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  • Supreme Court agrees with Third Circuit that consumers may sue “any” government entity under FCRA

    Courts

    On February 8, the Supreme Court of the United States unanimously decided that a consumer can sue any government agency—in this case the U.S. Department of Agriculture (USDA)—for damages for violating the Fair Credit Reporting Act of 1970, as amended by the Consumer Credit Reporting Reform Act of 1996 (the Act). The court found that government agencies are expressly included in the definition of any “person” who violates the statute.  On appeal from the 3rd Circuit, the case involved an individual who sued the USDA for monetary damages under FCRA, alleging that the USDA furnished incorrect information to a credit reporting company stating that his account was past due, damaging his credit score and impairing his ability to access affordable credit. 

    In affirming the 3rd Circuit’s reversal of the lower court’s dismissal of the case, the Supreme Court noted that, while the U.S. is “generally immune” from monetary judgment suits as a sovereign body, Congress can waive this immunity. Applying a “clear statement” rule, the Supreme Court interpreted the Act’s statutory language that authorizes consumer suits for money damages against “[a]ny person” who willfully or negligently fails to comply with [the law]” to constitute a clear waiver of federal government sovereign immunity. As the Court explained, “the Act defines the term ‘person’ to include “any . . . governmental . . . agency,” therefore “FCRA clearly waives sovereign immunity in cases like this one.” 

    Courts U.S. Supreme Court FCRA CCRA USDA Sovereign Immunity

  • Supreme Court hears oral argument in case challenging SEC ALJ use

    Courts

    On November 29, the Supreme Court heard oral argument in the SEC’s request to appeal the 5th Circuit’s decision in Securities and Exchange Commission v. Jarkesy. As previously covered by InfoBytes, the 5th Circuit held that the SEC’s in-house adjudication of a petitioners’ case violated their Seventh Amendment right to a jury trial and relied on unconstitutionally delegated legislative power. At oral argument, Justice Kavanaugh stated in his questioning of Principal Deputy Solicitor General Brian Fletcher (representing the SEC) that given the severity of the potential outcome of cases, the SEC’s decision-making process fully being carried out in-house could be “problematic,” and that it “doesn’t seem like a neutral process.” Meanwhile, Fletcher mentioned that the boundaries and “outer edges” of the public rights doctrine can be “fuzzy.” Justices’ questions also centered around Atlas Roofing v. Occupational Safety and Health Review Commission—a Supreme Court case that held that “Congress does not violate the Seventh Amendment when it authorizes an agency to impose civil penalties in administrative proceedings to enforce a federal statute.”

    Courts Appellate U.S. Supreme Court ALJ Constitution Securities Exchange Act SEC Advisers Act Fifth Circuit Securities Act

  • District Court grants payday lender's motion to stay CFPB case pending Supreme Court decision

    Courts

    On November 3, the U.S. District Court of Nevada granted a payday lender’s motion to stay a case brought by the CFPB, pending a SCOTUS’s decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau (see InfoBytes here and here). The CFPB issued a civil investigative demand (CID) in late 2022 to the lender, as part of an investigation into its lending practices. The lender complied with the CID initially, but later requested a stay due to the impending SCOTUS decision regarding the constitutionality of the CFPB’s funding structure, which could impact the CFPB’s enforcement authority. Although the CFPB opposed the stay by arguing that the extensive delay could hinder its ability to investigate the lender, the court granted the lender’s motion, in line with other district courts that have faced similar issues.

    Courts CFPB Constitution U.S. Supreme Court Consumer Finance Consumer Protection CID Payday Lending

  • Fifth Circuit affirms dismissal of Fannie, Freddie shareholders’ claims related to FHFA removal restriction and funding

    Courts

    On October 12, the U.S. Court of Appeals for the Fifth Circuit affirmed dismissal of Fannie Mae and Freddie Mac shareholders’ claims that the FHFA’s unconstitutional removal restriction caused them harm and that the FHFA’s funding mechanism is inconsistent with the Appropriations Clause. After the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship, it entered into several preferred stock purchase agreements with the U.S. Treasury. As a result of these agreements, any value the companies generated would go to the Treasury and not to junior preferred and common stockholders such as plaintiffs.

