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States file brief in support of Biden’s student loan debt-relief program
On January 11, a coalition of 22 state attorneys general from Massachusetts, California, Colorado, Connecticut, Delaware, the District Of Columbia, Hawaii, Illinois, Maryland, Michigan, Minnesota, Nevada, New Jersey, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Washington, and Wisconsin, filed an amicus brief with the U.S. Supreme Court in two pending actions concerning challenges to the Department of Education’s student loan debt relief program. At the beginning of December, the Supreme Court agreed to hear the Biden administration’s appeal of an injunction entered by the U.S. Court of Appeals for the Eighth Circuit that temporarily prohibits the Secretary of Education from discharging any federal loans under the agency’s student debt relief plan (covered by InfoBytes here). In a brief unsigned order, the Supreme Court deferred the Biden administration’s application to vacate, pending oral argument. Shortly after, the Supreme Court also granted a petition for certiorari in a challenge currently pending before the U.S. Court of Appeals for the Fifth Circuit, announcing it will consider whether the respondents (individuals whose loans are ineligible for debt forgiveness under the plan) have Article III standing to bring the challenge, as well as whether the Department of Education’s debt relief plan is “statutorily authorized” and “adopted in a procedurally proper manner” (covered by InfoBytes here). Oral arguments in both cases are scheduled for February 28.
The states first pointed out that under the Higher Education Act, Congress gave the Secretary “broad authority both to determine borrowers’ loan repayment obligations and to modify or discharge these obligations in myriad circumstances.” The Secretary was also later granted statutory authority under the HEROES Act to take action in times of national emergency, which includes allowing “the Secretary to ‘waive or modify any statutory or regulatory provision applicable to the student financial assistance programs’ if the Secretary ‘deems’ such actions ‘necessary’ to ensure that borrowers affected by a national emergency ‘are not placed in a worse position financially’ with respect to their student loans.” The states stressed that while “the magnitude of the national emergency necessitating this relief is unprecedented, the relief offered to borrowers falls squarely within the authority Congress gave the Secretary to address such emergencies and is similar in kind to relief granted pursuant to other important federal student loan policies that have concomitantly advanced our state interests.”
The states went on to explain that the Secretary tailored the limited debt relief using income thresholds to ensure that “the borrowers at greatest risk of pandemic-related defaults receive critical relief, either by eliminating their loan obligations or reducing them to a more manageable level,” thus meeting the express goal of the HEROES Act to “prevent[] affected borrowers from being placed in a worse position because of a national emergency.” The states also stressed that the Secretary reasonably concluded that targeted relief is necessary to address the impending rise in pandemic-related defaults once repayment restarts. The HEROES Act expressly permits the Secretary to “exercise his modification and waiver authority ‘notwithstanding any other provision of law, unless enacted with specific reference to [20 U.S.C. § 1098bb(a)(1)],” the states asserted, noting that “relevant statutory and regulatory provisions related to student loan repayment and cancellation contain no such express limiting language.”
Secretary Miguel Cardona issued the following statement in response to the filing of more than a dozen amicus curiae briefs: “The broad array of organizations and experts—representing diverse communities and different perspectives—supporting our case before the Supreme Court today reflects the strength of our legal positions versus the fundamentally flawed lawsuits aimed at denying millions of working and middle-class borrowers debt relief.” A summary of the briefs can be accessed here.
3rd Circuit: Now-invalid default judgment still in effect when debt collection attempts were made
On January 11, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s decision to grant summary judgment in favor of defendants accused of violating the FDCPA when attempting to collect on a judgment that was later vacated. According to the opinion, the plaintiff was sued in state court for an unpaid debt. Contradictory orders were entered by the Superior Court, one which dismissed the action due to one of the defendant’s failure to attend trial, and another that entered default judgment against the plaintiff (which was confirmed two years later by the state court).
A few years later, an attempt was made to collect on the debt. The plaintiff disputed the debt and later sued, claiming the defendants “knew or should have known” that the debt was unenforceable. The plaintiff later filed a motion in state court to vacate the default judgment and declare it “void ab initio,” which was eventually granted by the state court after it determined that the judgment was erroneously entered by the clerk after the court had already dismissed the case due to the debt collector’s failure to appear for trial. The plaintiff filed a cross-motion for summary judgment in the district court.
