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On January 15, Paul Clement, the lawyer selected by the U.S. Supreme Court to defend the leadership structure of the CFPB, filed a brief in Seila Law LLC v. CFPB arguing that Seila Law’s constitutionality arguments are “remarkably weak” and that “a contested removal is the proper context to address a dispute over the President’s removal authority.” First, Clement stated that “there is no ‘removal clause’ in the Constitution,” and that because the “constitutional text is simply silent on the removal of executive officers” it does not mean there is a “promising basis for invalidating an Act of Congress.” Moreover, the Constitution leaves it to Congress to decide “all manner of questions about the organization and structure of executive-branch departments and officers,” Clement wrote. Second, Clement disagreed with the argument that Congress cannot impose modest restrictions on the President’s ability to remove executive officers, so long as the President is the one exercising the removal powers. Third, Clement noted that in the past, the Court has repeatedly upheld the ability to place permissible restrictions on a President’s removal authority.
Clement further contended, among other things, that the dispute in Seila is “not just unripe, but entirely theoretical.” He referenced the Bureau’s brief filed last September (covered by InfoBytes here), in which the CFPB argued that the for-cause restriction on the President’s authority to remove the Bureau’s single director violates the Constitution’s separation of powers, and noted that “[w]hatever was true when this suit was first filed, the theory of the unitary executive appears alive and well in the Director’s office.” Rather, Clement stated, the Court should wait for an instance where a CFPB director has been fired for something short of the “inefficiency, neglect of duty, or malfeasance in office” threshold that Congress set for dismissing a CFPB director in Dodd-Frank before ruling on the question. Clement also emphasized that “text, first principles and precedent” all “strongly support” upholding the U.S. Court of Appeals for the Ninth Circuit’s decision from last May, which deemed the CFPB to be constitutionally structured and upheld a district court’s ruling enforcing Seila Law’s compliance with a 2017 civil investigative demand.
As previously covered by InfoBytes, the 9th Circuit held that the for-cause removal restriction of the CFPB’s single director is constitutionally permissible based on existing Supreme Court precedent. The panel agreed with the conclusion reached by the U.S. Court of Appeals for the D.C. Circuit majority in the 2018 en banc decision in PHH v. CFPB (covered by a Buckley Special Alert) stating, “if an agency’s leadership is protected by a for-cause removal restriction, the President can arguably exert more effective control over the agency if it is headed by a single individual rather an a multi-member body.”
The parties in Seila filed briefs last December. While both parties are in agreement on the CFPB’s single-director leadership structure, they differ on how the matter should be resolved. Seila Law argued that the Court should invalidate all of Title X of Dodd-Frank, whereas the Bureau contended that the for-cause removal provision should be severed from the rest of the law in accordance with Dodd-Frank’s express severability clause. Oral arguments are scheduled for March 3. (Previous InfoBytes coverage here.)
On December 26, the CFPB denied a petition by a student loan relief company to modify or set aside a civil investigative demand (CID) issued by the Bureau last October. According to the company’s petition, the CID requested information as part of an investigation into the company’s promotion of student loan debt relief programs. As previously covered by InfoBytes, stipulated orders were entered against the company by the FTC and the Minnesota attorney general for violations of TILA and the assisting and facilitating provision of the Telemarketing Sales Rule, which resulted in the company being permanently banned from engaging in transactions involving debt relief products and services or making misrepresentations regarding financial products and services. In its petition, the company argued that the CFPB’s requests were duplicative of the FTC’s earlier investigation. The company also argued that the documents and materials sought in the CID were overly burdensome and the time frame to respond was too short. Furthermore, the company stated that until the U.S. Supreme Court issues a decision in Seila Law v. CFPB on whether the Bureau’s structure violates the Constitution’s separation of powers under Article II, the CID should either be withdrawn or stayed because of the uncertainty surrounding the Bureau’s ability to proceed with enforcement actions.
The Bureau denied the petition, arguing that “the administrative CID petition process is not the proper forum for raising and deciding constitutional challenges to provisions of the Bureau’s statute.” The Bureau also noted that the company failed to show that it engaged with Bureau staff on ways to alleviate undue burden, such as proposing modifications to the substance of the requests, and that even though the Bureau proposed an extension to the CID deadline, the company did not seek such an extension.
