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On Thursday, December 14, the Federal Communications Commission voted 3-2 to reverse its 2015 order classifying the provision of broadband internet access services as a “telecommunication service” subject to Title II of the Communications Act of 1934, and restoring the classification of broadband internet access services as an “information service” under Title I of the Communications Act.  This reclassification moves the provision of broadband internet services from treatment as a utility (with greater governmental oversight over the provision of the utility’s services) to treatment as another offering by a telecommunications service provider.

The December 14 Order consequentially rescinds the rules prohibiting blocking of lawful internet content and applications, throttling or degrading lawful internet traffic, and paid prioritization of certain internet traffic.  These three prohibitions form the core of the “net neutrality” rules – essentially, the rules that required all internet traffic to be treated equally.

The FCC reversal on net neutrality could impact consumer payments in a couple of ways.  First, fintech companies (generally speaking, young companies with fewer resources whose business models are supported by fast, cheap internet access) which find their internet speeds either throttled or more costly may be outcompeted by larger, more established businesses which can more easily pay for higher internet speeds.  This may result in fewer fintech companies bringing new ideas and products to market.

A more direct impact may be felt in peer to peer payment platforms.  One could imagine two or three reasonably similar mobile device based payment applications, which have purchased (or can afford) varying degrees of internet access.  If one P2P platform takes 1-2 seconds to transact, while another takes 10-15, from a user experience perspective it is reasonable to assume the slower platform will quickly be abandoned in favor of the quicker platform.  Again, this favors providers with either larger margins or deeper pockets that can afford to pay for faster internet access, or a model that introduces tiered pricing for speeds.  One can imagine P2P platforms offering free and premium versions of their platform, with a premium version introducing higher access and settlement speeds.

Relatedly, the FCC and the Federal Trade Commission signed a memorandum of understanding on December 14 in which the FTC agreed to monitor the broadband market, and investigate and take enforcement actions against internet service providers for unfair or deceptive acts or practices (using the FTC’s authority under Section 5 of the FTC Act).  While the FTC is focused on UDAP issues with respect to the provision of internet services, might the CFPB look at internet speeds (and their disclosure) in connection with consumer financial services and identify potential issues for purposes of its authority to prohibit unfair, deceptive, or abusive acts or practices?  For example, would banks or platform providers need to disclose their internet speed, and could they face a UDAAP challenge if their transactions failed to meet such speeds?

Following the FCC’s vote, New York Attorney General Eric Schneiderman announced his plans to “lead a multistate lawsuit to stop the rollback of net neutrality.”  According to media reports, nearly 20 states, including Massachusetts, Mississippi, Hawaii, Maine, Vermont, and Illinois, have indicated that they intend to participate in Mr. Schneiderman’s lawsuit.

The State of Oklahoma has filed an amicus brief in support of the motion to dismiss filed by four online tribal lenders sued by the CFPB for alleged Consumer Financial Protection Act and Truth in Lending Act violations.  The CFPB’s lawsuit was originally filed in an Illinois federal district court and subsequently transferred to federal district court in Kansas.

The CFPB’s complaint alleges that the lenders engaged in unfair, deceptive, and abusive acts or practices in violation of the CFPA by attempting to collect loans that were purportedly void or uncollectible in whole or in part under state law.  The CFPB asserts that the loans are void or uncollectible in whole or in part as a matter of state law because the lenders charged  interest at rates that exceeded state usury limits and/or failed to obtain required state licenses.  The CFPB alleges that the defendants’ efforts to collect amounts that consumers did not owe under state law are “unfair,” “deceptive” and “abusive” under the CFPA as a matter of federal law.  The CFPB also alleges CFPA violations by the defendants based on their alleged failure to disclose the APR as required by TILA in advertisements and when providing information orally in response to telephone inquiries.

This is not the CFPB’s first attempt to transform alleged violations of state law into CFPA UDAAP violations.  However, as we observed when the complaint was filed, the CFPB’s legal position is far more aggressive than it was in its past cases and represents a frontal attack on all forms of tribal lending.  In this case, the CFPB acknowledged that the four lenders are owned by a federally-recognized Indian tribe and thus are tribal entities (and not merely tribal members).  Further, the complaint does not allege that non-tribal parties were the “true lenders” or attempting to collect interest on their own account.

