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CFPB’s TSR claims against software company to proceed
On April 5, the U.S. District Court for the Central District of California denied a motion to dismiss claims brought by the CFPB alleging violations of the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA). As previously covered by InfoBytes, the California-based software company and its owner (collectively, “defendants”) market and sell credit-repair business software and other tools to credit-repair businesses charging unlawful advance fees to consumers. According to the Bureau, the defendants provide substantial assistance to these businesses and purportedly encourage them to “charge unlawful advance fees” even though, under the TSR, companies that telemarket their services are prohibited from requesting or receiving fees from consumers until consumers are provided with a credit report showing that the promised results have been achieved.
The court was unpersuaded by the defendants’ argument that the Bureau exceeded its authority to pursue enforcement actions against them, claiming the credit-repair businesses that use defendants’ products and services are not “covered persons” under the CFPA, as the businesses “provide only retrospective credit-repair services and thus do not provide prospective consumer financial services under the CFPA.” The court held that the CFPA’s broad purpose and expansive language covers the services provided by the credit-repair businesses to improve or repair consumers’ credit and that such activity is considered “credit counseling” under the CFPA and is therefore a “consumer financial product or service.” The court further held that the credit-repair businesses were “covered persons” based on allegations that they provide consumers’ credit history to help with the approval of a mortgage or auto loan, recognizing that performing analysis relating to the credit history of consumers in connection with a decision regarding a consumer financial product or service is covered by the CFPA. The court also disagreed with the defendants’ argument that they are not “service providers” under the statute, in part, because the defendants “have the capacity to vet and monitor” the credit-repair businesses. The court also was not persuaded that the Credit Repair Organizations Act’s (CROA) provision allowing credit-repair businesses to charge monthly fees supersedes the TSR requirement that such a company cannot collect payment until the promised results have been achieved, holding that the requirements of each are not in conflict and noting that “if a credit repair agency does not qualify as a telemarketer, then it need not comply with the TSR—only the CROA is applicable,” and that nothing in the language of the CROA indicates that the defendants’ activities “may not simultaneously be regulated by the [TSR].”
CFPB’s UDAAP claims to proceed against mortgage lender
On March 31, the U.S. District Court for the District of Columbia mostly denied motions to dismiss filed by a mortgage lender and four executives (collectively, “defendants”) sued by the CFPB for allegedly engaging in unlawful mortgage lending practices. As previously covered by InfoBytes, the Bureau filed a complaint last year against the defendants alleging violations of several federal laws, including TILA and the CFPA. According to the Bureau, (i) unlicensed employees allegedly offered and negotiated mortgage terms; (ii) company policy regularly required consumers to submit documents for verification before receiving a loan estimate; (iii) employees denied consumers credit without issuing an adverse action notice; and (iv) defendants regularly made misrepresentations about, among other things, the availability and cost savings of FHA streamlined refinance loans.
The mortgage lender had argued in its motion to dismiss that neither TILA nor the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) required the lender to ensure that its individual employees were licensed under state law. In denying the motions to dismiss, the court disagreed with the lender’s position stating that in order for a mortgage originator to comply with TILA, it must also comply with Bureau requirements set out in Regulation Z, including a requirement that “obligates loan originator organizations to ensure that individual loan originators working for them are licensed or registered as required by state and federal laws.”
The court also concluded that the individual defendants must face claims for allegedly engaging in unfair or deceptive practices. The Bureau contended that the company’s chief compliance officer had warned the individual defendants that certain unlicensed employees were engaging in activities requiring licensure, and that the company’s owners approved the business model that permitted the underlying practices. According to the court, an individual “engages” in a UDAAP violation if the individual “participated directly in the practices or acts or had authority to control them” and “‘had or should have had knowledge or awareness’ of the misconduct.” The court rejected defendants’ arguments that it was improper to adopt this standard, and stated that “the fact that a separate theory of liability exists for substantially assisting a corporate defendant’s UDAAP violations has no bearing on how courts evaluate whether an individual defendant himself engaged in a UDAAP violation.”
While the court allowed the count to continue to the extent that it was based on allegations of unlicensed employees performing duties that would require licensure, it found that the complaint did not support an inference that the individual defendants knew that the employees were engaging in activities to make it appear that they were licensed. The court provided the Bureau an opportunity to replead the count to provide a stronger basis for such an inference.
