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CFPB says furnishers’ investigative duties include legal disputes
On April 20, the CFPB filed an amicus brief in a case before the U.S. Court of Appeals for the Eleventh Circuit arguing that the duty to investigate a consumer’s credit dispute applies not only to factual disputes but also to disputes that can be labeled as legal in nature. The plaintiffs entered into a timeshare agreement with the defendant hotel chain and made monthly payments for nearly two years but then stopped. The plaintiffs disputed the validity of, and attempted to rescind, the agreement. The defendant did not agree to the rescission and continued to record the deed under the plaintiffs’ names. The plaintiffs later obtained copies of their credit reports, which showed past-due balances with the defendant, and subsequently submitted letters to a credit reporting agency (CRA) disputing the credit reporting. After the defendant certified the information was accurate, the plaintiffs sued the defendant and the CRA alleging that the defendant violated the FCRA by failing to conduct a proper investigation. The defendant moved for summary judgment, arguing that the issue of whether the debt is owed—the basis of the plaintiffs’ FCRA claim—constitutes a legal dispute and is not a factual inaccuracy. The defendant further maintained that there was no legal error because the plaintiffs owed the money as a matter of law. Last December, the U.S. District Court for the Middle District of Florida granted partial summary judgment in favor the defendant after concluding, among other things, that because the plaintiffs’ dispute centered on the legal validity of their debt, rather than a factual inaccuracy, the investigation requirement was not triggered and the claim was “not actionable under the FCRA.”
The Bureau argued in favor of the plaintiffs-appellants. According to the Bureau, the district court “unduly narrow[ed] the scope of a furnisher’s obligations by holding that furnishers categorically need not investigate indirect disputes involving ‘legal’ inaccuracies.” This position, the Bureau maintained, contradicts the purpose of the FCRA’s requirement to conduct a reasonable investigation of consumer disputes and “could reduce the incentive of furnishers to resolve ‘legal’ disputes, and, in turn, could increase the volume of consumer complaints about credit reporting issues that the Bureau receives and devotes resources to address.”
Explaining that the FCRA does not distinguish between legal and factual disputes, the Bureau stated that the district court’s conclusion “is not supported by the statute, risks exposing consumers to more inaccurate credit reporting, conflicts with the decision of another circuit, and undercuts the remedial purpose of the FCRA.” The Bureau presented several arguments to support its position, including that a reasonable investigation is required under the FCRA, and that while the reasonableness of an investigation is case specific, it “can be evaluated by how thoroughly the furnisher investigated the dispute (e.g., how well its conclusion is supported by the information it considered or reasonably could have considered).”
The Bureau also claimed that the Congress did not intend to exclude disputes that involve legal questions. “[M]any inaccurate representations pertaining to an individual’s debt obligations arguably could be characterized as legal inaccuracies, given that determining the truth or falsity of the representation could require the reading of a contract,” the Bureau wrote. Moreover, an “atextual exception for legal inaccuracies will create a loophole that could swallow the reasonable investigation rule,” the Bureau stressed. The agency urged the court to “reject a formal distinction between factual and legal investigations because it will likely prove unworkable in practice” and said that allowing such a distinction would “curtail the reach of the FCRA’s investigation requirement in a way that runs counter to the purpose of the provision to require meaningful investigation to ensure accuracy on credit reports.”
As previously covered by InfoBytes, the CFPB and the FTC filed an amicus brief presenting the same arguments last December in a different FCRA case on appeal to the 11th Circuit involving the same defendant.
District Court won’t stay CFPB litigation with credit reporter
On April 13, the U.S. District Court for the Northern District of Illinois denied a credit reporting agency’s (CRA) bid to stay litigation filed by the CFPB alleging deceptive practices related to the marketing and sale of credit scores, credit reports, and credit-monitoring products to consumers. The Bureau sued the CRA and one of its former senior executives last April (covered by InfoBytes here), claiming the defendants allegedly violated a 2017 consent order by continuing to engage in “digital dark patterns” that caused consumers seeking free credit scores to unknowingly sign up for a credit monitoring service with recurring monthly charges.
