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States say student loan trusts are subject to the CFPA’s prohibition on unfair debt collection practices
On November 15, a bipartisan coalition of 23 state attorneys general led by the Illinois AG announced the filing of an amicus brief supporting the CFPB’s efforts to combat allegedly illegal debt collection practices in the student loan industry. As previously covered by InfoBytes, in February, the U.S. District Court for the District of Delaware stayed the Bureau’s 2017 enforcement action against a collection of Delaware statutory trusts and their debt collector after determining there may be room for reasonable disagreement related to questions of “covered persons” and “timeliness.” The district court certified two questions for appeal to the U.S. Court of Appeals for the Third Circuit related to (i) whether the defendants qualify as “covered persons” subject to the Bureau’s enforcement authority; and (ii) whether the case can be continued after the Supreme Court’s 2020 decision in Seila Law v. CFPB (which determined that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau—covered by a Buckley Special Alert). Previously, the district court concluded that the suit was still valid and did not need ratification because—pointing to the majority opinion in the Supreme Court’s decision in Collins v. Yellen (covered by InfoBytes here)—“‘an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed[,]’” and therefore the Bureau’s actions are not void and do not need to be ratified, unless a plaintiff can show that “the agency action would not have been taken but for the President’s inability to remove the agency head.” The district court later acknowledged, however, that Collins “is a very recent Supreme Court decision” whose scope is still being “hashed out” in lower courts, which therefore “suggests that there is room for reasonable disagreement and thus supports an interlocutory appeal here.”
The states argued that they have a “substantial interest” in protecting state residents from unlawful debt collection practices, and that this interest is implicated by this action, which addresses whether the defendant student loan trusts are “covered persons” subject to the prohibition on unfair debt collection practices under the CFPA. Urging the 3rd Circuit to affirm the district court’s decision to deny the trusts’ motion to dismiss, the states contended among other things, that hiring third-party agencies to collect on purchased debts poses a large risk to consumers. These types of trusts, the states said, “profit only when the third parties that they have hired are able to collect on the flawed debt portfolios that they have purchased.” Moreover, “[d]ebt purchasing entities, including entities like the [t]rusts, are thus often even more likely than the original creditors to resort to unlawful tactics in undertaking collection activities,” the states stressed, explaining that in order to combat this growing problem, many states apply their prohibitions on unlawful debt collection practices “to all debt purchasers that seek to reap profits from these illegal activities, including those purchasers that outsource collection to third parties.” The Bureau’s decision to do the same is therefore appropriate under the CFPA, the states wrote, adding that “as a practical matter, these debt purchasers are as problematic as debt purchasers that collect on their own debt. The [t]rusts’ request to be treated differently because of their decision to hire third party agents to collect on the debts that they have purchased (and reap the profits on) should be rejected.”
District Court issues judgment against company bilking 9/11 first responders
On November 23, the U.S. District Court for the Southern District of New York entered a stipulated final judgment and order against a finance company, two related entities, and the companies’ founder and owner (collectively, “defendants”) for engaging in deceptive and abusive acts or practices under the Consumer Financial Protection Act (CFPA) related to the offering of cash advances to people on their settlement payouts from victim-compensation funds established for certain first responders to the World Trade Center attack on September 11, 2001.
As previously covered by InfoBytes, in 2017, the CFPB and the New York attorney general filed a complaint alleging that the defendants engaged in deceptive and abusive acts by misleading consumers into selling expensive advances on benefits to which they were entitled by mischaracterizing extensions of credit as assignments of future payment rights, thereby causing the consumers to repay far more than they received. In March 2022, the district court ruled that the CFPB could proceed with its 2017 enforcement action against the defendants (covered by InfoBytes here) two years after the U.S. Court of Appeals for the Second Circuit vacated a 2018 district court order dismissing the case on the grounds that the Bureau’s single-director structure was unconstitutional, and that, as such, the agency lacked authority to bring claims alleging deceptive and abusive conduct by the company (covered by InfoBytes here).
