On May 24, 2017, the US Court of Appeals for the D.C. Circuit (D.C. Circuit) held oral argument in the PHH case, which we have blogged about extensively. The constitutionality of the CFPB’s structure was the central issue at the oral argument, occupying the vast majority of the time and the judges’ questions. It appears that the court intends to decide whether the CFPB’s single-director-removable-only-for-cause structure violates the Constitution’s separation of powers doctrine, even if the court rules in PHH’s favor on the RESPA issues.

The judges’ questioning signaled that, in their minds, the resolution turns on three questions: First, how does the CFPB structure diminish Presidential power more than a multi-member commission structure, which the Supreme Court has approved? Second, doesn’t the CFPB’s structure make it more accountable and transparent than a multi-member commission? Third, what are the consequences of approving the CFPB structure? Judges that appeared not to be concerned with the CFPB’s structure generally focused on the first two questions. Judges that appeared to be concerned with the CFPB’s structure focused on the third question. Another key theme addressed at various points throughout the oral argument is whether the CFPB’s structure is sufficiently close to the structures validated in prior Supreme Court cases, such that the court must uphold the CFPB’s structure.

At the oral argument, PHH’s counsel urged the court to recognize the serious affront that the various features of the CFPB’s structure, taken together, present to Presidential power, including: (i) the single director, (ii) the for cause removal provision, (iii) the funding outside the Congressional appropriations process, (iii) the director’s ability to appoint all inferior officers with no outside input, (iv) the director’s five-year term, (v) the deferential standard of review given to the director’s decisions, (vi) the director’s ability to promulgate regulations unilaterally, and (vii) the director’s sole ability to interpret and enforce regulations.

Before PHH’s counsel could even fully articulate his argument, however, judges started questioning him on how these features diminished Presidential power more than the multi-member commissions running other agencies, which the Supreme Court approved in Humphry’s Executor. The DOJ, which was given time at the oral argument, forcefully responded to the judges’ questions. The “quintessential” character of the executive is the ability to act “with energy and dispatch,” counsel argued. Multi-member panels, as deliberative bodies, lack that quality and are thus more legislative and judicial than executive. Thus, they encroach on Presidential power to a much lesser degree.

DOJ’s counsel also pointed out that the rationale justifying the for cause removal provision that that the Supreme Court approved in Humphry’s Executor was not present in agencies endowed with the CFPB’s structural features. The DOJ’s counsel pointed to language in Humphry’s Executor approving the for-cause removal provisions only as to “officers of the kind here under consideration,” namely FTC commissioners. The Humphry’s Executor court extensively described the FTC and the officers “here under consideration” in a way that precluded any applicability of the case to the CFPB. In Humphry’s Executor, the FTC was described as a “non-partisan,” non-political body of experts that exercised quasi-judicial and quasi-legislative powers. The CFPB does not fit that mold, the DOJ ‘s counsel argued.

Counsel for both PHH and the DOJ also stressed that the CFPB did not fit the mold of the inferior officer at issue in Morrison v Olson, in which the Supreme Court approved a for-cause removal provision applicable to a special prosecutor. A few judges asked counsel questions apparently aimed at establishing that the existence of special prosecutors was as great an affront to Presidential power as is the CFPB’s structure.

During these lines of questioning, one judge suggested that the CFPB’s structure makes it more accountable to the President. She pointed out that, with a single director, there is one person to blame for problems and that, unlike multi-member commissions, the President has the power to appoint leadership with complete control over the agency. Counsel for PHH and the DOJ responded to this by reminding the court that the President can only appoint a director after the last director’s five-year term expires or the for-cause removal provision is triggered. Interestingly, no one raised the point that the for cause removal provision and five-year term also limit the ability of a President to remove a director that he or she appointed, even if the appointee did not act in a manner satisfactory to the President. Thus, the argument that the CFPB director is somehow more accountable than a multi-member commission does not hold water.

Some judges’ questions presented the issue that “if” the CFPB director is the same as a special prosecutor or FTC commissioner, then the D.C. Circuit is bound by Humphry’s Executor and Morrison v. Olson. Without missing a beat, however, the DOJ picked up on that “if” and argued the point that the CFPB director is nothing like either position. DOJ’s counsel asserted that the director is not an inferior officer, as was the special prosecutor in Morrison v. Olson, nor is the director part of a non-partisan body of experts, as was the FTC commissioner in Humphry’s Executor.

