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On December 16, a national bank and the city of Philadelphia agreed to a $10 million settlement in a fair lending suit filed against a national bank in 2017 in the U.S. District Court for the Eastern District of Pennsylvania. The settlement resolves claims against the bank alleging violations of the Fair Housing Act, as previously covered in InfoBytes. Specifically, the city alleged that the bank engaged in discriminatory mortgage lending practices by placing minority borrowers in loans with less favorable terms than loans to similar non-minority borrowers. According to the complaint, these allegedly discriminatory loans increased foreclosure rates and resulted in falling property values, particularly in minority and low-income neighborhoods in Philadelphia. The empty properties and lower property values in turn reduced tax revenues and increased costs to the city to pay for municipal services including police, fire fighting, housing programs, and also maintenance for the growing number of empty properties. The court had previously denied the bank’s motion to dismiss, (prior InfoBytes coverage here), which argued, among other things, that the city had failed to show that the bank’s alleged lending practices were the proximate cause of the city’s harm.
On December 13, the FTC filed a brief in a U.S. Supreme Court action that is currently awaiting the Court’s decision to grant certiorari. The question presented to the Court asks whether the FTC is empowered by Section 13(b) of the FTC Act to demand equitable monetary relief in civil enforcement actions. The petitioners, who include a Kansas-based operation and its owner, filed the petition for a writ of certiorari in October, appealing a December 2018 decision by the U.S. Court of Appeals for the Ninth Circuit (covered by InfoBytes here), which upheld a $1.3 billion judgment against the petitioners for allegedly operating a deceptive payday lending scheme. Among other things, the 9th Circuit rejected the petitioners’ argument that the FTC Act only allows the court to issue injunctions, concluding that a district court may grant any ancillary relief under the FTC Act, including restitution. The 9th Circuit also rejected the petitioners’ request to revisit those precedents in light of the Court’s 2017 holding in Kokesh v. SEC—which limited the SEC’s disgorgement power to a five-year statute of limitations period applicable to penalties and fines under 28 U.S.C. § 2462 (previously covered by InfoBytes here)—concluding that the district court did not abuse its discretion in calculating the award. Additionally, the 9th Circuit referenced the Court’s statement in Kokesh that noted “[n]othing in [its] opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings.”
In response to the petition, the FTC asked the Court to delay reviewing the appeal, stating that the Court should hold the petition pending the disposition in a matter that was recently granted cert “to decide whether district courts may award disgorgement to the [SEC] under analogous provisions of the securities laws.” The FTC acknowledged that while the “relevant statutory schemes are not identical, and the FTC’s and the SEC’s authority to seek monetary relief will not necessarily rise and fall together,” the questions presented in both cases overlap.
On December 11, a payments company filed a lawsuit against the CFPB in the U.S. District Court for the District of Columbia alleging that the Bureau’s Prepaid Account Rule (Rule), which took effect April 1 and provides protections for prepaid account consumers, exceeds the agency’s statutory authority and is “arbitrary and capricious” under the Administrative Procedures Act (APA). The company further asserts that the Rule violates its First Amendment rights by requiring it to make confusing disclosures that contain categories not relevant to the company’s products. According to the complaint, the Rule mandates that the company send “short form” fee disclosures to customers that include references to fees for ATM balance inquiries, customer service, electronic withdrawal, international transactions, and other categories, and “prohibits [the company] from including explanatory phrases within the disclosure box to describe the nature of these fee categories.” These disclosures, the company asserts, have confused many customers who mistakenly believe the company charges fees to access funds stored as a balance with the company, to make a purchase with a merchant, or to send money to friends or family in the U.S. The company also claims that the Bureau erroneously lumped it into the same category as providers of general purpose reloadable cards (GPR cards), and argues that the Rule ignores how prepaid cards fundamentally differ from digital wallets, which has resulted in several unintended consequences.
The company asserts that the Rule is unlawful and invalid under the APA and the Constitution for three principal reasons:
- The Rule contravenes the Bureau’s statutory authority by (i) establishing a mandatory and misleading disclosure regime that is not authorized by federal law; and (ii) “impos[ing] a 30-day ban on consumers linking certain credit cards to their prepaid account—a prohibition the law nowhere authorizes the Bureau to impose.”
