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

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

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

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

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

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

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

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

 

Earlier this week, Governor Andrew Cuomo again advanced controversial legislation that would establish a state licensing regime for student loan servicers.  The proposal, which is packaged as Part L of the governor’s proposed Transportation, Economic Development and Environmental Conservation Bill for fiscal year 2020, would require companies that service student loans held by New Yorkers to obtain a state license from the New York Department of Financial Services (NYDFS) and submit to onerous reporting and examination requirements.  The proposal also would authorize NYDFS to seek—in addition to remedies already available to other New York and federal regulators—substantial penalties for enumerated categories of loan servicing misconduct.

Similar legislation has repeatedly failed in the past.  Last year’s proposal, despite having support from the office of former New York Attorney General Eric Schneiderman, was “intentionally omitted” from the amended budget bill passed by the New York legislature; the same thing happened in 2017.  Efforts to codify a “student loan borrower bill of rights” died in the Higher Education committees of the New York Assembly and Senate during the 2017-18 legislative session.

This year’s proposed licensing scheme differs significantly from previous efforts in several respects.  First, it expressly includes a limited carve-out for entities that service federal student loans (i.e., those issued under the William D. Ford Federal Direct Loan Program, or issued under the Federal Family Education Loan Program and later purchased by the federal government).  That provision was most likely included in response to the recent federal court opinion holding that federal law partially preempted the District of Columbia’s like-minded attempt to license student loan servicers.  The New York proposal would still, however, leave servicers of federal student loans subject to penalty for failure to satisfy certain notice obligations or adhere to the aforementioned substantive standards of operation.  Those provisions are likely to continue to present preemption issues.

Also unlike previous efforts, the FY 2020 proposal provides for substantial penalties for violations of the proposed licensing scheme.  Proposed penalties are capped at the greater of (1) $10,000 per offense; (2) double the actual damages caused by the violation; or (3) double the “aggregate economic gain” attributable to the violation.  The new proposal drops calls for a student loan ombudsman within NYDFS.  It also abandons provisions from the prior year’s draft that would have imposed restrictions on student debt consultants and prevented certain state licensing boards from denying a professional license because of an applicant’s student debt.

Whether these changes will be enough to persuade the New York legislature to adopt a measure that it has repeatedly rejected, and that is all but certain to face additional challenges in federal court, remains to be seen.

 

 

 

 

According to a report issued earlier this month, the Maryland Financial Consumer Protection Commission is considering the adoption of the “Model State Consumer and Employee Justice Enforcement Act” developed several years ago by the National Consumer Law Center.

The Model Act proposes a number of “state interventions” aimed at preventing the alleged harms caused by “forced arbitration.”  Based upon the Model Act and the U.S. Consumer Financial Protection Bureau’s since-repealed final arbitration rule, the Commission’s report concludes that “forced arbitration clauses lessen consumer protection.”  It assigns three reasons for this: “(1) many clauses require consumers to pursue what are often small dollar claims individually, without the benefit of a class or group; (2) arbitration can be very expensive due to mandatory fees or requirements to use arbitration in another geographic location; and (3) businesses’ greater familiarity with the process may allow them to prolong the duration of arbitration.”

Fortunately, based on strong opposition by the Maryland Bankers Association and other industry groups, the Commission stopped short of recommending adoption of the model act.  Instead, it has recommended “further study to identify remedies which may serve to establish increased fairness for consumers.”  That is a good thing for consumers – because individual arbitration has been proven to be cheaper, faster and more beneficial to consumers than class action litigation.

The CFPB’s own statistics prove that arbitration is a far superior choice for consumers (though not for the lawyers who represent them in class actions).  After exhaustively studying arbitration and class actions for several years, the CFPB came to these empirical conclusions:

  • Arbitration was found to be faster and less costly than class action litigation.  Disputes were resolved in two to five months instead of two years or more, and consumers paid just $200 in fees or, in many cases, nothing.  By contrast, it cost consumers $400 just to file a complaint in federal court.
  • The average consumer recovery in arbitration was nearly $5,400.  But the average class member received a mere $32 (166 times less).  Most class members did not even get that paltry sum.  According to the CFPB, 87% of class members got no benefits at all.  The lawyers for the class, by contrast, made a whopping $424,495,451 in attorneys’ fees.
  • Moreover, disputes actually get resolved in arbitration.  None of the 562 class actions studied by the CFPB went to trial.  By contrast, of 341 cases resolved by arbitrator, in-person hearings were held in 34% of the cases, and arbitrator reached merits of the claims in 146 cases.  Arbitration produces results, not foot-dragging.

