The CFPB is asking a Michigan federal district court to hold two companies in contempt for failing to comply with civil investigative demands.  While the CFPB has filed numerous petitions to enforce a CID, the contempt motion is reported to represent the first time that the CFPB has sought to have a CID recipient held in contempt for failing to comply.

In February 2017, the federal district court granted the CFPB’s petitions to enforce the CIDs.  The CIDs had sought information related to agreements of deed offered by the companies.  The companies argued that the CFPB did not have jurisdiction because such agreements are not credit products.  The court ruled that unless the CFPB’s jurisdiction was “plainly lacking,” it was required to enforce the CIDs.  Since there was a “plausible basis” for finding an agreement for deed to be a credit product, the court held that the CFPB had jurisdiction to issue the CIDs and ordered the companies to comply within 30 days.  It thereafter denied the companies’ motion to stay the court’s order enforcing the CIDs pending appeal and gave the companies an additional seven days beyond the 30-day deadline to comply.

Approximately six weeks after the new deadline to comply, the CFPB filed a motion to hold the companies in civil contempt.  In the motion, the CFPB asserted that companies had produced nothing until about two weeks after the extended deadline and then provided “only limited, incomplete responses that are qualified by frivolous ‘general objections’ (some of which were previously rejected by the Court)” and had “yet to produce any documents in response to some requests.”  The CFPB asked the court to impose a daily monetary fine of $5,000 on each company until they had complied with the court’s order.

In opposing the CFPB’s motion, the companies argued that their actions do not rise to the level of contempt.  According to the companies, they “have—and continue to—respond [to the CIDs] in good faith.”  A hearing on the CFPB’s contempt motion has been scheduled for August 23.

 

The CFPB has issued its eleventh Semi-Annual Report to the President and Congress covering the period October 1, 2016 through March 31, 2017.

The 178-page report recycles information from previously-issued CFPB reports and reviews ongoing and past developments, which we have covered in previous blog posts.

By way of aggregate statistics, the report indicates that in the six-month period it covers, CFPB supervisory actions resulted in financial institutions providing more than $6.2 million in redress to over 16,549 consumers.  It also indicates that during that period, the CFPB announced orders in enforcement actions providing for approximately $200 million in total relief for consumers and over $43 million in civil money penalties.  According to the report, the CFPB had 1,671 employees as of March 1, 2017.

While the amounts of consumer relief and civil money penalties are more than the corresponding amounts reported by the CFPB in its last Semi-Annual Report covering the period April 1, 2016 to September 30, 2016 ($40 million and $13.7 million, respectively), the amount of consumer redress from supervisory actions is substantially less than the corresponding amount reported by the CFPB in the prior report.  The prior report indicated consumer redress in supervisory actions of more than $14 million.

 

 

On June 26, 2017, the en banc D.C. Circuit was equally divided on the question of whether SEC administrative law judges (“ALJs”) are “inferior officers.”  This leaves intact the D.C. Circuit panel decision in Lucia which held that SEC ALJs are not officers and do not have to be appointed by the President.  Because SEC ALJs are not appointed that way, a different decision may have called into question virtually every SEC ALJ decision ever issued.

Because it was an SEC ALJ who rendered the initial PHH decision, there was talk that a different decision in Lucia may have given the en banc D.C. Circuit a way to decide the PHH case in PHH’s favor without addressing the constitutional issues surrounding the CFPB’s structure.  Indeed, in its final merits brief at the panel level, PHH raised the same argument at issue in Lucia.  While the panel decision in PHH did not address the issue, in his concurrence, Judge Randolph stated that the problem with the ALJ’s appointment “itself rendered the proceedings against petitioners unconstitutional.”  It may be that the Lucia issue ends up being decided in the PHH case, which has an eleven-judge panel that cannot split evenly.

