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Financial Services Law Insights and Observations


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  • Plaintiffs file suit challenging Biden’s latest student debt relief plan


    On August 4, two nonprofit entities filed a lawsuit against the federal government aimed at blocking the Biden administration’s recent effort to provide debt relief to student borrowers. The administration’s efforts were implemented in response to the Supreme Court’s June 30 decision striking down the DOE’s student loan debt relief program that would have canceled between $10,000 and $20,000 in debt for certain student borrowers (covered by InfoBytes here). The lawsuit, filed in the U.S. District Court for the Eastern District of Michigan, targets the administration’s efforts to credit borrowers participating in the Public Service Loan Forgiveness (PSLF) plan and Income-Driven Repayment (IDR) plan by providing credit for periods when loans were in forbearance or deferment, which would affect more than 804,000 borrowers, forgiving approximately $39 billion in loan payments, according to the DOE.

    As an initial matter, plaintiffs assert that they are injured by the administration’s actions because, as 501(c)(3) nonprofit organizations, they benefit from the PSLF program by allowing them to “attract and retain borrower-employees who might otherwise choose higher-paying employment with non-qualifying employers in the private sector.” Thus, according to plaintiffs, cancellation of PSLF loans would reduce the incentive for borrowers to work at public service employers and the decision “unlawfully deprives [PSLF] employers of the full statutory benefit to which they are entitled under PSLF.”

    Plaintiffs accuse the administration of putting the plan on an “accelerated schedule apparently designed to evade judicial review.” The plaintiffs assert that the DOE lacks authority to classify “non-payments as payments,” and that the statutes for the PSLF and IDR programs require actual payments to qualify for forgiveness under each plan. The suit brings four claims against the administration: (i) violation of the Appropriation Clause of the U.S. Constitution by canceling debt that Congress did not authorize; (ii) violation of the Administrative Procedure Act (APA) by issuing a final agency decision without appropriate statutory authority; (iii) violation of the APA by taking an arbitrary and capricious agency action by failing to “explain why [DOE] has changed its policy from not crediting non-payments during periods of loan forbearance to crediting such payments for purposes of PSLF and IDR forgiveness” and “entirely fail[ing] to consider the cost to taxpayers of crediting periods of forbearance toward PSLF and IDR forgiveness,” among other reasons; and (iv) violation of the APA by failing to undertake notice-and-comment procedures in implementing the changes. 

    Courts Federal Issues Biden Student Lending Michigan Department of Education Income-Driven Repayment PSLF

  • CFPB files reply brief supporting its constitutional structure


    On August 3, the CFPB filed a Reply Brief in support of its request to overturn the Fifth Circuit’s decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau, in which the 5th Circuit found that the CFPB’s funding structure violated the Constitution’s Appropriations Clause (covered by InfoBytes here, here, and here, and in a firm article here).

    In its Reply Brief, the CFPB argues that Congress did not violate the Appropriations Clause by failing to specify a specific dollar amount to fund the CFPB because “the Appropriations Clause contains no dollar-amount requirement.” In support of that argument, the CFPB points to the Founders’ appropriation of funds for the Post Office and the National Mint where they did not decide the specific amounts of annual funding, the funding structure for the OCC and the Federal Reserve Board, and to current federal appropriations for Social Security payments and unemployment assistance.

    The Bureau then argues that even if there was a specific dollar amount requirement, that requirement is nonetheless satisfied because “Congress fixed the CFPB’s maximum annual funding.” According to the Bureau, the fact that it has the discretion to ask for less than the maximum authorized is commonplace and “[t]o this day, Congress routinely appropriates sums ‘not to exceed’ a particular amount;’ that phrase appears more than 400 times in the Consolidated Appropriations Act, 2022.”

    The Bureau then aims to refute plaintiff’s arguments that the Appropriations Clause requires time-limited funding laws and imposes special rules for law enforcement agencies. The Bureau argues that the fact that the Constitution includes a specific restriction limiting Congress from funding the army for more than two years dictates that by negative implication there is no such prohibition of a standing appropriation for a different appropriation.

    Finally, the Bureau argues that its combination of features is not as unique as CFSA contends, and that even if the Supreme Court ultimately finds the funding structure unconstitutional vacating the Payday Lending Rule is an inappropriate remedy because the 5th Circuit failed “to consider whether the defect it perceived could be cured by severing portions of Section 5497.”