The Commission’s report also suggests that companies win more often in arbitration than consumers.  Not so.  A 2009 Northwestern University School of Law study of more than 300 arbitrations showed that consumers won relief in 53.3% of the cases and recovered their attorneys’ fees in 63.1% of them.  And, a 2005 Harris Interactive poll of 609 consumers who participated in arbitrations found that arbitration was seen by most of the participants as faster, simpler and cheaper than going to court, and two-thirds of them said they would be likely to use arbitration again.

Facts such as these lead to one inexorable conclusion: consumers will be harmed if arbitration is replaced by class action litigation as a way to resolve disputes.  A study by the U.S. Chamber of Commerce showed that 90% of the claims that consumers bring against financial services companies are not even suitable for class action treatment because they involve unique, individualized facts that do not apply to others.  The Commission should consider how these consumers will resolve their disputes if arbitration is eliminated.

The Commission’s report also notes that relatively few consumers avail themselves of arbitration when they have disputes with companies.  But that is due, in large part, to the fact that consumers have not been educated in any systematic fashion on the benefits that arbitration has to offer.  Unfortunately, the CFPB did not take the opportunity to do so.  But consumers who experience arbitration like it.  We strongly suggest that the Commission consider the implementation of a consumer arbitration education program as one of the “remedies which may serve to establish increased fairness for consumers.”

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

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

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

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

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

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

A Minnesota federal district court recently ruled that lead generators for a payday lender could be liable for punitive damages in a class action filed on behalf of all Minnesota residents who used the lender’s website to obtain a payday loan during a specified time period.  An important takeaway from the decision is that a company receiving a letter from a regulator or state attorney general that asserts the company’s conduct violates or may violate state law should consult with outside counsel as to the applicability of such law and whether a response is required or would be beneficial.

The amended complaint names a payday lender and two lead generators as defendants and includes claims for violating Minnesota’s payday lending statute, Consumer Fraud Act, and Uniform Deceptive Trade Practices Act.  Under Minnesota law, a plaintiff may not seek punitive damages in its initial complaint but must move to amend the complaint to add a punitive damages claim.  State law provides that punitive damages are allowed in civil actions “only upon clear and convincing evidence that the acts of the defendants show deliberate disregard for the rights or safety of others.”

In support of their motion seeking leave to amend their complaint to add a punitive damages claim, the named plaintiffs relied on the following letters sent to the defendants by the Minnesota Attorney General’s office:

  • An initial letter stating that Minnesota laws regulating payday loans had been amended to clarify that such laws apply to online lenders when lending to Minnesota residents and to make clear that such laws apply to online lead generators that “arrange for” payday loans to Minnesota residents.”  The letter informed the defendants that, as a result, such laws applied to them when they arranged for payday loans extended to Minnesota residents.
  • A second letter sent two years later informing the defendants that the AG’s office had been contacted by a Minnesota resident regarding a loan she received through the defendants and that claimed she had been charged more interest on the law than permitted by Minnesota law.  The letter informed the defendants that the AG had not received a response to the first letter.
  • A third letter sent a month later following up on the second letter and requesting a response, followed by a fourth letter sent a few weeks later also following up on the second letter and requesting a response.

The district court granted plaintiffs leave to amend, finding that the court record contained “clear and convincing prima facie evidence…that Defendants know that its lead-generating activities in Minnesota with unlicensed payday lenders were harming the rights of Minnesota Plaintiffs, and that Defendants continued to engage in that conduct despite that knowledge.”  The court also ruled that for purposes of the plaintiffs’ motion, there was clear and convincing evidence that the three defendants were “sufficiently indistinguishable from each other so that a claim for punitive damages would apply to all three Defendants.”  The court found that the defendants’ receipt of the letters was “clear and convincing evidence that Defendants ‘knew or should have known’ that their conduct violated Minnesota law.”  It also found that evidence showing that despite receiving the AG’s letters, the defendants did not make any changes and “continued to engage in lead-generating activities in Minnesota with unlicensed payday lenders,” was “clear and convincing evidence that shows that Defendants acted with the “requisite disregard for the safety” of Plaintiffs.”

The court rejected the defendants’ argument that they could not be held liable for punitive damages because they had acted in good-faith when not acknowledging the AG’s letters.  In support of that argument, the defendants pointed to a Minnesota Supreme Court case that held punitive damages under the UCC were not recoverable where there was a split of authority regarding how the UCC provision at issue should be interpreted.  The district court found that case “clearly distinguishable from the present case because it involved a split in authority between multiple jurisdictions regarding the interpretation of a statute.  While this jurisdiction has not previously interpreted the applicability of [Minnesota’s payday loan laws] to lead-generators, neither has any other jurisdiction.  Thus there is no split in authority for the Defendants to rely on in good faith and [the case cited] does not apply to the present case.  Instead, only Defendants interpret [Minnesota’s payday loan laws] differently and therefore their argument fails.”

