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District Court: Defendants cannot use CFPB funding argument to dismiss deceptive marketing lawsuit
On November 18, the U.S. District Court for the Northern District of Illinois ruled that the CFPB can proceed in its lawsuit against a credit reporting agency, two of its subsidiaries (collectively, “corporate defendants”), and a former senior executive accused of allegedly violating a 2017 enforcement order in connection with alleged deceptive practices related to their marketing and sale of credit scores, credit reports, and credit-monitoring products to consumers. According to the court, a recent decision issued by the U.S. Court of Appeals for the Fifth Circuit, which found that the Bureau’s funding structure violates the Appropriations Clause of the Constitution (covered by a Buckley Special Alert), is a persuasive basis to have the lawsuit dismissed.
As previously covered by InfoBytes, the Bureau sued the defendants in April claiming the corporate defendants, under the individual defendant’s direction, allegedly violated the 2017 consent order from the day it went into effect instead of implementing agreed-upon policy changes intended to stop consumers from unknowingly signing up for credit monitoring services that charge monthly payments. The Bureau further claimed that the corporate defendants’ practices continued even after examiners raised concerns several times, and that the individual defendant had both the “authority and obligation” to ensure compliance with the 2017 consent order but did not do so.
The defendants sought to have the lawsuit dismissed for several reasons, including on constitutional grounds. The court disagreed with defendants’ constitutional argument, stating that, other than the 5th Circuit, courts around the country have “uniformly” found that Congress’ choice to provide independent funding for the Bureau conformed with the Constitution. “Courts are ill-equipped to second guess exactly how Congress chooses to structure the funding of financial regulators like the Bureau, so long as the funding remains tethered to a law passed by Congress,” the court wrote. The court also overruled defendants’ other objections to the lawsuit. “[T]his case is only at the pleading stage, and all the Bureau must do is plausibly allege that [the individual defendant] was recklessly indifferent to the wrongfulness of [the corporate defendants’] actions over which he had authority,” the court said, adding that the Bureau “has done so because it alleges that because of financial implications, [the individual defendant] actively ‘created a plan to delay or avoid’ implementing the consent order.”
The Bureau is currently seeking Supreme Court review of the 5th Circuit’s decision during its current term. (Covered by InfoBytes here.)
CFPB asks Supreme Court to review 5th Circuit decision
On November 14, the DOJ, on behalf of the CFPB, submitted a petition for a writ of certiorari asking the U.S. Supreme Court to review whether the U.S. Court of Appeals for the Fifth Circuit erred in holding that the Bureau’s funding structure violates the Appropriations Clause of the Constitution. The Bureau also asked the court to consider the 5th Circuit’s decision to vacate the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (Payday Lending Rule) on the premise that it was promulgated at a time when the Bureau was receiving unconstitutional funding.
The Bureau’s funding is derived through the Federal Reserve instead of the annual congressional appropriations process—a process, the appellate court said, that violates the Constitution. Specifically, the 5th Circuit’s October 19 holding (covered by a Buckley Special Alert) found that although the Bureau spends money pursuant to a validly enacted statute, the structure violates the Appropriations Clause because (i) the Bureau obtains its funds from the Federal Reserve (not the Treasury); (ii) the agency maintains funds in a separate account; (iii) the Appropriations Committees do not have authority to review the agency’s expenditures; and (iv) the Bureau exercises broad authority over the economy. The 5th Circuit also rejected the Bureau’s arguments that the funding structure was necessarily constitutional because it was created by and subject to Congress, and distinguished other agencies that are funded outside of the annual appropriations process.
The case involves a challenge to the Bureau’s Payday Lending Rule, which prohibits lenders from attempting to withdraw payments for covered loans from consumers’ accounts after two consecutive withdrawal attempts have failed due to insufficient funds. As a result of the 5th Circuit’s decision, lenders’ obligation to comply with the rule (originally set for August 19, 2019, but repeatedly delayed) will be further delayed while the constitutional issue winds its way through the courts.
