The New York Attorney General, on October 12, 2018, filed a notice of an appeal to the Second Circuit from Judge Preska’s dismissal on September 12, 2018 of all of the NYAG’s federal and state law claims, and her subsequent September 18 order amending the September 12 order to provide that the NYAG’s claims under Dodd-Frank Section 1042 were dismissed “with prejudice.”  (Section 1042 authorizes state attorneys general to initiate lawsuits based on UDAAP violations.)

On September 14, the CFPB filed an appeal with the Second Circuit from Judge Preska’s June 21, 2018 decision, as amended by her September 12 order, in which she ruled 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.  That was followed on September 25 by RD Legal Funding’s filing of a cross-appeal with the Second Circuit from Judge Preska’s June 21 decision, as subsequently amended, in which Judge Preska had ruled that the NYAG had stated federal and state law claims against RD Legal Funding.  (Although Judge Preska’s various orders resulted in the dismissal of all of the CFPB’s and NYAG’s claims, RD Legal Funding may have filed the cross-appeal to preserve its ability to challenge Judge Preska’s June 21 ruling that the NYAG had stated claims against RD Legal Funding should the Second Circuit conclude that the CFPB’s structure is constitutional or that the structure is unconstitutional but that the proper remedy is to sever the Dodd-Frank for-cause removal provision rather than strike all of Title X.)

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.

 

 

Last week, the Connecticut Fair Housing Center, Inc. filed a complaint against Liberty Bank in Connecticut federal district court alleging that the Bank engaged in discriminatory mortgage lending in violation of the federal Fair Housing Act.  The complaint describes the Bank as “the eighth-largest conventional home purchase lender and eleventh-largest refinancer in Connecticut.”

The complaint alleges that the Bank violated the FHA by engaging in the following conduct:

  • According to the complaint, the Bank deliberately drew its CRA assessment area so as to exclude and thereby avoid CRA scrutiny of its banking and lending activities in certain towns with racially diverse populations and generates a disproportionately low number of mortgage loans within its assessment area from non-white applicants, making “significantly fewer than expected loans than nearly all its peers in majority-non-white census tracks, even when controlling for underwriting criteria like income and whether the borrower will live in the property.”  The Bank is also alleged to over-concentrate its branches in white census tracts and, compared to its leading competitors, to have an insufficient number of branches in majority-non-white and racially diverse census tracts.  The complaint alleges that to test for redlining, the plaintiff “used a statistical measure called a shortfall.”   This measure “assumes that the number of loans is constant across the region and then estimates what the distribution of loans would be if they were made solely according to the income of loan applicants rather than some other factor like composition of neighborhood or race of the applicant.”  It then “allows a comparison between expected lending patterns and actual lending patterns for a single mortgage lender, and tests whether differences in origination volume are a result of applicant characteristics or variables such as discrimination against a protected class.”
  • Discrimination in extending credit.  The complaint alleges that the bank denies African-American and Latino loan applicants at a substantially higher rate than substantially similar white applicants after controlling for income and other neighborhood features.
  • Discouraging applications.  The complaint alleges that Bank representatives made statements that would discourage African-American and Latino applicants from applying for loans, provided significantly less information about the home-buying process to African-American and Latino applicants than white applicants, and offered loan terms to African-American and Latino applicants that were inferior to those offered to white applicants.  In support of these allegations, the complaint describes six different tests in which African-American, Latino, and white testers were allegedly sent by the plaintiff to various Bank locations to meet with a loan officer or obtain copies of advertising materials for mortgages.

The complaint serves as a reminder that while fair lending enforcement may appear to no longer be emphasized by the CFPB under Acting Director Mulvaney, lenders should keep fair lending issues front of mind.  In addition to private plaintiffs, state regulators continue to pursue initiatives to enforce fair lending laws.

 

On September 21, 2018, the Attorney General for the State of Washington filed a lawsuit (see complaint) against several companies engaged in purchasing charged-off consumer debts, for operating as “collection agencies” without a license, in violation of the Washington Collection Agency Act (WCAA).  The lawsuit names EGP Investments, LLC, JPRD Investments, LLC, and The Collection Group LLC (the Debt Buyers) as defendants, along with Fair Resolutions, Inc. (FRI) – a licensed collection agency hired to collect debts on their behalf – and Brian Fair (Fair) of Wenatchee, Washington, who formed and owns/controls each company.  While all of the named entities are currently licensed “collection agencies” under Washington law, the lawsuit relates to conduct between May 2004 and September 2009, when the Debt Buyers allegedly filed thousands of collection complaints against Washington consumers without a license.  The lawsuit charges FRI and Fair with aiding and abetting the Debt Buyers’ alleged violation of the WCAA.

