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District Court enters consent order in 2016 CFPB structured settlement action
On May 18, the U.S. District Court for the District of Maryland approved a consent order against defendants in an action concerning allegedly unfair, abusive, and deceptive structured settlement practices. As previously covered by InfoBytes, in 2016 the Bureau initiated an enforcement action against the defendants alleging that they violated the CFPA by employing abusive practices when purchasing structured settlements from consumers in exchange for lump-sum payments. According to the Bureau, the defendants encouraged consumers to take advances on their structured settlements and falsely represented that the consumers were obligated to complete the structured settlement sale, “even if they [later] realized it was not in their best interest.” In July 2021, the court denied the defendants’ motions to dismiss the Bureau’s amended complaint, which argued that the enforcement action was barred by the U.S. Supreme Court’s decision in Seila Law LLC v. CFPB, which held that the director’s for-cause removal provision was unconstitutional (covered by a Buckley Special Alert). The defendants had also argued that that the ratification of the enforcement action “came too late” because the statute of limitations on the CFPA claims had already expired (covered by InfoBytes here). Under the terms of the May 18 consent order, the individual defendant, who “had an ownership interest in [the company] and served in executive positions at [the defendants] from their inception to their dissolution" is prohibited from, among other things, participating or assisting others in participating in transfer of payment streams from structured-settlement holders and referring consumers to a specific individual or for-profit entity for advice concerning any structured-settlement transaction, including for independent professional advice. The individual defendant must also pay a $5,000 civil money penalty.
District Court issues judgment against student debt relief operation
On May 24, the U.S. District Court for the Central District of California entered a stipulated final judgment and order against an individual defendant who participated in a deceptive debt-relief enterprise operation. As previously covered by InfoBytes, in 2019, the CFPB, along with the Minnesota and North Carolina attorneys general, and the Los Angeles City Attorney (together, the “states”), announced an action against the student loan debt relief operation for allegedly deceiving thousands of student-loan borrowers and charging more than $71 million in unlawful advance fees. In the third amended complaint, the Bureau and the states alleged that since at least 2015 the debt relief operation violated the CFPA, TSR, FDCPA, and various state laws by charging and collecting improper advance fees from student loan borrowers prior to providing assistance and receiving payments on the adjusted loans. In addition, the Bureau and the states claimed that the debt relief operation engaged in deceptive practices by misrepresenting, among other things: (i) the purpose and application of fees they charged; (ii) their ability to obtain loan forgiveness for borrowers; and (iii) their ability to actually lower borrowers’ monthly payments. Moreover, the debt relief operation allegedly failed to inform borrowers that it was their practice to request that the loans be placed in forbearance and also submitted false information to student loan servicers to qualify borrowers for lower payments. Under the terms of the final judgment, the individual defendant must pay a $483,662 civil money penalty to the Bureau.
9th Circuit says CFPB can seek restitution in action against payday lender
On May 23, the U.S. Court of Appeals for the Ninth Circuit upheld a district court’s judgment finding an online loan servicer and its affiliates liable for a deceptive loan scheme. However, the appellate court vacated the district court’s order, which had imposed a $10 million civil penalty (rather than the requested penalty of over $50 million) and had declined the CFPB's request for $235 million in restitution. As previously covered by InfoBytes, in 2018, the district court ordered the defendants to pay the civil penalty for offering high-interest loans in states with usury laws barring the transactions after determining in September 2016 that the online loan servicer was the “true lender” of the loans that were issued through entities located on tribal land (covered by a Buckley Special Alert). At the time, the district court found that a lower statutory penalty was more appropriate than the CFPB’s requested amount because the Bureau failed to show the company “knowingly violated the CFPA” or acted “recklessly.” In rejecting the Bureau’s requested restitution amount, the district court found that the agency had not put forth any evidence that the defendants “intended to defraud consumers or that consumers did not receive the benefit of their bargain from the [program]” for restitution to be an appropriate remedy.
According to the 9th Circuit, the district court applied the wrong legal analysis in 2018 when it assessed only a $10 million civil money penalty against the defendants and no restitution payments to consumers harmed by the improper loans. By applying federal common law choice-of-law principles, the appellate court declined to apply tribal law, holding that state laws applied to the loans, thus rendering them invalid. The appellate court determined that the defendants acted recklessly when they attempted to collect on invalid debts after counsel advised in 2013 that such actions were likely illegal. While the defendants shut down the tribal lending program for new loans, the 9th Circuit said they continued to collect on existing loans. “We conclude that from September 2013 on, the danger that [defendants’] conduct violated the statute was ‘so obvious that [defendants] must have been aware of it,’” the appellate court wrote. Noting that penalties for “reckless” violations under tier two were appropriate beginning September 2013, the appellate court ordered the district court to recalculate the civil penalty on remand. The 9th Circuit also directed the district court on remand to reconsider the appropriate restitution without relying on irrelevant considerations that motivated its earlier decision, including (i) whether defendants acted in bad faith; and (ii) “whether consumers received the benefit of their bargain.” Moreover, the appellate court held that the district court erred by stating “that the ‘proposed restitution amount [should be] netted to account for expenses.’”
