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Appeal Denied in Los Angeles Fair Housing Suit
On May 26, the Ninth Circuit issued decisions affirming the District Court’s decisions to grant summary judgments in two separate lawsuits brought against two different national banks by the city of Los Angeles (city). (View the district court’s summary judgments here and here). In separate appeals, the city alleged that each of the banks violated the Fair Housing Act by engaging in discriminatory mortgage lending to minority borrowers. The city also asserted that this practice resulted in risky loans and increased foreclosures, which lowered the city’s property tax revenues.
The appellate court disagreed with the city. In both decisions, the court observed that the city’s theory of liability was based on alleged “disparate impact,” which requires the city to demonstrate both the existence of a disparity and a facially neutral policy that caused the disparity.” The court noted that under established precedent a disparate impact claim, to succeed, must be supported by evidence of a robust causal connection between the disparity and the facially neutral policy. In the first case, the court held that the city failed to show such a robust causal connection, and in the second, it found “[t]he record does not reflect that the city raised a genuine issue of material fact as to a policy or policies with a robust casual connection to the racial disparity.” (View appellate memoranda for these cases here and here).
Supreme Court Rules Five-Year Statute of Limitations Applies to SEC Civil Penalties
In a unanimous ruling handed down on June 5, the United States Supreme Court held that the SEC is bound by a five-year statute of limitations on civil penalties or the return of illegal profits, citing 28 U.S.C. §2462 of the U.S. Code, which “establishes a [five-year] limitations period for ‘an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture.’” Justice Sotomayor delivered the opinion.
The decision resolves a New Mexico case dating back to 2009, in which a jury found the defendant liable for misappropriating more than $34.9 million from 1995 through July 2007 from four SEC-registered investment companies under his control. See S.E.C. v. Kokesh, 834 F.3d 1158 (10th Cir. 2016). The district court judge ordered the defendant to pay a $2.4 million civil penalty, nearly $35 million in disgorgement, and more than $18 million in prejudgment interest after finding that §2462 did not apply because “disgorgement” is not a penalty within the meaning of the statute. The defendant appealed the ruling on the grounds that the disgorgement should be set aside because the claims accrued more than five years before the SEC brought its action against him and are consequently barred under the five-year statute of limitations. However, the 10th Circuit affirmed the ruling of the lower court, agreeing that disgorgement was not a penalty.
The Supreme Court reversed. Justice Sotomayor explained why the Court disagreed with the 10th Circuit panel’s conclusion that disgorgement was not a penalty under the statute. The Court held that disgorgement “bears all the hallmarks of a penalty” and “is imposed as a consequence of violating a public law and . . . is intended to deter, not to compensate.” Consequently, disgorgement represents a penalty, thus falling within the five-year statute of limitations of §2462.
Do Not Call Violations Net $280 Million Fine for FTC, States
On June 5, the U.S. District Court for the Central District of Illinois ruled in favor of the Federal Trade Commission (FTC) and the states of California, Illinois, North Carolina, and Ohio resolving Do Not Call litigation against a direct-broadcast satellite service provider. The court found the service provider liable for making millions of calls resulting in violations of the Telemarketing Sales Rule (TSR) and the Telephone Consumer Protection Act, among other things. The $280 million in civil penalties, with a record $168 million going to the FTC, is the largest civil penalty ever awarded for violation of the FTC Act.
Additionally, the court issued a permanent injunction order against the service provider. Among the requirements in the order, the service provider will show within 90 days of the order effective date that they are “fully complying with the safe harbor provisions” and “have made no prerecorded telemarketing calls at any time during the five (5) years immediately preceding the effective date.” The service provider must also hire an expert to ensure compliance with the injunction and telemarketing laws, provide semi-annual compliance materials, and ensure their compliance with the TSR.
Department of Education Student Debt Collection Contracting Injunction Extended
On May 31, U.S. Court of Federal Claims Chief Judge Susan G. Braden extended her preliminary injunction in a legal dispute involving the awarding of Department of Education (Department) debt collection contracts. She stated the order would stay in place “to preserve the status quo until the viability of the debt collection contracts at issue is resolved.”
Judge Baden’s order provides several reasons for her decision, all pulled from news reports, including: (i) a CFPB report stating that private collection agencies chosen by the Department offer uncertain value despite great cost; (ii) a New York Times article suggesting that oversight for the Department’s student debt would be transferred to the Treasury Department; and (iii) press reports announcing James Runcie’s resignation. Runcie served as the chief operating officer of the Office of Federal Student Aid.
The order has prevented the government from collecting on defaulted student loans—a halt which began on March 29 when Judge Braden issued a temporary restraining order in the matter.
