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

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

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

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

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

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

The CFPB and its Acting Director are facing a proposed class action lawsuit alleging discrimination against minority and female workers based on allegations of lesser pay and fewer promotions than their white male counterparts. The case is captioned at, Jones et al v. Mulvaney, U.S. District Court, District of Columbia, No. 18-2132.

The Complaint, filed on September 13, 2018, in the D.C. District Court, alleges violations of the 1866 Civil Rights Act, Title VII of the 1964 Civil Rights Act and the 1963 Equal Pay Act. The lawsuit is seeking punitive damages and compensation for lost pay and benefits for minorities and women who have worked as consumer response specialists at the CFPB.

The plaintiffs contend that while the CFPB and Acting Director Mulvaney are tasked with providing justice to American consumers, they have failed in their responsibility to their own employees. The plaintiffs, Ms. Carzanna Jones and Mr. Heynard Paz-Chow, are seeking certification to join in the case a class of racial minority and female employees, both past and present, working in the consumer response division, whom the plaintiffs allege were subjected to the same discrimination and retaliation while working for the CFPB. Ms. Jones is a current employee of the CFPB, and her allegations cover the length of her career at the bureau dating back to 2012. Mr. Paz-Chow is a former employee of the bureau from 2011-2014, and his allegations occurred under the leadership of former CFPB Director Richard Cordray. The consumer response division of the bureau is responsible for investigating consumer complaints and determining whether laws or regulations have been violated.

The pending lawsuit alleges that through an agency-wide pattern and practice of discrimination and retaliation, the CFPB has sought to disparately impact racial minority and female workers despite the continued objections of CFPB employees. Specifically, it is alleged that the CFPB instituted discriminatory policies and procedures in its training, assigning, evaluating, and compensation of minority and female employees. The Complaint also details specific instances of discrimination and retaliation alleged to have been suffered by the individual named plaintiffs including:

  • Denial of training and promotion opportunities
  • Unequal assignment of investigations leading to disproportionate case closings which impact employee evaluations
  • Denial of transfer requests
  • Pay disparities
  • Failure to abide by the requirements of the ADA and FMLA
  • Retaliatory actions after employees complained about inequalities

The allegations in the Complaint stretch back as far as 2011 and address statistical studies and congressional reports that have highlighted equality issues at the CFPB under multiple directors. According to the Complaint, those analyses and investigations have shown deficiencies in the pay and promotion of both racial minorities and female employees in line with the allegations of the Complaint. The Complaint cites to a Congressional Investigation by the U.S. House of Representatives initiated in 2014 and an Office of Inspector General (“OIG”) report from 2015. Both authorities found significant issues with widespread disparities negatively impacting racial minority and female employees with regard to performance ratings, pay, promotion and related areas. During a hearing of the U.S. House of Representatives Financial Services Committee, a CFPB attorney testified that the white males in authority at the bureau gave themselves the best performance evaluations to garner better raises and bonuses.

The BCPB has historically taken the position that it can use investigations to conduct compliance “sweeps” of entire industries. Indeed, a version of the BCFP’s Enforcement Policies and Procedures Manual made available to the public through a FOIA request in 2016 stated that: “It is not necessary to have evidence that a law has in fact been violated before opening a formal investigation. That means, for example, that the Bureau could conduct a ‘compliance’ sweep to investigate whether industry participants are complying with a law or regulation.”

The BCFP has historically used CIDs and investigations to supervise industries over which it otherwise lacked supervisory authority—imposing huge costs on industry participants without justification.  On September 6, 2018, the Fifth Circuit took a dim view of that tactic. In its opinion in the The Source for Public Data, L.P. case, the Fifth Circuit struck down a CID apparently issued as part of such an industry sweep. “Simply put,” the court held, “the CFPB does not have the ‘unfettered authority to cast about for potential wrongdoing.’”

Dodd-Frank requires the BCFP to include a “Notification of Purpose” in every CID stating “the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation.” The BCFP has historically read this requirement very loosely. Paraphrasing, most Notifications of Purpose said no more than: “The purpose of this investigation is to determine whether anybody did anything wrong.”  They generally gave CID recipients no information whatsoever as to the conduct under investigation. Sometimes it was possible to guess based on the document requests and interrogatories included in the CIDs, but the Notifications of Purpose were not generally specific enough to allow recipients to meaningfully negotiate the scope of the CID or to know whether they were targets of an investigation or only third-party witnesses. The BCFP has taken and endorsed this approach even under Mulvaney, who recently denied a request to modify or set aside a CID containing a broad Notification of Purpose.

