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Financial Services Law Insights and Observations


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  • Another appellate court holds that a debt buyer qualifies as a debt collector under the FDCPA


    On March 9, the U.S. Court of Appeals for the Ninth Circuit held that an entity that purchases consumer debts, but outsources the collection activity to a third party still qualifies as a debt collector under the FDCPA. According to the opinion, the plaintiff sued the debt buyer (defendant) claiming it was “vicariously and jointly liable” for alleged FDCPA violations by the third party collector. The district court granted the defendant’s motion to dismiss, ruling that the plaintiff failed to state a claim because debt purchasing companies like the defendant “who have no interactions with debtors and merely contract with third parties to collect on the debts they have purchased simply do not have the principal purpose of collecting debts.” The district court reasoned that Congress intended the FDCPA to apply only to those who directly interact with customers, based on the court’s interpretation of the language used in the substantive provisions of the law.

    On appeal, the 9th Circuit reversed the dismissal, determining that the FDCPA does not solely regulate entities that directly interact with consumers. As applied to the defendant, the court found that the purpose of the FDCPA would be “entirely circumvented” if the law’s restrictions did not apply to companies like the defendant. Accordingly, the appellate court concluded that an entity that otherwise meets the “principal purpose” definition of debt collector—“any business the principal purpose of which is the collection of any debts”—cannot avoid liability under the FDCPA merely by hiring a third party to perform debt collection activities on its behalf. The appellate court stressed that Congress’s intent in enacting the FDCPA was to eliminate abusive, deceptive, and unfair collection practices, and that its interpretation of the principal purpose prong of the debt collector definition furthers the FDCPA’s purpose. The 9th Circuit joined the 3rd Circuit, which issued an order last year (covered by InfoBytes here) concluding that “[a]s long as a business’s raison d’etre is obtaining payment on the debts that it acquires, it is a debt collector. Who actually obtains the payment or how they do so is of no moment.”

    Courts Appellate Ninth Circuit Debt Buyer FDCPA Debt Collection

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  • 5th Circuit: Non-party plaintiff cannot bring action to enforce violation of CFPB consent order


    On March 4, the U.S. Court of Appeals for the Fifth Circuit affirmed summary judgment in favor of a debt collector (defendant) accused of violating the FDCPA and the terms of a CFPB consent order. According to the opinion, the defendant attempted to collect a credit card debt from the plaintiff that the plaintiff did not recognize. In December 2014, the defendant filed suit to collect the past due debt. In the meantime, the CFPB issued a consent order against the defendant for violations of the FDCPA (covered by InfoBytes here) while the parties awaited trial. Thereafter, the plaintiff filed a complaint with the CFPB regarding the validity of the debt, but the Bureau closed that complaint after verifying the defendant’s ownership of the plaintiff’s debt. The plaintiff responded by filing his own lawsuit in March 2017, claiming the defendant violated the FDCPA by (i) “lacking validation of his debt prior to his January 2016 trial”; (ii) failing to timely validate his debt in violation of provisions of its consent order with the CFPB; and (iii) “misrepresenting that it intended to prove ownership of his debt if contested.” The district court granted summary judgment for the defendant based on the plaintiff’s failure to prove actual damages.

    On appeal, the appellate court determined that the district court erred in ruling that the plaintiff failed to plead actual damages, finding that “the FDCPA does not require proof of actual damages to ground statutory damages.” However, the appellate court did not reverse the district court’s decision. Instead, the appellate court affirmed, holding that the plaintiff’s debt validation claims were time-barred because he did not file suit within the FDCPA’s one-year statute of limitations. Regarding the other two claims, the appellate court stated that while the claims were not time-barred, the plaintiff lacked standing because “private persons may not bring actions to enforce violations of consent decrees to which they are not a party.” The CFPB’s consent order with the defendant specified that the CFPB was the enforcer of the order, and its text could not be read to invoke a private right of action permitting the plaintiff’s suit. Accordingly, the appellate court affirmed summary judgment against the plaintiff on these remaining two claims.

