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CFPB Files Amicus Brief Supporting Reversal of Preliminary Injunction Freezing Department of Education’s Student Debt Collection
On August 21, the CFPB filed an amicus brief in the Court of Appeals for the Federal Circuit, urging the court to reverse a trial court’s order and arguing that precluding the Department of Education (Department) from sending billions of dollars in defaulted student loans to debt collection companies is contrary to public interest. The Bureau, siding with the Department, claims the trial court’s preliminary injunction deprives “borrowers in default of access to basic information about key consumer protections and the opportunity to arrange repayment—functions performed by debt collection contractors under [the Department’s] current collections regime—[and] does not facilitate, but impedes, borrowers’ ability to enter into income-driven repayment plans, whether through rehabilitation or consolidation.” As previously reported in InfoBytes, on May 31, U.S. Court of Federal Claims Chief Judge Susan G. Braden ordered a continuation of her preliminary injunction, which prevents the Department from collecting on defaulted student loans—a process that was halted on March 29 when Judge Braden issued a temporary restraining order in this matter. The May order, Judge Braden stated, would stay in place “until the viability of the debt collection contracts at issue is resolved.”
In its amicus brief, the Bureau contended that data presented in its 2016 Ombudsman Report (Report) providing recommendations for reforms to the current process for collection and restructuring federal student loan debt does not support the trial court’s position, a claim the court made when issuing its order. Rather, the Bureau’s position is that the Report provides several recommendations for improvements to the current system, which focus on which companies will be granted debt collection contracts and, additionally, suggests solutions such as moving rehabilitated borrowers into income-driven repayment plans. The Bureau also proposes ways policymakers can simplify and streamline the rehabilitation process. Thus, the Bureau countered, the preliminary injunction is “wholly divorced from these concerns and recommendations and is, in fact, inconsistent with them.”
Two of the defendant-appellants also filed separate briefs August 14 and 15. The Department claimed in its August 15 brief that, as of May 31, the injunction has “deprived approximately 234,000 defaulted borrowers, holding accounts valued at $4.6 billion, of loans servicing services” and, furthermore, has resulted in approximately $2.4 million in uncollected funds.
Notably, the appeals court issued an order on July 18 holding the defendant-appellants motions to stay in abeyance pending the trial court’s decision and denying the plaintiff-appellee’s motion to dismiss.
On August 15, a federal judge in the U.S. District Court for the Northern District of Illinois Eastern Division granted a pet health insurance company’s (defendants) motion to strike class allegations in a Telephone Consumer Protection Act (TCPA) lawsuit over alleged robocalls. Citing a recent Supreme Court ruling in Spokeo v. Robins, the judge opined that because evidence proved some of the class members agreed to receive calls, plaintiffs failed to establish a lack of consent and could therefore not claim to have suffered a concrete injury. In 2014, plaintiffs filed a suit against the defendants proposing certification of two classes—“advertisement” and “robocall”—alleging that calls were made to individuals’ cell phones without specific consent and arguing that these calls were a form of “advertising,” which, pursuant to FTC rules, requires express written consent. However, the defendants’ position—for which the judge ruled in favor—was that because affidavits signed by individuals during the pet adoption process show that some of the class members consented to receive calls about special offers (electing not to opt-out), these individuals would not be able to prove injury under the Spokeo standard. Thus, issues of individualized consent would predominate, making it impossible for plaintiffs to “establish a lack of consent with generalized evidence.” Furthermore, the court stated that if plaintiffs agreed to receive calls—as defendants claim a significant number did, just not in writing—a lack of written evidence does not make the calls unsolicited.
On August 18, the OCC filed a motion in the U.S. District Court for the Southern District of New York to dismiss a lawsuit brought by the New York Department of Financial Services (NYDFS) challenging the OCC’s fintech charter, which would allow the OCC to consider applications from fintech firms for Special Purpose National Bank Charters (SPNB). See Vullo v. Office of the Comptroller of the Currency, Case 17-cv-03574 (S.D.N.Y., Aug. 18, 2017). In a memorandum supporting its motion to dismiss, the OCC argued that the case is not ready for judicial review because NYDFS’ claims that the charter is unlawful and would grant preemptive powers over state law are “contingent on future actions that [the] OCC might or might not take.” Therefore, because NYDFS “cannot point to any injury-in-fact that it has suffered as a result of [the] OCC’s purported actions . . . all of the potential injuries . . . are future-oriented and speculative, and therefore insufficient to confer standing.” Citing Lujan v. Defenders of Wildlife, the OCC asserted that injury must be “likely”—not just “speculative” in nature.
