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On January 14, acting Director of the FHFA, Joseph Otting, filed a supplemental brief with the U.S. Court of Appeals for the 5th Circuit stating the agency will no longer defend the constitutionality of the FHFA’s structure in the upcoming en banc rehearing. As previously covered by InfoBytes, in July 2018, the 5th Circuit concluded that the FHFA’s single-director structure violates Article II of the Constitution because the director is too insulated from removal by the president. In August, while the agency was still under the leadership of Mel Watt, it petitioned the court for an en banc rehearing, challenging the constitutionality holding. Now, according to the supplemental brief, the FHFA states it “will not defend the constitutionality of [the Housing Economic Recovery Act’s] for-cause removal provision and agrees with the analysis in [the relevant portion] of Treasury’s Supplemental Brief that the provision infringes on the President’s control of executive authority.” The en banc rehearing, which will address the constitutionality issue as well as the plaintiff’s other statutory claims in the case, is scheduled for January 23.
5th Circuit: Loan originators cannot be liable for loan servicers’ violations of RESPA loss mitigation requirements
On December 21, the U.S. Court of Appeals for the 5th Circuit held that a mortgage loan originator cannot be held vicariously liable for a loan servicer’s failure to comply with the loss mitigation requirements of RESPA (and its implementing Regulation X). According to the opinion, in response to a foreclosure action, a consumer filed a third-party complaint against her loan servicers and loan originator alleging, among other things, that the loan servicers had violated Regulation X’s requirement that a servicer evaluate a completed loss mitigation application submitted more than 37 days before a foreclosure sale. In subsequent filings, the consumer clarified that the claims against the loan originator were for breach of contract and vicarious liability for one of the loan servicer’s alleged RESPA violations. The district court dismissed both claims against the loan originator and the consumer appealed the dismissal of the RESPA claim.
On appeal, the 5th Circuit affirmed the dismissal for two independent reasons. First, the 5th Circuit noted it is well established that vicarious liability requires an agency relationship and determined the consumer failed to assert facts that suggested such a relationship existed. Second, in an issue of first impression at the circuit court stage, the court ruled that, as a matter of law, the loan originator could not be vicariously liable for its servicer’s alleged violations of RESPA, as the applicable statutory and regulatory provisions only impose loss mitigation requirements on “servicers,” and therefore only servicers could fail to comply with those obligations. The appellate court reasoned that Congress explicitly imposed RESPA duties more broadly in other sections (using the example of RESPA’s prohibition on kickbacks and unearned fees that applies to any “person”), but chose “a narrower set of potential defendants for the violations [the consumer] alleges.” The court concluded, “the text of this statute plainly and unambiguously shields [the loan originator] from any liability created by the alleged RESPA violations of its loan servicer.”
5th Circuit finds company delay unfairly prejudiced plaintiff, reverses decision to compel arbitration
On November 28, the U.S. Court of Appeals for the 5th Circuit reversed a lower court decision to grant a technology analytics company’s motion to compel arbitration, finding that the company substantially invoked the judicial system prior to moving to compel arbitration, and the individual plaintiff was prejudiced by such actions. According to the opinion, in 2015, the plaintiff filed a complaint against the company alleging various violations of Illinois law relating to deceptive practices and unjust enrichment. In response, the company filed a motion to dismiss for failure to state a claim and, in the alternative, moved to transfer the case for forum non conveniens arguing that the plaintiff’s claims were subject to arbitration in Texas. After the case was transferred to Texas, the company filed a subsequent motion to dismiss and reply brief, both of which did not mention arbitration. In 2017, after receiving the plaintiff’s requests for production, the company filed with the district court its motion to compel arbitration. The district court granted the motion to compel, holding that while the company substantially invoked the judicial process, the plaintiff had only “suffered some prejudice” in the form of delay and delay alone is insufficient to deny arbitration.
On appeal, the 5th Circuit agreed that the company substantially invoked the judicial system, but determined the lower court erred when it found the plaintiff had not been prejudiced unfairly. As a result, the company waived its right to arbitrate. The 5th Circuit noted that after the case was transferred from Illinois to Texas, the company waited 13 months before moving to compel arbitration, in order to first obtain a dismissal from the district court. Acknowledging the damage to the plaintiff’s legal position and additional litigation expenses incurred because of this tactic, the appellate court stated, “[a] party cannot keep its right to demand arbitration in reserve indefinitely while it pursues a decision on the merits before the district court.”
