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7th Circuit: Plaintiff lacks standing to bring FCRA claim on credit report disputes
On October 18, the U.S. Court of Appeals for the Seventh Circuit affirmed dismissal of an FCRA action in favor of a defendant bank. According to the opinion, the plaintiff real estate investor obtained a loan secured by a mortgage from the defendant bank. The mortgage required the plaintiff to maintain a certain level of hazard insurance or the defendant bank could lender-place such insurance, with the cost of the lender-placed insurance amounts becoming additional debt secured by the mortgage. After the plaintiff underpaid on his flood insurance premiums, the defendant bank obtained lender-placed insurance. When the plaintiff did not pay the increased monthly payment associated with the lender-placed insurance amounts in full, the defendant bank informed the plaintiff that he was in default and that the entire amount of the loan would be accelerated if the default was not cured. While the plaintiff continued to submit partial payments, the defendant began reporting certain 2011 payments as 60 days or more late to the credit reporting agencies (CRAs). In 2012, the plaintiff disputed these purportedly late payments with the CRAs.
The plaintiff sued claiming, among other things, that the defendant violated the FCRA by failing to responsibly investigate the 2012 disputes. On appeal, after determining that the district court did not abuse its discretion by failing to rely on unsupported statements in the plaintiff's affidavit, the 7th Circuit found that the district court erred in requiring the plaintiff to prove damages as an element of his FCRA claim. However, the appellate court held that the plaintiff ultimately lacked standing to bring a claim under the FCRA because, as the appellate court highlighted, the injury that the plaintiff alleged—a decrease in his credit score in November 2011—could not be fairly traced to the defendant’s alleged action—a failure to reasonably investigate credit reporting disputes in January 2012.
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.
9th Circuit says telemarketing texts sent to mixed-use cells phones fall under TCPA
On October 12, a split U.S. Court of Appeals for the Ninth Circuit reversed a district court’s dismissal of a TCPA complaint, disagreeing with the argument that the statute does not cover unwanted text messages sent to businesses. Plaintiffs (who are home improvement contractors) alleged that the defendants used an autodialer to send text messages to sell client leads to plaintiffs' cell phones, including numbers registered on the national do-not-call (DNC) registry. The plaintiffs contented they never provided their numbers to the defendants, nor did they consent to receiving text messages. The defendants countered that the plaintiffs lacked Article III and statutory standing because the TCPA only protects individuals from unwanted calls. The district court agreed, ruling that the plaintiffs lacked statutory standing and dismissed the complaint with prejudice.
On appeal, the majority disagreed, stating that the plaintiffs did not expressly consent to receiving texts messages from the defendants and that their alleged injuries are particularized. In determining that the plaintiffs had statutory standing under sections 227(b) and (c) of the TCPA, the majority rejected the defendants’ argument that the TCPA only protects individuals from unwanted calls. While the defendants claimed that by operating as home improvement contractors the plaintiffs fall outside of the TCPA’s reach, the majority determined that all of the plaintiffs had standing to sue under § 227(b), “[b]ecause the statutory text includes not only ‘person[s]’ but also ‘entit[ies].’” With respect to the § 227(c) claims, which only apply to “residential” telephone subscribers, the appellate court reviewed whether a cell phone that is used for both business and personal reasons can qualify as a “residential” phone. Relying on the FCC’s view that “a subscriber’s use of a residential phone (including a presumptively residential cell phone) in connection with a homebased business does not necessarily take an otherwise residential subscriber outside the protection of § 227(c),” and “in the absence of FCC guidance on this precise point,” the majority concluded that a mixed-use phone is “presumptively ‘residential’ within the meaning of § 227(c).”
Writing in a partial dissent, one judge warned that the majority’s opinion “usurps the role of the FCC and creates its own regulatory framework for determining when a cell phone is actually a ‘residential telephone,’ instead of deferring to the FCC’s narrower and more careful test.” The judge added that rather than “deferring to the 2003 TCPA Order which extended the protections of the national DNC registry to wireless telephones only to the extent they were similar to residential telephones, a reasonable interpretation of the TCPA, the majority has leaped over the FCC’s limitations to provide its own, much laxer, regulatory framework and procedures that broadly allow anybody who owns a cell phone to sue telemarketers under the TCPA.”