    The plaintiff shareholders sued in 2016, arguing that the “for cause” removal protection for the director of the FHFA was unconstitutional. The district court granted summary judgment in favor of FHFA, but a panel of the 5th Circuit reversed. Sitting en banc, the 5th Circuit then determined that the removal provision violated the separation of powers, and held that the proper remedy was to sever the removal restriction from the rest of the authorizing statute. On further appeal, the Supreme Court held that for-cause restriction on the President’s removal authority violates the separation of powers, but it refused to hold that the relevant preferred stock purchase agreement must be undone.

    The Supreme Court remanded the case for lower courts to resolve whether the unconstitutional removal provision caused harm to plaintiffs as shareholders, and the 5th Circuit, again sitting en banc, remanded that question to the district court. Plaintiffs filed an amended complaint on remand, bringing claims under the Administrative Procedure Act (“APA”) and directly under the Constitution. The amended complaint also alleged, for the first time, that the FHFA’s financing structure violates the Appropriations Clause. Defendants moved to dismiss, and the district court granted the motion in its entirety and dismissed all claims with prejudice.

    The 5th Circuit determined that the removal claims were within the scope of the remand order, contrary to the district court’s conclusion, but that the plaintiff’s APA claim was barred by an anti-injunction clause in the authorizing statute. Turning to the Constitutional claim, the 5th Circuit concluded that judicial review was not precluded and proceeded to the merits of the claim.

    To show compensable harm from the unconstitutional removal provision, plaintiffs had to allege, among other things, a “nexus between the desire to remove and the challenged actions taken by the insulated actor.” More specifically, they had to allege a connection between the Trump Administration’s desire to remove the director of the FHFA and the Administration’s failure to have FHFA exit the conservatorships and return Fannie Mae and Freddie Mac to private control. The amended complaint, however, failed to plead facts demonstrating that the Trump Administration’s purported plan for re-privatization would have been completed if President Trump had been able to remove the existing FHFA director. Those allegations, the Fifth Circuit held, were insufficient.

    The 5th Circuit agreed with the district court that the plaintiffs’ Appropriations Clause argument was outside the mandate of the earlier remand order. The appeals court reasoned that the remand order “[left] no opening for plaintiffs to bring a challenge under a completely different constitutional theory for the first time on remand,” nor was there an intervening change in the law such that the mandate rule would not apply.

    Courts Fifth Circuit Appellate FHFA Fannie Mae Freddie Mac Shareholders Constitution U.S. Supreme Court

  • Supreme Court hears oral argument in challenge to CFPB

    Courts

    On October 3, the Supreme Court heard oral argument in CFPB v. Community Financial Services Association of America —a case presenting the most significant challenge yet to the constitutionality of the CFPB. As previously covered by InfoBytes, a panel of the U.S. Court of Appeals for the Fifth Circuit agreed with the plaintiff industry groups that the CFPB’s funding structure violates the appropriations clause. At oral argument, the U.S. Solicitor General observed that the lower court decision was the “first time any court in our nation’s history has held that Congress violated the Appropriations Clause by enacting a statute providing funding.”  She noted that Congress has approved similar “standing appropriations” for agencies including the U.S. Customs Service, the U.S. Post Office, and the U.S. Mint.

    Several conservative justices pushed back against the CFPB’s and Solicitor General’s stance. For example, Chief Justice Roberts called it “very aggressive view” of Congress’ authority, and Justice Alito emphasized that the CFPB’s funding mechanism was unique in that its funding comes from the Federal Reserve, which is itself not funded through normal appropriations. However, Justice Thomas challenged counsel for the industry groups, noting that “we need a finer point” on “what the constitutional problem is,” beyond the uniqueness of the funding mechanism. Justice Barrett, too, stated she was “struggling to figure out” what standard courts might use in determining whether a cap on an agency’s appropriation is too high. 

