Earlier this week, the U.S. Supreme Court ruled in Timbs v. Indiana that the prohibition on excessive fines in the Eighth Amendment of the U.S. Constitution is incorporated against the States by the Fourteenth Amendment.  Although it involved a civil asset forfeiture of a vehicle arising from the petitioner’s criminal conviction, the decision could provide a new weapon for consumer financial services providers facing fines and penalties sought by State attorneys general and regulators.

The Eighth Amendment provides: “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.”  In its decision, the Supreme Court cited  language from its 1998 decision which held that in rem forfeitures are fines for purposes of the Eighth Amendment.  In that decision, the Court wrote that the phrase “nor excessive fines imposed” in the Eighth Amendment prohibition “limits the government’s power to extract payments, whether in cash or in kind, ‘as punishment for some offense.’”

Since the Supreme Court did not reach the question of whether the forfeiture resulted in an excessive fine that violated the Eighth Amendment, the decision does not discuss the standards for determining whether a particular fine is unconstitutionally excessive.  It should be noted, as the Supreme Court did in its opinion, that “all 50 states have a constitutional provision prohibiting the imposition of excessive fines either directly or by requiring proportionality.”  While such state provisions would be available to a consumer financial services provider, they might not be interpreted in a manner that is as protective as the Eighth Amendment prohibition.  (Perhaps that is the reason that the petitioner in Timbs did not challenge the forfeiture under the Indiana Constitution.)  Accordingly, the Supreme Court’s decision now gives providers a potential second line of attack when facing fines and penalties sought by State attorneys general and regulators.

With the creation of a Consumer Financial Protection Unit as one of his early actions, Pennsylvania  Attorney General Josh Shapiro made clear his intention to pursue an aggressive pro-consumer agenda.  Mr. Shapiro named Nicholas Smyth, a former CFPB enforcement attorney, to serve as Assistant Director of the Attorney General’s Bureau of Consumer Protection.

In what may be confirmation of increased activity by the PA AG,  Mr. Smyth has posted a job listing stating that the Bureau of Consumer Protection is looking to hire two attorneys in Pittsburgh and two more in Philadelphia “to help out with our growing litigation caseload.”

The Widener Law Commonwealth Law and Government Institute and the Business Advising Program recently announced that Mr. Smyth will be giving a lecture on March 19, 2019 in Harrisburg, PA at a program titled “Consumer Financial Protection in Pennsylvania: Student Borrowers and Beyond.”  Mr. Smyth will be joined in the lecture by Seth Frotman, Executive Director of the Student Borrower Protection Center.  Mr. Frotman was formerly the CFPB’s Student Loan Ombudsman.  The Student Borrower Protection Center is a nonprofit organization created by Mr. Frotman to advocate for additional oversight of the student loan industry.

 

On January 23, Delaware Governor John Carney signed the “Delaware Federal Employees Civil Relief Act” into law.  The Act states that its purpose “is to provide for the temporary suspension of judicial and administrative proceedings in Delaware that may adversely affect the civil rights of Federal workers during a shutdown.”  The Act provides for enforcement by the Delaware Attorney General and a civil penalty of up to $10,000 per violation, with that amount to be assessed daily for willful violations.

The Act defines a “Federal worker” as “an employee of a Federal government agency who resides in the State of Delaware and includes an employee of a contractor.”  The term “covered period” is defined as “the period beginning on the date on which a shutdown begins and ending on the date that is 30 days after the date on which that shutdown ends.”

Court-ordered stay.  The Act provides that a Federal worker who is furloughed or required to work without pay during a shutdown “may apply to a court for a temporary stay, postponement, or suspension regarding any payment of rent, mortgage, tax, fine, penalty, insurance premium, judgment, or other civil obligation or liability that the Federal worker owes or would owe during the duration of the shutdown.”  A Delaware “court” (as defined in the Act)  is authorized to grant such relief if it finds “that the ability of the Federal worker to pay such obligation has been materially affected by the shutdown.”  A stay can be ordered for the “covered period and 90 days thereafter, or for any part of that period” and a court “may set the terms and amounts for such installment payments as is considered reasonable by the court.”