The CFPB announced that it had simultaneously filed two complaints and corresponding proposed stipulated final judgments in a California federal district court in actions against four credit repair companies and three individuals for alleged violations of the Consumer Financial Protection Act (CFPA) and Telemarketing Sales Rule (TSR).  The judgments would require the defendants in one of the actions to pay a civil money penalty of $1.53 million and the defendants in the other action to pay $500,000 in disgorgement to the CFPB with the disgorgement payments to be deposited in the U.S. Treasury.

According to the complaints, certain of the named defendant companies in one of the complaints entered into an agreement with the named defendant company in the other complaint (whose name was Park View Law (PVL)) to provide credit repair services under PVL’s name.  The CFPB alleged that that the defendants violated the CFPA and TSR through conduct that included:

  • Charging unlawful advance fees before providing consumers with a credit report showing that the promised results were achieved
  • Failing to clearly disclose that the money-back guarantee offered by the companies was subject to significant limits, such as requirements for a consumer to pay for at least six months of services to be eligible for the guarantee and, even if there was no improvement in the consumer’s credit score, establish that the companies’ services had not resulted in the removal of at least one disputed item from the consumer’s credit report within six months.
  • Misrepresenting the effectiveness of their services by creating the impression that their services would, or likely would, result in the removal of material negative entries on a consumer’s credit report or a substantial increase in a consumer’s credit score when the companies lacked a reasonable basis for making such claim

In addition to requiring the payment of a civil money penalty or disgorgement, the proposed final judgments would bar all defendants from doing business in the credit repair industry for five years.

In its press release about the new actions, the CFPB referenced the lawsuit it filed in the same federal district court in September 2016 against Prime Marketing Holdings, LLC (PMH), a credit repair company that allegedly partnered with PVL.  The CFPB has alleged that PMH engaged in similar violations of the CFPA and TSR.

This past November, the district court ruled that the CFPB’s TSR claims that relied on alleged misrepresentations were subject to the heightened pleading requirements for fraud claims under Federal Rule of Civil Procedure 9(b) and dismissed them without prejudice.  This past January, ruling on PMH’s motion to dismiss the CFPB’s Amended Complaint, the court found that the CFPB had satisfied Rule 9(b) for two of the previously dismissed TSR claims.  However, it again dismissed the CFPB’s TSR claim based on PMH’s alleged failing to disclose truthfully, in a clear and conspicuous manner, all material terms and conditions regarding a refund or cancellation of services before accepting payment for services.  According to the court, the CFPB had failed to plead facts with sufficient particularity under Rule 9(b) indicating that PMH had ever accepted payment before providing consumers with the terms of its money-back guarantee.

The CFPB filed a Second Amended Complaint in February 2017 to which PMH has filed an answer.  The court has scheduled a jury trial for February 2018.

 

On Monday, the U.S. Supreme Court denied the petition for certiorari in CFPB v. Chance Edward Gordon, a case filed by the CFPB in 2012 that alleged the defendant had duped consumers by falsely promising loan modifications in exchange for advance fees and, in reality, did little or nothing to help consumers.  The CFPB charged the defendant with violations of the Consumer Financial Protection Act and Regulation O, the Mortgage Assistance Relief Services Rule.

As part of his affirmative defenses to the CFPB’s complaint, the defendant included a challenge to President Obama’s recess appointment of Director Cordray.  He argued that because Mr. Cordray was not validly appointed as CFPB Director, the CFPB’s enforcement action was invalid because the CFPB had no authority over non-banks in the absence of a validly-appointed Director.  The district court did not address the merits of the defendant’s recess appointment argument but found that he had violated the CFPA and Regulation O and ordered approximately $11.4 million in disgorgement and restitution.

In its opinion affirming the district court’s finding of liability, the Ninth Circuit ruled that Director Cordray’s invalid recess appointment did not render the enforcement action against the defendant invalid because Director Cordray’s subsequent valid appointment coupled with his notice ratifying the actions he took as Director while serving as a recess appointee cured any initial constitutional deficiencies.  The petition for certiorari presented the questions of whether the recess appointment rendered the enforcement action invalid as well as whether it deprived the court of Article III jurisdiction to hear the enforcement action.