    Courts CFPB Constitution Supreme Court Funding Structure Fifth Circuit Appellate Payday Rule

  • Judge stays CFPB, NY AG lawsuit against auto lender


    On August 7, the U.S. District Court for the Southern District of New York granted a defendant’s motion to stay a lawsuit against an alleged predatory auto lender until the Supreme Court determines the constitutionality of the CFPB’s funding in a separate lawsuit (CFSA Case; covered by InfoBytes here).

    The CFPB and the New York Attorney General (AG) brought the complaint in January, accusing the lender of UDAAP and TILA violations that involved tricking consumers into loans financing used cars with high interest rates (typically above 22 percent) and add-on products they could not afford. The CFPB and AG alleged the dealers affiliated with the company (i) engaged in deceptive conduct; (ii) used high pressures sales tactics; (iii) pressured consumers into unaffordable auto loans; (iv) pressured family and friends to cosign the loans; (v) withheld prices of vehicles; and (vi) misrepresented key financial terms of the purchase, violating the CFPB, the Martin Act, and fraud and UDAP statutes, among other allegations.

    In its decision, the district court reasoned that the stay awaiting the Supreme Court’s decision would (i) allow for clarity and guidance on the legal issues at hand and it may help the defendant avoid unnecessary litigation costs; and (ii) promote judicial efficiency and minimize the possibility of conflicts with other courts. Furthermore, the court determined that although it would be in the public interest to enforce consumer protection laws, the potential harm to the public caused by the stay is outweighed by the benefit to consumers “in proceeding in a streamlined fashion.” The order requires the parties to file a joint letter updating the court by the earlier of November 3 or one week after a major development in the CFSA case.  

    Courts Federal Issues CFPB CFPA Consumer Protection Auto Lending Martin Act Deceptive New York State Attorney General Abusive

  • Tech giant denied summary judgment in private browsing lawsuit


    On August 7, the U.S. District Court for the Northern District of California entered an order denying a multinational technology company’s motion for summary judgment on claims that the company invaded consumers’ privacy by tracking the consumers’ browsing history in the company’s private browsing mode. After reviewing the company’s disclosed general terms of service and privacy notices and disclosures, the court found that the company never explicitly told users that it would be collecting their data while browsing in private mode.  Without evidence that the company explicitly told users of this practice, the court concluded that it could not “find as a matter of law that users explicitly consented to the at-issue data collection,” and therefore, could not grant the company’s motion for summary judgment.

    Plaintiffs, who are account holders (Class 1 for Incognito users and Class 2 for users of other private browsing modes), brought a class action suit against the company for the “surreptitious interception and collection of personal and sensitive user data” while the users were in a “private browsing mode.” Along with invasion of privacy, intrusion upon seclusion, and breach of contract, plaintiffs asserted violations of (i) the Federal Wiretap Act; (ii) The California Invasion of Privacy Act; (iii) Comprehensive Data Access and Fraud Act; and (iv) California’s Unfair Competition Law.

    The court previously denied the defendant’s two motions to dismiss. 

    Courts Privacy, Cyber Risk & Data Security Consumer Protection CIPA Wiretap Act California Data Collection / Aggregation

  • CFPB's small biz loan data rule stifled for many banks


    On July 31, the U.S. District Court for the Southern District of Texas entered an order granting in part and denying in part a motion for a preliminary injunction against the CFPB. The injunction, filed by a bank and two trade associations (collectively “plaintiffs”), aims to prevent the CFPB from enforcing its new final rule, implementing section 1071 of the CPA, which would require financial institutions to collect and provide to the Bureau data on lending to small businesses (covered by InfoBytes here). A 2022 5th Circuit ruling (covered by an Orrick Special Alert here) in a different suit, however, deemed the CFPB’s funding structure unconstitutional.

    Plaintiffs urged the 5th Circuit to enjoin enforcement of the small business lending rule pending Supreme Court resolution of the constitutionality of the CFPB’s funding structure, estimating that the burden of complying with the final rule would be $100,000 per community bank, and “the nonrecoverable costs of complying with an invalid regulation constitute irreparable harm,” among other things. The court held that the plaintiff bank had standing because its injury is imminent and not speculative based on the effective date of the final rule, and the costs of preparation for compliance. The court also held that there is a “substantial likelihood” that the plaintiffs would prevail in asserting the final rule is invalid based on the claim that the Bureau’s funding is unconstitutional. The court agreed with plaintiffs’ claim that the costs of compliance with the final rule are “more than de minimis and thus constitute irreparable harm,” despite the CFPB’s argument that the costs of compliance would not be incurred now. Finally, the court held that the CFPB failed to show any evidence that a stay of the final rule will cause harm. While the court entered an injunction, it limited it to the plaintiffs and their members, declining to enter a nationwide injunction as requested by plaintiffs, because “generic reasons such as ‘nationwide scope’ or ‘need for uniformity’ without more are insufficient.”