Also rejected by the court was the defendants’ argument that there was “an innocent and equally viable explanation for their decision not to respond or take other actions in response to the [AG’s] letters.”  More specifically, the defendants claimed that their decision “was based on their good faith belief and reliance on their own unilateral company policy that that they were not subject to the jurisdiction of the Minnesota Attorney General or the Minnesota payday lending laws because their company policy only required them to respond to the State of Nevada.”

The court found that the defendants’ evidence did not show either that there was an equally viable innocent explanation for their failure to respond or change their conduct after receiving the letters or that they had acted in good faith reliance on the advice of legal counsel.  The court pointed to evidence in the record indicating that the defendants were involved in lawsuits with states other than Nevada, some of which had resulted in consent judgments.  According to the court, that evidence “clearly show[ed] that Defendants were aware that they were in fact subject to the laws of states other than Nevada despite their unilateral, internal company policy.”

 

 

 

Having declared the CFPB eviscerated by President Trump, Colorado’s newly elected Democratic Attorney General, Phil Weiser, is expected to take an active approach to consumer protection.  In this week’s podcast, Ballard Spahr Partner Matt Morr, based in the firm’s Denver office, discusses Mr. Weiser’s background, key appointees, and likely areas of focus.

To listen to the podcast, click here.

 

 

A coalition of 14 state Attorneys General and the D.C. Attorney General have filed an amicus brief with the U.S. Court of Appeals for the Fourth Circuit in Williams v. Big Picture Loans in which a tribal lender and its tribal service provider have appealed from the district court’s denial of their motion to dismiss the complaint filed by consumers who alleged that the interest rate charged by the lender violated Virginia law.

The defendants argued that the complaint should be dismissed because, as “arms of the tribe,” the lawsuit was barred by sovereign immunity.   In denying the motion to dismiss, the district court ruled that the defendants had the burden of proving that they were shielded by sovereign immunity and had not met that burden.

In their amicus brief, the Attorneys General argue that the district court correctly placed on the defendants the burden of providing their entitlement to sovereign immunity (rather than on the plaintiffs to negate a claim of sovereign immunity).  They also argue that in determining whether the defendants acted as “arms of the tribe,” it was proper for the district court to look beyond the defendants’ official actions (meaning their legal or organizational relationship to the tribe) and consider their practical operation in relation to the tribe.

 

On December 28, 2018, New York Governor Cuomo signed into law amendments to the state’s General Business Law (GBL) that address the collection of family member debts.  The amendments made by Senate Bill 3491A become effective March 29, 2019.

While the legislative history indicates that the amendments are intended to address the collection of a deceased family member’s debts, they are drafted more broadly to prohibit “principal creditors and debt collection agencies” from: (a) making any representation that a person is required to pay the debt of a family member in a way that contravenes the FDCPA; and (b) making any misrepresentation about the family member’s obligation to pay such debts.

The GBL defines a “principal creditor” as “any person, firm, corporation or organization to whom a consumer claim is owed, due or asserted to be due or owed, or any assignee for value of said person, firm, corporation or organization.”  The amendments define a “debt collection agency” as “a person, firm or corporation engaged in business, the principal purpose of which is to regularly collect or attempt to collect debts: (A) owed or due or asserted to be owed or due to another; or (B) obtained by, or assigned to, such person, firm or corporation, that are in default when obtained or acquired by such person, firm or corporation.” 

In 2011, the FTC issued its final Statement of Policy Regarding Communications in Connection With the Collection of Decedents’ Debts to provide guidance on how it would enforce the FDCPA and Section 5 of the FTC Act in connection with the collection of debts of deceased debtors.  The policy statement provides that the FTC will not initiate an enforcement action under the FDCPA against a debt collector who (1) communicates for the purpose of collecting a decedent’s debts with a person who has authority to pay such debts from the assets of the decedent’s estate even if that person does not fall within the FDCPA’s definition of “consumer,” or (2) includes in location communications a statement that it is seeking to identify a person with authority to pay the decedent’s “outstanding bills” from the decedent’s estate.  It also contains a caution that, depending on the circumstances, contacting survivors about a debt too soon after the debtor’s death may violate the FDCPA prohibition against contacting consumers at an “unusual time” or at a time “inconvenient to the consumer.”

 

 

The NY Attorney General and the plaintiffs in Expressions Hair Design v. Schneiderman have filed a joint motion with the U.S. Court of Appeals for the Second Circuit asking the court to vacate the district court’s final judgment in the case, remand with an order to the district court to dismiss the complaint with prejudice, and dismiss the plaintiffs’ appeal as moot.

