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On May 23, the U.S. Court of Appeals for the Ninth Circuit upheld a district court’s judgment finding an online loan servicer and its affiliates liable for a deceptive loan scheme. However, the appellate court vacated the district court’s order, which had imposed a $10 million civil penalty (rather than the requested penalty of over $50 million) and had declined the CFPB's request for $235 million in restitution. As previously covered by InfoBytes, in 2018, the district court ordered the defendants to pay the civil penalty for offering high-interest loans in states with usury laws barring the transactions after determining in September 2016 that the online loan servicer was the “true lender” of the loans that were issued through entities located on tribal land (covered by a Buckley Special Alert). At the time, the district court found that a lower statutory penalty was more appropriate than the CFPB’s requested amount because the Bureau failed to show the company “knowingly violated the CFPA” or acted “recklessly.” In rejecting the Bureau’s requested restitution amount, the district court found that the agency had not put forth any evidence that the defendants “intended to defraud consumers or that consumers did not receive the benefit of their bargain from the [program]” for restitution to be an appropriate remedy.
According to the 9th Circuit, the district court applied the wrong legal analysis in 2018 when it assessed only a $10 million civil money penalty against the defendants and no restitution payments to consumers harmed by the improper loans. By applying federal common law choice-of-law principles, the appellate court declined to apply tribal law, holding that state laws applied to the loans, thus rendering them invalid. The appellate court determined that the defendants acted recklessly when they attempted to collect on invalid debts after counsel advised in 2013 that such actions were likely illegal. While the defendants shut down the tribal lending program for new loans, the 9th Circuit said they continued to collect on existing loans. “We conclude that from September 2013 on, the danger that [defendants’] conduct violated the statute was ‘so obvious that [defendants] must have been aware of it,’” the appellate court wrote. Noting that penalties for “reckless” violations under tier two were appropriate beginning September 2013, the appellate court ordered the district court to recalculate the civil penalty on remand. The 9th Circuit also directed the district court on remand to reconsider the appropriate restitution without relying on irrelevant considerations that motivated its earlier decision, including (i) whether defendants acted in bad faith; and (ii) “whether consumers received the benefit of their bargain.” Moreover, the appellate court held that the district court erred by stating “that the ‘proposed restitution amount [should be] netted to account for expenses.’”
The 9th Circuit also concluded that the district court was correct in holding one of the individual defendants personally liable for the company’s conduct. Furthermore, the appellate court held that the defendants’ argument that the structure of the Bureau is unconstitutional did not affect the validity of the lawsuit (which was filed when the Bureau was headed by lawfully appointed former Director Richard Cordray), writing that, as in Collins v. Yellen (covered by InfoBytes here), “the unlawfulness of the removal provision does not strip the Director of the power to undertake the other responsibilities of his office.”
On May 2, the U.S. Court of Appeals for the Fifth Circuit issued an en banc decision vacating a district court’s interlocutory decision denying the plaintiff payday lenders’ motion for judgment on the pleadings, and holding that the CFPB can continue its enforcement action against a Mississippi-based payday lending company subject to further order of the district court. As previously covered by InfoBytes, the CFPB filed a complaint against two Mississippi-based payday loan and check cashing companies for allegedly violating the CFPA’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 Bureau is unconstitutional and that the agency’s claims violate due process. The 5th Circuit agreed to hear an interlocutory appeal on the constitutionality question. And, prior to the U.S. Supreme Court’s ruling in Seila Law LLC v. CFPB, a divided panel 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 (covered by InfoBytes here).
The 5th Circuit voted sua sponte to rehear the case en banc and issued an opinion in which the majority vacated the district court’s opinion as contrary to Seila Law. The majority did not, however, direct the district court to enter judgment against the Bureau because, though the Supreme Court had found that the director’s for-cause removal provision was unconstitutional, it was severable from the statute establishing the Bureau (covered by a Buckley Special Alert). The majority determined that the “time has arrived for the district court to proceed” and stated it “place[s] no limitation on the matters that that court may consider, including, without limitation, any other constitutional challenges.”