During the argument, Judge Brown and Judge Kavanaugh, who wrote the panel’s majority opinion, attempted to draw the rest of the court’s attention to the consequences of extending Humphry’s Executor to a single-director agency and Morrison v. Olson to principal, as opposed to inferior, officers. Judge Brown suggested that, if the CFPB’s structure is constitutional, nothing would prevent Congress from slapping lengthy terms and for-cause removal restrictions on cabinet-level officials. That, she argued, would reduce the presidency to a “nominal” office with no real executive power. Judge Kavanaugh addressed the same issue making an apparent reference to the speculation that Elizabeth Warren may run for President after Trump leaves office. How would it be, he questioned, if she ran on a consumer protection platform, got elected, and was stuck with a Trump-appointed CFPB director, who would presumably take a much different position on issues central to her platform?

The CFPB’s counsel defended the Bureau’s structure at the hearing using the same technical arguments that the CFPB has been making all along. The CFPB’s counsel asserted that the CFPB’s structure was constitutional because each of the features taken individually has support in Supreme Court jurisprudence, principally Humphry’s Executor and Morrison v. Olson.

In discussing the CFPB’s problematic structural features, CFPB counsel argued that, because each feature is a “zero” in terms of a problematic Congressional encroachment on Presidential power, that adding them together resulted in zero constitutional problems. “Zero plus zero plus zero, is zero,” he said. In rebuttal, PHH’s counsel pointed out that, as catchy as the argument may be rhetorically, it completely ignores the fact that even Supreme Court jurisprudence supportive of the individual features recognizes them as departures from the norm, acceptable only under certain circumstances. PHH’s counsel observed that the features at issue are not “zeros.”

The RESPA and statute of limitations issues did not occupy much time at the oral argument. Counsel for PHH urged the D.C. Circuit to reinstate the panel’s RESPA and statute of limitations rulings, all of which were in favor of PHH, and to rule on one issue not addressed by the panel.  While the panel decided, contrary to the CFPB’s views, that the CFPB is subject to statutes of limitations in administrative proceedings, the panel left for the CFPB on remand to decide if, as argued by the CFPB, each reinsurance premium payment triggered a new three-year statute of limitations, or whether, as argued by PHH, the three year statute of limitations is measured from the time of loan closing.  The judges did not raise any questions in response to counsel’s arguments on the RESPA and statutes of limitation issues.

Even though Lucia v. SEC was argued that same day, no questions surfaced during the PHH oral argument about the impact that Lucia may have on the PHH case.

* * *

It is likely that the earliest the D.C. Circuit’s decision will be issued is toward year-end. We will continue to monitor developments in this case.

 

On May 15, 2017, the Federal Reserve Office of Inspector General – which also oversees the CFPB – released a report finding deficiencies in the CFPB Office of Enforcement’s (Enforcement) processes for securing sensitive information.  The evaluation, conducted between February 2016 and July 2016, reviewed Enforcement’s processes for protecting the information it collects from the entities subject to its investigations and litigation activities related to potential violations of federal consumer financial laws, referred to as confidential investigative information (CII).

First, the Report found that access to matters containing CII was not always restricted to employees that required it to perform their assigned duties – during the time period evaluated, the OIG identified 113 individuals with access to matters when they no longer needed it.  Although CFPB policy is to require that access to high-sensitivity information, including CII, be restricted to individuals “with a demonstrated business need;” employees were generally allowed broad access to the network drive containing CII.  To address these issues, the Report offered five recommendations: (1) formalize in policy that employees should be granted access to Enforcement’s review tools and network drive matter folders only when such access is relevant to their assigned duties; (2) update policies and procedures to specify the process for approving and updating matter folder access rights for Enforcement’s review tools and network drive; (3) expand existing training for employees to reinforce guidance on Enforcement’s  interpretation that “demonstrated business need” means relevance to performing assigned duties, and the access approval and updating process for Enforcement’s review tools and network drive; (4) develop and implement a monitoring and testing approach to periodically confirm that Enforcement’s matter folders are appropriately restricted; and (5) coordinate with the Chief Information Officer to ensure that the new cloud environment, which is intended to replace the network drive, includes access approval and monitoring capabilities that meet the current and future needs of Enforcement.