Protection from eviction, insurance termination. The Act prohibits evictions from residential property during a covered period for nonpayment of rent without a court order.  An eviction can be stayed for a period of 30 days if the court finds the Federal worker’s ability to comply with the lease has been materially affected by the shutdown and the stay can be extended for reasons of justice and equity.  In addition, without a court order, a “covered insurance policy” cannot “lapse, terminate or be forfeited because a Federal worker does not pay a premium or interest or indebtedness on a premium under a policy that is due during a covered period.”

6% interest rate limit. The Act provides that “an obligation or liability bearing interest at a rate in excess of 6 percent per year that is incurred by a Federal worker, or a Federal worker and the Federal worker’s spouse jointly, before the shutdown shall not bear interest in excess of 6 percent.”  If the debt is “a mortgage, trust deed, or other security in the nature of a mortgage,” the 6% rate limit applies “during the covered period and 90 days thereafter,” meaning until 120 days after the shutdown ends.  For any other debts, the 6% limit applies only during the covered period, meaning until 30 days after the date the shutdown ends.  For purposes of the 6% limit, the Act provides that “interest” includes “service charges, renewal charges, fees, or any other charges, except bona fide insurance, with respect to an obligation or liability.”

Any interest in excess of 6% that cannot be charged because of the Act “is forgiven” and the amount of a periodic payment “shall be reduced by the amount of the interest forgiven…that is allocable to the period for which such payment is made.”  A creditor can obtain court relief from the Act’s interest rate limitation if, in the court’s opinion, the Federal worker’s ability to pay more than 6% interest “is not materially affected by reason of the shutdown.”

The Act’s 6% interest rate limit is not self-executing.  To receive the benefit of the limit, the Federal worker must “provide to the creditor written notice that the Federal worker is furloughed or not getting paid as a result of the shutdown not later than 90 days after the date that the shutdown began.”

The most recent federal shutdown began on December 22 and ended on January 25.  Since the Act became effective when it was signed by Governor Carney on January 23, a Federal worker would have until approximately mid-March 2019 to provide notice to a creditor to obtain an interest rate reduction.  For mortgage debts, a Federal worker would be eligible to have his or her interest rate reduced to 6% for the period of December 22 until 120 days after January 25.  For other debts, the period of the reduction would be December 22 until 30 days after January 25.

Issues. We are hopeful that Delaware’s Attorney General or Department of Banking will issue guidance on the Act.  Among the many concerns and issues it raises are:

  • Because it requires creditors to forgive contracted for interest, the Act might be vulnerable to a constitutional challenge as a violation of the U.S. Constitution’s provision prohibiting a state from passing any law “impairing the Obligation of Contracts.”
  • While the Act does not include a private right of action and provides for enforcement only by the Delaware Attorney General, it appears a Federal worker would be entitled to the rights and remedies provided to borrowers under Delaware’s general usury law.  Under that law, a Federal worker could withhold payment of any “interest” greater than 6% (and assert usury as a defense in an action to collect the excess “interest”) or, if the debt has been fully repaid with interest at rate greater than 6%, bring an action to recover the greater of 3 times the excess interest paid or $500.  (Since a creditor is likely to assert that the fact that a Federal worker who paid off a debt at the full interest rate has demonstrated that the worker’s ability to pay the full amount of interest was not “materially affected by the shutdown,” the effectiveness of a private usury action as a remedy is questionable.)
  • The Act’s 6% interest rate limit is not restricted to consumer purpose debts.
  • The Act would appear to be preempted as to out-of-state banks that rely on federal preemption to charge Delaware residents an interest rate permitted by their home states that is greater than 6%.
  • Since the Act is modeled on the federal Servicemembers Civil Relief Act (SCRA), we would expect that creditors can comply with the interest rate reduction required by the Act by using the same calculation methods that they are using for SCRA compliance.
  • The extent to which the Act’s protections extend to Federal workers who are guarantors of debts owed by non-Federal workers is unclear.
  • The term “court” is used throughout the statute as the source for redress for the Federal worker or Attorney General, such as to obtain stays and orders of court.  However “Court” is defined in the Act to mean “any court or administrative agency of the State, or a subdivision thereof, whether or not a court or administrative agency of record.”  It is unclear how courts or administrative agencies which do not ordinarily have power to, for example, issue injunctive relief could be included under such definition, given how the term is used in the Act.  Further, the enforcement section provides that a finding of a “court or tribunal of competent jurisdiction” is necessary to recover the fines noted above, but the Act does not clarify what “tribunal” may refer to apart from the already broadly defined “court.”

