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Court backs FTC’s $120 million settlement in Belizean real estate scheme
On August 28, the U.S. District Court for the District of Maryland granted the FTC’s request for four individuals and the remaining corporate defendants who have not yet settled (collectively, “defendants”) to pay over $120 million in redress to resolve allegations the defendants operated an international real estate investment development scheme. As previously covered by InfoBytes, in November 2018, the FTC initiated the action against the individuals, several corporate entities, and a Belizean bank, asserting that the defendants violated the FTC Act and the Telemarketing Sales Rule (TSR) by advertising and selling parcels of land that were part of a luxury development in Belize through the use of deceptive tactics and claims. The FTC contends that consumers who purchased lots in the development purchased the lots outright or made large down payments and sizeable monthly payments, and paid monthly homeowners association fees, and that defendants used the money received from these payments to fund their “high-end lifestyles,” rather than to invest in the development. In September 2019, the FTC settled with the Belizean bank, requiring the bank to pay $23 million in equitable relief, including consumer redress (covered by InfoBytes here).
Following a trial, the district court has now agreed with the FTC, concluding that the remaining defendants violated the FTC Act and the TSR. The court found the defendants jointly and severally liable for over $120 million in restitution and granted the FTC’s request for permanent injunctions—banning the defendants from any telemarketing activity and banning one defendant, described as “nothing less than the mastermind” of the operations, from “engaging in any kind of real estate activity” in the future.
CFPB denies company’s petition to set aside CID, citing investigative authority broader than enforcement authority
On August 13, the CFPB denied a petition by a credit repair software company to set aside a civil investigative demand (CID) issued by the Bureau in April. The CID requested information from the company “to determine whether providers of credit repair business software, companies offering credit repair that use this software, or associated persons, in connection with the marketing or sale of credit repair services, have: (1) requested or received prohibited payments from consumers in a manner that violates the Telemarketing Sales Rule [(TSR)]. . .; or (2) provided substantial assistance in such violations in a manner that violates [the CFPA or TSR].” The company petitioned the Bureau to set aside the CID, arguing, among other things, that the CID exceeds the Bureau’s jurisdiction and scope of authority because the agency lacks investigative and enforcement authority over companies that provide credit repair services and companies that provide customer relationship management software for such services. The company also argued that (i) the CID is invalid because the company does not engage in telemarketing, perform credit repair services, or market or sell credit repair services to consumers; (ii) the company is not a “covered person” or “service provider” under the CFPA; and (iii) the company is not required to respond to the CID because “it is clear that [the company] does not provide any assistance, let alone substantial assistance, to any covered person in violation of the CFPA.”
The Bureau rejected the company’s arguments, countering that its “authority to investigate is broader than its authority to enforce.” According to the Bureau, “[r]egardless of whether [the company] itself engages in telemarketing or accepts payments from consumers in a manner that violates the TSR, the Bureau has the authority to obtain information from [the company] that will help it assess whether others may have done so.” Furthermore, the Bureau stated that the CFPA grants it the authority to prohibit unfair, deceptive, or abusive acts or practices committed by a “covered person” or a “service provider,” and “the authority over those who, knowingly or recklessly, provide substantial assistance to a covered person,” which include companies that provide credit repair services. “Whether a company that sells business software to credit repair firms does, in fact, substantially assist any violations committed by those firms depends upon the facts,” the Bureau explained.
9th Circuit affirms some of Oakland’s claims against national bank
On August 26, the U.S. Court of Appeals for the Ninth Circuit affirmed in part and reversed in part the district court’s decision to partially dismiss an action brought by the City of Oakland, alleging a national bank violated the Fair Housing Act (FHA) and California Fair Employment and Housing Act. As previously covered by InfoBytes, Oakland alleged that the national bank violated the FHA and the California Fair Employment and Housing Act by providing minority borrowers mortgage loans with less favorable terms than similarly situated non-minority borrowers, leading to disproportionate defaults and foreclosures causing (i) decreased property tax revenue; (ii) increases in the city’s expenditures; and (iii) reduced spending in Oakland’s fair-housing programs. The district court dismissed the City’s municipal expenditure claims, but allowed claims based on decreased property tax revenue to continue. The district court also held that the City could pursue its claims for injunctive and declaratory relief.
On appeal, the 9th Circuit affirmed the court’s denial of the bank’s motion to dismiss as to Oakland’s claims for decreased property tax revenue and the court’s dismissal of Oakland’s claims for increased city expenditures. Specifically, with respect to claims for reduced tax revenue, the appellate court concluded that the “FHA’s proximate-cause requirement is sufficiently broad and inclusive to encompass aggregate, city-wide injuries.” Based on allegations that the City could use statistical regression analysis “to precisely calculate the loss in property values in Oakland’s minority neighborhoods that is attributable to foreclosures caused by [the bank’s] predatory loans,” the 9th Circuit found that Oakland’s claim for decreased property tax revenues “has some direct and continuous relation to [the bank]’s discriminatory lending practices.” Regarding the City’s alleged municipal expenditure injuries, the appellate court agreed with the district court that Oakland’s complaint failed to account for independent variables that may have contributed or caused such injuries and that those alleged injuries therefore did not satisfy the FHA’s proximate-cause requirement. Finally, the appellate court held that the City’s claims for injunctive and declaratory relief were also subject to the FHA’s proximate-cause requirement, and that on remand, the district court must determine whether Oakland’s allegations satisfied this requirement.
