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On July 9, the FHFA sent a letter to the U.S. Court of Appeals for the 5th Circuit notifying the court that the agency has a new Director, Mark Calabria, and that the FHFA has reconsidered its position regarding the constitutionality of its structure, presently concluding the Housing Economic Recovery Act’s (HERA) for-cause removal provision is constitutional. As previously covered by InfoBytes, in July 2018, the 5th Circuit concluded that the FHFA’s single-director structure violates Article II of the Constitution because the director is too insulated from removal by the president. In August 2018, while the agency was still under the leadership of Mel Watt, it petitioned the court for an en banc rehearing, challenging the constitutionality holding. Subsequently, in January, then acting Director, Joseph Otting, filed a supplemental brief stating the agency will no longer defend the constitutionality of the FHFA’s structure. Now, under the leadership of Director Calabria, the agency asserts that it reconsidered the issue, and respectfully requests that the appellate court uphold the agency’s structure as constitutional.
5th Circuit: District courts lack jurisdiction over claims arising from FDIC enforcement proceedings
On March 28, the U.S. Court of Appeals for the 5th Circuit held that federal district courts lacked subject matter jurisdiction over claims arising out of certain FDIC enforcement proceedings. According to the opinion, the FDIC brought two enforcement actions against the bank and its directors (plaintiffs), alleging violations of various banking laws and regulations, which resulted in civil money penalties and cease-and-desist orders. The plaintiffs petitioned the 5th Circuit for review. While the first appeal was pending, the plaintiffs filed a lawsuit in federal district court alleging the FDIC committed constitutional violations during the enforcement actions. Specifically, the plaintiffs alleged that the FDIC (i) targeted the bank due to the bank president’s age and denied it equal protection; and (ii) violated due process by preventing the plaintiffs from offering certain evidence and preventing the president’s ability to talk with his counsel at certain times. These allegations were raised and rejected during the FDIC’s second enforcement proceeding. The FDIC moved to dismiss the action for a lack of subject matter jurisdiction, asserting that the statutory review process precludes district court jurisdiction over actions arising from enforcement proceedings. The district court agreed and dismissed the action without prejudice, indicating that the bank could assert its claims in the district court on direct review of the agency’s final order. The bank appealed.
On appeal, the 5th Circuit noted that the language in the statute “virtually compels” it to concede that Congress intended to preclude district court jurisdiction over claims against the FDIC arising from enforcement proceedings. The appellate court then addressed whether the claims raised by the plaintiffs were the type of claims Congress intended to be reviewed within the statutory scheme. The appellate court determined that the Federal Deposit Insurance Act allows for “meaningful judicial review,” by authorizing review of challenges to a final agency order by a federal circuit court. Moreover, the court rejected the plaintiffs’ argument that its claims are “wholly collateral” to the administrative order because they did not challenge the merits of the order but rather, the claims “arise directly from alleged irregularities in the agency enforcement proceedings.” Lastly, the court found that the plaintiffs’ constitutional claims do not fall outside of the agency’s expertise. Based on the foregoing, the court found that the district court correctly dismissed the action.
On March 8, the CFPB and two payday loan trade groups filed a joint status report with the U.S. District Court for the Western District of Texas in the litigation over the Bureau’s final rule on payday loans, vehicle title loans, and certain other installment loans (Rule). As previously covered by InfoBytes, the two payday loan trade groups initiated the suit against the Bureau in April 2018, asking the court to set aside the Rule on the grounds that, among other reasons, the Bureau is unconstitutional and the rulemaking failed to comply with the Administrative Procedures Act. In June 2018 and November 2018, the court stayed the litigation and the compliance date of the Rule, after the Bureau’s announcement that it intended to issue a proposed rulemaking to reconsider parts of the Rule. In February 2019, the Bureau issued a proposal, which seeks to rescind certain provisions of the Rule related to the ability-to-repay underwriting standards and delay the compliance date of those affected provisions until August 2020. The proposal does not reconsider the payment-related provisions of the Rule, leaving the compliance date for those provisions at August 19, 2019. (Covered by InfoBytes here.)
