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District Court: Defendants cannot use CFPB funding argument to dismiss deceptive marketing lawsuit
On November 18, the U.S. District Court for the Northern District of Illinois ruled that the CFPB can proceed in its lawsuit against a credit reporting agency, two of its subsidiaries (collectively, “corporate defendants”), and a former senior executive accused of allegedly violating a 2017 enforcement order in connection with alleged deceptive practices related to their marketing and sale of credit scores, credit reports, and credit-monitoring products to consumers. According to the court, a recent decision issued by the U.S. Court of Appeals for the Fifth Circuit, which found that the Bureau’s funding structure violates the Appropriations Clause of the Constitution (covered by a Buckley Special Alert), is a persuasive basis to have the lawsuit dismissed.
As previously covered by InfoBytes, the Bureau sued the defendants in April claiming the corporate defendants, under the individual defendant’s direction, allegedly violated the 2017 consent order from the day it went into effect instead of implementing agreed-upon policy changes intended to stop consumers from unknowingly signing up for credit monitoring services that charge monthly payments. The Bureau further claimed that the corporate defendants’ practices continued even after examiners raised concerns several times, and that the individual defendant had both the “authority and obligation” to ensure compliance with the 2017 consent order but did not do so.
The defendants sought to have the lawsuit dismissed for several reasons, including on constitutional grounds. The court disagreed with defendants’ constitutional argument, stating that, other than the 5th Circuit, courts around the country have “uniformly” found that Congress’ choice to provide independent funding for the Bureau conformed with the Constitution. “Courts are ill-equipped to second guess exactly how Congress chooses to structure the funding of financial regulators like the Bureau, so long as the funding remains tethered to a law passed by Congress,” the court wrote. The court also overruled defendants’ other objections to the lawsuit. “[T]his case is only at the pleading stage, and all the Bureau must do is plausibly allege that [the individual defendant] was recklessly indifferent to the wrongfulness of [the corporate defendants’] actions over which he had authority,” the court said, adding that the Bureau “has done so because it alleges that because of financial implications, [the individual defendant] actively ‘created a plan to delay or avoid’ implementing the consent order.”
The Bureau is currently seeking Supreme Court review of the 5th Circuit’s decision during its current term. (Covered by InfoBytes here.)
DOJ, FTC, Wisconsin AG sue timeshare scammers
On November 22, the DOJ, FTC, and the Wisconsin attorney general announced a civil enforcement action against 16 defendants for allegedly using deceptive sales practices to sell timeshare “exit services” to consumers, mostly involving senior citizens. The complaint, which was filed in the U.S. District Court for the Eastern District of Missouri, alleged that the defendants failed to assist consumers in exiting their timeshare contracts while collecting large fees for the incomplete service. The complaint also alleged that the defendants deceived consumers into registering for timeshare exit services by, among other things, falsely claiming that consumers could not exit timeshare contracts on their own, and that the defendants were affiliated with legitimate companies. The complaint further alleged that the defendants failed to notify consumers of their rights under federal and state law to cancel their contracts with defendants within three business days. The complaint noted that the defendants allegedly deceived consumers into paying over $90 million to the defendant companies for services that were not delivered. The complaint also stated that the defendants’ actions violated the FTC Act, the FTC’s rule concerning the cooling-off period for sales made at home or other locations, and certain Wisconsin state laws concerning fraudulent misrepresentations and direct marketing. The complaint seeks monetary relief, civil penalties, and injunctive relief. According to the DOJ, the defendants’ timeshare exit services are also the subject of lawsuits filed by the Alaska and Missouri attorneys general in June 2022.
FTC, CFPB weigh in on servicemembers’ right to sue under the MLA
On November 22, the FTC and CFPB (agencies) announced the filing of a joint amicus brief with the U.S. Court of Appeals for the Eleventh Circuit seeking the reversal of a district court’s decision that denied servicemembers the right to sue to invalidate a contract that allegedly violated the Military Lending Act (MLA). (See corresponding CFPB blog post here.) The agencies countered that the plain text of the MLA allows servicemembers to enforce their rights in court. Specifically, the agencies argued that Congress made it clear that when a lender extends a loan to a servicemember that fails to comply with the MLA, the loan is rendered void in its entirety. Moreover, Congress amended the MLA to unambiguously provide servicemembers certain legal rights, including an express private right of action and “the right to rescind and seek restitution on a contract void under the criteria of the statute.”