    Courts Appellate Fifth Circuit Debt Collection FDCPA CFPB Consent Order Statute of Limitations Time-Barred Debt

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  • 5th Circuit: CFPB structure is constitutional


    On March 3, the same day the U.S. Supreme Court heard oral arguments in Seila Law LLC v. CFPB (covered by InfoBytes here), a divided U.S. Court of Appeals for the Fifth Circuit 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. As previously covered by InfoBytes, the CFPB filed a complaint against two Mississippi-based payday loan and check cashing companies for allegedly violating the Consumer Financial Protection Act’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 structure of the CFPB is unconstitutional and that the CFPB’s claims violate due process. The 5th Circuit agreed to hear an interlocutory appeal on the constitutionality question, and subsequently, the payday lenders filed an unchallenged petition requesting an initial hearing en banc. (Covered by InfoBytes here.)

    On appeal, the majority upheld the district court’s decision that the Bureau is not unconstitutional based on its single-director structure. “The payday lenders argue that the structure of the CFPB denies the Executive Branch its due because the Bureau is led by a single director removable by the President only for cause,” the majority wrote. “We find no support for this argument in constitutional text or in Supreme Court decisions and uphold the constitutionality of the CFPB’s structure, as did the D.C. and Ninth [C]ircuits.” The majority compared the case to the D.C. Circuit’s en banc decision in PHH v. CFPB (covered by a Buckley Special Alert) and the 9th Circuit’s decision in CFPB v. Seila Law LLC (covered by InfoBytes here), both of which upheld the Bureau’s structure. The majority also distinguished a 2018 ruling from the 5th Circuit sitting en banc, which held the FHFA’s single-director structure unconstitutional (covered by InfoBytes here). This provoked a strong dissent charging that the majority had “suddenly discover[ed] that stare decisis is for suckers.”

    Courts U.S. Supreme Court CFPB Single-Director Structure Seila Law Appellate Fifth Circuit

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  • 7th Circuit rejects request to void $17.5 million TCPA settlement


    On February 25, the U.S. Court of Appeals for the Seventh Circuit denied a request to overturn a $17.5 million settlement agreement arising out of a national bank’s alleged violations of the TCPA. Six different class actions had been filed against the bank in different federal courts, all alleging that the bank had violated the TCPA by making robocalls and autodialed calls and sending text messages to the class members even though they were not customers of the bank. The settlement resolved all six cases, involving roughly 440,000 total class members. An individual claiming to be a class member sought to object to the settlement, but the district court found that he lacked standing to object because he could not show that he had received a call or text, and the bank’s records indicated that he had not, and therefore he was not a member of the class.

    Upon appeal, the 7th Circuit affirmed the lower court’s determination that the objector was not a class member in a brief, unsigned order. The panel corrected the objector’s misrepresentation of the lower court’s ruling that the objector’s own testimony could not prove that he was a class member, stating that “[t]he problem here is that [the objector’s] account was so vague—no dates, no subject matter, and not even whether the calls were ‘artificial or pre-recorded’”—that the court reasonably discounted it in comparison to the evidence from [the bank] that [the objector] never received one of the disputed types of calls.”

    Courts Federal Issues Appellate Seventh Circuit TCPA Settlement

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  • Supreme Court vacates as moot 11th Circuit’s FHA decision


    On March 2, the U.S. Supreme Court vacated as moot a 2019 judgment of the U.S. Court of Appeals for the Eleventh Circuit, which had held that the City of Miami plausibly alleged that two national banks’ lending practices violated the Fair Housing Act (FHA) and led to defaults, foreclosures, and vacancies, eventually reducing property values and corresponding property tax revenues. (Covered by InfoBytes here.) This follows the City’s voluntarily dismissal in January of fair housing lawsuits brought against four national banks (covered by InfoBytes here).