In their motion to dismiss, the lenders argue that as “arms of the tribe,” they are immune from suit under the CFPA and TILA, the CFPB has no authority to enforce state law, and the loans are governed by tribal law. (The CFPB’s complaint alleges that the lenders’ loan agreements contained a tribal choice-of-law provision.)

In its amicus brief, Oklahoma agrees with the lenders’ position that they are immune from suit under the CFPA and TILA.  In addition to questioning the CFPB’s constitutionality, Oklahoma asserts that it “is especially alarmed that the CFPB claims jurisdiction over States and State entities in the same breath as it claims authority over Indian tribes.”  It argues that the CFPB’s position “is without textual support, bad policy, and contrary to our system of federalism and separation of powers.”  According to Oklahoma, if the CFPB’s position is correct, it would mean that “Oklahoma operates a number of agencies that the CFPB may now regulate, investigate, and coerce in the same way the CFPB is investigating Defendants as arms of Indian tribes.”

As we’ve discussed before, the CFPB sued Navient over its student loan servicing practices in the Middle District of Pennsylvania.  In doing so, the CFPB followed its strategy of announcing new legal standards by enforcement action and then applying them retroactively. The chief allegation in the complaint is that Navient wrongly “steered” consumers into using loan forbearance rather than income-based repayment plans to cure or avoid defaults on their student loans.

On March 24, 2017, Navient moved to dismiss the complaint on a number of grounds.  Although the district court, in a decision issued on August 4, declined to dismiss the case, the motion raised several arguments that a court of appeals should not be so quick to gloss over.  We focus here on two of them: fair notice and the constitutionality of the CFPB’s structure.

Fair Notice

Navient argued in its briefs that the CFPB was pursuing them for alleged conduct when Navient was not given fair notice that the conduct, if it occurred, violated the law.  The court used a technicality to decline to consider Navient’s fair notice argument at all.  The court stated that: “[Under the relevant authorities,] Navient’s fair notice argument fails if it was reasonably foreseeable to Navient that a court could construe their alleged conduct as unfair, deceptive, or abusive under the CFP Act.  Navient, however, has only advanced arguments as to why it did not have fair notice of the Bureau’s interpretation of the CFP Act (emphasis added).”  Thus, the court found that it need not consider the fair notice argument.

In doing so, the court ignored authorities Navient cited that held that, as Navient paraphrased, “[a]n agency cannot base an enforcement action on law created or changed after the conduct occurred.”  The court also ignored the obvious and clearly-implied corollary to Navient’s argument: the only way for Navient to be liable for the claims alleged in the complaint would be for a court, namely, the Middle District of Pennsylvania, to adopt the Bureau’s position.  Thus, with all due respect for the court, Navient’s fair notice argument was fairly before it and should not have been so lightly cast aside.

This is especially so given how well-founded the argument seems to have been.  How could Navient have known that the CFP Act required it to provide over-the-phone individualized financial counseling to borrowers as a result of a statement on its website indicating that “Our representatives can help you by identifying options and solutions, so you can make the right decision for your situation (emphasis added).”  The statement was both conditional, and placed the duty for making the right decision squarely on consumers. The court completely ignored the fact that the CFP Act’s prohibition on unfair, deceptive, or abusive conduct would not have alerted anyone that the CFPB or a court would make the inferential leap between that statement and the duty that the CFPB says Navient undertook by making it.

Constitutionality of CFPB Structure

The court also rejected the argument that the CFPB’s structure was unconstitutional.  We’ve discussed before why we believe that such a view is incorrect and even dangerous to our constitution.  But a few of those arguments bear repeating in light of the Navient court’s ruling.  The first problem with the Navient court’s holding is that it applies Humphrey’s Executor in a way that ignores the fundamental holding of the case.  In Humphrey’s Executor, the Supreme Court held that for-cause removal, staggered terms, and a combination of enforcement and law-making powers was acceptable in a multi-member commission.  Its rationale: because of the commission structure, the FTC would operate as a quasi-legislative and quasi-judicial body, not a quasi-executive one.  Not to state the obvious, but the CFPB is not a multi-member commission; its unitary director is like the President, a unitary executive.  Thus, the Supreme Court’s indulgence of these accountability-limiting features in Humphrey’s Executor does not apply to the CFPB.