Notably, the Debt Buyers (like many of their peers operating in Washington State) obtained licenses prior to October 1, 2013, when the WCAA was amended to clarify that it applied to debt buyers, “whether [they] collect[]  the claims [themselves] or hire[] a third party for collection or an attorney for litigation in order to collect such claims.”  Prior to the amendment, and as relevant here, the WCAA defined a “collection agency” to include entities “directly or indirectly engaged in soliciting claims for collection, or collecting or attempting to collect claims owed or due or asserted to be owed or due another.”  (emphasis added).  Thus, prior to the amendment, many “passive debt buyers” operated under the presumption that the WCAA did not require them to be licensed – an interpretation adopted by the Washington Collection Agency Board, which regulates collection agencies within the state.

However, Washington’s Supreme Court rejected this interpretation in 2014, after the Eastern District of Washington certified the issue during a lawsuit brought by a consumer against a large national debt buyer (see opinion).  Like the Debt Buyers, the defendant in that case became licensed immediately before the 2013 amendment took effect, prior to which it allegedly violated the WCAA by operating without a license – notwithstanding the fact that it hired licensed collection agencies and/or attorneys to actively pursue collection.  While the Washington Supreme Court acknowledged that the pre-amendment definition was “ambiguous,” it found “the most reasonable interpretation [to be] that debt buyers fall within it when they solicit claims for collection[,]” regardless of whether they “outsource[d] the collection [or the filing of collection lawsuits].”  The court noted that the amendment supported this interpretation, as it served to clarify (rather than change) the statute.  Following the Supreme Court’s holding, the defendant raised a good faith defense, and argued that it should not be held liable for violating the WCAA where the statute was ambiguous, and it acted in good faith reliance on the state regulator’s interpretation of the statute. The District Court rejected this argument, however, finding that the legislature’s decision to define the violation as a “per se” unfair practice meant the defendant was liable, even if it acted in good faith.

The Washington AG’s lawsuit highlights the risk created by ambiguous laws and regulations, along with the need for a company to stay current on and consult with legal counsel about potentially applicable laws and regulations – at the federal, state, and local level – in any market in which the company does business.  This is particularly true for laws and regulations pertaining to consumer protection, which (like the WCAA) often allow for enforcement through either private litigation or government enforcement actions.

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.

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.

 

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.

 

 

 

The CFPB has filed a proposed Rule 54(b) judgment in the RD Legal Funding case.  The proposed judgment provides that “for the reasons stated in the Court’s June 21, 2018 Order, (ECF No. 80), final judgment is hereby entered pursuant to Rule 54(b) against the Consumer Financial Protection Bureau and in favor of Defendants [RD Legal Funding et al.]”

In her June 21 order, Judge Preska ruled that the CFPB’s structure is unconstitutional and struck all of Title X of Dodd-Frank.  Since Judge Preska, on August 23, entered an order granting the CFPB’s request for entry of a Rule 54(b) judgment so that it could appeal her June 21 ruling, she can be expected to sign the proposed order.  In a letter accompanying the proposed order, the CFPB states that “the parties have conferred” and the NYAG and all of the defendants “do not object to the proposed judgment.”

 

The New York Attorney General has sent a letter to Judge Preska asking her to clarify her August 23 order granting the CFPB’s request for entry of a Rule 54(b) judgment so that it can appeal her June 21 constitutionality ruling.  In the August 23 order, Judge Preska also denied RD Legal’s request that she certify the remainder of her ruling for interlocutory appeal but granted RD Legal’s request to stay the district court proceedings pending the outcome of the CFPB’s appeal.

In her June 21 ruling, Judge Preska held that 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 New York Attorney General to proceed with its CFPA and state law claims.  RD Legal had argued that Judge Preska’s 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.  Accordingly, it had asked Judge Preska to dismiss the NYAG’s federal claims with prejudice and dismiss the NYAG’s state law claims for lack of federal subject matter jurisdiction without prejudice to their being refiled in state court.

Judge Preska’s August 23 order appears to implicitly accept RD Legal’s argument that her constitutionality ruling, if upheld by the Second Circuit, would require dismissal of the NYAG’s CFPA claims.  In its letter, the NYAG asks her to provide answers to three questions that it deems “essential to determining the NYAG’s further conduct in this case.”

The NYAG asks Judge Preska:

  • Whether the NYAG’s CFPA claims remain before the court because it has found that it has jurisdiction to hear those claims
  • Whether, if the court actually dismissed the NYAG’s CFPA claims in its June 21 ruling, the court retained jurisdiction over the NYAG’s state law claims because the claims contain an embedded federal law question (which the NYAG has previously identified to be whether the transactions that RD Legal Funding entered into with consumers entitled to benefits under the September 11th Victim Compensation Fund of 2001 were void under the federal Anti-Assignment Act and therefore loans subject to New York usury law)
  • Whether, even if the court dismissed the NYAG’s CFPA claims and found that it lacked jurisdiction to hear the NYAG’s state law claims based on the existence of an embedded federal law question, the court has nonetheless exercised its jurisdiction to retain supplemental jurisdiction over the state law claims

