State Attorneys General

Last week, 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.  More specifically, the case could provide a potent constitutional basis for challenging such fines and penalties.  The case’s potential significance is heightened as State AGs and regulators ramp up their supervisory and enforcement activity in order to fill the void created by a less aggressive CFPB.

The petitioner in the Supreme Court case, Timbs, had pled guilty to one count of dealing a controlled substance.  In addition to receiving a six year sentence, with the first year to be served in home detention and the remaining five years on probation, Timbs agreed to pay fines and court costs.  Indiana law allowed the court to impose a maximum fine of $10,000 for his crime.  Several months later, the State of Indiana filed a case seeking the forfeiture of the vehicle Timbs was driving at the time of his arrest: a Land Rover worth approximately $40,000.

Following an evidentiary hearing on the State’s forfeiture request, the Indiana trial court determined that forfeiture would be grossly disproportionate to the crime, and therefore unconstitutional under the Eighth Amendment’s Excessive Fines Clause.  The Eighth Amendment provides: “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.”  The Indiana Court of Appeals affirmed but the Indiana Supreme Court unanimously reversed, declining to apply the Excessive Fines Clause because the U.S. Supreme Court has not yet held that the States are subject to the Excessive Fines Clause.

The questions and comments posed by the U.S. Supreme Court at the oral argument strongly suggested a general consensus among the justices that the Excessive Fines Clause is incorporated against the States under the Fourteenth Amendment, and therefore does apply to economic sanctions imposed by State and local governments.  The justices’ comments, however, suggested disagreement on the scope of the right guaranteed by the Excessive Fines Clause, especially in the context of civil asset forfeitures.  Because the Indiana Supreme Court did not reach the question of the forfeiture’s excessiveness due to the absence of definitive U.S. Supreme Court authority regarding the application of the Excessive Fines Clause to the States, the U.S. Supreme Court could hold that the Excessive Fines Clause does apply to the States, but not provide standards for determining whether a particular fine is unconstitutionally excessive.  A transcript of the oral argument is available here.

A group of 16 Democratic state attorneys general have sent a letter to the CFPB in response to its Request for Information Regarding Bureau Civil Investigative Demands and Associated Processes.

The AGs express their opposition to any curtailment of the Bureau’s investigatory authority because “it would significantly hinder the Bureau’s ability to fulfill its mandate of promoting fairness, transparency, and competitiveness in the markets for financial products and services.”  According to the AGs, judicial supervision of the Bureau’s investigatory authority “ensure[s] that the Bureau does not overstep its bounds in exercising its civil investigative demand authority.”  They also assert that the CFPB has used its investigative authority “responsibly and effectively.”

Perhaps the most notable aspect of the AGs’ letter is its discussion of the investigative powers available to state AGs, with the authority of various of the AGs who signed the letter used as examples.  The AGs who signed the letter, which include the New York and Pennsylvania AGs, can be expected to use their extensive investigative powers and pursue an aggressive enforcement agenda in support of efforts to fill any void created by a less aggressive CFPB under the Trump Administration.

State AGs and regulators have direct enforcement authority under various federal consumer protection statutes and, pursuant to Section 1042 of the Consumer Financial Protection Act, can bring civil actions to enforce the provisions of the CFPA, most notably its prohibition of unfair, deceptive or abusive acts or practices.

Ballard Spahr attorneys submitted comments to the CFPB in response to its RFI on the CID process in which we urge the CFPB to make significant changes to the current process to address the lack of basic procedural safeguards and help alleviate the unreasonable burdens that the current process imposes on CID recipients.

 

Since the CFPB issued its final rule for general purpose prepaid accounts on October 5, 2016, it has faced attacks from Congress and criticism from industry participants

On April 5, in a letter to Congressional leaders, attorneys general (AGs) from 17 states (Iowa, California, Maine, Hawaii, Maryland, Massachusetts, Illinois, Minnesota, Mississippi, Vermont, New York, Virginia, North Carolina, Washington, Oregon, Pennsylvania, and Rhode Island) and the District of Columbia urged Congress to cease its efforts to nullify the rule under the Congressional Review Act (CRA).