Second, the Report found that Enforcement employees did not consistently follow CFPB guidelines for safeguarding CII, were unaware of certain aspects of the CFPB’s policies, and did not understand how relevant policies applied to their daily work activities.  The Report offered three recommendations to address this issue: (1) develop and implement operational procedures specific to Enforcement for handling printed high-sensitivity information, including but not limited to information labeling requirements and the use of cover sheets; (2) establish a strategy to periodically reinforce handling and safeguarding requirements and establish a monitoring approach to test compliance with information handling and safeguarding policies and procedures; and (3) monitor securable, access-controlled storage space, including but not limited to lockable cabinets and offices, to ensure that it meets the needs of all Enforcement employees.

Lastly, the Report found that Enforcement’s lack of a uniform naming convention hindered its ability to monitor and maintain access to matter folders.  The Report found that matter folder names were not uniform, with several instances of duplicate matters, and matters were inconsistently identified across different systems.  This hindered management’s ability to: (1) locate documents; (2) assign and monitor access to matter folders; and (3) ensure uniform and complete documentation or data for a matter.  The Report recommended developing a policy to establish a standard naming convention for matter folders and other relevant Enforcement folders to be used across all Enforcement applications and internal drives.

The Report raises significant – and continuing – concerns regarding Enforcement’s ability to safeguard the information it collects in the course of its investigations.  The Report follows the OIG’s September 29, 2016, memorandum, which identified information security as an area of improvement for CFPB management (see our prior blog post).  It is also interesting to note that the Report’s review period coincides with Enforcement’s March 2016 consent order with Dwolla, which marked Enforcement’s first – and to date, its only – foray into the data security realm (see our blog post on the consent order).  The Report’s findings highlight Enforcement’s continued struggle to satisfy the same internal data security requirements that it expects companies to maintain.  Enforcement’s failure to restrict access to sensitive information creates a risk of unauthorized disclosure.  Moreover, while the Report notes that former employees do not pose a significant risk due to the fact that they should no longer have access to the CFPB’s network, the fact that their access has not been restricted provides at least some reason for concern that these individuals may be able to misuse this information.

One of the hallmarks of the CFPB’s enforcement actions has been its use of those actions to announce new legal standards. Navient attacks this enforcement strategy in its motion to dismiss a recent case brought against it by the CFPB. On January 18, 2017, the CFPB sued Navient, alleging a number of violations. The chief allegation is that Navient unlawfully “steered” consumers into resolving student loans defaults using forbearance instead of income-driven repayment plans (“IDB”), even in situations where IDB would have been allegedly better for consumers. The motion to dismiss briefing closed on May 15, 2017.

Navient’s main argument is that the CFPB cannot seek penalties against it for the alleged steering because no one had fair notice that steering, if it occurred, violated UDAAP before the enforcement action began.  This is especially so when, as Navient points out, it was governed by the comprehensive rules, regulations, and contractual obligations that never even mention the conduct that the CFPB is suing over.

In addition, Navient argues that the CFPB is required to engage in rulemaking before imposing penalties on industry actors for alleged UDAAP violations. The CFPB is authorized under 12 U.S.C. § 5531(a) to seek fines and penalties against any entity that that engages in “an unfair, deceptive, or abusive act or practice under Federal Law.” Navient argues that “under Federal Law” means the CFPB must declare that conduct violates UDAAP through rulemaking before seeking fines and penalties for alleged violations. This, Navient argues, is supported by § 5531(a)’s placement in the statute immediately before § 5531(b), which allows the CFPB to “prescribe rules . . . identifying as unlawful unfair, deceptive, or abusive acts or practices.” The CFPB disagrees, arguing that “under Federal Law” is a reference to the general prohibition on UDAAPs in § 5536, and that no rulemaking is required prior to a UDAAP enforcement action. No court that we know of has yet addressed this specific issue under Dodd-Frank. How the court resolves this argument could have a substantial impact on how the CFPB does business going forward.

Navient also attacked the premise of the CFPB’s steering claims. For steering to be a violation, Navient argues, the CFPB has to first establish that Navient had some legal duty to counsel consumers on whether IDB or forbearance is better for their individualized situations. In an attempt to manufacture that duty, the CFPB points to general statements on Navient’s website inviting consumers to let Navient help them resolve their student loan defaults. In response, Navient emphasizes that such generalized statements do not create a fiduciary relationship as a matter of law and rightly reminds the court that lenders are not fiduciaries of borrowers.

We will continue to follow this case and keep you posted. Oral argument on the motion has been scheduled for June 27.