We were not surprised by the Supreme Court’s denial of the certiorari petition since there is currently no clear circuit split on the issue of how ratification affects a federal official’s past actions.  In addition, Gordon did not present the separation of powers issue involved in PHH.  Unlike that issue which could have far-reaching consequences, the ratification issue only impacts actions that pre-date Director Cordray’s subsequent valid appointment.  As a result, if after the D.C. Circuit issues its en banc decision in PHH a certiorari petition is filed that presents the separation of powers issue, there is a much greater likelihood that the Court will grant the petition.

 

A group of Democratic Senators have introduced a bill, the “Military Consumer Protection Act” (S. 1565), that would amend the Consumer Financial Protection Act (CFPA) to include various sections of the Servicemembers Civil Relief Act (SCRA) within the list of laws defined by the CFPA as “enumerated consumer laws.”

The “enumerated consumer laws” are included within the CFPA’s definition of “Federal consumer financial laws.”  Section 1054 authorizes the CFPB to bring a civil action against a person who violates a “Federal consumer financial law.”  As a result, the bill would appear to give the CFPB direct SCRA enforcement authority.  While the CFPB currently examines supervised entities for SCRA compliance, it refers SCRA matters to the DOJ for enforcement.

The bill would appear to give the CFPB authority to enforce the following SCRA sections:

  • Section 107. Waiver of rights pursuant to written agreement (except with respect to bailments)
  • Section 108. Exercise of rights under the SCRA not to affect certain future financial transactions (except with respect to insurance)
  • Section 201. Protection of servicemembers against default judgments, which excludes child custody proceedings
  • Section 207. Maximum rate of interest on debts incurred before military service
  • Section 301. Evictions and distress
  • Section 302. Protection under installment contracts for purchase or lease
  • Section 303. Mortgages and trust deeds
  • Section 305. Termination of residential or motor vehicle leases
  • Section 305A. Termination of telephone service contracts

 

 

 

 

We previously reported that the Connecticut Attorney General, on behalf of himself and the Attorneys General of Indiana, Kansas and Vermont (the “state AGs”), had filed a joint motion to intervene in a CFPB enforcement action against Sprint to request a Consent Order modification permitting unused settlement funds to be paid to the National Association of Attorneys General (“NAAG”).  Under the proposed modification, the undistributed settlement funds would be used by NAAG for the purpose of developing the National Attorneys General Training and Research Institute Center for Consumer Protection (“NAGTRI”).

Subsequently, in February 2017, the state AGs and the defendant filed a joint submission seeking to allocate $14 million of the unused settlement funds from the U.S. Treasury to NAAG and to redirect the remaining $1.14 million to a community organization that provides internet access to underprivileged high school students.  The court thereafter directed the CFPB and the DOJ to state, in separate submissions, their positions with respect to the modified proposal to redirect the unused settlement funds.

The CFPB filed what the court characterized as “a gossamer two-page memorandum, modifying its previous position of indifference to one of steadfast opposition to the State AGs’ proposal.”  In a “Statement of Interest of the United States of America,” which the court characterized as “a thoughtful submission,” the DOJ likewise opposed the proposal.  “If NAAG wishes to fund its program with federal dollars,” remarked the DOJ, “it may seek a Congressional appropriation, but no portion of the Redress Amount may be diverted for that purpose.”  Although still advocating for the proposed modification, the defendant “took a more measured tone” in its responsive memorandum, “in essence deferring to the Court on the issue.”  The State AGs filed a responsive memorandum, maintaining what the court characterized as “a full-court press, infusing their brief with a new basis to substantiate their modification request.”

In a well-reasoned Opinion and Order, the court recently granted the joint motion to intervene, and denied the modification request.  The court analyzed the proffered alternative bases for modification separately.