“No other court has ever held that Congress violated the Appropriations Clause by passing a statute authorizing spending,” the Bureau argued as it requested a prompt Supreme Court review, asserting that the 5th Circuit’s decision “threatens to inflict immense legal and practical harms on the CFPB, consumers, and the Nation’s financial sector.” The agency also stressed that “[n]ew challenges to the Bureau’s rules and other actions can be expected to multiply in the weeks and months to come, and will presumably be filed in the 5th Circuit whenever possible.” The decision also has the potential to impact past enforcement actions and rulemaking as well, the Bureau said.
The Bureau further asserted that while the 5th Circuit concluded that “‘an appropriation is required’ to authorize spending” and that “‘[a] law’ providing an agency with a funding source and spending authority ‘does not suffice,’” the appellate court failed to specify what would be required for such a law to qualify as an appropriation.
Moreover, the 5th Circuit’s reasoning was incorrect, the Bureau argued, because Congress specified that the agency could claim up to 12 percent of the Fed’s budget to fund its operations, and it is subject to, among other things, budget and financial oversight, government audits, and requirements that its director prepare and submit annual reports to the Senate and House appropriations committees concerning its fiscal operating plans and forecasts. These safeguards, the Bureau stressed, should assuage concerns about whether the agency is insulated from congressional oversight. “The court of appeals’ novel and ill-defined limits on Congress’s spending authority contradict the Constitution’s text, historical practice, and this Court’s precedent,” the Bureau said, adding that the decision also conflicts with a holding issued by the U.S. Court of Appeals for the D.C. Circuit where the appellate court recognized that “Congress can, consistent with the Appropriations Clause, create governmental institutions reliant on fees, assessments, or investments rather than the ordinary appropriations process.”
The Bureau asked the Supreme Court to review the case during its current term, which would ensure resolution of the issue by the summer of 2023.
District Court approves payday settlement
On November 10, the U.S. District Court for the Southern District of Mississippi issued a final settlement order resolving allegations that a Mississippi-based payday lender violated the CFPA in connection with check cashing services and small dollar loans. As previously covered by InfoBytes, the CFPB filed a complaint against two Mississippi-based payday loan and check cashing companies for allegedly violating the CFPA’s prohibition on unfair, deceptive, or abusive acts or practices.
In March 2018, a district court denied the payday lenders’ motion for judgment on the pleadings, rejecting the argument that the Bureau's structure unconstitutional and that the agency’s claims violate due process. The U.S. Court of Appeals for the Fifth Circuit agreed to hear an interlocutory appeal on the constitutionality question, and, prior to the U.S. Supreme Court’s ruling in Seila Law LLC v. CFPB, a divided panel held that the CFPB’s single-director structure is constitutional, finding no constitutional defect with allowing the director of the Bureau to only be fired for cause (covered by InfoBytes here). The order noted that the 5th Circuit voted sua sponte to rehear the case en banc and issued an opinion in which the majority vacated the district court’s opinion as contrary to Seila Law. The majority did not, however, direct the district court to enter judgment against the Bureau because, though the Supreme Court had found that the director’s for-cause removal provision was unconstitutional, it was severable from the statute establishing the Bureau (covered by a Buckley Special Alert). The majority determined that the “time has arrived for the district court to proceed” and stated it “place[s] no limitation on the matters that that court may consider, including, without limitation, any other constitutional challenges.”
According to the settlement, the owner and president of the company must pay a civil money penalty of $899,350 to the Bureau “by reason of the [UDAAP violations] alleged in the Complaint.” However, the order further noted that the amount is remitted by $889,350 because he paid “that amount in fines to the Mississippi Department of Banking and Consumer Finance.” The district court also entered a separate order dismissing the lawsuit with prejudice.
8th Circuit pauses student debt relief program
On November 14, the U.S. Court of Appeals for the Eighth Circuit granted an emergency motion for injunction pending appeal filed by state attorneys general from Nebraska, Missouri, Arkansas, Iowa, Kansas, and South Carolina to temporarily prohibit the Secretary of Education from discharging any federal loans under the agency’s student debt relief plan (announced in August and covered by InfoBytes here). Earlier in October, the 8th Circuit issued an order granting an emergency motion filed by the states, which requested an administrative stay prohibiting the discharge of any student loan debt under the cancellation plan until the appellate court had issued a decision on the states’ motion for an injunction pending an appeal. (Covered by InfoBytes here.) The October order followed a ruling issued by the U.S. District Court for the Eastern District of Missouri, which dismissed the states’ action for lack of Article III standing after concluding that the states—which attempted “to assert a threat of imminent harm in the form of lost tax revenue in the future”— failed to establish imminent and non-speculative harm sufficient to confer standing.