We previously reported that the Connecticut Attorney General, on behalf of 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”).  We subsequently reported that the CFPB and the DOJ had been directed to state, in separate submissions, their positions with respect to the state AGs’ modified proposal to redirect $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.

In its Memorandum on the Joint Motion to Intervene to Modify Stipulated Final Judgment and Order, the CFPB stated that the Consent Order should not be modified because Fed. R. Civ. P. 60(a) “does not, in the Bureau’s view, provide grounds for the proposed modification.”  Rule 60(a) permits a court to “correct a clerical mistake or a mistake arising from an oversight or omission” in a judgment, order or other part of the record.

The Bureau also noted in its submission that it had not proposed to apply the unused settlement funds to other equitable relief reasonably related to the allegations set forth in the complaint and therefore the Consent Order provision authorizing alternative uses of that nature was not at issue.  The Bureau concluded its submission by stating that it would direct the Defendant to pay the unused settlement funds to the U.S. Treasury if the Court declined to modify the Consent Order.

In a separate submission titled “Statement of Interest of the United States of America,” the DOJ initially asserted that the motion to intervene should be denied as untimely.  It then proceeded to argue that Rule 60(a) is limited to modifications that implement the result intended by the court when the order was entered, and does not allow changes that alter the original meaning of the judgment.  The DOJ further noted that the state AGs had not identified any clerical error or mistake arising from an omission or oversight.  Instead, the DOJ noted, the provision at issue requiring that unused settlement funds be deposited in the U.S. Treasury as disgorgement “is a standard term that appears in numerous CFPB consent orders.”  Finally, the DOJ asserted that “[n]othing in the Consent Order suggests that NAGTRI or NAAG is an intended beneficiary” and, as the Court itself had noted, the proposed modification “seeks to alter the Consent Order in a fundamental way by redirecting elsewhere” unused settlement funds of $15.14 million that would otherwise be deposited in the U.S. Treasury.

The DOJ concluded its submission with observations relating to the Miscellaneous Receipts Act.  Specifically, the DOJ noted that, “while [its] Statement of Interest is submitted on behalf of the United States as a whole, the CFPB is submitting a separate response opposing modification of the Consent Order.”  As a result, and in view of the fact that it believed there is no ground under Rule 60(a) to permit the proposed modification, the DOJ suggested that the Court need not address the issue of whether the proposed modification would implicate the Miscellaneous Receipts Act.

The DOJ noted, however, that “because the funds at issue have been constructively received by the United States, the Miscellaneous Receipts Act in any case would preclude the CFPB from directing the funds anywhere but the U.S. Treasury, including to NAAG or NAGTRI.”  “If NAAG wishes to fund its program with federal dollars,” the DOJ remarked, “it may seek a Congressional appropriation, but no portion of the Redress Amount may be diverted for that purpose.”

The state AGs and the Defendant may file responsive memoranda by May 24, 2017.  We will continue to monitor developments in this case.

 

 

 

 

Two enforcement actions filed by the CFPB recently went to trial in federal district court.

One of the cases was filed by the CFPB in July 2014 in a Wisconsin federal district court against two law firms and four of the firms’ attorneys for alleged violations of Regulation O, formerly known as the Mortgage Assistance Relief Services Rule, and for engaging in alleged deceptive practices in violation of the CFPA UDAAP prohibition.  The CFPB’s complaint alleged that the defendants violated Regulation O by charging advance fees to consumers before obtaining a loan modification, making various misrepresentations, and failing to provide required disclosures.  It alleged that the defendants violated the CFPA UDAAP prohibition by various actions that included deceiving consumers into thinking that they would receive legal representation even though many consumers never spoke with an attorney or had their case reviewed by one.

The district court held a five-day bench trial that began on April 24, 2017.  In various pre-trial rulings, the district court found that the defendants had engaged in conduct that would constitute a violation of Regulation O unless they could establish at trial that they satisfied the Regulation O attorney exemption.  (For example, the court found that they had charged advance fees before obtaining a loan modification and failed to provide required disclosures.)  Other issues to be decided at trial included whether the defendants had made certain of the misrepresentations alleged by the CFPB.  Post-trial briefs are due later this month.

The second case was filed by the CFPB in May 2015 in a California federal district court against two related companies offering a biweekly mortgage payment program and their individual owner.  The CFPB’s complaint alleged that the defendants engaged in deceptive telemarketing acts or practices in violation of the Telemarketing Sales Rule and engaged in abusive and deceptive acts or practices in violation of the CFPA UDAAP prohibition by making false representations regarding the costs of the defendants’ program and the savings consumers could achieve through the program.