The district court, however, found that the defendants’ alleged efforts to collect the debt were not false or misleading because the now-invalid default judgment at issue was technically still valid and existed when the collection attempts were made. The plaintiff appealed, arguing that the summary judgment violated the Rooker-Feldman doctrine because the district court “‘could not have reached the decision that it did without necessarily supplanting’ the Superior Court’s order vacating the judgment against her.” The plaintiff also argued that the district court erred when it found the Superior Court judgment against the plaintiff to be “in effect . . . until such time as it was vacated, . . . rather than ‘per se not valid’” when the defendants engaged in their efforts to collect the debt.
On appeal, the 3rd Circuit disagreed with the plaintiff’s assertions. According to the appellate court, the plaintiff satisfied none of the four requirements to trigger the Rooker-Feldman doctrine, adding that regardless of whether the state court declared the judgment “void ab initio,” it was in effect when the defendant attempted to collect on the debt. Moreover, the appellate court noted that the plaintiff “failed to present a triable issue that any communication from Defendants to [the plaintiff] regarding the collection of the default judgment was made unlawful retroactively upon the Superior Court vacating its default judgment order.”
CFPB says EFTA applies to pandemic assistance prepaid cards
On January 10, the CFPB filed an amicus brief in a case before the U.S. Court of Appeals for the Fourth Circuit concerning the scope of accounts covered under EFTA and Regulation E. (See also CFPB blog post here.) As previously covered by InfoBytes, last August the U.S. District Court for the District of Maryland dismissed a putative class action alleging violations of EFTA and state privacy and consumer protection laws brought against the national bank on behalf of consumers who were issued prepaid debit cards providing pandemic unemployment benefits. The named plaintiff alleged that he lost nearly $15,000 when an unauthorized user fraudulently used a prepaid debit card containing Pandemic Unemployment Assistance (PUA) funds that were intended for him. However, the district court dismissed the class claims with respect to EFTA and Regulation E, finding that the PUA payments were “qualified disaster relief payments” and, as such, they were excluded from Regulation E’s definition of a “prepaid account.”
The Bureau disagreed. In its amicus brief, it argued that a prepaid debit card loaded with PUA funds is a “government benefit account” subject to EFTA and Regulation E and their error resolution requirements, which apply to alleged unauthorized transfers such as the one at issue in the case. Writing that the district court erred by applying “a regulatory exclusion to hold that prepaid accounts loaded with pandemic unemployment benefits were excluded from coverage,” the Bureau claimed that the holding is not supported by statutory and regulatory text and “undermines the primary purpose of EFTA to provide individual rights to consumers.” According to the Bureau, a “prepaid account” under Regulation E includes specific categories of accounts, including a “government benefit account,” which is not subject to the prepaid account exclusions.
9th Circuit reverses decision in COPPA suit
In December, the U.S. Court of Appeals for the Ninth Circuit reversed and remanded a district court’s decision to dismiss a suit alleging that a multinational technology company used persistent identifiers to collect children’s data and track their online behavior surreptitiously and without their consent in violation of the Children’s Online Privacy Protection Act (COPPA). According to the opinion, the company used targeted advertising “aided by sophisticated technology that delivers curated, customized advertising based on information about specific users.” The opinion further explained that “the company’s technology ‘depends partly on what [FTC] regulations call ‘persistent identifiers,’ which is information ‘that can be used to recognize a user over time and across different Web sites or online services.’” The opinion also noted that in 2013, the FTC adopted regulations under COPPA that barred the collection of children’s “persistent identifiers” without parental consent. The plaintiff class claimed that the company used persistent identifiers to collect data and track their online behavior surreptitiously and without their consent, and alleged state law claims arising under the constitutional, statutory, and common law of California, Colorado, Indiana, Massachusetts, New Jersey, and Tennessee, in addition to COPPA violations. The district court ruled that the “core allegations” in the third amended complaint were squarely covered, and preempted, by COPPA.
