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On September 9, the U.S. Court of Appeals for the Fifth Circuit affirmed a district court’s dismissal of a plaintiff’s FCRA claims against two consumer reporting agencies (CRAs), holding that omitting a favorable credit item does not render a credit report misleading. The plaintiff filed a lawsuit after the CRAs stopped reporting a favorable item—a timely paid credit card account—and refused to restore it, alleging that the refusal to include the item on his consumer report violated section 1681e(b), which requires CRAs to follow “reasonable procedures to assure maximum possible accuracy” of consumer information. As a result, the plaintiff claimed his creditworthiness was harmed, which caused him to be denied a credit card and rejected for a mortgage. The district court dismissed the suit.
In affirming the dismissal, the 5th Circuit found that the omission of a single credit item does not render a report ”inaccurate” or “misleading.” According to the appellate court, a “credit report does not become inaccurate whenever there is an omission, but only when an omission renders the report misleading in such a way and to such an extent that it can be expected to adversely affect credit decisions.” As such, “[b]usinesses relying on credit reports have no reason to believe that a credit report reflects all relevant information on a consumer.” The 5th Circuit further held, among other things, that the plaintiff failed to state a claim for violations of section 1681i(a), which requires agencies to conduct an investigation if consumers dispute “the completeness or accuracy of any item of information contained in a consumer’s file.” The court held that because the plaintiff “disputed the completeness of his credit report, not of an item in that report,” the statute did not require an investigation.
On July 16, the U.S. Court of Appeals for the Fifth Circuit affirmed a district court’s order compelling arbitration in a lawsuit brought by consumers refuting their liability on a commercial loan, arguing that a Mississippi-based bank “violated numerous state and federal consumer protection laws throughout the loan process.” According to the opinion, the consumers allege a bank representative instructed them to form an LLC and purchase a large plot of land with a commercial loan, as opposed to a consumer loan, in order to receive a “lower interest rate and protection from personal liability[.]” As a part of the transaction, the consumers signed an arbitration agreement that covered “‘any dispute or controversy’ arising from the transaction.” The consumers subsequently filed suit, arguing, among other things, that the bank committed “an unfair, deceptive, abusive act, or practice…by coaxing the [consumers] into forming an LLC and taking out a less favorable commercial loan” rather than a consumer loan, which they originally sought. The bank moved to compel arbitration, and the district court granted the motion and dismissed the action with prejudice.
On appeal, the 5th Circuit agreed with the district court, rejecting the consumers’ argument that there was not a valid agreement to arbitrate. The appellate court concluded that the agreement was neither procedurally nor substantively unconscionable, noting that the consumers voluntarily entered into the agreement and the provision entitling “the victor in arbitration to recover fees from the losing party” was not “one-sided or oppressive.” Moreover, the appellate court concluded that the consumers failed to provide any federal policy or statute that would support their additional argument that the bank’s alleged UDAAP violation would void an otherwise valid arbitration agreement. Thus, the panel affirmed the district court’s order.
On July 9, the U.S. Supreme Court agreed to review the following cases:
- FHFA Constitutionality. The Court agreed to review the U.S. Court of Appeals for the Fifth Circuit’s en banc decision in Collins. v. Mnuchin (covered by InfoBytes here), which concluded that the FHFA’s structure—which provides the director with “for cause” removal protection—violates the Constitution’s separation of powers requirements. As previously covered by a Buckley Special Alert last month, the Court held that a similar clause in the Dodd-Frank Act that requires cause to remove the director of the CFPB violates the constitutional separation of powers. The Court further held that the removal provision could—and should—be severed from the statute establishing the CFPB, rather than invalidating the entire statute.
- FTC Restitution Authority. The Court granted review in two cases: (i) the 9th Circuit’s decision in FTC V. AMG Capital Management (covered by InfoBytes here), which upheld a $1.3 billion judgment against the petitioners for allegedly operating a deceptive payday lending scheme and concluded that a district court may grant any ancillary relief under the FTC Act, including restitution; and (ii) the 7th Circuit’s FTC v. Credit Bureau Center (covered by InfoBytes here), which held that Section 13(b) of the FTC Act does not give the FTC power to order restitution. The Court consolidated the two cases and will decide whether the FTC can demand equitable monetary relief in civil enforcement actions under Section 13(b) of the FTC Act.