 

 

 

According to an American Banker report, Chris D’Angelo, the CFPB’s Associate Director of Supervision, Enforcement and Fair Lending, has announced that he is leaving the Bureau to serve in the Office of the New York Attorney General as Chief Deputy Attorney General for Economic Justice.

The current New York Attorney General is Letitia James, who was elected in November 2018.  Ms. James is expected to continue the aggressive pro-consumer approach of former NY AG Eric Schneiderman.

Economic Justice is one of five major divisions in the NY AG’s office and consists of the following six bureaus:

  • Antitrust
  • Consumer Frauds & Protection
  • Internet  and Technology (which also covers privacy and cryptocurrency)
  • Investor Protection
  • Real Estate Finance
  • Taxpayer Protection

 

 

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.)

 

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.

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.

In November 2018, the U.S. Supreme Court heard oral argument in the case of Timbs v. Indiana, which presents the issue of whether the prohibition on excessive fines in the Eighth Amendment of the U.S. Constitution is incorporated against the States under the Fourteenth Amendment.   Although it involves a civil asset forfeiture arising from the petitioner’s criminal conviction, the case could have significant implications for consumer financial services companies facing fines and penalties sought by State attorneys general and regulators.

In this week’s podcast, we review the litigation and lower court decisions and discuss how the case could provide companies with a constitutional basis for challenging such fines and penalties as State attorneys general and regulators ramp up their supervisory and enforcement activity to fill the void created by a less aggressive CFPB.

To listen to the podcast, click here.

 

 

 

The Attorneys General of 42 states and the District of Columbia (collectively, the States) have entered into an Assurance of Voluntary Compliance/Assurance of Discontinuance  (Agreement) with Encore Capital Group, Inc. and its subsidiaries, Midland Funding, LLC and Midland Credit Management, Inc., (collectively, Midland) to settle allegations relating to Midland’s debt collection practices.  According to a press release from the Illinois AG, which describes Midland as one of the nation’s largest debt buyers, Midland engaged in a “pattern of signing and filing affidavits in state courts against consumers in large volumes without verifying the information printed in them – a practice commonly called robosigning.”

The Agreement requires Midland to pay $6 million to the States which, at the sole discretion of their AGs, shall “be used for reimbursement of attorney’s fees and/or investigative costs, used for future public protection purposes, placed in or applied to the consumer protection enforcement fund, consumer education, litigation, or local consumer aid fund or revolving fund, or similar fund [for consumer protection purposes].”  Midland must also internally set aside $25,000 per State for restitution to consumers and provide a credit of up to $1,850 to the outstanding balance of certain judgments it obtained involving disputed debts.

The Agreement contains various requirements for Midland’s collection practices, including the following:

  • Midland cannot collect or attempt to collect a debt unless it has in its possession the information specified in the Agreement
  • In the circumstances specified in the Agreement (which include the consumer’s dispute of the debt, the debt’s purchase through a purchase agreement without meaningful representations and warranties as to the debt’s accuracy or validity or without meaningful commitments to provide original account-level documentation or in a portfolio known by Midland to contain unsupportable or materially inaccurate information of the debt), Midland cannot represent that a consumer owes a debt or its amount without reviewing certain account-level information
  • For accounts as to which Midland has not yet begun collection activity, Midland cannot begin such activity without determining whether the debt has a special status (i.e., a bankruptcy, a deceased consumer, or a consumer who is an active duty service member) and if the debt is determined to have such a status, Midland must satisfy certain conditions to collect the debt
  • Until September 2020, Midland can only resell debts to anyone other than an entity described in the Agreement  (such as an entity that initially sold the debt to Midland)
  • Midland may not initiate a collection lawsuit unless it has specified documentation in its possession and has provided specified information to the consumer and must provide certain instructions to all of the attorneys it uses to conduct collection litigation on its behalf
  • Midland’s affiants may not sign an affidavit in connection with collection litigation unless the facts stated in the affidavit are based upon the affiant’s review of pertinent records in Midland’s possession and any personal knowledge “gained by those records actually reviewed by and relied upon by the affiant.”
  • Midland may not pay incentives to employees or third-party providers based solely on the volume of affidavits prepared, verified, executed, or notarized.
  • Midland’s procedures for the generation and use of affidavits in collection litigation must require those employees who review and sign affidavits to perform certain tasks, such as confirming that all of the data points in the affidavit accurately reflect Midland’s records prior to executing the affidavit
  • Midland may not knowingly pursue or threaten to pursue collection litigation on any time-barred debts and any communications with consumers about time-barred debts must include specified disclosures