The CRA requested a stay while the U.S. Supreme Court considers whether the Bureau’s funding mechanism is unconstitutional. Earlier this year, the Court agreed to review next term the 5th Circuit’s decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau, where it found that the CFPB’s “perpetual self-directed, double-insulated funding structure” violated the Constitution’s Appropriations Clause. (Covered by InfoBytes here and a firm article here.) While acknowledging that a ruling against the Bureau may result in the dismissal of the action against the CRA, the court concurred with the Bureau that consumers may be exposed to harm during a stay. “Were I to grant the requested stay, it could last more than one year, depending on when the Supreme Court issues its opinion,” the court wrote. “In that time, if the Bureau’s allegations bear out, consumers will continue to suffer harm because of defendants’ unlawful conduct. That potential cost is too great to outweigh the resource preserving benefits a stay would confer.”
District Court orders fintech to pay $2.8 million to settle claims of price manipulation of crypto-assets security
On April 20, the U.S. District Court for the Southern District of New York entered a final judgment in which a fintech company and its former CEO (collectively, “defendants”) have agreed to pay the SEC more than $2.8 million to settle allegations that they manipulated the price of their crypto-assets security. The SEC filed charges against the defendants last September for “perpetrating a scheme to manipulate the trading volume and price” of their digital token, and for effectuating the unregistered offering and sale of such token. The complaint also contended that the defendants hired a third party to create the false appearance of robust market activity for the token and inflated the token’s price in order to generate profits for the defendants. According to the SEC, the defendants allegedly earned more than $2 million as a result. The SEC charged the defendants with violating several provisions of the Securities Act of 1934 and Rule 10b-5, as well as certain sections of the Exchange Act. At the time the charges were filed, the third party’s CEO consented to a judgment (without admitting or denying the allegations), which permanently enjoined him from participating in future securities offerings and required him to pay disgorgement and prejudgment interest.
The defendants, while neither admitting nor denying the allegations, consented to the terms of the April final judgment. The company agreed to pay nearly $2.8 million, including more than $1.5 million in disgorgement of net profits, a civil penalty of more than $1 million, and roughly $240,000 in prejudgment interest. The former CEO agreed to pay more than $260,000, representing disgorgement, prejudgment interest, and a civil penalty. Both defendants are permanently enjoined from engaging in future securities law violations, and are restricted in their ability to engage in any offering of crypto asset securities.
3rd Circuit: No ambiguity in collection dispute notice
On April 18, the U.S. Court of Appeals for the Third Circuit affirmed the dismissal of a putative FDCPA class action debt collection lawsuit concerning allegedly misleading dispute language. A letter the plaintiff received from the defendant debt collector included the following statement:
Unless you notify this office within 30 days after receiving this notice that you dispute the validity of this debt or any portion thereof, this office will assume this debt is valid. If you notify this office in writing within 30 days after receiving this notice that you dispute the validity of this debt or any portion thereof, this office will obtain verification of the debt or obtain a copy of a judgment and mail you a copy of such judgment or verification. If you request of this office in writing within 30 days after receiving this notice[,] this office will provide you with the name and address of the original creditor, if different from the current creditor.
If you dispute the debt, or any part thereof, or request the name and address of the original creditor in writing within the thirty-day period, the law requires our firm to suspend our efforts to collect the debt until we mail the requested information to you.
The plaintiff argued that the suspended collection language in the second paragraph violated the FDCPA because it led her to believe “that she could suspend collection by disputing all or part of the debt orally outside of the 30-day window.” Doing so, the plaintiff maintained, would conflict with her rights under Section 1692g(b) of the statute, which “guarantees that, if a consumer invokes her § 1692g(a) right to request information about a debt, and the consumer invokes this right in writing and within the thirty-day period prescribed by statute, a debt collector must ‘cease collection of the debt’ until it has provided the requested information to the debtor.” While the defendant was not required to notify the plaintiff about her rights under 1692g(b), the plaintiff claimed that including inaccurate information about those rights gave her “contrary and inconsistent” information.