The case involves an active-duty servicemember and his spouse who financed the purchase of a timeshare from the defendants. Plaintiffs entered into an agreement with the defendants, made a down payment, and agreed to pay the remaining balance in monthly installments carrying an interest rate of 16.99 percent, in addition to annual assessments and club dues. None of the loan documents provided to the plaintiffs discussed the military annual percentage rate, nor did the defendants make any supplemental oral disclosures. Additionally, the agreement contained a mandatory arbitration clause (the MLA prohibits creditors from requiring servicemembers to submit to arbitration) and purportedly waived plaintiffs’ right to pursue a class action and their right to a jury trial. Plaintiffs filed a putative class action lawsuit alleging the agreement violated the MLA on several grounds, and sought an order declaring the agreement void. Plaintiffs also sought recission of the agreement, restitution, statutory, actual, and punitive damages, and an injunction requiring defendants to comply with the MLA going forward.
Defendants moved to dismiss, countering “that the plaintiffs lacked standing because they had not suffered any concrete injury and, even if they had, whatever injury they suffered was not traceable to the alleged MLA violations.” Defendants also argued that the loan was exempt under the MLA’s exemption for residential mortgages, and claimed that the MLA does not authorize statutory damages, nor did the plaintiffs state a claim for declaratory or injunctive relief. Further, defendants stated the court lacked jurisdiction to hear the case. The district court dismissed the lawsuit for lack of standing, agreeing with the magistrate judge that, among other things, plaintiffs “failed to allege ‘that the inclusion of the arbitration provision impacted [their] decision to accept the contract,’ and that they could not ‘seek[] relief based on a mere technicality that has not impacted them in any way.’”
Disagreeing with the district court’s ruling, the agencies argued that plaintiffs have a legal right to challenge the contract in court because (i) they made a down payment on an illegal and void loan; (ii) the injuries are traceable to the challenged conduct since “their monetary losses are the product of the illegal and void loan"; and (iii) their injuries “are redressable by an order of the court awarding restitution for the amounts that plaintiffs have already paid on the loan, and by a declaration confirming that the loan is void and that the plaintiffs have no obligation to make additional payments going forward.” The agencies asserted that courts have recognized that economic injury is exactly the sort of injury that courts have the power to redress.
Moreover, the agencies pointed out that the district court’s ruling “risks substantially curtailing private enforcement of the MLA and limiting servicemembers’ ability to vindicate their rights under the statute. It does so by reading the MLA’s voiding provision out of the statute and reading into the statute an atextual materiality requirement. But it may be very difficult, if not impossible, for servicemembers to demonstrate that certain MLA violations had a direct effect on their decision to procure a financial product or caused them to pay money they would not otherwise have paid.”
Supreme Court to fast-track review of student debt relief program
On December 1, the U.S. Supreme Court agreed to hear the Biden administration’s appeal of an injunction entered by the U.S. Court of Appeals for the Eighth Circuit that temporarily prohibits the Secretary of Education from discharging any federal loans under the agency’s student debt relief plan (announced in August and covered by InfoBytes here). In a brief unsigned order, the Supreme Court deferred the Biden administration’s application to vacate, pending oral argument. The Supreme Court said it will treat the Biden administration’s application as a “petition for a writ of certiorari before judgment,” and announced a briefing schedule will be established to allow the case to be argued in the February 2023 argument session to resolve the legality of the program.
