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

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

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

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

 

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.

On September 20, 2017, the Federal Reserve’s Office of Inspector General (“OIG”) issued a report on the CFPB’s process for issuing Civil Investigative Demands (“CID”). The OIG found that the CFPB “generally complied” with requirements for issuing CIDs, with two exceptions. First, the CFPB failed to use notifications of purpose that adequately informed recipients about the nature of the investigation. Second, the CFPB failed to keep complete organized records of challenges to CIDs.

First, the OIG found that the CFPB’s internal policy manual encouraged investigators to “describe the nature of the conduct and the potentially applicable law in very broad terms.” Investigators apparently told the OIG that the notifications of purpose must be “necessarily broad.” This, they said, is to allow the investigation to “develop over time.” The OIG found that such notifications of purpose might “increase the risk that the language in the CID’s [] notification of purpose does not comply with [] case law.” Such notifications “may [also] limit the recipient’s ability to understand the basis for requests and thereby heighten the risk that the CID may face a legal challenge. . . .” These findings are not new. As we mentioned earlier this year, the D.C. Circuit recently affirmed a lower court’s determination that a CID was invalid because the notification of purpose was impermissibly vague. The OIG noted that the CFPB took steps to correct this deficiency. It found that those steps effectively cured the problem.

Second, the OIG found that the CFPB could do a better job at records management. It found that the CFPB maintained only decentralized records of CID challenges and lacked a centralized record-keeping system. In reaching this conclusion, the OIG noted that “The lack of a centralized record of all petitions and supporting documents may have contributed to the Office of the Executive Secretariat’s delay in responding to our request for the number of petitions filed to date.” The decentralized record-keeping issue is relevant to the public and the industry because the CFPB posts CID challenges on its website. The OIG noted that the CFPB took steps to centralize its record-keeping. It indicated, however, that further follow-up was needed to verify that the new system addressed the issue.

In another recent defeat for the CFPB, a California federal district court refused to award restitution sought by the CFPB in its lawsuit filed in May 2015 against two related companies offering a biweekly mortgage payment program and their individual owner.  The CFPB’s complaint 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 the payment program and the savings consumers could achieve through the program.  (Earlier this month, a Minnesota federal district court dismissed the CFPB’s Regulation E claims in a lawsuit targeting a bank’s overdraft protection program.  Last month, a federal district court in Atlanta sanctioned the CFPB for its conduct in connection with the defendants’ depositions of CFPB witnesses by striking four counts from the CFPB’s complaint, resulting in the dismissal from the case of the defendants who sought the sanctions.)

In an opinion and order issued following a seven-day bench trial, the California federal district court found that the CFPB had shown that some, but not all, of the marketing statements made by the biweekly mortgage payment companies were false or misleading and constituted deceptive practices that violated the CFPA’s UDAAP prohibition.  The CFPB had asked the court to order nearly $74 million in restitution, representing the revenue earned by the companies (less refunds) from the setup fee charged by the companies to all consumers who participated in the program during the relevant time period.  The court noted that the CFPB’s rationale for selecting refund of the setup fee as an appropriate remedy was that, in the CFPB’s view, “the setup fee effectively represents the purchase price of the financial services product, which consumers were misled into purchasing–even assuming the setup fee itself was adequately disclosed.”  To the extent restitution was not paid, the CFPB sought disgorgement from the companies’ owner of approximately $33 million, representing shareholder distributions he received during the relevant period.

The court concluded that the CFPB had failed to show that restitution of all customers’ setup fees was appropriate.  According to the court, the CFPB had not proved that “defendants engaged in the type of fraud commonly connoted by the well-worn phrase ‘snake oil salesmen.’  [The CFPB has] not shown, and could not show, that the [payment program] never provides a benefit to consumers, or that no fully-informed consumer would ever elect to participate in the program.”  The court also observed that the CFPB had not shown that the setup fee itself was not adequately disclosed, some of the statements found to constitute misrepresentations or omissions did not apply to all customers, and the only misrepresentation affecting all customers was literally true.  Because no restitution was awarded, the court also did not order disgorgement from the companies’ owner.

While the court did award the CFPB approximately $7.9 in civil money penalties, it 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.  The penalty amount was based on the CFPB’s request for the CFPA’s maximum first tier penalty of $5,000 per day for the relevant period.  Although it noted that the CFPB may have “only sought first tier penalties because it believed the restitutionary award would be large,” the court determined that nevertheless “under all the circumstances that penalty figure is appropriate.”

