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PHH opposes intervention by plaintiffs in another case challenging CFPB’s constitutionality

Posted in CFPB Enforcement

PHH has filed a response opposing the motion of the plaintiffs in State National Bank of Big Spring, Texas, et al. v. Lew to intervene in the en banc rehearing.  The D.C. Circuit granted the CFPB’s petition for en banc rehearing on February 16.

In July 2016, the D.C. federal district court rejected the plaintiffs’ attempt in State National Bank of Big Spring to invalidate the actions taken by Director Cordray while he was a recess appointee.  The district court deferred ruling on the plaintiffs’ separation of powers constitutional challenge pending a decision by the D.C. Circuit in PHH.  The D.C. Circuit subsequently ruled in PHH that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional.  Following the D.C. federal district court denial of the plaintiffs’ attempt to consolidate their case with PHH on appeal to the D.C. Circuit, the plaintiff filed a motion to intervene with the D.C. Circuit.

In their motion to intervene, the plaintiffs argued that if the D.C. Circuit grants the CFPB’s petition for rehearing en banc but decides the case on RESPA grounds, their “constitutional claims will be left unresolved, and the district court will be left without binding guidance from this Court as to how the constitutional question should be answered.”  According to the plaintiffs, a decision on RESPA grounds would delay the resolution of their case, “prolonging the harm they suffer from being subject to unconstitutionally promulgated regulations and ensuring that they will wait even longer for an eventual, inevitable merits determination from this Court.”  The plaintiffs also asserted that because they could not rely on PHH to defend the panel’s constitutionality holding as vigorously as they would, they met the requirement for intervention of right that no party to the action could adequately protect their interests.

In its response in opposition to the motion to intervene, PHH argues that like other intervention motions that have been filed in the case, the motion filed by the plaintiffs in State National Bank of Big Spring “appears to be little more than a naked attempt to seize control of this litigation from the actual litigants for the purpose of someday petitioning the Supreme Court for a writ of certiorari in the event the defeated litigant determines that it is not in its interest to do so.  That goal is equally illegitimate when pursued by those who agree with PHH on the separation-of-powers question as it is for those who disagree.”  PHH characterizes the plaintiffs’ motion as an improper attempt to use intervention as a means of circumventing the district court’s abeyance order.

PHH also challenges the plaintiffs’ standing to intervene, asserting that “it is elementary that a third party’s purported interest in securing a particular precedent does not create standing to intervene.” (emphasis provided).  According to PHH, this principle applies with even more force in this case because the plaintiffs are not concerned merely with an adverse legal decision but with any decision that leaves the constitutional claims unresolved.  According to PHH, if the plaintiffs “were truly aggrieved by the CFPB’s order, as PHH is, than it is unclear why [plaintiffs] would have any interest in the rationale this Court employs in vacating that order.  It is well-established that a party’s interest in securing a decision with a particular legal rationale is insufficient to provide standing to appeal the decision if it produces no adverse consequences.” (emphasis provided).

With regard to the plaintiffs’ claim that they cannot rely on PHH to adequately protect their interest in challenging the CFPB’s constitutionality, PHH asserts that “PHH, represented by capable counsel, is fully capable of representing that interest and “there is utterly no reason to think that [plaintiffs] can do a better job in pressing [the constitutional argument] than PHH.” PHH also observes that “[t]o the extent [plaintiffs] are interested in the issues presented, their amicus curiae brief [filed with the D.C. Circuit in support of PHH prior to the panel’s ruling] allows them to be heard and to advise the Court as to the possible effects of its decision in this matter on [plaintiffs’] pending litigation, a traditional function of such briefs.”

 

Court declines to enjoin Dept. of Education termination of recognition status of college accrediting organization challenging CFPB CID

Posted in CFPB Enforcement

In December 2016, the Secretary of Education issued a decision adopting the decision of the Department of Education’s Senior Department Official terminating and withdrawing the Department’s recognition of the Accrediting Council for Independent Colleges and Schools (ACICS) as a nationally recognized accrediting agency.  Earlier this week, the D.C. federal district court denied ACICS’ motion for temporary restraining order and preliminary injunction.  The motion sought to stay the decision revoking ACICS’ recognition, restore the status quo and continue ACICS’ recognition status, and enjoin the Department from implementing and enforcing a requirement that, as condition of receiving Title IV assistance, ACICS-accredited schools must take immediate steps to obtain an alternate federally-recognized accreditor.   