In the joint status report, both parties agree that the court’s stay of compliance date and stay of litigation should remain with regard to the underwriting provisions until the Bureau concludes the rulemaking process. As for the payment-related provisions, the payday loan trade groups request the court maintain both the litigation stay and compliance stay of payment provisions until the Bureau completes the underwriting rulemaking process, because the Bureau acknowledged in the proposals that it intends to examine issues related to the payment provisions and “and if the Bureau determines that further action is warranted, the Bureau will commence a separate rulemaking initiative,” which may ultimately moot the litigation. Moreover, the trade groups believe lifting the stays would lead to “piecemeal and potentially wasteful litigation.”
The Bureau also does not seek a lift to the stay of the litigation or compliance date for the payment-related provisions, but for separate reasons. The Bureau argues that the stay of the litigation should be “more limited,” at least until the 5th Circuit issues a decision on the Bureau’s constitutionality in a pending action (covered by InfoBytes here). As for the compliance date stay for the payment-related provisions, the Bureau believes it is not an issue the court needs to decide at this time, but acknowledges that should it request the court lift the stay in the future, the trade groups and the Bureau would have an opportunity to address whether lifting the stay should be delayed to “allow companies to come into compliance with the payments provisions.”
In response to the joint status report, on March 19, the court entered an order continuing the stay of the litigation and the compliance date for both the Rule’s underwriting provisions and its payment-related provisions.
On January 14, acting Director of the FHFA, Joseph Otting, filed a supplemental brief with the U.S. Court of Appeals for the 5th Circuit stating the agency will no longer defend the constitutionality of the FHFA’s structure in the upcoming en banc rehearing. As previously covered by InfoBytes, in July 2018, the 5th Circuit concluded that the FHFA’s single-director structure violates Article II of the Constitution because the director is too insulated from removal by the president. In August, while the agency was still under the leadership of Mel Watt, it petitioned the court for an en banc rehearing, challenging the constitutionality holding. Now, according to the supplemental brief, the FHFA states it “will not defend the constitutionality of [the Housing Economic Recovery Act’s] for-cause removal provision and agrees with the analysis in [the relevant portion] of Treasury’s Supplemental Brief that the provision infringes on the President’s control of executive authority.” The en banc rehearing, which will address the constitutionality issue as well as the plaintiff’s other statutory claims in the case, is scheduled for January 23.
5th Circuit: Loan originators cannot be liable for loan servicers’ violations of RESPA loss mitigation requirements
On December 21, the U.S. Court of Appeals for the 5th Circuit held that a mortgage loan originator cannot be held vicariously liable for a loan servicer’s failure to comply with the loss mitigation requirements of RESPA (and its implementing Regulation X). According to the opinion, in response to a foreclosure action, a consumer filed a third-party complaint against her loan servicers and loan originator alleging, among other things, that the loan servicers had violated Regulation X’s requirement that a servicer evaluate a completed loss mitigation application submitted more than 37 days before a foreclosure sale. In subsequent filings, the consumer clarified that the claims against the loan originator were for breach of contract and vicarious liability for one of the loan servicer’s alleged RESPA violations. The district court dismissed both claims against the loan originator and the consumer appealed the dismissal of the RESPA claim.
On appeal, the 5th Circuit affirmed the dismissal for two independent reasons. First, the 5th Circuit noted it is well established that vicarious liability requires an agency relationship and determined the consumer failed to assert facts that suggested such a relationship existed. Second, in an issue of first impression at the circuit court stage, the court ruled that, as a matter of law, the loan originator could not be vicariously liable for its servicer’s alleged violations of RESPA, as the applicable statutory and regulatory provisions only impose loss mitigation requirements on “servicers,” and therefore only servicers could fail to comply with those obligations. The appellate court reasoned that Congress explicitly imposed RESPA duties more broadly in other sections (using the example of RESPA’s prohibition on kickbacks and unearned fees that applies to any “person”), but chose “a narrower set of potential defendants for the violations [the consumer] alleges.” The court concluded, “the text of this statute plainly and unambiguously shields [the loan originator] from any liability created by the alleged RESPA violations of its loan servicer.”