The court also noted that because there was evidence showing that the defendants “took affirmative steps such as training, quality control, and seeking legal counsel, in an effort to stay on the right side of the line,” the imposition of a penalty at the higher tiers for reckless or knowing violations was not warranted.  It is notable that the penalty was computed using the time period, rather than on a “per violation” basis, which we have encountered in our interactions with the CFPB.  The Dodd-Frank Act, of course, refers to the time period of the violation, but the CFPB has frequently taken the position that what the statute really means is “per violation per day.”  In this instance, however, the CFPB appears to have hewed more closely to the statutory language.

It is also notable that in this case the CFPB limited the start of the “look back” period for restitution and civil money penalties to July 21, 2011 (the Dodd-Frank Act “designated transfer date”), thereby tacitly conceding no retroactive application of the CFPA.  However, it has been our experience that during settlement negotiations, the CFPB will often seek redress for alleged violations that occurred before the designated transfer date.

 

 

 

This past January, the CFPB filed a lawsuit against TCF National Bank in Minnesota federal district court that alleged that the bank, in connection with offering overdraft services, violated the Consumer Financial Protection Act’s UDAAP prohibition and Regulation E (which implements the Electronic Funds Transfer Act).  Earlier this month, the district court granted in part TCF’s motion to dismiss the CFPB’s amended complaint and dismissed with prejudice the CFPB’s Regulation E claims.  This opinion represents a serious setback for the CFPB (1) specifically in connection with other similar overdraft protection cases in which the CFPB has alleged that a bank’s opt-in procedure violated Regulation E, and (2) generally in connection with a wide variety of cases in which the CFPB is seeking to recover damages and civil money penalties for alleged CFPA violations that predate July 21, 2011.

Although it was undisputed that TCF had provided the opt-in notice required by Regulation E, the CFPB alleged that TCF engaged in abusive and deceptive practices in connection with enrolling new customers in overdraft services and that it did not comply with the Regulation E requirements to provide a “reasonable opportunity” for customers to consent to overdraft services and to obtain the customer’s affirmative consent.

The court was unwilling to dismiss the CFPB’s UDAAP claims because it could not conclude that “the Bureau failed to plausibly allege abusive or deceptive conduct simply because the required notice was provided at some point during the account-opening process.”  However, the court would not allow the CFPB to assert UDAAP claims arising before July 21, 2011 (the CFPA’s “designated transfer date”) using “a type of continuing-violation theory.”  The court observed that “accepting the Bureau’s argument theoretically could render unlawful every account opening ever conducted by TCF, since some of them occurred after the CFPA’s effective date.”

In dismissing the CFPB’s Regulation E claims, the court rejected the CFPB’s attempt to transform conduct that allegedly violated the CFPA into Regulation E violations.  According to the court, while the CFPA broadly attaches to abusive or deceptive practices, “Regulation E, on the other hand, specifies with almost surgical precision the information banks must convey to consumers in connection with overdraft services—a description of the services, the right to opt-in (or not) and so on—and the ways in which they may obtain consumers’ consent.”

The court determined that Regulation E’s “reasonable opportunity” requirement “concerns only the manner in which consent may be obtained, and nothing more.”  In the court’s view, Regulation E’s intent was “to delineate specific information banks must provide to customers, not to more broadly prevent misleading or deceptive conduct in connection with the opt-in decision—the purview of the CFPA.”  Because the amended complaint did not allege that TCF failed to provide reasonable or appropriate means for consumers to provide consent, the court concluded that the CFPB’s “reasonable opportunity” claim failed.

The court also characterized the CFPB’ claim that customers failed to “affirmatively consent” because they did not understand what they were agreeing to as an attempt to “squeeze the CFPA’s broader proscriptions against misleading conduct into [Regulation E].”  The court noted that the amended complaint contained no plausible allegation that TCF failed to “actually obtain” new or existing customers’ consent to overdraft services. (emphasis provided). Calling this deficiency “fatal,” the court observed that Regulation E “requires a bank to obtain ‘affirmative consent’ and nothing more, and it is not infused with the CFPA’s gloss of preventing ‘abusive’ or ‘deceptive’ conduct.  By the Bureau’s reckoning, it would not be enough to obtain a consumer express (or ‘affirmative’) consent, but rather a bank such as TCF would be required to obtain the customer’s informed consent, lest it violate Regulation E.” (emphasis provided).

