On September 17, 2018, four Amici filed briefs in the CFPB’s case against All American Check Cashing, which is now before the Fifth Circuit Court of Appeals. The Court is considering whether the structure of the CFPB is constitutional and what impact its structure, right or wrong, has on its ability to continue to prosecute claims against regulated entities. The Amici, all supporting the CFPB, were as follows:

  • Certain current and former Members of Congress involved in drafting Dodd-Frank;
  • Five people calling themselves “CFPB Separation of Powers Scholars,” including Harold Bruff, Gillian Metzger, Peter Shane, Peter Strauss, and Paul Verkuil;
  • Nine consumer advocacy groups, including Public Citizen, Inc., Americans for Financial Reform Education Fund, Center for Responsible Lending, Consumer Federation of America, Consumers Union, National Association of Consumer Advocates, National Consumer Law Center, Tzedek DC, and U.S. Public Interest Research Group Education Fund, Inc.; and
  • The Appleseed Foundation, Inc.

The Amici made substantially the same arguments made by amici supporting the CFPB in connection with the PHH case.

California Governor Jerry Brown has signed into law Assembly Bill 38, which significantly modifies the scope, administration, and servicing requirements of the state’s Student Loan Servicing Act.  The bill was approved by the California Assembly 55-23-2 and the California Senate 28-11-1 with the intent to “build upon existing law to ensure that the Student Loan Servicing Act’s goals are met as the federal government enacts new regulations.”  The bill contains no provisions delaying its immediate effectiveness.

In its most dramatic change, the bill narrows the scope of the Act by adding an exemption and redefining several terms.  The bill carves out from coverage guaranty agencies engaged in default aversion through an agreement with the Secretary of Education and redefines “student loan servicer” to exclude a debt collector who exclusively services defaulted student loans—federal loans where no payment has been received for 270 days or more and private student loans in default according to the terms of the borrower’s agreement.  The Act also adds a section to clarify that any person claiming an exemption or an exception from a definition has the burden of proving that exemption or exception.

Reflecting these changes, the licensing trigger has been restricted to those who “engage in the business of servicing a student loan in this state.”  The previous definition included any person “directly or indirectly” engaged in servicing.  However, an out-of-state entity is still deemed to be servicing “in this state” if it services loans to California residents.  In further modifying the Act’s scope, the term “student loan” has also been changed from a loan made “primarily” to finance a postsecondary education to a loan made “solely” to finance a postsecondary education.

The bill also provides significant licensing changes. Now, the commissioner may require that applications, filings, and assessments be completed through the Nationwide Multistate Licensing System & Registry (NMLS).  The commissioner is further empowered  to waive or modify NMLS requirements, use NMLS “as a channeling agent for requesting information from and distributing information to” the Department of Justice and other governmental agencies, and to create a process by which licensees may challenge information entered into the NMLS by the commissioner.

The criteria for denying a license application have been clarified, and now include: failure to meet a material requirement for issuance of a license; violations of a similar regulatory scheme of California or a foreign jurisdiction; liability in any civil action by final judgment or an administrative judgment by any public agency within the past seven years; and failure to establish that the business will be operated honestly, fairly, efficiently, and in accordance with the requirements of the Act.  Additionally, applicants must now appoint the commissioner as an agent for service of process.

With respect to servicing requirements, the bill extends the timeframe within which a servicer must acknowledge a borrower’s Qualified Written Request (QWR) to ten business days.  Previously, the Act and the most recent round of regulations required that servicers acknowledge a QWR within five business days, except when the servicer fulfilled the borrower’s request within that period.

CFPB Acting Director Mick Mulvaney recently responded to former CFPB Student Loan Ombudsman Seth Frotman’s vocal departure from the Bureau.  As previously reported, Frotman tendered his resignation in a letter—also delivered to members of Congress—which accused Mulvaney of being derelict in his oversight of the “student loan market.”  Among other things,  Frotman accused Mulvaney of undercutting enforcement, undermining the Bureau’s independence, and shielding “bad actors” from scrutiny—collectively, “us[ing] the Bureau to serve the wishes of the most powerful financial companies in America.”

In an interview addressing the letter, Mulvaney has emphasized that he is focused on the explicit statutory authority provided in the Dodd-Frank Act, including the limitations on his oversight of student loans.  When asked about Frotman’s resignation, Mulvaney responded that he “never met the gentleman” and “doesn’t know who he is.”  Mulvaney has served as Acting Director since November 2017.  Frotman joined the Bureau during its creation in 2011 to focus on military lending issues as a senior advisor to Holly Petraeus (the Assistant Director for the Office of Servicemember Affairs) and transitioned to the Private Education Loan Ombudsman in April 2016.  Mulvaney added, “I talked to his supervisor who met with him on a regular basis during the nine months I’ve [been] there; [Frotman] never complained about anything that was happening at the Bureau, so I think he was more interested in getting his name in the paper.”