3rd Circuit says debt collector owes finder’s fee
On September 23, the U.S. Court of Appeals for the Third Circuit overturned a district court’s summary judgment ruling in favor of a defendant debt collector. The action concerned whether a federal contract entered between the debt collector and the Department of Education (DOE) required the payment of a finder’s fee to a plaintiff consulting company that helped the defendant secure the contract. The defendant entered into an agreement with the plaintiff to help it secure federal contracts in debt collection in exchange for a finder’s fee. The defendant signed a contract with the DOE in 2014, but did not begin performing work on the contract until 2016 after the agreement with the plaintiff had expired. The defendant refused to pay the finder’s fee, arguing that even though the contract with the DOE was signed while the agreement was still active, the contract had not been “consummated” during the agreement’s applicable period because the defendant was not eligible to receive work orders or start performing work until after the agreement expired. The plaintiff sued, but the district court ruled in favor of the defendant. The plaintiff appealed and the 3rd Circuit reversed, holding that the contract had in fact been “consummated” when it was formed in 2014, and that the defendant owed the finder’s fee. On remand, the district court again granted summary judgment for the defendant, this time on the grounds that the defendant had not “facilitated” the contract with the DOE.
On the second appeal, the 3rd Circuit determined that the agreement specifies that a finder’s fee is owed whenever a “fee transaction is consummated” and defined a fee transaction as “the subsequent consummation of any contract with any Federal government agency for which [defendant] has been invited to compete, and is later awarded a contract to perform, which both parties herein expressly agree shall have arisen due to any ‘teaming’ or ‘subcontracting’ engagement Finder may have facilitated in advance of any such award of a contract by a Federal government agency.” According to the appellate court, it did not matter when the work orders from the DOE began, because the fee transaction was consummated during the agreement period.
3rd Circuit: Debt buyer not required to be licensed under Pennsylvania law
On September 19, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s ruling in an FDCPA suit, finding that a defendant debt buyer was not required to be licensed under Pennsylvania law when it attempted to collect interest that had accrued at a rate of more than 6 percent under the original credit card agreement. According to the opinion, the plaintiff opened a credit card with a bank, which had an interest rate of 22.9 percent. The plaintiff defaulted on a debt he accrued on the card, and the debt was subsequently charged-off and sold by the bank to the defendant. The plaintiff argued that the defendant violated the FDCPA since the interest rate was limited by the Pennsylvania Consumer Discount Company Act (CDCA), which states that an unlicensed firm “in the business of negotiating or making loans or advances of money on credit [less than $25,000]” may not collect interest at an annual interest rate over 6 percent. The district court granted the defendant’s motion to dismiss, ruling that the defendant was entitled to collect interest above 6 percent because it held a license under a different state law.
On the appeal, the 3rd Circuit found that the CDCA applies to companies that arrange for or negotiate loans with certain parameters, and that there is nothing in the plaintiff’s amended complaint to suggest that the defendant is in the business of negotiating loans. The appellate court noted that the plaintiff’s allegations “indicate that [the defendant] purchases debt, such as [plaintiff’s] credit card account that [the bank had] charged off. But even with that allegation as a starting point, it is not reasonable to infer that an entity that purchases charged-off debt would also be in the business of negotiating or bargaining for the initial terms of loans or advances.” The appellate court further noted that “the amended complaint cuts against such an inference: it alleges that [the bank], not [the defendant], set the annual interest rate for [plaintiff’s] use of the credit card for loans and advances at 22.90%. Thus, with the understanding that negotiate means ‘to bargain’ and not ‘to transfer,’ [the plaintiff’s] allegations do not support an inference that [defendant] is in the business of negotiating loans or advances.”
2nd Circuit: NY law on interest payments for escrow accounts is preempted
On September 15, the U.S. Court of Appeals for the Second Circuit held that New York’s interest-on-escrow law impermissibly interferes with the incidentals of national bank lending and is preempted by the National Bank Act (NBA). Plaintiffs in two putative class actions obtained loans from a national bank, one before and the other after certain Dodd-Frank provisions took effect. The loan agreements—governed by New York law—required plaintiffs to deposit money into escrow accounts. After the bank failed to pay interest on the escrowed amounts, plaintiffs sued for breach of contract, alleging, among other things, that under New York General Obligations Law (GOL) § 5-601 (which sets a minimum 2 percent interest rate on mortgage escrow accounts) they were entitled to interest. The bank moved to dismiss both actions, contending that GOL § 5-601 did not apply to federally chartered banks because it is preempted by the NBA. The district court disagreed and denied the bank’s motion, ruling first that RESPA (which regulates the amount of money in an escrow account but not the accruing interest rate) “shares a ‘unity of purpose’ with GOL § 5-601.” This is relevant, the district court said, “because Congress ‘intended mortgage escrow accounts, even those administered by national banks, to be subject to some measure of consumer protection regulation.’” Second, the district court reasoned that even though TILA § 1639d does not specifically govern the loans at issue, it is significant because it “evinces a clear congressional purpose to subject all mortgage lenders to state escrow interest laws.” Finally, with respect to the NBA, the district court determined that “the ‘degree of interference’ of GOL § 5-601 was ‘minimal’ and was not a ‘practical abrogation of the banking power at issue,’” and concluded that Dodd-Frank’s amendment to TILA substantiated a policy judgment showing “there is little incompatibility between requiring mortgage lenders to maintain escrow accounts and requiring them to pay a reasonable rate of interest on sums thereby received.” As such, GOL § 5-601 was not preempted by the NBA, the district court said.