FDIC Releases List of Enforcement Actions Taken Against Banks and Individuals in April 2017
On May 26, the FDIC released its list of 18 administrative enforcement actions taken against banks and individuals in April. Among the consent orders on the list are civil money penalties for violations of the Flood Disaster Protection Act of 1973 and its flood insurance requirements. Also on the list are a cease and desist order and a civil money penalty assessment issued to a Louisiana-based bank (Bank) for violations of the Bank Secrecy Act (BSA), EFTA, RESPA, TILA, HMDA, and the National Flood Insurance Program. According to the cease and desist order, the FDIC Board of Directors agreed with the Administrative Law Judge’s recommended decision that the Bank engaged in unsafe or unsound practices, which warranted a cease and desist order and civil money penalty. The order also addressed a number of shortcomings identified by the Bank’s examiners, including the following: (i) the Bank’s BSA program lacked adequate internal controls to ensure compliance; (ii) it failed to provide correct and compete electronic funds transfer disclosures to consumers; (iii) borrowers were provided “untimely and improperly completed” good faith estimates; and (iv) the Bank repeatedly failed to accurately report required HMDA information to federal agencies.
An additional eight actions listed by the FDIC related to unsafe or unsound banking practices and breaches of fiduciary duty, including five removal and prohibition orders. There are no administrative hearings scheduled for June 2017. The FDIC database containing all of its enforcement decisions and orders may be accessed here.
FTC Submits Annual Report on 2016 Enforcement Actions to CFPB
On June 1, the FTC announced that it submitted its 2016 Annual Financial Acts Enforcement Report to the CFPB. The report—requested by the Bureau for its use in preparing its 2016 Annual Report to Congress—covers the FTC’s enforcement activities related to compliance with Regulation Z (Truth in Lending Act or TILA), Regulation M (Consumer Leasing Act), and Regulation E (Electronic Funds Transfer Act or EFTA), as well as its initiatives to engage in research and consumer education.
According to the report, the FTC’s enforcement actions in 2016 concerning TILA involved automobile purchasing and financing, payday loans, and financing of consumer electronics. Regarding mortgage-related credit activity, the report highlights continued litigation in two cases involving mortgage assistance relief services involving “forensic audit scams.” Furthermore, the FTC continued its consumer and business education efforts on issues related to consumer credit transactions in the following areas: military lending, auto sales and financing, payday lending, marketplace lending, and consumer disclosures and testing.
Regarding the Consumer Leasing Act, the report noted the FTC had issued a final administrative consent order for deceptive advertising practices and failure to disclose key lease offer terms. The FTC also filed two federal court actions against automobile dealers. The FTC also engaged in research and policy development and educational activities in this area.
Concerning the EFTA, the FTC reported six new or ongoing cases, including four cases alleging violations in the context of “negative option” plans, in which a consumer agrees to “receive various goods or services from a company for a trial period at no charge or at a reduced price” but later incurs unauthorized recurring charges after the end of the trial period, in violation of the EFTA. The remaining two cases involved payday lending and consumer electronics financing. The FTC also engaged in rulemaking, research, policy development, and educational activities involving the EFTA.
City Agrees to Settlement of Housing Discrimination Suit with DOJ
On May 26, the Department of Justice (DOJ) and the city of Jacksonville, Florida (city), agreed on a settlement over claims that the city violated the Fair Housing Act (FHA) and the Americans with Disabilities Act (ADA). The DOJ alleged that the city denied permission for the development of permanent supportive housing for individuals with disabilities in an historic district and discriminated on the basis of the intended residents’ disabilities.
The settlement provides for a civil penalty of $25,000 to be paid to the U.S. Treasury as well as the creation by the city of a $1.5 million grant to be awarded to a qualified developer of permanent supportive housing in the community. The city also agreed to take additional specific steps to comply with the requirements of the ADA and FHA.
Two other plaintiffs whose suits were consolidated with the DOJ’s—Ability Housing, Inc. and Disability Rights Florida, Inc.—also received compensation for reasonable attorneys’ fees and other costs.
As part of the settlement, the city denied any wrongdoing alleged by the DOJ.
PHH v. CFPB Update: D.C. Circuit Hears Oral Arguments Before En Banc Court
On May 24, the en banc U.S. Court of Appeals for the D.C. Circuit heard oral arguments in the matter of PHH Corp. v. CFPB. The parties and the Department of Justice generally presented their arguments as expected based on their briefs. However, questions from some members of the court indicated doubts about the conclusion by a panel of the court in October 2016 that the CFPB’s structure was unconstitutional. In particular, multiple members of the court repeatedly pressed PHH’s counsel on whether prior Supreme Court decisions upholding the constitutionality of the Federal Trade Commission and other independent agencies led by presidential appointees who could only be removed “for cause” prevented the D.C. Circuit from concluding that the president lacked sufficient authority over the CFPB’s Director.
