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On March 26, the U.S. District Court for the District of Delaware dismissed a 2017 lawsuit filed by the CFPB against a collection of Delaware statutory trusts and their debt collector, ruling that the Bureau lacked enforcement authority to bring the action when its structure was unconstitutional. As previously covered by InfoBytes, the Bureau alleged the defendants filed lawsuits against consumers for private student loan debt that they could not prove was owed or that was outside the applicable statute of limitations, which allowed them to obtain over $21.7 million in judgments against consumers and collect an estimated $3.5 million in payments in cases where they lacked the intent or ability to prove the claims, if contested. In 2020, the court denied a motion to approve the Bureau’s proposed consent judgment, allowing the case to proceed. The defendants filed a motion to dismiss, arguing that the Bureau lacked subject-matter jurisdiction because the defendants should not have been under the regulatory purview of the agency, and that former Director Kathy Kraninger’s ratification of the enforcement action, which followed the Supreme Court holding in Seila Law LLC v. CFPB that that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau (covered by a Buckley Special Alert), came after the three-year statute of limitations had expired. While the Bureau acknowledged that the ratification came more than three years after the discovery of the alleged violations, it argued that the statute of limitations should be ignored because the initial complaint had been timely filed and that the limitations period had been equitably tolled.
The court rejected the subject-matter jurisdiction argument because it held that the term “covered persons” as used in the Consumer Financial Protection Act, 12 U.S.C. § 5481(6), is not a jurisdictional requirement. However, the court then determined that the Bureau’s claims were barred by the statute of limitations. The Bureau filed the complaint while operating under a structure later found unconstitutional in Seila Law, and Director Kraninger’s subsequent ratification of the action came after the limitations period had expired. The court concluded that this made the complaint untimely. It also rejected the Bureau’s equitable tolling argument based on the Bureau’s failure to take actions to preserve its rights during the period when its constitutionality was in question. The court also noted that the Bureau “failed to pursue this very argument seriously in its brief,” which presented the equitable tolling argument in a “brief and conclusory” fashion.
On February 26, the U.S. District Court for the Middle District of Pennsylvania granted a student loan servicer’s request for interlocutory appeal as to whether questions concerning the CFPB’s constitutionality stopped the clock on claims that it allegedly misled borrowers. The court’s order pauses a 2017 lawsuit in which the Bureau claimed the servicer violated the CFPA, FCRA, and FDCPA by allegedly creating obstacles for borrower repayment options (covered by InfoBytes here), and grants the servicer’s request to certify a January 13 ruling. As previously covered by InfoBytes, the servicer argued that the Supreme Court’s finding in Seila Law LLC v. CFPB (covered by a Buckley Special Alert—which held that that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the CFPB)—meant that the Bureau “never had constitutional authority to bring this action and that the filing of [the] lawsuit was unauthorized and unlawful.” The servicer also claimed that the statute of limitations governing the CFPB’s claims prior to the decision in Seila had expired, arguing that Director Kathy Kraninger’s July 2020 ratification came too late. The court disagreed, ruling, among other things, that “[n]othing in Seila indicates that the Supreme Court intended that its holding should result in a finding that this lawsuit is void ab initio.”
The court’s order sends the ruling to the 3rd Circuit to review “[w]hether an act of ratification, performed after the statute of limitations has expired, is subject to equitable tolling, so as to permit the valid ratification of the original action which was filed within the statute of limitations but which was filed at a time when the structure of the federal agency was unconstitutional and where the legal determination of the presence of the structural defect came after the expiration of the statute of limitations.” Specifically, the court explained that this particular “question does not appear to have been addressed by any court in the United States. . . .Not only is there a lack of conflicting precedent, there is no supporting precedent; indeed, no party has identified any comparable precedent.” Further, “[i]f this court erred in applying the doctrine of equitable tolling, it would almost certainly lead to a reversal on appeal and dismissal of this action,” the court noted.
On January 20, Kathy Kraninger resigned from her position as CFPB director and newly sworn-in President Biden announced that Dave Uejio would serve as acting director until permanent leadership is confirmed by the U.S. Senate. President Biden officially nominated Rohit Chopra as the permanent director of the Bureau.