The 9th Circuit also concluded that the district court was correct in holding one of the individual defendants personally liable for the company’s conduct. Furthermore, the appellate court held that the defendants’ argument that the structure of the Bureau is unconstitutional did not affect the validity of the lawsuit (which was filed when the Bureau was headed by lawfully appointed former Director Richard Cordray), writing that, as in Collins v. Yellen (covered by InfoBytes here), “the unlawfulness of the removal provision does not strip the Director of the power to undertake the other responsibilities of his office.”
Remittance provider hints it may challenge CFPB’s funding structure
On May 20, a global payments provider, which was recently sued by the New York attorney general and the CFPB, filed a pre-motion letter hinting that it will challenge the constitutionality of the Bureau’s funding structure. As previously covered by InfoBytes, the complaint claimed the “repeat offender” defendant allegedly violated numerous federal and state consumer financial protection laws in its handling of remittance transfers. Earlier in the month, the defendant called the allegations “false, inflammatory and misleading,” and took issue with the Bureau’s suggestion that it had “uncovered widespread and systemic issues involving ‘substantial’ consumer harm.” According to the defendant, “data from the CFPB’s own consumer complaint portal strongly suggest otherwise.” (Covered by InfoBytes here.)
The defendant raised several arguments, including that the “CFPB’s funding structure also violates the Appropriations Clause, requiring dismissal”—a nod to a recent en banc decision issued by the U.S. Court of Appeals for the Fifth Circuit (covered by InfoBytes here), in which several dissenting judges argued that the case should be dismissed because the agency’s funding structure violates the Constitution’s separation of powers and “is doubly removed from congressional review.” The defendant’s pre-motion letter also argued that the Bureau’s complaint should be moved to the Northern District of Texas where the company is headquartered and where the Bureau’s examinations were conducted.
In response, the Bureau and New York AG filed their own letter responding to the defendant’s proposed grounds for dismissal, countering, among other things, that the case is “adequately pled,” the claims are timely, and that the Bureau’s funding structure is constitutional. Challenging the defendant’s contention that the Bureau’s statutory method of funding violates the Constitution’s appropriations clause, the letter stressed that the U.S. Supreme Court and the U.S. Court of Appeals for the Second Circuit have held that this clause “simply requires that federal spending be authorized by statute,” adding that “[b]oth the Bureau’s receipt of funds and its use of those funds are so authorized.”
7th Circuit reverses dismissal of FDCPA case involving misleading letters
On May 20, the U.S. Court of Appeals for the Seventh Circuit reversed a district court’s order dismissing a suit against a debt collection firm that allegedly sent misleading letters to a debtor. According to the order, the plaintiff defaulted on a credit card debt owed to a bank, which hired the defendant for collection services. The defendant filed a collection action on behalf of the bank and obtained a judgment against the plaintiff. The defendant then sent the plaintiff a letter, referencing the plaintiff’s credit card “account,” describing the amount of the judgment as the “balance due,” and offering to settle that debt for 40 cents on the dollar if the plaintiff made the payment within a specified time frame. The plaintiff did not pay the offered settlement amount by that deadline and ultimately learned that interest on the judgment was increasing daily. The plaintiff then filed suit against the debt collector, alleging that it violated the FDCPA by sending a misleading letter that: (i) described the debt as an “account” even though it was a judgment; (ii) listed two different amounts as the “balance due” (the amount of the judgment and the offered settlement amount); and (iii) did not disclose that the debt was increasing daily. The district court dismissed the case, finding that the plaintiff had failed to allege a concrete injury because he did not allege “that he had the ability to pay the debt owed, that he actually paid other debts instead, or that he took any detrimental step as a result of the alleged confusion.”
On the appeal, the 7th Circuit held that the plaintiff had sufficiently alleged an injury, finding that his allegation that he would have prioritized paying the judgment over other debts “supports the reasonable inference that he had the ability to pay the settlement and that he used his available funds on other debts.” The appellate court also rejected the defendant’s argument that the plaintiff lacked standing because he was insolvent at all relevant times and could not have paid his credit card debt, finding that this argument raised a factual dispute that should have been resolved with an evidentiary hearing.