The district court dismissed the action for failure to state a claim on the premise that, when “read holistically,” the letter did not suggest that the plaintiff could have collection activity suspended by orally disputing the debt outside the 30-day window. On appeal, the 3rd Circuit agreed with the district court that the language that preceded the disputed statement “eliminates any ambiguity” because “it explains that a debtor who wishes to avail herself of her statutory right to validation of a debt must request validation in writing and within 30 days of receiving a collection notice.”
CFPB: ECOA prohibits discrimination in any aspect of a credit transaction
On April 14, the CFPB filed a statement of interest saying ECOA’s prohibition on discrimination applies “to any aspect of a credit transaction,” and therefore covers every aspect of a borrower’s dealings with a creditor, not just specific loans terms such as the interest rate or fees.
The case, which is currently pending in the U.S. District Court for the Southern District of Florida, concerns a putative class of Black students enrolled at a for-profit nursing school who took out credit in the form of federal and private student loans to pay for the program. Plaintiffs alleged that the school adopted new policies while they were enrolled that increased the time and money it would take to complete the program, and asserted the program was intentionally targeted to individuals on the basis of race “with the understanding that they were highly likely to require an extension of credit to pay for the program.” Plaintiffs claimed the school violated ECOA by engaging in “reverse redlining” and brought other claims under state and federal law. The school moved to dismiss, arguing that the plaintiffs failed to specify any aspect of any credit transaction that is discriminatory based on race or another protected class under ECOA, and failed to identify any specific loan term that was unfair or predatory (based on race or otherwise), the Bureau said in a corresponding blog post.
The statement of interest addressed two questions concerning ECOA’s applicability raised in the school’s motion to dismiss. First, the Bureau refuted the school’s argument that in order to state a claim for discriminatory targeting under ECOA, the plaintiff must allege that the individual (i) is a member of a protected class; (ii) applied and qualified for a loan; (iii) the loan was made on “grossly unfavorable terms”; and (iv) the lender intentionally targeted the plaintiff for unfair loans or gave more favorable terms to others. Calling this contention “mistaken,” the Bureau explained that to state a claim under ECOA, “a plaintiff need allege only facts to plausibly suggest that a defendant discriminated on a prohibited basis with respect to an aspect of a credit transaction; they need not allege the elements of a prima facie case, which is an evidentiary standard and not a pleading requirement.” The Bureau pointed to allegations showing that the school allegedly targeted Black students by, among other things, engaging in race-targeted advertising and marketing, enrolling a disproportionate number of Black students as compared to the surrounding neighborhoods’ populations, and making a greater percentage of loans in majority Black census tracts, as examples of discriminatory targeting.
Second, the Bureau disagreed with the school’s assertion that plaintiffs failed to identify any aspects of the credit transactions that were discriminatory based on race, or any specific loans terms that were allegedly unfair or predatory. Emphasizing that even if the loan terms are not themselves unfair or predatory, plaintiffs may proceed with a discriminatory targeting claim because ECOA prohibits discrimination “with respect to any aspect of a credit transaction,” which encompasses more than just the loan terms in a contract, the Bureau explained. According to the Bureau, the plaintiffs alleged discrimination in relation to multiple aspects of their credit transactions with the school and have accordingly stated a claim under ECOA.
CFPB Director Rohit Chopra issued a statement emphasizing that courts have consistently upheld that discriminatory targeting violates ECOA when a company targets consumers on a prohibited basis for harmful and predatory loans. The Bureau will continue to work with the DOJ, federal agencies, and the states to ensure lenders that engage in discriminatory targeting are held accountable, Chopra said.
