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Connecticut Supreme Court says lender protected by tribal sovereign immunity
On May 20, the Connecticut Supreme Court held that a lender accused of issuing usurious consumer loans without being properly licensed is protected by tribal sovereign immunity. In 2014, the Connecticut Department of Banking initiated an enforcement action against two lenders and a tribal officer of one of the lenders, claiming the lenders violated Connecticut’s banking and usury laws by making high-interest consumer loans over the internet without a license. The commissioner issued cease-and-desist orders and imposed civil penalties on the lenders. The lenders filed a motion in Connecticut Superior Court to dismiss the administrative proceedings for lack of jurisdiction, claiming they were arms of a federally recognized tribe and entitled to tribal sovereign immunity. The Superior Court vacated the orders against the lenders and remanded the case for an evidentiary hearing on whether the lenders are entitled to sovereign immunity.
The Connecticut Supreme Court reversed in part the Superior Court’s order, finding that the lower court should have applied the “Breakthrough factors” adopted by the U.S. Court of Appeals for the Fourth, Ninth, and Tenth Circuits to determine whether the lenders were arms of the tribe. These factors include analysis of (i) “the method of creation” of the entities; (ii) the stated purpose of the entities; (iii) “the structure, ownership, and management of the entities,” which includes the amount of control the tribe has over them; (iv) the tribe’s intent with respect to extending its sovereign immunity to the entities; and (v) “the financial relationship between the tribe and the entities.” Applying these factors, the Connecticut Supreme Court found that one of the lenders was entitled to sovereign immunity because the lender was created under tribal law, is controlled by directors appointed by the tribal council for the purpose of promoting tribal economic development and welfare, and there was a “significant financial relationship” between the tribe and the lender. With respect to the other lender, the court found that there was insufficient evidence to show that it is an arm of the tribe and that further proceedings were necessary to determine its right to sovereign immunity.
Colorado sues PSLF student loan servicer
On May 26, the Colorado attorney general filed a complaint against a Pennsylvania-based student loan servicer that handles the Public Service Loan Forgiveness (PSLF) program, alleging the servicer failed to comply with state law when asked to provide certain documentation. Under the Colorado Student Loan Servicers Act (SLSA), the state is “authorized to conduct examinations and investigations of student loan servicers that are servicing student education loans owned by residents of Colorado.” The SLSA also allows the state to enforce compliance by bringing a civil action to prevent servicers from violating the SLSA and to obtain other appropriate relief. According to the AG’s press release, the state requested information related to the servicer’s handling of the PSLF program during the Covid-19 pandemic. The servicer allegedly refused to produce the requested materials and only provided certain limited documents regarding non-government owned loans related to its business line. The complaint seeks a preliminary and permanent injunction compelling the servicer to comply with the AG’s oversight authority and provide the requested documentation.
District Court rules FCRA waives sovereign immunity
On May 13, the U.S. District Court for the Eastern District of Michigan denied a motion to dismiss filed by the Department of Education (Department), ruling that the FCRA “unequivocally waives sovereign immunity” concerning the allegations at issue in the case. In the lawsuit, the plaintiff alleges, among other things, that the Department violated Section 1681s-2(b) of the FCRA by “negligently and willfully” failing to conduct a proper investigation of her dispute and by failing to remove an erroneous notation of “account in dispute” from a tradeline reported on her credit files. The Department moved to dismiss, arguing, among other things, that it could not be sued for damages under the FCRA “because Congress has not waived sovereign immunity with respect to that statute.”
The court, disagreed, pointing out that while the question of whether sovereign immunity is waived under the FCRA “has generated a circuit split,” the “authority finding that the FCRA waives sovereign immunity is more persuasive than the authority supporting the contrary view.” After examining the statute, the court noted that the FCRA defines a “person” to include a “government or governmental subdivision or agency,” and pointed out that the term “person” appears in other FCRA provisions cited within the plaintiff’s lawsuit. As an example, the court referenced Section 1681n(a), which states: “Any person who willfully fails to comply with any requirement imposed under this subchapter with respect to any consumer is liable to that consumer.” The court also determined that the waiver of sovereign immunity “is sufficiently explicit” in Section 1681u of the FCRA.
District Court denies TRO request to block CFPB’s eviction disclosure rule
On May 14, the U.S. District Court for the Middle District of Tennessee denied a request for a temporary restraining order (TRO) to block a CFPB interim final rule (IFR), which requires all landlords to disclose to tenants certain federal protections put in place as a result of the ongoing Covid-19 pandemic. As previously covered by InfoBytes, the plaintiffs sued the CFPB asserting the IFR violates their First Amendment rights because it “mandates untrue speech and encourages plainly misleading speech” by requiring disclosures about a moratorium that has been challenged or invalidated by several federal courts, including a court in Tennessee where the complaint was filed, as well as the U.S. Court of Appeals for the Sixth Circuit. The Bureau urged the court to deny the temporary injunction, arguing, among other things, that “requiring debt collectors to provide routine, factual notification of rights or legal protections that consumers ‘may’ have, in jurisdictions where the CDC [o]rder applies, does not compel false speech and plainly passes First Amendment muster” (covered by InfoBytes here).