- Even if the Bureau possesses the statutory authority it claims to have, the rulemaking process was “fundamentally flawed” due to its one-size-fits-all Rule that misunderstands the different characteristics of digital wallets compared to GPR cards. By treating digital wallets as if they are GPR cards, the Rule violates the APA’s reasoned decision-making requirement. Additionally, the Rule is marked by “an insufficient cost-benefit analysis that failed to properly weigh the limited benefits consumers might derive from the Rule against the costs” stemming from the Rule’s changes.
- The Rule violates the First Amendment by failing to satisfy the heightened standard that a law or regulation “directly advances a substantial government interest” because it requires the company to makes certain disclosures that are irrelevant to its digital wallet product. Moreover, the Rule’s disclosure obligations “functionally impair the speech in which [the company] might otherwise engage” by mandating that it provide confusing and misleading disclosures about the nature of its offerings.
The complaint asks that the Rule be vacated and declared arbitrary, an abuse of discretion, not in accordance with the law, and unconstitutional, and additionally seeks injunctive relief, attorneys’ fees and costs.
On December 13, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s grant of summary judgement in favor of a bank and mortgage servicer defendants in an action brought by a consumer to prevent foreclosure of his property. According to the unpublished opinion, in 2016, the consumer, who was struggling with his mortgage payments, submitted loan modification requests on three occasions. In each request, the consumer provided written acknowledgment of the original debt and expressed his desire to pay in order to keep his property. The consumer asserted that Washington state law and the FDCPA prohibited the defendants from instituting foreclosure proceedings on his mortgage because the six-year statute of limitations for filing for foreclosure had expired. On appeal, the three judge panel rejected the consumer’s argument, determining that the limitation on filing for foreclosure had not run, explaining that because the consumer had not communicated to defendants “an intent not to pay,” and each of the modification requests acknowledged the debt in writing, the foreclosure statute of limitations period was restarted each of the three times he submitted his loan modification requests.
On December 13, the U.S. District Court for the District of Maryland denied an international hospitality company’s motion to dismiss a data breach suit brought by the City of Chicago. According to the city’s complaint, the company violated the Illinois Consumer Fraud and Deceptive Business Practices Act by, among other things, allegedly failing to (i) “protect Chicago residents’ personal information”; (ii) implement and maintain reasonable security measures; (iii) disclose that it did not maintain reasonable security measures; and (iv) provide “prompt notice” of the breach to Chicago residents. According to the opinion, the city had established standing to sue the company because it adequately alleged injury to its municipal interests. Additionally, the court rejected the company’s assertion that the suit is unconstitutional under the Illinois Constitution, stating that the consumer protection ordinance the company was alleged to have violated “addresses a local problem, making it a legitimate exercise of the City’s home rule authority” under the state’s constitution. The company had released a statement in November 2018, which is at the center of the city’s action, stating that the breach was discovered in September 2018, had exposed personal information from 500 million guests, and been ongoing since 2014.
On December 12, the U.S. Court of Appeals for the Fifth Circuit reversed the district court’s ruling overturning a jury verdict in favor of the consumer for a debt collection company’s (company) violation of the FDCPA and the Texas Fair Debt Collection Practices Act (Texas Act). The consumer sued the company claiming that after she sent the company a letter disputing a debt, the company failed to report to the credit bureaus that the debt was “disputed.” At trial, the jury awarded the consumer $61,000 for the company’s alleged FDCPA and Texas Act violations. Afterwards, the district court granted the company’s post-trial motion for judgment as a matter of law, overturned the jury’s verdict, and dismissed the case, ruling that the consumer failed to provide evidence that the disputed debt was a consumer debt.
On appeal, the 5th Circuit held that it is within the jury’s discretion to make credibility determinations and that it was permissible for the jury to credit the consumer’s testimony about the consumer nature of the debt—a determination which cannot be disturbed unless it is impossible that the testimony is true. In addition, the appellate court noted that the jury has discretion to draw inferences and that it reasonably inferred that the disputed debt was, in fact, a consumer debt, as the consumer claimed.