- TCPA Autodialer Definition. The Court agreed to review the U.S. Court of Appeals for the Ninth Circuit’s decision in Duguid v. Facebook, Inc. (covered by InfoBytes here), which concluded the plaintiff plausibly alleged the social media company’s text message system fell within the definition of autodialer under the TCPA. The 9th Circuit applied the definition from their 2018 decision in Marks v. Crunch San Diego, LLC (covered by InfoBytes here), which broadened the definition of an autodialer to cover all devices with the capacity to automatically dial numbers that are stored in a list. The 2nd Circuit has since agreed with the 9th Circuit’s holding in Marks. However, these two opinions conflict with holdings by the 3rd, 7th, and 11th Circuits, which have held that autodialers require the use of randomly or sequentially generated phone numbers, consistent with the D.C. Circuit’s holding that struck down the FCC’s definition of an autodialer in ACA International v. FCC (covered by a Buckley Special Alert).
5th Circuit: Collection letters misrepresenting legal enforceability of underlying debt violate FDCPA
On April 29, the U.S. Court of Appeals for the Fifth Circuit held that letters seeking the collection of time-barred debt that include ambiguous offers and contain threats misrepresenting the legal enforceability of the underlying debt violate section 1692e of the FDCPA. In 2011, a creditor placed the plaintiff’s debt with the defendant for collection. Six collection letters were initially sent to the plaintiff for which there was no response, and in 2017, the defendant sent four more letters to the plaintiff. While it was undisputed that the four-year statute of limitations to sue to collect the debt had expired, none of the letters mentioned that the debt was time-barred or that a partial payment may restart the statute of limitations clock. The plaintiff filed suit claiming the 2017 letters violated the Texas Debt Collection Act and were false or misleading and unfair or unconscionable in violation of FDCPA §§ 1692e and 1692f respectively. The district court granted summary judgment for the plaintiff on the 1692e claim, but ruled that “‘there is a growing consensus’ that a claim under § 1692f is a ‘backstop’ to catch conduct outside that barred by § 1692e and other provisions,” and granted summary judgment to the defendant on the 1692f claim. The defendant appealed the 1692e decision.
On appeal, the 5th Circuit affirmed and held that, read as a whole, the letters misrepresented the legal enforceability and character of the debt in violation of § 1692e. The appellate court found that the 2017 letters were ambiguous and failed to even mention when the debt was incurred, which may have provided some insight to the plaintiff as to whether the debt might be legally enforceable. The appellate court also took issue with the 2017 letters’ use of unexplained “urgent” language and vague collection threats, and stated that “the complete silence in these letters works in conjunction with their vague language to mislead the unsophisticated consumer that the debt is enforceable.”
On April 21, the U.S. Court of Appeals for the Fifth Circuit affirmed a district court’s order denying a plaintiff’s motion to compel arbitration, holding that two credit reporting agencies (CRAs) are not subject to arbitration because of their contractual relationships with a bank. The plaintiff sued the bank and the CRAs, alleging violations of the FCRA and that the bank additionally violated the TCPA and the Fair Credit Billing Act in connection with disputed, unfamiliar charges that appeared on his credit card. The bank moved to compel arbitration pursuant to a provision in its credit card agreement, and the CRA defendants moved to stay the claims against them pending the outcome of the arbitration between the plaintiff and the bank. While the plaintiff opposed the bank’s motion to compel arbitration, he simultaneously moved to compel the CRAs to arbitration in the event that the bank’s motion was granted. The district court granted the bank’s motion to compel arbitration and denied the plaintiff’s motion to compel the CRAs to arbitration, reasoning that “‘there is a rebuttable presumption that non-signatories to a contract cannot be bound by arbitration agreements.’”
On appeal, the 5th Circuit agreed with the district court, concluding that because the CRAs were not signatories to the credit card agreement and were neither expressly nor implicitly parties to the agreement, they could not be compelled to arbitrate the plaintiff’s FCRA claims. Furthermore, while Alabama law governed the agreement, the appellate court rejected the plaintiff’s arguments that equitable estoppel and third-party beneficiary theories under Alabama common law required the CRAs to arbitrate the claims.
