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  • NY District Court holds CFPB structure is unconstitutional

    Courts

    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.”

    Courts PHH v. CFPB State Attorney General CFPB CFPB Succession Consumer Finance CFPA

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  • CA Attorney General secures $67 million in debt relief for former students of defunct for-profit school

    State Issues

    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.

    State Issues State Attorney General Student Lending Debt Cancellation Debt Collection Consumer Finance Lending Courts

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  • National bank and coalition of 42 Attorneys General settle LIBOR action for $100 million

    State Issues

    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.

    State Issues State Attorney General Settlement LIBOR

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  • New York Court of Appeals rules claims under Martin Act governed by three-year statute of limitations

    Courts

    On June 12, the New York Court of Appeals issued a 4 to 1 ruling that claims brought under the state’s Martin Act are governed by a statute of limitations of three years, not six. Former New York Attorney General Eric Schneiderman filed a suit against a bank alleging that in 2006 and 2007, the bank misrepresented the quality of residential mortgage-backed securities it created and sold, bringing its claims under the state’s Martin Act, which grants the Attorney General of New York expanded liability for investigating and enjoining fraudulent practices in the marketing of stocks, bonds and other securities beyond what can be recognized under the common law fraud statute. The bank argued that the action was time-barred because too much time had elapsed to bring claims under the Martin Act, and an argument ensued as to whether the three-year statute of limitations that applies to actions to recover upon a liability or penalty imposed by a statute, or the six-year statute of limitations that applies to an action based upon fraud, applied. In its decision, the majority wrote that the three-year period applied because the Martin Act “expands upon, rather than codifies, the common law of fraud” and “imposes numerous obligations—or ‘liabilities’—that did not exist at common law, justifying the imposition of a three-year statute of limitations.” The court concluded that the broad definition of “fraudulent practices” encompasses wrongs that are not otherwise cognizable under the common law and “dispenses, among other things, with any requirement that the Attorney General prove scienter or justifiable reliance on the part of investors.” The court remanded the case to the New York State Supreme Court for further proceedings concerning the state’s claim against the bank for alleged violations of Executive Law Section 63(12).

    Courts Mortgages RMBS State Issues State Attorney General

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  • Sixteen State Attorneys General urge the CFPB to maintain the public consumer complaint database

    Federal Issues

    On June 4, the New York Attorney General, Barbara Underwood, along with fourteen other state Attorneys General submitted a comment letter in response to the CFPB’s Request for Information (RFI) on the public reporting of consumer complaints, previously covered by InfoBytes here. The Attorneys General highlight the utility of the CFPB’s consumer complaint database, stating it “has been an invaluable resource for identifying trends and patterns,” and noting its usefulness in investigations into certain companies “whose misconduct was initially brought to [their] attention through a critical mass of complaints filed with the CFPB.” The letter also comments on the database’s benefit to the public for (i) empowering consumers to educate themselves; (ii) incentivizing companies to treat consumers fairly; and (iii) potentially revealing patterns of widespread misconduct. The coalition concludes the letter by urging the CFPB to maintain the public database.

    Additionally, on the same day, the New Jersey Attorney General, Gurbir Grewal, responded to the same RFI with similar sentiments but also emphasized that eliminating or reducing the public availability of the database “would conflict with the open-government principles of the Freedom of Information Act” (FOIA) because FOIA requires government agencies to proactively disclose frequently requested records. According to Grewal, the Bureau receives a substantial number of requests for consumer complaint records and this number will likely increase without the public database.

    Federal Issues State Issues State Attorney General Consumer Complaints CFPB RFI

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  • New Jersey Attorney General seeks to partner with Department of Education on for-profit investigations

    State Issues

    On May 17, the New Jersey Attorney General, Gurbir Grewal, sent a letter to the Secretary of Education, Betsy Devos, regarding concerns that the Department of Education (Department) is no longer investigating fraudulent activities at for-profit colleges. Grubir cited work that State Attorneys General did with the Department during the previous administration regarding these investigations and noted that the cooperation between his office and the Department has “ground to a halt.” The letter concludes with Grubir requesting the Department continue several investigations that are in progress and offers to assist in sharing information and supplementing resources or, if the Department chooses not to pursue the investigations, to allow the New Jersey Attorney General to “pick up where [the Department] leave[s] off.”