On appeal, the 9th Circuit considered whether COPPA preempts state law claims based on underlying conduct that also violates COPPA’s regulations. To determine this, the appellate court examined the language of COPPA’s preemption clause, which states that state and local governments cannot impose liability for interstate commercial activities that is “inconsistent with the treatment of those activities or actions” under COPPA. The opinion noted that the 9th Circuit has long held “that a state law damages remedy for conduct already proscribed by federal regulations is not preempted,” and that the statutory term “inconsistent” in the preemption context refers to contradictory state law requirements, or to requirements that stand as obstacles to federal objectives. The appellate court stated that it was not “persuaded that the insertion of ‘treatment’ in the preemption clause here evinces clear congressional intent to create an exclusive remedial scheme for enforcement of COPPA requirements.” The opinion noted that because “the bar on ‘inconsistent’ state laws implicitly preserves ‘consistent’ state substantive laws, it would be nonsensical to assume Congress intended to simultaneously preclude all state remedies for violations of those laws.” As such, the appellate court held that “COPPA’s preemption clause does not bar state-law causes of action that are parallel to, or proscribe the same conduct forbidden by, COPPA. Express preemption therefore does not apply to the children’s claims.”
CFPB says ruling on funding structure doesn’t affect debt collector’s CID
In December, the CFPB denied a petition by a debt collection agency to set aside a civil investigative demand (CID) issued last October. The company challenged the Bureau’s authority to issue the CID on the grounds that the agency’s funding mechanism is unconstitutional. The company’s argument relied on a decision issued by the U.S. Court of Appeals for the Fifth Circuit on October 19 (covered by a Buckley Special Alert), which found that the Bureau is unconstitutionally funded and vacated the CFPB’s Payday Lending Rule. The Bureau submitted a petition for a writ of certiorari in November asking the U.S. Supreme Court to review the 5th Circuit decision (covered by InfoBytes here).
The debt collection agency and the CFPB held a “meet and confer” at the end of October, and the company argued that during the meet and confer the parties did not agree on two of the company’s objections: (i) the inadequate Notification of Purpose Pursuant to 12 C.F.R. §1080.5 contained in the CID; and (ii) the Bureau’s unconstitutional funding mechanism. The company filed a petition to set aside the CID, arguing that because the Bureau’s funding mechanism is unconstitutional, the Bureau lacks enforcement authority and the CID should be set aside in its entirety. The company claimed a similar nexus exists between the Bureau’s unconstitutional funding mechanism and the concrete harm suffered by the company. Just as the Payday Lending Rule was vacated by the 5th Circuit and set aside as unenforceable, “but for the Bureau’s unconstitutional spending, the CID would not have been issued,” the company said.
In rejecting the company’s arguments, the Bureau commented that it “has consistently taken the position that the administrative process … for petitioning to modify or set aside a CID is not the proper forum for raising and adjudicating challenges to the constitutionality of the Bureau’s statute.” In declining to set aside the CID on constitutional grounds, the Bureau wrote that should it later determine that it is necessary to obtain a court order compelling compliance with the CID, the company will have an opportunity to raise any constitutional arguments as a defense in district court.
9th Circuit affirms decision in FCRA, CFPA, and TSR suit
In December, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s ruling holding an individual liable for violations of the FCRA, the TSR, and the CFPA after the defendant, who allegedly “played a central role” in the scheme — and other defendants — were sued by the CFPB for allegedly obtaining individuals’ credit reports illegally and charging advance fees for debt relief services. As previously covered by InfoBytes, the CFPB filed a complaint in 2020 claiming 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. However, the Bureau alleged that the defendants instead resold or provided the reports to numerous companies, including companies engaged in marketing student loan debt relief services. The defendants also allegedly violated the TSR by charging and collecting advance fees for their debt relief services and violated both the TSR and CFPA by placing telemarketing sales calls and sending direct mail to encourage consumers to consolidate their loans, while falsely representing that consolidation could lower student loan interest rates, improve borrowers’ credit scores, and allow borrowers to change their servicer to the Department of Education. Settlements have already been reached with certain defendants (covered by InfoBytes here, here, and here). In August 2021, the U.S. District Court for the Central District of California granted the Bureau’s motion for summary judgment against the individual defendant after determining that undisputed evidence showed that the individual defendant, among other things, “obtained and later used prescreened lists from [a consumer reporting agency] without a permissible purpose” in order to send direct mail solicitations from the businesses that he controlled to consumers on the lists as opposed to firm offers of credit or insurance. (Covered by InfoBytes here.)