On January 13, fifteen Democratic Senators, led by Senators Catherine Cortez Masto (D-NV) and Sherrod Brown (D-OH) sent a letter to the Inspector General of the Federal Reserve Board calling for an investigation into the CFPB’s restitution penalties levied against companies accused of wrongdoing. The Senators claim that the Bureau’s restitution approach “creates a perverse incentive for companies to violate the law by allowing them to retain all or nearly all of the funds they illegally obtain from consumers.” The letter asks the Inspector General to investigate four recent settlements to examine how the Bureau determines restitution awards and whether the applied standard for restitution differs from the standard applied by courts and in prior CFPB settlements.
Included among the examples of actions for which consumers were provided limited to zero restitution is a recent settlement with a debt collector accused of engaging in improper debt collection tactics. As previously covered by InfoBytes, the company agreed to pay $36,878 in redress to harmed consumers, limiting the restitution to “only those consumers who affirmatively ‘complained about a false threat or misrepresentation’” by the company, the Senators wrote. Specifically, the Senators seek to determine the number of consumers who may have been excluded from the settlement because they did not affirmatively complain about the company’s behavior. A second example highlights an action taken against a group of payday lenders that allegedly, among other things, misrepresented to consumers an obligation to repay loan amounts that were voided because the loan violated state licensing or usury laws. (Previously covered by InfoBytes here.) According to the Senators, the settlement “dropped the requests for restitution and other relief for victimized consumers.” The letter also references a report released last October by the House Financial Services Committee (covered by InfoBytes here) following an investigation into these particular settlements, in which the Bureau responded “that it did not seek restitution in these cases because it could not determine ‘with certainty’ which consumers had been harmed or the amount of the harm.”
On January 9, the CFPB and the Utah attorney general’s office announced that the first of the American Consumer Financial Innovation Network’s (ACFIN) joint office hours will be held in Salt Lake City, Utah on January 30. The CFPB’s announcement states that the office hours are intended to “provide innovators with the opportunity to discuss issues such as financial technology, innovative products or services, regulatory sandboxes, no action letters, and other matters related to financial innovation with officials from the CFPB and state partners.” As previously covered by InfoBytes, the CFPB, along with a number of state regulators, established ACFIN in September with the aim of reducing “regulatory burdens” and increasing “regulatory certainty for innovative financial products and services.” Members of ACFIN currently include state AGs from Alabama, Alaska, Arizona, Colorado, Georgia, Indiana, South Carolina, Tennessee, and Utah; and state financial regulators from Florida, Georgia, Missouri, and Tennessee. ACFIN membership is open to any state and federal partners interested in joining.
On January 10, the CFPB issued its second no-action letter (NAL) under the agency’s revised NAL Policy that was issued last September. The new NAL Policy’s goal is to streamline the review process to “focus[ ] on the consumer benefits and risks of the product or service in question.” As previously covered by InfoBytes, the Bureau issued its first NAL under the revised policy in response to a request by HUD on behalf of more than 1,600 housing counseling agencies (HCAs) that participate in HUD’s housing counseling program.
A national bank is the recipient of the most recent NAL regarding the bank’s funding arrangements with HCAs certified by HUD. The NAL states that the Bureau will not take supervisory or enforcement actions against the bank under RESPA or UDAAP for entering into certain arrangements with HCAs for pre-purchase housing counseling services conditioned on the consumer applying for a loan from the bank, even if that activity could be construed as a referral, as long as the level of payment for the services is no more than a level that is commensurate with the services provided and is reasonable and customary for the area. The Bureau noted that the bank submitted its application to facilitate funding arrangements with HCAs through the HUD NAL application, which was made public last year.
