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District Court orders student loan debt-relief defendant to pay $20 million
On September 23, the U.S. District Court for the Central District of California entered a judgment in favor of the CFPB against an individual defendant in an action taken by the Bureau against a lender and several related individuals and companies (collectively, “defendants”) for alleged violations of the Consumer Financial Protection Act (CFPA), Telemarketing Sales Rule (TSR), and Fair Credit Reporting Act (FCRA). As previously covered by InfoBytes, the CFPB filed a complaint in 2020 claiming the defendants violated the FCRA by, among other things, illegally obtaining consumer reports from a credit reporting agency for millions of consumers with student loans by representing that the reports would be used to “make firm offers of credit for mortgage loans” and to market mortgage products. However, the Bureau alleged that the defendants instead resold or provided the reports to numerous companies, including companies engaged in marketing student loan debt relief services. The defendants also allegedly violated the TSR by charging and collecting advance fees for their debt relief services, and violated both the TSR and CFPA by placing telemarketing sales calls and sending direct mail to encourage consumers to consolidate their loans, while falsely representing that consolidation could lower student loan interest rates, improve borrowers’ credit scores, and allow borrowers to change their servicer to the Department of Education. Settlements have already been reached with certain defendants (covered by InfoBytes here, here, and here).
In August the court granted the Bureau’s motion for summary judgment against the individual defendant after determining that undisputed evidence showed that the individual defendant, among other things, “obtained and later used prescreened lists from [a consumer reporting agency] without a permissible purpose” in order to send direct mail solicitations from the businesses that he controlled to consumers on the lists as opposed to firm offers of credit or insurance. (Covered by InfoBytes here.) At the time, the court found that injunctive relief, restitution, and a civil money penalty were appropriate remedies. While the individual defendant objected to the proposed judgment, the court ultimately ordered that the Bureau is entitled to a judgment for monetary relief of over $19 million as redress for fees paid by affected consumers. This restitution is owed jointly and severally with the student loan debt relief company defendants in the amounts imposed in default judgments entered against each of them (covered by InfoBytes here). Additionally, the court determined that the individual defendant “recklessly” violated the CFPA, TSR, and FCRA, warranting a $20 million civil money penalty. The individual defendant is also permanently banned from participating in telemarketing activities or from using or obtaining prescreened consumer reports.
6th Circuit: TCPA robocall claims not invalidated by severance of 2015 amendment in AAPC
On September 9, the U.S. Court of Appeals for the Sixth Circuit determined that the U.S. Supreme Court’s decision in Barr v. American Association of Political Consultants Inc. (AAPC) (covered by InfoBytes here, which held that the government-debt exception in Section 227(b)(1)(A)(iii) of the TCPA is an unconstitutional content-based speech restriction and severed the provision from the statute) does not invalidate a plaintiff’s TCPA claims concerning robocalls he received prior to the Court issuing its decision. In the current matter, the plaintiff filed a proposed class action alleging violations of the TCPA’s robocall restriction after he received two robocalls from the defendant in late 2019 and early 2020 advertising its electricity services. Following the Court’s decision in AAPC, the district court granted the defendant’s motion to dismiss, ruling that because severance of the exception in AAPC only operates prospectively, “the robocall restriction was unconstitutional and therefore ‘void’ for the period the exception was on the books.” As such, the district court concluded that because the robocall restriction was void, it could not provide a basis for federal-question jurisdiction for alleged TCPA robocall violations arising before the Court severed the exception.
On appeal, the 6th Circuit conducted a severability analysis, holding that the district court erred in concluding that the court, in AAPC, offered “‘a remedy in the form of eliminating the content-based restriction' from the TCPA.” Rather, the appellate court pointed out that “the Court recognized only that the Constitution had ‘automatically displace[d]’ the government-debt-collector exception from the start, then interpreted what the statute has always meant in its absence,” adding that the legal determination in AAPC applied retroactively and did not render the entire TCPA robocall restriction void until the exception was severed by the court. A First Amendment defense presented by the defendant premised on the argument that “government-debt collectors have a due-process defense to liability because they did not have fair notice of their actions’ unlawfulness” for robocalls placed before AAPC was also rejected. The 6th Circuit opinion emphasized that “[w]hether a debt collector had fair notice that it faced punishment for making robocalls turns on whether it reasonably believed that the statute expressly permitted its conduct. That, in turn, will likely depend in part on whether the debt collector used robocalls to collect government debt or non-government debt. But applying the speech-neutral fair-notice defense in the speech context does not transform it into a speech restriction.”