Other provisions require Midland to comply with the FDCPA, the FCRA, and applicable state laws pertaining to its debt collection activities, appropriately staff teams that resolve disputes and address consumer questions, maintain a mandatory training program for its employees, and conduct call monitoring.

In a press release about the settlement, Midland stated that “[t]he issues that were the genesis of the settlement have not been the company’s practice for nearly 10 years” and that while it believes its practices were in accordance with relevant laws, it “chose to agree to a settlement, so we can all move ahead.”  The press release also stated that nearly all of the Agreement’s operational requirements are already part of Midland’s current practice and most requirements were implemented during or prior to Midland’s negotiations with the AGs.

 

Virginia’s Attorney General has announced that “he has secured more than $50 million in debt relief and ordered civil penalties” as a result of his lawsuit filed in state court in March 2018 against Future Income Payments, LLC; FIP, LLC; and their individual owner for allegedly making loans to Virginia consumers, many of whom were military veterans, that were falsely marketed as asset purchases.  As discussed below, the court’s order is a default judgment in favor of the Virginia AG.

Although the AG’s complaint alleged that the interest rates charged on the transactions exceeded Virginia’s usury limits, it did not charge the defendants with violating the state’s usury laws.  Instead, the complaint charged the companies’ with violating the Virginia Consumer Protection Act (VCPA) based on their alleged misrepresentations to consumers and sought to hold the individual defendant personally liable for the companies’ VCPA violations based on his active participation in their business activities.  (The complaint alleged that the affected consumers could have brought private actions under Virginia’s usury laws but that the defendants avoided such potential actions by misrepresenting its transactions as “sales.”)

In September 2018, the CFPB filed a lawsuit against the defendants in a California federal district court in which it alleged that defendants made loans disguised as asset purchases that violated state usury and licensing laws.  More specifically, the CFPB alleged that the defendants had committed deceptive acts in violation of the Consumer Financial Protection Act and failed to make disclosures required by the Truth in Lending Act.  The CFPB also alleged that numerous state and local regulators and agencies, including the Virginia AG, had concluded that the defendants’ transactions were loans for purposes of applicable state laws.  The defendants have not yet filed an answer to the CFPB’s complaint or otherwise responded.

While the CFPB’s complaint provided no explanation for why the defendants’ transactions are in fact extensions of credit, the Virginia AG’s complaint alleged that although the defendants’ agreements had some variations, they have “always been virtually guaranteed repayment by Virginia pensioners, or [the defendants] built-in potential events that would discharge the pensioners’ obligations to repay, knowing those events were unlikely to occur.”

The Virginia court’s docket indicates that the defendants’ counsel withdrew from the case on May 30, 2018 following their filing of a motion to dismiss.  Based on a July 23, 2018 Wall Street Journal article that referred to the individual defendant as a “felon,” the defendant companies have been shut down and investors in the companies are expected to bring lawsuits against the individual defendant.  On September 11, 2018, the court denied the motion to dismiss and ordered the defendants to answer the complaint.

On November 14, the court entered a Permanent Injunction and Final Judgment that provided the defendants were in default due to their failure to answer the complaint.  The Permanent Injunction and Final Judgment includes a finding that the defendants’ transactions were loans disguised as sales and a declaration that the transactions were usurious to the extent they were made at rates exceeding 12% per annum.  However, the Virginia AG’s recharacterization of the transactions as loans was not litigated because the factual allegations against the defendants are deemed admitted for purposes of a default judgment.

The Permanent Injunction and Final Judgment also awards the following relief to the Virginia AG:

  • A civil penalty of $31,740,000
  • A permanent injunction barring the defendants from collecting usurious interest in the amount of $20,098,159.63
  • Restitution to consumers for losses in the amount of $414,473.72
  • Costs and attorneys’ fees in the amount of $198,000
  • A permanent injunction barring the defendants from violating the VCPA