The NYAG observes that by staying the case as to the NYAG rather than dismissing all of its claims, “it appears that the Court has determined that it retains some jurisdiction over at least some claims.” (emphasis provided).  According to the NYAG, if the court has dismissed the NYAG’s CFPA claims in their entirety, “the NYAG may wish to seek leave to have the dismissal certified for interlocutory appeal in the hopes of having such an appeal consolidated with the CFPB’s so that all CFPA claims in this case might be reviewed at once.”  The NYAG also indicates that if the court has dismissed the NYAG’s CFPA claims entirely but retained jurisdiction over the state law claims, the NYAG may need to “seek vindication of its state law claims in state court” rather than wait for an appeal to be decided because of “the age and ill health of some of the New York residents who are victims in this case.”  Finally, the NYAG indicates that “giving the parties certainty about their positions will facilitate any settlement discussions that may take place during the stay.”

 

 

Judge Preska has entered an order granting the CFPB’s request for entry of a Rule 54(b) judgment to allow the CFPB to appeal her June 21 constitutionality ruling to the Second Circuit.  Although Judge Preska’s order denies RD Legal’s request that she certify the remainder of her ruling for interlocutory appeal, it grants RD Legal’s request to stay the district court proceedings pending the outcome of the CFPB’s appeal.

In her June 21 ruling, Judge Preska held that 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 New York Attorney General to proceed with its CFPA and state law claims.  RD Legal had argued that Judge Preska’s 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.  Accordingly, it had asked Judge Preska to dismiss the NYAG’s federal claims with prejudice and dismiss the NYAG’s state law claims for lack of federal subject matter jurisdiction without prejudice to their being refiled in state court.

While denying RD Legal’s request to certify her ruling on the NYAG’s claims for interlocutory appeal, Judge Preska’s order appears to implicitly accept RD Legal’s argument that her constitutionality ruling, if upheld by the Second Circuit, would require dismissal of the NYAG’s CFPA claims.  She stated that “[t]he controlling question of law as to the Court’s subject matter jurisdiction, and thus to the order dismissing the CFPB, relates to the constitutionality of the CFPB’s structure….Assuming that the CFPB proceeds with its stated intention of appealing this Court’s June 21, 2018 Order dismissing its claims against the RD Legal Parties, the final disposition of that appeal alone will ‘materially advance the ultimate termination of the litigation’ because it will bring certainty to the parties in their litigation of the federal issues presented.  The same cannot be said for the state law issues.  By and large, they are well-settled.”  (As discussed in a prior blog post, we think the logic used by the court in concluding that the transactions at issue were disguised loans was erroneous.)

The NYAG had opposed RD Legal’s request for a stay of the district court proceedings pending the outcome of the CFPB’s appeal.  In explaining her rationale for granting a stay, Judge Preska stated that “[a] stay will avoid the possibility of prejudice to the parties and will mitigate the expense and practical difficulties Defendants would face if tasked with defending two overlapping trials at once.”

A CFPB appeal of Judge Preska’s constitutionality ruling to the Second Circuit means that two circuits will be actively considering the CFPB’s constitutionality, thereby increasing the likelihood of this issue coming before the U.S. Supreme Court in the next year or so.  The issue of the CFPB’s constitutionality is currently before the Fifth Circuit in the interlocutory appeal of All American Check Cashing from the district court’s ruling upholding the CFPB’s constitutionality.  American Check Cashing has filed a petition asking the Fifth Circuit to hear its interlocutory appeal en banc as an initial matter.  A third circuit, the D.C. Circuit, held in its January 2018 en banc PHH decision that the CFPB’s structure is constitutional.

Resolving an ambiguity in the California Finance Lender’s Law (CFLL), the California Supreme Court unanimously held that borrowers may use the unconscionability doctrine to challenge the interest rate on consumer loans of $2,500 or more, despite the fact that the CFLL has deregulated interest rates on such loans.  Although unconscionability claims of this nature will be difficult to prosecute, the decision creates heightened risk for nonbank consumer lenders doing business in California, particularly when lending at high rates.  Furthermore, because the decision could be followed in other states or applied in other contexts, such as small business lending, it also could impact loans made under other statutes that have deregulated interest rates, as opposed to statutes that affirmatively authorize interest rates established by contract.

In addition to copycat lawsuits by private plaintiffs alleging their interest rates are unconscionable, high-rate lenders could even face enforcement actions challenging their rates.  In California, it is possible that the state’s Attorney General, local prosecutors, or the California Department of Business Oversight (which has regulatory and supervisory jurisdiction over CFLL licensees) will pile on.

On October 16, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “The Sky is Not The Limit: California Supreme Court Re-Regulates Deregulated Interest Rates.”  The webinar registration form is available here.

See our legal alert for a fuller discussion of the California Supreme Court’s decision.