District Court grants in part/denies in part defendant’s motion in RESPA, FDCPA case
Recently, the U.S. District Court for the Western District of Tennessee granted in part and denied in part a defendant mortgage servicer’s motion for summary judgment concerning allegations that the defendant improperly foreclosed on plaintiff’s property. The plaintiff alleged that the defendant wrongfully accused her of failing to remedy her default and therefore violated RESPA and the FDCPA, among other things. Ultimately, the court denied defendant’s summary judgment request as to plaintiff’s RESPA claim because the defendant failed to exercise due diligence. But the court granted defendant’s request for summary judgment regarding plaintiff’s FDCPA claim because plaintiff presented no evidence that the defendant acted deceptively.
The plaintiff’s original loan—serviced by a previous servicer—was modified in 2016. But payments again were not made, so the previous servicer notified the plaintiff in December 2018 that it had accelerated the loan’s maturity date and referred the loan to foreclosure. The plaintiff, however, again applied for another modification in early 2019. After telling plaintiff her application was complete, the previous servicer then told the plaintiff, who claimed she inherited the property, that it needed additional documents to prove plaintiff’s successor-in-interest status. Ultimately, the previous servicer did not confirm the modification because the plaintiff did not confirm her successor-in-interest status.
The plaintiff again applied for a loan modification in March 2019, after the previous servicer transferred servicing rights to the defendant, and this modification was denied. She allegedly spoke with one of defendant’s representatives about the denial and indicated that she wished to reapply for a modification. However, the representative advised that she would have to reinstate the mortgage first before any loan modification. The defendant then sent a default letter to plaintiff’s property, which advised that the loan was still in default and needed payment.
The plaintiff submitted at least one additional request for mortgage assistance after the March 2019 modification application. The defendant acknowledged receipt of the request and detailed the documents it needed to process the request. The defendant then followed up in June 2019, stating again that it could not confirm that she was the successor-in-interest on the loan without documentation. A month later the defendant advised the plaintiff again that documents were still missing that were necessary to process her loan assistance request. The loan remained in default thereafter and the defendant foreclosed in August 2019.
In adopting the magistrate judge’s recommendation that the defendants’ motion for summary judgment be denied as to the RESPA claim, the district court noted that the defendant possibly should have sought documents, specifically the successor-in-interest documentation from the previous servicer, after the plaintiff submitted an incomplete loan modification application. The court stated that “there is a question of material fact whether [defendant] exercised reasonable diligence in failing to request the successor-in-interest documentation from [the previous servicer].” The court added that “there is a requirement of reasonable diligence, and there is no evidence showing that [defendant] met this standard. Failing to address the regulatory standard creates a question that cannot be resolved on the available information. Thus, there is at least one question of material fact here.”
Regarding plaintiff’s FDCPA claim, the court noted that “there is no evidence of deception in the foreclosure of loan payment process” and that “[p]laintiff has failed to provide any evidence that [defendant] acted dishonestly in requesting additional documentation to complete the loan modification.” The court therefore granted defendant’s summary judgment motion as to the FDCPA claim.
9th Circuit: Revived FCRA suit questions reasonableness of furnisher’s investigation
On May 16, the U.S. Court of Appeals for the Ninth Circuit reversed and remanded a district court’s summary judgment ruling in favor of a defendant furnisher, stating that it is up to a jury to decide whether the defendant’s “reasonable investigation” into the plaintiff’s dispute complied with the FCRA. After the plaintiff defaulted on both his first and second mortgages, the property was foreclosed and sold. Several years later, the plaintiff tried to purchase another home but was denied a mortgage due to a tradeline on his credit report that showed one of his mortgages as past due with accruing interest and late fees due to missed payments. The plaintiff disputed the debt through the consumer reporting agency (CRA) and provided a citation to the Arizona Anti-Deficiency Statute, which abolished his liability for the reported debt. The CRA then told the defendant about the dispute and provided information about the statutory citation. The defendant originally “updated” the plaintiff’s account to show that the debt was being disputed, but continued to report current and past due balances. Yet after the plaintiff again disputed the validity of his debt, the defendant marked the account as “paid, closed” and changed the balance to $0.