The OCC additionally contended that NYDFS’ challenge lacks standing because:
- The matter fails to meet the fitness and hardship prongs for ripeness and lacks evidence of concrete hardship: (i) the fitness prong is not met because the OCC’s inquiry regarding whether to offer SPNB Charters is ongoing and it has not decided whether it will accept applications for the charters; and (ii) the hardship prong is not met because the OCC averred NYDFS “will not suffer any immediate or significant hardship” if the court were to delay review of this matter.
- Any challenge to the OCC’s 2003 amendment to Section 5.20(e)(1) is “time-barred by the statute of limitations applicable to civil actions against federal agencies.” Furthermore, “[i]nsofar as the adoption of the amendment . . . constitutes a final agency action that [NYDFS] seeks to challenge here, any cause of action would have accrued on January 16, 2004, when the Final Rule became effective. 68 Fed. Reg. 70122 (Dec. 17, 2003). Accordingly, the time for filing a facial challenge to the regulation expired on January 16, 2010.”
- NYDFS’ complaint fails to state a claim on which relief may be granted because the OCC would have had to have issued Section 5.20(e)(1) charters—non-finalized policy statements and requests for public input alone are insufficient to satisfy the “final agency action” requirement needed to give rise to a claim under the Administrative Procedure Act. The OCC asserted it has not completed its decision-making process and that its actions have not affected rights or obligations or resulted in legal consequences.
- Under the National Bank Act, the OCC’s interpretation of “the business of banking”—in which a special purpose bank “must conduct at least one of the following three core banking functions: receiving deposits; paying checks; or lending money”—deserves Chevron deference.
- The OCC has statutory and constitutional authority to issue a Section 5.20(e)(1) charter because: (i) the limited judicial authority cited by the DFS is not entitled to weight; (ii) the historical understanding of “bank” is consistent with the OCC’s interpretation; and (iii) any SPNB charters issued to fintechs pursuant to Section 5.20(e)(1) would not violate the Tenth Amendment.
On August 10, the U.S. Court of Appeals for the Eleventh Circuit held that the Telephone Consumer Protection Act (TCPA) “permits a consumer to partially revoke her consent to be called by means of an automatic telephone dialing system.” As alleged in this case, when the consumer plaintiff applied for a credit card, she broadly consented to receive automated calls from the bank defendant on her cell phone. After falling behind on her payments, she started receiving automated delinquency calls from the bank. On an October 2014 call with a bank employee, the plaintiff expressed that she did not want to receive these automated calls “in the morning” and “during the work day.” The plaintiff claimed that the bank violated the TCPA by making “over 200 automated calls” thereafter during these restricted times of day, until she fully revoked consent in March 2015.
The U.S. District Court for the Southern District of Florida had granted summary judgment in favor of the bank, but the Eleventh Circuit reversed. The Eleventh Circuit disagreed with the bank’s legal argument that “the only effective revocations are unequivocal requests for no further communications whatsoever.” Instead, the court concluded that “the TCPA allows a consumer to provide limited, i.e., restricted, consent for the receipt of automated calls,” and that “unlimited consent, once given, can also be partially revoked as to future automated calls under the TCPA.” The court also concluded that there was an “issue of material fact” as to whether the plaintiff’s October 2014 statements constituted a partial revocation. Noting that “[t]his issue is close,” the court explained that a reasonable jury could find that the plaintiff revoked her consent to be called “in the morning” and “during the work day,” even if she did not specify exactly what times she meant. Accordingly, the court remanded for trial.
On August 15, the U.S. Court of Appeals for the Ninth Circuit issued an opinion, on remand from the U.S. Supreme Court, ruling that a consumer plaintiff could proceed with his Fair Credit Reporting Act (FCRA) claims because he had sufficiently alleged a “concrete” injury and therefore had standing to sue under Article III of the Constitution. Robins v. Spokeo, Inc., No. 11-56843, 2017 WL 3480695 (9th Cir. Aug. 15, 2017). By way of background, the plaintiff had alleged that the defendant consumer reporting agency “willfully violated various procedural requirements under FCRA,” and consequently published an inaccurate consumer report on its website that “falsely stated his age, marital status, wealth, education level, and profession” and “included a photo of a different person.” In May 2016, the Supreme Court vacated an earlier Ninth Circuit decision, finding that the court failed to consider an essential element of Article III standing: whether the plaintiff alleged a “concrete” injury. (See previous Special Alert here.) After providing some guidance—including that the plaintiff’s injury must be “real” and not “abstract” or merely “procedural”—the high court remanded to the Ninth Circuit for further consideration.