In granting the emergency motion, the appellate court disagreed with the district court’s assertion that the states lacked standing. The 8th Circuit reviewed whether the state of Missouri could rely on any harm the Missouri Higher Education Loan Authority (MOHELA) might suffer as a result of the Department of Education’s cancellation plan. The appellate court found that the relationship between MOHELA and the state is relevant to the standing analysis, especially as Missouri law specifically directs MOHELA (which receives revenue from the student loan accounts it services) to distribute $350 million into the state’s treasury. As such, “MOHELA may well be an arm of the State of Missouri” under this reasoning, the appellate court wrote, adding that several district courts have concluded that MOHELA is an arm of the state. However, regardless of whether MOHELA is an arm of the state, the resulting financial impact due to the cancellation plan would, among other things, affect the state’s ability to fund public higher education institutions, the 8th Circuit noted. “Consequently, we conclude Missouri has shown a likely injury in fact that is concrete and particularized, and which is actual or imminent, traceable to the challenged action of the Secretary, and redressable by a favorable decision,” the appellate court wrote, adding that since one party likely has standing it does not need to address the standing of the other states. The appellate court also determined that “the equities strongly favor an injunction considering the irreversible impact the Secretary’s debt forgiveness action would have as compared to the lack of harm an injunction would presently impose.” The 8th Circuit explained that it considered several criteria, including the fact that the collection of student loan payments and the accrual of interest have both been suspended. The Missouri attorney general released a statement applauding the 8th Circuit’s decision.
The 8th Circuit’s decision follows a recent ruling issued by the U.S. District Court for the Northern District of Texas, which found that the student loan forgiveness program is “an unconstitutional exercise of Congress’s legislative power.” (Covered by InfoBytes here.)
District Court blocks student loan forgiveness program
On November 10, the U.S. District Court for the Northern District of Texas ruled that the Biden administration’s $400 billion student loan forgiveness program under the HEROES Act of 2003 is “an unconstitutional exercise of Congress’s legislative power.” As previously covered by InfoBytes, the three-part debt relief plan was announced in August to provide, among other things, up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education (DOE) and up to $10,000 in debt cancellation to non-Pell Grant recipients for borrowers making less than $125,000 a year or less than $250,000 for married couples. Plaintiffs, whose loans are ineligible for debt forgiveness under the program, sued the DOE and the DOE secretary claiming the agency violated the Administrative Procedure Act’s (APA) notice-and-comment rulemaking procedures and arbitrarily decided the program’s eligibility criteria. Plaintiffs further contended that the DOE secretary does not have the authority under the HEROES Act to implement the program. Defendants countered that the plaintiffs lacked standing.
The court entered summary judgment in favor of the plaintiffs (rather than granting preliminary injunctive relief as requested) after determining it was appropriate to proceed to the merits of the case. Concerning defendants’ assertion regarding lack of standing to challenge the DOE’s program because it is conferring a benefit and therefore “nobody is harmed by the existence of that benefit,” (as the court characterized defendants’ argument), the court ruled that the U.S. Supreme Court has actually “recognized that a plaintiff has standing to challenge a government benefit in many cases.” The court next reviewed whether plaintiffs suffered a concrete injury based on the denial of their procedural rights under the APA by not being afforded the opportunity to provide meaningful input to protect their concrete interests. While the HEROES Act expressly exempts the APA’s notice-and-comment obligations, the court stressed that the HEROES Act “does not provide the executive branch clear congressional authorization to create a $400 billion student loan forgiveness program,” and, moreover, does not mention loan forgiveness. “If Congress provided clear congressional authorization for $400 billion in student loan forgiveness via the HEROES Act, it would have mentioned loan forgiveness,” the court wrote. Shortly after the ruling was issued, the DOJ filed a notice of appeal on behalf of the DOE with the U.S. Court of Appeals for the Fifth Circuit. Secretary of Education Miguel Cardona released a statement following the ruling expressing disappointment in the decision.