The Biden administration filed its application last month asking the Supreme Court to vacate, or at minimum narrow, the 8th Circuit’s injunction. Among other things, the Biden administration claimed that the 8th Circuit failed to “analyze the merits of the respondents’ claims, much less determine they are likely to succeed” when it granted an emergency motion for injunction pending appeal filed by state attorney generals from Nebraska, Missouri, Arkansas, Iowa, Kansas, and South Carolina. As previously covered by InfoBytes, the 8th Circuit determined that “the equities strongly favor an injunction considering the irreversible impact the Secretary’s debt forgiveness action would have as compared to the lack of harm an injunction would presently impose,” and pointed to the fact that the collection of student loan payments and the accrual of interest have both been suspended.
The appellate court’s “erroneous injunction leaves millions of economically vulnerable borrowers in limbo, uncertain about the size of their debt and unable to make financial decisions with an accurate understanding of their future repayment obligations,” the Biden administration said, adding that if the Supreme Court “declines to vacate the injunction, it may wish to construe this application as a petition for a writ of certiorari before judgment, grant the petition, and set the case for expedited briefing and argument this Term to avoid prolonging this uncertainty for the millions of affected borrowers.”
In its application, the Biden administration argued that the universal injunction was overbroad. The application further argued that the states lack standing because the debt relief plan “does not require respondents to do anything, forbid them from doing anything, or harm them in any other way.” Moreover, the Secretary of Education was acting within the bounds of the HEROES Act when he put together the debt relief plan, the application contended. “The COVID-19 pandemic is a ‘national emergency declared by the President of the United States,’” the application said. “Both the Trump and Biden Administrations previously invoked the HEROES Act to categorically suspend payments and interest accrual on all Department-held loans in light of the pandemic.” The application further argued that the states “have not disputed that those actions were lawful,” and that the Secretary of Education “reasonably ‘deem[ed]’ relief ‘necessary to ensure’ that a subset of these affected individuals—namely, those with lower incomes—‘are not placed in a worse position’ in relation to their student-loan obligations ‘because of their status as affected individuals.’”
Meanwhile, on December 1, the 5th Circuit denied the Department of Education’s (DOE) opposed motion for stay pending appeal, following a ruling issued by the U.S. District Court for the Northern District of Texas related to whether the agency’s student debt relief plan violated the Administrative Procedure Act’s (APA) notice-and-comment rulemaking procedures. As previously covered by InfoBytes, the district court determined that while the HEROES Act expressly exempts the APA’s notice-and-comment obligations, the court stressed that the HEROES Act “does not provide the executive branch clear congressional authorization to create a $400 billion student loan forgiveness program,” and, moreover, does not mention loan forgiveness.
Earlier, on November 22, the Department of Education (DOE) extended the pause on student loan repayments, interest, and collections in an effort to alleviate uncertainty for borrowers. Saying “it would be deeply unfair to ask borrowers to pay a debt that they wouldn’t have to pay,” the DOE stated that payments will resume 60 days after it is allowed to implement the debt relief plan or the litigation is resolved, explaining that this will give the Supreme Court time to resolve the case during its current term. However, if the debt relief plan has not been implemented and litigation has not been resolved by June 30, 2023, borrowers’ payments will resume 60 days after that, the DOE explained.
District Court sends overdraft fee suit to arbitration
On November 16, the U.S. District Court for the District of Massachusetts granted a defendant’s motion to compel arbitration regarding claims that consumers are charged significant overdraft or non-sufficient funds fees on bank accounts linked to discount cards issued by the gas-discount company. According to the plaintiff’s putative class action suit, the defendant advertises fuel discounts through a mobile app and payment card system while claiming that its service acts “like a debit card” by “‘effortlessly deduct[ing]’ funds from linked checking accounts at the time of purchase[.].” While these payments and discounts are represented as being “automatically applied,” the plaintiff alleged that paying with the discount card results in significant processing delays. These delays, the plaintiff contended, cause users to run the risk of having insufficient fees in their checking accounts before the payment is processed, thus resulting in overdraft fees. Additionally, the plaintiff claimed that the defendant does not verify whether a consumer has sufficient funds in the checking account before payments are withdrawn. The defendant moved to compel arbitration, or in the alternative, moved to dismiss the complaint, claiming that during the sign-up process, the plaintiff was presented with terms and conditions that explicitly require users to arbitrate any disputes, claims, or controversies. Moreover, the defendant argued that users cannot sign up for the program unless they first check a button that says “I agree” with the terms of use. While the parties agreed that the plaintiff was presented at a minimum a hyperlink to the terms and conditions, they disputed whether the sign-up process required the plaintiff to affirmatively assent to them. According to the plaintiff, there was no such checkbox button when he signed up for the program.