In denying the plaintiffs’ request to block the enactment of the IFR, the court ruled that the IFR does not apply where courts have already blocked the CDC’s eviction order from being enforced. Therefore, “[b]y its very terms, the [IFR] compels nothing at all—including disclosure of false speech—in jurisdictions where the CDC [o]rder does not apply (whether due to a court order declaring the [IFR] invalid, or to something else).” Additionally, the court noted that the plaintiffs’ First Amendment arguments did not suggest that they would suffer irreparable harm without a TRO, as “[p]laintiffs cannot be harmed by a rule where it does not apply.” The court also addressed the plaintiffs’ claim that the rule is unlawful under the Administrative Procedures Act because it requires disclosures not mandated under the FDCPA that could contain false, deceptive, or misleading representations. Because debt collectors in jurisdictions where the CDC order does not apply do not have to make the required disclosures, the IFR cannot be “unlawful on the grounds that it requires false disclosures.”
The court did not opine as to the “wisdom or fairness” of the IFR or the CDC’s order, or whether the IFR is “likely unlawful for any reason other than the particular ones” put forth by the plaintiffs.
FTC settles with remaining operators of student loan debt-relief scam
On May 17, the FTC announced settlements to resolve litigation against the remaining defendants involved in a student loan debt-relief operation charged with allegedly engaging in deceptive and abusive practices by collecting advance fees and making false promises to consumers that they could lower or eliminate loan payments or balances. As previously covered by InfoBytes, the FTC filed complaints against two groups of defendants involved in the debt-relief operation claiming the defendants, among other things, charged consumers advance fees and enrolled consumers in a high-interest financing program without making required disclosures. These actions, the FTC, contended, violated the FTC Act, TILA, and the Telemarketing Sales Rule (TSR), and stipulated orders were entered against several of the defendants in 2019. The terms of the stipulated final orders reached with the remaining defendants (see here and here) prohibit the defendants from (i) engaging in transactions involving secured or unsecured debt relief products and services; (ii) making misrepresentations and unsubstantiated claims regarding any products and services; (iii) violating the TSR; and (iv) collecting any further payments from consumers who purchased debt-relief services prior to the entry of the order. Additionally, certain defendants are required to pay a more than $24.5 million monetary judgment, which will be partially suspended due to inability to pay. One of the defendants is also required to pay $11,500, which will go towards consumer redress.
CFPB obtains new judgments against debt-relief defendants
On May 11, the U.S. District Court for the Central District of California obtained two additional judgments in an action by the CFPB against a mortgage lender and several related individuals and companies (collectively, “defendants”) for alleged violations of the Consumer Financial Protection Act (CFPA), Telemarketing Sales Rule (TSR), and Fair Credit Reporting Act (FCRA). These are the latest judgments reached with defendants in the ongoing litigation. (See InfoBytes coverage on previously announced settlements here, here, here, and here.)
As previously covered by InfoBytes, the Bureau filed a complaint in January 2020 claiming the defendants violated the FCRA by, among other things, illegally obtaining consumer reports from a credit reporting agency for millions of consumers with student loans by representing that the reports would be used to “make firm offers of credit for mortgage loans” and to market mortgage products, but instead, the defendants allegedly resold or provided the reports to companies engaged in marketing student loan debt-relief services. The defendants also allegedly violated the TSR by charging and collecting advance fees for their debt-relief services. The CFPB further claimed that the defendants violated the TSR and CFPA when they used telemarketing sales calls and direct mail to encourage consumers to consolidate their loans, and falsely represented that consolidation could lower student-loan interest rates, improve borrowers’ credit scores, and change their servicer to the Department of Education.
The May 11 stipulated final judgment entered against a group of corporate defendants, as well as an associated individual, requires the defendants to pay more than $18 million in consumer redress. Payment will be suspended, however, upon satisfaction of certain outlined obligations. The defendants, who neither admitted nor denied the allegations, are also obligated to pay a $125,000 civil money penalty to the Bureau, and are permanently enjoined from offering or providing debt-relief services or from using or obtaining consumer reports for any purpose. Additionally, the individual defendant is banned from using or obtaining benefit from consumer information contained in prescreened consumer reports.
On the same day, a second stipulated final judgment was entered against one of the individual defendants. The judgment requires the individual defendant to pay more than $3.4 million in redress to affected consumers, which will be partially suspended upon satisfaction of certain outlined obligations, along with a $1 civil money penalty. The individual defendant, who also neither admitted nor denied the allegations, is permanently enjoined from offering or providing debt relief services, from participating or engaging in the telemarketing of any consumer financial product or service, or from using or obtaining prescreened consumer reports for any purpose.
