InfoBytes Blog

CFPB argues structure is constitutional under current precedent

On September 10, the CFPB rejected the arguments made by two Mississippi-based payday loan and check cashing companies (appellants) challenging the constitutionality of the CFPB’s single director structure. The challenge results from a May 2016 complaint filed by the CFPB against the appellants alleging violations of the Consumer Financial Protection Act (CFPA) for practices related to the companies’ check cashing and payday lending services, previously covered by InfoBytes here. The district court denied the companies’ motion for judgment on the pleadings in March 2018, declining the argument that the structure of the CFPB is unconstitutional and that the CFPB’s claims violate due process. The following April, the 5th Circuit agreed to hear an interlocutory appeal on the constitutionality question and subsequently, the appellants filed an unopposed petition requesting for initial hearing en banc, citing to a July decision by the 5th Circuit ruling the FHFA’s single director structure violates Article II of the Constitution (previously covered by InfoBytes here).

In its September response to the appellants’ arguments, which are similar to previous challenges to the Bureau’s structure—specifically that the Bureau is unconstitutional because the president can only remove the director for cause—the Bureau argues that the agency’s structure is consistent with precedent set by the U.S. Supreme Court, which has held that for-cause removal is not an unconstitutional restriction on the president’s authority. The brief also cited to the recent 5th Circuit decision holding the FHFA structure unconstitutional and noted that the court acknowledged the Bureau’s structure as different from FHFA in that it “allows the President more ‘direct[] control.’” The Bureau also argues that the appellants are not entitled to judgment on the pleadings because the Bureau’s complaint— which was filed under the previous Director, Richard Cordray— has been ratified by acting Director, Mick Mulvaney, who is currently removable at will under his Federal Vacancies Reform Act appointment and therefore, any potential constitutional defect in the filing is cured. Additionally, the Bureau argues that even if the single-director structure were deemed unconstitutional, the provision is severable from the rest of the CFPA based on an express severability clause in the Dodd-Frank Act.

Courts Fifth Circuit Appellate Federal Issues CFPB CFPB Succession Dodd-Frank FHFA Single-Director Structure U.S. Supreme Court

8th Circuit holds employee failed to plead injuries in FCRA suit against employer, law firm, and credit reporting agency

On September 6, the U.S. Court of Appeals for the 8th Circuit held that an employee lacked standing to bring claims under the Fair Credit Reporting Act (FCRA) because she failed to sufficiently plead she suffered injuries. An employee brought a lawsuit against her former employer, a law firm, and a credit reporting agency (defendants) alleging various violations of the FCRA after the employee’s credit report that was obtained as part of the hiring process background check was provided to the employee in response to her records request in a wrongful termination lawsuit she had filed. The district court dismissed the claims against the employer and the law firm and granted judgment on the pleadings for the credit reporting agency. Upon appeal, the 8th Circuit, citing the Supreme Court’s 2016 ruling in Spokeo, Inc. v. Robins (covered by a Buckley Sandler Special Alert), concluded the former employee lacked Article III standing to bring the claims. The court found that the former employee authorized her employer to obtain the credit report and failed to allege the report was used for unauthorized purposes, therefore there was no intangible injury to her privacy. Additionally, the court determined that the injuries to her “reputational harm, compromised security, and lost time” were “‘naked assertion[s]’ of reputational harm, ‘devoid of further factual enhancement.’” As for claims against the law firm and credit reporting agency, the court found that the injury was too speculative as to the alleged failures to take reasonable measures to dispose of her information. Further, whether the credit reporting agency met all of its statutory obligations to ensure the report was for a permissible purpose was irrelevant, as she suffered no injury because she provided the employer with consent to obtain her credit report.

Courts FCRA Eighth Circuit Appellate Spokeo Credit Reporting Agency Standing

Texas bank petitions Supreme Court over CFPB constitutionality

On September 6, a Texas bank and two associations (petitioners) filed a petition for writ of certiorari with the U.S. Supreme Court challenging the constitutionality of the CFPB’s structure. Specifically, the petition asks the Court (i) whether the CFPB as an independent agency headed by a single director that can only be removed from office for cause violates the Constitution’s separation of powers; (ii) whether a 1935 Supreme Court case upholding removal restrictions on members of the FTC should be overturned; and (iii) weather the CFPB’s “perpetual, on-demand funding streams” are permitted under the Appropriations Clause. The petition results from a 2012 lawsuit challenging the constitutionality of several provisions of the Dodd-Frank Act, which resulted in the June decision by the D.C. Circuit to uphold summary judgment against the petitioners. That decision was based on the January 2018 D.C. Circuit en banc decision concluding the CFPB’s single-director structure is constitutional (covered by a Buckley Sandler Special Alert.