The plaintiff sued, claiming the defendant violated the FCRA by failing to reasonably investigate his dispute and for reporting inaccurate information. The district court granted the defendant’s motion for summary judgment, ruling that the reports it made were accurate as a matter of law and that the defendant had reasonably investigated the dispute. Moreover, “whether the Arizona anti-deficiency statute rendered [plaintiff’s] debt uncollectible is a legal question, not a factual one,” the district court stated, adding that “the FCRA does not impose on furnishers a duty to investigate legal disputes, only factual inaccuracies.”
The 9th Circuit disagreed, writing that Arizona law required that the plaintiff’s balance be “abolished,” so it was “patently incorrect” for the defendant to report otherwise. In applying Arizona law, the plaintiff had “more than satisfied his burden” of showing inaccurate reporting, the appellate court wrote, explaining that the “situation was no different than a discharge under bankruptcy law, which extinguishes ‘the personal liability of the debtor.’” The 9th Circuit also held that the FCRA does not “categorically exempt legal issues from the investigations that furnishers must conduct.” Pointing out that the “distinction between ‘legal’ and ‘factual’ issues is ambiguous, potentially unworkable, and could invite furnishers to ‘evade their investigation obligation by construing the relevant dispute as a ‘legal’ one,’” the panel referred to an April 2021 amicus brief filed in support of the plaintiff by the CFPB, which argued that the FCRA does not distinguish between legal and factual disputes when it comes to furnishers’ obligations to investigate disputes referred from CRAs. The CFPB recently made a similar argument in an amicus brief filed last month in the 11th Circuit (covered by InfoBytes here). There, the CFPB argued that importing this exemption would run counter to the purposes of FCRA, would create an unworkable standard that would be difficult to implement, and could encourage furnishers to evade their statutory obligations any time they construe the disputes as “legal.”
Holding that there was a “genuine factual dispute about the reasonableness” of the defendant’s investigation, the appellate court ultimately determined that it would “leave it to the jury” to decide whether the defendant’s investigation had been reasonable. “Unless ‘only one conclusion about the conduct’s reasonableness is possible,’ the question is normally inappropriate for resolution at the summary judgment stage,” the appellate court stated. “Here, as is ordinarily the case, this question is best left to the factfinder.”
5th Circuit rules against SEC’s use of ALJs
On May 18, the U.S. Court of Appeals for the Fifth Circuit held that the SEC’s in-house adjudication of a petitioners’ case violated their Seventh Amendment right to a jury trial and relied on unconstitutionally delegated legislative power. The appellate court further determined that SEC administrative law judges (ALJs) are unconstitutionally shielded from removal. In a 2-1 decision, the 5th Circuit vacated the SEC’s judgment against a hedge fund manager and his investment company arising from a case, which accused petitioners of fraud under the Securities Act, the Securities Exchange Act, and the Advisers Act in connection with two hedge funds that held roughly $24 million in assets. According to the SEC, the petitioners had, among other things, inflated the funds’ assets to increase the fees they collected from investors. Petitioners sued in federal court, arguing that the SEC’s proceedings “infringed on various constitutional rights,” but the federal courts refused to issue an injunction claiming they lacked jurisdiction and that petitioners had to continue with the agency’s proceedings. While petitioners’ sought review by the SEC, the U.S. Supreme Court issued a decision in Lucia v. SEC, which held that SEC ALJs are “inferior officers” subject to the Appointments Clause of the Constitution (covered by InfoBytes here). Following the decision, the SEC assigned petitioners’ proceeding to an ALJ who was properly appointed, “but petitioners chose to waive their right to a new hearing and continued under their original petition to the Commission.” The SEC eventually affirmed findings of liability against the petitioners, and ordered the petitioners to cease and desist from committing further violations and to pay a $300,000 civil penalty. The investment company was also ordered to pay nearly $685,000 in ill-gotten gains, while the hedge fund manager was barred from various securities industry activities.
In vacating the SEC’s judgment, the appellate court determined that the SEC had deprived petitioners of their right to a jury trial by bringing its action in an “administrative forum” instead of filing suit in federal court. While the SEC challenged “that the legal interests at issue in this case vindicate distinctly public rights” and therefore are “appropriately allowed” to be brought in agency proceedings without a jury, the appellate court countered that the SEC’s enforcement action was “akin to traditional actions at law to which the jury-trial right attaches.” Moreover, the 5th Circuit noted that while “the SEC agrees that Congress has given it exclusive authority and absolute discretion to decide whether to bring securities fraud enforcement actions within the agency instead of in an Article III court[,] Congress has said nothing at all indicating how the SEC should make that call in any given case.” As such, the 5th Circuit opined that this “total absence of guidance is impermissible under the Constitution.”