On appeal, the 2nd Circuit concluded that the district court erred in its preemption analysis. According to the appellate court, the important question “is not how much a state law impacts a national bank, but rather whether it purports to ‘control’ the exercise of its powers.” In reversing the ruling and holding that that GOL § 5-601 was preempted by the NBA, the appellate court wrote that the “minimum-interest requirement would exert control over a banking power granted by the federal government, so it would impermissibly interfere with national banks’ exercise of that power.” Notably, the 2nd Circuit’s decision differs from the 9th Circuit’s 2018 holding in Lusnak v. Bank of America, which addressed a California mortgage escrow interest law analogous to New York’s and held that a national bank must comply with the California law requiring mortgage lenders to pay interest on mortgage escrow accounts (covered by InfoBytes here). Among other things, the 2nd Circuit determined that both the district court and the 9th Circuit improperly “concluded that the TILA amendments somehow reflected Congress’s judgment that all escrow accounts, before and after Dodd-Frank, must be subject to such state laws.”
In a concurring opinion, one of the judges stressed that while the panel concluded that the specific state law at issue is preempted, the opinion left “ample room for state regulation of national banks.” The judge noted that the opinion relies on a narrow standard of preempting only those “state laws that directly conflict with enumerated or incidental national bank powers conferred by Congress,” and stressed that the appellate court declined to reach a determination as to whether Congress subjected national banks to state escrow interest laws in cases (unlike the plaintiffs’ actions) where Dodd-Frank’s TILA amendments would apply.
10th Circuit: Payday lender must pay $38.4 million restitution order
On September 15, the U.S. Court of Appeals for the Tenth Circuit affirmed the CFPB’s administrative ruling against a Delaware-based online payday lender and its founder and CEO (respondents/petitioners) regarding a 2015 administrative enforcement action that alleged violations of the Consumer Financial Protection Act (CFPA), TILA, and EFTA. As previously covered by InfoBytes, in 2015, the CFPB announced an action against the respondents for alleged violations of TILA and the EFTA, and for engaging in unfair or deceptive acts or practices. Specifically, the CFPB alleged that, from May 2008 through December 2012, the online lender (i) continued to debit borrowers’ accounts using remotely created checks after consumers revoked the lender’s authorization to do so; (ii) required consumers to repay loans via pre-authorized electronic fund transfers; and (iii) deceived consumers about the cost of short-term loans by providing them with contracts that contained disclosures based on repaying the loan in one payment, while the default terms called for multiple rollovers and additional finance charges. The order required the respondents to pay $38.4 million as both legal and equitable restitution, along with $8.1 million in penalties for the company and $5.4 million in penalties for the CEO.
According to the opinion, between 2018 and 2021, the U.S. Supreme Court issued four decisions, Lucia v. SEC (covered by InfoBytes here), Seila Law v. CFPB (covered by a Buckley Special Alert here), Liu v. SEC (covered by InfoBytes here), and Collins v. Yellen (covered by InfoBytes here), which “bore on the Bureau’s enforcement activity in this case,” by “decid[ing] fundamental issues such as the Bureau’s constitutional authority to act and the appointment of its administrative law judges (‘ALJ’).” The decisions led to intermittent delays and restarts in the Bureau’s case against the petitioners. For instance, the opinion noted that two different ALJs decided the present case years apart, with their recommendations separately appealed to the Bureau’s director. The CFPB’s director upheld the decision by the second ALJ and ordered the lender and its owner to pay the restitution, and a district court issued a final order upholding the award. The petitioners appealed.
On appeal, the petitioners made three substantive arguments for dismissing the director’s final order. The petitioners argued that under Seila, the CFPB’s structure was unconstitutional and therefore the agency did not have authority to issue the order. The appellate court disagreed, stating that it is “to use a ‘scalpel rather than a bulldozer’ in remedying a constitutional defect,” and that “because the Director’s actions weren’t unconstitutional, we reject Petitioners’ argument to set aside the Bureau’s enforcement action in its entirety.”