In dissent, several judges issued an opinion arguing that the case should be dismissed because the agency’s funding structure violates the Constitution’s separation of powers and “is doubly removed from congressional review.” The dissenting judges explained that the Bureau is not subject to the Congressional appropriations process for its budget, unlike most federal agencies, but rather receives its funding directly from the Federal Reserve Board. This budgetary process was intended to ensure full independence from Congress and prevent future congresses from using budget cuts to influence the Bureau’s agenda and priorities. The dissenting judges argued, however, that such a structure violates the Appropriations Clause of the Constitution. “The CFPB’s double insulation from Article I appropriations oversight mocks the Constitution’s separation of powers by enabling an executive agency to live on its own in a kingly fashion,” the dissent stated. “The Framers warned that such an accumulation of powers in a single branch of government would inevitably lead to tyranny. Accordingly, I would reject the CFPB’s novel funding mechanism as contravening the Constitution’s separation of powers. And because the CFPB funds the instant prosecution using unconstitutional self-funding, I would dismiss the lawsuit.”
On April 11, a Florida county court concluded that a defendant lender and certain company officials were entitled to sovereign immunity in a case concerning alleged usury claims. The plaintiff claimed the lender used its supposed federally-recognized tribal affiliation to escape state usury regulations. The court dismissed the complaint, however, finding that the lender is an “arm of the tribe” under a six-prong test established by the U.S. Court of Appeals for the Tenth Circuit in Breakthrough Management Group, Inc. v. Chukchansi Gold Casino & Resort. The test determines whether sovereign immunity should apply by examining, among other factors, an entity’s creation, the amount of control a tribe has over the entity, and the financial relationship between the tribe and the entity. According to the court, the defendant’s evidence suggests that the tribe created the defendant as a business entity “to generate and contribute revenues” to the tribe’s general fund. The court found that insufficient detail was presented to support the plaintiff’s assertion that the defendant pays a relatively small percentage of its gross revenues to the tribe. The court added that the plaintiff also failed to present evidence proving that large portions of the defendant’s revenue were distributed to non-tribal entities. In dismissing the case with prejudice, the court also dismissed claims against three individual defendants because they were entitled to sovereign immunity. The court concluded that the plaintiff’s allegations demonstrated that the individuals committed the alleged wrongs in their capacities as employees and officers and therefore the “real party in interest” is the lender.
On April 6, the CFPB released a report on consumer use of state payday loan extended payment plans, which is believed to be the first study to compare state extended payment plans and usage rates. The report examines state payday loan extended payment plans, an intervention which permits payday borrowers to repay their loan in no-cost installments. The report analyzed laws in states that authorize payday loans and determined that 16 of the 26 payday-authorizing jurisdictions address extended payment plans. According to the Bureau, the savings of a no-cost extended payment plan can be substantial when compared to the total charges associated with repeated rollover fees. A Bureau press release regarding the report highlighted findings from prior research that most payday loans were made to borrowers who use the rollover option so many times that the accrued fees were greater than the original principal.
Key findings of the report include, among other things:
- State payday loan extended payment plan laws typically address certain key provisions. Key provisions include, among other things, number of installments, plan length, allowable fees, frequency of use, consumer eligibility, and disclosures. While specific requirements vary by state, typical features include: disclosure of the right to elect an extended payment plan at the time consumers enter into a payday loan agreement, the requirement that an extended payment plan be repaid in several installments, and that there be no additional fees charged for an extended payment plan.
- Eligibility requirements for extended payment plans vary by state and likely impact usage rates. For example, in Washington, which has possibly the most borrower-friendly extended payment plan, the usage rate is 13.4 percent, whereas states with more restrictive requirements, such as Florida, which requires credit counseling to be eligible, may have usage rates under 1 percent.