Rule 60(a) – Modification to Correct an Inadvertent Error:  In their motion and supporting memorandum, the State AGs asserted that their proposed modification was permissible, pursuant to Fed. R. Civ. P. 60(a), because it would correct an inadvertent error.  Specifically, they argued that “wiring the remaining funds to the U.S. Treasury contravenes the parties’ intent to use all funds for consumer protection purposes.”  The CFPB ultimately opposed the proposed modification on the basis that there is no clerical mistake or inadvertent error in the Consent Order.

The court framed “the critical question” with respect to the inadvertent error argument as whether the Final Judgment, which incorporates the Redress Plan by reference, establishes an intent “for the settlement funds to be used generally toward consumer protection initiatives, untethered to [the defendant’s] third-party billing practices.”

Under the Residual Clause of the Redress Plan, the Bureau was the only party that could apply the unused settlement funds toward other equitable relief.  The Residual Clause relegated the Federal Communications Commission (“FCC”) and the State AGs, which had been involved in parallel litigation with the defendant, to consulting with the Bureau concerning whether unused settlement funds might be used for other equitable relief.  However, with respect to the State AGs’ motion to redirect the unused settlement funds, the court noted “that the CFPB’s involvement at this juncture in the litigation has been underwhelming.”

The court observed that, “[u]ntil this Court issued its April 10 Order, the CFPB appeared uninterested in the fate of the unexpended funds.”  In the view of the court, this disinterest was evidenced by the fact that the unexpended funds still reside in the defendant’s account notwithstanding a Redress Plan provision directing the defendant to wire any remaining balance to the CFPB after nine months from the Claims Deadline.  The court perceived this as an abdication of responsibility that “leads this Court to ask who will guard the guardians.”

Secondly, the court noted that the Residual Clause expressly required that any other equitable relief must be “reasonably related to the allegations set forth in the Complaint” (i.e., the alleged third-party billing practices of the defendant).  “Nowhere in the Final Judgment or the Redress Plan,” the court stated, “is there any language supporting the State AGs’ view that leftover funds should broadly aid consumers.”  The absence of any such language may have prompted the court, in its Memorandum and Order directing the CFPB and the DOJ to address the State AGs’ proposal, to characterize the clerical error argument as “particularly galling.”

Rule 60(b)(6) – Modification Due to Extraordinary Circumstances or Extreme Hardship:  The court next addressed a new argument asserted by the State AGs in their response to the CFPB and DOJ submissions – that the proposed modification was authorized by Fed. R. Civ. P. 60(b)(6) for other reasons that justify awarding the relief requested.  In this regard, the State AGs noted “the Consent Order represents a global settlement involving” the parties to the CFPB enforcement action, the FCC and the state attorneys general.  They further noted that, “should the Court deny the proposed modification, consumers, like those harmed by the acts and practices alleged in the Complaint, may not have the full benefit of a valuable resource for consumers – consumer protection attorneys well-trained by the NAGTRI Center for Consumer Protection.”

The court stated, however, that Rule 60(b) required the moving party to demonstrate extraordinary circumstances or extreme hardship and concluded that “[t]he equities in this action do not weigh in favor of the relief the State AGs seek.”  After acknowledging that the proposed alternative use of the funds “is perhaps a noble undertaking,” the court nevertheless concluded that the State AGs should seek a Congressional appropriation if they wish to fund the NAGTRI with federal dollars.  Absent other equitable relief reasonably related to the challenged third-party billing practices, noted the court, “[c]ondoning an unintended use of the settlement funds . . . . would circumvent ‘the congressional appropriations process under the guise of Article III’ and invoke questions regarding ‘the proper relationship of our Federal government’s three branches when dealing with the People’s money.’”  Observing that “[t]he proper body to which the State AGs must make their appeal is Congress,” the court stated that “[t]here is simply no extraordinary hardship or circumstance to justify re-writing the negotiated terms of the Redress Plan and Final Judgment.”