On November 16, the U.S. Court of Appeals for the 5th Circuit affirmed a Texas district court’s denial of attorney’s fees in an FDCPA action, concluding the district court did not abuse its discretion in denying the fees based on the “outrageous facts” in the case. The decision results from a lawsuit filed by a consumer against a debt collector, alleging the company violated the FDCPA and the Texas Debt Collection Act (TDCA) by using the words “credit bureau” in its name despite having ceased to function as a consumer reporting agency, and therefore misrepresented itself as a credit bureau in an attempt to collect a debt. The district court adopted a magistrate judge’s recommendation and found the company violated the FDCPA, granted summary judgment in part for the plaintiff (while denying the TDCA claims), and awarded her statutory damages of $1,000. The plaintiff then filed a motion for $130,410 in attorney’ fees, based on her attorney’s hourly rate of $450. The magistrate judge denied the attorney’s fees, noting that although violation of the FDCPA ordinarily justifies awards of attorneys’ fees, the amount claimed was “excessive by orders of magnitude,” and the lawsuit appeared to have been “created by counsel for the purpose of generating, in counsel’s own words, an ‘incredibly high fee request.’” The district court adopted the magistrate judge’s order.
On appeal, the 5th Circuit noted that other circuits have held there can be narrow exceptions to the FDCPA’s attorneys’ fees mandate, including the presence of bad faith conduct on the part of the plaintiff. In determining the “extreme facts” of the case justify the district court’s denial of attorney’s fees, the appeals court noted the almost 290 hours claimed to be worked by the attorneys are not reflected in the pleadings filed, which were “replete with grammatical errors, formatting issues, and improper citations.” The poor craftsmanship of the filings, the court noted, did not justify the $450 hourly rate charged.
On September 10, the CFPB rejected the arguments made by two Mississippi-based payday loan and check cashing companies (appellants) challenging the constitutionality of the CFPB’s single director structure. The challenge results from a May 2016 complaint filed by the CFPB against the appellants alleging violations of the Consumer Financial Protection Act (CFPA) for practices related to the companies’ check cashing and payday lending services, previously covered by InfoBytes here. The district court denied the companies’ motion for judgment on the pleadings in March 2018, declining the argument that the structure of the CFPB is unconstitutional and that the CFPB’s claims violate due process. The following April, the 5th Circuit agreed to hear an interlocutory appeal on the constitutionality question and subsequently, the appellants filed an unopposed petition requesting for initial hearing en banc, citing to a July decision by the 5th Circuit ruling the FHFA’s single director structure violates Article II of the Constitution (previously covered by InfoBytes here).
In its September response to the appellants’ arguments, which are similar to previous challenges to the Bureau’s structure—specifically that the Bureau is unconstitutional because the president can only remove the director for cause—the Bureau argues that the agency’s structure is consistent with precedent set by the U.S. Supreme Court, which has held that for-cause removal is not an unconstitutional restriction on the president’s authority. The brief also cited to the recent 5th Circuit decision holding the FHFA structure unconstitutional and noted that the court acknowledged the Bureau’s structure as different from FHFA in that it “allows the President more ‘direct control.’” The Bureau also argues that the appellants are not entitled to judgment on the pleadings because the Bureau’s complaint— which was filed under the previous Director, Richard Cordray— has been ratified by acting Director, Mick Mulvaney, who is currently removable at will under his Federal Vacancies Reform Act appointment and therefore, any potential constitutional defect in the filing is cured. Additionally, the Bureau argues that even if the single-director structure were deemed unconstitutional, the provision is severable from the rest of the CFPA based on an express severability clause in the Dodd-Frank Act.
On September 6, the U.S. Court of Appeals for the 5th Circuit declined to enforce a Civil Investigative Demand (CID) issued by the CFPB against a Texas public records company, after holding the Bureau did not comply with Dodd-Frank when it issued the CID. After initially receiving the CID, the Texas company objected to its Notification of Purpose as inadequate, as it read, “whether consumer reporting agencies, persons using consumer reports, or other persons have engaged or are engaging in unlawful acts and practices in connection with the provision or use of public records information in violation of the Fair Credit Reporting Act . . . or any other federal consumer law.” In response, the Bureau filed a petition in federal court seeking to enforce the CID and the lower court granted the petition, holding that the Notification of Purpose provided fair notice of the violations under investigation as required by the Dodd-Frank Act. The 5th Circuit disagreed, however, finding that the CID did not identify an alleged violation. The court noted that the CID only made references to the FCRA, a “broad provision of law that the CFPB has authority to enforce,” and “any other federal consumer financial law,” which subsequently “defeats any specificity provided by the reference to the FCRA.” The court emphasized that it could not review the CID under the “reasonable relevance” standard, because the CID failed to identify the conduct under investigation and concluded that the Bureau does not have “unfettered authority to cast about for potential wrongdoing.”