    The Supreme Court first addressed the underlying case in 2017, holding that municipal plaintiffs may be “aggrieved persons” authorized to bring suit under the FHA against lenders for injuries allegedly flowing from discriminatory lending practices. (Covered by a Buckley Special Alert.) However, the Court held that such injuries must be proximately caused by, rather than simply the foreseeable result of, the alleged misconduct. On remand, the 11th Circuit found “a logical and direct bond between discriminatory lending as a pattern and practice applied to neighborhoods throughout the City and the reduction in property values,” but also noted that the City’s allegations fell short of establishing a direct relationship between the alleged misconduct and the City’s purported increase in its municipal services expenditures. The banks subsequently filed petitions (see here and here) last November, asking the Supreme Court to review “[w]hether proximate cause in private litigation about the [FHA] requires more than a ‘logical bond’ between the alleged statutory violation and the plaintiff’s injury.”

    Courts Appellate Eleventh Circuit U.S. Supreme Court FHA Fair Lending

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  • 9th Circuit reduces punitive damages in FCRA class action


    On February 27, the U.S. Court of Appeals for the Ninth Circuit reduced punitive damages in a class action against a credit reporting agency (CRA) for allegedly violating the Fair Credit Reporting Act (FCRA) by erroneously linking class members to criminals and terrorists with similar names in a database maintained by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC). At trial, the jury found that the CRA violated the FCRA by willfully failing to (i) “follow reasonable procedures to assure accuracy of the terrorist alerts”; (ii) “disclose to the class members their entire credit reports by excluding the alerts from the reports”; and (iii) “provide a summary of rights” to class members with each disclosure. Subsequently, the jury awarded $8 million in statutory damages and $52 million in punitive damages to the class.

    Upon appeal, the 9th Circuit affirmed the lower court’s determinations that all class members—not just the class representative—must have “standing at the final stage of a money damages suit when class members are to be awarded individual monetary damages.” But the appellate court found that all class members did have standing due to, among other things, the CRA’s “reckless handling of information from OFAC,” which subjected class members to “a real risk of harm,” and because “the violation of a statutory right constituted a concrete injury.” In addition, the appellate court rejected the CRA’s request for judgment as a matter of law or a new trial on the basis that the class had failed to provide sufficient evidence of injuries or to support the damages award. Moreover, the appellate court held that the district court did not abuse its discretion in finding that the class representative’s claims were typical of the class’s claims, nor in certifying the class or denying the CRA’s motion to decertify the class. The appellate court also agreed with the lower court on statutory damages, but it held that the $52 million punitive damages award was “unconstitutionally excessive.” The appellate court explained that although the CRA’s “conduct was reprehensible, it was not so egregious as to justify a punitive award of more than six times an already substantial compensatory award.” Accordingly, the appellate court vacated the jury’s award of punitive damages and remanded, directing that the punitive damages be reduced to four times the statutory damages award.

    Courts FCRA Credit Reporting Agency Credit Report Class Action Punitive Damages OFAC Appellate Ninth Circuit

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  • 6th Circuit: Rooker-Feldman doctrine does not apply to state court writs of garnishment


    On February 26, the U.S. Court of Appeals for the Sixth Circuit reversed a district court’s decision dismissing a group of borrowers’ claims against a number of creditors and their law firms (defendants) for allegedly violating the FDCPA by charging an improper amount of post-judgment interest when trying to recover unpaid debt. According to the opinion, the consumers defaulted on their credit accounts and were sued by the defendants for unpaid debts. Judgments were awarded against the plaintiffs in Michigan state court, and the law firms representing the financial institutions obtained writs of garnishment against the plaintiffs. The plaintiffs filed a lawsuit in federal district court contending that the defendants allegedly applied an “impermissibly high interest rate” of 13 percent to the debt in violation of the FDCPA and state law. The district court dismissed the action on the grounds that it lacked subject matter jurisdiction based on the Rooker-Feldman doctrine.