The 2nd Circuit remanded the case to the district court, determining that the U.S. Supreme Court’s ruling in Seila Law LLC v. CPFB (holding that the director’s for-cause removal provision was unconstitutional but severable from the statute establishing the Bureau, as covered by a Buckley Special Alert) superseded the 2018 ruling. The appellate court further noted that following Seila, former Director Kathy Kraninger ratified several prior regulatory actions (covered by InfoBytes here), including the enforcement action brought against the defendants, and as such, remanded the case to the district court to consider the validity of the ratification of the enforcement action. The defendants later filed a petition for writ of certiorari, arguing that the Bureau could not use ratification to avoid dismissal of the lawsuit, but the Supreme Court declined the petition. (Covered by InfoBytes here). In 2021, the defendants filed a motion to dismiss the Bureau’s enforcement action on the grounds that “it was brought by an unconstitutionally constituted agency” and that the Bureau’s “untimely attempt to subsequently ratify this action cannot cure the agency’s constitutional infirmity.” (Covered by InfoBytes here). The district court turned to the Supreme Court’s June 2021 majority decision in Collins v. Yellen, which held that “‘an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed[.]’” Accordingly, the agency’s actions are not void and do not need to be ratified, unless a plaintiff can show that “the agency action would not have been taken but for the President’s inability to remove the agency head.” (Covered by InfoBytes here).
In the amended complaint, filed in July 2022, the Bureau and the New York AG alleged that, among other things, the defendants engaged in deceptive acts by misrepresenting to consumers that the company’s contracts created valid and enforceable assignments of their payment proceeds when, in fact, the assignments were not valid and enforceable. The amended complaint also alleged that the company misrepresented to consumers when they would receive funds from the company, often promising consumers an earlier date of disbursement than the actual disbursement. Additionally, the joint complaint alleged that the defendants violated state law by collecting on purported assignments that are void, unenforceable, and uncollectable, or alternatively, by collecting on contracts that functioned as loans with interest rates that exceed usury limits under state law, which are also void and on which no payment is due.
Under the terms of the final judgment, defendants must pay a $1 civil money penalty to the Bureau and must not take any action to collect any unpaid or future amounts owed by the harmed responders, which totals at least $600,000. Under the order, defendants must also refrain from participating in offering, brokering, or providing credit or advances of funds to individuals entitled to payments from governmentally created funds established to compensate victims of 9/11.
CFPB issues fall supervisory highlights
On November 15, the CFPB released its fall 2022 Supervisory Highlights, which summarizes its supervisory and enforcement actions between January and June 2022 in the areas of auto servicing, consumer reporting, credit card account management, debt collection, deposits, mortgage origination, mortgage servicing, and payday lending. Highlights of the findings include:
- Auto Servicing. Bureau examiners identified instances of servicers engaging in unfair, deceptive, or abusive acts or practices connected to add-on product charges, loan modifications, double billing, use of devices that interfered with driving, collection tactics, and payment allocation. For instance, examiners identified occurrences where consumers paid off their loans early, but servicers failed to ensure consumers received refunds for unearned fees related to add-on products.
- Consumer Reporting. The Bureau found deficiencies in credit reporting companies’ (CRCs) compliance with FCRA dispute investigation requirements and furnishers’ compliance with FCRA and Regulation V accuracy and dispute investigation requirements. Examples include: (i) NCRCs that failed to report the outcome of complaint reviews to the Bureau; (ii) furnishers that failed to send updated information to CRCs following a determination that the information reported was not complete or accurate; and (iii) furnishers’ policies and procedures that contained deficiencies related to the accuracy and integrity of furnished information.
- Credit Card Account Management. Bureau examiners identified violations of Regulation Z related to billing error resolution, including instances where creditors failed to (i) resolve disputes within two complete billing cycles after receiving a billing error notice; (ii) conduct reasonable investigations into billing error notices due to human errors and system weaknesses; and (iii) provide explanations to consumers after determining that no billing error occurred or that a different billing error occurred from that asserted. Examiners also identified Regulation Z violations where credit card issuers improperly mixed original factors and acquisition factors when reevaluating accounts subject to a rate increase, and identified deceptive acts or practices related to credit card issuers’ advertising practices.
