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

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

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

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

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

The CFPB recently submitted a proposed stipulated final order that would shut down a credit repair service and permanently enjoin it from “[a]dvertising, marketing, promoting, providing, offering for sale, selling, assisting in the sale of, or administering Credit Repair Services.” The proposed order would also enjoin the credit repair service from “[r]eceiving any remuneration or other consideration from, holding any ownership interest in, providing services to, or working in any capacity for any person engaged in or assisting in advertising, marketing, promoting, offering for sale, or selling Credit Repair Services.” It includes a $150,000 civil monetary penalty, but does not include any reimbursement to consumers.

In the lawsuit, which we previously blogged about here, the CFPB alleged that the credit repair service violated the Telemarketing Sales Rule and Dodd-Frank’s UDAAP Provision by: 1) charging illegal advance fees; 2) misleading consumers about the benefits of the services it provided; 3) misrepresenting the actual costs of the service; and 4) misrepresenting the numerous conditions and limitations on its “money-back guarantee.” The court originally dismissed the complaint without prejudice after it found that the CFPB failed to satisfy Federal Rule of Civil Procedure 9(b)’s heightened pleading standard. Following this order, the CFPB submitted a second amended complaint, and ultimately submitted the proposed stipulated final order.

The proposed stipulated final order follows similar consent orders against credit repair companies issued by the CFPB in June 2017. The CFPB’s website also contains warnings to consumers about credit repair services and debt settlement companies.

Credit repair services cause significant headache for the financial services industry. As the CFPB’s website acknowledges, many will promise to remove even accurate information from a consumer’s credit report. They attempt to do this by disputing credit reporting data the consumer knows to be accurate and submitting large numbers of such disputes – including multiple disputes for the same consumer – to furnishers to overwhelm the furnisher’s ability to investigate the disputes. This practice harms consumers with legitimate disputes by burying furnishers in a large volume of meritless disputes, and in our view, is one of the largest current flaws in the credit reporting dispute system.  Although the CFPB’s enforcement actions against credit repair agencies are a positive step, we would like to see official guidance from the Bureau aimed at alleviating the burden that furnishers face to investigate and respond to the tidal wave of meritless FCRA disputes that are currently flooding into furnishers’ offices.

Members of Ballard Spahr’s consumer financial services group will hold a webinar on strategies for dealing with debt settlement companies at 12:00 PM ET on October 4, 2017. To register for this event, access the following link: https://response.ballardspahr.com/116/3145/landing-pages/registration-form-(blank).asp

Director Cordray, responding today to a letter from Rep. Jeb Hensarling who chairs the House Financial Services Committee, stated that “I have no further insights to provide” on whether he intends to serve his full term as CFPB Director.

As we reported earlier today, it now appears that Director Cordray will not resign before Labor Day and intends to remain as Director until at least a date in September.  However, because it is widely believed that Director Cordray still intends to resign to run for Ohio Governor and there is conjecture that the ultimate timing of his departure will turn on when a final payday loan rule issued, Mr. Hensarling sent a letter to Director Cordray asking him to confirm that he intends to serve his full term as Director or to provide the earlier date on which he intends to resign.  Mr. Hensarling also asked Director Cordray for his categorical denial that political considerations have informed any aspect of his actions relating to the payday loan rulemaking.

In addition to providing the categorical denial requested by Mr. Hensarling, Director Cordray indicated in his response that he had been asked before whether he intends to serve his full term and his “answer remains the same.”  The issue of Director Cordray’s departure plans was raised by Mr. Hensarling and several other members of the House Financial Services Committee during Director Cordray’s last appearance before the Committee on April 5, 2017.  Indeed, when asked by Rep. Zeldin whether he intended to serve the remainder of his term, Director Cordray also responded by saying that he had “no insights to provide.”

Despite the various signs suggesting Director Cordray would resign before Labor Day, it now appears that he intends to remain as Director until at least a date in September.