In September 2021, the district court entered judgment in favor of the Bureau against the individual defendant. While the individual defendant objected to the judgment, the district court ultimately determined that the Bureau is entitled to a judgment for monetary relief of over $19 million as redress for fees paid by affected consumers. This restitution is owed jointly and severally with the student loan debt relief company defendants in the amounts imposed in default judgments entered against each of them (covered by InfoBytes here).
On the appeal, the 9th Circuit cited “undisputed” evidence demonstrating how the individual defendant “violated” the FCRA, TSR, and CFPA. According to the appellate court, the defendant “is individually liable for corporate violations of the CFPA.” The appellate court further noted that the individual defendant “‘participated directly’ in these deceptive practices and ‘had the authority to control them,’” had a “central role” in these practices,” was “‘recklessly indifferent to the truth or falsity of the misrepresentations,’ and did not attempt to verify the truthfulness of statements” regarding the companies he controlled.
2nd Circuit affirms dismissal in FCRA suit
On January 4, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s decision to grant summary judgment for a credit reporting agency (defendant) in a suit alleging FCRA violations. According to the opinion, four years after the plaintiff took out a student loan, he filed for bankruptcy protection. The bankruptcy court issued a final decree of discharge, which released the plaintiff from all “dischargeable debts,” but did not specifically indicate that the loan was discharged. The student loan servicer indicated that the student loan was not discharged, and the plaintiff executed a loan modification agreement with the loan holder and made payments for several years. The plaintiff filed suit against the defendant consumer reporting agency, alleging that it violated the FCRA and New York law for including the loan on his credit report. The district court granted summary judgment in favor of the defendant after determining that the consumer’s loan had not been discharged. The plaintiff appealed.
On appeal, the 2nd Circuit noted that the plaintiff’s claim “hinges on the resolution of an unsettled legal question”: whether the loan was in fact discharged in the bankruptcy proceeding. Making such a determination would have required the defendant to resolve a legal question related to the debt, which the appellate court concluded was not required under the FCRA. As a result, the appellate court affirmed the dismissal of the plaintiff’s complaint because the alleged inaccuracy is not considered to not be an actionable “inaccuracy” under the FCRA.
CFPB, FTC say furnishers’ investigative duties extend to legal disputes
On December 16, the CFPB and FTC filed an amicus brief in a case on appeal to the U.S. Court of Appeals for the Eleventh Circuit concerning two related FCRA cases in support of plaintiffs-appellants and reversal of their suits involving a defendant hotel chain’s summary judgments. Both cases involve the same defendant company. In one case, the plaintiff entered into a timeshare agreement with the defendant for a property and made monthly payments for approximately three years. When the plaintiff stopped making payments, the plaintiff mailed the defendant letters that disputed the validity of, and purported to rescind, the agreement, while permitting the defendant to retain all prior payments as liquidated damages. The plaintiff obtained a copy of his credit report from a credit reporting agency (CRA), which stated that he had an open account with the defendant with a past-due balance. In three letters to the CRA, the plaintiff disputed the credit reporting. The letters stated that the plaintiff had terminated his agreement with the defendant and that he did not owe a balance. After the CRA communicated each dispute to the defendant, the defendant certified that the information for the defendant’s account was accurate. The plaintiff sued alleging the defendant violated the FCRA when it verified the accuracy of his credit report without conducting reasonable investigations following receipt of his indirect disputes. The defendant moved for summary judgment, alleging, among other things, that the plaintiff’s claim that he was not contractually obligated to make the payments to the defendant that are reported on his credit report as being due “is inherently a legal dispute and is not actionable under the FCRA.” The district court granted the defendant’s motion for summary judgment, which the plaintiff appealed.