The district court held a six-day bench trial that also began on April 24, 2017 at which the CFPB sought to prove that the defendants engaged in the conduct alleged in its complaint.  Post-trial briefs are due to be filed next month and the court has scheduled closing arguments for June 26, 2017.

 

 

For years many industry participants wondered if allowing their real estate agents or loan officers to engage in co-marketing on Zillow Group applications and websites posed a risk to their companies under RESPA.  The industry may soon know the answer, as Zillow Group advised in recent prepared remarks on first quarter earnings that “Over the past two years, the Consumer Financial Protection Bureau, or CFPB, has been reviewing our program for compliance with the Real Estate Settlement Procedures Act, or RESPA, which is a regulation designed to protect consumers.”

To say that the CFPB is not a fan of marketing arrangements between settlement service providers is an understatement.  We previously reported on an October 2015 bulletin in which the CFPB addressed its experiences with such marketing arrangements.  The CFPB stated “In sum, the Bureau’s experience in this area gives rise to grave concerns about the use of [marketing services agreements] in ways that evade the requirements of RESPA.”  The recent announcement by Zillow may cause industry members to assess co-marketing arrangements.

While the Zillow announcement indicates that the CFPB investigation has occurred over the past two years, the apparent reason for the announcement is the disclosure that “Recently, the CFPB requested additional information and documents from us as part of their evaluation, which we are working with them on.”  Zillow also notes that it considers its co-marketing program to be compliant, and that it has continually encouraged consumers to shop around while looking for a mortgage.

 

 

In a new lawsuit filed in an Illinois federal district court, the CFPB alleges that four online tribal lenders engaged in unfair, deceptive, and abusive acts or practices in violation of the Consumer Financial Protection Act by attempting to collect loans that were purportedly void or uncollectible in whole or in part under state law.

The CFPB’s complaint alleges that the lenders are owned and incorporated by a federally-recognized Indian tribe located in California.  According to the complaint, the defendants’ loan agreements contained a governing law provision stating that the loans were made and accepted on tribal lands and governed by tribal law regardless of where the borrower resided at the time the loan was requested.  However, the CFPB claims that: the defendants have no storefront on tribal land to originate loans in person; very few, if any, consumers who signed loan agreements did so on tribal lands; and the majority of the people who work on the defendants’ behalf work in Kansas.

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 first time the CFPB has attempted to “piggy-back” alleged violations of state law into CFPA “UDAAP” violations.  However, in the new case, the CFPB acknowledges that the lenders were tribal entities (and not merely a tribal member).  Further the complaint does not allege that non-tribal parties were the “true lenders” or attempting to collect interest on their own account.  Thus, the CFPB’s legal position in the new case is far more aggressive than it was in its past cases.  Indeed, the new case represents a frontal attack on all forms of tribal lending.

 

 

The Office of Inspector General for the Fed and CFPB recently issued an audit report entitled “The CFPB Can Strengthen Contract Award Controls and Administrative Processes.”  The objective of the OIG’s audit was to assess the CFPB’s compliance with applicable laws, regulations and CFPB policies and procedures related to contract solicitation, selection and award processes, as well as the effectiveness of the CFPB’s associated internal controls.

While finding the CFPB to be generally compliant, the OIG found occasions on which reviews and approvals were overlooked or not documented as required by regulation or CFPB policy.  Among its other findings was that the CFPB could improve the documentation used to support price reasonableness determinations for sole-source contracts (i.e. contracts where there is other than a full and open competition).

The OIG’s work plan updated as of April 1, 2017 includes the following initiated projects in which the OIG will evaluate:

  • the CFPB Enforcement Office’s processes for protecting confidential information obtained through the use of the CFPB’s enforcement powers, such as information received in response to a CID (completion expected second quarter 2017)
  • the CFPB’s compliance with the requirements for issuing CIDs including those in the Dodd-Frank Act (completion expected third quarter 2017)  (Last week, the D.C. Circuit affirmed the district court’s denial of the CFPB’s petition to enforce a CID because the CFPB had not complied with the Dodd-Frank requirements.)
  • the effectiveness of the CFPB’s management of examiner commissioning and training (completion expected third quarter 2017)

Planned projects described in the work plan include (1) an evaluation of the effectiveness of the Division of Supervision, Enforcement, and Fair Lending in monitoring and ensuring that supervised entities take timely action to correct deficiencies identified in examinations, (2) an evaluation of the risk assessment framework used by the CFPB to prioritize examinations, and (3) a review of the extent to which the CFPB has assessed the risks associated with the collection, maintenance, storage, and disposal of privacy data and personally identifiable information and applied appropriate information security controls and protection over the data to mitigate those risks.