Courts U.S. Supreme Court CFPB Writ of Certiorari Dodd-Frank Appellate Single-Director Structure

5th Circuit rejects enforcement of CFPB CID for failing to allege a violation

On September 6, the U.S. Court of Appeals for the 5th Circuit declined to enforce a Civil Investigative Demand (CID) issued by the CFPB against a Texas public records company, after holding the Bureau did not comply with Dodd-Frank when it issued the CID. After initially receiving the CID, the Texas company objected to its Notification of Purpose as inadequate, as it read, “whether consumer reporting agencies, persons using consumer reports, or other persons have engaged or are engaging in unlawful acts and practices in connection with the provision or use of public records information in violation of the Fair Credit Reporting Act . . . or any other federal consumer law.” In response, the Bureau filed a petition in federal court seeking to enforce the CID and the lower court granted the petition, holding that the Notification of Purpose provided fair notice of the violations under investigation as required by the Dodd-Frank Act. The 5th Circuit disagreed, however, finding that the CID did not identify an alleged violation. The court noted that the CID only made references to the FCRA, a “broad provision of law that the CFPB has authority to enforce,” and “any other federal consumer financial law,” which subsequently “defeats any specificity provided by the reference to the FCRA.” The court emphasized that it could not review the CID under the “reasonable relevance” standard, because the CID failed to identify the conduct under investigation and concluded that the Bureau does not have “unfettered authority to cast about for potential wrongdoing.”

Courts CFPB CIDs Fifth Circuit Appellate Dodd-Frank FCRA

8th Circuit: Bank that discharged employees as a “business necessity” did not violate Section 19 of the FDI Act

On August 29, the U.S. Court of Appeals for the 8th Circuit affirmed a lower court’s order granting summary judgment in favor of a national bank, holding that the bank did not violate the Federal Deposit Insurance Act’s Section 19 employment ban when it discharged African-American and Latino employees who previously had been convicted of crimes involving dishonesty. Under Section 19, individuals who have been convicted of a crime “involving dishonesty or a breach of trust” cannot be employed by a financial institution covered by federal deposit insurance. A bank that violates the ban is subject to criminal penalties, although an individual may request a waiver from the FDIC. According to the order, the bank screened all home mortgage division employees in 2012 and discharged anyone who was found to have a conviction without providing the option to apply for a waiver. The class members—who brought discrimination claims based on a disparate impact theory—complained that the bank’s automatic discharge of all affected employees impacted African Americans and Latinos at a higher rate than white employees, and contended that the bank could have prevented this result with an alternative such as giving employees “advance notice of the need for a Section 19 discharge, granting leave time to seek a waiver, and/or sponsoring a waiver.” The appellate court relied on data showing that approximately half of waiver applications are approved by the FDIC, and class members presented no data to show that sponsored waivers would ameliorate any racial disparity. In addition, the appellate court held that the bank’s decision to comply with the statute was a business necessity in light of the possibility of a $1 million-per-day fine “even if [the bank’s] policy of summarily terminating or not hiring any Section 19 disqualified individual creates a disparate impact.” Moreover, the appellate court stated that the class members “failed to establish a prima facie case of disparate impact,” and did not present a less discriminatory alternative that would serve the bank’s interests in compliance with the statute.

Courts Appellate Eighth Circuit FDI Act Disparate Impact

8th Circuit holds a garnishment notice sent after receiving a “cease” letter does not violate the FDCPA

On August 27, the U.S. Court of Appeals for the 8th Circuit affirmed summary judgment for a law firm, holding that a garnishment notice sent after a consumer requested the company cease communication did not violate the Fair Debt Collection Practices Act (FDCPA). The court held that sending a notice of garnishment was permissible because a “creditor may communicate with a debtor after receiving a cease letter to notify the consumer that the debt collector or creditor may invoke specified remedies which are ordinarily invoked by such debt collector or creditor.”  The court further held that the notice’s inclusion of a contact phone number did not “transform” the notice into a communication regarding the debt because, while the notice was a “communication regarding the debt in a general sense . . . it still fits within the remedy exception” and it would have been “odd” for the notice not to provide contact information.  The court also rejected the claim that the law firm violated the FDCPA by discussing possible resolution of the debt in a subsequent phone call initiated by the consumer, noting that the consumer had asked about the debt, and agreeing with the district court that the phone call was “an unsubtle and ultimately unsuccessful attempt to provoke [the law firm] into committing an FDCPA violation.”  The court added that prohibiting debt collectors from responding to a consumer’s inquiries after a cease letter would often force debt collectors to file suit in order to resolve debts, which is “clearly at odds with the language and purpose of the FDCPA.” 

Finally, the court rejected the argument that the garnishment notice deceived consumers into contacting the law firm to discuss the legal aspects of the garnishment process, when in fact they would be subjected to debt collection efforts.  Applying the unsophisticated consumer standard, the court held that the garnishment notice was not deceptive because it did not state that phone calls would be answered by attorneys prepared to answer questions solely about garnishment, and the consumer’s belief to the contrary was “the exact sort of peculiar interpretation against which debt collectors are protected by the objective element of the unsophisticated consumer standard.”