    State Issues State Attorney General Department of Education For-Profit College Student Lending

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  • District court sanctions banker for violating consent order issued by CFPB and Maryland Attorney General

    Courts

    On May 21, the U.S. District Court for the District of Maryland granted in part and denied in part a motion for sanctions brought by the CFPB and the Consumer Protection Division of the Maryland Attorney General’s Office (plaintiffs) against a banker (defendant) previously held in civil contempt for violating a final judgment order prohibiting him from participating in the mortgage industry. As previously covered in InfoBytes, in April 2015, a joint enforcement action alleging participation in a mortgage-kickback scheme in violation of RESPA and state law was bought against the defendant, five other individuals, and a Maryland title company. According to the 2018 sanctions order, a stipulated final judgment and order between the parties was approved in November 2015, which, among other things, limited the defendant—who neither admitted nor denied the allegations—from participating in the mortgage industry for two years but did not prohibit him “from acting solely as a personnel or human-resources manager for a mortgage business operated by a FDIC insured banking institution. . . .”

    However, in August 2017, the court held the defendant in civil contempt for failing to comply with the order when it was discovered that the defendant (i) owned and operated mortgage businesses in violation of the order, while claiming to be employed as a human resources professional at one of the businesses; (ii) operated bank branches in Maryland and California; (iii) failed to upload the final judgment and order into the Nationwide Mortgage Licensing System and Registry (NMLSR); and (iv) failed to comply with stipulated reporting requirements. The plaintiffs’ proposed sanctions sought to disgorge all of the defendant’s income from 2015 until the date of compliance and impose a lifetime ban from the industry. In issuing the sanctions, the court ordered that all contemptuous income since the final judgment should be disgorged and extended the original two-year ban another two years—minus the exemption for employment as an HR professional. The defendant is further required to post the sanctions order on the NMLSR within 60 days.

    Courts CFPB State Attorney General Mortgages RESPA Enforcement

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  • Maryland announces settlement with mortgage servicer over property inspection fees

    State Issues

    On May 14, the Maryland Attorney General announced a settlement with a mortgage loan servicer to resolve allegations that it charged homeowners illegal inspection fees. According to the announcement, the servicer allegedly charged borrowers for property inspections that were done when the borrower was in default on their payments, in violation of a Maryland law, which prohibits passing on such inspection costs. The mortgage servicer ceased the practice in 2014  for forward mortgages and in 2016 for reverse mortgages, according to the Attorney General’s office. The settlement requires the mortgage servicer to (i) refrain from engaging in the same practice in the future; (ii) complete the return of almost $1 million in collected inspection fees; and (iii) pay nearly $500,000 in penalties and costs.

    State Issues Mortgage Servicing Settlement Home Inspection State Attorney General

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  • Coalition of state Attorneys General oppose efforts to weaken CFPB’s investigative authority

    Federal Issues

    On April 25, a coalition of 16 state Attorneys General issued a comment letter responding to the CFPB’s Request for Information (RFI) on Civil Investigative Demands (CIDs). (See previous InfoBytes coverage on the RFI here and here.) According to the letter, the coalition opposes “any effort to curtail the Bureau’s civil investigative demand authority,” noting, among other things, that (i) the CFPB’s implementation of its final rule relating to investigations was “non-controversial” and based on established FTC enforcement practices; (ii) federal agencies are allowed to fulfill their mandates through the legislative grant of civil investigative demand authority; (iii) judicial supervision over CIDs protects recipients’ rights; and (iv) the CFPB “has used its investigative authority responsibly and effectively.”

    Federal Issues State Attorney General CFPB CIDs

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  • Illinois Attorney General sues online “pension sale” installment lender

    Lending

    On April 19, the Illinois Attorney General announced a lawsuit against a Nevada-based installment loan company alleging the company made illegal installment loans without a license. According to the press release, the Illinois Attorney General alleges that the company markets high rate installment loans in exchange for payments from a consumer’s pension benefits in violation of Illinois law. In addition, the Attorney General claims that the company illegally advertised its loans and concealed high finance charges from consumers and, in some instances, continued to withdraw money from accounts after consumers attempted to cancel the agreement. The Attorney General is seeking the contracts to be voided, an injunction against the behavior, restitution for consumers, and civil money penalties.

    Lending State Issues Installment Loans Pension Benefits Interest Rate State Attorney General

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