Second, the retort to this argument, that the CFPB Director is somehow more accountable to the President, is a legal fiction at best. If the President has no power to remove the Director without cause, the Director is not accountable to him. Period. The President can approach the Director, ask him to implement a certain policy, and the Director can ignore the President with impunity. That is not accountability, however one may measure it. It is true that the five FTC Commissioners, the entire board of the Federal Reserve, or the SEC Commissioners could do the same. But, those interactions are more like the ones the President faces in dealing with Congress or the Judiciary, interactions that the Constitution contemplated and intended. With the CFPB Director, the President stands powerless before the unitary executive of a federal agency whose will can stand in direct contrast to his own. If that is not an affront to the Constitution’s notion of the President as a unitary executive, what is?

Third, the Supreme Court also indulged accountability-limiting features in Morrison v. Olsen, because, among other reasons, the inferior officer at issue in the case “lack[ed] policymaking or significant administrative authority.” Such is not the case with the CFPB Director.  The Director is not an inferior officer. More importantly, he has substantial policymaking authority.  The Director has the authority to approve and enforce regulations relating to any consumer financial product or service, companies and individuals involved in providing such services, and service-providers to those companies and individuals.  The CFPB has interpreted its authority to extend not just to banks, lenders, and debt collectors, but to mobile phone companies, homebuilders, payment processors, and law firms. The court in this case ignored these substantial differences between the CFPB Director and the inferior officer approved in Morrison v. Olsen.

Finally, the court ignored the implications of its ruling.  Before long, if the CFPB structure is replicated elsewhere in government, we’ll have a government where Congress, the President, and even the courts are relegated to the sidelines while powerful bureaucrats make law, interpret the law, and enforce it with virtually no political oversight.

* * *

As the case progresses, Navient will continue to defend itself. We will keep a close eye on the case and, as always, keep you posted.

The CFPB has issued a new compliance bulletin (2017-11) to provide guidance on pay-by-phone fees.  The guidance includes examples of conduct relating to pay-by-phone practices identified by the CFPB in its supervision and enforcement activities that may violate or risk violating the Dodd-Frank UDAAP prohibition or the FDCPA.

The enforcement actions cited in the guidance involving alleged UDAAP violations arising from pay-by-phone practices date from 2015 and, while recent CFPB supervisory highlights have discussed potential FDCPA violations arising from “convenience fees” charged by debt collectors to process payments by phone, recent supervisory highlights have not discussed potential UDAAP violations arising from pay-by-phone practices.  As a result, the CFPB’s issuance of the guidance suggests that it intends to give pay-by-by phone practices closer scrutiny in examinations and in enforcement actions.  We have been reviewing and suggesting revisions to many clients regarding their pay-by-phone practices since the CFPB began focusing on this area in examinations.  It is important for creditors and debt collectors to be mindful that such practices may also create a risk of state law violations.

Examples provided of conduct that may violate the UDAAP prohibition include:

  • Failing to disclose the prices of all available pay-by-phone services when different options carry materially different fees.  According to the CFPB, while many companies disclose in periodic billing statements or elsewhere that a transaction fee may apply to various payment methods, they do not disclose the fee amounts and instead depend on phone representatives to do so.  The CFPB observes that phone representatives risk engaging in an unfair practice by only revealing higher-cost options or failing to inform consumers of material price differences between available options.
  • Misrepresenting the available payment options or that a fee is required to pay by phone.  The CFPB observes that some companies charge a fee for expedited phone payments but also offer no-fee phone payment options that post a payment after a processing delay.  According to the CFPB, some of such companies offer their fee-based expedited payment option as their default pay-by-phone option, with the result that consumers could be misled to believe that a fee is always required to pay by phone and cause consumers to be charged for expedited payment even if such consumers did not need to post a payment on the same day.
  • Failing to disclose that a pay-by-phone fee would be added to a payment.  According to the CFPB, a company may risk engaging in a deceptive act or practice by failing to disclose that a pay-by-phone fee will be charged in addition to a consumer’s otherwise applicable payment amount and indicating that only the otherwise applicable payment amount will be charged.  In the CFPB’s view, such conduct may create the misimpression that no pay-by-phone fee is charged.
  • Failing to adequately monitor employees or oversee service providers. The CFPB observes that although a company may have policies and procedures requiring phone representatives to disclose all available pay-by-phone options and fees, deviations from call scripts may cause phone representatives to misrepresent available options and fees.  According to the CFPB, companies can reduce the risk of misrepresentations through adequate monitoring and references its November 2016 compliance bulletin (2016-03) on production incentives.  The CFPB suggests that companies should consider the impact of incentives for employees and service providers may have on compliance risks relating to potential UDAAP violations.

