The CFPB and New York Attorney General have filed their opening briefs in their appeals to the Second Circuit in RD Legal Funding.  The CFPB filed an appeal 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.  The NYAG filed an appeal 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.)

Both the CFPB and NYAG argue that the CFPB’s structure is constitutional under controlling U.S. Supreme Court precedent and that if the Second Circuit determines that the Dodd-Frank Act’s for-cause removal provision that limits the President’s authority to remove the CFPB Director is unconstitutional, it should sever the provision rather than strike all of Title X as Judge Preska did.

The NYAG makes the following two additional arguments:

  • Even if the Second Circuit concludes that the for-cause removal provision cannot be severed from Title X, it should not invalidate Dodd-Frank Sections 1041 or 1042.  As noted above, Section 1042 authorizes state AGs to enforce the CFPA’s UDAAP prohibition.  Section 1041 preserves state consumer protection laws to the extent they are not inconsistent with the  provisions of Title X.  The NYAG argues that these provisions are “wholly unrelated” to the for-cause removal provision.
  • Even if the Second Circuit concludes that the CFPB’s structure is unconstitutional and strikes Title X in its entirety, the Second Circuit must nevertheless reverse the district court’s dismissal of the NYAG’s state law claims for lack of subject matter jurisdiction.  According to the NYAG, the district court has jurisdiction because such claims involve an embedded federal issue, namely whether the federal Anti-Assignment Act (AAA) voids only the assignment of a substantive claim against the United States, or whether it also voids the assignment of the proceeds of such a claim in a private contract.  (RD Legal Funding purchased at a discount, for immediate cash payments, benefits to which consumers were ultimately entitled under the September 11th Victim Compensation Fund of 2001 (VCF).  The district court concluded that the assignments of VCF benefits were void under the AAA.)

The CFPB’s defense of its constitutionality is at odds with the position of the Department of Justice.  In opposing the petition for certiorari filed by State National Bank of Big Spring (which the Supreme Court denied), the DOJ argued that while it agreed with the bank that the CFPB’s structure is unconstitutional and the proper remedy would be to sever the Dodd-Frank for-cause removal provision, the case was a poor vehicle for deciding the constitutionality issue.  If the CFPB’s structure is found to be unconstitutional, and severing the for-cause removal provision is determined to be the appropriate remedy, a Democratic President might have the ability to remove Ms. Kraninger without cause before the end of her five-year term.

The Bureau’s constitutionality is also currently before two other circuits, the Ninth and Fifth Circuits.  On January 9, 2019, the Ninth Circuit heard oral argument in Seila Law.  On March 12, 2019, the Fifth Circuit heard oral argument in All American Check Cashing’s interlocutory appeal.

 

 

The CFPB has filed a request in the District Court for the Southern District of New York to enforce a civil investigative demand (“CID”) against the Law Offices of Crystal Moroney, P.C. (“LOCM”), a debt collection law firm located in New City, New York, continuing under Director Kraninger the CFPB’s pursuit of law firms despite the fact that such entities are generally exempt from the CFPB’s enforcement authority under section 1027(e) of Dodd-Frank.

Originally issued on June 23, 2017, the CID was part of the CFPB’s investigation into LOCM’s potential violations of the Fair Debt Collection Practices Act and the Fair Credit Reporting Act. It sought answers to 21 interrogatories, seven requests for written reports, 15 requests for documents, and four requests for other “tangible things” by July 21, 2017. While LOCM initially provided responses to at least some of the CFPB’s requests and engaged in discussions with respect to potential modifications and extensions to the CID, the CFPB now alleges that LOCM refuses to answer the remaining requests “based on its interpretation of certain rules of professional responsibility” for New York and New Jersey. The exact nature of the requested information is unclear, but the CFPB further alleges that it relates to telephone calls, written correspondence with consumers, credit reporting disputes, and LOCM’s contracts with its clients.

Unsurprisingly, the CFPB’s filing does not attempt to refute LOCM’s assertion that it is prevented from responding due to its professional obligations. It instead uses formulaic language declaring its “power of inquisition” where “the investigation is being conducted for a legitimate purpose, that the inquiries may be relevant to that purpose, that the information sought is not already within the [its] possession, and that [applicable] administrative steps [are followed].