Uejio has been with the Bureau since 2012, and prior to his appointment as acting director, he has served as the Bureau’s Chief Strategy Officer since 2015. Chopra, who is currently a Democratic Commissioner of the FTC, previously served as the Bureau’s first student loan ombudsman and assistant director of the Office for Students before leaving the Bureau in 2015.
Kraninger’s resignation is a notable departure from the Bureau’s original structure, as outlined in Dodd-Frank, which called for a single director, appointed to a five-year term and only removable by the president for cause (i.e., for “inefficiency, neglect of duty, or malfeasance in office”). As previously covered by a Buckley Special Alert, in June 2020, the Supreme Court, in a plurality opinion in Seila Law LLC v. CFPB, held that the CFPB’s statutory structure violates the constitutional separation of powers by restricting the president’s ability to remove the director. The Court remedied the constitutional violation by severing the “for cause” removal language from the remainder of the statute. When Kraninger submitted her resignation on President Biden’s Inauguration Day, she stated it was in “support of the Constitutional prerogative of the President to appoint senior officials within the government who support the President’s policy priorities…”
On January 13, the U.S. District Court for the Middle District of Pennsylvania denied a student loan servicer’s motion for judgment on the pleadings, ruling that the servicer’s argument that the CFPB is unconstitutional “strays afar” from the U.S. Supreme Court’s finding in Seila Law LLC v. CFPB. The servicer previously argued that the Supreme Court’s finding in Seila (covered by a Buckley Special Alert)—which held that that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the CFPB—meant that the Bureau “never had constitutional authority to bring this action and that the filing of [the] lawsuit was unauthorized and unlawful.” The servicer also claimed that the statute of limitations governing the CFPB’s claims prior to the decision in Seila had expired, arguing that Director Kathy Kraninger’s July 2020 ratification came too late. However, the court determined, among other things, that “[n]othing in Seila indicates that the Supreme Court intended that its holding should result in a finding that this lawsuit is void ab initio.” The court further noted that the servicer’s assertion that the Bureau “‘never had constitutional authority to bring this action’ is belied by Seila’s implicit finding that the CFPB always had the authority to act, despite the Supreme Court’s finding that the removal protection was unconstitutional.”
On December 29, the U.S. Court of Appeals for the Ninth Circuit reaffirmed a district court’s order granting the CFPB’s petition seeking to enforce a civil investigative demand (CID) sent to Seila Law. As previously covered by InfoBytes, the Bureau filed a supplemental brief arguing that the formal ratifications of then-Acting Director Mick Mulvaney and current Director Kathy Kraninger, paired with the U.S. Supreme Court’s ruling in Seila v. CFPB, are sufficient for the appellate court to enforce the CID previously issued against the law firm, and that “[s]etting aside the CID at this point would serve no valid purpose.” In reaffirming the order, the appellate court wrote that “Director Kraninger’s ratification remedied any constitutional injury that Seila Law may have suffered due to the manner in which the CFPB was originally structured. Seila Law’s only cognizable injury arose from the fact that the agency issued the CID and pursued its enforcement while headed by a Director who was improperly insulated from the President’s removal authority. Any concerns that Seila Law might have had about being subjected to investigation without adequate presidential oversight and control had now been resolved. A Director well aware that she may be removed by the President at will had ratified her predecessors’ earlier decisions to issue and enforce the CID.” The 9th Circuit also rejected Seila Law’s argument that the ratification occurred outside the limitations period for bringing an enforcement action against the law firm, determining that the “statutory limitations period pertains solely to the bringing of an enforcement action, which the CFPB had not yet commenced against Seila Law.”
On November 30, the U.S. District Court of the District of Maryland denied a motion to dismiss an action brought by the CFPB against a debt collection entity, its subsidiaries, and their owner (collectively, “defendants”), rejecting the defendants’ argument that the Bureau lacked standing to bring the action. As previously covered by InfoBytes, in September 2019, the Bureau alleged the defendants violated the FCRA, FDCPA, and the CFPA by, among other things, failing to (i) establish or implement reasonable written policies and procedures to ensure accurate reporting to consumer-reporting agencies; (ii) incorporate appropriate guidelines for the handling of indirect disputes in its policies and procedures; (iii) conduct reasonable investigations and review relevant information when handling indirect disputes; and (iv) furnish information about accounts after receiving identity theft reports about such accounts without conducting an investigation into the accuracy of the information. The defendants moved to dismiss the action arguing, among other things, that (i) the Bureau lacks standing to bring the action; and (ii) Director Kraninger’s ratification of the litigation was invalid. In the alternative, the defendants moved to stay the lawsuit until the U.S. Supreme Court issued a ruling in Collins v. Mnuchin (covered by InfoBytes here).