    Find continuing InfoBytes coverage on CFPB v. Community Financial Services Association of America here.

    Courts U.S. Supreme Court CFPB Hearing Constitution Funding Structure

  • Challenge to HUD fair housing rule denied

    Courts

    On September 19, the U.S. District Court for the District of Columbia denied a motion for summary judgment from the National Association of Mutual Insurance Companies arguing that the Department of Housing and Urban Development’s disparate-impact rule conflicts with the limits of the Fair Housing Act as interpreted at the Supreme Court. The rule, promulgated in 2013 and reinstated under the Biden administration, a policy is unlawful if it has a “discriminatory effect” on a protected class and was not necessary to achieve a “substantial, legitimate, nondiscriminatory” interest or if there is a less discriminatory alternative. Judge Richard J. Leon held that the rule does not exceed limitations on disparate-impact liability under the FHA placed by the Supreme Court in Texas Department of Housing & Community Affairs v. Inclusive Communities Project, Inc., 576 U.S. 519 (2015) where those limitations avoid potential constitutional issues and prevent the Act from forcing housing authorities to reorder their legitimate priorities.

    Courts HUD FHA U.S. Supreme Court

  • SEC files brief in its Supreme Court appeal to reverse 5th Circuit ruling against use of adjudication powers and ALJs

    Courts

    On August 28, the SEC filed a brief in its appeal to the U.S. Supreme Court to reverse the decision of the U.S. Court of Appeals for the Fifth Circuit’s 2022 ruling that the commission’s in-house adjudication is unconstitutional. As previously covered by InfoBytes, the 5th Circuit held that the SEC’s in-house adjudication of a petitioners’ case violated their Seventh Amendment right to a jury trial and relied on unconstitutionally delegated legislative power. The brief argues that securities laws are “distinct from common law because they authorize the government to seek civil penalties even if no private person has yet suffered harm from the defendant’s violation (and therefore no person could obtain damages).” Moreover, the SEC argues that the Court has continually upheld the right of an agency to decide whether to enter an enforcement action through the civil or criminal process. The SEC referenced the 1985 Heckler v. Chaney case, which set the precedent that there is no constitutional difference between the power to decide whether to pursue an enforcement action and where to pursue an enforcement action, as they are both executive powers, supporting the claim that there is “a long and unbroken line of decisions that have relied on the public-rights doctrine in upholding such statutory schemes against Article III and Seventh Amendment challenges.” The SEC also reminded the Court that when it enforces securities laws through an administrative enforcement proceeding with a result that is not in favor of the respondent, the respondent may obtain a judicial review through the court of appeals. Finally, the commission contends that the 5th Circuit erred when it held that statutory removal restrictions for ALJs are unconstitutional, and that Congress has “acted permissibly in requiring agencies to establish cause for their removal of ALJs.”

    Courts Securities SEC U.S. Supreme Court Fifth Circuit ALJ Constitution Securities Act Securities Exchange Act Enforcement

  • USDA urges Supreme Court to overturn FCRA 3rd Circuit ruling

    Courts

    On August 15, the USDA filed a brief urging the U.S. Supreme Court to overturn a U.S. Court of Appeals for the Third Circuit decision to reverse its FCRA lawsuit brought by a plaintiff who alleged that the consumer credit reporting agency reported two loans as past due even though he claimed both were closed with a $0 balance. In August 2022, the 3rd Circuit reversed a district court’s decision to grant a student loan servicer, consumer credit reporting agency, and the USDA’s (defendants) motion to dismiss a case finding that Congress unambiguously waived the government’s sovereign immunity in enacting FCRA (covered by InfoBytes here). The USDA argues that the district court was wrong in its decision, and that the FCRA does not waive the U.S.’s sovereign immunity for claims under 15 U.S.C. 1681n and 1681o because, among other things, (i) a waiver of sovereign immunity requires “unmistakably clear” statutory language; (ii) the FCRA does not create a cause of action that “‘expressly authorizes suits against sovereigns,’ and ‘recognizing immunity’ would ‘negate[]’ that express authorization”; (iii) the FCRA uses “persons” in a way that does not distinguish between sovereign and non-sovereign senses; (iv) “inexplicable incongruencies” with the term “person” within the context of §§ 1681n and 1681o includes a sovereign entity, which would not only expose the federal government but also individual states to potential lawsuits seeking monetary damages; and (v) interpreting the FCRA to permit lawsuits against the U.S. would significantly broaden the scope of liability for federal agencies, creating “overlap” already provided by the Privacy Act.

