indeed, when the VRA was passed, the Senate committee that considered the VRA explicitly stated that, “statutes enacted in the future purporting to or argued to be construed to govern the temporary filling of offices covered by this statute are not to be effective unless they expressly provide that they are superseding the Vacancies Reform Act.” So, because Dodd-Frank did not explicitly override the VRA, the VRA governs.

In addition, CUNA points out the serious constitutional problems that would result if the court adopted English’s position. If she is right, then a departing CFPB Director would have the power to appoint anyone as his or her successor, including non-citizens, through the simple expedient of naming him or her as the Deputy Director, while the President would have more limited powers of appointment under the VRA. That would give the CFPB Director more power than the President over an agency in the executive branch of government.

What’s more, English’s argument also implies that the President would be as unable to remove an Acting CFPB Director as he is the CFPB Director. That only exacerbates the constitutional defects that are at the heart of the PHH case, which we have blogged about extensively.

CUNA’s brief, which Ballard Spahr authored, highlights the industry perspective on why Leandra English is wrong and why the court should not try to unwind the President’s appointment of an Acting CFPB Director. We will continue to follow this unfolding saga closely.

Congress may have now have the opportunity to disapprove by a simple majority vote the CFPB’s disparate impact theory of assignee liability for so-called dealer “markup” disparities as a result of a determination by the General Accountability Office (GAO) that the CFPB’s Bulletin describing its legal theory is a “rule” subject to override under the Congressional Review Act (CRA).

We previously blogged about press reports that the GAO had accepted a request from Senator Patrick Toomey to determine whether CFPB Bulletin 2013-02, titled “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” (the “Bulletin”), is a “rule” within the scope of the CRA.  (“Indirect auto lenders” is the term used by the Bureau to refer to persons, such as banks and sales finance companies, that are engaged in the business of accepting assignments of automobile retail installment sale contracts from dealerships.)  We subsequently suggested that a recent GAO determination that the interagency leveraged lending guidance is a “rule” subject to the CRA foreshadowed a similar determination for the CFPB indirect auto finance guidance reflected in the Bulletin.

As it turns out, we were right.  The GAO issued its decision on December 5, 2017, concluding that the Bulletin is a “rule” subject to the CRA because “it is a general statement of policy designed to assist indirect auto lenders to ensure they are operating in compliance with [the] ECOA and Regulation B, as applied to dealer markup and compensation policies.”

The Bulletin is an official guidance document issued by the Bureau on March 21, 2013.  It effectively previewed the Bureau’s subsequent ECOA enforcement actions against assignees of automobile retail installment sale contracts (RISCs), setting forth the views of the CFPB concerning what it characterized as a significant ECOA compliance risk associated with an asserted assignee “policy” of “allowing” dealerships to negotiate the annual percentage rate under a retail installment sale contract by “marking up” the wholesale buy rate established by a prospective assignee.  The Bulletin’s intent to establish its enforcement and supervisory approach with respect to the subject practice was unmistakably clear not only from its text but also from the tag line in the accompanying press release – “Consumer Financial Protection Bureau to Hold Auto Lenders Accountable for Illegal Discriminatory Markup.”

Before responding to Senator’s Toomey’s request, in accordance with its standard procedure for responding to requests of this nature, the GAO solicited and obtained the CFPB’s views.  The Bureau responded to the GAO by letter dated July 7, 2017.

The legal analysis reflected in the GAO opinion is straightforward.  Subject to exceptions not relevant, the CRA adopts the Administrative Procedure Act definition of a “rule,” which states, in relevant part, that a rule is “”the whole or a part of an agency statement of general . . . applicability and future effect designed to implement, interpret, or prescribe law or policy . . ..”  The GAO framed the question presented as “whether a nonbinding general statement of policy, which provides guidance on how [the] CFPB will exercise its discretionary enforcement powers, is a rule under [the] CRA.”  It agreed with the CFPB’s assertion that the Bulletin “is a non-binding guidance document” that “identifies potential risk areas and provides general suggestions for compliance” with the ECOA.

The GAO rejected, however, the CFPB’s argument that the CRA does not apply to the Bulletin because the Bulletin has no legal effect on regulated entities.  Specifically, the Bureau had argued “taken as a whole the CRA can logically apply only to agency documents that have [binding] legal effect.”  The GAO concluded that “CRA requirements apply to general statements of policy, which, by definition, are not legally binding.”