    The final rule is scheduled to go into effect on August 29. 

    Courts Federal Issues CFPB Small Business Lending Section 1071 Dodd-Frank Funding Structure Administrative Procedure Act

  • ETF, founder to pay SEC $4.4M for misleading trustees


    On August 1, the SEC settled for $4.4 million with an investment adviser and entities he founded (collectively, the “respondents”) on charges that they breached both their duty of care and duty of loyalty to their client, an exchange traded fund (ETF), in violation of the Investment Advisers Act and the Investment Company Act. As alleged in the settlement, the respondents needed funds to settle a substantial private litigation judgment, and to secure the funds to do so, committed to keep the client’s security lending business with the company providing the financing to the respondents. However, there were better offers on better terms from other securities lenders that could have provided millions more in revenue to the client, and the respondents did not disclose this information to their client or to the client’s independent trustees. In addition to the civil penalties, without admitting or denying the findings, respondents agreed to various non-monetary penalties, including cease-and-desist orders, an associational bar for the investment adviser and censures for the respondent entities.

    Securities Courts SEC Enforcement Digital Assets Cryptocurrency

  • Payment processor fined $75k, partner owes $243M in CFPB suit


    On July 31, the District Court for the Central District of California entered judgment in favor of the court-appointed receiver for defendants against the non-party provider of payment processing and escrow services to defendants and its managing member in the amount of $75,000, following a July 10 order requiring defendant to pay $243 million in redress and civil penalties. These judgments were entered in connection with the lawsuit filed by the CFPB, along with the Minnesota and North Carolina attorneys general, and the Los Angeles City Attorney, against a student loan debt relief operation for allegedly deceiving thousands of student-loan borrowers and charging more than $71 million in unlawful advance fees (covered by InfoBytes here).

    The defendant companies and one of the controlling business partners settled in 2020, but the court ordered the remaining controlling business partner to pay $243 million in redress and civil penalties earlier in July based on his involvement in violating various laws through the operation, including the TSR and the CFPA. Of the $243 million, the CFPB is entitled to over $95 million as redress for unlawful fees paid by consumers affected by the student loan debt relief operation and nearly $148 million of civil money penalties, and Minnesota, North Carolina, and California are each entitled to $5,000 of civil money penalties. The recent judgment of $75,000 entered against the non-party payment processing service provider resulted from the settlement of a separate lawsuit alleging that the service provider facilitated the fraud perpetuated by the defendants in the student loan debt relief operation and later attempted to deceptively transfer consumer funds held by defendants to avoid their transfer to the receiver.

    Courts CFPB Student Lending Debt Relief Payment Processors California Minnesota North Carolina State Attorney General CFPA TSR

  • Judge grants MSJ in class action over disputed debt investigation


    On July 28, the U.S. District Court for the Southern District of Alabama granted summary judgment in favor of a defendant third-party debt collector in an FCRA and FDCPA putative class action, holding that the defendant carried out a reasonable investigation following plaintiff’s dispute of the debt it had reported to credit reporting agencies (CRAs) and that the plaintiff failed to establish that the defendant knew or should have known that the debt was inaccurate or invalid. Defendant entered into an asset purchase agreement with another third-party debt collector and reported debts to credit reporting agencies under the name of the non-defendant third-party debt collector, including an account erroneously associated with plaintiff. When defendant received notice that plaintiff disputed the erroneous account information, defendant verified the account information in its system and provided by the CRA, asked the creditor to provide account documentation, and then requested that the CRAs delete their reporting of the account once the creditor failed to provide account documentation within the requested thirty-day period.

    In relation to the FCRA claim, the court found that the defendant “did everything required by the FCRA in response to Plaintiff’s dispute” such that the plaintiff “failed to establish how this investigation was not reasonable” or in violation of the FCRA. The court also found that plaintiff “failed to show that any different result would have occurred had [defendant] conducted any part of its investigation differently.” Finally, plaintiff’s claim failed as a matter of law concerning defendant’s initial report of the debt to the CRAs because the defendant was not required under the FCRA to “investigate the validity of a debt before commencing to report on that account to the CRAs.” While the defendant was prohibited from reporting inaccurate consumer information, no private cause of action exists for violations of this initial reporting provision of the FCRA.