One of those signs was the notice on the CFPB’s website of the Fall 2017 Credit Union Advisory Council Meeting in Washington, D.C. on September 7, 2017 that originally indicated that Acting Deputy Director Silberman would be giving remarks at the meeting rather than Director Cordray.  The notice has since been revised to indicate that Director Cordray will welcome attendees.

While it is still widely believed that Director Cordray will resign this fall to run for Ohio Governor, the timing of his departure is now a question mark.  Since it is also widely believed that he wants to issue a final payday loan rule before he departs, it is possible Director Cordray had expected to issue a final rule before Labor Day and is delaying his resignation until the final rule is issued.  The final rule is now expected to be narrower in scope than the CFPB’s proposed rule and only cover short-term loans.

The possibility of a connection between the timing of a final rule and Director Corday’s departure prompted a letter to Director Cordray from Rep. Jeb Hensarling, who chairs the House Financial Services Committee.  In his letter, Mr. Hensarling stated that reports which have not been rebutted by the CFPB “suggest that your personal political ambitions may be informing decisions you are making regarding what is supposed to be a nonpartisan and objective rulemaking process governed by the Administrative Procedure Act.  Simply put, there is no valid legal basis for accelerating a federal rulemaking to satisfy an arbitrary deadline necessitated by election dates established under Ohio law.”

Mr. Hensarling also asked Director Cordray, to give the House committee by August 30, his written “categorical denial that political considerations have informed any aspect of [his actions relating to the payday loan rulemaking]” and written “confirmation that [he] intends to serve [his] full statutory term as Bureau Director” or, if Director Cordray intends to leave earlier, “confirmation of the date [he] intend[s] to resign from office.”

Last Friday, we blogged about a new sign that Director Cordray’s resignation may be imminent.  That sign was the CFPB’s posting on its website of a notice of a meeting on September 7, 2017 of the Fall 2017 Credit Union Advisory Council Meeting in Washington, D.C. that indicated Acting Deputy Director David Silberman will be present and make remarks.  As we observed, this is a departure from Director Cordray’s usual practice of giving remarks at advisory group meetings, with Acting Deputy Director Silberman only rarely giving remarks in Director Corday’s stead.

The meeting notice followed two other signs fueling the speculation about Director Cordray’s plans: the announcement that he will give a speech in Cincinnati, Ohio at a Labor Day picnic sponsored by the AFL-CIO (which seems like an ideal venue for launching a campaign for Ohio Governor) and the scheduling of an Ohio gubernatorial debate for September 12.

Now, thanks to Isaac Boltansky of Compass Point, we have learned of a fourth sign that Director Cordray’s resignation may be imminent—the announcement that Director Cordray is scheduled to deliver remarks from 1:15 p.m. to 1:45 p.m. on September 12 in Cleveland, Ohio as the keynote speaker at the annual Ohio Land Bank Conference.  The announcement confirms that Director Cordray is planning to be in Ohio on September 12, the date of the gubernatorial debate.  Presumably, the debate will take place in the evening.  In addition, the focus of the Conference appears to be the re-purposing of vacant and abandoned properties and revitalizing of neighborhoods, issues with no readily apparent connection to ongoing CFPB activities.

 

The CFPB has created a new online form for obtaining informal staff guidance on questions about CFPB regulations.  A link to the new form appears on the CFPB’s website on the “Compliance and guidance” page.

It is unclear whether the new form is intended to replace the email address and phone number previously given by the CFPB for regulatory questions (CFPB_reginquiries@cfpb.gov; (202) 435-7700) since the website’s eRegulations page still invites questions at that email address and phone number.

With regard to the new online form, the CFPB states: ” You can expect to hear back from us in 10-15 business days.  If we need more time to answer your question or cannot answer your question, we will tell you.  Response times and formats vary depending on the current volume of questions, the amount of time needed to research your question, and staff availability.”

On July 20, we reported that Director Cordray is scheduled to give a speech at the September 4 Cincinnati AFL-CIO Labor Day picnic.  Assuming the speculation that Director Cordray plans to run for Ohio governor is accurate, that event seemed to be an ideal venue for him to announce his candidacy.