The court denied the motion to stay, concluding that the issues pending before the Supreme Court in Mnuchin may not necessarily apply to the Bureau, as they are different agencies and further, there is no issue of ratification in Mnuchin. Thus, given the “uncertainty surrounding the effect a decision in Collins v. Mnuchin will have on the present case,” the court denied the motion to stay. The court also denied the motion to dismiss, concluding, among other things, that the Supreme Court’s finding in Seila Law LLC v. CFPB (covered by a Buckley Special Alert) that the Bureau had a constitutional defect in its leadership structure under Article II does not diminish the agency’s Article III standing. Moreover, the court concluded that the decision in Seila Law does not mean that the Bureau “lacked authority during the time in which it was led by an improperly removable Director,” and therefore the Bureau had the authority to initiate the September 2019 lawsuit against the defendants. Further, the court held that the July 2020 ratification of the enforcement action was proper.
On December 1, the U.S. District Court for the District of Rhode Island denied a national bank’s motion to dismiss a CFPB lawsuit alleging violations of the Consumer Financial Protection Act (CFPA) and TILA, rejecting the bank’s arguments that, among other things, the CFPB’s claims were time-barred and that the case cannot proceed because the CFPB’s structure violates constitutional separation-of-powers identified in Seila Law LLC v. CFPB. As previously covered by InfoBytes, the CFPB filed suit in January against the bank alleging, among other things, that when servicing credit card accounts, the bank failed to properly (i) manage consumer billing disputes for unauthorized card use and billing errors; (ii) credit refunds to consumer accounts resulting from such disputes; or (iii) provide credit counseling disclosures to consumers. According to the CFPB, the alleged conduct “began in 2010 or earlier and ended, depending on the violation, sometime in 2015 or 2016.” The CFPB also noted that the parties signed agreements tolling all relevant statutes of limitations from February 23, 2017, until January 31, 2020. The bank argued that the CFPB’s claims are governed by section 1640 of TILA with its one-year statute of limitations, but the CFPB countered that its claims were brought pursuant to section 1607 of TILA, which provides a “three-year discovery period.”
In denying the bank’s motion to dismiss, the court concluded that the tolling agreements were valid and that the three-year limit under section 1607 applied because “plain language indicates that § 1640 only governs cases brought by individuals or state attorneys general,” whereas § 1607 “provides the cause of action for federal enforcement agencies such as the CFPB.” Furthermore, the court determined that because § 1607 “does not contain a statute of limitations,” and “instead stat[es] that cases brought by the CFPB ‘shall be enforced under. . . subtitle E of the [CFPA],’ the action is governed by subtitle E’s requirement that cases be brought within three years of discovery by the CFPB.” The court also dismissed the bank’s constitutional claims, ruling, among other things, that the argument is moot following the U.S. Supreme Court’s decision in Seila, which held that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the CFPB (covered by a Buckley Special Alert).
On October 30, the U.S. Court of Appeals for the Second Circuit summarily vacated a 2018 district court order that had dismissed CFPB and New York Attorney General claims against a New Jersey-based finance company accused of misleading first responders to the World Trade Center attack and NFL retirees about high-cost loans mischaracterized as assignments of future payment rights (covered by InfoBytes here). The district court found that the Bureau’s single-director structure was unconstitutional, and that, as such, the agency lacked authority to bring deceptive and abusive claims under the Consumer Financial Protection Act (CFPA). The district court also rejected an attempt by then-acting Director Mulvaney to salvage the Bureau’s claims, concluding that the “ratification of the CFPB’s enforcement action against defendants failed to cure the constitutional deficiencies in the CFPB’s structure or otherwise render defendants’ arguments moot.”
The 2nd Circuit remanded the case to the district court, determining that the U.S. Supreme Court’s ruling in Seila Law LLC v CPFB (covered by a Buckley Special Alert, holding that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau) superseded the 2018 ruling. Following Seila, Director Kathy Kraninger also ratified several prior regulatory actions (covered by InfoBytes here), including the enforcement action brought against the defendants. “In light of these developments, we affirm the district court's holding that the for-cause removal provision is unconstitutional, we reverse the district court's holding that the for-cause removal provision is not severable from the remainder of the CFPA, and we remand for the district court to consider in the first instance the validity of Director Kraninger’s ratification of this enforcement action,” the appellate court wrote.