While LOCM’s response is likely to provide additional detail as to the ethical defenses on which it relies, we have long been concerned with the potential for the CFPB to use its broad CID powers to infringe on professional obligations such as attorney-client privilege. This filing is a keen reminder to financial institutions of that risk.

A letter recently sent by House Financial Services Committee Chairwoman Maxine Waters to CFPB Director Kathy Kraninger will undoubtedly be followed in the coming months by many similar letters to the CFPB from the Committee’s new Democratic leadership.

In the letter, Chairwoman Waters raises concerns “about how the Consumer Bureau is exercising its enforcement activity, especially how it is determining whether to require companies to pay redress to consumers that have been harmed.”  She highlights three recent CFPB settlements that did not provide for any consumer redress, including its settlements with Sterling Jewelers and NDG Financial, and comments that “the fact that two of the three settlements involve online lending raises serious concerns about the Consumer Bureau’s commitment to protecting America’s consumers from predatory online lending practices.”

The letter asks the CFPB to provide various records related to the settlements, including “all documents and communications referring to or related to the issue of restitution” in each of the settlements.

 

The CFPB announced that it has entered into a settlement with the owners of payday loan retail outlets that operated under the name “Cash Tyme” in seven states to resolve alleged violations of the Consumer Financial Protection Act, the Gramm-Leach-Bliley Act/ Regulation P, and the Truth in Lending Act/ Regulation Z.  The consent order requires Cash Tyme to pay a civil money penalty of $100,000.

The CFPB found that Cash Tyme had engaged in unfair acts or practices in violation of the CFPA by conduct that included:

  • Having inadequate processes to prevent ACH debits of accounts of customers who no longer owed the amounts debited or to accurately and promptly identify and refund overpayments, with such conduct having likely resulted in NSF or overdraft fees to customers whose accounts were wrongfully debited
  • Routinely making calls to third parties to collect debts, including to a customer’s employer, supervisor, and personal references (with some of such calls placed despite Cash Tyme having received do-not-call requests)

The CFPB found that Cash Tyme had engaged in deceptive acts or practices in violation of the CFPA by conduct that included:

  • Using information about third-party references provided on loan applications for marketing purposes where the “net impression of the loan applications” was that such information would only be used for verification purposes in connection with the loan being applied for
  • Advertising unavailable services, including check cashing, phone reconnections, and home telephone connections, on the storefronts’ outdoor signage

The CFPB’s conclusion that Cash Tyme violated GLBA/Reg P was based on its finding that Cash Tyme had failed to provide initial privacy notices to consumers who had paid off a loan in full and subsequently took out a new loan.  According to the CFPB, such consumers, when taking out the new loan, were establishing a new customer relationship with Cash Tyme that required a new initial privacy notice.

The Bureau’s conclusion that Cash Tyme violated TILA/Reg Z was based on its findings that Cash Tyme had failed to include a payday loan database fee charged to Kentucky customers in the APR it disclosed in loan contracts and advertisements, rounded APRs to whole numbers in advertisements, and disclosed an example APR and payment amount that was based on an example term of repayment without disclosing the corresponding repayment terms used to calculate that APR.

In addition to payment of the $100,000 civil money penalty, the consent order requires Cash Tyme to conduct an audit to identify any consumers who were overcharged or overpaid as a result of improper ACH debits and, as of the date the consent order is issued, had not received a refund from Cash Tyme in amount equal to or greater than the amount of the overcharge or overpayment.

 

 

The CFPB has entered into a proposed settlement with a group of corporate and individual defendants who were alleged to have engaged in unlawful conduct in connection with offering “short-term loans to consumers located in the United States through a network of affiliated companies located in Canada and Malta.”

The settlement is intended to resolve a lawsuit filed by the CFPB against the defendants in 2015 in a New York federal district court that alleged the defendants made payday loans to residents of states in which the loans were void under state law because the defendants charged interest rates that exceeded state usury limits or the defendants failed to acquire required licenses.  The CFPB claimed that the defendants engaged in unfair, deceptive, or abusive conduct in violation of the CFPA through actions that included: (1) misrepresenting that consumers were obligated to pay debts that were void under state law and that the loans were not subject to U.S. federal or state law, and (2) misrepresenting that the defendants would sue consumers who did not pay or take other actions they did not intend to take.  The complaint also alleged that the defendants violated the Credit Practices Rule by conditioning the loans on irrevocable wage assignments.