Last month, the CFPB issued another report on checking account overdraft services and four one-page prototype model forms to replace the current Regulation E model form for banks to use to disclose overdraft fees and obtain a consumer’s consent to overdraft services.  In its Spring 2017 rulemaking agenda, as it did in its Fall 2015 agenda and Fall and Spring 2016 agendas, the CFPB stated that it “is continuing to engage in additional research and has begun consumer testing initiatives related to the opt-in process.”

In an unusual procedural move last week in the RD Legal Funding case about which we have previously blogged, SDNY Judge Loretta Preska (the judge presiding over the CFPB’s lawsuit against RD Legal Funding) has referred to EDPA Judge Anita Brody the question of whether the NFL Concussion Litigation settlement agreement forbids assignments of settlement benefits. Judge Brody has been presiding over the multidistrict litigation for over five years and is currently overseeing the implementation of the settlement. Within the Order, Judge Preska noted “[t]his case presents an unusual situation in which the Defendants’ underlying conduct is intertwined with an MDL class action settlement in another court,” and stated the referral “ensures uniformity of adjudication with a single ruling that will apply not only to the Defendants in this action but also to other potential lenders to class members who might assert the same defense[.]” The referral had been requested by the NFL Concussion Litigation Co-Lead Class Counsel, Christopher Seeger.

In related news, earlier this week Judge Brody granted a request from Seeger to compel several entities to produce (1) a list of all retired NFL players with whom the entities communicated, (2) a list of all retired NFL players with whom the entities entered into agreements related to the NFL Concussion Settlement, and (3) a copy of any agreement related to the settlement. However, Judge Brody denied Seeger’s request to compel production of similar information from RD Legal Funding.

On September 5, 2017, the CFPB entered into a consent order with Zero Parallel, LLC (“Zero Parallel”), an online lead aggregator based in Glendale, California. At the same time, it submitted a proposed order in the U.S. District Court for the Central District of California, where it is litigating with Zero Parallel’s CEO, Davit Gasparyan. Zero Parallel and Gasparyan agreed to pay a total of $350,000 in civil money penalties to settle claims brought by the CFPB.

In the two actions, the CFPB claimed that Zero Parallel, with Gasparyan’s substantial assistance, helped provide loans to consumers which would be void under the laws of the states in which the consumers lived. Zero Parallel allegedly facilitated the loans by acting as a lead aggregator. In that role, Zero Parallel collected information that consumers entered into various websites indicating that they were interested in taking out payday or installment loans. Zero Parallel then transmitted consumers’ information to various online lenders which evaluated the consumers’ information. The lenders then decided whether they wished to make the loans. If they did, the lenders purchased the leads from Zero Parallel and interacted directly with consumers to complete the loan transactions. (More on the lead generation process in our previous blog postings.)

In some cases, the lenders who purchased the leads offered loans on terms that were prohibited in the states where the consumers resided. The CFPB claims that such loans were therefore void. Because Zero Parallel allegedly knew that the leads it sold were likely to result in void loans, the CFPB alleged that Zero Parallel engaged in abusive acts and practices. Under the consent order, and the proposed order, if it is entered, Zero Parallel will be prohibited from selling leads that would facilitate such loans. To prevent this from happening, the orders require Zero Parallel to take reasonable steps to filter the leads it receives so as to steer consumers away from these allegedly void loans.

The CFPB also faulted Zero Parallel for failing to ensure that consumers were adequately informed about the lead generation process. This allegedly caused consumers to get bad deals on the loans they took out.

Consistent with our earlier blog posts about regulatory interest in lead generation, we see two takeaways from the Zero Parallel case.  First, the CFPB remains willing to hold service providers liable for the alleged bad acts of financial services companies to which they provide services. This requires service providers to engage in “reverse vendor oversight” to protect themselves from claims like the ones the CFPB made here.  Second, the issue of disclosure on websites used to generate leads remains a topic of heightened regulatory interest. Financial institutions and lead generators alike should remain focused such disclosures.

A federal district court in Atlanta has granted the defendants’ motions for Rule 37 sanctions against the CFPB for its conduct in connection with the defendants’ depositions of CFPB witnesses.  To sanction the CFPB, the court struck four counts from the CFPB’s complaint, and with no claims remaining against them, the court dismissed the defendants who sought the sanctions from the case.