Yesterday, the Ohio Democratic Party announced that the first in a series of six gubernatorial debates will be held on September 12 at Martins Ferry High School in Belmont County.  All of the announced candidates (former U.S. Rep. Betty Sutton, Dayton Mayor Dan Whaley, former state Senate Minority Leader Joe Schiavoni and former State Senator Connie Pillich) have agreed to participate.

As of now, Director Cordray is not slated to participate in the debate.  Party Chairman David Pepper was quoted by Cleveland.com: “I think anyone looking to run for statewide office, there aren’t that many months left before you really have to get going…As you can see, we’re moving forward.”

So far, Director Cordray has not indicated whether he is planning to enter the Ohio gubernatorial race and, if so, when that will happen.  If he decides to run, he must first resign as CFPB Director.  That could happen in early September so that he can launch his campaign on Labor Day at the Cincinnati AFL-CIO picnic, and/or participate in the first Democratic Party gubernatorial debate on September 12.

As we’ve discussed before, the CFPB sued Navient over its student loan servicing practices in the Middle District of Pennsylvania.  In doing so, the CFPB followed its strategy of announcing new legal standards by enforcement action and then applying them retroactively. The chief allegation in the complaint is that Navient wrongly “steered” consumers into using loan forbearance rather than income-based repayment plans to cure or avoid defaults on their student loans.

On March 24, 2017, Navient moved to dismiss the complaint on a number of grounds.  Although the district court, in a decision issued on August 4, declined to dismiss the case, the motion raised several arguments that a court of appeals should not be so quick to gloss over.  We focus here on two of them: fair notice and the constitutionality of the CFPB’s structure.

Fair Notice

Navient argued in its briefs that the CFPB was pursuing them for alleged conduct when Navient was not given fair notice that the conduct, if it occurred, violated the law.  The court used a technicality to decline to consider Navient’s fair notice argument at all.  The court stated that: “[Under the relevant authorities,] Navient’s fair notice argument fails if it was reasonably foreseeable to Navient that a court could construe their alleged conduct as unfair, deceptive, or abusive under the CFP Act.  Navient, however, has only advanced arguments as to why it did not have fair notice of the Bureau’s interpretation of the CFP Act (emphasis added).”  Thus, the court found that it need not consider the fair notice argument.

In doing so, the court ignored authorities Navient cited that held that, as Navient paraphrased, “[a]n agency cannot base an enforcement action on law created or changed after the conduct occurred.”  The court also ignored the obvious and clearly-implied corollary to Navient’s argument: the only way for Navient to be liable for the claims alleged in the complaint would be for a court, namely, the Middle District of Pennsylvania, to adopt the Bureau’s position.  Thus, with all due respect for the court, Navient’s fair notice argument was fairly before it and should not have been so lightly cast aside.

This is especially so given how well-founded the argument seems to have been.  How could Navient have known that the CFP Act required it to provide over-the-phone individualized financial counseling to borrowers as a result of a statement on its website indicating that “Our representatives can help you by identifying options and solutions, so you can make the right decision for your situation (emphasis added).”  The statement was both conditional, and placed the duty for making the right decision squarely on consumers. The court completely ignored the fact that the CFP Act’s prohibition on unfair, deceptive, or abusive conduct would not have alerted anyone that the CFPB or a court would make the inferential leap between that statement and the duty that the CFPB says Navient undertook by making it.

Constitutionality of CFPB Structure

The court also rejected the argument that the CFPB’s structure was unconstitutional.  We’ve discussed before why we believe that such a view is incorrect and even dangerous to our constitution.  But a few of those arguments bear repeating in light of the Navient court’s ruling.  The first problem with the Navient court’s holding is that it applies Humphrey’s Executor in a way that ignores the fundamental holding of the case.  In Humphrey’s Executor, the Supreme Court held that for-cause removal, staggered terms, and a combination of enforcement and law-making powers was acceptable in a multi-member commission.  Its rationale: because of the commission structure, the FTC would operate as a quasi-legislative and quasi-judicial body, not a quasi-executive one.  Not to state the obvious, but the CFPB is not a multi-member commission; its unitary director is like the President, a unitary executive.  Thus, the Supreme Court’s indulgence of these accountability-limiting features in Humphrey’s Executor does not apply to the CFPB.