On August 13, two Mississippi-based payday loan and check cashing companies (appellants) filed an unopposed petition for initial hearing en banc with the U.S. Court of Appeals for the 5th Circuit regarding a challenge to the constitutionality of the CFPB’s single director structure. In April, the 5th Circuit agreed to hear the appellant’s interlocutory appeal, and now the appellants request the appeals court move straight to an en banc panel, stating “if [the] appeal is heard under the normal panel process, [the] Court will likely be asked to rehear that panel’s decision en banc, as occurred in the D.C. Circuit’s PHH case.” (covered by a Buckley Sandler Special Alert here.) The appellants cite to the July decision by the 5th Circuit ruling the FHFA’s single director structure violates Article II of the Constitution (previously covered by InfoBytes here) and note that a petition for rehearing en banc has already been filed in that case. The appellants suggest coordination in scheduling the potential en banc arguments should the court accept both petitions, arguing that the decision would “guarantee that the Fifth Circuit speaks with one voice regarding the constitutionality of these agencies’ structures.”
On July 27, the U.S. Court of Appeals for the 5th Circuit affirmed a district court’s decision following a bench trial to dismiss plaintiffs’ allegations that a bank violated an automatic stay imposed during one of the plaintiff’s (debtor) bankruptcy schedules when it took foreclosure action, holding that the plaintiffs were barred by judicial estoppel from pursuing claims because the debtor failed to amend his bankruptcy schedules to disclose a quitclaim deed for his mortgage or note a change in his financial status. In this case, the debtor filed a Chapter 13 bankruptcy, but failed to list the address or creditor information for a property in which he had entered into an equity sharing agreement with his son. When the son signed a quitclaim deed conveying the property to the debtor, the deed was recorded but not listed on the bankruptcy schedules.
According to the appellate court, the debtor failed to “disclose an asset to a bankruptcy court, but then pursue[d] a claim in a separate tribunal based on that undisclosed asset” when it filed a lawsuit against the bank for wrongful foreclosure. The doctrine of judicial estoppel requires that three elements be met: (i) “the party against whom estoppel is sought has asserted a position plainly inconsistent with a prior position”; (ii) “a court accepted the prior position”; and (iii) "the party did not act inadvertently.” The court held the first two elements were met by the plaintiff’s failure to amend his bankruptcy schedules to disclose the quitclaim deed or his legal action against the bank. The court noted, however, the debtor’s actions were not inadvertent because he was aware of the inconsistency and had a motive to conceal the asset. The appellate court specifically noted the motive to conceal was “self-evident” because the debtor’s failure to disclose his changed financial status had the potential to provide a financial benefit to the debtor. The appellate court further held that the district court did not abuse its discretion in denying plaintiffs' motion for a new trial, and that, moreover, the plaintiffs failed to show that the district court abused its discretion when it chose to exclude several of their exhibits.
On July 16, in a divided opinion, the U.S. Court of Appeals for the 5th Circuit affirmed in part and reversed in part a lower court’s decision that addressed two claims brought by a group of Fannie Mae and Freddie Mac (government-sponsored entities or GSEs) shareholders: (i) whether the Federal Housing Finance Agency (FHFA) acted within its statutory authority when it adopted a dividend agreement, which requires the GSEs to turn over every quarter “dividends equal to their entire net worth” to the Treasury Department; and (ii) whether the structure of the FHFA is unconstitutional and in violation of the separation of powers. The lower court previously dismissed the shareholder’s statutory claims and granted summary judgment in favor of the Treasury Department and the FHFA on the constitutional claim. In addressing the first claim, the appellate court agreed with the lower court and found the government-sponsored entities’ payments acceptable under the agency’s statutory authority and that the FHFA was lawfully established by Congress through the Housing and Economic Recovery Act of 2008, which places restrains on judicial review. However, the appellate court reversed the lower court’s decision as to the second claim and agreed with shareholders that Congress went too far in insulating the FHFA’s single director from removal by the president for anything other than cause, ruling that the agency’s structure violates Article II of the Constitution. “We hold that Congress insulated the FHFA to the point where the Executive Branch cannot control the FHFA or hold it accountable,” the opinion stated. The divided appellate panel remanded to the lower court for further proceedings.