FTC takes action against debt collection schemes
On August 19, the U.S. District Court for the District of South Carolina lifted the temporary seal of two FTC complaints (available here and here) filed against two groups of debt collection companies and their owners (collectively, “defendants”), alleging that the defendants’ debt collection practices violated the FTC Act and the FDCPA. According to both complaints, which were filed on July 13, the FTC alleges that the defendants engaged in a scheme to collect payments from consumers for debts that they did not actually owe or that the defendants had no authority to collect. Specifically, the defendants used a “two-step collection process,” in which they used robocalls with prerecorded messages to tell consumers they were subject to “an audit or other proceeding.” After the consumers contacted the defendants about the information in the robocalls, the defendants “falsely represent[ed] that they are representatives of a law firm or a mediation company” and falsely alleged that the consumers would be subject to legal action, including arrest, on a delinquent debt if it was not paid. The FTC asserts that the defendants collected over $17 million from the alleged scheme and is seeking, among other things, restitution, injunctions, and asset freezes.
CFPB moves to enforce subpoena against telemarketer in alleged credit repair operation
On August 25, the CFPB filed a motion in the U.S. District Court for the District of Northern Florida to compel a telemarketing company (defendant) allegedly associated with a credit repair operation to comply with a subpoena and produce documents requested by the Bureau. According to the Bureau, the defendant has refused to comply with a subpoena in the ongoing litigation of a 2019 CFPB action against the credit repair operation (covered by InfoBytes here). The operation allegedly violated the Telemarketing Sales Rule and the Consumer Financial Protection Act by using “Hotswap Partners,” such as the defendant, who allegedly engaged in deceptive acts and practices when selling and marketing financial products and “live-transferr[ing]” consumers to the credit repair operation’s telemarketing call centers. The Bureau contends that the defendant transferred “thousands of consumers” to the operation each year for at least a decade, yet has only provided a minimal number of documents in response to the subpoena, which seeks records related to the defendant’s business activities and marketing relationship with the credit repair operation. According to the Bureau, the defendant has refused to produce additional materials based on “boilerplate and unsubstantiated objections.” The Bureau also argues that the defendant has failed to provide a basis for its objections, which include a “general privilege objection and a general objection that the requested format of certain unspecified documents would ‘impose an unreasonable burden on the Company,’” and has “rebuffed” every attempt made by the Bureau to discuss compliance with the subpoena.
CFPB says it is on track to meet data collection deadlines
On August 24, the CFPB filed another status report in the U.S. District Court for the Northern District of California as required under a stipulated settlement reached in February with a group of plaintiffs, including the California Reinvestment Coalition. The settlement (covered by InfoBytes here) resolved a 2019 lawsuit that sought an order compelling the Bureau to issue a final rule implementing Section 1071 of the Dodd-Frank Act, which requires the Bureau to collect and disclose data on lending to women and minority-owned small businesses. Details on the Bureau’s first status update can be found here.
Among other things, the Bureau noted in the status report that (i) on July 22, it released a “survey of lenders to obtain estimates of the onetime costs that lenders would incur to prepare to collect data required by Section 1071”; and (ii) on August 11, it provided the SBA and the Office of Management and Budget’s Office of Information and Regulatory Affairs a draft Small Business Regulatory Enforcement Fairness Act (SBREFA) outline regarding proposals under consideration and alternatives considered. The status report emphasizes that the Bureau is “on track” to release a SBREFA outline by September 15 and convene a SBREFA panel by October 15, as required by the settlement.
State AGs challenge FDIC’s “valid-when-made” rule
On August 20, eight state attorneys general—from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina, and the District of Columbia—filed an action in the U.S. District Court for the Northern District of California challenging the FDIC’s valid-when-made rule. As previously covered by InfoBytes, the FDIC’s final rule clarifies that, under the Federal Deposit Insurance Act (FDIA), whether interest on a loan is permissible is determined at the time the loan is made and is not affected by the sale, assignment, or other transfer of the loan (details on the effect of the rule can be found in Buckley’s Special Alert on the issuance of the OCC’s similar rule).
In the complaint—which follows a similar action filed in July by three of the same attorneys general against the OCC for issuing a final rule designed to effectively reverse the Second Circuit’s 2015 Madden v. Midland Funding decision (previously covered here)—the attorneys general argue, among other things, that the FDIC does not have the power to issue the rule, asserting that the FDIC has the power to issue “‘regulations to carry out’ the provisions of the FDIA,” but not regulations that would apply to non-banks. Moreover, the attorneys general assert that the rule’s extension of state law preemption would “facilitate evasion of state law by enabling “rent-a-bank” schemes.” Finally, the complaint states that the FDIC failed to explain its consideration of evidence contrary to its assertions, including evidence demonstrating that “consumers and small businesses are harmed by high interest-rate loans, and thus that Madden is likely to have been beneficial rather than harmful.” The complaint requests the court to declare that the FDIC violated the Administrative Procedures Act in issuing the rule and hold the rule unlawful.