Finally, the court noted that the State AGs could have negotiated the requested relief in their separate settlement with the defendant.  Permitting them to do so now in the federal enforcement action by the Bureau would “hollow out the terms of the Final Judgment” and “permit State actors with, at best, a collateral interest in this Federal action to hijack a significant portion of the settlement funds under the guise of ‘consumer protection,’ . . . for the purpose of underwriting a project that principally benefits the states.”  In the view of the court, this result would erode the “extraordinary circumstances” standard for a modification pursuant to Rule 60(b) and “deprive the Federal agency here of its responsibility to monitor and enforce the settlement’s terms to completion.”

Accordingly, the court concluded that “[t]he time when these funds should have been remitted to the People is long past,” and directed the Bureau to deposit the unused settlement funds, including any accrued interest, with the U.S. Treasury as disgorgement forthwith.

Analogizing to the Sessions Memorandum:  One of our colleagues recently reported on the U.S. Attorney General’s memorandum (the “Sessions Memorandum”) prohibiting “payments to various non-governmental, third-party organizations as a condition of settlement with the United States.”  In the aftermath of its issuance, the Chair of the Senate Judiciary Committee sent a letter to Attorney General Sessions inquiring as to whether payments made to non-governmental third parties pursuant to Obama-era settlements with the DOJ “could lawfully be rescinded and re-directed back into the General Fund of the U.S. Treasury.”

In its decision, the court analogized to the Sessions Memorandum.  Although acknowledging that the Sessions Memorandum was not directly on point, the court nevertheless characterized it as instructive.  Specifically, the court noted that the Sessions Memorandum “recognizes that the ‘goals of any settlement are, first and foremost, to compensate victims, redress harm, or punish and deter unlawful conduct,’ and seeks to end the practice of using settlements to provide ‘payment or loan to any non-governmental person or entity that is not a party to the dispute.’” (emphasis in original).

On June 7, the CFPB submitted a Rule 28(j) letter to the D.C. Circuit in the PHH case.  In the letter, the CFPB embraced the fact that the Supreme Court’s recent Kokesh v. SEC decision makes the five-year statute of limitations in 28 USC § 2462 applicable to disgorgement remedies in CFPB administrative proceedings.  The CFPB asserted (incorrectly in our view) that Kokesh somehow obviated the applicability of RESPA’s three-year statute of limitations in the PHH case.

PHH forcefully responded to that argument in its reply letter.  It started with the point that § 2462’s limitation period applies “except as otherwise provided” by Congress. Because RESPA “otherwise provides” a three-year statute of limitations, § 2462 is inapplicable.  Next, it pointed out how unreasonable it is for the CFPB to assume that Congress would set one statute of limitations for judicial actions and another for administrative proceedings.  That “would destroy the certainty that Section 2614 was intended to provide,” it argued.  PHH also reminded the court of the CFPB Director’s holding in an earlier proceeding that no statute of limitations applies to administrative actions.  It chided the CFPB for trying to back away from that position at the “eleventh-hour.”

PHH also pointed out that “at the same time the CFPB argued in this Court that Section 2462 governs disgorgement, the Acting Solicitor General argued in Kokesh that it does not.  The CFPB’s freelancing merely underscores that the Director answers to no one but himself.”

The CFPB recently announced that it has entered into a consent order with Fay Servicing, LLC (“Fay”) to settle alleged mortgage servicing violations.  A copy of the consent order can be found here.  As is typical for CFPB enforcement activity in the mortgage servicing space, the focus of this consent order is alleged misconduct in connection with loss mitigation procedures and foreclosure protections.

According to the consent order, Fay did not send timely loss mitigation acknowledgement notices and loss mitigation evaluation notices.  The loss mitigation acknowledgement notice must generally be sent within five days after receipt of a loss mitigation application, and either confirm that the application is complete or detail the additional information or documents required.  The loss mitigation evaluation notice must generally be sent within 30 days of receiving a complete loss mitigation application and detail the determination of which options, if any, will be offered.

In some instances, the CFPB claims that Fay proceeded with certain foreclosure steps while the borrower was subject to foreclosure protections under Regulation X.  Those protections generally apply to a borrower who has submitted a complete loss mitigation application by certain points in the foreclosure process, and continue while the application is evaluated and resolved pursuant to Regulation X.