CFPB settles with student loan servicer over unfair practices
On March 30, the CFPB announced a settlement with a student loan servicer to resolve allegations that the company engaged in deceptive acts with respect to borrowers with Federal Family Education Loan Program (FFELP) loans about their eligibility for Public Service Loan Forgiveness (PSLF), in violation of the Consumer Financial Protection Act, among other things. The CFPB alleged that the company engaged in unfair, deceptive, or abusive acts or practices by misrepresenting: (i) that FFELP borrowers could not receive PSLF; (ii) that FFELP borrowers were making payments towards PSLF before loan consolidation; and (iii) that certain jobs were not eligible for PSLF. The Bureau also alleged that the servicer “did not provide any information about how to become eligible for PSLF when borrowers inquired about the program or mentioned that they worked in a job that was likely a qualifying public-service job.”
Under the terms of the consent order, the servicer is required to: (i) notify all affected borrowers of the Department of Education’s limited PSLF waiver to provide affected consumers the opportunity to take advantage of the waiver before it ends on October 31; (ii) “develop and implement a call script for Customer Service Representatives that, at minimum, requires them to solicit information from all FFELP Consumers about whether a consumer’s employment may make them eligible for PSLF, and if so, to direct them to a Public Service Specialist, who will provide accurate and complete information about PSLF”; and (iii) pay a civil money penalty of $1 million to the Bureau.
According to a statement by CFPB Director Rohit Chopra, the Bureau “has long been concerned that others in the student loan servicing industry have derailed borrowers from making progress toward loan cancellation,” and “CFPB law enforcement work has identified these problems for years, finding failures at multiple servicers.”
District Court denies motion to dismiss for lack of jurisdiction
On March 21, the U.S. District Court for the Western District of Virginia denied defendants’ motion to dismiss for lack of subject matter jurisdiction in a suit alleging that they misrepresented the cost of immigration bond services and deceived migrants to keep them paying monthly fees, including by making false threats of deportation for failure to pay. The defendants argued that “the CFPB lacks authority to exercise any power to enforce the CFPA with respect to [the defendants] because these corporations are regulated by state insurance regulators (12 U.S.C. § 5517(f)) and are merchants, retailors, or sellers of nonfinancial goods or services.” However, the district court noted that “limitations on the CFPB’s regulatory authority do not equate to limitations on this court’s jurisdiction.” The defendants also argued “that the exclusions to CFPB jurisdiction enumerated in the CFPA are jurisdictional limits on the court.” The district court found the defendants were “mistaken” and that “Congress did not expressly state that any threshold limitation on the CFPA’s scope shall count as jurisdictional limitations on the court. For these reasons, the court finds that it has subject-matter jurisdiction in this case.”
As previously covered by InfoBytes, the U.S. District Court for the District of Columbia denied the defendants’ request to enforce a modified Civil Investigative Demand (CID) and prevent the CFPB from obtaining personal information about the defendants’ clients via CIDs to third parties. In August 2017, the CFPB issued a CID to the defendants requesting various documents and information. The CFPB filed the present lawsuit in February 2021.
District Court enters $2.8 million judgment in CFPB student debt relief action
On March 22, the U.S. District Court for the Central District of California entered a stipulated final judgment and order against one of the defendants in an action brought by the CFPB, the Minnesota and North Carolina attorneys general, and the Los Angeles City Attorney, alleging a student loan debt relief operation deceived thousands of student-loan borrowers and charged more than $71 million in unlawful advance fees. As previously covered by InfoBytes, the complaint asserted that the defendants violated the CFPA, the Telemarketing Sales Rule, and various state laws. Amended complaints (see here and here) also added new defendants and included claims for avoidance of fraudulent transfers under the Federal Debt Collection Procedures Act and California’s Uniform Voidable Transactions Act, among other things. A stipulated final judgment and order was entered against the named defendant in July (covered by InfoBytes here), which required the payment of more than $35 million in redress to affected consumers, a $1 civil money penalty to the Bureau, and $5,000 in civil money penalties to each of the three states. The court also previously entered final judgments against several of the defendants, as well as a default judgment and order against two other defendants and a settlement with two non-parties (covered by InfoBytes here, here, here, here, and here).
The final judgment issued against the settling defendant, who neither admitted nor denied the allegations except as specifically stated, permanently bans the defendant from participating in telemarking services or offering or selling debt-relief services, and prohibits it from misrepresenting benefits consumers may receive from a product or service. The defendant is also permanently restrained from violating applicable state laws, and may not disclose, use, or benefit from customer information obtained in connection with the offering or providing of the debt relief services. The settlement orders the defendant to pay more than $2.8 million in consumer redress, as well as a $1 civil money penalty to the Bureau and $5,000 to each of the three states.