Courts Appellate Eighth Circuit Debt Collection

1st Circuit holds homeowners who defaulted on an allegedly unlicensed mortgage loan cannot escape time bars for their claims

On August 23, the U.S. Court of Appeals for the 1st Circuit held that homeowners who defaulted on a refinance loan on their Massachusetts property could not void the transaction or enjoin their property’s foreclosure sale. The appellate court determined that the homeowners’ claims that the lender violated the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act, the Truth in Lending Act, and the Massachusetts consumer protection statute were all time-barred. The homeowners argued that the statute of limitations never began to run because the lender was not licensed to lend money in the state, making the original note and mortgage “akin to forgeries and thus ‘void ab initio,’” but the court held that there was “no authority for this unusual proposition.” The court also refused to toll the limitations period under the doctrine of fraudulent concealment, which requires the plaintiff “to make a threshold showing of due diligence,” because the homeowners filed their claims more than five years after they retained counsel and ten years after they granted the mortgage at issue.

Courts Appellate First Circuit Mortgages Licensing FDCPA RESPA TILA

8th Circuit rules Fannie Mae, Freddie Mac net worth sweep payments acceptable under FHFA statutory authority

On August 23, the U.S. Court of Appeals for the 8th Circuit affirmed a lower court’s dismissal of claims brought by shareholders of Fannie Mae and Freddie Mac (GSEs) against the GSEs’ conservator, the Federal Housing Finance Agency (FHFA), alleging that FHFA exceeded its powers under the Housing and Economic Recovery Act (HERA) and “acted arbitrarily and capriciously” when it entered an agreement with the Treasury Department requiring the GSEs to pay their entire net worth, minus a small buffer, as dividends to the Treasury every quarter.  In so holding, the 8th Circuit joined the 5th, 6th, 7th, and D.C. Circuits, each of which has previously “rejected materially identical arguments” presented by other GSE shareholders. (See previous InfoBytes coverage on the 5th Circuit decision here.) The shareholders sought an injunction to set aside the so-called “net worth sweep,” asserting that “HERA’s limitation on judicial review does not apply when FHFA exceeds its statutory powers under the Act . . . [and] that the net worth sweep exceeds, and is antithetical to, FHFA’s statutory powers.” However, the appellate court agreed with the lower court and found, among other things, the net worth sweep payments to be acceptable because HERA “grant[s] FHFA broad discretion in its management and operation of Fannie and Freddie” and permits, but does not require, the agency “to preserve and conserve Fannie’s and Freddie’s assets and to return [them] to private operation.”  The court also noted that HERA “authorize[d] FHFA to act ‘in the best interests’ of either Fannie and Freddie or itself,” thus affording FHFA more discretion than common law conservators.   Finally, the appellate court held that HERA’s anti-injunction provision, which states that “no court may take any action to restrain or affect the exercise of powers or functions of the [FHFA] as a conservator or a receiver,” also precludes enjoining the Treasury Department from participating in the net worth sweep because doing so would “restrain or affect” FHFA.

Courts Appellate Eighth Circuit GSE Fannie Mae Freddie Mac FHFA Single-Director Structure

Appellants petition 5th Circuit for en banc hearing of CFPB constitutionality challenge

On August 13, two Mississippi-based payday loan and check cashing companies (appellants) filed an unopposed petition for initial hearing en banc with the U.S. Court of Appeals for the 5th Circuit regarding a challenge to the constitutionality of the CFPB’s single director structure. In April, the 5th Circuit agreed to hear the appellant’s interlocutory appeal, and now the appellants request the appeals court move straight to an en banc panel, stating “if [the] appeal is heard under the normal panel process, [the] Court will likely be asked to rehear that panel’s decision en banc, as occurred in the D.C. Circuit’s PHH case.” (covered by a Buckley Sandler Special Alert here.) The appellants cite to the July decision by the 5th Circuit ruling the FHFA’s single director structure violates Article II of the Constitution (previously covered by InfoBytes here) and note that a petition for rehearing en banc has already been filed in that case. The appellants suggest coordination in scheduling the potential en banc arguments should the court accept both petitions, arguing that the decision would “guarantee that the Fifth Circuit speaks with one voice regarding the constitutionality of these agencies’ structures.”

Courts Fifth Circuit Appellate Federal Issues CFPB PHH v. CFPB CFPB Succession Dodd-Frank FHFA Single-Director Structure

National bank petitions for cert in 9th Circuit preemption decision

On August 14, a national bank filed a petition for writ of certiorari with the U.S. Supreme Court requesting review of the U.S. Court of Appeals for the 9th Circuit’s March decision, which held that a California law that requires the bank to pay interest on mortgage escrow funds is not preempted by federal law. As previously covered by InfoBytes, the 9th Circuit held that the Dodd-Frank Act of 2011 essentially codified the existing National Bank Act preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson. In May, a panel of three judges on the U.S. Court of Appeals for the 9th Circuit denied the petition for an en banc rehearing. In its petition, the bank argues that the appeals court decision warrants further review “because it creates significant uncertainty about whether national banks must comply with similar laws in other states” and whether other state banking laws also apply to national banks. The petition argues the uncertainty is exacerbated by the fact that the appellate court “disregarded and refused to enforce longstanding OCC regulations.” The bank contends that the 9th circuit interpreted the decision in Barnett incorrectly, and when a state law limits “a national bank’s federal authority to set the terms for their products and services, it is preempted by the National Bank Act.”

Courts U.S. Supreme Court Writ of Certiorari Ninth Circuit Appellate Escrow Mortgages National Bank Act