5th Circuit finds company delay unfairly prejudiced plaintiff, reverses decision to compel arbitration
On November 28, the U.S. Court of Appeals for the 5th Circuit reversed a lower court decision to grant a technology analytics company’s motion to compel arbitration, finding that the company substantially invoked the judicial system prior to moving to compel arbitration, and the individual plaintiff was prejudiced by such actions. According to the opinion, in 2015, the plaintiff filed a complaint against the company alleging various violations of Illinois law relating to deceptive practices and unjust enrichment. In response, the company filed a motion to dismiss for failure to state a claim and, in the alternative, moved to transfer the case for forum non conveniens arguing that the plaintiff’s claims were subject to arbitration in Texas. After the case was transferred to Texas, the company filed a subsequent motion to dismiss and reply brief, both of which did not mention arbitration. In 2017, after receiving the plaintiff’s requests for production, the company filed with the district court its motion to compel arbitration. The district court granted the motion to compel, holding that while the company substantially invoked the judicial process, the plaintiff had only “suffered some prejudice” in the form of delay and delay alone is insufficient to deny arbitration.
On appeal, the 5th Circuit agreed that the company substantially invoked the judicial system, but determined the lower court erred when it found the plaintiff had not been prejudiced unfairly. As a result, the company waived its right to arbitrate. The 5th Circuit noted that after the case was transferred from Illinois to Texas, the company waited 13 months before moving to compel arbitration, in order to first obtain a dismissal from the district court. Acknowledging the damage to the plaintiff’s legal position and additional litigation expenses incurred because of this tactic, the appellate court stated, “[a] party cannot keep its right to demand arbitration in reserve indefinitely while it pursues a decision on the merits before the district court.”
On November 16, the U.S. Court of Appeals for the 5th Circuit affirmed a Texas district court’s denial of attorney’s fees in an FDCPA action, concluding the district court did not abuse its discretion in denying the fees based on the “outrageous facts” in the case. The decision results from a lawsuit filed by a consumer against a debt collector, alleging the company violated the FDCPA and the Texas Debt Collection Act (TDCA) by using the words “credit bureau” in its name despite having ceased to function as a consumer reporting agency, and therefore misrepresented itself as a credit bureau in an attempt to collect a debt. The district court adopted a magistrate judge’s recommendation and found the company violated the FDCPA, granted summary judgment in part for the plaintiff (while denying the TDCA claims), and awarded her statutory damages of $1,000. The plaintiff then filed a motion for $130,410 in attorney’ fees, based on her attorney’s hourly rate of $450. The magistrate judge denied the attorney’s fees, noting that although violation of the FDCPA ordinarily justifies awards of attorneys’ fees, the amount claimed was “excessive by orders of magnitude,” and the lawsuit appeared to have been “created by counsel for the purpose of generating, in counsel’s own words, an ‘incredibly high fee request.’” The district court adopted the magistrate judge’s order.
On appeal, the 5th Circuit noted that other circuits have held there can be narrow exceptions to the FDCPA’s attorneys’ fees mandate, including the presence of bad faith conduct on the part of the plaintiff. In determining the “extreme facts” of the case justify the district court’s denial of attorney’s fees, the appeals court noted the almost 290 hours claimed to be worked by the attorneys are not reflected in the pleadings filed, which were “replete with grammatical errors, formatting issues, and improper citations.” The poor craftsmanship of the filings, the court noted, did not justify the $450 hourly rate charged.
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.
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.”
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.”
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