The proposed Stipulated Final Judgment and Order sets forth the CFPB’s findings that the defendants had engaged in the alleged unlawful conduct and permanently bars the defendants from engaging in the following conduct:

  •  “advertising, marketing, promoting, offering, originating, servicing, or collecting” a consumer loan made to a U.S. resident, assisting others in such activities, or receiving any remuneration or other consideration from providing service to, or working in any capacity for, anyone engaged in or assisting with such activities
  • collecting on or selling any loans made to a U.S. consumer before the date the Order is entered
  • disclosing, using, or benefitting from information regarding U.S. consumers obtained before the date the Order is entered

The proposed settlement provides for no monetary penalty, something that has not gone unnoticed by consumer advocates.

The CFPB has published two final rules in today’s Federal Register, one dealing with civil penalty adjustments and the other with allowable charges for FCRA disclosures.  Both rules are effective immediately.

Civil penalty adjustments.  The CFPB’s final rule finalizes an interim final rule (IFR) it published in November 2016 to create 12 C.F.R. Part 1083 which sets forth the maximum amounts as adjusted annually for civil penalties within the Bureau’s jurisdiction.  It also finalizes the CFPB’s October 2018 proposal to add language to Section 1083.1 specifying that the adjusted penalties will apply only to violations that occurred on or after November 2, 2015.  The November 2 date is when the 2015 amendment to the Federal Civil Penalties Inflation Adjustment Act of 1990 requiring federal agencies to make annual adjustments to the civil penalties within their jurisdiction was signed into law.

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 final rule sets forth the adjusted maximum amounts that apply to civil penalties assessed after January 31, 2019.

FCRA disclosures.  The FCRA provides that where a consumer is not entitled to a free disclosure of information in his or her credit file, a consumer reporting agency (CRA) can impose a reasonable charge for disclosing such information up to the maximum amount allowed by the FCRA.  Before Dodd-Frank transferred to the CFPB the FTC’s authority to make annual adjustments to the maximum amount, the FTC made the adjustments by issuing a notice rather than by issuing a rule.  That practice was continued by the CFPB.  The final rule adds a new section (12 CFR Section 1022.41) to Regulation V to codify that the charge imposed by a CRA for a credit file disclosure to a consumer “shall not exceed the maximum allowable charge set by the Bureau” and to add a new appendix (Appendix O) that the CFPB will amend (by notice) each year to indicate the maximum allowable charge for a new calendar year.  The appendix will also provide historical information regarding the maximum allowable charge for prior calendar years.

 

The CFPB announced that it has entered a settlement with Mark Corbett to resolve the Bureau’s allegations that Mr. Corbett violated the Consumer Financial Protection Act in connection with his brokering of contracts providing for the assignment of veterans’ pension payments to investors in exchange for lump sum amounts.  In its press release announcing the settlement, the Bureau stated that its investigation “is being conducted in partnership with the Office of Arkansas Attorney General Leslie Rutledge and the South Carolina Department of Consumer Affairs.”

The findings and conclusions set forth in the consent order state that the following conduct by Mr. Corbett constituted unfair and deceptive acts or practices in violation of the CFPA:

  • Misrepresenting that the transactions were valid and enforceable when they were in fact void because federal law prohibits agreements under which another person assigns the right to receive a veteran’s pension payments and failing to disclose to consumers that the transactions were illegal because of such federal law prohibition
  • Misrepresenting to consumers that the transactions were sales “and not high-interest credit offers”
  • Misrepresenting to consumers the date by which they would receive funds from investors
  • Failing to inform consumers of the interest rates charged on the transactions

The consent order permanently bans Mr. Corbett from brokering, offering, or arranging agreements between veterans and third parties under which the veteran purports to sell a future right to an income stream from the veteran’s pension or assisting others in engaging in such conduct.  Due to his inability to pay, the consent order imposes a civil money penalty of $1.

