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Financial Services Law Insights and Observations

District Court issues judgment against company bilking 9/11 first responders

Courts State Issues CFPB Enforcement CFPA UDAAP State Attorney General New York Consumer Finance

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On November 23, the U.S. District Court for the Southern District of New York entered a stipulated final judgment and order against a finance company, two related entities, and the companies’ founder and owner (collectively, “defendants”) for engaging in deceptive and abusive acts or practices under the Consumer Financial Protection Act (CFPA) related to the offering of cash advances to people on their settlement payouts from victim-compensation funds established for certain first responders to the World Trade Center attack on September 11, 2001.

As previously covered by InfoBytes, in 2017, the CFPB and the New York attorney general filed a complaint alleging that the defendants engaged in deceptive and abusive acts by misleading consumers into selling expensive advances on benefits to which they were entitled by mischaracterizing extensions of credit as assignments of future payment rights, thereby causing the consumers to repay far more than they received. In March 2022, the district court ruled that the CFPB could proceed with its 2017 enforcement action against the defendants (covered by InfoBytes here) two years after the U.S. Court of Appeals for the Second Circuit vacated a 2018 district court order dismissing the case on the grounds that the Bureau’s single-director structure was unconstitutional, and that, as such, the agency lacked authority to bring claims alleging deceptive and abusive conduct by the company (covered by InfoBytes here).

The 2nd Circuit remanded the case to the district court, determining that the U.S. Supreme Court’s ruling in Seila Law LLC v. CPFB (holding that the director’s for-cause removal provision was unconstitutional but severable from the statute establishing the Bureau, as covered by a Buckley Special Alert) superseded the 2018 ruling. The appellate court further noted that following Seila, former Director Kathy Kraninger ratified several prior regulatory actions (covered by InfoBytes here), including the enforcement action brought against the defendants, and as such, remanded the case to the district court to consider the validity of the ratification of the enforcement action. The defendants later filed a petition for writ of certiorari, arguing that the Bureau could not use ratification to avoid dismissal of the lawsuit, but the Supreme Court declined the petition. (Covered by InfoBytes here). In 2021, the defendants filed a motion to dismiss the Bureau’s enforcement action on the grounds that “it was brought by an unconstitutionally constituted agency” and that the Bureau’s “untimely attempt to subsequently ratify this action cannot cure the agency’s constitutional infirmity.” (Covered by InfoBytes here). The district court turned to the Supreme Court’s June 2021 majority decision in Collins v. Yellen, which held that “‘an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed[.]’” Accordingly, the agency’s actions are not void and do not need to be ratified, unless a plaintiff can show that “the agency action would not have been taken but for the President’s inability to remove the agency head.” (Covered by InfoBytes here).

In the amended complaint, filed in July 2022, the Bureau and the New York AG alleged that, among other things, the defendants engaged in deceptive acts by misrepresenting to consumers that the company’s contracts created valid and enforceable assignments of their payment proceeds when, in fact, the assignments were not valid and enforceable. The amended complaint also alleged that the company misrepresented to consumers when they would receive funds from the company, often promising consumers an earlier date of disbursement than the actual disbursement. Additionally, the joint complaint alleged that the defendants violated state law by collecting on purported assignments that are void, unenforceable, and uncollectable, or alternatively, by collecting on contracts that functioned as loans with interest rates that exceed usury limits under state law, which are also void and on which no payment is due.

Under the terms of the final judgment, defendants must pay a $1 civil money penalty to the Bureau and must not take any action to collect any unpaid or future amounts owed by the harmed responders, which totals at least $600,000. Under the order, defendants must also refrain from participating in offering, brokering, or providing credit or advances of funds to individuals entitled to payments from governmentally created funds established to compensate victims of 9/11.

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