On December 13, the U.S. District Court for the Eastern District of Virginia granted final approval of a $12 million settlement to resolve allegations including unjust enrichment, usury, and violations of RICO against tribe-related lenders (lenders) that plaintiffs claim charged extremely high interest rates on consumer payday loans. According to the memorandum in support of the settlement, one lender’s “operation constituted a “rent-a-tribe,” where it originated high-interest loans through entities formed under tribal law in an attempt to evade state and federal laws.” The parties filed a preliminary settlement agreement in June. According to the approval order, the court found that “the settlement agreement is fair, adequate and reasonable,” reaffirmed certification of a final settlement class, and additionally found that “the class representatives have and continue to adequately represent settlement class members.” This settlement ends three separate putative class actions against the lenders.
On December 10, the U.S. District Court for the Eastern District of New York issued a memorandum and order denying an international bank’s motion to dismiss a DOJ suit filed in 2018. As previously covered in InfoBytes, the DOJ alleges the bank and several affiliates violated the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) by misleading investors and rating agencies in offering documents and presentations regarding the underwriting quality and other important attributes of the mortgages they securitized into residential mortgage-backed securities (RMBS) for sale to investors during the financial crisis. Specifically, the complaint alleges (i) “mail fraud affecting federally-insured financial institutions (FIFIs)”; (ii) wire fraud affecting FIFIs; (iii) bank fraud; (iv) “fraudulent benefit from a transaction with a covered financial institution (FI)”; and (v) “false statements made to influence the actions of a covered FI.” The DOJ seeks the maximum civil penalty.
According to the district court’s memorandum, the bank’s motion to dismiss sets forth a number of arguments, including, among other things, a failure to sufficiently plead fraudulent intent and the particular circumstances constituting fraud, and a lack of personal jurisdiction, all with which the court rejected. Specifically, the bank suggested that the DOJ’s complaint did not show that the bank “acted with fraudulent intent,” or that the bank committed “bank fraud, [made] fraudulent bank transactions, and [made] false statements to banks.” The memorandum rejects the bank’s claims, adding that personal jurisdiction over the bank and its affiliates is shown “based on [the bank’s] origination of loans” in New York.
On December 10, the U.S. Supreme Court, in an eight-to-one decision, held that the one-year time limit for filing an FDCPA action starts on the date of the violation, and that no “discovery rule” applies. According to the opinion, the respondent law firm sued the petitioner seeking payment of credit card debt. The respondent attempted service on the petitioner at his old address, where the occupant accepted service. After the petitioner did not respond, a default judgment was entered against him in 2009. The petitioner claimed that he had no knowledge of the default judgement until 2014. He then sued the respondent in district court in 2015 alleging that the respondent “purposely served process in a manner that ensured he would not receive service,” and that the respondent violated the FDCPA by filing the debt collection suit against the petitioner “after the state-law limitations period expired,” and thus had no “lawful ability to collect.” The district court dismissed the action, rejecting the petitioner’s assertion of the U.S. Court of Appeals for the Ninth Circuit holding that a “discovery rule” exists, which delays the one-year limit to the date when the violation is discovered. The district court held that the FDCPA does not include a discovery rule, relying on the FDCPA’s “plain language.”
On appeal, the U.S. Court of Appeals for the Third Circuit affirmed the district court’s decision, holding that “there is no default presumption” of a discovery rule in the FDCPA.
Upon review by the Court, Justice Thomas, who penned the majority opinion, averred that the FDCPA explicitly provides a one-year limitation starting on “the date on which the violation occurs.” Moreover, the opinion points out that Congress would have added a provision to delay that limitation until after a violation was discovered if it meant for the FDCPA to have such a provision.
According to Justice Ginsberg’s dissenting opinion, though she agreed with the one-year limitation for filing suit under the FDCPA, she added that the discovery rule should be observed when fraud prevents the petitioner from filing within the one-year period, distinguishing the “fraud-based discovery rule” from general “equitable tolling” principles.
On December 9, parties filed briefs in Seila Law LLC v. CFPB. As previously covered by InfoBytes, the U.S. Supreme Court granted cert in Seila to answer the question of whether an independent agency led by a single director violates the Constitution’s separation of powers under Article II, while also directing the parties to brief and argue whether 12 U.S.C. §5491(c)(3), which sets up the CFPB’s single director structure and imposes removal for cause, is severable from the rest of the Dodd-Frank Act, should it be found to be unconstitutional. While both parties are in agreement on the CFPB’s single-director leadership structure, they differ on how the matter should be resolved.