The CFPB does not articulate the basis for its legal conclusion that the transactions were loans rather than sales and does not identify the states whose laws were purportedly violated.  Perhaps its conclusion rests on the premise that the veterans had an absolute obligation to repay the lump sum amounts, a feature that state law might use to define a loan.  In this regard, we note that the Bureau alleged that the veterans, in exchange for lump sum amounts paid by the investors, “are thereafter obligated to repay a much larger amount by assigning to investors all or part of their monthly pensions or disability payments” and that the veterans “were required to purchase life insurance policies so that, should a veteran die and the income stream stop, the outstanding amount on the contract would still be paid.”

Alternatively, the CFPB might have based its conclusion on the alleged invalidity of the assignments.  This was the principal (if not only) argument for why an assignment of settlement benefits should be recharacterized as a loan that the New York AG and the Bureau successfully asserted in a lawsuit filed against RD Legal Funding under former Director Cordray’s leadership and now on appeal to the Second Circuit.  While the district court’s ruling that the CFPB’s structure is unconstitutional has garnered the most attention, the underlying allegation in the lawsuit, and the principal issue addressed in the district court’s opinion, was a claim that RD Legal’s litigation settlement advance product 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, violated New York usury laws, and could not be assignments because the underlying settlements and/or applicable law expressly prohibited assignment of claimant recoveries.

For some reason, the CFPB and NY AG did not argue in RD Legal Funding, and the court did not determine, that the transactions were loans because payment of settlement benefits to RD Legal was assured.  Rather, the decision was based on the district court’s conclusion that the benefit assignments were void and as a result, the transactions were necessarily disguised loans.  As we observed, the basis for the conclusion that an invalid assignment of assets is necessarily a loan is untethered to the New York definition of usurious loans.

Under former Director Cordray’s leadership, the CFPB also took action against structured settlement and pension advance companies.  The first CFPB enforcement action under former Acting Director Mulvaney’s leadership was also filed against a pension advance company and alleged that the company made predatory loans to consumers that were falsely marketed as asset purchases.  The new consent order indicates that finance companies whose products are structured as purchases rather than loans remain a CFPB focus.  It is a reminder of the need for all players in this space, including litigation funding companies and merchant cash advance providers, to revisit true sale compliance, both in the language of their agreements and in the company’s actual practices.  (While the CFPB’s jurisdiction over small business finance is limited, this is not true of other enforcement authorities, such as state AGs.)

 

The CFPB and New York Attorney General have agreed to a settlement with Sterling Jewelers Inc. of a lawsuit they filed jointly in a New York federal district court alleging federal and state law violations in connection with credit cards issued by Sterling that could only be used to finance purchases made in the company’s stores.  The proposed Stipulated Final Order and Judgment, which requires Sterling to pay a $10 million civil money penalty to the CFPB and a $1 million civil money penalty to the State of New York, represents the second settlement of an enforcement matter announced by the CFPB under Kathy Kraninger’s leadership as CFPB Director.  (In addition to a civil money penalty, the other settlement required the payment of consumer restitution.)

The complaint contains three counts asserted by the CFPB and NYAG alleging unfair or deceptive acts or practices in violation of the Consumer Financial Protection Act based on the following alleged conduct by Sterling:

  • Representing to consumers that they were completing a survey, enrolling in a rewards program, or checking on the amount of credit for which the consumer would qualify when, in fact, either the consumer or a Sterling employee was completing a credit application for the consumer without his or her knowledge or consent
  • Misrepresenting financing terms to consumers, including interest rates, monthly payment amounts, and eligibility for promotional financing
  • Enrolling consumers for payment protection plan insurance (PPPI) without informing them that they were being enrolled or misleading them about what they were signing up for

This alleged conduct is also the basis of two counts alleging state law violations asserted only by the NYAG.

In another count asserted only by the CFPB, Sterling is alleged to have violated TILA and Regulation Z by issuing credit cards to consumers without their knowledge or consent and not in response to an oral or written request for the card.  This alleged TILA/Reg Z violation is also the basis for a count alleging a state law violation asserted only by the NYAG as well as a count alleging a CFPA violation asserted by both the CFPB and NYAG.

In addition to requiring payment of the civil money penalties, the settlement prohibits Sterling from continuing to engage in the alleged unlawful practices and to “maintain policies and procedures related to sales of credit cards and any related add-on products, such as [PPPI], that are reasonably designed to ensure consumer consent is obtained before any such product is sold or issued to a consumer.  Such policies and procedures must include provisions for capturing and retaining consumer signatures and other evidence of consent for such products and services.”  By not requiring consumer restitution, the settlement differs from consent orders entered into by the CFPB under the leadership of former Director Cordray that required restitution by companies that had allegedly enrolled consumers in a product without their consent.

