We previously reported that the Connecticut Attorney General, on behalf of the Attorneys General of Indiana, Kansas and Vermont, (the “state AGs”) had filed a joint motion to intervene in a CFPB enforcement action to request a Consent Order modification permitting unused settlement funds to be paid to the National Association of Attorneys General (“NAAG”).  Under the proposed modification, the undistributed settlement funds would be used by NAAG for the purpose of developing the National Attorneys General Training and Research Institute Center for Consumer Protection (“NAGTRI”).

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

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

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

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

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

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

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

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

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

 

The Democratic Attorneys General of 16 states and the District of Columbia have filed a motion with the D.C. Circuit seeking to intervene in the PHH appeal.  The states are Connecticut, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Mississippi, New Mexico, New York, North Carolina, Oregon, Rhode Island, Vermont, and Washington.

According to the AGs, they had little reason to intervene when PHH originally filed its appeal in June 2015 because the CFPB then had an independent Director and was fully committed to defending the CFPB’s constitutionality.  They assert that the situation has changed due to the Presidential election, with President Trump having expressed strong opposition to Dodd-Frank reforms and media reporting that he is considering the removal of Director Cordray as soon as possible.  More specifically, they claim that the new Administration “has indicated that it may not continue an effective defense of the statutory for-cause protection of the CFPB director” and “[a] significant probability exists that the pending petition for rehearing will be withdrawn, or the case otherwise rendered moot, in a way that directly prejudices the interests of the State Attorneys General and the citizens of the States that they represent.”

The AGs argue that they satisfy the standard for intervention on appeal as of right because:

  • Although a motion to intervene must be filed within 30 days after a petition for review is filed, the motion is timely because the court has discretion to extend the deadline for good cause.  Such cause exists because there was no reason for the AGs to believe until after the presidential election “that their interests would not be represented in full.”
  • They have a legally protected interest in the litigation based on their role in enforcing consumer protection laws.  The AGs claim that because the CFPA requires a state AG to notify the CFPB when the AG is using his or her Section 1042 authority to enforce the CFPA and allows the CFPB to intervene as a party, “[r]emoval of the Director’s independence as a result of this Court’s ruling would…effectively giv[e] the President veto power over the State Attorneys’ General enforcement of the CFPA.”  They also note that because the CFPA directs the CFPB to coordinate regulatory actions with state AGs, the D.C. Circuit’s ruling threatens the AGs’ ability to bring coordinated regulatory actions “free from political influence and interference.”
  • If the CFPB chooses to no longer defend the case, the interests of the state AGs and state citizens will be seriously impaired because by “permitting the immediate termination of the Director at will,” the panel’s decision not only compromises the CFPB’s independence but also “will likely derail pending policy initiatives and enforcement actions and possibly call into question the validity of past initiatives.”
  • Because “[t]here is reason to believe that the new administration will not maintain its defense of the CFPB,” the interests of the state AGs are unlikely to be adequately represented by the executive branch.

The AGs also argue in the alternative that they satisfy the requirements for permissive intervention because, in arguing like the CFPB and United States that the D.C. Circuit’s constitutionality ruling is wrong, they “would have a defense that would share a common question of law with the main action.”

Since the AGs indicate in their motion that they do not intend to file additional briefs unless the D.C. Circuit “orders briefing for the en banc proceedings,” the motion seems unlikely to significantly delay a ruling on the CFPB’s petition for en banc rehearing.  Pursuant to the D.C. Circuit’s order granting PHH’s motion for leave to file a supplemental response to the CFPB’s petition, PHH must file its supplemental response by January 27.  Presumably, the D.C. Circuit will rule on the petition soon thereafter.

The Attorneys General for the states of Connecticut, Indiana, Kansas, and Vermont recently took the unusual step of filing a joint motion to intervene to modify the settlement terms of a CFPB enforcement action.

The motion was filed in the CFPB’s action filed in a New York federal district court in December 2014 against Sprint Corporation that alleged Sprint had violated the Consumer Financial Protection Act by allowing unauthorized third-party charges on its customers’ telephone bills.  To settle the action, Sprint and the CFPB entered into a Stipulated Final Judgment and Order (Stipulated Judgment) that required Sprint to pay $50 million in consumer refunds pursuant to a redress plan.