CFPB charges debt-settlement company with TSR and CFPA violations
On May 17, the CFPB announced a settlement with a Massachusetts-based debt-settlement company for allegedly violating the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA). As previously covered by InfoBytes, the Bureau alleged the company violated the TSR and/or the CFPA by, among other things, (i) requesting and receiving payment of fees for services before renegotiating, settling, reducing, or otherwise altering the terms of at least one debt pursuant to an agreement or before a consumer had made a payment under their agreement; (ii) misrepresenting to consumers that it would not charge fees for its services until it settled a debt and consumers made payments under the settlement to the creditor; (iii) charging fees based on the amount of debt after enrollment instead of the amount of debt at the time of enrollment; and (iv) failing to disclose the amount of time it would take the company to make a settlement offer or the amount of debt the consumer would need to accumulate to make a settlement offer to each creditor. The CFPB’s original complaint had sought an injunction against the company as well as damages, redress, disgorgement of ill-gotten gains, and the imposition of civil money penalties.
The judgment, ordered by the court on May 19, requires the company to: (i) pay a $7.7 million judgment, which would be partially suspended upon the company paying harmed consumers $5.4 million; (ii) stop its deceptive practices and; (iii) pay a $1 civil money penalty.
Custody bank to pay $115 million to end overbilling investigation
On May 13, a Massachusetts-based custody bank entered into a deferred prosecution agreement (agreement) with the DOJ related to a criminal indictment for a single count of conspiracy to commit wire fraud. According to the DOJ’s press release, the bank acknowledged that, from at least 1998 through 2015, it, along with eight co-conspirator bank executives (collectively, “defendants”), defrauded clients of more than $290 million by charging hidden markups to out-of-pocket (OOP) expenses “on top of fees that the clients had agreed to pay the bank, and despite written agreements that caused clients to believe the expenses would be passed through to them without a markup.”
Under the terms of the agreement, the bank agreed to (i) pay a $115 million monetary penalty; (ii) continue to cooperate with the U.S. Attorney’s Office; (iii) enhance its compliance practices; and (iv) hire an independent compliance and business ethics monitor for two years. The DOJ credited the bank for (i) voluntarily disclosing its misconduct; (ii) cooperating with the DOJ’s investigation; (iii) undertaking remedial measures to enhance its compliance program and to ensure consequences for individuals and business units involved in the misconduct; (iv) reimbursing affected clients for the overbilled amounts; and (v) previously paying $88 million in civil money penalties to the SEC and $8.575 million in civil penalties to state regulators.
9th Circuit denies en banc rehearing in CFPB case against Seila Law
On May 14, the U.S. Court of Appeals for the Ninth Circuit denied en banc rehearing of CFPB v. Seila Law, LLC. As previously covered by InfoBytes, following remand from the U.S. Supreme Court, a three-judge panel of the 9th Circuit had reaffirmed a district court order granting the CFPB’s petition to enforce a civil investigative demand (CID) sent to Seila Law. The panel wrote that “Director Kraninger’s ratification [of the CID] remedied any constitutional injury that Seila Law may have suffered due to the manner in which the CFPB was originally structured. Seila Law’s only cognizable injury arose from the fact that the agency issued the CID and pursued its enforcement while headed by a Director who was improperly insulated from the President’s removal authority. Any concerns that Seila Law might have had about being subjected to investigation without adequate presidential oversight and control had now been resolved. A Director well aware that she may be removed by the President at will had ratified her predecessors’ earlier decisions to issue and enforce the CID.”
Judge Bumatay, joined by three other circuit judges, dissented from denial of en banc rehearing, arguing that “[o]ur court’s decision to deny rehearing en banc effectively means that Seila Law is entitled to no relief from the harms inflicted by an unaccountable and unchecked federal agency. Thus, while David slayed the giant, Goliath still wins.” Judge Bumatay further stressed that the doctrine of ratification does not permit the Bureau to “retroactively gift itself power that it lacked,” concluding that the panel’s condoning of the Bureau’s “power grab was erroneous.”
District Court approves online marketplace data breach settlement
On May 13, the U.S. District Court for the Northern District California preliminarily approved a class action settlement, resolving allegations that a California-based online designer marketplace failed to protect customers’ personal information from a computer hacking group in a May 2020 data breach. The plaintiffs asserted negligence and brought claims under California’s Consumer Privacy Act and Unfair Competition Law after plaintiffs launched an investigation into the cybersecurity incident. The preliminary settlement requires the company to establish a $5 million settlement fund, which would “provide for an estimated $43 payment per participating class member, two years of credit monitoring, and identity restoration services.” The company must also implement several business practice changes to enhance security, including enhancing password protection and implementing a policy regarding minimizing the retention of customers’ personally identifiable information. The settlement also notes that “members subject to identity theft can also obtain fraud resolution assistance to dispute transactions, mediate calls with merchants, and implement fraud alerts.” Class members who do not agree to the settlement may opt out of the settlement by September 16.