District court lifts litigation stay in challenge to CFPB’s Payday Rule
On August 20, the U.S. District Court for the Western District of Texas granted a joint motion to lift a stay of litigation in a lawsuit filed by two payday loan trade groups (plaintiffs) challenging the CFPB’s 2017 final rule covering payday loans, vehicle title loans, and certain other installment loans (Rule). As previously covered by InfoBytes, in 2018 the plaintiffs filed a lawsuit asking the court to set aside the Rule, claiming the Bureau’s rulemaking failed to comply with the Administrative Procedure Act and that the Bureau’s structure was unconstitutional. The parties filed their joint motion to lift the stay last month following several recent developments, including the U.S. Supreme Court’s decision in Seila Law LLC v. CFPB, which held that the clause that required cause to remove the director of the CFPB was unconstitutional but was severable from the statute establishing the Bureau (covered by a Buckley Special Alert). In light of the Court’s decision, the Bureau ratified the Rule’s payments provisions and issued a final rule revoking the Rule’s underwriting provisions (covered by InfoBytes here). The litigation will focus on the Rule’s payments provisions, with the Bureau noting in the joint motion that it intends to “promptly fil[e] a motion to lift the stay of the compliance date for the payments provisions of the 2017 Rule.” The order outlines the briefing schedule for the parties, with summary judgment briefing due to be completed by December 18.
Pennsylvania Supreme Court says state mortgage law does not apply retroactively
On August 18, the Supreme Court of Pennsylvania affirmed a lower court’s decision, holding that 2008 amendments to the Pennsylvania Loan Interest and Protection Law (also known as “Act 6”), which raised the mortgage principle-amount ceiling from $50,000 to nearly $215,000, do not apply retroactively to loans executed prior to 2008. According to the opinion, in May 2002, homeowners executed a mortgage for $74,000. In 2008, the homeowners defaulted on their mortgage and in 2009, their bank—through its counsel—filed a mortgage foreclosure complaint, which included $1,300 in attorneys’ fees. In 2012, while their foreclosure was still pending, the homeowners filed a class action against the bank’s counsel, alleging the counsel violated Act 6’s limit on attorney’s fees. The trial court sustained the counsel’s demurrer, concluding that the homeowners’ mortgage was not “a ‘residential mortgage’ as Act 6 defined that term in 2002.” The superior court affirmed.
On appeal, the Pennsylvania Supreme Court agreed with the superior court, noting not only the “presumption against finding statutes retroactive,” but the state’s General Assembly’s “explicit instruction that courts should avoid applying legislation retroactively unless the statute clearly and manifestly states otherwise.” Because Act 6 does not expressly state that the 2008 increased mortgage-ceiling should apply to mortgages executed prior to the amendment, the Court concluded there was “no basis allowing for application of the updated law to the [homeowners]’ mortgage,” and thus, the counsel was not subject to Act 6’s limitation on attorneys’ fees.
District court certifies class in a lawsuit against an unlicensed debt collector
On August 17, the U.S. District Court for the District of Utah certified two classes related to a debt collector’s efforts to pursue judgments on defaulted debts without being appropriately registered with the state. The order certified two classes: one for class claims arising under the FDCPA, and another for class claims brought under the Utah Consumer Sales Practices Act (UCSPA). The court certified the UCSPA class for liability purposes only, as the statute does not allow a plaintiff to seek statutory damages on behalf of a class, leaving “issues related to what relief may be available for which class members to subsequent proceedings.” According to the order, the lead plaintiff filed a lawsuit against the defendant after it attempted to collect unpaid medical debt. The defendant obtained a judgment but was not registered as a debt collector in the state when it filed the action. The defendant argued that Utah’s registration requirement did not apply to it and filed a motion for summary judgment, but the court disagreed and allowed the plaintiff to seek certification for two classes of individuals who had debt collection lawsuits filed against them in Utah by the defendant while it was unlicensed. Among other things, the defendant argued that the plaintiff’s proposed class included individuals without an underlying consumer debt, which destroyed commonality under Rule 23. The court agreed and limited the proposed FDCPA class to individuals who were sued for a “debt” as defined by 15 U.S.C. § 1692a(5). However, the court stated that the need for individualized determinations concerning each class member’s debt did not upset Rule 23’s predominance requirement, and concluded that the issue does not predominate over the question of whether the failure to register as a debt collector was a violation of the FDCPA and UCSPA. The court also disagreed with the defendant’s res judicata argument to defeat the certification request, ruling that even though the defendant ultimately obtained a judgment against the lead plaintiff—which it also allegedly did for at least 645 other members of the class—that was not enough to prove a conflict existed between the lead plaintiff and the other unaffected members of the class.