The GAO letter explains that, “to strengthen congressional oversight of agency rulemaking,” the CRA requires all federal agencies, including independent regulatory agencies, to submit a report on each new rule to both Houses of Congress and to the Comptroller General before it can take effect.” (emphasis added)  The CFPB acknowledged that it had not complied with this formal reporting requirement because it did not believe the Bulletin was a “rule” subject to the CRA reporting requirement.  In response to the GAO decision, Senator Toomey issued a press release stating that “I intend to do everything in my power to repeal this ill-conceived rule using the Congressional Review Act.”

As explained in prior blog posts, the CRA establishes a streamlined procedure pursuant to which Congress may enact, by simple majority vote, a joint resolution disapproving a “rule.”  A joint resolution of disapproval passed by Congress is presented to the President for executive action.  If approved by the President, the joint resolution is enacted into law and assigned a Public Law number.  If a joint resolution of disapproval is enacted into law, the disapproved rule “may not be reissued in substantially the same form, and a new rule that is substantially the same as such a rule may not be issued, unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.”  Thus, the enactment of a joint resolution of disapproval has a preclusive effect on future regulatory action.

According to a Congressional Research Service report, in prior instances where the GAO determined that the agency action satisfied the CRA definition of a “rule” and joint resolutions of disapproval were subsequently introduced, “the Senate has considered the publication in the Congressional Record of the official GAO opinions . . . as the trigger date for the initiation period to submit a disapproval resolution and for the action period during which such a resolution qualifies for expedited consideration in the Senate.”  If a joint resolution of disapproval is introduced, it therefore would appear that the CRA clock may start to run for expedited consideration by the Senate once the GAO opinion is published in the Congressional Record.

So, what does all of this mean for the automobile sales finance industry?  We think there are several important implications.  First, the GAO’s decision strengthens the argument that the CFPB’s effort to regulate dealer pricing of RISCs should have been pursued through a rulemaking proceeding, rather than through “guidance” and enforcement actions.

Second, the GAO determination means that Congress could override the Bulletin by means of a joint resolution of disapproval, with a majority vote that could not be avoided by a Senate filibuster.  Given the Republican opposition to the CFPB’s pursuit of this issue, and the Democratic support for auto dealers as well (expressed in letters from members of Congress to the CFPB), there seems to be a fair chance of a CRA disapproval resolution passing.  Indeed, as Senator Toomey noted in his press release, the House of Representatives passed the Reforming CFPB Indirect Auto Financing Guidance Act in November 2015 by a bipartisan vote of 332-96.

What would the enactment of a joint resolution of disapproval mean?  Obviously, it would mean the Bulletin would be null and void.  But since the Bulletin was non-binding anyway and the CFPB did not comply with the CRA reporting requirement, what difference would it make?

Opponents of the CFPB’s disparate impact theory of liability would argue that the override of the guidance is, by definition, a Congressional repudiation of its content – the legal and factual theories of liability contained in the Bulletin. The corollary of this compelling argument is that the override would preclude not only another similar “rule,” but also that which is inherent in the existence of such a “rule” – its application to regulated entities in supervisory activities or enforcement actions. This repudiation would be permanent (unless altered by a subsequent Congressional enactment), and might therefore offer a lasting end to the CFPB’s efforts to regulate dealer pricing through banks and sales finance companies, rather than the potentially temporary hiatus that could be brought about by new leadership at the CFPB.

We hope that Congress will override the Bulletin under the CRA, and possibly put a final end to this highly questionable legal and factual ECOA theory.

A new filing by the CFPB in its action against Nationwide Biweekly Administration Inc. may be an indicator of the enforcement philosophy of Mick Mulvaney, President Trump’s designee as CFPB Acting Director, and how that philosophy may impact future CFPB enforcement activity.  In addition to a 30-day freeze on all regulatory action, CFPB hiring, and payments from the civil penalty fund, Mr. Mulvaney is reported to have put a 30-day hold on new enforcement cases.  Mr. Mulvaney is also reported to have named Brian Johnson as a senior adviser to him at the CFPB.   Mr. Johnson is Senior Counsel to the House Financial Services Committee and was a member of President Trump’s transition team.