District Court: Arbitration provision is severable from a voided loan contract
On September 16, the U.S. District Court for the Southern District of Alabama granted a defendant tribal payday lender’s motion to dismiss and compel arbitration, ruling that an arbitration agreement in a loan contract is still valid even if an arbitration panel found the contracts were void. The plaintiff initiated an arbitration proceeding against the defendant alleging that payday loan contracts carrying interest rates between 200 and 830 percent were void because the defendant was not licensed under the Alabama Small Loans Act to extend such loans. An American Arbitration Association panel determined, among other things, that the defendant had waived any tribal sovereign immunity, “the transactions involved off-reservation commercial activities to which sovereign immunity does not apply,” and that the loans were entirely void because each of the loans was extended without a license. The plaintiff filed suit in state court to confirm the arbitration award and pursue a class action on the premise that the loans are usurious and should be declared void. The defendant removed the case to federal court and asked the court to dismiss the proposed class action and compel arbitration. The district court agreed with the defendant that the arbitration agreement in the voided loan contract remained binding despite the arbitrator’s earlier determination in the plaintiff’s favor. Specifically, the court disagreed with the plaintiff’s argument that the arbitrator’s determination meant that “no aspect of the contact survives,” stating that the plaintiff “overlooks a central tenet in binding precedential arbitration law: severability.” According to the court, “‘[a]s a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract.’”
9th Circuit says tribal lenders can arbitrate RICO class claims
On September 16, a split U.S. Court of Appeals for the Ninth Circuit concluded that “an agreement delegating to an arbitrator the gateway question of whether the underlying arbitration agreement is enforceable must be upheld unless that specific delegation provision is itself unenforceable.” The appellate court’s decision reversed a district court’s ruling that an arbitration agreement entered between tribal lenders and borrowers was unenforceable because it impermissibly waived borrowers’ rights to pursue federal statutory claims. As previously covered by InfoBytes, in April the U.S. District Court for the Northern District of California granted class certification to residents who received loans from an online lender, allowing them to pursue class Racketeer Influenced and Corrupt Organizations Act (RICO) claims based on allegations they were charged interest rates that exceeded state limits for lenders claiming tribal immunity. The class of borrowers include California residents who collected loans from an Oklahoma-based tribe, and California residents who received loans from a Montana-based tribe. The district court also ruled that the entire arbitration agreement, including provisions containing a class action waiver, was unenforceable. The lenders appealed.
On appeal, the 9th Circuit majority cited to the U.S. Supreme Court’s decision in Rent-A-Center, West, Inc. v. Jackson, which determined, among other things, that when a party challenges an entire agreement—not just an arbitration provision—deciding “gateway” issues such as enforceability must be delegated to an arbitrator. “We do not dispute that [b]orrowers have a reasonable argument that the arbitration agreement as written precludes them from asserting their RICO claims or other federal claims in arbitration. . . . And if that is true, the arbitration agreement is likely unenforceable as a prospective waiver,” the majority wrote. “But, when there is a clear delegation provision, that question is. . .for the arbitrator to decide so long as the delegation provision itself does not eliminate parties’ rights to purse their federal remedies,” the majority added.
The 9th Circuit’s opinion differs from decisions issued by other appellate courts, which found that certain delegation provisions were unenforceable for various reasons after reviewing whether an arbitration agreement as a whole was unenforceable due to prospective waiver of federal claims. (See InfoBytes coverage of the 3rd and 4th Circuit decisions here and here.) The majority stated that the other appellate courts “considered the wrong thing by ‘confus[ing] the question of who decides arbitrability with the separate question of who prevails on arbitrability.’” According to the majority, “[t]he proper question is not whether the entire arbitration agreement constitutes a prospective waiver, but whether the antecedent agreement delegating resolution of that question to the arbitrator constitutes prospective waiver.”
District Court denies company’s bid to arbitrate in class action
On September 15, the U.S. District Court for the Southern District of California denied a defendant tech company’s motion to compel arbitration, dismiss or stay a class action lawsuit alleging that it violated the California Invasion of Privacy Act, among other things, by monitoring certain contract employees’ social media activity. The complaint alleges that the named plaintiff, a contract delivery driver for the company, and other contract employees, utilized an online platform to “discuss ‘a myriad of issues surrounding their employment,’ including strikes, protests, pay, benefits, deliveries, working conditions, and unionizing efforts.” The plaintiff alleged that the company was secretly monitoring and wiretapping the employees’ social media groups and created a team “to ‘monitor and/or intercept[]’ posts to closed [online] groups ‘in real time . . . using automated monitoring tools,’” without obtaining consent.
With respect to the defendants’ motion to compel arbitration, the company argued that, under the applicable terms of service, the plaintiff was required to arbitrate his claims on an individual basis. The court, however, found that that the plaintiff met his burden to demonstrate that the claims alleged do not fall within the scope of the arbitration provision.