- Debt Collection. The Bureau found instances of FDCPA violations where debt collectors engaged in conduct that harassed, oppressed, or abused the person with whom they were communicating. The report findings also discussed instances where debt collectors communicated with a person other than the consumer about the consumer’s debt when the person had a name similar or identical to the consumer, in violation of the FDCPA.
- Deposits. The Bureau discussed how it conducted prioritized assessments to evaluate how financial institutions handled pandemic relief benefits deposited into consumer accounts. Examiners identified unfairness risks at multiple institutions due to policies and procedures that may have resulted in, among other things, (i) garnishing protected economic impact payments funds in violation of the Consolidated Appropriations Act of 2021; or (ii) failing to apply the appropriate state exemptions to certain consumers’ deposit accounts after receiving garnishment notice.
- Mortgage Origination. Bureau examiners identified Regulation Z violations and deceptive acts or practices prohibited by the CFPA. An example of this is when the settlement service had been performed and the loan originator knew the actual costs of those service, but entered a cost that was completely unrelated to the actual charges that the loan originator knew had been incurred, resulting in information being entered that was not consistent with the best information reasonably available. The Bureau also found that the waiver language in some loan security agreements was misleading, and that a reasonable consumer could understand the provision to waive their right to bring a class action on any claim in federal court.
- Mortgage Servicing. Bureau examiners identified instances where servicers engaged in abusive acts or practices by charging sizable fees for phone payments when consumers were unaware of those fees. Examiners also identified unfair acts or practices and Regulation X policy and procedure violations regarding failure to provide consumers with CARES Act forbearances.
- Payday Lending. Examiners found lenders failed to maintain records of call recordings necessary to demonstrate full compliance with conduct provisions in consent orders generally prohibiting certain misrepresentations.
District Court approves payday settlement
On November 10, the U.S. District Court for the Southern District of Mississippi issued a final settlement order resolving allegations that a Mississippi-based payday lender violated the CFPA in connection with check cashing services and small dollar loans. As previously covered by InfoBytes, the CFPB filed a complaint against two Mississippi-based payday loan and check cashing companies for allegedly violating the CFPA’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 Bureau's structure unconstitutional and that the agency’s claims violate due process. The U.S. Court of Appeals for the Fifth Circuit agreed to hear an interlocutory appeal on the constitutionality question, and, prior to the U.S. Supreme Court’s ruling in Seila Law LLC v. CFPB, a divided panel 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 (covered by InfoBytes here). The order noted that the 5th Circuit voted sua sponte to rehear the case en banc and issued an opinion in which the majority vacated the district court’s opinion as contrary to Seila Law. The majority did not, however, direct the district court to enter judgment against the Bureau because, though the Supreme Court had found that the director’s for-cause removal provision was unconstitutional, it was severable from the statute establishing the Bureau (covered by a Buckley Special Alert). The majority determined that the “time has arrived for the district court to proceed” and stated it “place[s] no limitation on the matters that that court may consider, including, without limitation, any other constitutional challenges.”
According to the settlement, the owner and president of the company must pay a civil money penalty of $899,350 to the Bureau “by reason of the [UDAAP violations] alleged in the Complaint.” However, the order further noted that the amount is remitted by $889,350 because he paid “that amount in fines to the Mississippi Department of Banking and Consumer Finance.” The district court also entered a separate order dismissing the lawsuit with prejudice.