The court disagreed, ruling that the plaintiff had notice of and agreed to terms and conditions that included an arbitration clause and class action waiver. According to the court, the defendant adequately showed that the checkbox button was part of the process when the plaintiff signed up and that the defendant obtained his affirmative asset to the agreement. Further, the plaintiff failed to support his claim with any specific evidence that the checkbox button may not have been there during the sign-up process, the court maintained.
9th Circuit says number generator does not violate TCPA
On November 16, the U.S. Court of Appeals for the Ninth Circuit upheld a district court’s dismissal of a proposed TCPA class action, holding that in order for technology to meet the definition of an “automatic telephone dialing system” (autodialer), the system must be able to “generate and dial random or sequential telephone numbers under the TCPA’s plain text.” Plaintiff claimed he began receiving marketing texts from the defendant after he provided his phone number to an insurance company on a website. Plaintiff sued alleging violations of the TCPA and asserting that the defendant used a “sequential number generator” to select the order in which to call customers who had provided their phone numbers. This type of number generator qualifies as an autodialer under the TCPA, the plaintiff contended, referring to a footnote in the U.S. Supreme Court’s ruling in Facebook v. Duguid (covered by a Buckley Special Alert), which narrowed the definition of an autodialer under the TCPA and said “an autodialer might use a random number generator to determine the order in which to pick phone numbers from a preproduced list.” Defendant countered, however, that its system is not an autodialer, and “that the TCPA defines an autodialer as one that must generate telephone numbers to dial, not just any number to decide which pre-selected phone numbers to call.”
The 9th Circuit was unpersuaded by the plaintiff’s argument, calling it an “acontextual reading of a snippet divorced from the context of the footnote and the entire opinion.” The appellate court pointed out that nothing in Facebook suggests that the Supreme Court “intended to define an autodialer to include the generation of any random or sequential number.” The 9th Circuit further explained that “[u]sing a random or sequential number generator to select from a pool of customer-provided phone numbers would not cause the harms contemplated by Congress.”
2nd Circuit: Convicted SEC whistleblower cannot claim award
On November 15, the U.S. Court of Appeals for the Second Circuit denied a petition from a plaintiff to review a decision by the SEC to not grant him his whistleblower award because he pled guilty to participating in the crime he reported. According to the order, the plaintiff provided information to the SEC that assisted in a successful agency enforcement action with respect to an international bribery scheme. The plaintiff timely filed an application for a whistleblower award in connection with both the action for which he had provided information and another related action. He pled guilty to bribery charges but had not yet been sentenced. The order further noted that because of the guilty plea, the SEC determined that the plaintiff had been “convicted of a criminal violation related to” the bribery scheme that was at issue in both actions. The order noted that, generally, the SEC is required under federal law to pay a monetary award to a whistleblower when that whistleblower “voluntarily provided original information to the Commission that led to the successful enforcement” of “any judicial or administrative action brought by the Commission under the securities laws that results in monetary sanctions exceeding $1,000,000.” The order further noted that the SEC may not make an award "to any whistleblower who is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower otherwise could receive an award.”