On remand, the court first asked “whether the statutory provisions at issue were established to protect [the plaintiff’s] concrete interests (as opposed to purely procedural rights).” The court answered affirmatively, finding that “the FCRA procedures at issue in this case were crafted to protect consumers’ . . . concrete interest in accurate credit reporting about themselves.” Next, the court asked “whether the specific procedural violations alleged in this case actually harm, or present a material risk of harm to, such interests.” The court again answered affirmatively, finding that the plaintiff sufficiently alleged that he suffered a “real harm” to his “concrete interests in truthful credit reporting.” That is, the plaintiff sufficiently alleged that the defendant “prepared . . . an [inaccurate] report,” “that it then published the report on the Internet,” and that “the nature of the specific alleged reporting inaccuracies” was not “trivial or meaningless,” but instead covered “a broad range of material facts” about the plaintiff’s life “that may be important to employers or others making use of a consumer report.” Finally, the court found that the plaintiff’s allegations were not too speculative, because “both the challenged conduct and the attendant injury have already occurred.” After reaffirming that the plaintiff had adequately alleged the other essential elements of standing, the court remanded to the Central District of California for further proceedings.
On August 4, a federal judge in the U.S. District Court for the Middle District of Pennsylvania denied a motion to dismiss brought by a student loan servicer, ruling that the CFPB is constitutional, and that it has the authority to act against companies without first adopting the rules used to define a specific practice as unfair, deceptive, or abusive. Further, the court found that the Bureau’s complaint is “adequately pleaded.” As previously reported in InfoBytes, the CFPB filed a complaint in January of this year, contending that the student loan servicer systematically created obstacles to repayment and cheated many borrowers out of their rights to lower repayments, causing them to pay much more than they had to for their loans.
Citing numerous precedents, including several which have already examined the issue of the CFPB’s constitutionality, the court disposed of several arguments raised by the student loan servicer, finding that:
- There is no merit in the argument that the “CFPB lack[ed] statutory authority to bring an enforcement action without first engaging in rulemaking to declare a specific act or practice unfair, deceptive, or abusive,” because under the provisions of Title X of Dodd-Frank, the CFPB has the authority to declare something as “unlawful” both through rulemaking and litigation.
- The CFPB isn’t outside the bounds of the Constitution, in part because its provision making it difficult for the President to remove the CFPB’s director isn’t any more burdensome than those of other agencies, such as the FTC. By recognizing this, and that the CFPB director “is not insulated by a second layer of tenure and is removable directly by the President,” the court ruled that the “Bureau’s structure is not constitutionally deficient.”
- The funding method utilized by the Bureau has parallels in other federal agencies and does not affect presidential authority, stating that “although the CFPB is funded outside of the appropriations process, Congress has not relinquished all control over the agency’s funding because it remains free to change how the Bureau is funded at any time.” The court therefore found that the President’s constitutional powers have not been curtailed.
The court dismissed the student loan servicer’s assertion that it is unable to “reasonably prepare a response” due to the vague and ambiguous nature of the complaint. Rather, the court argues that the Bureau’s complaint provides enough “multiple specific examples” to warrant a response by way of an answer.
District Judge Denies Motion to Compel Arbitration, Rules Arbitration Agreement Contained in Nested Hyperlink Invalid
On July 21, a federal judge in the U.S. District Court for the Southern District of California denied a Defendant’s motion to compel arbitration, finding that the Plaintiff had not agreed to arbitrate where the Defendant had presented the arbitration agreement electronically to the Plaintiff through a multi-layered set of hyperlinks. See McGhee v. North American Bancard, LLC, 17-CV-0586-AJB-KSC, 2017 WL 3118799 (S.D. Cal. Jul. 21, 2017). The dispute revolved around an agreement for the use of a credit card reader provided by the Defendant. The terms and conditions for this service were presented to the Plaintiff electronically via a hyperlink. The hyperlink was placed next to a checkbox and button labeled with the phrase “I have read and agree to the Terms and Conditions.” But the Terms and Conditions document accessible through that hyperlink did not contain the arbitration agreement. Instead, the arbitration agreement was only accessible by clicking on a second hyperlink contained in the first document. Additionally, the Terms and Conditions document accessible through the first-level hyperlink conflicted with the nested arbitration agreement because the Terms and Conditions document included a forum selection clause designating state and federal courts of Georgia. On these facts, the court found that Plaintiff’s consent applied only to the Terms and Conditions document immediately behind the first hyperlink, and did not apply to the arbitration agreement accessible through the nested hyperlink.
In an opinion handed down on July 17, the U.S. Court of Appeals for the Fourth Circuit ruled that the Servicemembers Civil Relief Act (SCRA) does not apply to a mortgage loan obligation incurred during a borrower’s military service, even if the obligation was incurred during an earlier, distinct period of military service. At issue was the SCRA’s requirement that lenders obtain a court order before foreclosing on or selling property owned by a current or recent servicemember if the mortgage obligation “originated before the period of the servicemember’s military service.”