According to Seila Law’s brief, the CFPB’s single-director leadership structure is a blatant violation of the Constitution’s separation of powers clause. Seila Law proposes that the Court eliminate the CFPB entirely, leaving Congress to determine how to address the unconstitutionality of the Bureau, rather than save the law by making the director an at-will employee of the President. Removing the director at will, Seila Law argues, “would radically reshape the CFPB, creating a mutant version of the agency that Congress envisioned—one that would still be unaccountable to Congress, yet fully within presidential control.” Discussing the U.S. Court of Appeals for the Ninth Circuit’s reliance in part on a 1935 Supreme Court decision in Humphrey’s Executor v. United States (which dealt with removal protections for members of a nonpartisan, multimember commission) in its May ruling which held that the Bureau’s single-director structure is constitutional (InfoBytes coverage here), Seila Law states that the Court’s ruling in Humphrey’s Executor was “badly reasoned, wrongly decided, and should be overruled,” and, in any event, is distinguishable when addressing the CFPB’s single-director leadership structure. Whether the Court distinguishes or overturns Humphrey’s Executor’s precedent, Seila Law argues, it should hold that the Bureau’s structure violates the separation of powers clause and reverse the 9th Circuit’s judgment.
“By insulating the director of the CFPB from removal at will by the President while empowering him to exercise substantial executive power, Congress breached the President’s core prerogatives under Article II of the Constitution,” Seila Law further asserts, claiming that the appropriate remedy for the constitutional violation would be to deny the CFPB’s petition to enforce the CID and ultimately let Congress determine how to address the “constitutional defect in the CFPB’s structure.” Seila Law also argues that should the Court decide to engage in severability analysis, it should invalidate all of Title X of Dodd-Frank, which does not allow the current leadership structure to be altered to a multi-member commission.
In contrast, though the CFPB concedes that Dodd-Frank’s restriction on the President’s ability to remove the Bureau’s director violates the “separation of powers” principles of the Constitution, it contends in its brief that, should the removal provision be found unconstitutional, it should be severed from the rest of the law in accordance with Dodd-Frank’s express severability clause. “Even considering only the Bureau-specific provisions contained in Title X . . . , there is no basis to conclude that Congress would have preferred to have no Bureau at all rather than a Bureau headed by a Director who would be removable like almost all other single-headed agencies,” the CFPB wrote. “Nothing in the statutory text or history of the Bureau’s creation suggests, much less clearly demonstrates, that Congress would have preferred, for example, that the regulatory authority vested in the Bureau revert back to the seven federal agencies that previously administered those responsibilities if a court were to invalidate the Director’s removal restriction.”
Oral arguments are scheduled for March 3, 2020.
- Andrew W. Schilling to moderate "Expectations of in-house counsel from their law firm partners" at the ACI's 7th Annual Advanced Forum on False Claims and Qui Tam
- Buckley Webcast: Tips for navigating changes to the FHA recertification process
- Daniel P. Stipano to discuss "A 20/20 view on 2020’s legislative and regulatory outlook" at the ACAMS Anti-Financial Crime and Public Policy Conference
- Kari K. Hall and Michelle L. Rogers to discuss "Overdrafts and regulatory trends" at the CLE Alabama Banking Law Update
- Kathryn L. Ryan to discuss "Industry open forum session on NMLS usage" at the NMLS Annual Conference & Training
- Kathryn L. Ryan to discuss "Regulating innovative consumer lending products" at the NMLS Annual Conference & Training
- Daniel P. Stipano to moderate "Washington update" at the 17th Puerto Rican Symposium of Anti Money Laundering 2020 conference
- APPROVED Checkpoint Webcast: CFL overview
- Daniel P. Stipano to discuss "Pathway of the SARs: Tracking trajectories of suspicious activity reports from alerts to prosecution" at the ACAMS moneylaundering.com 25th Annual International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "Which bud’s for you? A deep-dive into evolving marijuana laws" at the ACAMS moneylaundering.com 25th Annual International AML & Financial Crime Conference