The underlying case is a CFPB enforcement action filed in April 2015 targeting an alleged debt collection scam that named as defendants not only the debt collectors and their individual principals but various companies alleged to have been “service providers” to the collectors, including payment processors.  The CFPB claimed that the payment processors were subject to its enforcement authority as both “covered persons” and “service providers” under the CFPA.

The CFPB’s complaint alleged that the debt collectors, using information purchased from debt and data brokers, made phone calls to consumers in which they threatened arrest or notice to a consumer’s employer unless the consumers agreed to settle debts falsely claimed to be owed.  The CFPB claimed that the payment processors facilitated the alleged scheme by enabling the debt collectors to accept credit and debit card payments.  According to the complaint, the processors engaged in deficient underwriting when they agreed to provide services for the debt collectors and failed to appropriately monitor the debt collectors’ accounts, including by ignoring signs that the debt collectors were committing fraud, such as high chargeback volumes.

The payment processor defendants argued that the CFPB had not presented a knowledgeable witness because its designated witness relied heavily on various “memory aids” and was not prepared to testify as to any exculpatory facts.  The court agreed, characterizing the “memory aids” used by the CFPB’s witness as “scripts” and finding that “the witness was hardly able to offer any testimony beyond what he read off the memory aids.  And…the readings were often unrelated to the question asked.”  According to the court, by displaying an inability to answer follow-up questions or stray from the memory aids, the CFPB’s witness had failed to abide by instructions given by the court that the witness be able “to provide a ‘human touch’ by responding to Defendants’ follow-up questions.”

The court also found that the position taken by the CFPB’s witness that he was unable to identify any exculpatory facts was not reasonable and reflected an unwillingness to comply with the court’s instructions that the CFPB be prepared to testify as to any facts “it could reasonably identify as exculpatory.”  The court found the CFPB’s insistence that it could not find any exculpatory evidence to also reflect “a bad faith attempt to frustrate the purpose of the Defendants’ depositions” and concluded that such conduct amounted to a failure to present a knowledgeable witness.

As their second argument in support of sanctions, the payment processors argued that the CFPB had improperly relied on privilege objections to prevent its witness from answering questions about the factual bases of the CFPB’s claims.  In particular, the processors pointed to the CFPB’s refusal to answer on the basis of work product questions regarding the facts on which the CFPB was relying to establish its claim that the defendants either knowingly or recklessly disregarded unlawful conduct engaged in by the debt collector defendants.

The court found that the CFPB’s continued assertion of privilege objections showed “blatant” and “willful” disregard for the court’s instructions that the CFPB answer questions regarding facts within its knowledge supporting the CFPB’s claims of knowledge or recklessness.  In the court’s view, the CFPB had “put up as much opposition as possible at every turn” to the court’s instruction that it “needed to produce a witness prepared to apprise the Defendants of the facts they would face at trial.”  The court observed that the CFPB’s opposition took two forms: (1) “to bury the Defendants in so much information that it cannot possible identify, with any reasonable particularity, what supports the CFPB’s claims,” and (2) “to assert privilege objections to questions that the Court has repeatedly ordered to be answered.”

Concluding it was not “optimistic that reopening the depositions would be fruitful” in light to the CFPB’s pattern of conduct, the court struck the four counts of the complaint containing the CFPB’s UDAAP and “substantial assistance” claims against the payment processors.  Having stricken all of the CFPB’s claims against them, the court then dismissed these defendants from the case.

We see several significant takeaways from the court’s ruling.  First, it will likely serve as an additional factor to encourage financial services companies to be more willing to litigate CFPB enforcement claims.  We have seen an increase in parties litigating cases with the CFPB recently, and in our view, the success of the defendants in this case will further encourage parties to believe that successfully defending a CFPB enforcement action is a real possibility.

Second, in contested cases, the ruling will provide a road map for parties to seek discovery from the CFPB about the factual basis for its claims and the information discovered during its investigation.  In this sense, the decision really illustrates the level playing field that the CFPB finds itself on when it litigates a case in court, which is very different from the one-way discovery that occurs in connection with a civil investigative demand.

Third, we would hope that the decision will change the CFPB’s approach to participating in discovery in litigation – to be more open about the basis for its claims – in order to prevent its enforcement cases from being disposed of in the manner that played out here, and to carry its motto of being a transparent agency through to its litigated matters.