    On appeal, the 6th Circuit discussed the applicability of the Rooker-Feldman doctrine, which prohibits lower federal courts from reviewing state court civil judgments. The 6th Circuit concluded that the doctrine applies only when a state court renders a judgment, and not to “‘ministerial’ actions by court clerks.” In this case, the writs of garnishment were not state-court judgments that the debtors sought to have reviewed in federal court, but were rather “the result of a ‘ministerial process’. . . in which the clerk of the court has a nondiscretionary obligation to issue the writ if the request ‘appears to be correct.’” Moreover, even if the writs of garnishment were state court judgments, the plaintiffs’ alleged injuries did not stem from the writs of garnishment themselves, but rather from the post-judgment interest rate the defendants improperly included in the calculation of costs.

    Courts Appellate Sixth Circuit FDCPA Rooker-Feldman Debt Collection State Issues

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  • 7th Circuit: Dialing system that cannot generate random or sequential numbers is not an autodialer under the TCPA


    On February 19, the U.S. Court of Appeals for the Seventh Circuit affirmed a district court’s ruling that a dialing system that lacks the capacity to generate random or sequential numbers does not meet the definition of an automatic telephone dialing system (autodialer) under the TCPA. According to the 7th Circuit, an autodialer must both store and produce phone numbers “using a random or sequential number generator.” The decision results from a lawsuit filed by a consumer alleging a company sent text messages without first receiving his prior consent as required by the TCPA. However, according to the 7th Circuit, the company’s system—the autodialer in this case—failed to meet the TCPA’s statutory definition of an autodialer because it “exclusively dials numbers stored in a customer database” and not numbers obtained from a number generator. As such, the company did not violate the TCPA when it sent unwanted text messages to the consumer, the appellate court wrote.

    Though the appellate court admitted that the wording of the provision “is enough to make a grammarian throw down her pen” as there are at least four possible ways to read the definition of an autodialer in the TCPA, the court concluded that while its adopted interpretation—that “using a random or sequential number generator” describes how the numbers are “stored” or “produced”—is “admittedly imperfect,” it “lacks the more significant problems” of other interpretations and is thus the “best reading of a thorny statutory provision.”

    The 7th Circuit’s opinion is consistent with similar holdings by the 11th and 3rd Circuits (covered by InfoBytes here and here), which have held that autodialers require the use of randomly or sequentially generated phone numbers, as well as the D.C. Circuit’s holding in ACA International v. FCC, which struck down the FCC’s definition of an autodialer (covered by a Buckley Special Alert here). However, these opinions conflict with the 9th Circuit’s holding in Marks v. Crunch San Diego, LLC, (covered by InfoBytes here), which broadened the definition of an autodialer to cover all devices with the capacity to automatically dial numbers that are stored in a list.

    Courts Appellate Seventh Circuit Eleventh Circuit Third Circuit D.C. Circuit TCPA Autodialer ACA International

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  • U.S. Solicitor General: Supreme Court can decide on severability clause without deciding CFPB's future


    On February 14, U.S. Solicitor General Noel J. Francisco filed a reply brief for the CFPB in Seila Law LLC v. CFPB, arguing that the U.S. Supreme Court could decide whether the CFPB’s single-director structure violates the Constitution’s separation of powers under Article II without deciding whether the Bureau as a whole should survive. “Although the removal restriction is unconstitutional, Congress has expressly provided that the rest of the Dodd-Frank Act shall be unaffected,” Francisco said, replying in part to arguments made by Paul D. Clement, the lawyer selected by the Court to defend the leadership structure of the Bureau. As previously covered by InfoBytes, Clement argued, among other things, 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.” Clement also contended 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.” According to Francisco, Seila Law’s arguments for invalidating the entirety of Title X of Dodd-Frank “are insufficient to overcome the severability clause’s plain text,” and its “arguments for ignoring the severability questions altogether are both procedurally and substantively wrong.” Francisco further emphasized that “refusing to apply the severability provision . . .would be severely disruptive” because the Bureau is the only federal agency dedicated solely to consumer financial protection.