The consent order further states that there was a mistaken understanding that the loss mitigation requirements under Regulation X only applied to retention options (e.g., loan modification or repayment plan), and not to non-retention options (e.g., short sale or deed in lieu).  Finally, the CFPB asserted that Fay’s loss mitigation policies and procedures were lacking, and did not enable its personnel to engage in compliant practices.

Fay is required to pay restitution to consumers of up to $1.15 million, and to facilitate loss mitigation for those accounts that were the subject of the alleged misconduct.  Further, the consent order requires an extensive set of measures intended to ensure compliance going forward.

This enforcement action highlights again the importance of technical compliance with the loss mitigation procedures under Regulation X.  Since the servicing rules became effective in 2014, the CFPB has consistently signaled its prioritization of these requirements.

The CFPB’s petition filed in a Pennsylvania federal district court last June to enforce a CID issued to J.G. Wentworth, LLC, a purchaser of structured settlements and annuities, was denied by the court last week as moot.  The order denying the petition was entered after the CFPB filed a Notice in which it indicated that it had withdrawn the petition on June 1, stated that “because the CID is no longer active, the Bureau intends to soon dismiss the Petition,” and asked the court to refrain from ruling on the petition.  The Notice was followed by a “Suggestion of Mootness” filed by the CFPB in which it stated that because it had withdrawn the CID, the action was moot and must be dismissed by the court for lack of subject matter jurisdiction.  No reason was given by the CFPB for its decision to withdraw the CID.

The CFPB had issued the CID to J.G. Wentworth in September 2015 to investigate alleged violations of consumer protection laws.  J.G. Wentworth filed an administrative petition to set aside the CID as beyond the CFPB’s statutory authority, arguing that its purchase of settlements and annuities was not a consumer financial product or extension of credit subject to the CFPB’s UDAAP authority or TILA.  The CFPB denied the petition to set aside, asserting that J.G. Wentworth might be providing financial advisory services to consumers in connection with offers to purchase structured settlements or annuities, which would constitute a “consumer financial product or service” subject to Dodd Frank’s UDAAP prohibition.  Alternatively, the CFPB asserted that the purchases could be extensions of credit subject to TILA.  After its petition was denied, J.G. Wentworth produced some initial information to the CFPB, but ultimately refused to comply with the CID on the grounds the CFPB lacked jurisdiction over its activities.  In response, the CFPB filed the petition to enforce the CID.

The Chamber of Commerce of the United States of America filed an amicus brief opposing the CFPB’s petition in which the Chamber argued that the petition represented an attempt by the CFPB to expand its jurisdiction beyond the limits of Dodd-Frank.  The CFPB has consistently pushed the jurisdictional envelope by adopting broad interpretations of its statutory authority with the most aggressive and public example of the CFPB’s “jurisdictional creep” being its efforts to indirectly regulate the conduct of car dealerships (which is expressly carved out from the CFPB’s jurisdiction by Dodd-Frank) by applying a questionable interpretation of ECOA to impose disparate impact liability against auto finance companies.

In April 2017, the D. C. Circuit affirmed the D.C. federal district court’s April 2016 denial of the CFPB’s petition to enforce a CID issued in 2015 to the Accrediting Council for Independent Colleges and Schools (ACICS).  The district court ruled that the CFPB exceeded its statutory authority by issuing the CID because the ACICS’s accreditation process for-profit schools, which was the focus of the CID, was not a financial product or service, and had no connection to a for-profit school’s private student lending practices.  In affirming the denial of the CFPB’s petition to enforce the CID, the D.C. Circuit declined to reach the broad question of whether the CFPB had statutory authority “to investigate the area of accreditation at all” and instead limited its analysis to whether the CID satisfied the CFPA  requirement that “[e]ach [CID] shall state the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation.”  It concluded that the Notification of Purpose in the ACICS CID failed to adequately state the unlawful conduct under investigation or the applicable law.