On appeal, the plaintiff argued that he was not “convicted” under 15 U.S.C. § 78u-6(c)(2)(B). The plaintiff also claimed that the fact that he had not yet been sentenced—even though a court has accepted his guilty plea—means that he had not been “convicted.” The appellate court found that he did not raise this issue before the agency and therefore it need not address the plaintiff’s argument about the meaning of “convicted.” But even if it were to excuse the forfeiture, the plaintiff’s argument would fail, the appellate court concluded. The plaintiff also argued that the bribery charges to which he pled guilty were not connected to the actions he was a whistleblower on, and that the SEC did not support its finding of a connection with any substantial evidence. The appellate court disagreed with this argument as well, stating the SEC and the plaintiff interpret the meaning of “related to” differently. The appellate court further explained that “[t]he SEC interprets the term to mean that 'the conduct underlying the criminal conviction must be connected to or stand in some relation to the Covered Action.'" The order stated, “[the plaintiff] suggests that the term requires the whistleblower to have been 'a part of the conduct underlying the ... enforcement action' and to have known about the conduct during its occurrence.’”
CFPB asks Supreme Court to review 5th Circuit decision
On November 14, the DOJ, on behalf of the CFPB, submitted a petition for a writ of certiorari asking the U.S. Supreme Court to review whether the U.S. Court of Appeals for the Fifth Circuit erred in holding that the Bureau’s funding structure violates the Appropriations Clause of the Constitution. The Bureau also asked the court to consider the 5th Circuit’s decision to vacate the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (Payday Lending Rule) on the premise that it was promulgated at a time when the Bureau was receiving unconstitutional funding.
The Bureau’s funding is derived through the Federal Reserve instead of the annual congressional appropriations process—a process, the appellate court said, that violates the Constitution. Specifically, the 5th Circuit’s October 19 holding (covered by a Buckley Special Alert) found that although the Bureau spends money pursuant to a validly enacted statute, the structure violates the Appropriations Clause because (i) the Bureau obtains its funds from the Federal Reserve (not the Treasury); (ii) the agency maintains funds in a separate account; (iii) the Appropriations Committees do not have authority to review the agency’s expenditures; and (iv) the Bureau exercises broad authority over the economy. The 5th Circuit also rejected the Bureau’s arguments that the funding structure was necessarily constitutional because it was created by and subject to Congress, and distinguished other agencies that are funded outside of the annual appropriations process.
The case involves a challenge to the Bureau’s Payday Lending Rule, which prohibits lenders from attempting to withdraw payments for covered loans from consumers’ accounts after two consecutive withdrawal attempts have failed due to insufficient funds. As a result of the 5th Circuit’s decision, lenders’ obligation to comply with the rule (originally set for August 19, 2019, but repeatedly delayed) will be further delayed while the constitutional issue winds its way through the courts.
“No other court has ever held that Congress violated the Appropriations Clause by passing a statute authorizing spending,” the Bureau argued as it requested a prompt Supreme Court review, asserting that the 5th Circuit’s decision “threatens to inflict immense legal and practical harms on the CFPB, consumers, and the Nation’s financial sector.” The agency also stressed that “[n]ew challenges to the Bureau’s rules and other actions can be expected to multiply in the weeks and months to come, and will presumably be filed in the 5th Circuit whenever possible.” The decision also has the potential to impact past enforcement actions and rulemaking as well, the Bureau said.
The Bureau further asserted that while the 5th Circuit concluded that “‘an appropriation is required’ to authorize spending” and that “‘[a] law’ providing an agency with a funding source and spending authority ‘does not suffice,’” the appellate court failed to specify what would be required for such a law to qualify as an appropriation.
Moreover, the 5th Circuit’s reasoning was incorrect, the Bureau argued, because Congress specified that the agency could claim up to 12 percent of the Fed’s budget to fund its operations, and it is subject to, among other things, budget and financial oversight, government audits, and requirements that its director prepare and submit annual reports to the Senate and House appropriations committees concerning its fiscal operating plans and forecasts. These safeguards, the Bureau stressed, should assuage concerns about whether the agency is insulated from congressional oversight. “The court of appeals’ novel and ill-defined limits on Congress’s spending authority contradict the Constitution’s text, historical practice, and this Court’s precedent,” the Bureau said, adding that the decision also conflicts with a holding issued by the U.S. Court of Appeals for the D.C. Circuit where the appellate court recognized that “Congress can, consistent with the Appropriations Clause, create governmental institutions reliant on fees, assessments, or investments rather than the ordinary appropriations process.”