In the CFPB’s action against Nationwide, another related company, and the companies’ individual owner, the CFPB alleged that the defendants engaged in abusive and deceptive acts or practices in violation of the CFPA UDAAP prohibition by making false representations regarding the costs of a biweekly mortgage payment program and the savings consumers could achieve through the program.  A California federal district court refused to award restitution sought by the CFPB but did award the CFPB approximately $7.9 in civil money penalties.  (However, the court rejected the CFPB’s request for an award against each defendant and imposed only a single penalty for which the defendants would be jointly and severally liable.)

On November 27, the CFPB had filed a response opposing a motion filed by the defendants to stay execution of the $7.9 million judgment without posting a bond.  The defendants had offered alternate security in the form of an agreement not to sell Nationwide’s commercial real property or the individual owner’s residence pending the disposition of anticipated post-trial motions and appeal.  Two days later, on November 29, the CFPB filed a notice withdrawing its response and stating that the CFPB “takes no position as to whether the Court should require Defendants in this matter to post a bond as a condition of staying the monetary judgment pending the disposition of Defendants’ anticipated post-trial motions.”  An attorney for the defendants is reported to have stated that the change in the CFPB’s position was in response to a letter she had sent to Mr. Mulvaney informing him of the CFPB’s November 27 filing.

The CFPB has filed a brief opposing the petition for certiorari filed by two tribally-affiliated lenders seeking U.S. Supreme Court review of the Ninth Circuit’s decision in CFPB v. Great Plains Lending, LLC, et al.  In that decision, the Ninth Circuit rejected the lenders’ challenge to the CFPB’s authority to issue civil investigative demands (CID) to companies that are “arms” of Native American tribes.

After the CFPB denied their petition to set aside the CIDs, the lenders refused to comply with the CIDs.  The CFPB then filed a petition to enforce the CIDs in a California federal district court.  The district court granted the CFPB’s petition and the lenders appealed to the Ninth Circuit.  Because courts apply less scrutiny to jurisdictional challenges in pre-complaint investigations, the Ninth Circuit limited its inquiry to whether the CFPB’s authority was “plainly lacking” and concluded that Congress likely did not intend to exclude tribally-owned financial services companies from CFPA coverage.

The CFPB authorizes the CFPB to issue CIDs to “any person” and defines “person” to include “company[ies]” and “other entities.”  In its opposition to the lenders’ certiorari petition, the CFPB argues that the Ninth Circuit correctly held that it did not plainly lack jurisdiction to issue the CIDs to the lenders and that the Ninth Circuit’s interpretation of the term “person” to include all companies that offer financial services to consumers nationwide without regard to tribal ownership does not conflict with any Supreme Court decision or present a circuit conflict.  In addition, the CFPB argues that the lenders had not yet factually established their status as “arms of the Tribe.”

The CFPB has filed a lawsuit in a California federal district court against Freedom Debt Relief (FDR) and its CEO for alleged violations of the Consumer Financial Protection Act (CFPA) and the Telemarketing Sales Rule (TSR).  The CFPB’s press release describes Freedom as “the largest debt-settlement services provider in the United States.”

According to the CFPB’s complaint, Freedom communicated by phone with prospective customers and, before enrolling a consumer in its programs, obtained a credit report to confirm the identities of the consumer’s creditors and information about the debts owed.  Freedom required consumers enrolled in its debt-settlement program to deposit money into dedicated accounts with an FDIC-insured bank and informed consumers that it would negotiate with creditors to accept less than the amounts actually owed.   When a debt was settled or collection attempts ceased, Freedom charged the consumer a fee that typically ranged from 18 to 25 percent of the amount of the debt.

The CFPB claims that Freedom knew that certain major credit card issuers and other creditors had policies against working with debt-settlement companies or “track records of repeatedly refusing to negotiate with Freedom.”  It also claims that, when it had been unable to negotiate with creditors, Freedom told consumers to negotiate directly with their creditors and gave them instructions for doing so.

The CFPB alleges that Freedom and its CEO violated the CFPA and TSR by engaging in the following conduct:

  • Despite knowing there was a significant chance that it would be unable to negotiate directly with certain creditors, by touting its “negotiating power” when marketing its services, creating “the false net impression that Freedom itself would be able to negotiate directly with all creditors.”
  • Despite representing to consumers that it would not charge any fees for its services until it had settled a debt and the consumer had made a settlement payment to the creditor, charging fees in cases where Freedom had not settled the consumer’s debt and no settlement payment was made.
  • Failing to disclose to consumers before they enrolled in Freedom’s program that they might be required to negotiate with creditors on their own.
  • Failing to clearly and conspicuously disclose that consumers owed the funds held in the dedicated accounts, could withdraw from the debt-relief service at any time, and, if the consumer withdrew, were entitled to all funds in the account other than funds earned by Freedom.