The petitioners also argued that the enforcement action violated their due-process rights by denying the CEO additional discovery concerning the statute of limitations. The petitioners claimed that they were entitled to a “new hearing” under Lucia, and that the second administrative hearing did not rise to the level of due process prescribed in that case. The appellate court determined that there was “no support for a bright-line rule against de novo review of a previous administrative hearing," nor did it see a reason for a more extensive hearing. Moreover, the petitioners “had a full opportunity to present their case in the first proceeding,” the 10th Circuit wrote. The appellate court further rejected the company’s argument regarding various evidentiary rulings, including permitting evidence about the company’s operational expenses, among other things. The appellate court also concluded that the CFPA’s statute of limitations commences when the Bureau either knows of a violation or, through reasonable diligence, would have discovered the violation. Therefore, the appellate court rejected the argument “that the receipt of consumer complaints triggered the statute of limitations.”
The petitioners also challenged the remedies order, claiming they were not allowed “to present evidence of their good-faith reliance on counsel (as to restitution and civil penalties) and evidence of their expenses (as to the Director’s residual disgorgement order).” The appellate court rejected that challenge, holding that the director properly considered all factors, including good faith, and rejected the petitioners’ challenge to the ALJ’s recommended civil penalties.
The 10th Circuit affirmed the district court’s order of a $38.4 million restitution award, rejecting the petitioners’ various challenges and affirming the director’s order.
FTC, CFPB say furnishers must investigate indirect disputes
On September 13, the FTC and CFPB (agencies) filed a joint amicus brief with the U.S. Court of Appeals for the Third Circuit, seeking the reversal of a district court decision that held furnishers of credit information are only obligated to investigate “bona fide” indirect disputes and may choose to decline to investigate other indirect disputes raised by consumers that are deemed frivolous. The agencies argued that this “atextual, judge-made exception” could undermine a key FCRA protection that allows consumers to dispute and correct inaccurate information in their credit reports, leading to a likely increase in consumer complaints related to credit reporting inaccuracies. Under the FCRA, consumers may file a direct dispute with a furnisher or file an indirect dispute with a consumer reporting agency (CRA), which may refer the dispute to the furnisher.
The case involves a direct dispute submitted by a plaintiff to a cable company, requesting an investigation into an allegedly fraudulent delinquent account listed on his credit report. The plaintiff informed the cable company that he was a victim of identity theft and that the account was opened in his name without his authorization. The cable company eventually referred the account to a debt collector (defendant) for collection after the plaintiff failed to provide requested information showing his account was opened due to fraud. An indirect dispute was later filed by the plaintiff with the CRA, which in turn sent the dispute to the defendant as the furnisher of the allegedly inaccurate information. After a second indirect dispute was filed noting the allegedly fraudulent account was the subject of litigation, the defendant removed the account from the plaintiff’s credit report and ceased collections. The plaintiff sued, asserting claims under the FCRA, FDCPA, and Pennsylvania law. The district court granted summary judgment in favor of the defendant, ruling that the plaintiff failed to provide evidence substantiating the basis of his dispute, and that “a furnisher is obligated to investigate only ‘bona fide’ indirect disputes and may therefore decline to investigate any indirect dispute it deems frivolous.”
In urging the appellate court to overturn the decision, the agencies countered in their amicus brief that the text of the FCRA is unambiguous—“furnishers must investigate all indirect disputes.” Nothing in the text suggests that a furnisher can choose not to investigate an indirect dispute if it determines it to be frivolous, the agencies stressed, further noting that if Congress intended to “create an exception for frivolous disputes, it knew how to do so,” and that in other parts of the statute Congress expressly provided that certain frivolous disputes do not need to be investigated.
The amicus brief also pointed out that under the FCRA, consumers are entitled to be notified about the outcome of their disputes, as well as given an opportunity to cure any deficiencies. The district court holding, the agencies said, would circumvent these requirements, thereby undercutting a central remedy under the FCRA that ensures consumers are able to dispute and correct inaccurate information in their credit reports. If furnishers were able to ignore disputes referred to them by CRAs, it could open an unintended loophole that would allow disputes to disappear “into a proverbial black hole,” the agencies asserted, emphasizing that if the district court’s interpretation is affirmed, consumers who submit an indirect dispute that is deemed frivolous by a furnisher may never receive any notice of that determination, and therefore, may never be able to cure any deficiencies or correct erroneous information in their credit reports.
The agencies also challenged whether the exception created by the district court’s ruling is necessary, as the FCRA already provides protections to furnishers from investigating frivolous disputes. Specifically, the statute allows CRAs to determine if a dispute a frivolous before forwarding a dispute to the furnisher. Moreover, furnishers “are not required to conduct an unreasonably onerous investigation into a conclusory or unsubstantiated dispute,” the agencies explained, stating that whether a furnisher has satisfied its obligation to conduct a reasonable investigation is normally a fact-intensive question for trial.
The Bureau noted in an accompanying blog post that it has also filed several other amicus briefs in other pending FCRA cases (previously covered by InfoBytes here) related to consumer reporting obligations.