In his resignation letter, Frotman noted that the “Student Loan Ombudsman,” statutorily created by Section 1035 of the Dodd-Frank Act, was authorized to “provide timely assistance to borrowers,” “compile and analyze” borrower complaints, and “make appropriate recommendations” to the Director of the CFPB, the Secretary of Education, the Secretary of the Treasury, and Congressional committees regarding student loans.  Frotman, however, omits any mention of statutory limits to the Ombudsman’s authority.  Section 1035—titled “Private Education Loan Ombudsman”—directs the Ombudsman to “provide timely assistance to borrowers of private education loans,” “compile and analyze data on borrower complaints regarding private education loans” and to “receive, review, and attempt to resolve informally complaints from borrowers of [private education] loans.”

With respect to federal student loans, Section 1035 of the Dodd Frank Act only contemplates the Private Education Loan Ombudsman’s cooperation with the Department of Education’s student loan ombudsman through a memorandum of understanding (MOU).  Mulvaney noted the somewhat informal nature of the MOU created during the Obama administration, referring to it as a “handshake agreement.”  Arguably signaling an intent to defer to the Department of Education on federal student loan issues, Mulvaney stated that the issue he is most “worr[ied] about [is] the growth in …student loans” because federal involvement in the market has created a “disconnect between the making of a loan and the repaying of [a] loan.”

We have been following very closely the lawsuit filed by the CFPB and the New York Attorney General against RD Legal Funding.  We earlier reported that on June 21 Judge Preska dismissed the CFPB’s claims based on the unconstitutionality of the CFPA. We subsequently reported that on September 12 Judge Preska dismissed the claims brought by the New York Attorney General under Section 1042 of Dodd -Frank (i. e., the provision authorizing state attorneys general to initiate lawsuits based on UDAAP violations) and also dismissed the Attorney General’s state law claims for lack of subject matter jurisdiction as a result of there being no remaining federal questions in the case.

The most recent development is that yesterday Judge Preska amended her September 12 order to provide that her dismissal of the New York Attorney General’s 1042 claims are “with prejudice”. That means that the New York Attorney General should not be able to re-file her 1042 claims in state court unless and until a higher court reverses Judge Preska’s order. The CFPB has already filed an appeal with the Second Circuit and it seems likely that the New York Attorney General will do the same.

Beginning in 2019, all California “debt collectors”—including creditors collecting their own debts regularly and in the ordinary course of business—will be required to provide notice to debtors when collecting on debts that are past the statute of limitations and will be prohibited from suing on such debts. The new law is based on provisions in the 2013 California Fair Debt Buying Practices Act. However, unlike the 2013 Act, which limited the notice requirement to “debt buyers,” the new law extends the notice requirement to any collector, wherever located, that is engaged in collecting a debt from a California consumer.

The notice requirements have been added to the Rosenthal Fair Debt Collections Practices Act, which applies to “any person who, in the ordinary course of business, regularly, on behalf of himself or herself or others, engages in debt collection.” Under the new law, collectors must deliver one form of notice if an account is reported to credit bureaus and another form if it is beyond the Fair Credit Reporting Act’s seven-year limitation period, or date for obsolescence. (There is no separate notice for a collector who has not reported, and will not report, an account to credit bureaus for any other reason.)

The notices, which are identical to those in the 2013 California debt buying law, must be “included in the first written communication provided to the debtor after the debt has become time-barred” or “after the date for obsolescence,” respectively. “First written communication” means “the first communication sent to the debtor in writing or by facsimile, email or other similar means.” We recommend that clients who email the “first written communication” ensure they receive an effective consent to receive electronic communications from debtors.

We surmise that the BCFP may be studying California’s disclosures as the BCFP formulates its notice of proposed rulemaking for third-party debt collection, which it has said it will issue next year. The 2013 advance notice of proposed rulemaking and 2016 outline of proposals issued by the Cordray-era Bureau suggested it was considering limits on the collection of time-barred debts. Therefore, California’s new law may influence any ongoing discussions and drafting by the Bureau’s current staff and leadership on this point.

The new California law also amends the statute of limitations provision in Section 337 of the California Code of Civil Procedure to prohibit any person from bringing suit or initiating an arbitration or other legal proceeding to collect certain debts after the four year limitations period has run. With this amendment, the expiration of the statute of limitations will be an outright prohibition to suit, rather than an affirmative defense that must be raised by the consumer.