- Despite the prevalence of state laws providing for no-cost extended payment plans, rollover and default rates consistently exceed extended payment plan usage rates. According to the report, monetary incentives encourage lenders to promote higher-cost rollovers, and collect the fees associated with such rollovers, at the expense of extended payment plans.
On January 14, the U.S. District Court for the District of Columbia granted two motions to dismiss a challenge to the Bureau’s 2020 final rule revoking certain underwriting provisions of the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (Payday Lending Rule). As previously covered by InfoBytes, the final rule revokes, among other things (i) the provision that makes it an unfair and abusive practice for a lender to make covered high-interest rate, short-term loans or covered longer-term balloon payment loans without reasonably determining that the consumer has the ability to repay the loans according to their terms; (ii) the prescribed mandatory underwriting requirements for making the ability-to-repay determination; (iii) the “principal step-down exemption” provision for certain covered short-term loans; and (iv) related definitions, reporting, and recordkeeping requirements. The plaintiff (a national association of organizations serving Latino communities) filed suit alleging the Bureau’s 2020 final rule violated federal rulemaking requirements and arguing that the 2020 final rule rested on an “unreasonable” new evidentiary standard and advanced statutory definitions that “appear custom-designed to repeal the ability-to-repay protections” of the Payday Lending Rule. The plaintiff asked the court to overturn the repeal and order the Bureau to implement the 2017 Payday Lending Rule. Motions to dismiss for lack of standing were filed by the Bureau as well as an intervenor-defendant association.
In dismissing the action, the court determined that the plaintiff failed to establish a “concrete and demonstrable injury to its activities” attributable to the 2020 final rule’s impact. The plaintiff contended that it suffered injury because the 2020 final rule made its work more difficult due to member organizations needing more assistance and resources from the plaintiff in order to “help families avoid or address unaffordable payday and title loans.” The court reasoned, however, that “[e]xpenditure of resources in response to agency action alone is not enough to establish a cognizable injury because it leaves step one of the inquiry unanswered.” Rather, “there must be a separate perceptible impairment of the organization's ability to provide services—something that makes it more difficult for the organization to conduct its activities”—an impairment, the court stated, for which the plaintiff has not plausibly alleged.
On December 8, the CFPB released its fall 2021 Supervisory Highlights, which details its supervisory and enforcement actions in the areas of credit card account management, debt collection, deposits, fair lending, mortgage servicing, payday lending, prepaid accounts, and remittance transfers. The report’s findings cover examinations that were completed between January and June of 2021 in addition to prior supervisory findings that led to public enforcement actions in the first half of 2021. Highlights of the examination findings include:
- Credit Card Account Management. Bureau examiners identified violations of Regulation Z related to billing error resolution, including instances where creditors failed to (i) resolve disputes within two complete billing cycles after receiving a billing error notice; (ii) reimburse late fees after determining a missed payment was not credited to a consumer’s account; and (iii) conduct reasonable investigations into billing error notices concerning missed payments and unauthorized transactions. Examiners also identified deceptive acts or practices related to credit card issuers’ advertising practices.
- Debt Collection. The Bureau found instances of FDCPA violations where debt collectors represented to consumers that their creditworthiness would improve upon final payment under a repayment plan and the deletion of the tradeline. Because credit worthiness is impacted by numerous factors, examiners found “that such representations could lead the least sophisticated consumer to conclude that deleting derogatory information would result in improved creditworthiness, thereby creating the risk of a false representation or deceptive means to collect or attempt to collect a debt in violation of Section 807(10).”
- Deposits. The Bureau discussed violations related to Regulation E, including error resolution violations related to misdirected payment transfers and failure to investigate error notices where consumers alleged funds were sent via a person-to-person payment network but the intended recipient did not receive the funds.