The Fifth Circuit acknowledged this as a real problem. It found that such broad Notifications of Purpose did not allow courts to meaningfully evaluate whether the information requested by the BCFP was “reasonably relevant” to the matter under investigation—the standard courts apply to government requests for information. As a result, the Fifth Circuit found that it could not enforce the CID and, reversing the lower court, struck the CID down entirely. In doing so, the Fifth Circuit joined with the D.C. Circuit which, in 2017, rejected a similarly broad Notification of Purpose in the ACICS case. In striking the CID, the Fifth Circuit held that “[t]here are consequences to ‘the absurdity of giving a notification that notifies of no purpose whatsoever.”

The CFPB is asking the Texas federal district court to give it a 45-day extension to respond to the preliminary injunction motion filed by two trade groups in their lawsuit challenging the CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule).  The motion seeks a preliminary injunction to block the CFPB from enforcing the Payday Rule and asks the court to act on the motion by November 1.  The trade groups also filed a motion to lift the stay of their lawsuit that the district court had granted despite denying their request for a stay of the Payday Rule’s August 19, 2019 compliance date.

In its motion to extend the response deadline, the CFPB states that, if the stay of the lawsuit were not in effect, its response would be due by September 21.  The 45-day extension is sought if the court grants the trade groups’ motion to lift the stay.  In support of its request, the CFPB states the following:

The relief sought by this motion will not prejudice Plaintiffs. Moreover, to the extent that Plaintiffs aver their members are suffering irreparable harm that justifies Plaintiffs’ request for a ruling from this Court by November 1, the current time constraints are largely of Plaintiffs’ own making.  Plaintiffs did not file this lawsuit challenging the Payday Rule until almost 6 months after that rule was published in the Federal Register.  Plaintiffs then waited 94 days after the Court denied the parties’ joint motion to stay the compliance date of the Payday Rule, including 38 days after the Court denied Plaintiffs’ motion for reconsideration, before submitting their Motion for a Preliminary Injunction.  The Bureau and the Court should not be unduly rushed in arguing and adjudicating these issues as a result of Plaintiffs’ own delay.  The requested extension would, if granted, give the Bureau 45 days to respond to Plaintiffs’ motion.

 

 

 

 

The two trade groups that unsuccessfully attempted to obtain a stay of the August 19, 2019 compliance date for the CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule) have now filed a Motion for Preliminary Injunction to enjoin the CFPB from enforcing the Payday Rule.  While the Texas federal district court had denied a stay of the compliance date, it had granted the trade groups’ request for a stay of the April 2018 lawsuit they had filed challenging the Payday Rule.  According, concurrently with filing the preliminary injunction motion, the trade groups also filed an Unopposed Motion to Lift the Stay of Litigation.

Early this year, the CFPB announced that it intended to engage in a rulemaking process to reconsider the Payday Rule pursuant to the Administrative Procedure Act (APA) and in its Spring 2018 rulemaking agenda, it indicated that it expects to issue a Notice of Proposed Rulemaking to revisit the Payday Rule in February 2019.  In their Unopposed Motion to Lift the Stay of Litigation, the trade groups state that the CFPB “has noted that it does not expect that rulemaking to be complete before the compliance date.  Moreover, it is impossible to know what the result of that rulemaking will be.”  They assert that because the compliance date has not been stayed, they “now have no choice but to pursue a preliminary injunction” to avoid the irreparable injuries the trade groups’ members will suffer in preparing for compliance with the Payday Rule’s requirements.  They indicate that they have conferred with the CFPB about the motion and that the CFPB has stated that it does not oppose the motion provided the trade groups agree that the CFPB does not have to file an answer in the case pending further court order.”  The trade groups agreed to the CFPB’s request.