District Court stays CFPB payday action following 5th Circuit decision
On October 31, the U.S. District Court for the Northern District of Texas stayed an enforcement action filed by the CFPB against a defendant Texas-based payday lender until after the U.S. Court of Appeals for the Fifth Circuit issues its mandate in CFSA v. CFPB. As previously covered by a Buckley Special Alert, a three-judge panel unanimously held in CFSA that the CFPB’s funding structure created by Congress violated the Appropriations Clause of the Constitution. The parties filed a joint motion saying there was “good cause” to pause further proceedings in the litigation, explaining that the “agreed stay pending issuance of the mandate in CFSA will promote efficient resolution of the case, as the final decision in CFSA will control the resolution of key issues presented in [defendant’s] pending motion to dismiss.” One of the arguments raised in the defendant’s motion to dismiss centers around the assertion that the Bureau’s complaint should be dismissed because the agency’s funding structure violates the Constitution’s separation of powers.
In July, the Bureau sued the defendant for allegedly engaging in illegal debt-collection practices and allegedly generating $240 million in reborrowing fees from borrowers who were eligible for free repayment plans, in violation of the CFPA (covered by InfoBytes here). According to the Bureau, the defendant allegedly “engaged in unfair, deceptive, and abusive acts or practices by concealing the option of a free repayment plan to consumers who indicated that they could not repay their short term, high-cost loans originated by the defendant.” The defendant also allegedly attempted to collect payments by unfairly making unauthorized electronic withdrawals from over 3,000 consumers’ bank accounts.
CFPB argues funding constitutionality holding does not make sense
On October 25, the CFPB responded to a notice of supplemental authority filed by a credit reporting agency (CRA) in the U.S. District Court for the Northern District of Illinois, which sought to use a recent decision issued by the U.S. Court of Appeals for the Fifth Circuit as justification for the dismissal of a lawsuit against the CRA. In April, the Bureau sued the CRA, two of its subsidiaries, and a former senior executive (collectively, “defendants”) for allegedly violating a 2017 consent order in connection with alleged deceptive practices related to their marketing and sale of credit scores, credit reports, and credit-monitoring products to consumers. (Covered by InfoBytes here.) Following the 5th Circuit’s decision, in which a three-judge panel unanimously held in CFSA v. CFPB that the CFPB funding structure created by Congress violated the Appropriations Clause of the Constitution (covered by a Buckley Special Alert), the defendants filed a notice of supplemental authority on October 20, arguing that the suit must be dismissed and that the Bureau may not use unappropriated funds when prosecuting the suit. The defendants further contended that the 2017 consent order is invalid because the Bureau used unappropriated funds in its preparation.
The Bureau countered in its response that the 5th Circuit’s holding does not “make sense,” is “without support in law,” and does not help the defendants’ defense. According to the Bureau, “the court mustered no case from more than 230 years of constitutional history that has ever held that Congress violates the Appropriations Clause or separation of powers when it authorizes spending by statute, as it did for the Bureau.” Moreover, the Bureau argued that the appellate court’s contention that the CFPB’s funding was “impermissibly ‘double-insulated’ from congressional oversight” was incorrect because “Congress is fully capable of overseeing the Bureau’s spending, including because of several provisions in the Bureau’s statute that ensure its ability to supervise.” Adding that the court “should reject” the 5th Circuit’s analysis and “join every other court to address the issue—including the en banc D.C. Circuit—in upholding the Bureau’s statutory funding mechanism,” the agency further argued that even if the district court should disagree with this contention, it should still deny the defendants’ motion to dismiss because any alleged defect in the agency’s funding authorization “would not deprive the Bureau of the power to carry out the responsibilities given it by Congress to enforce the law.”