3rd Circuit: Card renewal notices not subject to TILA itemization requirements
On April 11, the U.S. Court of Appeals for the Third Circuit upheld the dismissal of a putative class action suit claiming a national bank’s failure to itemize fees in its credit card renewal notices violated TILA and Regulation Z. Plaintiff alleged that his 2019 card renewal notice listed the annual membership fee as $525, but did not separate the fee into itemized amounts: $450 for the primary cardholder and $75 for an additional authorized user. Stating that the annual membership fee later appeared in his 2020 renewal notice as two separate fees, he claimed that he would have only paid the $450 fee for his own card if he had known it was an option in 2019. Plaintiff sued claiming the 2019 renewal notice violated TILA and Regulation Z, which require creditors to make disclosures before and during a creditor-borrower relationship, including the existence of any annual and periodic fees. The district court rejected the bank’s argument that the plaintiff lacked standing after finding that he suffered an economic injury by paying the full $525. However, the court granted the bank’s motion to dismiss after determining that the plaintiff failed to allege a TILA violation because neither the statute nor its implementing regulation expressly require banks to itemize fees in a renewal notice.
On appeal, the 3rd Circuit issued a precedential opinion finding that while the plaintiff had standing, he failed to plead an actual TILA violation. “While there is an itemization requirement in the statutes and regulations governing periodic disclosures,” the court clarified that “the same requirement is not included in the statutes and regulations applicable to renewal notices.” The 3rd Circuit stated that “[r]enewal notices are not subject to the same disclosure requirements as solicitations and applications, which are provided to consumers before the parties have any relationship,” explaining that because “the creditor does not yet know whether the consumer will add an authorized user to the account” during the solicitation or application period, it “must disclose ‘optional’ additional card fees.” However, during the account renewal stage, TILA and Regulation Z only require creditors to “disclose terms ‘that would apply if the account were renewed.’”
Credit reporter must face FCRA suit on hard-inquiry reinvestigation
On April 10, the U.S. District Court for the Eastern District of Pennsylvania denied a credit reporting agency’s (CRA) motion for summary judgment in a certified class action suit accusing the CRA of willfully violating the reinvestigation provision in the FCRA. Plaintiff claimed that he disputed an alleged inaccurate hard inquiry on his credit report, and argued that not only did the CRA fail to remove the hard inquiry from his credit file, he was given a sales pitch for an identity theft product. The CRA conceded that it did not reinvestigate the dispute and argued, among other things, “that hard inquiries do not necessarily decrease a consumer’s credit score and, even if they did, such diminutions do not necessarily result in the denial of credit.” Experts for both parties debated the extent to which a hard inquiry affects a consumer’s credit score.
The court disagreed with the CRA’s position concerning the impact of hard inquiries on consumers’ credit scores, noting the conflict with federal regulators’ cautionary advice that “[t]hese inquiries will impact your credit score because most scoring models look at how recently and how frequently you apply for credit.” Moreover, the CRA’s own expert opined that hard inquiries usually do have a “minor impact” on consumers’ credit scores. Additionally, the court rejected the CRA’s argument that it did not willfully violate the FCRA because its process for handing hard-inquiry disputes was in line with industry-wide practices. The court cited Third Circuit precedent requiring CRAs to reinvestigate any information a consumer claims is inaccurate if the CRA does not deem the information frivolous or chooses not to delete it from the customer’s file. “When industry practices are contradicted by clear statutory language and case law giving force to that language, common practice does not save a defendant from a finding of willfulness,” the court wrote. With respect to the decertification request, the court said class members established that the time and resources spent trying to resolve disputes over inaccurate hard inquiries, and their lowered credit scores, amounted to concrete injury that can be fairly traceable to the CRA’s statutory violation.
The court denied summary judgment for two reasons. First, the court did not find that the CRA’s actions were “objectively reasonable” based on the CRA’s reliance on a “contorted and inconsistent” reading of the FCRA and its interpretation of § 1681i (which “requires a reasonable reinvestigation when consumers raise a dispute of inaccuracy”). The court also denied summary judgment “[b]ecause a jury could find that [the CRA’s] blanket policy of refusing to reinvestigate disputes of hard inquiries is not reasonable under the law.”