Examples of conduct that may violate the FDCPA:

  • The CFPB notes the FDCPA prohibition on the collection of any amount by a debt collector unless such amount is expressly authorized by the agreement creating the debt or permitted by law.  The CFPB states that its examiners found that one or more mortgage servicers meeting the FDCPA “debt collector” definition violated the FDCPA by charging fees for taking mortgage payments by phone to borrowers whose mortgage instruments did not expressly authorize such fees and who resided in states where applicable law did not expressly permit collection of such fees.

The guidance indicates that the CFPB expects companies to review their practices on charging pay-by-phone fees for potential risks of UDAAP or FDCPA violations and provides suggestions for companies to consider in assessing whether their practices present a risk of constituting a UDAAP or FDCPA violation.  It also advises companies to consider whether production incentive programs create incentives to steer consumers to certain payment options or avoid disclosures.  According to the CFPB, such incentives could enhance the potential risk of UDAAPs if they reward employees or service providers based on consumers using a higher-cost pay-by-phone option or based on the number of daily calls completed.

 

On June 5, 2017, the U.S. Supreme Court handed down a unanimous decision in Kokesh v. SEC. In Kokesh, the SEC took the position that disgorgement was not a penalty and therefore not subject to the statute of limitations in 28 U.S.C. § 2462. The Court held that disgorgement remedies are indeed “penalties” and therefore  subject to the five-year statute of limitations in § 2462. In its PHH briefing, the CFPB argued that “[its] administrative proceedings are subject only to the statute of limitations set forth in 28 U.S.C. § 2462.” Thus, the Supreme Court’s reasoning in Kokesh would also apply squarely to the disgorgement remedies available to the CFPB.

The opening paragraph of the Kokesh opinion says it all.

“A 5-year statute of limitations applies to any ‘action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise.’ 28 U.S.C. § 2462. This case presents the question of whether § 2462 applies to claims for disgorgement imposed as a sanction for violating a federal securities law. The Court holds that it does. Disgorgement in the securities-enforcement context is a ‘penalty’ within the meaning of § 2462, and so disgorgement actions must be commenced within the five years of the date the claim accrues.”

The Court rested its decision on the principle that “[s]uch limits are ‘vital to the welfare of society’ and rest on the principle that ‘even wrongdoers are entitled to assume that their sins may be forgotten.'” The CFPB has argued that, except for the statute of limitations in § 2462, no statute of limitations applies to claims it brings through administrative enforcement actions. This argument was brought to the fore by the PHH case, which we have blogged about extensively. The CFPB lost on that issue in the PHH case before a three-judge panel of the D.C. Circuit. The panel’s decision was vacated when the D.C. Circuit decided to re-hear the case en banc. We are still waiting to see what the en banc court will do.

In addition to its implications for CFPB rulemaking, the D.C. Circuit’s decision in PHH Corporation v. CFPB has significant implications for the CFPB’s authority to enforce federal consumer financial protection laws as well as the Consumer Financial Protection Act (CFPA) prohibition of unfair, deceptive, or abusive acts or practices (UDAAP).

In its decision, the D.C. Circuit ruled not only that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional but also ruled that RESPA’s three-year statute of limitations (SOL) applies to CFPB administrative enforcement actions.  According to the court, when using it authority under Section 5563 of the CFPA to conduct hearings and adjudication proceedings to enforce a federal consumer financial protection law as to which it has enforcement authority, the CFPB is subject to any limits in such law, such as a SOL.  It stated that “[b]y its terms, then, Section 5563 ties the CFPB’s administrative adjudications to the statutes of limitations of the various federal consumer protection laws it is charged with enforcing.”