In the preliminary injunction motion, the trade groups argue that they are likely to succeed on the merits in their lawsuit challenging the Payday Rule because:

  • The Payday Rule was adopted by an unconstitutionally-structured agency.
  • The lending practices prohibited by the Payday Rule do not meet the CFPA’s standard for an act or practice to be deemed “unfair” because extending payday loans without satisfying the Bureau’s “ability to repay” determination is not likely to cause “substantial injury” to consumers, any injury caused by the prohibited practices is “reasonably avoidable,” and any injury that is not reasonably avoidable is “outweighed by countervailing benefits.”
  • The lending practices prohibited by the Payday Rule do not meet the CFPA’s standard for an act or practice to be deemed “abusive” because consumers do not lack “understanding” of the loans covered by the Payday Rule and the prohibited practices do not take “unreasonable advantage” of consumers’ inability to protect their interests.
  • The Payday Rule violates the CFPA provision prohibiting the Bureau from establishing a usury limit.
  • The account access practices prohibited by the Payday Rule do not meet the CFPA’s standards for an act or practice to be deemed “abusive” or “unfair.”

The trade groups also argue that a preliminary injunction is necessary to prevent irreparable harm to their members in the form of the “massive irreparable financial losses” they will suffer if required to comply with the Payday Rule beginning in August 2019.  They assert that these harms are not mitigated by the Bureau’s plans to reconsider the Payday Rule because “[t]he outcome of that rulemaking is uncertain and, in any event, repeal would not remedy the harms that are occurring now.”

Finally, the trade groups contend that the balance of harms and public interest favor a preliminary injunction. With regard to the balance of harms, they assert that there will be no cost to the Bureau in preserving the status quo pending an adjudication of the Payday Rule’s validity and “given its decision to reconsider the Final Rule, the Bureau will actually benefit from an injunction, which will ensure that the Bureau has sufficient time to conduct a thorough and careful reassessment of the rule.”  (emphasis included).  With regard to the public interest, the trade groups assert that the Payday Rule’s “unlawful nature” weighs heavily in favor of an injunction and a stay “will ensure that borrowers whom the rule would otherwise deprive of needed sources of credit will continue to have access to payday loans until the rule’s legality is resolved.”

The trade groups’ motion to stay the compliance date and litigation was filed jointly with the CFPB.  In the preliminary motion, the trade groups state that they conferred with the CFPB and the CFPB stated that it could not take a position on the motion before reading it.  Whether or not the CFPB opposes the motion, we expect consumer advocacy groups, in all likelihood the same groups that opposed the stay motion, will seek to file an amicus brief opposing the preliminary motion.  Should the CFPB not oppose the preliminary injunction motion, the consumer advocacy groups are likely to assert as they did in opposing the stays that their participation is necessary to provide the court with the benefit of adversarial briefing.

We were hopeful that after the district court denied the trade groups’ request for reconsideration of the court’s denial of a stay of the Payday Rule’s compliance date, the CFPB would move quickly to issue a proposal to delay the compliance date pursuant to the APA’s notice-and-comment procedures.  The filing of the preliminary injunction motion suggests that the trade groups are not optimistic that the CFPB will promptly take this course.  Perhaps the CFPB will reveal its plans in its response to the motion.

In light of the CFPB’s prior support for the trade groups’s stay motion, the CFPB might consent to the entry of a preliminary injunction.  Even if it does so, however, there is no certainty that the district court will grant a preliminary injunction.  If the district court were to deny the preliminary injunction motion, the trade groups would have the right to appeal the denial to the Fifth Circuit which already has before it another case which raises the same constitutional challenge to the CFPB that the trade groups have raised.

 

 

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.

 

In June 2018, the CFPB announced that it planned to reconstitute three of its advisory groups, the Consumer Advisory Board (CAB), the Community Bank Advisory Council (CBAC), and the Credit Union Advisory Council (CUAC), and disbanded the three groups.  Last week, the CFPB announced the appointment of new members to those groups.

The CFPB announced 9 new CAB members, 7 new CBAC members, and 7 CUAC members.  All new members will serve a one-year term.  Before their disbandment, each of the advisory groups was much larger, with the CAB having as many as 25 members, the CBAC as many as 19 members, and the CUAC as many as 15 members.  New CAB members previously served a three–year term and new members to the CBAC and CUAC previously served a two-year term.

The CFPB’s announcement has met with considerable criticism from consumer advocates and former CAB members who have asserted that as a result of its reduced membership, the CAB lacks sufficient diversity and depth of perspective.  They have also criticized the CFPB not only for reducing the number of consumer advocates on the CAB from 8 to 2 but also for not including any large financial institutions, major credit card providers, or debt collectors on the new CAB.  Consumer advocates observe that although such sectors “probably have other opportunities for access with the CFPB, one of the most valuable aspects of the recently disbanded CAB was that it provided a forum for fruitful and productive conversations among a variety of stakeholders in consumer finance, which often generated valuable insights for the Bureau and the CAB members.”