Earlier this year, in response to a challenge to the CFPB's single-director structure, the U.S. Court of Appeals for the D.C. Circuit en banc upheld the CFPB’s constitutionality in a 7-3 decision (see Buckley Sandler Special Alert). The 5th Circuit is also scheduled to hear a challenge by two Mississippi-based payday loan and check cashing companies to the constitutionality of the CFPB’s single-director structure, in which 14 state Attorney General filed an amici curiae brief encouraging the appellate court to disagree with the en banc decision of the D.C. Circuit. (See previous InfoBytes coverage here and here.)
On April 24, the U.S. Court of Appeals for the 5th Circuit agreed to hear a challenge by two Mississippi-based payday loan and check cashing companies to the constitutionality of the CFPB’s single-director structure. The CFPB filed a complaint against the two companies in May 2016 alleging violations of the Consumer Financial Protection Act for practices related to the companies’ check cashing and payday lending services, previously covered by InfoBytes here. The district court denied the companies’ motion for judgment on the pleadings, rejecting their arguments that the structure of the CFPB is unconstitutional and that the CFPB’s claims violate due process. However, the district court granted the companies’ motion to certify an interlocutory appeal as to the question of the constitutionality of the CFPB’s structure, referencing the D.C. Circuit’s decision in PHH Corp. v. CFPB, (covered by a Buckley Sandler Special Alert here), and noting the “substantial ground for difference of opinion as to this issue as exhibited by the differences of opinion amongst the jurists in the [D.C. Circuit] who have considered this issue.” The district court emphasized that the question is a “controlling question of law” that the 5th Circuit has yet to decide and, if the CFPB were determined to be an unconstitutional entity, this would materially advance the underlying action’s termination. A panel of the 5th Circuit has now granted the companies’ motion for leave to appeal from the interlocutory order on the issue of the constitutionality of the CFPB’s structure.
- Kathryn L. Ryan to discuss "NMLS usage" at the NMLS Annual Conference & Training
- Jeffrey S. Hydrick to discuss "State legislative update" at the NMLS Annual Conference & Training
- Kathryn L. Ryan to speak at the "Business model primer" at the NMLS Annual Conference & Training
- Daniel P. Stipano to discuss "Dynamic customer due diligence and beneficial ownership from KYC to ongoing CDD and the new rule implementation" at the Puerto Rican Symposium of Anti-Money Laundering
- Michelle L. Rogers to discuss "Preparing for servicing exams in the current regulatory environment" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Jon David D. Langlois to discuss "Regulatory risks of convenience fees" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- APPROVED Webcast: NMLS Annual Conference & Ombudsman Meeting: Review and recap
- Brandy A. Hood to discuss "Keeping your head above water in flood insurance compliance" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Melissa Klimkiewicz to discuss "Servicing super session" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Daniel P. Stipano to discuss "Lessons learned from recent high profile enforcement actions" at the Florida International Bankers Association AML Compliance Conference
- Moorari K. Shah to provide "Regulatory update – California and beyond" at the National Equipment Finance Association Summit
- Sasha Leonhardt and John B. Williams to discuss "Privacy" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Aaron C. Mahler to discuss "Regulation B/fair lending" at the National Association of Federally-Insured Credit Unions Spring Regulatory Compliance School
- Heidi M. Bauer to discuss "'So you want to form a joint venture' — Licensing strategies for successful JVs" at RESPRO26
- Jonice Gray Tucker to discuss "Small business & regulation: How fair lending has evolved & where are we heading?" at CBA Live
- Jonice Gray Tucker to to discuss "DC policy: Everything but the kitchen sink" at CBA Live
- Daniel P. Stipano to discuss "Lessons learned from ABLV and other major cases involving inadequate compliance oversight" at the ACAMS International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "A year in the life of the CDD final rule: A first anniversary assessment" at the ACAMS International AML & Financial Crime Conference
- Moorari K. Shah to discuss "State regulatory and disclosures" at the Equipment Leasing and Finance Association Legal Forum
- Hank Asbill to discuss "Pay no attention to the man behind the curtain: Addressing prosecutions driven by hidden actors" at the National Association of Criminal Defense Lawyers West Coast White Collar Conference
- Daniel P. Stipano to discuss "Keep off the grass: Mitigating the risks of banking marijuana-related businesses" at the ACAMS AML Risk Management Conference
- Daniel P. Stipano to discuss "Mid-year policy update" at the ACAMS AML Risk Management Conference
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program