CFPB issues guidance on “junk fees”
On October 26, President Biden discussed guidance issued by the CFPB to help banks avoid charging illegal “junk fees” on deposit accounts. The Bureau’s Circular 2022-06 noted that overdraft fees can be considered an “unfair” practice and violate the Consumer Financial Protection Act (CFPA) even if such fees are in compliance with other laws and regulations. Specifically, the Circular noted that “overdraft fees assessed by financial institutions on transactions that a consumer would not reasonably anticipate are likely unfair.” The guidance further stated that unanticipated overdraft fees are likely to impose substantial injury on consumers that they cannot reasonably avoid and that are not outweighed by countervailing benefits to consumers or competition. The Bureau’s compliance bulletin on surprise depositor fees explained that a returned deposited item is a check that a consumer deposits into their checking account that is returned to the consumer because the check could not be processed against the check originator’s account. The bulletin stated that “blanket policies of charging returned deposited item fees to consumers for all returned transactions irrespective of the circumstances or patterns of behavior on the account are likely unfair under the [CFPA].” The Bureau further explained that indiscriminately charging depositor fees, regardless of circumstances, are likely illegal and noted that the bulletin is intended to put regulated entities on notice regarding how the agency plans to exercise its enforcement and supervisory authorities in the context of deposit fees. The bulletin urged financial institutions to charge depositor fees only in situations where a depositor could have avoided the fee, such as when a depositor repeatedly deposits bad checks from the same originator. The Bureau emphasized the guidance as part of its Junk Fee Initiative, noting that since it launched the initiative in January 2022, the CFPB has taken action to constrain “pay-to-pay” fees (covered by InfoBytes here), and has announced an advance notice of proposed rulemaking soliciting information from credit card issuers, consumer groups, and the public regarding late payments, credit card late fees, and card issuers’ revenue and expenses (covered by InfoBytes here).
CFPB sues payment processor over junk fees and dark patterns
On October 18, the CFPB filed a complaint against a Texas-based payment processing service platform (primarily related to collecting and processing event fees) for allegedly violating the Consumer Financial Protection Act (CFPA) and the EFTA by engaging in deceptive and abusive acts and practices. The Bureau alleged that the defendant enrolled consumers in, and charged them, for discount club memberships without their consent that were largely unrelated to the event the consumers were signing up for. The complaint noted that although the defendant’s memberships had a 30-day free “negative option trial membership,” the memberships automatically begin charging the membership fees at the end of the trial period. The Bureau also alleged that the defendant deployed dark patterns, which “are hidden tricks or trapdoors that companies build into their websites to get consumers to inadvertently click links, sign up for subscriptions, or purchase products or services.” The Bureau further alleged that the defendant violated the EFTA and Regulation E by increasing consumers’ membership fees without sending the consumer written notice of the new amount and the date of the new payment at least 10 days before initiating the new payment, which also constitute violations of the CFPA. The Bureau is seeking permanent injunctive relief, damages, restitution, disgorgement, civil money penalties, and other relief.
According to a statement by CFPB Director Rohit Chopra, the Bureau is “closely watching whether financial services firms are deploying digital dark patterns,” and is “looking at a range of ways to reduce unwanted junk fees.” He also added that the Bureau is “working to ensure our payments system is working safely and fairly” and that it “will continue to look at how payment platforms extract data and fees from their users.”
CFPB’s Supervisory Highlights targets student loan servicers
On September 29, the CFPB released a special edition of its Supervisory Highlights focusing on recent examination findings related to practices by student loan servicers and schools that directly lend to students. Highlights of the supervisory findings include:
- Transcript withholding. The Bureau found several instances where in-house lenders (i.e., where the schools themselves are the lender) are withholding transcripts as a debt collection practice. According to the Bureau, many post-secondary institutions choose to withhold official transcripts from borrowers as an attempt to collect education-related debts. The Supervisory Highlights states the position that the blanket withholding of transcripts to coerce borrowers into making payments is an “abusive” practice under the Consumer Financial Protection Act.
- Supervision of federal student loan transfers. The Bureau identified certain consumer risks linked to the transfer of nine million borrower account records to different servicers after two student loan servicers ended their contracts with the Department of Education (DOE). The review, which was handled in partnership with the DOE and other state regulators, identified several concerns, such as (i) the information received during the transfer was insufficient to accurately service the loan; (ii) transferee and transferor servicers reported different numbers of total payments that count toward income-driven repayment forgiveness for some borrowers; (iii) information inaccurately stated the borrower’s next due date; (iv) certain accounts were placed into transfer-related forbearances following the transfer, instead of in more advantageous CARES Act forbearances; and (v) multiple servicers experienced significant operational challenges.