    Courts FCRA Third Circuit Consumer Reporting Agency Consumer Finance Credit Furnishing Credit Report Sovereign Immunity Department of Agriculture U.S. Supreme Court

  • States urge Supreme Court to find CFPB funding unconstitutional

    Courts

    On July 10, the West Virginia attorney general, along with 26 other states, filed an amicus brief in support of respondents in Consumer Financial Protection Bureau v. Community Financial Services Association of America, arguing that the CFPB’s funding structure violates the Constitution and that by operating outside the ordinary appropriations process states are often left “out in the cold.” In their brief, the states urged the U.S. Supreme Court to uphold the U.S. Court of Appeals for the Fifth Circuit’s decision in which it found that the Bureau’s “perpetual self-directed, double-insulated funding structure” violated the Constitution’s Appropriations Clause (covered by InfoBytes here and a firm article here). The 5th Circuit’s decision also vacated the agency’s Payday Lending Rule on the premise that it was promulgated at a time when the Bureau was receiving unconstitutional funding.

    Arguing that the Bureau is operating beyond the boundaries established by the Constitution, the states maintained that the current funding mechanism limits Congress’s ability to oversee the agency. “Even if the CFPB has done some good—and some would even dispute that premise—it wouldn't matter,” the states said, warning that “sidelining Congress can greenlight an agency to wreak havoc,” especially if the “agency wields broad regulatory and enforcement powers over the entire U.S. financial system, acts under the control of a single powerful figure, and lacks other protections from meaningful oversight.”

    The appropriations process plays a crucial role in enabling states to influence agency actions indirectly, the states maintained, explaining that when an agency initiates a new enforcement initiative or significant rulemaking endeavor, it is required to publicly outline its projected work in order to secure the necessary funding to carry it out. “Disclosure on the front end of the appropriations process can empower affected parties—including the [s]tates—to take quick, responsive actions beyond lobbying their representatives (up to suing to stop illegal action, if need be).” In contrast, the Bureau’s insulation from this process has allowed it to hide its actions from public view, the states wrote. As an example, the Bureau has repeatedly declined to interpret or provide further clarity on how the provisions governing unfair, deceptive, or abusive acts or practices work.

    The brief also highlighted examples of when Congress used funding cuts through the appropriations process to curtail agencies’ powers. Additionally, unlike the challenges of amending authorizing statutes, appropriations bills must be passed by Congress each year to avoid a government shutdown, which can be “a painful pill to swallow for the sake of standing up for an agency’s policy choice,” the states noted, adding that “[b]ecause appropriations involves both oversight committees and appropriations committees, agencies may have ‘less flexibility to ally themselves with executive branch officials or interest groups.’”

    The states also urged the Court to “ignore doomsaying” about the consequences of finding the funding structure unconstitutional. Should the Court agree to invalidate the funding structure, Congress can pass a proper appropriations bill for the Bureau, the states explained, adding that “a rebuke from this Court would no doubt grease the sticky wheels of the legislative process and move them a bit faster.” Moreover, states could also fill any gaps should Congress somehow pare back the CFPB’s funding, the brief stressed.

    Several amicus briefs were also filed this week in support of CFSA, including an amici curiae brief filed by the U.S. Chamber of Commerce and several banking associations and an amici curiae brief filed by 132 members of Congress, including 99 representatives and 33 senators, which urged the Court to uphold the 5th Circuit’s decision.