I am very excited to announce that today, Ballard Spahr’s Consumer Financial Services Group has launched The Consumer Finance Monitor Podcast, a weekly podcast program focused on legal developments that are of importance to the consumer finance industry.  We’ll be talking about how to make sense of breaking developments, avoid risk, and make the most of opportunity.

While we hope our blog readers will continue to follow our blog for current information on important developments, and we will continue to hold webinars and report on developments through legal alerts, we want to offer our clients and friends the convenience of listening to podcasts as another way of keeping up with what’s going on in their industry.  In addition to Ballard Spahr’s website, our podcasts will be available on Apple iTunes, Google Play, and Spotify.  A new podcast will be available each Thursday.

Our podcasts will feature attorneys who focus on every facet of the consumer finance industry—from new product development and emerging technologies to regulatory compliance and defense of government regulatory enforcement actions and private litigation.

In the first podcast, we discuss the litigation challenging the CFPB’s constitutionality and President Trump’s nomination of Kathy Kraninger to lead the CFPB.  We will also address the recent statements by HUD and the CFPB signaling an intent to revisit the disparate impact theory, and the implications for fair lending of these efforts.  Future topics will span federal and state regulation and enforcement, litigation trends, fair lending, debt collection, marketplace lending, Fintech, mortgage banking, auto and student lending, and cybersecurity.

We are hoping our podcast listeners will find our podcasts to be another source of reliable information and insight.  To listen and subscribe to the podcast, click here.

 

As expected, following Judge Preska’s dismissal on September 12 of all of the New York Attorney General’s federal and state law claims, the CFPB filed an appeal with the Second Circuit from Judge Preska’s June 21 ruling in the RD Legal Funding case in which she held that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, struck the CFPA (Title X of Dodd-Frank) in its entirety, and dismissed the CFPB from the case.

In its Notice of Appeal filed on September 14, the CFPB gives notice that it “appeals to the United States Court of Appeals for the Second Circuit from this Court’s June 21, 2018 Order (ECF No. 80), as amended by its September 12, 2018 Order (ECF No. 105), dismissing the Bureau’s claims against Defendants, and this Court’s Judgment (ECF No. 106) entered on September 12, 2018.”

Since Judge Preska dismissed all of its claims, the NYAG can also appeal to the Second Circuit.  Alternatively, the NYAG can refile its CFPA and state law claims in New York state court (although a state court might stay the case pending a decision by the Second Circuit in the CFPB’s appeal, particularly if the NY AG decides to appeal the dismissal of its claim brought under Dodd-Frank Section 1042.  If the NYAG appeals the jurisdictional dismissal of its state law claims, then RD Legal should be able to file a cross-appeal of Judge Preska’s June 21 decision ruling on the merits of the state law claims and denying RD Legal’s motion to dismiss.

The CFPB’s appeal means that the Bureau’s constitutionality is now before two circuits, the Second and Fifth Circuits.  In April 2018, the Fifth Circuit agreed to hear All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.  Also, a petition for certiorari was recently filed in the U.S. Supreme Court by State National Bank of Big Spring which, together with two D.C. area non-profit organizations that also joined in the petition, had brought one of the first lawsuits challenging the CFPB’s constitutionality.

 

According to a forthcoming article by Professors Andrea Chandrasekher and David Horton in the California Law Review, more consumers and their lawyers would take advantage of individual arbitration if states enacted non-waivable statutes allowing an arbitrator who awards a prevailing consumer fees and expenses under a fee-shifting statute to augment the award with an extra “bounty” for winning the arbitration.  Such laws, the authors argue, would create an incentive for consumers with small dollar claims to arbitrate rather than litigate, just as “bump-up” clauses used in some companies’ arbitration agreements guarantee the prevailing plaintiff a specific recovery even if the arbitrator’s award is less.  That would help produce more “repeat playing” plaintiff’s law firms to help level the playing field between individuals and “repeat playing” corporate law firms.  The authors assert that these state laws would not be subject to Federal Arbitration Act (FAA) preemption because they encourage arbitration rather than discriminate against it.