The CRA establishes a special set of procedures through which Congress can nullify final regulations issued by a federal agency.  Multiple joint resolutions have been introduced to disapprove of the final rule under the CRA – Representatives Tom Graves (R-Ga) and Roger Williams (R-Tx) introduced House Joint Resolution 62 and House Joint Resolution 73, respectively, and Senator David Perdue (R-Ga) introduced Senate Joint Resolution 19.  The Senate Joint Resolution was recently brought out of Committee and to the floor for consideration by way of a discharge petition filed by Senate Banking Chairman Mike Crapo.

In their letter, the AGs urge Congressional leadership of both parties to oppose these joint resolutions in order not to “eradicate important protections that have been proposed for consumers who use prepaid cards.”  The AGs assert that there are numerous issues related to prepaid cards, which are increasingly used to receive payroll funds, Federal financial aid, and payday loans.  The letter focuses on the use of prepaid cards in the payday loan context, specifically criticizing hybrid cards that enable a payday lender to “take consumers’ wages, which have been loaded onto a prepaid card, before consumers can even use them to cover their basic living expenses.”  The AGs also criticize overdraft protection features on prepaid accounts, citing the statistic that consumers using those features incur an average of 7 overdraft fees per year.

In order to protect consumers from these “predatory” practices, the AGs emphasize the need for additional regulation of the prepaid industry.  They note that the final rule covers a broad range of prepaid accounts, including certain mobile wallets and person-to-person payment products. The AGs commend the CFPB’s “careful approach to implementation demonstrat[ing] its dedication to crafting a rule that protects consumers and encourages a thriving, responsible industry.”  The AGs suggest that the rule, as crafted, will not only protect the unbanked but also promote the popularity of prepaid accounts.  The letter further defends the CFPB, noting that the agency has indicated that it is amenable to making substantive changes to the rule, and has proposed to delay the rule’s implementation date in response to feedback from the prepaid industry.

The AGs stress that if the rule is nullified by a CRA vote, “the agency is forever barred from enacting a substantially similar rule unless Congress authorizes it.”  It remains to be seen whether Congress will heed the AGs’ concerns, but this is a clear signal that the AGs are paying close attention to prepaid accounts and will step up oversight if the rule fails.

On Monday, we blogged about the highlights of the panel I moderated, “The CFPB Speaks,” that was part of the Practicing Law Institute’s 22nd annual Consumer Financial Services Institute in Manhattan. The next panel,  “Federal Regulators Speak: Priorities & Coordination,” focused on priorities and developments at the Department of Justice (DOJ), the OCC, and the FTC.

Sameena Shina Majeed, Principal Deputy Chief in the DOJ Housing and Civil Enforcement Section of the Civil Rights Division, chronicled the many redlining consent orders/lawsuits filed by DOJ over more than a decade.  The most recent was a lawsuit filed on January 13, before Inauguration Day and the confirmation of Jeff Sessions as the new Attorney General, against KleinBank, a Minnesota community bank.  I asked Ms. Majeed whether she expected DOJ to continue to pursue redlining cases under Attorney General Sessions.

Mr. Sessions’ nomination to serve as Attorney General met with considerable opposition from Democrats and civil rights groups who expressed concern as to whether Mr. Sessions would aggressively enforce fair housing and other federal laws that prohibit racial and other forms of discrimination. Ms Majeed responded by pointing out that the DOJ’s redlining consent orders/lawsuits spanned both Democratic and Republican administrations. She stated that there were four such cases during President Bush’s term in office. While that may be true, I’m deeply skeptical as to whether Attorney General Sessions will maintain this track record of vigorous enforcement of fair lending laws. One early test will be how DOJ handles the KleinBank case. To the extent DOJ softens its stance on redlining cases, I would expect the CFPB (at least while Richard Cordray remains as Director), state attorneys general, and public advocacy groups to fill that void.

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.

As he has done in prior years, Director Cordray spoke earlier this week to the National Association of Attorneys General.  His prepared remarks focused on the familiar theme of “the four Ds” that create obstacles for consumers in the financial services marketplace–deceptive marketing, debt traps, dead ends, and discrimination.