- Payment relief programs. The Bureau found occurrences where federal student loan servicers allegedly engaged in unfair acts or practices when they improperly denied a borrower’s application for loan cancellation through Teacher Loan Forgiveness or Public Service Loan Forgiveness. The Bureau claimed that many servicers “illegally misrepresented borrowers’ eligibility dates and the number of payments the borrower needed to make to qualify for relief,” and “provided misinformation about borrowers’ entitlement to progress toward loan forgiveness during the pandemic payment suspension.” The Bureau said it will continue to monitor servicers’ practices to ensure borrowers receive the relief for which they are entitled, and directed servicers to address consumer harm caused by these actions.
The Bureau issued a reminder that it will continue to supervise student loan servicers and lenders within its supervisory jurisdiction regardless of institution type. Student loan servicers, originators, and loan holders are advised to review the supervisory findings and take any necessary measures to ensure their operations address these risks.
CFPB sues online lender to servicemembers
On September 29, the CFPB filed a complaint against a New York-based online lender and 38 of its subsidiaries for allegedly violating the Military Lending Act (MLA) and the Consumer Financial Protection Act by imposing excessive charges on loans to servicemembers and their dependents. The Bureau alleges that the defendants required consumers to join its membership program and pay monthly membership fees ranging from $19.99 to $29 to access certain “low-APR” installment loans. The complaint says that when the membership fees are combined with loan-interest-rate charges, the total fees exceed the MLA’s allowable rate cap, contending that the MLA serves to protect active duty servicemembers and their dependents by limiting the APR applicable to extensions of credit to 36 percent. The Bureau further claims that the defendants deceived consumers by representing that they owed loan payments and fees that were actually void under the MLA. In addition, the Bureau claims that the defendants refused to allow customers to cancel their memberships and stop paying monthly fees until their loans were paid, despite leading many consumers to believe they could cancel their memberships for any reason at any time, thereby “avoid[ing] such automatic renewals and associated membership fees.” In certain cases, the defendants refused to cancel memberships if a consumer had unpaid membership fees even if the loan was paid off, the Bureau says. The Bureau is seeking permanent injunctive relief, damages, restitution, disgorgement, civil money penalties, and other relief.
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.
District Court orders college operator to comply with CFPB CID
On September 13, the U.S. District Court for the District of Utah ordered the operator of several defunct colleges to cooperate with a CFPB civil investigative demand (CID) for potential violations of the Consumer Financial Protection Act. In 2019, the Bureau issued a CID to the operator seeking information on its private student loan financing program, as well as litigation concerning the loan program dating back to 2012, to aid its investigation into whether the program constituted unfair, deceptive, or abusive acts or practices. The operator argued that the CID was unenforceable for several reasons, including that it was “unreasonably oppressive” and that the legality of its program had already been litigated in state action. The operator also argued that because the Bureau’s leadership structure rendered it unconstitutional, it lacked authority to enforce the CID. A magistrate judge’s recommendation narrowed the scope of the CID, but the operator continued to object, stating that a severe reduction in staff created a loss of “significant institutional knowledge” about the loan program. After the U.S. Supreme Court issued its ruling in Seila Law LLC v. CFPB (holding that the director’s for-cause removal provision was unconstitutional but severable from the statute establishing the Bureau, as covered by a Buckley Special Alert ), the Bureau’s director ratified the CID. The operator then raised new objections claiming the Bureau’s funding structure violates the U.S. Constitution’s separation of powers, and therefore the agency lacks valid authority to enforce the CID.
The court rejected the operator’s argument, writing that dicta in the Supreme Court’s decision in Seila Law “suggests the Bureau’s funding structure is not an unconstitutional delegation of power from Congress to the Executive Branch.” According to the court, while the majority opinion in Seila Law made note of the CFPB’s funding structure, it treated it “merely as an aggravator” of the for-cause removal protection issues and “went as far as saying the Bureau’s constitutional infirmity would ‘disappear’ if ‘the Director were removable at will by the President.’”
With respect to burdensomeness, the court said the operator has failed to show evidence establishing an unreasonable burden in its objections, and that, moreover, it “has had more than three years’ notice to preserve any information it thought may be relevant to the Bureau’s investigation.” The court further stressed that the CID does not become overly burdensome simply because the operator shuttered its campuses thereby allegedly relinquishing “institutional knowledge” concerning its own education loan program prior to complying with the CID. The court granted the operator a 90-day extension to comply with the CID.