Second, the retort to this argument, that the CFPB Director is somehow more accountable to the President, is a legal fiction at best. If the President has no power to remove the Director without cause, the Director is not accountable to him. Period. The President can approach the Director, ask him to implement a certain policy, and the Director can ignore the President with impunity. That is not accountability, however one may measure it. It is true that the five FTC Commissioners, the entire board of the Federal Reserve, or the SEC Commissioners could do the same. But, those interactions are more like the ones the President faces in dealing with Congress or the Judiciary, interactions that the Constitution contemplated and intended. With the CFPB Director, the President stands powerless before the unitary executive of a federal agency whose will can stand in direct contrast to his own. If that is not an affront to the Constitution’s notion of the President as a unitary executive, what is?

Third, the Supreme Court also indulged accountability-limiting features in Morrison v. Olsen, because, among other reasons, the inferior officer at issue in the case “lack[ed] policymaking or significant administrative authority.” Such is not the case with the CFPB Director.  The Director is not an inferior officer. More importantly, he has substantial policymaking authority.  The Director has the authority to approve and enforce regulations relating to any consumer financial product or service, companies and individuals involved in providing such services, and service-providers to those companies and individuals.  The CFPB has interpreted its authority to extend not just to banks, lenders, and debt collectors, but to mobile phone companies, homebuilders, payment processors, and law firms. The court in this case ignored these substantial differences between the CFPB Director and the inferior officer approved in Morrison v. Olsen.

Finally, the court ignored the implications of its ruling.  Before long, if the CFPB structure is replicated elsewhere in government, we’ll have a government where Congress, the President, and even the courts are relegated to the sidelines while powerful bureaucrats make law, interpret the law, and enforce it with virtually no political oversight.

* * *

As the case progresses, Navient will continue to defend itself. We will keep a close eye on the case and, as always, keep you posted.

The CFPB’s July 2017 complaint report, which the CFPB calls another “special edition complaint report,” departs from the format of the CFPB’s standard monthly reports.  (The CFPB’s June 2017 complaint report was also called a “special edition.”)  Instead of analyzing monthly complaint trends and highlighting complaints received about a particular product and from consumers in a particular state and city, the new report focuses on annual complaint volume by product for 2014-2016 and the channels used by consumers to submit such complaints.  (Total complaints by month and product through March 31, 2017 is shown in an appendix.)

The report includes the following data:

  •  As of July 1, 2017, the CFPB has handled over 1,242,800 consumer complaints.
  • Companies have provided timely responses to approximately 97% of complaints sent to them by the CFPB for response.

The new report also discusses (1) the meaning of the various response categories available to companies and provides aggregate data on a product-by-product basis showing the response categories used by companies through March 1, 2017, and (2) consumer feedback about companies’ responses and provides data on a product-by-product basis showing the percentage of company responses disputed by consumers through March 31, 2017.  For example, the report shows that consumers complaining about mortgages disputed 23% of company responses while customers complaining about prepaid cards disputed 14% of company responses.

We were pleased to see an acknowledgment by the CFPB that while information about consumer disputes of company responses “is an indicator of consumer satisfaction with companies’ responses to consumers’ issues, it has some limitations.”  As an example, the CFPB observes that “quantitative dispute data does not provide insight into the reasons why a consumer was dissatisfied with the company’s response to their complaint and dispute data does not reflect the positive feedback consumers have about how companies have addressed their concerns.”

On July 31, I published a blog post in which I suggested that, if Director Cordray resigns, Treasury Secretary Mnuchin would be the obvious and logical person to serve as CFPB Acting Director until President Trump nominates, and the Senate confirms, Director Cordray’s successor.  I stated that the President clearly has the authority to appoint an Acting Director under the Federal Vacancies Reform Act of 1998 (the “Vacancies Act”).