Director Cordray’s remarks included the following noteworthy comments on the “Four Ds”:

  • Deceptive marketing:  Director Cordray stated that “one of the most objectionable experiences we have had to date has been with law firms that purport to be helping people resolve their debts, but really are misusing their law license to defraud consumers.”  He indicated that these cases “have provided some of our most protracted litigation…including sanctions motions we had to file in some instances and criminal referrals we had to make in others.”
  • Debt traps:  With regard to payday and other “short-term, high-cost” loans, Director Cordray stated that the CFPB is “in the latter stages of considering how we can best formulate new rules to reform the market.”  His comments indicate that the CFPB’s proposal is likely to reflect state approaches to regulating payday loans.  He stated that the CFPB is “going about this rulemaking with the clear knowledge that states were regulating payday lending before the Bureau even existed.  That extensive and varied experience has shed light on the problems in this market and opportunities to craft measures that will benefit consumers.”
  • Dead ends:  Labeling debt collection a “key market where we find many dead ends,” Director Cordray stated that the CFPB is “hard at work analyzing and preparing the details of proposed policy measures, which could lead to the most significant changes in federal law in this area in almost forty years.”  He also indicated that the CFPB has been seeking input from state AGS and the FTC.
  • Discrimination:  Director Cordray indicated that the CFPB “has focused significant resources on rooting out discrimination in indirect auto lending” and that settlements have resulted in supervised entities “collectively paying out approximately $136 million to provide redress for up to 425,000 consumers who were discriminated against on the basis of race.”  (We note that based on supervisory information previously provided by the CFPB, approximately $56 million of the $136 million in redress resulted from non-public supervisory resolutions.)

Also noteworthy were Director Cordray’s statements that (1) the CFPB’s publicly announced enforcement actions “so far have resulted in $5.3 billion in relief to 15 million consumers and more than $200 million in civil money penalties,” and (2) 22 state AGS and 28 state banking regulators have signed up to access the CFPB portal that provides “real time access” to complaints filed with the CFPB.

 

Below is an update on the lawsuits we have been following that state attorneys general and a state regulator have brought using their Dodd-Frank enforcement authority.  Under Dodd-Frank Section 1042, a state AG or regulator is authorized to bring a civil action to enforce provisions of Dodd-Frank Title 10 or regulations issued under Title 10, including the Dodd-Frank prohibition of unfair, deceptive or abusive acts or practices (UDAAP).

Illinois.  The Illinois AG filed two lawsuits using her Section 1042 authority.  In March 2014, the Illinois AG filed a state court lawsuit against a small loan lender alleging violations of the Dodd-Frank UDAAP prohibition as well as state law violations.  In April 2014, the defendant removed the case to an Illinois federal court.  In May 2014, the defendant filed a motion to dismiss.

Since our prior update, the court entered an order on December 9, 2014 denying the defendant’s motion to dismiss.  The court rejected the defendant’s arguments that (1) the AG’s claims were barred by res judicata  based on the prior administrative proceedings brought by the Illinois Department of Financial and Professional Regulation, and (2) the disclosures in the defendant’s revolving credit plan regarding the minimum payment barred any claims based on misrepresentations.  The defendant must file an answer to the complaint by February 4, 2015.

The Illinois AG’s second use of Section 1042 was in a lawsuit initially filed in state court against a for-profit college and its owners.  In March 2014, the state court granted the AG’s motion to further amend her complaint to add new counts alleging that the defendants’ practices were unfair and abusive under Dodd-Frank and in May 2014, the defendants removed the case to a federal district court in Illinois.

Since our prior update, the defendants filed a motion for partial summary judgment on December 22, 2014.  The motion seeks summary judgment on the AG’s Illinois Consumer Fraud Act claim to the extent it relies on internet marketing allegations.  The AG alleged that because the defendants’ internet advertisements appeared in response to google searches that involved terms relating to the FBI or Illinois state troupers, they misled consumers about the type of employment available to graduates of the defendant college’s criminal justice program.

Among the defendants’ argument for summary judgment on the ICFA claim is that the AG cannot satisfy the ICFA requirement that any confusion or deception of consumers must relate to a material fact.  According to the defendants, the AG did not produce any evidence that any consumer considered the appearance of one of their advertisements in response to a google search to be a material factor in deciding whether to enroll.  With regard to the AG’s Dodd-Frank UDAAP claims, the defendants argue that the court should enter partial summary judgment in their favor to the extent the AG is seeking remedies for alleged conduct that occurred before July 21, 2011, the effective date of Dodd-Frank.  The AG must respond to the motion by January 30, 2015 and the defendants have until February 11, 2015 to file a reply.