On April 22, the U.S. Court of Appeals for the Fifth Circuit affirmed a district court’s dismissal of an FCRA action, holding that the plaintiff failed to prove that his alleged injuries were the result of the defendants’ actions. According to the opinion, the plaintiff alleged that a financial institution wrongfully reported a payment delinquency on his retail credit card, which he claimed caused the subsequent denial of a loan application. Upon learning of the denial, the plaintiff disputed the late-payment notation with three credit reporting agencies (CRAs). Prior to the district court’s judgment, the plaintiff settled with the retailer, the financial institution, and one of the three CRAs. The remaining two defendant CRAs reinvestigated the delinquency with the financial institution, confirmed the information, and notified the plaintiff of the result of their investigation. The plaintiff argued that the CRAs “failed to conduct a reasonable investigation” because they never directly contacted the retailer about the disputed late payment. However, the district court held that that the CRAs’ reliance on the Automated Consumer Dispute Verification (ACDV) system to investigate the dispute and confirm the information was “generally acceptable.”
On appeal, the 5th Circuit agreed with the district court that the plaintiff “offered no reasonable factual basis” for why the CRAs “should have been on notice of a need to go beyond the ACDV system as to this dispute.” The appellate court further agreed that the plaintiff was unable to show that contacting the retailer would have changed the CRAs’ conclusions about the information they already possessed. Finally, the 5th Circuit held that the plaintiff had shown no evidence that the denial of his loan application was a direct result of the CRAs’ actions because, as the district court concluded, the loan application was denied because of a credit report from the CRA that had previously settled with the plaintiff and was no longer a party to the suit.
On March 20, the U.S. Court of Appeals for the Fifth Circuit issued an opinion ordering that—“on the Court’s own motion”—it will conduct an en banc hearing on whether the CFPB’s single-director leadership structure is constitutional. The order vacates the appellate court’s March 3 opinion (covered by InfoBytes here), in which it previously determined that there was no constitutional issue with allowing the Bureau director to only be fired for cause. According to the now-vacated opinion, the majority concluded that the claim that the Bureau’s structure is unconstitutional “find[s] no support. . .in constitutional text or in Supreme Court decisions.” The 5th Circuit’s prior decision came the same day the U.S. Supreme Court heard oral arguments in Seila Law LLV v. CFPB on the same issue.
On March 12, the U.S. Court of Appeals for the Fifth Circuit affirmed a district court’s decision that a debt collector (defendant) did not violate the FDCPA by mentioning that interest may accrue on an unpaid debt in a collection letter. In this case, the plaintiff alleged that the defendant violated the FDCPA’s prohibition on false, deceptive, or misleading representations in connection with the collection of a debt when it sent him a letter that included line items detailing the amount owed, separate line items that showed interest and fees as $0, and a disclosure that stated “[i]n the event there is interest or other charges accruing on your account, the amount due may be greater than the amount shown above after the date of this notice.” The plaintiff contended that the defendant was not allowed to collect interest on debts placed by the original creditor and that the original agreement between the plaintiff and the creditor “‘does not allow’ for interest to accrue or for other charges to be added.” The district court granted summary judgment for the defendant, stating that the letter accurately conveyed what was possible under the Texas Finance Code—that interest could accrue—and was therefore not false, deceptive, or misleading.
On appeal, the 5th Circuit affirmed the district court’s ruling, holding that “[t]he challenged statement in the letter is not false, deceptive or misleading because it merely expresses a common-sense truism about borrowing—if interest is accruing on a debt, then the amount due may go up.” [Emphasis in the original.] According to the appellate court, the “simple statement would have been clear even to an unsophisticated borrower. . . .” Moreover, the appellate court concluded that it did not matter whether the plaintiff’s agreement with the creditor prohibited interest or other charges “because the language at issue does not state that [the defendant or the creditor] would—or even could—collect interest.”
On March 4, the U.S. Court of Appeals for the Fifth Circuit affirmed summary judgment in favor of a debt collector (defendant) accused of violating the FDCPA and the terms of a CFPB consent order. According to the opinion, the defendant attempted to collect a credit card debt from the plaintiff that the plaintiff did not recognize. In December 2014, the defendant filed suit to collect the past due debt. In the meantime, the CFPB issued a consent order against the defendant for violations of the FDCPA (covered by InfoBytes here) while the parties awaited trial. Thereafter, the plaintiff filed a complaint with the CFPB regarding the validity of the debt, but the Bureau closed that complaint after verifying the defendant’s ownership of the plaintiff’s debt. The plaintiff responded by filing his own lawsuit in March 2017, claiming the defendant violated the FDCPA by (i) “lacking validation of his debt prior to his January 2016 trial”; (ii) failing to timely validate his debt in violation of provisions of its consent order with the CFPB; and (iii) “misrepresenting that it intended to prove ownership of his debt if contested.” The district court granted summary judgment for the defendant based on the plaintiff’s failure to prove actual damages.