The case concerned a borrower who had financed the purchase of a house while serving in the Navy. After his discharge from the Navy, he defaulted on his mortgage loan. The borrower then enlisted in the Army, and shortly thereafter, the bank sold the borrower’s house—without prior court approval—at a foreclosure sale. The borrower signed a move-out agreement and addendum that affirmatively waived “any rights and protections provided by [SCRA] with respect to” the deed and foreclosure sale.
More than five years after the foreclosure sale, the borrower filed a lawsuit against the bank, alleging that the foreclosure sale was invalid under SCRA. The district court granted summary judgment for the bank, ruling that “[b]ecause it is undisputed that [the borrower’s] mortgage originated while he was in the military, that obligation does not qualify under [SCRA].” Specifically, the district court reasoned that the SCRA is “designed to ensure that servicemembers do not suffer financial or other disadvantages as a result of entering the service . . . by shielding servicemembers whose income changes as a result of their being called to active duty, and who therefore can no longer keep up with obligations negotiated on the basis of prior levels of income.” “Such a change in income and lifestyle,” the district court explained, “was not a factor in [the borrower’s] case, as the mortgage at issue here originated while he was already in the service.”
The Fourth Circuit adopted the district court’s reasoning in a 2-1 decision. In dissent, Judge King contended that the majority’s ruling was contrary to the SCRA’s plain, unambiguous language. Judge King further reasoned that, even if the SCRA’s language was ambiguous, the borrower would still prevail because the SCRA must be liberally construed to protect servicemembers.
Of note, because of its ruling, the district court did not address the bank’s alternative argument that the borrower had waived his rights under the SCRA by executing the addendum to his move-out agreement.
On July 28, the OCC filed a motion in the U.S. District Court for the District of Columbia to dismiss a lawsuit brought by the Conference of State Bank Supervisors (CSBS) challenging the OCC’s fintech charter. See Conf. of State Bank Supervisors v. Office of the Comptroller of the Currency, Case 1:17-cv-00763-JEB (D.D.C. Jul. 28, 2017). In a memorandum supporting its motion to dismiss, the OCC argued that CSBS does not have standing to bring the case because the OCC has not yet come to a decision on whether it will make special purpose national bank charters available to fintech companies and other nonbank firms, and therefore, “[n]o tangible effect on CSBS or CSBS's members could even arguably occur until a 5.20(e)(1) Charter has been issued to a specific applicant.” For similar reasons, the OCC argued that the case was not ripe for judicial review.
Addressing the merits, the OCC cited Independent Community Bankers Ass’n of South Dakota, Inc. v. Board of Governors of the Federal Reserve System, 820 F.2d 428 (D.C. Cir. 1987), cert. denied, 484 U.S. 1004 (1988), arguing that the ruling confirms its authority to issue special purpose bank charters and “illustrates that the legal concept of a special purpose national bank power is not novel or unprecedented, but rather follows a decades-old OCC practice.” The OCC further argued that under the National Bank Act, the OCC’s interpretation of “the business of banking”—in which a special purpose bank “must conduct at least one of the following three core banking functions: receiving deposits; paying checks; or lending money”—deserves Chevron deference.
As previously discussed in a Special Alert, CSBS claimed the fintech charter violates the National Bank Act, Administrative Procedure Act, and the U.S. Constitution, and that the OCC has acted beyond the legal limits of its authority. Furthermore, CSBS asserts that providing special purpose national bank charters to fintech companies “exposes taxpayers to the risk of inevitable [fintech] failures.”
However, shortly after the OCC’s motion was filed, a federal judge ordered that the OCC’s motion to dismiss be stricken based on excessive footnoting. The judge, in a minute order on the docket, cited that the excessive number of footnotes “appear to be an effort to circumvent page limitations.” On August 2, the OCC filed a renewed motion to dismiss.
- John R. Coleman to discuss “CFPB update” at the MBA Legal Issues and Regulatory Compliance Conference
- Kathryn L. Ryan to discuss "State licensing and NMLS challenges" at MBA’s Legal Issues and Regulatory Compliance Conference
- Jonice Gray Tucker to discuss “Fair lending and equal opportunity laws” at the MBA Legal Issues and Regulatory Compliance Conference
- Jeffrey P. Naimon to discuss “Contemplating the boundaries of UDAAP” at the MBA Legal Issues and Regulatory Compliance Conference
- Steven vonBerg to speak at closing “super session“ on compliance topics at MBA Legal Issues and Regulatory Compliance Conference
- Buckley Webcast: Fifth Circuit muddles CFPB’s plans to use in-house judges in enforcement proceedings
- Jeffrey P. Naimon to discuss “Understanding the ESG impact on compliance” at the ABA’s Regulatory Compliance Conference