 

 

The D. C. Circuit has affirmed the D.C. federal district court’s April 2016 denial of the CFPB’s petition to enforce a CID issued to the Accrediting Council for Independent Colleges and Schools (ACICS) in August 2015.

After denying ACICS’s petition to modify or set aside the CID in October 2015, the CFPB filed a petition in D.C. federal district court to enforce the CID.  The CFPA allows the CFPB to issue a CID to “any person” that the CFPB believes may be possession of “any documentary material or tangible things, or may have any information, relevant to a violation” of laws enforced by the CFPB.  The CID’s Notification of Purpose indicated that the purpose of the CFPB’s investigation was “to determine whether any entity or person has engaged or is engaging in unlawful acts and practices in connection with accrediting for-profit colleges, in violation of sections 1031 and 1036 of the [CFPA prohibiting unfair, deceptive, or abusive acts or practices], or any other Federal consumer financial protection law.”  The CFPB argued that because it has authority to investigate for-profit schools in relation to their lending and financial advisory services, it had authority to investigate whether any entity has engaged in any unlawful acts relating to accrediting such schools.  The district court denied the CFPB’s petition, holding that the CFPB lacked statutory authority to investigate the accreditation process.

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 stated that it would “confine our analysis to the invalidity of this particular CID.”  More specifically, the D.C. Circuit considered only whether the CID satisfied the CFPB 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.”

The D.C. Circuit concluded that “as written, the Notification of Purpose [in the ACICS CID] fails to state adequately the unlawful conduct under investigation or the applicable law.”  In reaching that conclusion, the D.C. Circuit relied on case law holding that to determine whether to enforce a CID, a court should consider only whether the inquiry is within the agency’s statutory authority, whether the request is not too indefinite, and whether the information sought is reasonably relevant.

The CFPB’s Notification of Purpose defined the relevant conduct constituting the violation under investigation as “unlawful acts and practices in connection with accrediting for-profit colleges.”  According to the D.C. Circuit, because the Notification of Purpose gave “no description whatsoever” of the “unlawful acts and practices” the CFPB sought to investigate, the court “need not and probably cannot accurately determine whether the inquiry is within the authority of the agency and whether the information sought is reasonably relevant.”  The D.C. Circuit noted that the CFPB had argued that, even if it did not have statutory authority over the accreditation process, it had an interest in the possible connection between the lending practices of ACICS-accredited schools and the accreditation process.  However, the court observed that “[e]ven if the CFPB is correct, that interest does not appear on the face of the Notification of Purpose,” and the agency had failed to adequately inform ACICS of the link between the relevant conduct and the alleged violation.

The CID had identified “sections 1031 and 1036 of the [CFPA prohibiting unfair, deceptive, or abusive acts or practices], or any other Federal consumer financial protection law” as the laws applicable to the alleged violation under investigation  The D.C. Circuit determined that the this language was “similarly inadequate” because, coupled with the CID’s failure to adequately state the unlawful conduct under investigation, the statutory references “tell ACICS nothing about the statutory basis for the Bureau’s investigation.”  The court noted that although the CFPA provides detailed definitions of “Federal consumer financial law” and “consumer financial product or service,” the CID “contains no mention of these definitions or how they relate to its investigation.”  It also commented that the inclusion of the “uninformative catch-all phrase ‘any other Federal consumer financial protection law’ does nothing to cure the CID’s defect.”  According to the court, “were we to hold that the unspecific language of this CID is sufficient to comply with the statute, we would effectively write out of the statute all of the notice requirements that Congress put in.”

Because the D.C. Circuit did not reach the broader question of the CFPB’s authority to investigate the accreditation process and “express[ed] no opinion on whether a revised CID that complies with [the CFPA CID requirements] should be enforced,” the CFPB will get another bite at the apple should it decide to reissue the CID.   While the decision will likely result in more detailed Notifications of Purpose in future CFPB CIDs, because it does not substantively change the scope of the CFPB’s broad power to issue CIDs, the decision’s overall impact will likely be minimal.  In addition, there continues to be a fairly low standard for what constitutes relevant information in discovery and litigation.