District Court reimposes $5 million restitution award in FTC action
On September 13, the U.S. District Court for the Northern District of Illinois reimposed a more than $5 million restitution award in an action dating back to 2018, this time under Section 19 of the FTC Act. The court originally granted the FTC’s motion for summary judgment against a credit monitoring service and its sole owner in an action filed under Section 13(b) of the FTC Act, after concluding that no reasonable jury would find that the defendants’ scheme of using false rental property ads to solicit consumer enrollment in credit monitoring services without their knowledge could occur without engaging in unfair or deceptive practices (covered by InfoBytes here). However, as previously covered by InfoBytes, in 2019, the U.S. Court of Appeals for the Seventh Circuit held that Section 13(b) does not grant the FTC authority to order restitution—a position that the U.S. Supreme Court ultimately agreed with when issuing its decision in AMG Capital Management, LLC v. FTC (which unanimously held that Section 13(b) of the FTC Act “does not authorize the Commission to seek, or a court to award, equitable monetary relief such as restitution or disgorgement”—covered by InfoBytes here).
In its current ruling, the court agreed to reimpose the damages under the Restore Online Shopper Confidence Act (ROSCA) and Section 19. The court noted that because ROSCA incorporates all the enforcement tools of the FTC Act, the FTC could seek remedies using Section 19 of the FTC Act instead of relying on Section 18. Further, the court noted that the FTC indicated that the FTC may seek remedies under Section 19 when it brought the action under Section 5(a) of ROSCA, which the court ultimately agreed was correct. “The FTC has the better of this dispute,” the court wrote, adding, among other things, that “the court is unmoved by [the defendant’s] claims of unfair prejudice. Aside from the particular route to an award of restitution, nothing will materially change. The FTC seeks the same remedy, for the same reasons, and for the same victims under section 5(a) via section 19 as it did under section 13(b).”
6th Circuit reverses FCRA ruling over misreported debt
On September 13, the U.S. Court of Appeals for the Sixth Circuit reversed a district court’s summary judgment ruling in favor of a defendant mortgage servicer, holding that a jury could find the defendant “willfully and negligently” violated the FCRA by incorrectly reporting a past due account status to consumer reporting agencies (CRAs) for over a year after the plaintiff’s mortgage loan was discharged in bankruptcy. The plaintiff discovered the loan was being mis-reported as past due when he checked his credit score in advance of buying a car and found it to be lower than expected. The plaintiff disputed the tradeline, and the CRAs forwarded his dispute to the mortgage servicer. In response to the dispute, the servicer changed the plaintiff’s account status from past due to “no status”—which meant the status had not changed from the prior month—and continued reporting it to the CRAs.
The plaintiff sued the servicer for violating the FCRA, claiming the defendant knew the loan had been discharged but still reported it as past due for more than a year. The defendant countered, among other things, that because the plaintiff “chose not to apply for a car loan” he could not prove that he was harmed by negligence due to the mis-reporting. The district court ultimately ruled that (i) the plaintiff did not have standing to allege a negligent violation of the FCRA, and (ii) no “reasonable jury” would find that the defendant had willfully violated the statute.
On appeal, the 6th Circuit disagreed, finding that the plaintiff had standing to assert a negligence claim under FCRA and that a reasonable jury could find a negligent and willful violation. The court pointed out that the plaintiff’s credit score increased by almost 100 points once the tradeline was removed, suggesting the servicer’s mis-reporting did harm the plaintiff and gave him standing to sue in negligence. The court also found the defendant “knew that [the plaintiff’s] loan had been discharged but for more than a year told the credit-reporting agencies that the loan was past due. A jury could therefore find that [the defendant] was either incompetent or willful in its failure to correct its reports sooner.” The 6th Circuit added that the defendant’s implementation of policies to guide its analysts through resolving credit disputes “hardly disproves as a matter of law that [the defendant] acted willfully.” The court held the defendant was not entitled to summary judgment and remanded the case for further proceedings.
District Court grants summary judgment for defendant in FDCPA case
On September 1, the U.S. District Court for the Northern District of Illinois granted a defendant debt collector’s motion for summary judgment resolving FDCPA allegations. The defendant allegedly sent the plaintiff a debt collection letter, which the plaintiff disputed. Then, the plaintiff allegedly received another letter that included language regarding how to dispute the debt. Again, the plaintiff disputed the debt, requested validation of the debt, and filed a second dispute, which allegedly caused the plaintiff “stress and confusion” and “led her to unnecessarily expend time and money, as she went to the library to type and print the letter and spent money to mail it.” After the defendant filed a motion to dismiss, the court certified a class in the case. Since both sides had engaged in discovery, the court treated the defendants’ motion as one for summary judgment and concluded that the plaintiff did not demonstrate a concrete harm. The judge granted the defendant’s motion to dismiss, noting that the plaintiff’s “injury—spending time and money in an attempt to clear up her confusion concerning whether she had validly disputed the debt—is analogous to injuries arising from consultations with lawyers or filing suit, which the Seventh Circuit has held do not amount to concrete harm.”