At first blush, this might look like a creative way to incentivize plaintiffs’ lawyers to abandon litigation and embrace arbitration, which the authors (correctly) applaud for its “speed and relative affordability.”  The authors, however, are not exactly pro-arbitration advocates.  They denigrate arbitration as a “pale substitute for class actions” and call their own bounty proposal “a second-best solution.”  Their preferred solution is that “Congress should ban class arbitration waivers.”  A skeptic might ask whether the article’s bounty proposal is an attempt to achieve payback for AT&T Mobility LLC v. Concepcion, which upheld the use of class action waivers in consumer arbitration agreements, and Congress’ repeal of the Consumer Financial Protection Bureau’s (CFPB’s) final arbitration rule last October, which would have prohibited the use of such waivers.  In fact, the article does refer to “arbitration entrepreneurs” who inundate the same company with hundreds or even thousands of individual arbitration demands, and it recognizes the potential for a “tsunami of frivolous arbitrations” if the proposed state legislation is enacted.

Although the article is replete with statistics and regression analyses, there is other data supporting the view that an extra bounty is not necessary to incentivize the increased use of consumer arbitration.  For example, the CFPB’s 735-page empirical study of consumer arbitration demonstrated that individual arbitration is far more beneficial to consumers than class action litigation.  Individuals in arbitration received an average recovery of nearly $5,400 (166 times the average putative class member’s recovery of $32.35). That should be incentive enough.  The real problem, as we have argued, is that the prior CFPB director refused to use any of the CFPB’s substantial funds to educate consumers on the benefits afforded by arbitration.

Moreover, the CFPB study dispelled the misconception that companies have an unfair advantage over consumers in arbitration.  The study concluded that while most of the arbitration proceedings it studied involved companies with repeat experience in the forum, that was counter-balanced by the fact that counsel for the consumers were also usually repeat players in arbitration.  Indeed, in 81% of the arbitrations in which consumers were awarded affirmative relief, the company was a “repeat player,” but the consumer prevailed anyway.

Finally, there is a strong argument that the FAA would preempt state laws requiring a bounty to be awarded to prevailing plaintiffs.  First, a central premise of the FAA is that arbitration agreements must be enforced as written, and state laws that interfere with those agreements should be preempted.  It is one thing if parties agree to an enhanced recovery under certain conditions.  It is quite another thing if state laws mandate additional payments to prevailing plaintiffs as a condition for enforcing the arbitration agreement.  Second, under the FAA arbitration agreements are to be treated the same as any other contract.  The imposition of an “arbitrator multiplier” would only affect arbitration agreements and, therefore, the proposed state laws would treat arbitration agreements differently from other contracts.  Third, to the extent that imposition of the bounty would result in abuses of the arbitral system by “arbitration entrepreneurs,” it would be hostile to arbitration and therefore preempted.

In sum, this proposal is too clever by half to garner industry support or pass muster under the FAA.

On September 12, Judge Preska entered an order and judgment dismissing all of the New York Attorney General’s federal and state law claims against RD Legal Funding.  The NYAG had filed the case jointly with the CFPB and in a June 21 ruling, Judge Preska held that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, struck the CFPA (Title X of Dodd-Frank) in its entirety, dismissed the CFPB from the case, and allowed the NYAG to proceed with its CFPA and state law claims.

Judge Preska had initially rejected RD Legal’s argument that her dismissal of the CFPB from the case and striking of Dodd-Frank Title X necessitated her dismissal of the NYAG’s CFPA claims against RD Legal.  In an August 23 order, Judge Preska ruled that she would enter a Rule 54(b) judgment against the CFPB so it could immediately appeal her constitutionality ruling to the Second Circuit.  She also denied RD Legal’s request that she certify the remainder of her June 21 ruling for interlocutory appeal but granted RD Legal’s request to stay the district court proceedings pending the outcome of the CFPB’s appeal.  The NYAG thereafter sought clarification of the effect of her August 23 ruling on its federal and state law claims and the CFPB filed a proposed Rule 54(b) judgment.

In her September 12 order and judgment, Judge Preska “amends” her June 21 order to provide as follows with respect to the NYAG’s claims:

  • Having determined that invalidating Title X in its entirety is the proper remedy for the constitutional violation resulting from the CFPB’s for-cause removal provision, there is no longer a statutory basis for the NYAG to bring its CFPA claims and therefore such claims are dismissed without prejudice for lack of federal jurisdiction
  • There was no substantial federal question embedded in the NYAG’s state law claims that provided federal question jurisdiction over the state law claims. (The NYAG had argued that its state law claims raised issues involving the federal Anti-Assignment Act.)
  • The court will decline to exercise supplemental jurisdiction over the state law claims.
  • The NYAG’s state law claims are dismissed without prejudice.

Judge Preska also closed the case in her September 12 order and judgment.  Since Judge Preska has now dismissed the district court case in its entirety, a Rule 54(b) judgment is no longer necessary for the CFPB to appeal her constitutionality ruling to the Second Circuit and both the CFPB and NYAG can appeal as of right.  Alternatively, the NYAG can refile its CFPA and state law claims in New York state court (although a state court might stay the case pending the outcome of an appeal by the CFPB of the constitutionality issue.)