One of our blog readers sent  me a message asking why David Silberman, the current Acting Deputy Director, would not automatically become Acting Director under Section 1011(b)(5)(B) of Dodd-Frank. That provision states that the Deputy Director shall “serve as acting Director in the absence or unavailability of the Director.”  It is my view that this language does not cover a situation where the existing Director resigns and permanently leaves the agency, thereby creating a vacancy in the office.  My opinion remains the same even if Director Cordray eliminated “Acting” before “Deputy Director” in Mr. Silberman’s title.

I reached my conclusion based on the absence of any express reference to a “vacancy” in Section 1011(b)(5)(B) of Dodd-Frank.  This stands in contrast to numerous federal statutes in which Congress has expressly provided for the temporary filling of a vacancy in a position requiring Senate confirmation.  For example, Congress has expressly provided that when the offices of OMB Director, FAA Administrator, or Administrator of the SBA are “vacant” or have a “vacancy,” the Deputy Director or Administrator acts as Director or Administrator.

These statutes indicate that when Congress has wanted to give an officer holding a Deputy position the authority to run an agency in an acting capacity when the position of agency head became vacant, it has done so expressly.  Thus, the absence of any express language giving the CFPB Deputy Director authority to serve as Acting Director when there is a “vacancy” in the office of CFPB Director or when such office is “vacant” indicates that Congress did not intend to give the CFPB’s Deputy Director authority to automatically serve as Acting Director in that circumstance.

Furthermore, the Vacancies Act expressly covers the precise situation here – namely, a vacancy at an Executive Agency created by a resignation.  Two established rules of statutory construction are instructive.  First, when two federal statutes are arguably in conflict with one another, the more specific statute trumps (no pun intended) the more general statute.  See, e.g., Coady v. Vaughn, 251 F.3d 480, 484 (3d Cir. 2001) (“It is a well-established canon of statutory construction that when two statutes cover the same situation, the more specific statute takes precedence over the more general one. See Edmond v. United States, 520 U.S. 651, 657, 117 S.Ct. 1573, 137 L.Ed.2d 917 (1997) (‘Ordinarily, where a specific provision conflicts with a general one, the specific governs.’); Preiser v. Rodriquez, 411 U.S. 475, 488–89, 93 S.Ct. 1827, 36 L.Ed.2d 439 (1973) (holding that prisoner challenging validity of his confinement on federal constitutional grounds must rely on federal habeas corpus statute, which Congress specifically designed for that purpose, rather than broad language of Section 1983); West v. Keve, 721 F.2d 91, 96 (3d Cir.1983).  The rationale for this canon is that a general provision should not be applied ‘when doing so would undermine limitations created by a more specific provision.’  Varity v. Howe, 516 U.S. 489, 511, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996).”).  Second, when two federal statutes are arguable in conflict with one another, they should be harmonized with one another to the extent possible.  See, e.g., Shanty Town Associates, Ltd. Partnership v. E.P.A., 843 F.2d 782, 793 (4th Cir. 1988) (“[O]ur first obligation, when presented with a possible conflict between two federal statutes, is always to attempt to harmonize them.  See Morton v. Mancari, 417 U.S. 535, 551, 94 S.Ct. 2474, 2483, 41 L.Ed.2d 290 (1974) (“The courts are not at liberty to pick and choose among congressional enactments, and when two statutes are capable of co-existence, it is the duty of the courts, absent a clearly expressed congressional intention to the contrary, to regard each as effective.”).

I believe that Section 1011(b)(5)(B) of Dodd-Frank is intended to cover a situation in which the Director is still in office but unable to function as CFPB leader.  An example would be where the current Director is temporarily disabled.  As stated above, the Vacancies Act is intended to cover a temporary vacancy in the position of Director of the CFPB resulting from the resignation of the Director.

A reporter asked me recently how Secretary Mnuchin could possibly have the time to manage the CFPB on top of his main job of being Treasury Secretary.  Fortunately, Section 1012(b) of Dodd-Frank states:  “The Director of the Bureau may delegate to any duly authorized employee, representative, or agent any power vested in the Bureau by law.”