As previously covered by Infobytes, the Seventh Circuit earlier this year held that a consumer’s alleged “stress and confusion” did not constitute a concrete and particularized injury under the FDCPA after the plaintiff alleged that the defendant debt collector violated the FDCPA when it directly communicated with her by sending a dunning letter related to unpaid debt even though she had previously notified the original lender that she was represented by counsel and requested that all debt communications cease. In that case, the Seventh Circuit held that the consumer’s allegations—that the dunning letter caused her “stress and confusion” and “made her think that ‘her demand had been futile’”—did not amount to a concrete and particularized “injury in fact” necessary to establish Article III standing under the FDCPA. The court further noted that “the state of confusion is not itself an injury”—rather, for the alleged confusion to be concrete, “a plaintiff must have acted ‘to her detriment, on that confusion.’”
Maryland Court of Appeals says inspection fee ban applies to mortgage assignees and servicers
On August 27, the Maryland Court of Appeals held that the Maryland Usury Law applied to assignees of mortgage loans–and not just lenders as a defendant argued–and that the law’s prohibition on property inspection fees therefore applied to the mortgage servicer, as the agent of the loan’s assignee. The borrower entered into a mortgage loan secured by a deed of trust that was later assigned to Fannie Mae and contracted to the mortgage servicer. After the borrower defaulted, the servicer allegedly threatened foreclosure and assessed “fees for drive-by inspections of the property.”
The parties entered into a loan modification agreement to resolve the default, but the borrower objected to the inclusion of the property inspection fees. The borrower later filed a complaint claiming the servicer collected property inspection fees prohibited by the Maryland Usury Law (CL §12-121). The borrower also alleged violations of the Maryland Consumer Debt Collection Act (MCDCA). The trial court dismissed the claims concluding, among other things, that neither Fannie Mae nor the servicer were subject to state usury prohibitions because neither entity “fit the definition of ‘lender’ in the law.” An intermediate appellate court later reversed the trial court’s dismissal.
In a 6-1 holding, the Court of Appeals concluded that “the Maryland Commissioner of Financial Regulation has taken the position that mortgage servicers. . .are subject to the prohibition on inspection fees in CL §12-121 during the life of a mortgage loan,” and that, moreover, CL §12-121 “limits the authority of a person who makes a mortgage loan to charge property inspection fees in connection with that loan.” As such, the Court of Appeals held that the addition of the definition of “lender” to the Maryland Usury Law that made the Usury Law part of the Commercial Law Article, “did not change that rule.” The Court of Appeals also stated that the borrower adequately alleged the elements of an MCDCA claim when she asserted the servicer “attempted to collect an alleged debt by asserting a right to collect inspection fees with knowledge that the right did not exist.”
Maryland Court of Appeals rejects distinction between “methods” of debt collection and “amounts” of debt to be collected
On August 27, the Maryland Court of Appeals reversed a circuit court’s dismissal of petitioners’ Maryland Consumer Debt Collection Act (MCDCA) and Consumer Protection Act (MCPA) claims, rejecting a distinction drawn by some courts “between ‘methods’ of debt collection and ‘amounts’ of debts sought to be collected, when assessing a claim under CL § 14-202(8).” At issue is the amount of post-judgment interest charged above the maximum legal rate to individuals who defaulted on their residential leases.
In reversing, the Court of Appeals disagreed with the circuit court that MCDCA claims were restricted to “methods,” holding that § 14-202(8) should be interpreted “broadly to reach any claim, attempt, or threat to enforce a right that a debt collector knows does not exist,” and in this case, petitioners were not “precluded from invoking § 14-202(8) when the amount claimed by the debt collector includes sums that the debt collector, to its knowledge, did not have the right to collect.” However, the Court of Appeals held that, in contrast to the FDCPA, the MCDCA is not a “strict liability statute,” and although “where the law is settled at the time a collector takes a contrary position in claiming a right, the collector’s recklessness in failing to discover the contrary authority is equivalent to ‘aware[ness]’ (i.e., actual knowledge) of the authority,” such knowledge is a question of fact that could, in some cases, require a jury determination. As a result, the case was remanded to the circuit court to allow the petitioners an opportunity to file a new motion for class certification.