- Fair Lending. The report noted instances where examiners cited violations of ECOA and Regulation B by lenders "discriminating against African American and female borrowers in the granting of pricing exceptions based upon competitive offers from other institutions,” which led to observed pricing disparities, specifically as compared to similarly situated non-Hispanic white and male borrowers. Among other things, examiners also observed that lenders’ policies and procedures contributed to pricing discrimination, and that lenders improperly inquired about small business applicants’ religion and considered religion in the credit decision process.
- Mortgage Servicing. The Bureau noted that it is prioritizing mortgage servicing supervision attributed to the increase in borrowers needing loss mitigation assistance due to the Covid-19 pandemic. Examiners found violations of Regulations Z and X, as well as unfair and deceptive acts and practices. Unfair acts or practices included those related to (i) charging delinquency-related fees to borrowers in CARES Act forbearances; (ii) failing to terminate preauthorized EFTs; and (iii) assessing fees for services exceeding the actual cost of the performed services. Deceptive acts or practices found by examiners related to mortgage servicers included incorrectly disclosed transaction and payment information in a borrower’s online mortgage loan account. Mortgage servicers also allegedly failed to evaluate complete loss mitigation applications within 30 days, incorrectly handled partial payments, and failed to automatically terminate PMI in a timely manner. The Bureau noted in its press release that it is “actively working to support an inclusive and equitable economic recovery, which means ensuring all mortgage servicers meet their homeowner protection obligations under applicable consumer protection laws,” and will continue to work with the Federal Reserve Board, FDIC, NCUA, OCC, and state financial regulators to address any compliance failures (covered by InfoBytes here).
- Payday Lending. The report identified unfair and deceptive acts or practices related to payday lenders erroneously debiting consumers’ loan balances after a consumer applied and received confirmation for a loan extension, misrepresenting that consumers would only pay extension fees on the original due dates of their loans, and failing to honor loan extensions. Examiners also found instances where lenders debited or attempted one or more duplicate unauthorized debits from a consumer’s bank account. Lenders also violated Regulation E by failing “to retain, for a period of not less than two years, evidence of compliance with the requirements imposed by EFTA.”
- Prepaid Accounts. Bureau examiners found violations of Regulation E and EFTA related to stop-payment waivers at financial institutions, which, among other things, failed to honor stop-payment requests received at least three business days before the scheduled date of the transfer. Examiners also observed instances where service providers improperly required consumers to contact the merchant before processing a stop-payment request or failed to process stop-payment requests due to system limitations even if a consumer had contacted the merchant. The report cited additional findings where financial institutions failed to properly conduct error investigations.
- Remittance Transfers. Bureau examiners identified violations of Regulation E related to the Remittance Rule, in which providers “received notices of errors alleging that remitted funds had not been made available to the designated recipient by the disclosed date of availability” and then failed to “investigate whether a deduction imposed by a foreign recipient bank constituted a fee that the institutions were required to refund to the sender, and subsequently did not refund that fee to the sender.”
The report also highlights recent supervisory program developments and enforcement actions.
On November 5, the Illinois attorney general and the Illinois Department of Financial and Professional Regulation (IDFPR) announced a settlement resolving allegations that three companies violated Illinois lending laws by generating payday loan leads without a license and arranging high-cost payday loans for out-of-state payday unlicensed lenders. The AG and IDFPR further alleged that the companies falsely represented their loan network as being “trustworthy,” although the loan terms and conditions did not comply with Illinois law, which violated the Illinois’ Consumer Fraud and Deceptive Business Practices Act. The AG sued the companies in 2014 after the companies refused to comply with a cease and desist order issued by IDFPR, which required them to become licensed. According to the announcement, under the terms of the settlement, the companies are prohibited from: (i) arranging or offering small-dollar loans, online or otherwise, without being licensed by IDFPR; (ii) advertising or offering any small consumer loan arrangements or lead generation services in Illinois, unless they are licensed by IDFPR; and (iii) providing services associated with arranging or offering small dollar loans to Illinois consumers without being licensed by IDFPR.