CFPB releases compliance guidance on online consumer reviews
On March 22, the CFPB released a compliance bulletin regarding potentially illegal practices related to consumer reviews. The guidance highlights certain business practices related to consumer reviews that are generally unlawful under the CFPA, which include, among other things: (i) deceiving consumers by using purported contractual restrictions that are unenforceable; (ii) unfairly depriving consumers of information using restrictions on consumer reviews; and (iii) deceiving consumers who read consumer reviews about the nature of those reviews. According to the CFPB, the effort is related to the FTC’s work to counter fake reviews and connected fraud in the digital economy. (Covered by InfoBytes here).
District Court rules ratification unnecessary for CFPB to proceed with 2017 enforcement action
On March 16, the U.S. District Court for the Southern District of New York ruled that the CFPB can proceed with its 2017 enforcement action against a New Jersey-based finance company alleging, among other things, that it misled first responders to the World Trade Center attack and NFL retirees about high-cost loans mischaracterized as assignments of future payment rights. In 2020, 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.” After narrowly reviewing whether the Bureau had the authority to bring claims under the Consumer Financial Protection Act, 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.) The district court’s March 16 opinion applied Collins and ruled that “the CFPB possessed the authority to bring this action in February 2017 and, hence, that ratification by Director Kraninger was unnecessary.”
CFPB revises Rules of Practice for Adjudication Proceedings
On February 22, the CFPB published a procedural rule and request for public comment in the Federal Register, to update its Rules of Practice for Adjudication Proceedings. Under Section 1053(e) of the Consumer Financial Protection Act, the Bureau has authority to conduct administrative proceedings. The CFPB indicated that the amendments would provide greater procedural flexibility, providing parties earlier access to relevant information, expanding deposition opportunities, and making various changes related to “timing and deadlines, the content of answers, the scheduling conference, bifurcation of proceedings, the process for deciding dispositive motions, and requirements for issue exhaustion, as well as other technical changes.” The proposed amendments also propose to simplify and clarify the computation of deadlines and would indicate that motions for extension of time are “generally disfavored” (a list of factors to be considered, however, would be retained). Comments must be received by April 8.
Appeals Court to consider whether CFPA covers trusts
On February 11, the U.S. District Court for the District of Delaware stayed a 2017 CFPB 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.” As previously covered by InfoBytes, last December the court ruled that the CFPB could proceed with the enforcement action, which alleged, among other things, that the defendants filed lawsuits against consumers for private student loan debt that they could not prove was owed or that was outside the applicable statute of limitations. The court concluded that the suit was still valid and did not need ratification in light of the U.S. 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), upending its previous dismissal of the case, which had held that the Bureau lacked enforcement authority to bring the action when its structure was unconstitutional. At the time, the court also disagreed with the defendants’ argument that, as trusts, they are not “covered persons” under the Consumer Financial Protection Act (CFPA). While the defendants argued that they used subservicers to collect debt and therefore did not “engage in” providing services listed in the CFPA, the court stated that the trusts were still “engaged” in their business and the alleged misconduct even though they contracted it out.
However, the court now certified two questions for appeal to the U.S. Court of Appeals for the Third Circuit. The first question centers on whether the defendants qualify as “covered persons” subject to the Bureau’s enforcement authority. The court concluded that another court may rule differently on this “novel” issue. “I was the first judge to decide whether the Bureau may bring enforcement actions against creditors like the Trusts who contract out debt collection and loan servicing,” the judge wrote, noting that the judge previously assigned to the case had also “expressed ‘some doubt’ that the Trusts are covered persons.” The second question addresses the Bureau’s efforts to continue the case after Seila. The defendants argued that the suit should be dismissed because the initial filing was invalid due to the director’s unconstitutional insulation and was not ratified within the statute of limitations. In December the court had held that the Bureau did not need to ratify the suit 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 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.” The court now 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.”
District Court orders debt-relief company to pay $41.1 million CMP
On February 7, the U.S. District Court for the Northern District of Illinois entered a default judgment and order against a debt-relief company (default defendant) accused of allegedly violating the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act. As previously covered by InfoBytes, the Bureau filed the complaint in 2020 alleging that the company and its two owners (collectively, “defendants”) misrepresented material aspects of their student loan debt-relief services, and violated the TSR by requesting and receiving payment of disproportionate fees for their services before they altered or resolved the terms of the debts. The judgment against the default defendant imposes both permanent injunctive relief and monetary remedies including a $41.1 million civil monetary penalty. The default defendant must also pay $2.1 million in consumer restitution and is permanently enjoined from participating in the financial-advisory, debt-relief, or credit-repair service markets in any way, including through marketing or ownership of such services.