RESPA’s SOL provides that “actions brought by the Bureau, the Secretary [of HUD], the Attorney General of any State, or the insurance commissioner of any State may be brought within 3 years from the date of the occurrence of the violation.”  Not only did the court reject the CFPB’s argument that RESPA’s SOL did not apply to administrative enforcement actions, it also rejected the CFPB’s argument that by its terms, RESPA’s three-year SOL was limited to court actions.  The court concluded that the reference to “actions” in RESPA’s SOL includes both CFPB RESPA enforcement actions brought administratively and those brought  in court.

The court’s statement that Section 5563 “ties the CFPB’s administrative adjudications to the statutes of limitations of the various federal consumer protection laws it is charged with enforcing” has implications for attempts by the CFPB to avoid the SOLs of federal consumer financial protection laws other than RESPA.  Indeed, the court specifically noted that the CFPB’s argument that it was not bound by RESPA’s SOL “would extend to all 19 of the consumer protection laws that Congress empowered the CFPB to enforce” and cited to the CFPB’s administrative enforcement action against Integrity Advance, LLC in which the CFPB’s Administrative Law Judge (ALJ) found that the CFPB was not bound by the TILA or EFTA SOLs.  The respondents in that case filed a motion to stay their appeal of the ALJ’s decision and for their case to be remanded to the ALJ for reconsideration in light of the D.C. Circuit’s PHH decision.  The motion was denied by Director Cordray who, in an order issued on October 31, 2016, stated that he “was fully able to address [the respondents’] arguments about the appropriate statute of limitations in this appeal” and that he had “extended the briefing schedule sua sponte to ensure that the parties would have a full opportunity to present arguments on the impact (if any) of the D.C. Circuit’s decision in PHH v. CFPB.”

In addition to the ALJ’s finding in Integrity Advance that the CFPB was not bound by the TILA and EFTA SOLs, the ALJ found that the three-year SOL in Section 5564(g)(1) for actions to enforce the CFPA did not apply to the CFPB’s UDAAP claims. Section 5564(g)(1) provides that “[e]xcept as otherwise permitted by law or equity, no action may be brought under this title more than 3 years after the date of discovery of the violation to which an action relates.”  In rejecting the CFPB’s reading of “actions” in RESPA’s SOL, the D.C. Circuit observed that “[t]he Dodd-Frank Act repeatedly uses the term “action” to encompass court actions and administrative proceedings” and cited to various Dodd-Frank sections as examples.  Assuming the term “action” in Section 5564(g)(1) would similarly be read to encompass court actions and administrative proceedings, the CFPB would be bound by the provision’s three-year SOL, including its discovery rule, when bringing administrative actions to enforce its UDAAP authority.

The implications of the SOL issues for the CFPB’s exercise of its enforcement authority could include the fast-tracking of enforcement matters and greater use of its UDAAP authority for conduct that violates a federal consumer financial protection law with a SOL that is less than 3 years.  We will be watching to see how Director Cordray addresses the respondent’s TILA, EFTA and UDAAP SOL arguments when he rules on Integrity Advance’s appeal.

 

The CFPB announced that, jointly with the New York Attorney General, it has filed a lawsuit in a New York federal court against three companies that purchased consumer debts and two of the companies’ individual principals alleging that the defendants engaged in a “massive illegal debt-collection scheme.”

The complaint alleges that the defendants’ conduct violated the FDCPA, the UDAAP prohibition of the Consumer Financial Protection Act, and various New York laws, including New York’s debt collection and UDAP laws.  The FDCPA and NY state law claims are asserted by only, respectively, the CFPB and NY AG, while the UDAAP claims are asserted by both the CFPB and NY AG.  Under CFPA Section 1042, a state AG is authorized to bring a civil action for a violation of the CFPA UDAAP prohibition. While Section 1042 is not cited in the complaint, presumably the UDAAP claims rely on Section 1042 for the NY AG’s authority.  Although the NY Department of Financial Services has previously relied on Section 1042 to file a lawsuit alleging UDAAP violations, this is the first time we are aware of that the NY AG has relied on Section 1042 to assert UDAAP claims in court.  Several other state AGs have also used Section 1042 to assert UDAAP claims.