On October 14, the U.S. Court of Appeals for the Fifth Circuit stayed the implementation of the payment provisions of the CFPB’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (2017 Rule) for 286 days after the resolution of the appeal. The appellate court’s order contrasts with an order issued last month by the U.S. District Court for the Western District of Texas, which denied a request by the two trade group appellants to stay the compliance date pending appeal (covered by InfoBytes here). The district court previously upheld the 2017 Rule’s payment provisions (covered by InfoBytes here), finding that the Bureau’s ratification “was valid and cured the constitutional injury caused by the 2017 Rule’s approval by an improperly appointed official,” and that the payment provisions were not arbitrary and capricious. The district court’s order regarding the stay granted the plaintiffs’ request to stay the compliance date, which had been set as August 19, 2019, until 286 days after final judgment. The 5th Circuit’s order, however, grants the trade groups’ motion to extend the stay of the compliance date until 286 days after resolution of the appeal.
On October 14, the U.S. District Court for the Eastern District of Virginia granted class certification in an action alleging a payday lending operation violated RICO and Virginia’s usury law by partnering with federally-recognized tribes to issue loans with allegedly usurious interest rates. The plaintiffs alleged that the defendants (“founders, funders, [or] closely held owners of [a lender] that serviced the high-interest loans made by certain tribal lending entities”) participated in a lending scheme to circumvent state usury laws. The plaintiffs seek declaratory and injunctive relief, damages, and attorney’s fees and costs arising from claims alleging that the defendants, among other things: (i) used income derived from the collection of unlawful debt to further assist the operations of the enterprise; (ii) participated in an enterprise involving the unlawful collection of debt; (iii) collected unlawful debt; (iv) entered into unlawful agreements; (v) issued unlawful loans with interest rates exceeding 12 percent; and (vi) were thus unjustly enriched. The court granted class certification after finding that the existence of a class action waiver in loan agreements between plaintiffs and tribal lenders did not bar class certification. The court explained that “[b]ecause the class action waivers exist to ‘make unavailable to the borrowers the effective vindication of federal statutory protections and remedies,’ the prospective waiver doctrine applies.” The waivers were thus unenforceable.
On September 30, the U.S. District Court for the Western District of Texas denied a request made by two trade groups to stay the implementation of the payment provisions of the CFPB’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (2017 Rule) while they appeal an earlier decision allowing the provisions to take effect. As previously covered by InfoBytes, the court upheld the 2017 Rule’s payment provisions, finding that the Bureau’s ratification “was valid and cured the constitutional injury caused by the 2017 Rule’s approval by an improperly appointed official.” The court also concluded that the payment provisions, as a matter of law, “are consistent with the Bureau’s statutory authority and are not arbitrary and capricious,” and that the Bureau properly considered the costs and benefits of such payment provisions. The court’s order, however, granted the plaintiffs’ request to stay the compliance date, which had been set as August 19, 2019, until 286 days after final judgment.
The plaintiffs appealed to the U.S. Court of Appeals for the Fifth Circuit and asked the district court to stay the running of the 286-day stay pending appeal, such that compliance would not be required until 286 days after the appeal is resolved. The court rejected that request, stating that the plaintiffs “failed to make a sufficient showing to warrant a stay pending resolution of the appeal” and that “the equities do not support extending the stay of the compliance date beyond the court's 286-day stay from August 30, 2021.”
- Jedd R. Bellman to discuss “The CFPB’s crackdown on collection junk fees and the growing anti-CFPB rhetoric” at an Accounts Recovery webinar
- Benjamin W. Hutten to discuss “Latest on AML regulations and impact of economic sanctions” at a Mortgage Bankers Association webinar
- Benjamin W. Hutten to discuss “Fundamentals of financial crime compliance” at the Practicing Law Institute
- Benjamin W. Hutten to discuss “Ongoing CDD: Operational considerations” at NAFCU’s Regulatory Compliance & BSA Seminar