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FTC and New York Attorney General reach deal with debt collection firm
On July 20, the U.S. District Court for the Western District of New York issued a judgment to resolve a suit brought by the FTC and the New York Attorney General against a debt collection firm and an affiliated officer (defendants) accused of allegedly engaging in deceptive and abusive practices, including unlawfully threatening to arrest consumers if debts were not paid. (See previous InfoBytes coverage here.) Under the stipulated final order for permanent injunction and settlement of claims pursuant to the FTC Act and the Fair Debt Collection Practices Act, the defendants—who have not admitted to the allegations—are held jointly and severally liable for paying the more than $22.5 million under a suspended judgment should it ever be determined that the financial disclosures provided to the state and the FTC were not completely truthful, accurate, or complete. The defendants are also banned from the debt collection industry and required to file compliance reports with the FTC. The judgment further authorizes the receiver to liquidate the debt collection firm’s assets.
Texas Attorney General leads 14-state brief to 5th Circuit challenging CFPB structure
On July 10, the Attorney General of Texas and 13 other state Attorneys General filed an amici curiae brief with the U.S. Court of Appeals for the 5th Circuit, challenging the constitutionality of the CFPB. As previously covered by InfoBytes, in April, the 5th Circuit agreed to hear a challenge by two Mississippi-based payday loan and check cashing companies to the constitutionality of the CFPB’s single-director structure in response to a CFPB action filed against the companies. The brief encourages the appellate court to disagree with the en banc decision of the D.C. Circuit, which upheld the Bureau’s structure (covered by a Buckley Sandler Special Alert). Instead, the Attorneys General argue, the court should find the structure unconstitutional rendering “all its actions unlawful.” The brief poses similar arguments to past challenges, including (i) the director should be removable at will by the president and (ii) the president’s removal power should only be restricted for multi-member commissions.
Notably, the U.S. District Court for the Southern District of New York recently disagreed with the D.C. Circuit decision, concluding the CFPB’s organizational structure is unconstitutional and terminated the Bureau as a party to an action because the agency lacked the authority to bring claims under the Consumer Financial Protection Act (CFPA). (Previously covered by InfoBytes here.)
New York Attorney General: Don’t delay action if CFPB appeals constitutionality determination
On July 9, the New York Attorney General and a New Jersey-based litigation funding company and its affiliates filed a joint letter in the U.S. District Court for the Southern District of New York addressing how the parties would like to proceed in the legal matter after the court terminated the CFPB as a party to the action. As previously covered by InfoBytes, in June, the district court held the agency’s structure is unconstitutional and therefore not allowed to bring claims under the Consumer Financial Protection Act (CFPA), but allowed the Attorney General to continue the action. The letter discusses the parties’ desired path for the litigation should the Bureau choose to appeal the court’s constitutionality determination. If the Bureau should appeal, the defendants request the court allow the immediate appeal and stay the current litigation, while the Attorney General disagrees with allowing the immediate appeal and “would like the case to proceed as expeditiously as possible.”
As for whether the court continues to have jurisdiction over the remaining claims, the Attorney General argues that the federal district court continues to have subject matter jurisdiction over the Consumer Financial Protection Act (CFPA) claims and supplemental jurisdiction over the state law claims. The defendants disagree and interpret the June decision to strike all substantive provisions of the CFPA that would form the basis for federal jurisdiction.
The letter states the Bureau has not yet decided if it will pursue an appeal of the court’s determination.