New York.  In April 2014, Benjamin Lawsky, the Superintendent of the New York Department of Financial Service, using his Section 1042 authority, brought a civil action in a New York federal court for a violation of the Dodd-Frank UDAAP prohibition against a large subprime auto lender and its CEO and president.  In his lawsuit, , Mr. Lawsky alleged that the lender had systematically concealed from its customers the fact that they had refundable positive credit balances and failed to make refunds except when expressly requested by a customer.  The complaint also included the allegation that the lender had violated TILA by calculating interest based on a 360-day year and applying the resulting daily interest rate to its customers’ loan accounts each of the 365 days during the year.  According to the complaint, this practice resulted in customers paying interest in excess of the disclosed APR.  As we reported, in December 2014, Mr. Lawsky announced a settlement that included a $3 million civil penalty and required the defendants to refund all positive credit balances and interest charged in excess of the disclosed APR, plus nine percent interest on such amounts.

Florida/Connecticut.  On July 29, 2014, a Section 1042 lawsuit was filed jointly by the Attorneys General of Florida and Connecticut in a Florida federal court.  The lawsuit alleges that four individuals and their four businesses formulated and participated in a mortgage rescue scam that deceived consumers into paying upfront fees to be included as plaintiffs in so-called “mass-joinder” lawsuits against their mortgage lenders or servicers.

In addition to asserting claims under their states’ unfair trade practices acts, the AGs allege in their amended complaint that the defendants’ conduct violated the federal Mortgage Assistance Relief Services Rule (MARS Rule).  The AGs assert their MARS Rule claim pursuant to Section 1097 of Dodd-Frank (12 USC Section 5538), which authorizes a state AG to bring civil actions on behalf of his or her state’s residents to enforce the MARS Rule.  The AGs also assert a UDAAP claim under Section 1042 of Dodd-Frank.  Dodd-Frank Section 1097 further provides that a violation of the MARS Rule “shall be treated as a violation of a rule prohibiting unfair, deceptive, or abusive acts or practices under the Consumer Financial Protection Act of 2010.”  The AGs assert that pursuant to Section 1097, a violation of the MARS Rule is a UDAAP violation under Dodd-Frank.

Since our prior update,  the court approved settlements with several of the defendants under which they are permanently banned from engaging in various activities such as telemarketing and providing mortgage or debt relief services.

Mississippi.  In May 2014, the Mississippi AG filed a lawsuit against Experian in Mississippi state court alleging widespread federal and state law violations.  (While the AG’s complaint did not expressly allege that his claim of alleged UDAAP violations by Experian was brought under Section 1042, his complaint seeks various remedies under Dodd-Frank Section 1055 (12 U.S.C. 5565).)  In June 2014, Experian removed the case to a federal district court in Mississippi.  There have been no significant developments since our prior update.

The CFPB’s collaboration with state attorneys general was the focus of Director Cordray’s remarks today to the National Association of Attorneys General.  Director Cordray discussed the role of such collaboration in various CFPB enforcement actions, including its actions against Payday Loan Debt Solutions and CashCall.  He also commented that in addition to cases that have resulted in public filings, “our teamwork is much more deeply embedded” with the CFPB “speaking with, meeting with, or working with” state AG offices on a daily basis. 

Director Cordray indicated that the CFPB was particularly interested in obtaining input from state AGs in connection with its debt collection advance notice of proposed rulemaking.  He also identified “unfair and deceptive marketing practices by for-profit colleges” as an “area of mutual engagement” and noted shared concerns regarding online lending.  

Consumer complaints also received considerable attention from Director Cordray.  In particular, he described the portal that allows the CFPB to provide state agencies with “real time access” to complaints filed with the CFPB and allows regulators “to review complaints and even search and filter them by company, product, or issue.”  He noted that the California, Virginia, Oregon, and Texas AGs, as well as banking regulators in fourteen states, were already partnering with the CFPB on sharing complaint information.  Director Cordray urged “every attorney general to take advantage of this technology.”