    For the FDCPA claim, the court held that the plaintiff failed to establish that the defendant had knowledge that the debt it reported was not accurate or was otherwise disputed or invalid. Because the CFPB passed Regulation F in November 2021, after the events at question in this litigation, furnishing information regarding a debt to a CRA before communication with plaintiff was not unlawful at that time. Finally, the court found that plaintiff failed to timely assert that defendant violated the FDCPA provision prohibiting false, deceptive, or misleading representation by using the non-defendant third-party debt collector’s name when reporting the account to the CRAs because this allegation was not present in plaintiff’s complaint.

    Courts Third-Party Debt Collection FCRA FDCPA Alabama Credit Reporting Agency Class Action

  • Tenant screening company subject to FHA


    On July 26, a federal judge in the U.S. District Court for the District of Massachusetts ruled that a tenant screening algorithm is subject to the Fair Housing Act, including the FHA's ban on racial discrimination in housing. The court held that even though the company is not itself is not a landlord, as property owners allegedly relied solely on the company's decisions to deny prospective renters' applications, the company was effectively granting it authority to make housing decisions.

    Plaintiffs alleged in an amended complaint that a tenant-screening service operated by the defendants violated the Fair Housing Act, 42 U.S.C. § 3604 and Massachusetts anti-discrimination and consumer protection laws. The Plaintiffs claimed that the services discriminate against holders of rental vouchers and applicants of certain races and income classes, in violation of the FHA, resulting in less housing availability, less favorable terms and conditions in rental agreements, and discriminatory provision of services in connection with housing, in each case based on race and national origin.

    Defendants, in their respective motions to dismiss, argued that the FHA does not apply to a tenant-screening service, such as the defendant, because the service does not “make housing decisions.” In denying the motion to dismiss on this count, the court reasoned that the FHA provisions do not limit liability to people or entities that “make housing decisions” but rather “focuses on prohibited acts,” and reiterated that the Supreme Court has already held that “language of the Act is broad and inclusive.” The court observed that while housing providers are the typical target of FHA claims, other entities are often held liable under the Act. The court reasoned that the application of the FHA “beyond direct housing providers” is a “logical extension[] which effectuate[s] the purpose of the FHA,” as “a housing provider could simply use an intermediary to take discriminatory and prohibited actions on its behalf and defeat the purpose of the FHA.”

    Massachusetts antidiscrimination laws, among other things, make it unlawful to discriminate in the “terms, conditions, or privileges” of the sale or rental of housing or provision of such services “to aid, abet, incite, compel or coerce the doing of any of the acts forbidden under this chapter,” which includes Sections 4(6) and 4(10). Plaintiffs allege that the discriminatory rental application process was facilitated by the tenant score produced by the defendants. The court held that the chapter is construed broadly and reiterated the Massachusetts Supreme Court finding that defendants who play a role in the tenant selection process may be held liable under certain sections even if they only “aid[ed] or abet[ted]” a violation of Section 4(10). As such, the court held that the plaintiff’s claims for disparate impact discrimination for race or source of income under both FHA and Massachusetts antidiscrimination laws were sufficient to survive the motion to dismiss.

    Courts Federal Issues FHA HUD CFPB Consumer Finance Landlords Massachusetts Discrimination

  • Supreme Court of New York: FDCPA does not require collectors to explain how debt is acquired


    On July 19, the Supreme Court of the State of New York filed an order granting defendants’ motion for summary judgment, ruling that the FDCPA does not require debt collectors to provide debtors with proof of how they came to acquire the debt from the original creditor. One of the defendants purchased plaintiff’s defaulted credit card debt, which was placed with the second defendant for collection. The second defendant sent plaintiff a collection letter that identified the original creditor, along with the last four digits of the account number and identified the current creditor by name. Plaintiff sued, alleging violations of several sections of the FDCPA, claiming the letter was “false, deceptive, and misleading” because he never entered into a transaction with the current creditor and that the defendants reported the alleged debt to the credit reporting agencies. Plaintiff also maintained that prior to filing the lawsuit, he sought to validate the alleged debt but that neither defendant provided information sufficient to establish the current creditor’s ownership of the debt. Defendants filed for summary judgment seeking dismissal of plaintiff’s claims. In granting the motion, the court held that nothing in the FDCPA requires debt collectors “to educate the debtor ‘with proof, or at least a narrative, as to how it came to acquire the debt from [the] original creditor,’” and that the statute does not require plaintiffs to be notified when their debt is sold.

    Courts State Issues FDCPA Debt Collection Consumer Finance New York


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