Notably, however, in response to statements by PHH that current CFPB Director Richard Cordray could remain in his position after the expiration of his term in July 2018 until a successor was confirmed by the Senate, the CFPB’s counsel stated that, in the Bureau’s view, the “for cause” removal limitation no longer applied once the Director’s term expired, and the president could then remove the Director “at will.”
In contrast to the constitutional issue, the questioning on other aspects of the case was minimal and did not indicate that the en banc court was inclined to revisit the panel’s determination that the CFPB misinterpreted the Real Estate Settlement Procedures Act (RESPA) when applying it to PHH’s practices, violated due process by failing to give PHH proper notice of its interpretation, and improperly failed to apply RESPA’s statute of limitations in its administrative proceedings.
At the direction of the en banc court, the oral arguments in PHH followed those in Lucia v. SEC, a case addressing whether the SEC’s administrative law judges (ALJs) violate the appointments clause of the U.S. Constitution. Although this issue was not discussed during the PHH oral arguments, the CFPB originally brought its claims against PHH before an ALJ borrowed from the SEC and the court had previously suggested that a finding that the SEC ALJs were improperly appointed could also justify reversal of the CFPB’s decision against PHH. (See previous Special Alert here.)
A decision from the en banc court is not expected for months. Importantly, while questioning during oral argument is often used as a barometer of the potential outcome of a case, the questions asked by a judge do not necessarily indicate how that judge will vote on a particular issue. Judges often use oral argument to see how the parties and their colleagues will respond to hypotheticals, rather than to share their views of the case.
Company Accused of Bilking 9/11 First Responders Out of Millions of Dollars Says CFPB Action Unlawful
On May 15, a New Jersey-based finance company and its affiliated parties filed a motion to dismiss allegations that it scammed first responders to the World Trade Center attack and NFL retirees with high-cost loans. As previously covered in InfoBytes, the CFPB and the New York Attorney General’s office (NYAG) claimed the defendants engaged in deceptive and abusive acts by misleading consumers into selling expensive advances on benefits to which they were entitled by mischaracterizing extensions of credit as assignments of future payment rights, thereby causing the consumers to repay far more than they received. The defendants’ motion to dismiss was prompted, in part, by the recent PHH v. CFPB decision in which the court held that the CFPB’s single director leadership structure is unconstitutional and, thus, that the agency must operate as an executive agency supervised by the President. Here, the defendants argue, the complaint issued against them is a “prime example of how the unchecked authority granted to the CFPB leads to administrative overreach that has a profound effect on the businesses and individuals the agency targets.”
In response to the claims that they mischaracterized credit, the defendants assert that the complaint is “based on the erroneous theory that—despite clear contractual terms and the weight of legal authority to the contrary—these transactions are not true sales, but instead are ‘extensions of credit’ under the Consumer Financial Protection Act [(CFPA)], and therefore the [defendants] deceived consumers by labeling the agreements as sales.” The CFPA defines an extension of “credit” as “the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment.” In this instance, the defendants contend, there is no debt, no repayment obligation, and no “right granted to defer payment of a debt” because the consumers are the sellers of the asset.
The defendants argue that (i)“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”; (ii) because these transactions do not fall into the CFPA’s definition of credit, the case lacks a federal cause of action; and (iii) “each cause of action in the [c]omplaint individually fails to state a claim for relief, including because the Government is flat out wrong in its contention that the underlying settlement proceeds are not assignable.”
PHH v CFPB Update: D.C. Circuit Grants CFPB’s Request to Go Last at May 24 En Banc Oral Arguments
In an per curium order handed down on May 1, the U.S. Court of Appeals for the D.C. Circuit granted an uncontested motion brought by the CFPB seeking to revise the order of the oral arguments in the upcoming PHH Corp. v. CFPB hearing before the en banc court. With all briefing on the merits having been submitted, the case awaits oral arguments, which have been set for May 24. The Bureau sought to change the order of arguments such that the CFPB presented its argument last—after both PHH and the DOJ. In seeking a change in scheduling order, the CFPB argued that the original schedule—pursuant to which the DOJ would go last—did not afford the Bureau an opportunity to respond to the DOJ’s arguments. The Court’s May 1 Order, having granted the Bureau’s Motion, provides for the following argument order:
- Petitioners (PHH Corp.) – 30 minutes
- Amicus Curiae United States – 10 minutes
- Respondent (CFPB) – 30 minutes
Also, note that the CFPB’s motion agrees-in-advance to PHH to likewise respond to both the DOJ and CFPB, should it wish to do so.
As previously discussed in InfoBytes, the once-cooperative relationship between the CFPB and the DOJ recently turned adverse after the Sessions-led DOJ presented arguments in its latest briefing that differed markedly from both the CFPB’s positions and from the arguments asserted in briefing submitted by the Obama Administration in December 2016. For additional background, please see our recent PHH Corp. v CFPB Case Update.