New York Attorney General announces settlement with auto dealership over deceptive practices targeting non-English speakers
On July 5, the New York Attorney General announced a settlement with an auto dealership to resolve allegations that it engaged in deceptive practices targeted towards non-English speakers. The auto dealership allegedly misled consumers about the actual cost of their purchases and offered false refinancing promises. According to the announcement, the dealership allegedly (i) provided English documents to non-English speaking consumers containing loan terms and aftermarket items different from those discussed during the actual sale, including “supplemental service contracts, gap insurance policies, or special protections for tires, fabric, glass, or paint that added thousands of dollars to the auto sale or lease contracts”; and (ii) told consumers it would refinance their loans at a lower rate after receiving complaints of overcharges and unwanted aftermarket items. However, the Attorney General asserts that the dealership failed to honor the refinancing promises. Under the terms of the settlement, the dealership is required to reform its business practices, refrain from engaging in the alleged deceptive business practices, modify its employee training and complaint handling process, and produce sales and lending documents in languages for non-English speakers prior to the signing of any documentation in English. The dealership must also pay over $423,000 to cover restitution, penalties, fees, and costs to the state.
International bank settles with Illinois Attorney General for $20 million for alleged RMBS misconduct
On July 3, the Illinois Attorney General announced a settlement with an international bank to resolve allegations of misconduct in the bank’s marketing and sale of residential mortgage-backed securities (RMBS) in the lead-up to the 2008 financial crisis. According to the press release, the bank allegedly failed to disclose accurately the risk of the RMBS investments when selling the securities. Under the terms of the settlement, the bank has agreed to pay $20 million to the state, which will be divided between three state retirement systems. This settlement follows several other RMBS-related actions taken by the Attorney General.
As previously covered in InfoBytes, earlier in March, the bank reached a settlement with the New York Attorney General to resolve similar allegations.
21 Attorneys General oppose “Madden fix” legislation
On June 27, the Colorado and New York Attorneys General led a coalition of 21 state Attorneys General in a letter to congressional leaders opposing HR 3299 (“Protecting Consumers’ Access to Credit Act of 2017”) and HR 4439 (“Modernizing Credit Opportunities Act”), which would effectively overturn the 2015 decision in Madden v. Midland Funding, LLC. Specifically, H.R. 3299 and H.R. 4439 would codify the “valid-when-made” doctrine and ensure that a bank loan that was valid as to its maximum rate of interest in accordance with federal law at the time the loan was made shall remain valid with respect to that rate, regardless of whether the bank subsequently sells or assigns the loan to a third party.
The letter argues that the legislation “would legitimize the efforts of some non-bank lenders to circumvent state usury law” and it was not Congress’ intention to authorize these arrangements with the creation of the National Bank Act. In support of their position, the Attorneys General cite to a 2002 press release by the OCC and the more recent OCC Bulletin 2018-14 on small dollar lending, which stated the agency “views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s).” (Previously covered by InfoBytes here.) The letter also refers to an 1833 Supreme Court case, Nichols v. Fearson, which held that a “valid loan is not invalidated by a later usurious transaction involving that loan” but was not relevant to the decision in Madden because the borrower’s argument related to preemption. Ultimately, the Attorneys General conclude the legislation would erode an “important sphere of state regulation” as state usury laws have “long served an important consumer protection function in America.”
FTC and New York Attorney General announce action against phantom debt operation
On June 27, the FTC and the New York Attorney General’s Office announced charges against two New York-based phantom debt operations and their principals. The complaint alleges they ran a deceptive and abusive debt collection scheme involving the marketing and selling of fictitious loan debt portfolios and collecting on debts consumers did not owe. The charges brought against the operations allege violations of the FTC Act, the Fair Debt Collection Practices Act, and New York state law. According to the complaint, the debt broker knowingly purchased fabricated debt from a phantom debt collection operation previously charged by the FTC and the Illinois Attorney General in a separate action for selling fabricated debt. (As previously covered by InfoBytes, the Illinois-based operation was banned from the debt collection business and prohibited from selling debt portfolios.) The debt broker then engaged a debt collection agency and its owner to collect on the fabricated debt using illegal collection tactics, while continuing to purchase debts and place them for collection despite having knowledge that consumers disputed the debts. The complaint seeks, among other things, injunctive relief, restitution, and disgorgement.