 

RD Legal Funding, LLC is seeking to dismiss the lawsuit filed against it, two of its affiliates, and their individual principal in February 2017 by the CFPB and the New York Attorney General in a NY federal district court alleging that a litigation settlement advance product offered by the defendants is a disguised usurious loan that is deceptively marketed and abusive.  In particular, the complaint alleged that the transactions were falsely marketed as assignments rather than loans and violated New York usury laws. The complaint also alleged that the transactions could not be assignments because the underlying settlements expressly prohibited assignment of claimant recoveries.

In the complaint, both the CFPB and the NY AG asserted deception and abusiveness claims under Sections 1031 and 1042 of Dodd-Frank.  In addition to alleged violations of state civil and criminal usury laws (which were the predicate for one of the CFPB’s deception claims), the NY AG’s state law claims included alleged violations of NY’s UDAP statute.

In their motion to dismiss, the defendants argue that the court should strike down the CFPB as a whole (rather than make the Director removable without cause as the D.C. Circuit panel did in PHH) because its structure is unconstitutional.  The defendants’ other arguments for dismissal include: (1) the court does not have jurisdiction under the CFPA because the defendants’ transactions did not involve an extension of credit and therefore none of the defendants are “covered persons” under the CFPA, (2) the complaint’s deceptive conduct claims fail to meet the heightened pleading standard for claims based on allegations of fraud, (3) the complaint fails to allege abusive conduct because the defendants’ representations about the nature of the transactions were truthful and consumers were encouraged to seek professional advice before entering into a transaction, and (4) state usury laws do not apply because the transactions were sales.

In addition to defending the constitutionality of the CFPB’s structure in their opposition to the motion to dismiss , the CFPB and NY AG assert that the defendants are “covered persons” under the CFPA because they offered or extended credit through the transactions and that all counts in the complaint state valid claims for relief (for reasons that include the argument that heightened pleading standards for fraud claims do not apply to consumer protection claims under the CFPA or NY law.)

When the complaint was filed, the CFPB and the NY AG issued press releases and prepared remarks in which they referenced transactions entered into by the defendants with former NFL players who were entitled to payments from the settlement of the NFL concussion litigation.  Class counsel for the plaintiff settlement class in the concussion litigation filed a letter with the NY district court seeking permission to file a memorandum of law as amicus in support of the CFPB.  In their proposed memorandum, they assert that their participation is intended to address the defendants’ “erroneous” position that the settlement agreement in the concussion litigation permits the assignment of the settlement’s monetary awards.

A request to file a memorandum of law as amicus in support of the CFPB was also filed by the American Legal Finance Association (ALFA), which describes itself as a trade association that represents the country’s leading consumer legal funding companies.  In its memorandum, ALFA indicates that, due to the possibility that a holding in the case could impact the entire legal funding industry, its participation is intended to “assist the Court with expertise not otherwise represented by the parties” regarding the differences between the pre-settlement legal funding transactions offered by ALFA members and the defendants’ transactions.

The defendants opposed the requests of class counsel and ALFA to participate as amici and while the case docket indicates that the court granted permission to ALFA to file its amicus memorandum, it does not indicate the disposition of class counsel’s request.

On November 21, 2017, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar: Litigation Funding: Risks and Rewards.  Click here to register.

 

The Minnesota Attorney General announced that she has filed a lawsuit in state court against two pension advance companies.

According to the AG’s press release, the companies often solicited borrowers through their own websites or websites of “lead generators” who marketed “pension loans” or “loans that can fit your needs.”  The press release states that the transactions required military veterans and senior citizens to assign portions of their monthly pension payments for up to ten years in exchange for much smaller cash amounts (usually less than $5,000) on which the AG claimed the companies typically charged annual percentage rates of 200 percent.

The lawsuit is reported to allege that the companies violated Minnesota lending laws by making loans to Minnesota borrowers without being licensed as a lender and sought to evade Minnesota law by falsely characterizing the transactions as pension “purchase agreements” rather than loans.

In February 2017, the CFPB and the New York Attorney General filed a lawsuit in which they alleged that a litigation settlement advance product offered by the defendant was a usurious loan that was deceptively marketed as an assignment.  In August 2015, the CFPB and the New York Department of Financial Services filed a lawsuit against two pension advance companies in which the CFPB and NYDFS made similar allegations regarding the advances made by the companies.

The Minnesota AG’s lawsuit and the CFPB/NY lawsuits not only indicate that pension advance companies and litigation funding companies have become targets of regulatory enforcement actions, but also suggest that merchant cash advance providers and other finance companies whose products are structured as purchases rather than loans could face heightened scrutiny from state and federal regulators.