The CFPB’s complaint seeks consumer redress, civil money penalties, and injunctive relief.

The State of Oklahoma has filed an amicus brief in support of the motion to dismiss filed by four online tribal lenders sued by the CFPB for alleged Consumer Financial Protection Act and Truth in Lending Act violations.  The CFPB’s lawsuit was originally filed in an Illinois federal district court and subsequently transferred to federal district court in Kansas.

The CFPB’s complaint alleges that the lenders engaged in unfair, deceptive, and abusive acts or practices in violation of the CFPA by attempting to collect loans that were purportedly void or uncollectible in whole or in part under state law.  The CFPB asserts that the loans are void or uncollectible in whole or in part as a matter of state law because the lenders charged  interest at rates that exceeded state usury limits and/or failed to obtain required state licenses.  The CFPB alleges that the defendants’ efforts to collect amounts that consumers did not owe under state law are “unfair,” “deceptive” and “abusive” under the CFPA as a matter of federal law.  The CFPB also alleges CFPA violations by the defendants based on their alleged failure to disclose the APR as required by TILA in advertisements and when providing information orally in response to telephone inquiries.

This is not the CFPB’s first attempt to transform alleged violations of state law into CFPA UDAAP violations.  However, as we observed when the complaint was filed, the CFPB’s legal position is far more aggressive than it was in its past cases and represents a frontal attack on all forms of tribal lending.  In this case, the CFPB acknowledged that the four lenders are owned by a federally-recognized Indian tribe and thus are tribal entities (and not merely tribal members).  Further, the complaint does not allege that non-tribal parties were the “true lenders” or attempting to collect interest on their own account.

In their motion to dismiss, the lenders argue that as “arms of the tribe,” they are immune from suit under the CFPA and TILA, the CFPB has no authority to enforce state law, and the loans are governed by tribal law. (The CFPB’s complaint alleges that the lenders’ loan agreements contained a tribal choice-of-law provision.)

In its amicus brief, Oklahoma agrees with the lenders’ position that they are immune from suit under the CFPA and TILA.  In addition to questioning the CFPB’s constitutionality, Oklahoma asserts that it “is especially alarmed that the CFPB claims jurisdiction over States and State entities in the same breath as it claims authority over Indian tribes.”  It argues that the CFPB’s position “is without textual support, bad policy, and contrary to our system of federalism and separation of powers.”  According to Oklahoma, if the CFPB’s position is correct, it would mean that “Oklahoma operates a number of agencies that the CFPB may now regulate, investigate, and coerce in the same way the CFPB is investigating Defendants as arms of Indian tribes.”

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 siege, facing a barrage of enforcement actions by the CFPB as well as FTC and state AG enforcement actions.

 

As we’ve mentioned, the finance industry recently filed suit to overturn the CFPB’s arbitration rule in the U.S. Federal District Court for the Northern District of Texas. Shortly after the case was filed, it was assigned to Judge Sidney A. Fitzwater.

Judge Fitzwater was appointed to the bench in 1986 by President Ronald Reagan. He had previously served as a state district judge, and was only 32 years old when he was appointed to the federal bench. According to the Almanac of the Federal Judiciary, before his appointment, he served on the Executive Committee for the Dallas County Republican Party, on the Executive Committee of the Texas Federation of Young Republicans, and as the Director of the Dallas County Republican Men’s Club.

By all accounts, Judge Fitzwater is a sharp, detail-oriented, and fair-minded judge. According to the Almanac, he’s referred to by attorneys who practice before him as “the smartest guy on the bench.” Practitioners quoted in the Almanac also say that he “listens to everything,” and that he is “perfectly prepared” for all of his hearings. They also say that “He follows the law. He will not substitute his own opinions. You are getting the law as he understands it. He is careful not to inject his personal view into the case.” He has received the Dallas Bar Association’s highest overall poll evaluation for federal judges on several occasions, including in 2017.

We have not been shy about criticizing the CFPB’s arbitration rule or the CFPB’s specious justification for it. If the reports on him are accurate, it appears that Judge Fitzwater will carefully analyze the issues and reach a thoughtful, independent decision.