On January 7, Representatives Emanuel Cleaver II (D-MO) and Gregory Meeks D-NY) sent a letter to nine federal financial regulators urging them to strengthen their financial infrastructures against possible cyber-attacks in the wake of recent threats against the U.S. from Iran and its allies following the killing of Iranian official Qasem Soleimani. The letter also requests that the regulators coordinate with law enforcement and regulated entities to increase information sharing surrounding cyber threats, and “communicate a strategy to further mitigate existing cyber vulnerabilities within [the U.S.] financial infrastructure by March.” The letter was sent to the Federal Reserve Board, Treasury Department, SEC, FDIC, CFPB, Federal Housing Finance Agency, Commodity Futures Trading Commission, National Credit Union Administration, and the OCC.
As previously covered by InfoBytes, NYDFS separately issued an Industry Letter on January 4 warning regulated entities about the “heightened risk” of cyber-attacks by hackers affiliated with the Iranian government. The letter provides recommendations for ensuring quick responses to any suspected cyber incidents, and reminds entities they must inform NYDFS “as promptly as possible but in no event later than 72 hours’ after a material cybersecurity event.”
On January 8, the New York governor released a proposal that would, among other things, expand the entities subject to NYDFS’ enforcement authority and harmonize state regulator authority to bring actions against entities engaging in unfair, deceptive, or abusive acts or practices with federal authority. Proposed within the 2020 State of the State agenda are several initiatives designed to increase the state’s oversight and enforcement of the financial services industry. Key measures include:
- Abusiveness claims. The proposal would make New York consumer protection law consistent with federal law by aligning the state’s UDAAP powers with those of the CFPB, thereby empowering state authorities to bring abusiveness claims under state law.
- Eliminate certain exemptions. The proposal would end exemptions from state oversight for certain, unspecified consumer financial products and services. “With the current federal administration reducing the number and breadth of enforcement actions brought by the CFPB, it is crucial that state consumer protection laws apply to all the same consumer products and services subject to Dodd-Frank,” the proposal states.
- Closing loopholes and creating a level playing field. Under the proposal, state-licensed cryptocurrency companies would be required to pay assessment fees similar to other financial services companies. Currently, only supervised entities licensed under the state’s insurance law or banking law are required to pay assessments to NYDFS to cover examination and oversight costs.
- Fines. In order to effectively deter illegal conduct, the proposal would amend the state’s insurance law to increase fines. Additionally, instead of the current Financial Services Law (FSL) penalty of $5,000 per violation, the governor proposes “capping penalties at the greater of $5,000, or two times the damages, or the economic gain attributed to the violation,” while also updating the FSL to provide “explicit authority for [NYDFS] to collect restitution and damages.”
- Debt collection. Debt collectors under the proposal would be required to be licensed by NYDFS, thus allowing the department to examine and investigate suspected abuses. Additionally, NYDFS’ new oversight authority would allow it to bring punitive administrative actions against debt collectors, which may result in significant fines or the loss of a license. The proposal would also codify the FTC’s rule prohibiting confessions of judgment in consumer loans.
As previously covered by InfoBytes, the proposal would also, among other things, expand access to safe and affordable financial services through a collaborative initiative between the state’s Community Development Financial Institutions, NYDFS, and other state agencies designed to improve outreach and financial literacy education to the unbanked and underserved communities.
California governor proposes strengthening state consumer protection authority and increasing financial innovation
On January 10, the California governor submitted his proposal for California’s 2020-2021 state budget, which would, among other things, include the creation and administration of the California Consumer Protection Law (Law). The governor’s budget summary indicates that “[t]he federal government’s rollback of the CFPB leaves Californians vulnerable to predatory businesses and leaves companies without the clarity they need to innovate.” The proposed Law is intended to provide “consumers with more protection against unfair and deceptive practices when accessing financial services and products.” To create and administer the Law, the proposed budget contemplates the expansion of the Department of Business of Oversight’s (DBO) authority to “protect consumers” and “foster the responsible development of new financial products.” In light of the expanded role, the governor also proposed renaming the DBO to the Department of Financial Protection and Innovation. The governor’s budget includes an allocation to the DBO of a $10.2 million Financial Protection Fund and 44 positions in 2020-2021, which would increase to $19.3 million and 90 positions in 2022-2023 for creating and implementing the Law.