Divided 4th Circuit: Including GAP coverage does not eliminate auto loan exemption from MLA
On April 12, a split U.S. Court of Appeals for the Fourth Circuit held that loans borrowed in part to finance the purchase of a car are not governed by the Military Lending Act (MLA), even when the loan covers additional related costs. While the MLA’s requirements apply to the extension of consumer credit to covered members, loans procured “for the express purpose of financing” the purchase of a car (and are secured by the car) are excluded from many of the statute’s protections. Plaintiff purchased a car with an auto loan that included guaranteed asset protection coverage (GAP). The plaintiff then filed a putative class action against the defendant claiming the loan violated the MLA because it mandated arbitration (which is prohibited under the MLA) and failed to disclose certain information. The plaintiff argued that the loan should be protected under the MLA because part of his “bundled” loan went to GAP coverage. The district court disagreed and dismissed the case, ruling that the plaintiff’s contract was exempt from the MLA because GAP coverage and other add-on charges were “inextricably tied” to his purchase of the car.
On appeal, the majority concluded that loan, which was used for both an MLA-exempt and non-exempt purpose, can be treated together under the statute, because “[i]f a loan finances a car and related costs, then it is for the express purpose of financing the car purchase and the exception can apply.” The key issue was how to interpret the MLA exception that covers loans made for the “express purpose” of financing a car. “If that phrase, as used in the [MLA], means merely ‘for the specific purpose,’ [the defendant] wins. If it means ‘for the sole purpose,’ [plaintiff] wins,” the majority wrote. “We do not care and we do not ask” if the loan also financed GAP coverage, provided the loan was made for the specific purpose of financing a car, the court said, explaining that the loan is exempted from the MLA, “no matter what else it financed.”
The dissenting judge warned that the majority’s conclusion undermines the purpose of the MLA. “There is no reason to suspect that Congress regulated the marketing of financial products to service members, only to allow them to be smuggled in through a vehicle-loan back door,” the dissenting judge wrote, criticizing the majority’s conclusion and noting that opening up the MLA’s exception to include additional loans “permits lenders to piggyback virtually any financial product onto an exempt vehicle loan” at the expense to service members.
Notably, the CFPB, DOJ, and Department of Defense (DOD) filed an amicus brief last year on behalf of the United States in support of the plaintiff’s appeal, in which the agencies argued that the “hybrid” loan at issue must comply with the MLA. As previously covered by InfoBytes, the agencies wrote that GAP coverage “is not needed to buy a car and does not advance the purchase or use of the car.” The agencies noted that GAP coverage is identified as a “debt-related product that addresses a financial contingency arising from a total loss of the car” and that the coverage can be purchased as a standalone product. According to the brief, the plaintiff’s loan is a “hybrid loan—that is, a loan that finances a product bundle including both an exempt product (such as a car) and a distinct non-exempt product (such as optional GAP coverage),” and the district court erred in failing to interpret the MLA consistent with guidance issued in 2016 and 2017 by the DOD suggesting that such “hybrid loans” are consumer credit subject to the protections in the MLA. The 2017 guidance explained that “a credit transaction that includes financing for [GAP] insurance … would not qualify for the exception,” and the agencies argued that although the 2017 guidance was withdrawn in 2020, the “withdrawal did not offer a substantive interpretation of the statute that would alter the conclusion” that the plaintiff’s loan was not exempt from the MLA.
District Court dismisses RESPA claims that servicer failed on QWRs
The U.S. District Court for the Western District of Washington recently ruled on a loan servicer’s motion for summary judgment concerning claims that the servicer violated RESPA when it failed to respond to multiple qualified written requests (QWR) alleging account errors and improperly reported alleged delinquencies to credit reporting agencies (CRAs). Plaintiffs executed a promissory note and deed of trust, and later entered into a Chapter 11 bankruptcy plan to modify the terms of the loan. Plaintiffs sued, asserting violations of RESPA and various state laws, claiming, among other things, that the servicer failed to timely respond to their QWRs, provided false information to CRAs, and failed to adjust the loan to reflect the modified payment schedule from the bankruptcy plan.