The CFPB has announced that the three groups will have meetings on September 27.  According to the agenda published by the CFPB, each group will meet separately in the morning and will participate jointly in afternoon sessions on “Credit Invisibles and Alternative Data: Opportunities to improve credit profiles” and “Utilizing technology to prevent and respond to elder financial abuse.”

 

 

 

The CFPB filed its first new lawsuit under acting Director Mulvaney yesterday, alleging that a pension advance company and its president made predatory loans to consumers that were falsely marketed as asset purchases.  While it’s noteworthy as the Bureau’s first new case under current leadership, the action continues the CFPB’s focus on companies that offer settlement and pension advances, which began under Director Cordray and has continued under acting Director Mulvaney.

The defendants, under a pseudonym, unsuccessfully challenged the Bureau’s CID in federal court several months ago.  The investigation presumably continued, resulting in yesterday’s complaint filed in California federal court.  Similar to the Bureau’s earlier lawsuits against two pension advance companies and RD Legal, the complaint against Future Income Payments, its president Scott Kohn, and affiliated companies alleges that they made loans disguised as asset purchases that violated state usury and licensing laws.  More specifically, Future Income Payments and the other defendants allegedly committed deceptive acts in violation of the Consumer Financial Protection Act and failed to make disclosures required by the Truth in Lending Act by:

  • Falsely marketing that the alleged loans (1) are asset purchases rather than loans, (2) do not have interest rates, and (3) are comparable or cheaper than credit-card debt; and
  • Failing to provide the disclosures required by TILA explaining the cost of the credit.

The complaint, however, is missing a critical element.  It does not explain why the transactions are in fact extensions of credit.  Instead, the complaint concludes, without supporting allegations, that the funds provided to consumers are loans subject to the CFPA and TILA.  This failure to grapple with the elements of a loan under state law also exists in the CFPB’s pending action against RD Legal, which we highlighted in a blog.  In both cases, the Bureau fails to address the well-established, state-law factors for distinguishing asset purchases from loans, such as an absolute obligation by consumers to repay the funding company.

These lawsuits against pension and settlement advance companies are striking exceptions to acting Director Mulvaney’s public statements that the Bureau will neither push the envelope nor regulate by litigation/consent order.  We will, therefore, continue to monitor the Future Income Payments case as we have with the RD Legal lawsuit.

On September 12, 2018, the Bureau of Consumer Financial Protection (the “Bureau”) issued an interim rule to update two model disclosures following the recent enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”).

Pursuant to the Act, nationwide consumer reporting agencies must provide free national security freezes, which prevent potential lenders from accessing a consumer’s report and, in turn, limit an identity thief’s ability to open accounts in the consumer’s name.  The Act also requires that a notice regarding the right to a security freeze be provided to any consumer that receives either the Summary of Consumer Rights or the Summary of Consumer Identity Theft Rights pursuant to the Fair Credit Reporting Act.  The Act’s new requirements take effect on September 21, 2018.

In an effort to help businesses comply with the Act’s requirements, the Bureau’s interim rule updates its model forms to incorporate a security freeze notice and reflect the new minimum duration for initial fraud alerts, which the Act extended from 90 days to one year.  Additionally, the interim rule permits compliance alternatives to assist users of the Bureau’s 2012 model forms.  Specifically, under the interim rule, the Bureau will consider the use of the model forms published on November 14, 2012 in Appendices I and K (or a “substantially similar” form) to comply with the FCRA’s form requirements so long as a separate page containing the following additional information also is provided in the same transmittal: (i) a statement that the minimum duration of initial fraud alerts changed from 90 days to one year effective September 21, 2018, (ii) a notice that consumers have a right to a security freeze, as explained in the new version of Appendix K; and (iii) updated contact information for certain FCRA enforcement agencies.  While this compliance alternative can be used after the interim rule goes into effect later this month, the Bureau has advised that users should discontinue use of the older model forms published on December 21, 2011 no later than September 21, 2018.

The Bureau is currently soliciting comments on the model forms, available at https://www.consumerfinance.gov/documents/6832/bcfp_interim-final-rule_fcra_rights-summaries.pdf.