NY District Court holds CFPB structure is unconstitutional
On June 21, the U.S. District Court for the Southern District of New York terminated the CFPB as a party to an action against a New Jersey-based finance company and its affiliates (defendants), concluding that the CFPB’s organizational structure is unconstitutional and therefore, the agency lacks authority to bring claims under the Consumer Financial Protection Act (CFPA). As previously covered by InfoBytes, the Bureau and the New York Attorney General’s office (NYAG) filed a lawsuit in in February 2017, claiming the defendants engaged in deceptive and abusive acts by misleading first responders to the World Trade Center attack and NFL retirees with high-cost loans by mischaracterizing loans as assignments of future payment rights, thereby causing the consumers to repay far more than they received. The defendants sought dismissal of the case, arguing that, among other things, “the CFPB’s unprecedented structure violates fundamental constitutional principles of separation of powers, and the CFPB should be struck down as an unconstitutional administrative agency.”
The court denied the defendants’ motion as to the NYAG, finding that it had plausibly alleged claims under the CFPA and New York law and had the independent authority to pursue those claims. But the court concluded that the CFPB lacked such authority, noting that it was not bound by the recent decision of the D.C. Circuit upholding the Bureau’s constitutionality in PHH v. CFPB (covered by a Buckley Sandler Special Alert). The court instead adopted portions of two separate dissents from that decision to conclude that the Bureau’s single director structure is unconstitutional and that the defect cannot be remedied by striking the limitations on the president’s authority to remove the Bureau director because the “removal for cause” provision is “at the heart of Title X” of Dodd-Frank. Quoting one of the PHH dissents, the court stated, “I would strike Title X in its entirety.”
The court also rejected an attempt by acting Director Mulvaney to salvage the Bureau’s claims. Although the action was initiated by Director Cordray, the Bureau filed a notice in May ratifying that decision and arguing that, because the Bureau is currently led by an acting director who can be removed by the president at will, defendants’ motion to dismiss the Bureau’s claims should be denied. The court disagreed, concluding that the constitutional issues presented in the case “are not cured by the appointment of Mr. Mulvaney” because “the relevant provisions of the Dodd-Frank Act that render the CFPB’s structure unconstitutional remain intact.”
CA Attorney General secures $67 million in debt relief for former students of defunct for-profit school
On June 13, the Superior Court of the State of California ordered a California-based student loan provider to halt all debt collection efforts and forgive the balances on over 30,000 private student loans, which were used for programs at a now defunct for-profit college. According to the announcement by the California Attorney General, Xavier Becerra, the debt relief totals $67 million for the former students. The complaint, filed on the same day as the order, alleges the company engaged in unlawful debt collection practices, including sending borrowers notices threatening legal action, to collect on the student loans at issue. In addition to the debt forgiveness, the order requires the company to (i) refund all payments made on the student loans by California-residents after August 1, 2017; (ii) refund payments made prior to August 1, 2017 by borrowers who received allegedly unlawful debt collection notices; and (iii) delete negative credit reporting associated with the student loans for all of the for-profit students around the country.
As previously covered by InfoBytes, in a class action filed by former students, the Department of Education was recently barred by a preliminary injunction from continuing collection efforts on student loans used for the same defunct for-profit college.
National bank and coalition of 42 Attorneys General settle LIBOR action for $100 million
On June 15, the New York Attorney General, along with 41 other state Attorneys General, announced a $100 million settlement with a national bank for allegedly fraudulent conduct involving U.S. Dollar LIBOR. According to the settlement agreement, the bank “misrepresented the integrity of the LIBOR benchmark” to government and private institutional counterparties. The bank allegedly concealed, misrepresented, or failed to disclose information to “avoid negative publicity and protect the reputation of the bank,” including, among other things, asked employees in other sections of the bank avoid offering higher rates than the bank’s USD LIBOR submissions. Additionally, contributing to inaccurate LIBOR benchmark rates, the bank allegedly was aware that other financial institutions made USD LIBOR submissions that were inconsistent with their borrowing rates. The bank is required to pay $95 million into a settlement fund, which government and non-profit entities with LIBOR-linked investments from the bank may be eligible for distribution, while the remaining $5 million will cover costs and fees associated with the investigation and settlement.