Additionally, the 5th Circuit raised concerns about the statutory removal restrictions for SEC ALJs who can only be removed for “good cause” by SEC commissioners (who are removable only for good cause by the president). “Simply put, if the President wanted an SEC ALJ to be removed, at least two layers of for-cause protection stand in the President’s way,” the appellate court concluded. “Thus, SEC ALJs are sufficiently insulated from removal that the President cannot take care that the laws are faithfully executed. The statutory removal restrictions are unconstitutional.”
The dissenting judge disagreed with all three of the majority’s constitutional conclusions, contending that the majority, among other things, misread the Supreme Court’s decisions as to what are and are not “public rights,” and that “Congress’s decision to give prosecutorial authority to the SEC to choose between an Article III court and an administrative proceeding for its enforcement actions does not violate the nondelegation doctrine.” The judge further stated that while the Supreme Court determined in Lucia that ALJs are “inferior officers” within the meaning of the Appointments Clause in Article II, it “expressly declined to decide whether multiple layers of statutory removal restrictions on SEC ALJs violate Article II.” Consequently, the judge concluded that he found “no constitutional violations or any other errors with the administrative proceedings below.”
5th Circuit reverses decision that a portion of a contract was indefinite and unenforceable
On May 18, the U.S. Court of Appeals for the 5th Circuit reversed a district court’s decision to dismiss a suit against a creditor that sold portfolios of delinquent and defaulted debt, ruling that the disputed portion of the contract between the two parties was enforceable.
According to the opinion, the defendant sold portfolios of delinquent accounts to the plaintiff. The plaintiff and the defendant entered a “forward flow” agreement, where the defendant agreed to continue to send the plaintiff accounts during a specific timeline. Under the agreement, the defendant agreed to deliver “additional accounts,” which would be the same quality as the other accounts that had been sold. The parties could not settle on an agreement regarding the pricing for accounts that were submitted under the forward flow agreement, and the defendant sued the plaintiff for breach of contract. A district court granted the defendant’s motion to dismiss, which the plaintiff appealed.
The appellate court found that the district court erred on its decision that the term “additional accounts” was indefinite and therefore unenforceable. The court stated that “[t]aken together, the plain meaning of the word ‘additional,’ the contract’s clear architecture, and various settled principles of interpretation reveal that ‘additional accounts’ refers to all qualifying accounts that accrue quarterly.” The appellate court also noted that it “cannot ignore that this argument was not presented to the district court,” and that it will not speculate on why [the defendant-appellee did not] reached for this low-hanging factual fruit.”
District Court grants final approval of a $500 million tribal lending settlement
On May 12, the U.S. District Court for the Eastern District of Virginia granted final approval of a nearly $500 million class action settlement resolving allegations that tribal online lending companies charged usurious interest rates. Plaintiffs’ filings outline their class action against tribal entities, as well as several of the entities’ non-tribal business partners (individual defendants), for making and collecting on high-interest loans.
The U.S. Court of Appeals for the Fourth Circuit previously upheld a district court’s denial of defendants’ bid to dismiss or compel arbitration in the case (covered by InfoBytes here). The 4th Circuit concluded that the arbitration clauses in the loan agreements impermissibly forced borrowers to waive their federal substantive rights under federal consumer protection laws, and contained an unenforceable tribal choice-of-law provision because Virginia law caps general interest rates at 12 percent. As such, the appellate court stated that the entire arbitration provision was unenforceable. “The [t]ribal [l]enders drafted an invalid contract that strips borrowers of their substantive federal statutory rights,” the appellate court wrote. “[W]e cannot save that contract by revising it on appeal.”
The 4th Circuit also declined to extend tribal sovereign immunity to the tribal officials, determining that while “the tribe itself retains sovereign immunity, it cannot shroud its officials with immunity in federal court when those officials violate applicable state law.” The appellate court further noted that the “Supreme Court has explicitly blessed suits against tribal officials to enjoin violations of federal and state law.”
Following more than three years of litigation, the parties eventually reached a settlement that will include tribal officials canceling approximately $450 million in debt. As part of the settlement, the tribal officials will eliminate the balance on any outstanding loans on the basis that the debts are disputed, cease all collection activity, and will not sell, transfer, or assign any outstanding loans for collection. Tribal officials will also request deletion of any negative tradelines for loans in the name of tribal officials or tribal corporations, and will pay an additional $1 million to cover the costs of notice and administration for the settlement and $75,000 to go towards service awards. Additionally, the individual defendants will create a $39 million common fund that will go to class members who repaid unlawful amounts on their loans. Class counsel is also seeking attorneys’ fees and costs totaling around $13 million.