    Seila Law also filed a reply brief the same day, countering that Clement offered “no valid justification” for the Court to rule on the severability question separately, and arguing that a “civil investigative demand issued and enforced by an unaccountable director is void, and the only appropriate resolution is to order the denial of the CFPB’s petition for enforcement.” Seila Law further contended that the Court should reverse 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 obligation to comply with a 2017 civil investigative demand—and “leave to Congress the quintessentially legislative decision of how the CFPB should function going forward.”

    Notably, Francisco disagreed with Seila Law’s argument that the 9th Circuit’s judgment should be reversed outright, stating that to do so “would deprive the Bureau of ratification arguments” that the 9th Circuit chose not to address by instead upholding the removal restriction’s constitutionality. The Bureau’s ratification arguments at the time, Francisco stated, contended that even if the removal restriction was found to be unconstitutional, “the CID could still be enforced because the Bureau’s former Acting Director—who was removable at will—had ratified it.” As such, Francisco recommended that the Court “confirm that the severability clause means what it says and remand the case to the [9th Circuit] to resolve any remaining case-specific ratification questions.”

    The same day, the Court approved Seila Law’s motion for enlargement of time for oral argument and for divided argument. The time will be divided as follows: 20 minutes for Seila Law, 20 minutes for the solicitor general, 20 minutes for the court-appointed amicus curiae, and 10 minutes for the House of Representatives.

    Find continuing InfoBytes coverage on Seila here.

    Courts U.S. Supreme Court CFPB Single-Director Structure Seila Law Dodd-Frank CIDs Appellate Ninth Circuit

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  • 11th Circuit: Guaranty agency collecting nonexistent DOE loans is not a debt collector


    On February 7, the U.S. Court of Appeals for the Eleventh Circuit issued a split opinion holding that a student loan guaranty agency that mistakenly attempted to collect nonexistent student loans cannot be sued under the FDCPA because, as a guaranty agency operating on behalf of the Department of Education (Department), it does not qualify as a “debt collector” under the Act. According to the opinion, the plaintiff alleged that during a scheduled deferment period, the agency notified the plaintiff that it had paid a default claim on the loans and demanded full repayment. The plaintiff alleged that she called to dispute the demand and was told the agency had no record of her debt. Subsequently, the agency ordered the plaintiff’s employer to garnish her wages, and the plaintiff filed a complaint alleging, among other things, that the defendant violated the FDCPA by making false or misleading representations and failing to validate the debt. The plaintiff also alleged that the defendant engaged in fraudulent business practices. The district court granted summary judgment in favor of the defendant, ruling that the defendant was not a debt collector subject to the FDCPA because it was acting “incidental to a bona fide fiduciary obligation” to the Department. While the plaintiff conceded that a guaranty agency’s actions are incidental to a fiduciary obligation when it attempts to collect valid defaulted student loans, she argued that the exemption does not apply when the guaranty agency attempts to collect debts that do not exist.

    On appeal, the majority agreed with the district court, holding that determining whether the defendant was a debt collector subject to the FDCPA did not depend on the validity of the claimed debt. The majority held that as long as the defendant was acting in good faith, its collection efforts would be incidental to its fiduciary obligation to the Department and exempted from the definition of “debt collector.” Specifically, the majority referenced language from the FDCPA establishing that the fiduciary obligation exemption applies when an agency attempts to collect a debt that is “owed or due or asserted to be owed or due another,” holding that such language must apply to efforts to collect debts that do not exist or that phrase would have no meaning. According to the majority, “Congress easily could have written the [FDCPA] to impose liability on persons who attempt to collection nonexistent debts pursuant to a fiduciary obligation,” but Congress chose not to.

    Courts Appellate Eleventh Circuit Debt Collection Student Lending Department of Education FDCPA

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