In the other case, the plaintiff entered into a timeshare agreement with the defendant. She made a down payment and the first three installment payments, but did not make any additional payments. The plaintiff sent letters to the defendant disputing the validity of, and attempted to cancel, the agreement. The defendant reported the plaintiff’s delinquency to the CRA. In three letters to the CRA, the plaintiff disputed the credit reporting. After the CRA communicated the disputes to the defendant, the defendant determined there was no inaccuracy in the reporting. The plaintiff sued alleging the defendant violated the FCRA when it verified the accuracy of her credit report without conducting reasonable investigations following receipt of her indirect disputes about credit reporting inaccuracies. The district court granted the defendant’s motion for summary judgment, which the plaintiff appealed.
The CFPB and FTC argued in favor of the plaintiffs-appellants. According to the agencies, furnishers’ duty under the FCRA to reasonably investigate applies not only to factual disputes, but also to disputes that can be labeled as legal in nature. The agencies made three arguments to support their contention. First, a reasonable investigation is required under the FCRA to comport with its goal to “protect consumers from the transmission of inaccurate information about them.” The agencies argued that reasonableness is case specific, but it can “be evaluated by how thoroughly the furnisher investigated the dispute (e.g., how well its conclusion is supported by the information it considered or reasonably could have considered).”
Second, the agencies argued that Congress did not intend to exclude disputes that involve legal questions. The FCRA describes the types of indirect disputes that furnishers need to investigate, which are “those that dispute ‘the completeness or accuracy of any item of information contained in a consumer’s file.’” The agencies said nothing suggests that Congress intended to exclude information that is inaccurate on account of legal issues. Furthermore, the agencies noted that a lot of “inaccuracies in consumer reports could be characterized as legal, which would create an exception that would swallow the rule.” Consumer reports generally include information regarding an individual’s debt obligations, which are generally creatures of contract. Therefore, “many inaccurate representations pertaining to an individual’s debt obligations arguably could be characterized as legal inaccuracies, given that determining the truth or falsity of the representation could require the reading of a contract.”
Lastly, the agencies argued that an “atextual exception for legal inaccuracies would create a loophole that could swallow the reasonable investigation rule.” The agencies urged that “[g]iven the difficulty in distinguishing ‘legal’ from ‘factual’ disputes,” the court “should hold that there is no exemption in the FCRA’s reasonable investigation requirement for legal questions” because it would “curtail the reach of the FCRA’s investigation requirement in a way that runs counter to the purpose of the provision to require meaningful investigation to ensure accuracy on credit reports.”
States have their say on CFPB funding
Recently, a coalition of state attorneys general from 22 states, including the District of Columbia, filed an amicus brief supporting the CFPB’s petition for a writ of certiorari, which asked the U.S. Supreme Court to review whether the U.S. Court of Appeals for the Fifth Circuit erred in holding that the Bureau’s funding structure violates the Appropriations Clause of the Constitution. A separate coalition of 16 state attorneys general filed an amicus brief opposing the Bureau’s position and supporting the 5th Circuit’s decision, however these states also urged the Supreme Court to grant the Bureau’s petition to address whether the 5th Circuit’s conclusion was correct.
As previously covered by a Buckley Special Alert, the 5th Circuit’s October 19 holding found that although the Bureau spends money pursuant to a validly enacted statute, the structure violates the Appropriations Clause because (i) the Bureau obtains its funds from the Federal Reserve (not the Treasury); (ii) the agency maintains funds in a separate account; (iii) the Appropriations Committees do not have authority to review the agency’s expenditures; and (iv) the Bureau exercises broad authority over the economy. The case involves a challenge to the Bureau’s Payday Lending Rule, which prohibits lenders from attempting to withdraw payments for covered loans from consumers’ accounts after two consecutive withdrawal attempts have failed due to insufficient funds. As a result of the 5th Circuit’s decision, lenders’ obligation to comply with the rule (originally set for August 19, 2019, but repeatedly delayed) will be further delayed while the constitutional issue winds its way through the courts. The Bureau’s petition also asked the court to consider the 5th Circuit’s decision to vacate the Payday Lending Rule on the premise that it was promulgated at a time when the Bureau was receiving unconstitutional funding. (Covered by InfoBytes here.)