The complaint in Expressions Hair Design was filed by five merchants and their principals who alleged that New York’s “no credit card surcharge” law was an unconstitutional restriction on speech because it did not allow merchants to tell customers that they are paying more for using credit than for using cash or another payment method.  The district court had entered a judgment declaring the New York law unconstitutional and enjoining its enforcement against the plaintiffs but the Second Circuit reversed, ruling that the law did not implicate the First Amendment because it regulated a pricing practice, not speech.

The U.S. Supreme Court granted the plaintiffs’ petition for certiorari and ruled that the New York law did regulate speech, thereby making it subject to First Amendment scrutiny.  Because the Second Circuit had not considered whether, as a speech regulation, the law survived such scrutiny, the Supreme Court vacated the Second Circuit’s decision and remanded for the Second Circuit to consider that issue.

On remand, the Second Circuit certified to the New York Court of Appeals the question whether a merchant would comply with the New York law if it posted the total dollars-and-cents price charged to credit card customers (rather than posting a single cash price and indicating that an additional amount is added for credit card customers).  The New York court concluded that if a merchant posts its prices and charges lower prices to cash customers, it must post the price charged to credit card customers.  However, while concluding that the law did not allow a merchant to post a single cash price, the New York court determined that it did not prohibit a merchant from using the word “surcharge” or any other words to communicate to customers that the credit card price is higher than the cash price.

The next step in the case would have been for the Second Circuit to decide whether the New York law, as interpreted by the state’s Court of Appeals, was a valid restriction on commercial speech under U.S. Supreme Court precedent.  According to the NY Attorney General’s affirmations accompanying the joint motion, while further briefing was pending, the plaintiffs informed the NY Attorney General that they no longer wished to pursue any of their claims and wanted to dismiss their complaint, with prejudice.  The parties assert that the plaintiffs’ decision to withdraw their complaint moots the case.  Accordingly, they ask the Second Circuit to vacate the district court’s final judgment, instruct the district court to dismiss the complaint with prejudice, and dismiss the plaintiff’s appeal as moot.

The NY Attorney General’s affirmations also state that another factor weighing in favor of vacatur is that the plaintiffs’ decision to withdraw their complaint “should not leave intact a final judgment that declares a duly enacted state statute unconstitutional and enjoins the State and several District Attorneys from enforcing the statute against plaintiffs.”  As this statement suggests, once the district court’s decision is vacated, the NY Attorney General would be free to enforce the New York law against the plaintiffs–and other merchants–as interpreted by the New York Court of Appeals.  In other words, while a New York merchant can lawfully charge more to credit card than cash customers and label the differential amount a “surcharge,” the merchant would violate New York law if it only posted the cash price without also posting the higher price charged to credit card customers.

 

In a January 4 posting, Colorado’s outgoing Attorney General, Cynthia Coffman, issued an administrator’s opinion as to whether Section 5-2-214 of the Uniform Consumer Credit Code prohibits supervised lenders from utilizing post-dated checks, debit authorizations, and other forms of up-front payment authorization, as security for payment of “alternate charge” consumer installment loans. Alternate charge consumer loans under the UCCC allow supervised lenders to charge, among other things, acquisition charges and monthly installment handling charges, when the amount financed is not more than one thousand dollars. The AG expressed that holding a post-dated check –even if that check corresponds to a future regularly-scheduled installment payment — would be strictly prohibited. The AG opined, on the other hand, that the use of up-front payment authorizations — if limited to regularly scheduled payments and revocable by the consumer — would be permissible.

In analyzing the issue, the AG considered whether post-dated checks and up-front payment authorizations would constitute prohibited “collateral” – a term undefined by the UCCC – under C.R.S. § 5-2-214(7). The AG supplemented the UCCC with definitions of “collateral” and “security interest” as drawn from the Uniform Commercial Code. Doing so, the AG concluded that post-dated checks would constitute collateral under all circumstances while up-front payment authorizations would not constitute collateral under certain circumstances. The AG further bolstered her analysis by considering various courts’ interpretation of the federal Truth in Lending Act’s disclosure requirements, as pertaining to post-dated checks and certain debit authorizations.

Supervised lenders should take heed of the administrator’s opinion, and how it may impact the making and administration of alternate charge consumer installment loans under the watchful eye of Colorado’s new Attorney General, Phil Weiser. In particular, those supervised lenders who routinely utilize debit authorizations should be mindful that their written loan agreements expressly state that the consumer may revoke a debit authorization at any time, and should instruct their officers not to utilize debit authorizations to make a debit from the consumer’s bank account should the consumer fail to make a regularly-scheduled installment payment.