The court granted summary judgment in favor of the servicer. On the QWR-related allegations, the court found that, “while the [plaintiffs] say that [the servicer] did not address the issues raised in the QWRs, their brief does not identify a single issue that went unaddressed. . . Their brief does not, for example, point to a request in any QWR that went unanswered in [the servicer’s] corresponding response. Merely providing a laundry list of documents—without specifically identifying how [the servicer’s] responses were incomplete—is insufficient.” The court also found that the plaintiffs failed to show that the servicer’s responses were misleading, confusing, or incorrect. Though the plaintiffs provided a list of statements made by the servicer when responding to the QWRs, plaintiffs failed to explain what exactly was inaccurate or confusing about the servicer’s responses, the court said.
While the court flagged one possible inconsistency in at least one of the servicer’s responses (where the servicer incorrectly stated the monthly principal amount due but corrected the mistake less than a month later), the court determined that “this alone does not suffice under RESPA.”
With respect to plaintiffs’ allegations of false credit reporting, the court concluded that there was no evidence that the servicer submitted negative information about plaintiffs to a CRA, nor did the plaintiffs demonstrate how any such reports hurt their credit or identify whether the reports were filed within RESPA’s 60-day non-reporting period. Under RESPA, a servicer is prohibited from providing certain information regarding “any overdue payment, owed by such borrower and relating to such period or qualified written request, to any consumer reporting agency” during the 60-day period beginning on the date the servicer receives a QWR. The court further noted that the plaintiffs failed to show that they suffered actual damages “flowing from” the alleged RESPA violations, which is a requirement of the statute.
The court granted summary judgment on the RESPA claims in favor of the servicer and remanded the remaining state-law claims to state court.
CFPB sues co-trustees for concealing assets to avoid fine
On April 5, the CFPB filed a complaint against two individuals, both individually and in their roles as co-trustees of two trusts, accusing them of concealing assets to avoid paying a fine owed to the Bureau. In 2015 the Bureau filed an administrative action alleging one of the co-trustees—the former president of a Delaware-based online payday lender (the “individual defendant”)—and the lender violated TILA and EFTA and engaged in unfair or deceptive acts or practices when making short-term loans. (Covered by InfoBytes here.) The Bureau’s administrative order required the payment of more than $38 million in both legal and equitable restitution, along with $7.5 million in civil penalties for the company and $5 million in civil penalties for the individual defendant.
As previously covered by InfoBytes, two different administrative law judges (ALJs) decided the present case years apart, with their recommendations separately appealed to the Bureau’s director. The director upheld the decision by the second ALJ and ordered the lender and the individual defendant to pay the restitution. A district court issued a final order upholding the award, which was appealed on the grounds that the enforcement action violated their due process rights by denying the individual defendant additional discovery concerning the statute of limitations. The lender and the individual defendant recently filed a petition for writ of certiorari challenging the U.S. Court of Appeals for the Tenth Circuit’s affirmation of the CFPB administrative ruling, and asked the U.S. Supreme Court to review whether the high court’s ruling in Lucia v. SEC, which “instructed that an agency must hold a ‘new hearing’ before a new and properly appointed official in order to cure an Appointments Clause violation” (covered by InfoBytes here), meant that a CFPB ALJ could “conduct a cold review of the paper record of the first, tainted hearing, without any additional discovery or new testimony,” or whether the Court intended for the agency to actually conduct a new hearing.
The Bureau claimed in its announcement that to date, the defendants have not complied with the agency’s order, nor have they obtained a stay while their appeal was pending. The defendants have also made no payments to satisfy the judgment, the Bureau said. The complaint alleges that the co-trustee defendants transferred funds to hinder, delay, or defraud the Bureau, in violation of the FDCPA, in order to avoid paying the owed restitution and penalties. Specifically, the complaint alleges that between 2013 and 2015, after becoming aware of the Bureau’s investigation, the individual defendant transferred $12.3 million to his wife through their revocable trusts, for which his wife is the beneficiary. The complaint requests a declaration that the transactions were fraudulent, seeks to recover the value of the transferred assets via liens on the property in partial satisfaction of the Bureau’s judgment against the individual defendant, and seeks a monetary judgment against the wife and her trust for the value of the respective property and/or funds received as a transferee of fraudulent conveyances of the property belonging to the individual defendant.