- Amicus brief supporting CFPB’s position. The 22 states urged the Supreme Court to review the 5th Circuit’s decision, arguing that the Bureau’s funding is lawful and that even if the Supreme Court were to find a constitutional defect in the funding scheme, vacating otherwise lawfully-promulgated regulations is neither justified nor compelled by law. “Left undisturbed, the court of appeals’ reasoning could jeopardize many of the CFPB’s actions from across its decade-long existence, to the detriment of both consumers protected by those actions and financial-services providers that rely on them to guide their conduct,” the states said. In their brief, the states argued, among other things, that the Supreme Court should grant the petition “to review at least the question of whether the court of appeals erred in vacating a regulation promulgated during a time when the CFPB received allegedly unconstitutional funding.” The states asserted that the decision “threatens substantial harm” to the states because the states and their residents “could stand to lose the benefits of the CFPB’s critical enforcement, regulatory, and informational functions if the decision [] stands and is interpreted to impair the CFPB’s ongoing operations.” With respect to questions related to the Bureau’s funding structure, the states claimed that it is altogether speculative as to whether the Bureau would have behaved differently if its funding had come from the Treasury rather than the Federal Reserve. Former Director Kraninger’s ratification and reissuance of the Payday Lending Rule “is strong evidence that the CFPB would have issued the same regulation once again, after any constitutional defect was corrected,” the states said.
- Amicus brief opposing CFPB’s position. The 16 opposing states argued, however, that the Supreme Court should grant the Bureau’s petition to provide states with “certainty over their role” in regulating the financial system, and should affirm the 5th Circuit’s decision to “restore the CFPB’s accountability to the states.” In their brief, the states asked the Supreme Court “to resolve this issue quickly” and to “reinvigorate the protections of the Appropriations Clause, not weaken them.” The states maintained that if the Supreme Court does not quickly resolve the dispute, states “will have to litigate the same issue in other districts and circuits over and over,” and “[a]ny continuing confusion could seriously impede the growth of the consumer-financial services market at a time when the economy is already strained.” According to the brief, congressional oversight “ensures a level of state participation that ordinary administrative processes don’t allow.” In summary, the states’ position is that the 5th Circuit’s decision on the funding question is correct and that the court “was right to vacate a rule enacted without constitutional funding.”
10th Circuit: Vendor knowledge of consumer debt is not a public disclosure
On December 16, the U.S. Court of Appeals for the Tenth Circuit affirmed a lower court’s dismissal of an FDCPA suit. According to the opinion, the plaintiff, who had student loan debt, received a collection letter from the defendant that listed the assigned balance as $184,580.73 and the debt balance as $217,657.60 without explaining the difference or that the debt could increase due to interest, fees, and other charges. The defendant, who used an outside mailer to compose and send the letters, sent her two more letters without providing an explanation for the balances. The plaintiff sued, alleging the defendant violated the FDCPA by communicating information about the debt to a vendor that printed and mailed the letters. According to the plaintiff, communicating this information violated FDCPA provisions that prohibit debt collectors from communicating with, in connection with the collection of any debt, any person without the consumer’s consent or court permission. The plaintiff also claimed that the defendant violated the FDCPA by misrepresenting the amount of the debt because it did not indicate that the amount of the debt may increase.
On the appeal, the appellate court affirmed dismissal after it found that the plaintiff lacked standing since neither of the plaintiff’s claims caused a concrete injury. First, the appellate court found that one private entity knowing about the plaintiff’s debt is not a public disclosure of private facts, which does not rise to the level of sustaining a concrete injury needed to sue in federal court. Second, regarding the substance of the letters, the appellate court noted that the plaintiff simply claimed that the letters she received caused her to be confused and to believe the debt was not accruing interest. However, the appellate court found that “confusion and misunderstanding are insufficient to confer standing.”