The denial of the restraining order and preliminary injunction comes on the heels of the oral argument held in the D.C. Circuit earlier this month on the CFPB’s appeal from the D.C. federal district court’s April 2016 ruling that the CFPB exceeded its statutory authority when it issued a CID to ACICS in August 2015.  In its injunction motion, ACICS argues that its “operating revenue will be immediately and adversely affected as a result of the Secretary’s decision and the Department’s related directives to ACICS-accredited schools.”  ACICS claims that a number of ACICS-accredited schools are refusing to pay outstanding fees, are seeking refunds of fees paid for 2016 and 2017, and/or are planning to allow their ACICS membership to expire and pay no further fees.  It also claims that potential revenues from site visits and applications will be cut off and that its “day-to-day operations will be substantially curtailed.”

 

 

The Eastern District of Michigan affirms the CFPB’s broad authority to issue civil investigative demands

Posted in CFPB General

A recent decision from the Eastern District of Michigan in CFPB v. Harbour Portfolio Advisors, LLC; National Asset Advisors, LLC; and National Asset Mortgage, LLC serves as a reminder that the CFPB’s authority to issue a Civil Investigative Demand (“CID”) is very broad, particularly when compared to discovery in federal litigation. For example, federal courts will often limit discovery to conduct that occurred within the relevant statute of limitations. In Harbour Portfolio Advisors, however, the court allowed the CFPB to seek information dating back seven years, even though the pertinent statute of limitations was at most three years. In declining to limit the CID to the statute of limitations, the court reasoned that “information dating back to that period will help the Bureau develop a complete understanding of Respondents’ practices and operations.” Plaintiffs in civil litigation will often argue that they need pre-statute material to tell the full story of a defendant’s alleged misconduct, but federal courts rarely permit it in discovery disputes.

In addition to approving the seven year response period, other features of the opinion highlight the broad nature of the CFPB’s investigatory power compared to traditional discovery. The first relates to the subject matter of the CID and the CFPB’s authority over it. The CFPB sought information with respect to a product the respondents offered known as an agreement for deed. An agreement for deed is similar to a rent-to-own product, only for real property instead of personal property. In the transaction, a consumer agrees to make periodic payments to the owner of real property until a certain “purchase price” is reached. Once the consumer makes payments that total the purchase price, the owner of the property transfers the deed to the consumer.

The respondents, issuers and servicers of agreements for deeds, argued that the CFPB does not have jurisdiction over agreements for deeds because they are not credit products, much in the way that rent-to-own agreements are not credit products. The court held that it did not need to decide whether an agreement for deed is a credit product, however, because that argument is relevant to an enforcement action, not a CID. Instead, the court held that the inquiry was limited to whether the CFPB’s jurisdiction was “plainly lacking.” If the CFPB has a “plausible basis” for jurisdiction over the activity, the court reasoned, it must enforce the CID. The court then held that because there was at least a plausible basis for believing an agreement for deed is a credit product, the CFPB had jurisdiction to issue the CID. In reaching this decision, the court distinguished the CFPB’s attempt to enforce a CID against a college accrediting agency, in which case another federal district court ruled that the CFPB’s jurisdiction was plainly lacking.

The “plainly lacking” standard could end up being the most significant aspect of the case. The CFPB’s authority to enforce a CID against the supplier of a product that is arguably not a consumer financial product or service is currently at issue in the Eastern District of Pennsylvania, involving a CID directed to an issuer of settlement annuities. The target of the CID, and the Chamber of Commerce of the United States as amicus, argued that the settlement annuities are not a consumer financial product or service, and, therefore, the CFPB does not have jurisdiction to regulate them. On the same day the Harbour Portfolio decision was issued, the CFPB submitted it as supplemental authority. We will monitor that case closely to determine whether the Eastern District of Pennsylvania finds Harbour Portfolio persuasive.