West Virginia AG pings CFPB on "unconstitutionally appropriated" funds
On October 24, the West Virginia attorney general sent a letter to CFPB Director Rohit Chopra, and to the leadership of both the House Financial Services Committee and the Senate Banking Committee, regarding the constitutionality of the Bureau’s continuing operation. As previously covered by a Buckley Special Alert, the U.S. Court of Appeals for the Fifth Circuit held that the CFPB funding structure created by Congress violated the Appropriations Clause of the Constitution, which provides that “no money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” The 5th Circuit ruled that, although the CFPB spends money pursuant to a validly enacted statute, the structure violates the Appropriations Clause because the CFPB obtains its funds from the Federal Reserve (not the Treasury), the CFPB maintains funds in a separate account, the Appropriations Committees do not have authority to review the agency’s expenditures, and the Bureau exercises broad authority over the economy. In the letter, the AG argued that the Bureau cannot discharge its duties in a constitutionally permissible way. He further noted that the Bureau “plainly cannot do that with a funding scheme that ‘sever[s] any line of accountability between [Congress] and the CFPB.’” The AG urged the Bureau to reassess its future plans and to reevaluate whether its present regulations have any effect. The letter also requested answers to a series of questions, no later than November 1: (i) “Does the agency believe that any of the regulations that it promulgated under the unconstitutional funding scheme remain in effect? If so, which ones—and why? Similarly, how does the decision affect past enforcement actions?”; and (ii) “What plans does the Bureau plan to undertake to comply with the ruling? How will its ongoing enforcement efforts be effected? How will this change affect any promulgation of regulations? How will bank supervision continue, if at all?”
9th Circuit says district court must reassess statutory damages in TCPA class action
On October 20, the U.S. Court of Appeals for the Ninth Circuit ordered a district court to reassess the constitutionality of a statutory damages award in a TCPA class action. Class members alleged the defendant (a multi-level marketing company) made more than 1.8 million unsolicited automated telemarketing calls featuring artificial or prerecorded voices without receiving prior express consent. The district court certified a class of consumers who received such a call made by or on behalf of the defendant, and agreed with the jury’s verdict that the defendant was responsible for the prerecorded calls at the statutorily mandated damages of $500 per call, resulting in total damages of more than $925 million. Two months later, the FCC granted the defendant a retroactive waiver of the heightened written consent and disclosure requirements, and the defendant filed post-trial motions with the district court seeking to “decertify the class, grant judgment as a matter of law, or grant a new trial on the ground that the FCC’s waiver necessarily meant [defendant] had consent for the calls made.” In the alternative, the defendant challenged the damages award as being “unconstitutionally excessive” under the Due Process Clause of the Fifth Amendment.
On appeal, the 9th Circuit affirmed most of the district court’s ruling, including upholding its decision to certify the class. Among other things, the appellate court determined that the district court correctly held that the defendant waived its express consent defense based on the retroactive FCC waiver because “no intervening change in law excused this waiver of an affirmative defense.” The appellate court found that the defendant “made no effort to assert the defense, develop a record on consent, or seek a stay pending the FCC’s decision,” even though it knew the FCC was likely to grant its petition for a waiver. While the 9th Circuit did not take issue with the $500 congressionally-mandated per call damages figure, and did not disagree with the total number of calls, it stressed that the “due process test applies to aggregated statutory damages awards even where the prescribed per-violation award is constitutionally sound.” Recognizing that Congress “set a floor of statutory damages at $500 for each violation of the TCPA but no ceiling for cumulative damages, in a class action or otherwise,” the appellate court explained that such damages “are subject to constitutional limitation in extreme situations,” and “in the mass communications class action context, vast cumulative damages can be easily incurred, because modern technology permits hundreds of thousands of automated calls and triggers minimum statutory damages with the push of a button.” Accordingly, the 9th Circuit ordered the district court to reassess the damages in light of these concerns.
Special Alert: Fifth Circuit finds CFPB funding unconstitutional — Now what?
The Fifth Circuit ruled last night in CFSA v. CFPB that the Consumer Financial Protection Bureau’s funding structure is unconstitutional, triggering a potential wave of implications discussed below.
The holdings
A panel of three Fifth Circuit judges unanimously held that the CFPB funding structure created by Congress violated the Appropriations Clause of the Constitution, which provides that “no money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” It ruled that, although the CFPB spends money pursuant to a validly enacted statute, the structure violates the Appropriations Clause because the CFPB obtains its funds from the Federal Reserve (not the Treasury), the CFPB maintains funds in a separate account, the Appropriations Committees do not have authority to review the agency’s expenditures, and the bureau exercises broad authority over the economy. The court rejected the bureau’s arguments that the funding structure was necessarily constitutional because it was created by and subject to Congress, and distinguished other agencies that are funded outside of the annual appropriations process.