The Bureau asked the Supreme Court to review the case during its current term, which would ensure resolution of the issue by the summer of 2023.
District Court says university is a financial institution exempt from state privacy law
On November 4, the U.S. District Court for the Northern District of Illinois granted a defendant university’s motion to dismiss Illinois’ Biometric Information Privacy Act claims (BIPA), ruling that because the defendant participates in the Department of Education’s Federal Student Aid Program, it is a “financial institution” subject to Title V of the Gramm-Leach-Bliley Act (GLBA) and therefore exempt from BIPA. Plaintiff sued the defendant claiming the university used technology to collect biometric identifiers to surveil students taking online exams. According to the plaintiff, the defendant’s use of this technology violated students’ biometric privacy rights because the defendant did not obtain students’ written consent to collect and use that data, failed to disclose what happens with the data after collection, and failed to adhere to BIPA’s retention and destruction requirements.
The court disagreed and dismissed the putative class action. The court explained that the defendant’s direct student lending and participation in the Federal Student Aid Program allows it to qualify as a “financial institution,” defined by the GLBA as “any institution the business of which is engaging in financial activities.” As such, it is expressly exempt from BIPA. The court rejected plaintiff’s argument that the defendant did not fit within this definition because it is in the business of higher education rather than financial activities because at least five other courts that have also concluded that “institutions of higher education that are significantly engaged in financial activities such as making or administering student loans” qualify for exemption. The court also referred to a 2000 FTC rule issued when the Commission had both enforcement and rulemaking authority under the GLBA. The rule considered colleges and universities to be financial institutions if they “appear to be significantly engaged in lending funds to consumers,” which the court found to be “particularly persuasive because it evidences longstanding, consistent, and well-reasoned interpretation of the statute that it had been tasked to administer.”
District Court denies dismissal of RESPA "dual-tracking" suit
On November 1, the U.S. District Court for the Northern District of Ohio declined to grant summary judgment in favor of a mortgage servicer defendant in a Regulation X, RESPA, and Ohio Residential Mortgage Lending Act (RMLA) suit against the mortgage servicer and a law firm (collectively, “defendants”). The case concerned a loan modification that plaintiff had allegedly sought from defendants, for which the defendant mortgage servicer ultimately denied, and the defendant law firm initiated a foreclosure action. The defendant mortgage servicer challenged the count in the complaint alleging that the defendant mortgage servicer’s moving for summary judgment in the state foreclosure action violated Regulation X and RESPA’s prohibition on dual tracking. Dual tracking “occurs when a lender ‘actively pursues foreclosure while simultaneously considering the borrower for loss mitigation options.’” The defendant mortgage servicer argued that the prohibition on moving for summary judgment found in Regulation X did not apply because the plaintiff rejected the loan modification. The defendant mortgage servicer based this argument on the fact that it did not receive the plaintiff’s executed modification by a certain date. Because of this, the defendant mortgage servicer argued that it was permitted to move forward with a foreclosure judgment, and its decision to reverse the denial of the modification was at its discretion and not subject to the requirements of 12 C.F.R.1024.41(g).
The court found, however, that there was a genuine dispute as to whether the plaintiff returned the loan modification agreement by the designated date. The court continued, “[the defendant mortgage servicer’s] explanation regarding all three of the exceptions found at §41(g) subsections (1) through (3) each expressly depend upon the factual assertion that [the plaintiff] did not return a signed modification agreement and thereby rejected same. Inasmuch as there is evidence that [the plaintiff] did so, the court cannot conclude that [the defendant mortgage servicer] is entitled to judgment as a matter of law regarding the exceptions in §41(g) of Regulation X.” Among other things, the court also found that the defendant mortgage servicer “failed to act with reasonable care and diligence, in good faith, to safeguard and account for money tendered by [the plaintiff].” The court concluded by finding that the plaintiff sufficiently identified plausible damages as a result of a RESPA violation, further permitting her claims to stand.