On August 31, the CFPB filed a supplemental brief in the U.S. Court of Appeals for the Ninth Circuit, arguing that the formal ratifications of then-Acting Director Mick Mulvaney and current Director Kathy Kraninger, paired with the U.S. Supreme Court’s ruling in Seila v. CFPB, are sufficient for the appellate court to enforce the CID previously issued against the law firm, and that “[s]etting aside the CID at this point would serve no valid purpose.” As previously covered by InfoBytes, in 2017, the CFPB ordered Seila Law to comply with a CID seeking information about the firm’s business practices to determine whether it violated the CFPA, the Telemarketing Sales Rule (TSR), or other federal consumer financial laws when providing debt-relief services or products, but the law firm refused to comply, arguing that the CID was invalid because the CFPB’s structure was unconstitutional. Last year, after the 9th Circuit upheld the CID (covered by InfoBytes here), Seila Law appealed the decision to the Supreme Court. Following the Supreme Court’s opinion in June—which held that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau (covered by a Buckley Special Alert)—the Bureau noted that Kraninger formally ratified the agency’s decisions regarding the CID in July.
Among other things, the Bureau highlighted in its brief Seila Law’s argument “that the CID still should not be enforced because at the time this action commenced, the Supreme Court had not yet held invalid the removal provision.” The Bureau countered that any defect in the initiation of this action has been resolved because the CID, and the action to enforce it, “have now been formally and expressly ratified” by two Bureau officials removable at will by the President. The Bureau also asked the 9th Circuit to consider what may happen if the appellate court chooses to ignore the ratifications and rule in favor of Seila Law. According to the Bureau, such a result “could also, depending on the [c]ourt’s reasoning, be used to raise doubts about the validity of other actions the Bureau has taken over the past decade and that a fully accountable Director has now also ratified.” Should the 9th Circuit choose to set aside the CID, the appellate court would not only further delay a “legitimate law-enforcement investigation,” but also “undermine the very Article II authority that the Supreme Court so emphasized in deciding this case,” the Bureau argued.
On July 7, the CFPB, “out of an abundance of caution,” ratified several previous actions, including the large majority of the Bureau’s existing regulations, following the U.S. Supreme Court’s opinion in Seila v. Consumer Financial Protection Bureau. As previously covered by a Buckley Special Alert, the Court held that, while the clause in the Consumer Financial Protection Act that requires cause to remove the director of the CFPB violates the constitutional separation of powers, the removal provision could—and should—be severed from the statute establishing the CFPB, rather than invalidating the entire statute. According to the Bureau’s announcement, the action ratifies most regulatory actions taken by the Bureau from January 4, 2012 through June 30, 2020, and “provides the financial marketplace with certainty that the rules are valid in light of the Supreme Court decision in Seila Law.” The Bureau noted, however, that the ratification does not include two actions: (i) the July 2017 “Arbitration Agreements” rule, which was disapproved following the approval by President Trump of a joint resolution under the Congressional Review Act that provides “the ‘rule shall have no force or effect’”; and (ii) the November 2017 “Payday, Vehicle Title, and Certain High-Cost Installment Loans” rule (Payday Rule), for which the Bureau previously revoked the rule’s mandatory underwriting provisions. Both of these actions are not within the scope of the ratification, the Bureau stated, noting, however, that it has separately ratified the Payday Lending Rule’s payment provisions.
The Bureau is also considering whether to ratify other legally significant actions, such as certain pending enforcement actions, and stated it will make separate ratifications, if appropriate. However, the Bureau stressed it “does not believe that it is necessary for this ratification to include various previous Bureau actions that have no legal consequences for the public, or enforcement actions that have finally been resolved.” Additionally, because the ratification is not a “rule” or “rule making” as defined by the Administrative Procedure Act (APA), since it is “not an ‘agency statement of general or particular applicability and future effect’” and is “not ‘formulating, amending, or repealing a rule,’” the Bureau contended it is not subject to the APA’s notice-and-comment procedures.
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