According to the memorandum in support of the joint motion to intervene, the redress plan provides that once the deadline for customers to file passes and Sprint refunds all charges for approved claims, Sprint must pay the balance of the $50 million to the CFPB.  The CFPB, in consultation with the states (which were parties to separate agreements with Sprint relating to similar billing practices claims) and the FCC, must then determine if additional consumer redress is “wholly or partially impracticable or otherwise inappropriate.”  If additional redress is determined to be “wholly or partially impracticable or otherwise inappropriate,” the CFPB, again in consultation with the states and the FCC, can apply the remaining funds “for such other equitable relief, including consumer information remedies, as determined to be reasonably related to the allegations set forth in the Complaint.”  Any funds not used for such equitable relief are to be deposited in the U.S. Treasury as disgorgement.

The AGs claim in their motion that, after payment of claims, approximately $14 million of Sprint’s redress funds remain unused and that the CFPB, in consultation with the Vermont AG acting as liaison for the states and the FCC, has concluded that additional redress is wholly or partially impracticable or otherwise inappropriate and did not identify any other equitable relief towards which the CFPB could apply the remaining funds.

The AGs seek to modify the Stipulated Judgment to require the CFPB to deposit the remaining funds with the National Association of Attorneys General to continue and complete the development of the National Attorneys General Training and Research Institute (NAGTRI) Center for Consumer Protection.  NAGTRI proposes to use the funds “to train, support and improve the coordination of the state consumer protection attorneys charged with enforcement of the laws prohibiting the type of unfair and deceptive practices alleged by the CFPB [in its action against Sprint].”  The AGs state that neither the CFPB nor Sprint oppose their motion.

State AGs and financial regulators are widely expected to ramp up their enforcement of federal and state consumer financial protection laws in response to anticipated changes to the CFPB and other federal regulatory agencies in a Trump administration.  In a recent webinar, “Beyond the CFPB-Preparing for State Enforcement Post-Election,” Ballard Spahr attorneys reviewed the enforcement authority of state AGs and regulators, surveyed enforcement and rulemaking activity in the financial services industry, and discussed what can be done by companies to prepare to defend against state enforcement activity.

Since last Tuesday’s election, there has been much discussion of how expected changes under a Trump Administration are likely to reduce the CFPB’s impact, particularly in the enforcement arena.  Little attention, however, has been paid to the election’s implications for the role of state attorneys general and state financial services regulators in enforcing federal and state consumer financial protection laws.

Faced with a less aggressive CFPB, state attorneys general and financial regulators may be emboldened to ramp up their enforcement activity, with Democratic-controlled states such as New York, California and Illinois already known for an activist approach likely to take the lead.  Section 1042 of the Consumer Financial Protection Act authorizes state AGs and regulators to bring civil actions to enforce the provisions of the CFPA, most notably its prohibition of unfair, deceptive or abusive acts or practices.  Indeed, the New York AG, the New York Department of Financial Services, and the Illinois AG have already filed lawsuits using their Section 1042 authority.

Several federal consumer financial protection laws such as the TILA, FCRA, and RESPA directly give enforcement authority to state AGs.  In addition to relying on that authority, state AGs can be expected to take a more aggressive approach to enforcement of state law, including provisions in many states under which a federal law violation is deemed to be violation of state law.  When enforcing state law, state AGs can bring civil actions against national banks or federal savings associations to enforce state laws that are not preempted. (Such authority is expressly provided by the CFPA, which codified the U.S. Supreme Court’s 2009 decision in Cuomo v. Clearing House Association, LLC.)  The issue of which state laws are preempted could take on heightened significance in the face of increased state AG enforcement activity.

Providers of consumer financial services will need to be prepared to defend against this likely surge in state investigations and enforcement activity.  To help clients prepare, we will hold a webinar, “Beyond the CFPB: Preparing for State Enforcement Post-Election,” on December 15, 2016 from 12 p.m. to 1 p.m.  A link to register is available here.