On appeal, the appellate court determined that the district court erred in ruling that the plaintiff failed to plead actual damages, finding that “the FDCPA does not require proof of actual damages to ground statutory damages.” However, the appellate court did not reverse the district court’s decision. Instead, the appellate court affirmed, holding that the plaintiff’s debt validation claims were time-barred because he did not file suit within the FDCPA’s one-year statute of limitations. Regarding the other two claims, the appellate court stated that while the claims were not time-barred, the plaintiff lacked standing because “private persons may not bring actions to enforce violations of consent decrees to which they are not a party.” The CFPB’s consent order with the defendant specified that the CFPB was the enforcer of the order, and its text could not be read to invoke a private right of action permitting the plaintiff’s suit. Accordingly, the appellate court affirmed summary judgment against the plaintiff on these remaining two claims.
On March 3, the same day the U.S. Supreme Court heard oral arguments in Seila Law LLC v. CFPB (covered by InfoBytes here), a divided U.S. Court of Appeals for the Fifth Circuit 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. As previously covered by InfoBytes, the CFPB filed a complaint against two Mississippi-based payday loan and check cashing companies for allegedly violating the Consumer Financial Protection Act’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 structure of the CFPB is unconstitutional and that the CFPB’s claims violate due process. The 5th Circuit agreed to hear an interlocutory appeal on the constitutionality question, and subsequently, the payday lenders filed an unchallenged petition requesting an initial hearing en banc. (Covered by InfoBytes here.)
On appeal, the majority upheld the district court’s decision that the Bureau is not unconstitutional based on its single-director structure. “The payday lenders argue that the structure of the CFPB denies the Executive Branch its due because the Bureau is led by a single director removable by the President only for cause,” the majority wrote. “We find no support for this argument in constitutional text or in Supreme Court decisions and uphold the constitutionality of the CFPB’s structure, as did the D.C. and Ninth [C]ircuits.” The majority compared the case to the D.C. Circuit’s en banc decision in PHH v. CFPB (covered by a Buckley Special Alert) and the 9th Circuit’s decision in CFPB v. Seila Law LLC (covered by InfoBytes here), both of which upheld the Bureau’s structure. The majority also distinguished a 2018 ruling from the 5th Circuit sitting en banc, which held the FHFA’s single-director structure unconstitutional (covered by InfoBytes here). This provoked a strong dissent charging that the majority had “suddenly discover[ed] that stare decisis is for suckers.”
- H Joshua Kotin to discuss "Being fair, responsible, & profitable" at the QuestSoft Lending Compliance & Risk Management Virtual Conference
- Kathryn L. Ryan to discuss "NMLS mortgage call report – Where’s NMLS 2.0?" at the QuestSoft Lending Compliance & Risk Management Virtual Conference
- Thomas A. Sporkin to discuss "Managing internal investigations and advanced government defense" at the Securities Enforcement Forum
- Jeffrey P. Naimon to discuss "2021 - A new beginning/what's to come" at the QuestSoft Lending Compliance & Risk Management Virtual Conference
- H Joshua Kotin to discuss "Mortgage servicing in a recession: Early intervention, loss mitigation and more" at the NAFCU Virtual Regulatory Compliance Seminar
- Daniel R. Alonso to discuss "Independent monitoring in the United States" at the World Compliance Association Peru Chapter IV International Conference on Compliance and the Fight Against Corruption
- Jonice Gray Tucker to discuss "Cyber security, incident response, crisis management" at the Legal & Diversity Summit
- Jonice Gray Tucker to discuss "The future of fair lending" at the Mortgage Bankers Association Regulatory Compliance Conference
- Michelle L. Rogers to discuss "Major litigation" at the Mortgage Bankers Association Regulatory Compliance Conference
- Kathryn L. Ryan to discuss "Pandemic fallout – Navigating practical operational challenges" at the Mortgage Bankers Association Regulatory Compliance Conference
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute
- Daniel P. Stipano to discuss "BSA/AML - Covid impact and regulatory/guidance roundup" at an NAFCU webinar