Each of the claims alleged in the complaint are asserted against one or more of the defendant companies and both individual principals.  The UDAAP claims allege that the individuals are liable for the companies’ UDAAP violations because they knew or should have known of the companies’ alleged illegal practices.  According to the complaint, the individuals directed the companies’ operations, were aware of a debt seller’s audit that identified illegal practices by the companies, and the companies had received numerous complaints and inquiries from consumers, government agencies and consumer organizations about their collection practices.  With regard to the FDCPA claims, the CFPB alleges that the individuals’ involvement in the companies’ debt collection activities, including their management of staff and approval of the companies’ collection policies and practices, made them “debt collectors” under the FDCPA.

The complaint alleges that the defendants engaged in unlawful conduct that included:

  • Adding $200 to each consumer debt account the companies acquired without regard to whether the addition of such amount was permitted by applicable state law or the underlying contract between the consumer and the original creditor
  • Falsely threatening consumers with legal action they had no intention of taking and impersonating law enforcement officials, government agencies, and court officers, including using call-spoofing technologies to make it appear that collectors were calling from government agencies.

 

On September 15th, the FTC will hold a workshop to examine the testing and evaluation of disclosures that companies make to consumers about advertising claims, privacy practices, and other information.  The FTC’s workshop will explore how to test the effectiveness of these disclosures to ensure consumers notice them, understand them, and can use them in their decision-making.  Companies should incorporate the principles articulated during the workshop by federal regulators such as the FTC and the CFPB into the development of their own consumer disclosures, especially relating to e-commerce and mobile initiatives.

The “Putting Disclosures to the Test” workshop will explore ways to improve the evaluation and testing of consumer disclosures by industry, academics, and the FTC related to:

  • Disclosures in advertising  designed to prevent ads from being deceptive;
  • Privacy-related disclosures, including privacy policies and other mechanisms to inform consumers that they are being tracked; and
  • Disclosures in specific industries designed to prevent deceptive claims.

Among the participants at the workshop will be Heidi Johnson, a research analyst from the CFPB Office of Research, who will present a case study entitled, “Disclosure Research in the Lab and Online.” The CFPB’s Decision Making and Behavioral Studies team is engaged in a strategic initiative to invest in research that explores the factors that influence a disclosure’s efficacy, how to use different methodologies to study disclosure, and the market effects of disclosure. Ms. Johnson’s work as a part of this team has included consumer research on overdraft and other financial products.

On May 11, 2016, the CFPB sued All American Check Cashing, Mid-State Finance and their President and owner Michael E. Gray. It alleged that the Defendants engaged in abusive, deceptive, and unfair conduct in making certain payday loans, failing to refund overpayments on those loans, and cashing consumers’ checks.

The CFPB’s claims are mundane. The most interesting thing about the Complaint is the claim that isn’t there. Defendants allegedly made two-week payday loans to consumers who were paid monthly. They also rolled-over the loans by allowing consumers to take out a new loan to pay off an old one. The Complaint discusses how this practice is prohibited under state law even though it is not germane to the CFPB’s claims (which we discuss below). In its war against tribal lenders, the CFPB has taken the position that certain violations of state law themselves constitute violations of Dodd-Frank’s UDAAP prohibition. Yet the CFPB did not raise a UDAAP claim here based on Defendants’ alleged violation of state law.

This is most likely because of a possible nuance to the CFPB’s position that has not been widely discussed until recently. Jeff Ehrlich, CFPB Deputy Enforcement Director recently discussed this nuance at the PLI Consumer Financial Services Institute in Chicago chaired by Alan Kaplinsky. There, he said that the CFPB only considers state-law violations that render the loans void to constitute violations of Dodd-Frank’s UDAAP prohibitions. The Complaint in the All American Check Cashing case is an example of the CFPB adhering to this policy. Given that the CFPB took a more expansive view of UDAAP in the Cash Call case, it has been unclear how far the CFPB would take its prosecution of state-law violations. This case is one example of the CFPB staying its own hand and adhering to the narrower enforcement of UDAAP that Mr. Ehrlich announced last week.

In the All American Complaint, the CFPB cites an email sent by one of Defendants’ managers. The email contained a cartoon depicting one man pointing a gun at another who was saying “I get paid once a month.” The man with the gun said, “Take the money or die.” This, the CFPB claims, shows how Defendants pressured consumers into taking payday loans they didn’t want. We don’t know whether the email was prepared by a rogue employee who was out of line with company policy. But it nevertheless highlights how important it is for every employee of every company in the CFPB’s jurisdiction to write emails as if CFPB enforcement staff were reading them.