According to the DBO’s website, the DBO currently “provides protection to consumers and services to businesses engaged in financial transactions” and “oversees the operations of state-licensed financial institutions, including banks, credit unions, money transmitters, issuers of payment instruments and travelers checks, and premium finance companies.” Under the governor’s budget proposal summary, in addition to the DBO’s current functions, the DBO will have greater authority to “pursue unlicensed financial service providers not currently subject to regulatory oversight such as debt collectors, credit reporting agencies, and financial technology (fintech) companies, among others.”
The budget proposal summary provides that the DBO’s new activities will include:
- Offering services to educate consumers (e.g., older Americans, students, military service members, and recent immigrants).
- Licensing and examining industries that are currently under-regulated.
- Analyzing market patterns and developments for evidence-based policies and enforcement.
- Enforcing against unfair, deceptive, and abusive practices.
- Establishing a new Financial Technology Innovation Office, which will be tasked with proactively promoting “responsible development of new consumer financial products.”
- Providing legal support for the administration of the Law.
- Expanding administrative and IT staff to support the DBO’s increased authority.
The details of the Governor’s budget proposal have not yet been published.
On January 9, the CFPB announced that it filed a complaint in the U.S. District Court for the Central District of California against a mortgage lender, a mortgage brokerage, and several student loan debt relief companies (collectively, “the defendants”), for allegedly violating the FCRA, TSR, and FDCPA. In the complaint, the CFPB alleges that 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. The Bureau asserts that the reports of more than 7 million student loan borrowers were actually resold or provided to companies engaged in marketing student loan debt relief services.
According to the complaint, “using or obtaining prescreened lists to send solicitations marketing debt-relief services is not a permissible purpose under FCRA.” The complaint alleges that the defendants violated the TSR by charging and collecting advance fees before first “renegotiat[ing], settl[ing], reduc[ing], or otherwise alter[ing] the terms of at least one debt pursuant to a settlement agreement, debt-management plan, or other such valid contractual agreement executed by the customer,” and prior to “the customer ma[king] at least one payment pursuant to that settlement agreement, debt management plan, or other valid contractual agreement between the customer and the creditor or debt collector.” The CFPB further alleges that the defendants violated the TSR and the CFPA when they used telemarketing sales calls and direct mail to encourage consumers to consolidate their loans, and falsely represented that consolidation could lower student loan interest rates, improve borrowers’ credit scores, and change their servicer to the Department of Education.
The Bureau is seeking a permanent injunction to prevent the defendants from committing future violations of the FCRA, TSR, and CFPA, as well as an award of damages and other monetary relief, civil money penalties, and “disgorgement of ill-gotten funds.”
On December 23, the U.S. District Court for the District of Maryland granted a motion to stay in an action between the CFPB and parties of a structured-settlement company, pending the U.S. Supreme Court’s decision in CFPB v. Seila Law. According to the court, a decision in Seila Law that the CFPB’s structure violates the Constitution’s separation of powers under Article II may render the CFPB unable prosecute the case. A determination by the Court is expected later this year (previous InfoBytes coverage here).
As previously covered by InfoBytes, the court allowed to move forward the Bureau’s UDAAP claim, which alleged the defendants employed abusive practices when purchasing structured settlements from consumers in exchange for lump-sum payments. The defendants asked the court to stay the proceedings pending the outcome of two cases: Seila Law and a case pending in the Maryland Court of Appeals involving a different structured settlement company (covered by InfoBytes here). The court determined that a stay is not appropriate based on the Maryland case since it is not known when the case may be decided. The court also disagreed with the defendants’ argument that if the Maryland Court of Appeals upholds the settlement, the Bureau would be precluded from obtaining relief from the defendants. According to the court, “the extent to which the settlement is preclusive is unclear” and the provision that would preclude action by the Bureau is being disputed on appeal. However, the court concluded that a stay pending the outcome in Seila Law is warranted because “one of the Supreme Court’s paths in Seila Law may render the CFPB unable to prosecute this action; the stay would not be lengthy; and the interests of judicial efficiency and potential harm to the movants justify the stay.”
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