    Courts State Issues CFPB U.S. Supreme Court Funding Structure Constitution State Attorney General Appellate Fifth Circuit

  • CFSA says CFPB funding violates Constitution

    Courts

    On July 3, the Community Financial Services Association of America (CFSA) and the Consumer Service Alliance of Texas filed their brief with the U.S. Supreme Court, urging the high court that the CFPB’s independent funding structure is “unprecedented and must be stopped before it spreads without limit.” Respondents asked the Court to affirm the U.S. Court of Appeals for the Fifth Circuit’s decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau, where the appellate court found that the Bureau’s “perpetual self-directed, double-insulated funding structure” violated the Constitution’s Appropriations Clause (covered by InfoBytes here and a firm article here). The 5th Circuit’s decision also vacated the agency’s Payday Lending Rule on the premise that it was promulgated at a time when the Bureau was receiving unconstitutional funding.

    The Bureau expanded on why it believes the 5th Circuit erred in its holding in its opening brief filed with the Court in May (covered by InfoBytes here), and explained that even if there were some constitutional flaw in the statute creating the agency’s funding mechanism, the 5th Circuit should have looked for some cure to allow the remainder of the funding mechanism to stand independently instead of presuming the funding mechanism created under Section 5497(a)-(c) was entirely invalid. Vacatur of the agency’s past actions was not an appropriate remedy and is inconsistent with historical practice, the Bureau stressed.

    In their brief, the respondents challenged the Bureau’s arguments, writing that the “unconstitutionality of the CFPB’s funding scheme is confirmed by both its unprecedented nature and lack of any limiting principle. Whether viewed with an eye toward the past or the future, the threat to separated powers and individual liberty is easy to see.” Disagreeing with the Bureau’s position that the Constitution gives Congress wide discretion to exempt agencies from annual appropriations and that independent funding is not uncommon for a financial regulator, the respondents stated that Congress gave up its appropriations power to the Bureau “without any temporal limit.” The respondents further took the position that the Bureau “can continue to set its own funding ‘forever’” unless both chambers agree and can persuade or override the president. Moreover, because the Federal Reserve Board is required to transfer “the amount determined by the Director to be reasonably necessary to carry out the [CFPB’s] authorities, . . . it ‘foreclose[s] the application of any meaningful judicial standard of review.’”

    The respondents also argued that the Bureau’s funding structure is clearly distinguishable from other assessment-funded agencies in that these financial regulators are held to “some level of political accountability” since “they must consider the risk of losing funding if entities exit their regulatory sphere due to imprudent regulation.” Additionally, the respondents claimed that the fundamental flaws in the funding statute cannot be severed, reasoning, among other things, that courts “cannot ‘re-write Congress’s work’” and are not able to replace the Bureau’s self-funding discretion with either a specific sum or assessments from regulated parties.

    With respect to the vacatur of the Payday Lending Rule and the potential for unintended consequences, the respondents urged the Court to affirm the 5th Circuit’s rejection of the rule, claiming it was unlawfully promulgated since a valid appropriation was a necessary condition to its rulemaking. “Lacking any viable legal argument, the Bureau resorts to fear-mongering about ‘significant disruption’ if all ‘the CFPB’s past actions’ are vacated,” the respondents wrote, claiming the Bureau “grossly exaggerates the effects and implications of setting aside this Rule.” According to the respondents, the Bureau does not claim that any harm would result from setting aside the rule, especially since no one has “reasonably relied” on the rule as it has been stayed and never went into effect. As to other rules issued by the agency, the respondents countered that Congress could “legislatively ratify” some or all of the agency’s existing rules and that only “‘timely’ claims can lead to relief” in past adjudications. Additionally, the respondents noted that many of the Bureau’s rules were issued outside the six-year limitations period prescribed in 28 U.S.C. § 2401(a). This includes a substantial portion of its rules related to mortgage-related disclosure. Even for challenges filed within the time limit, courts can apply equitable defenses such as “laches” to deny retrospective relief and prevent disruption or inequity, the respondents said.

    Courts CFPB U.S. Supreme Court Appellate Fifth Circuit Funding Structure Constitution Payday Lending Payday Rule

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