Judge Preska states in her September 12 order that the conclusions of law in the order “supersede and replace any legal conclusions to the contrary in the June 11, 2018 order.”  In her June 11 order, Judge Preska also concluded that under New York law, the transactions at issue were disguised loans.  As discussed in a prior blog post, we believe the court’s logic was erroneous on the loan recharacterization question.  It would seem that Judge Preska’s ruling that the court did not have jurisdiction to hear the NYAG’s state law claims means that she could not properly rule on the merits of such claims and her recharacterization of the transactions as loans is effectively nullified.

RD Legal has sent a letter to Judge Preska “to clarify a potential clerical error” in her September 12 order.  It notes that she dismissed both the NYAG’s federal and state law claims “without prejudice.”  RD Legal suggests that the court intended to dismiss the NYAG’s federal claims “with prejudice.”

The CFPB’s constitutionality is also at issue in two other pending cases.  A petition for certiorari was filed in the U.S. Supreme Court late last week by State National Bank of Big Spring which, together with two D.C. area non-profit organizations that also joined in the petition, had brought one of the first lawsuits challenging the CFPB’s constitutionality.  In April 2018, the Fifth Circuit agreed to hear All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.

 

 

 

On September 5, 2018 a group of 14 state Attorneys General and the AG for the District of Columbia sent a comment letter to CFPB Acting Director Mick Mulvaney, urging him to refrain from “reexamining the requirements” of the Equal Credit Opportunity Act (“ECOA”). The AGs seek to preserve the interpretation that the ECOA provides for disparate impact liability.

This letter was written in response to the statement issued by the CFPB on May 21, 2018, responding to the enactment of S.J. Res. 57, disapproving of the CFPB’s Bulletin 2013-2 regarding “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act.” Through this joint resolution, Congress rejected the disparate impact theory underlying enforcement actions brought by the CFPB under the ECOA, related to auto dealer finance charge participation.  Although this enactment would appear to mark the demise of such enforcement actions, recent announcements from the New York Department of Financial Services have called that conclusion into question.

In its May 21, 2018 statement, the CFPB indicated that it “will be reexamining the requirements of the ECOA” in light of “a recent Supreme Court decision distinguishing between antidiscrimination statutes that refer to the consequences of actions and those that refer only to the intent of the actor” and “the fact that the Bureau is required by statute to enforce federal consumer financial laws consistently.”  (The statement presumably refers to the Supreme Court’s Inclusive Communities decision.)

Referencing the language in Regulation B and Regulation B Commentary regarding the “effects test,” the AGs argue in their letter that the regulations implementing the ECOA have continuously interpreted the statute as providing for disparate impact liability.  They assert that action by the CFPB in derogation of those regulations would violate the Administrative Procedure Act.

The AGs further argue that because their states have enacted statutes modeled on the ECOA, responsibility for enforcing the statutory protections is shared among the states and the federal government, such that the CFPB cannot overturn the Supreme Court’s 2015 ruling in Inclusive Communities.  The AGs state that the holding of Inclusive Communities, “dictates” that the ECOA provides for disparate impact liability, because the FHA and the ECOA contain identical language stating that it “shall be unlawful for any person . . . to discriminate against any person . . . because of race, color, religion, sex, handicap, familial status, or national origin.”

As we have observed previously, however, the Supreme Court’s conclusion in Inclusive Communities, that disparate impact liability is cognizable under the FHA, was largely based upon, “its results-oriented language, [and] the Court’s interpretation of similar language in Title VII and the [Age Discrimination in Employment Act (ADEA)].”  We commented that the Court’s analysis highlights material differences between the FHA and the ECOA; namely the lack of comparable “results oriented language” in the ECOA.

The states whose AGs signed the comment letter are North Carolina, California, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Vermont, and Virginia.  The same group of state AGs, with the addition of the Attorneys General for Iowa and Pennsylvania, recently sent a letter to HUD urging it not to make changes to its 2013 Disparate Impact Rule in light of the holding in Inclusive Communities.

As the Supreme Court aptly recognized in Inclusive Communities, limitations on disparate impact liability are necessary to protect potential defendants from abusive disparate impact claims.  The requirement of a “robust” causality requirement helps to safeguard potential defendants from claims that, in effect, seek to hold them “liable for racial disparities they did not create.”  These considerations, along with the materially different language in the two statutes, raises substantial questions as to how persuasive the CFPB will find the arguments presented by the state AGs.