 

 

 

 

 

 

We previously reported that the Connecticut Attorney General, on behalf of the Attorneys General of Indiana, Kansas and Vermont, (the “state AGs”) had filed a joint motion to intervene in a CFPB enforcement action 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”).

The state AGs’ motion and supporting memorandum was filed in CFPB v. Sprint Corporation, a litigation in which the Bureau alleged that Sprint had violated the Consumer Financial Protection Act by allowing unauthorized third-party charges on its customers’ telephone bills.  The associated Stipulated Final Judgment and Order (“Consent Order”) authorized the implementation of a consumer redress plan pursuant to which Sprint would pay up to $50 million in refunds.  The redress plan provided for the payment of refund claims on a “claims made” basis subject to a filing deadline.  Any balance remaining nine months after the claim filing deadline was to be paid to the CFPB.

The Bureau, in consultation with the AGs of all fifty states and the District of Columbia, which were parties to concurrent settlement agreements with Sprint relating to similar billing practice claims, and the FCC, was then to determine whether additional consumer redress was “wholly or partially impracticable or otherwise inappropriate.”  If so, the Bureau, again in consultation with the states and the FCC, was authorized to apply the remaining funds “for such other equitable relief, including consumer information remedies, as determined to be reasonably related to the allegations set forth in the Complaint.”  Any funds not used for such equitable relief were to be deposited in the U.S. Treasury as disgorgement.

In a recent Memorandum and Order recounting the history of the litigation, the district court stated that “the siren song of $15.14 million in unexpended funds [had] lured some new sailors into the shoals of this litigation” because “[d]espite full restitution to Sprint customers and subsequent consultations with the Attorneys General and the FCC, the CFPB could not identify any equitable relief to which $15.14 million in unexpended settlement funds could be applied.”  The court observed that, “[a]pparently, the prospect of simply complying with the Consent Order by paying the funds into the U.S. Treasury lacked sufficient imagination.”

Although the defendant initially filed a memorandum in opposition to the intervention motion, it subsequently filed a joint submission with the state AGs that adopted their proposal to redirect $14 million of the unused settlement funds from the U.S. Treasury to NAGTRI and proposed redirecting the remaining $1.14 million to a community organization that provides internet access to underprivileged high school students.  (The court acknowledged that these were perhaps noble causes worthy of consideration.)  The joint submission stated that the CFPB had been consulted about the proposed modification but “[took] no position” on it.  The court characterized its failure to do so as remarkable, given that the Bureau was “the plaintiff in this lawsuit responsible for securing the $50 million settlement.”

The district court thus observed that it had been left “in a quandary” because:

  • The proposal would “alter the Consent Order in a fundamental way by redirecting elsewhere $15.14 million earmarked for the U.S. Treasury”;
  • The proposal may raise an issue under the Miscellaneous Receipts Act, which requires that government officials receiving money for the government “from any source” must deposit such money with the Treasury;
  • The proposed modification “does not appear, at least at first blush, to be ‘reasonably related to the allegations set forth in the Complaint’”; and
  • The defendant had concurrently entered into settlements with the Attorneys General of all 50 states and the District of Columbia and already paid them $12 million to resolve a multi-state consumer protection investigation.

The court characterized as “particularly galling” the argument that Fed. R. Civ. P. 60(a) permits the proposed modification to correct a clerical mistake.  It noted that the parties had “unmistakably understood that the Consent Order related to federal claims and that any undistributed settlement funds would be paid to the U.S. Treasury.”

In view of the foregoing, the court concluded that it needed “to hear from the Government” because of “the peculiar posture of the intervention application.”  Specifically, the court noted that the CFPB, as the plaintiff in the action, needed to take a position on the proposed intervenors’ motion and application to modify the Consent Order.  And because the proposed modification would redirect funds earmarked for the U.S. Treasury, the court noted that the United States has a direct interest that should be considered.

Accordingly, the court directed the CFPB and the Department of Justice to respond separately to the proposed intervenors’ motion and application to modify the Consent Order.  Their separate memoranda must be filed by May 10, 2017; the state AGs and the defendant may file responsive memoranda by May 24, 2017.  The court stated that the responsive submission of the Bureau “should advise this Court where the unexpended funds have been deposited during the pendency of the intervenors’ application.”   We will continue to monitor developments in this case.