At the end of last week, the CFPB announced that it had entered into a consent order with State Farm Bank, FSB to settle allegations that the Bank violated the Fair Credit Reporting Act, Regulation V, and the Consumer Financial Protection Act in connection with furnishing information to consumer reporting agencies (CRAs ) and obtaining and using consumer reports.  The consent order does not require the Bank to pay any consumer redress or a civil penalty.  The Bank must implement and maintain reasonable written policies, procedures, and processes to address the practices at issue and prevent future violations and must submit a compliance plan to the Bureau designed to ensure that its consumer credit reporting practices comply with applicable federal laws and the terms of the consent order.

The Bureau’s findings set forth in the consent order include the following:

  • The Bank violated the FCRA requirement that consumer reports only be used or obtained for a permissible purpose.  It obtained credit reports of consumers who were not seeking an extension of credit or otherwise involved in a credit transaction or without some other permissible purpose.  In some instances such violations resulted from the Bank’s agents and employees initiating credit applications for the wrong consumer or initiating credit applications for consumers for the purpose of soliciting those consumers.
  • The Bank violated the FCRA prohibition on furnishing inaccurate information to a CRA if the furnisher knows or has reasonable cause to believe the information is inaccurate by furnishing account information on the wrong consumer, reporting current accounts as delinquent, and reporting inaccurate past due amounts and payment histories.  The Bank knew or had reasonable cause to believe the furnished information was inaccurate because it was in direct conflict with information in the Bank’s credit applications, loan files, or payment system of record.
  • The Bank violated the FCRA requirement for a furnisher to promptly notify the CRA and provide corrections to make furnished information complete and accurate that the furnisher has determined to be incomplete or inaccurate.  The Bank took several months to correct or complete furnished information after the Bank had determined such information was incomplete or inaccurate or when consumers had made repeated requests for corrections.
  • The Bank violated the FCRA requirement not to furnish information to a CRA that has been disputed by the consumer without notice of the dispute by failing to provide such notice to CRAs.
  • The Bank violated the Regulation V requirement for a furnisher to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of furnished information because the Bank’s policies and procedures were inadequate given the high volume and complexity of its furnishing activities and were not reasonable or appropriate given the nature, size, complexity, and scope of its activities.
  • The Bank’s FCRA and Regulation V violations also constituted CFPA violations.

 

 

 

The CFPB recently filed a complaint and a proposed stipulated final judgment and order to address claims that Village Capital & Investments LLC (Village) engaged in deceptive acts and practices in the solicitation of veterans for mortgage refinance loans to be guaranteed by the Department of Veterans Affairs (VA).

The CFPB asserts that between March 2017 and August 2018 Village employed loan officers in its San Antonio, Texas office who were responsible for making in-home sales presentations to veterans for VA Interest Rate Reduction Refinancing Loans to be made by Village. This type of loan is the VA version of a streamlined refinance loan that is primarily intended to provide a veteran borrower with a lower interest rate and monthly payment. The CFPB states that Village provided the loan officers with marketing materials for the in-home presentations, including a worksheet that would be used to compare the veteran’s current loan with a proposed refinance loan.

The CFPB asserts that that the worksheets were deceptive because they misrepresented the cost savings to the consumer of the refinanced loan by:

  • Inflating the future amount of principal owed under the veteran’s existing mortgage loan by underestimating the proportion of the consumer’s existing monthly payment that is applied to principal.
  • Underestimating the future amount of the monthly payments on the proposed refinance loan by overestimating the term of the loan.
  • Overestimating the total monthly benefit of the proposed refinance loan after the first month.

Without the adjudication of any issue of fact or law, to settle the matter Village agreed to pay $268,869 for the purpose of providing redress to affected consumers, and also agreed to pay a civil penalty of $260,000. Village further agreed not to misrepresent to consumers in connection with the offering of refinance loans (1) the future principal or future monthly payments owed on the consumer’s existing mortgage loan, or (2) the future principal or future monthly payments a consumer would owe on a refinance mortgage loan. Additionally, Village must develop a compliance plan that includes training for loan officers.