The Complaint also shows how the CFPB uses the testimony of consumers and former employees in its investigations. Several times in the Complaint, the CFPB cites to statements made by consumers and former employees who highlighted alleged problems with Defendants’ business practices. We see this all the time in the many CFPB investigations we handle. That underscores why it is very important for companies within the CFPB’s jurisdiction to be mindful of how they treat consumers and employees. They may be the ones the CFPB relies on for evidence against the subjects of its investigations.

The claims are nothing special and unlikely to significantly impact the state of the law. Although we will keep an eye on how certain defenses that may be available to Defendants play out, as they may be of some interest:

  • The CFPB claims that Defendants abused consumers by actively working to prohibit them from learning how much its check cashing products cost. If that happened, it is certainly a problem. Although, the CFPB acknowledged that Defendants posted signs in its stores disclosing the fees. It will be interesting to see how this impacts the CFPB’s claims. It seems impossible to hide a fact that is posted in plain sight.
  • The CFPB also claims that Defendants deceived consumers, telling them that they could not take their checks elsewhere for cashing without difficulty after they started the process with Defendants. The CFPB claims this was deceptive while at the same time acknowledging that it was true in some cases.
  • Defendants also allegedly deceived consumers by telling them that Defendants’ payday and check cashing services were cheaper than competitors when this was not so according to the CFPB. Whether this is the CFPB making a mountain out of the mole hill of ordinary advertising puffery is yet to be seen.
  • The CFPB claims that Defendants engaged in unfair conduct when it kept consumers’ overpayments on their payday loans and even zeroed-out negative account balances so the overpayments were erased from the system. This last claim, if it is true, will be toughest for Defendants to defend.

Most companies settle claims like this with the CFPB, resulting in a CFPB-drafted consent order and a one-sided view of the facts.  Even though this case involves fairly routine claims, it may nevertheless give the world a rare glimpse into both sides of the issues.

On Thursday, May 11, 2016 in Chicago, I moderated the “CFPB Speaks” panel which was the lead-off panel at the sold-out Practicing Law Institute  21st Annual Consumer Financial Services Institute. The CFPB speakers were:  Jeff Ehrlich, Deputy Assistant Director, Office of Enforcement, Paul Mondor, Managing Counsel, Office of Regulations and Chris Young, Senior Counsel and Chief of Staff, Office of Supervision Policy. My partner, Chris Willis (who is the Practice Group Leader of our firm’s Consumer Financial Services Litigation Group and who has handled a huge volume of CFPB investigations) was one of two industry representatives on the panel.

Jeff Ehrlich attempted to clarify the confusion surrounding the CFPB’s position in the CashCall lawsuit in which the CFPB asserted that longer term installment loans with interest rates that exceed the rate allowed under the law of the state where the borrower resides are also UDAAP violations. Many in the industry read the CashCall complaint as evidence that the CFPB views state usury violations as per se UDAAP violations.

Jeff indicated that the CFPB’s position is that there is a UDAAP violation if a state usury law violation makes a loan void or if state law provides that loans made without a required license are void. If, for example, the state law penalty for violating the state usury law is less draconian (e.g., double the finance charge or overcharge), then the CFPB would not assert that there is also a UDAAP violation.

Jeff’s comments, however, are not fully consistent with the complaint filed by the CFPB against CashCall. Specifically, the complaint asserts that the loans alleged to be UDAAP violations were subject to state laws that “rendered void or limited the consumer’s obligation to repay.” The complaint includes Colorado as a subject state and acknowledges that loans that exceed the usury limit in Colorado and loans originated without a license in Colorado are not void.  Rather, it states that in Colorado, consumers are relieved of the obligation to pay any charge that exceeds the usury limit and are entitled to a refund from the lender or assignee for any excess amount that they paid. It also states that a lender’s or assignee’s failure to obtain a required license removes the consumer’s obligation to pay finance charges to the lender or assignee.

As a result of the inconsistency between Jeff’s statement that there exists a UDAAP violation for a state law violation only when a company seeks to collect a loan that is void under state law and the much broader theory of UDAAP liability in the CashCall complaint itself, confusion continues to exist as to the CFPB’s position on when a state law violation constitutes a UDAAP violation.