The Harbour Portfolio court similarly drew a distinction between an enforcement action and a CID with respect to the respondents’ “fair notice” argument. The respondents argued that they did not have fair notice that an agreement for deed was a financial product subject to CFPB jurisdiction. The court held that fair notice only comes into play if the CFPB proceeds beyond the investigative stage and into the enforcement stage. Because a CID is part of the investigative stage, the court did not rule on the merits of the argument, and deferred consideration of it to a future enforcement action, should one occur.

Finally, the court rejected the respondents’ undue burden argument because, in the court’s view, the respondents did not put forth sufficient evidence of the burden of production. This holding is a useful reminder to entities facing CIDs from the CFPB and other agencies that, when making a burden argument, the better strategy is to come forward with very specific evidence of the cost, time, and resources necessary to comply with information requests. This evidence should be presented to the CFPB in the first instance, as enforcement attorneys will often work with targets of an investigation to reach modifications to the requests. In our experience, such requests are more likely to be granted when supported by specific evidence of the exact nature of the burden involved. If an agreement with the CFPB is not possible, evidence of the burden will almost certainly be required from a court. Thus, it is invariably worth the effort to establish the burden by specific evidence as early as possible.

Almost as interesting as the opinion itself is the fact that the New York Times covered it. It is rare for a major newspaper to run a lengthy article on what essentially amounts to a discovery dispute. But the article is best understood as not being about a single dispute over a CID, but the broader debate over the future of the CFPB itself. With bills being introduced in Congress that would eliminate or substantially reshape the CID, all of its actions will likely receive heightened attention in the press, as all sides of the debate seek to shape the public narrative around the future of the agency.

MLA Website malfunction

Posted in Military Issues

According to an announcement posted on the Military Lending Act (“MLA”) Website,
“[b]etween February 9, 2017 and February 15, 2017 there was a problem with MLA Multiple Record Requests that prevented 149 request files from processing.” The Defense Manpower Data Center advises any creditor who, during the time period in question, submitted a Multiple Record Request file that failed to process submit the file again for processing.

Under the Department of Defense (“DoD”) final rule, using information obtained directly or indirectly from the DoD’s MLA Website is one of the safe-harbor methods for conclusively determining whether a credit applicant is a covered borrower eligible for MLA protections. (A safe harbor is also available to a creditor that uses a consumer report from a nationwide consumer reporting agency.) Users of the MLA Website can retrieve information on one individual via a Single Record Request or on multiple individuals (or multiple dates for a single individual) via a Multiple Record Request, or “batch” request.

The MLA Website is an important compliance resource for creditors, who face serious penalties and remedies for MLA violations. As a practical matter, to protect against file generation failures, creditors might wish to consider establishing backup arrangements with a consumer reporting agency to determine covered-borrower status for MLA purposes.

CFPB seeking information on use of alternative data in credit process, including by small business lenders

Posted in Credit Reports, Small Business

The CFPB has issued a request for information (RFI) that seeks information about the use of alternative data and modeling techniques in the credit process.  On March 21, 2017 from 12:00 to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar: The New Frontier of Alternative Credit Models: Opportunities, Risks and the CFPB’s Request for Information.  A link to register is available here.

According to the CFPB, the RFI stems from the Bureau’s desire “to encourage responsible innovations that could be implemented in a consumer-friendly way to help serve populations currently underserved by the mainstream credit system.”  The CFPB had signaled the likelihood of future action relating to alternative credit data in a May 2015 report, “Data Point: Credit Invisibles,” that reported the results of a research project undertaken by the CFPB to better understand the demographic characteristics of consumers without traditional credit reports or credit scores.  The report, which the RFI cites, concluded that the current credit reporting system is precluding certain populations from accessing credit and taking advantage of other economic opportunities.

In conjunction with the RFI’s issuance, the CFPB held a field hearing on alternative credit data in Charleston, West Virginia at which Director Cordray gave remarks.  (In a break from its prior practice, the CFPB did not publish advance notice of the field hearing on its website.)

In the RFI’s Supplementary Information, the CFPB states that it not only seeks information relating to consumer credit but, “because some of the Bureau’s authorities relate to small business lending,” it “welcomes information about alternative data and modeling techniques in business lending markets as well.”  To that end, for many of the specific questions asked in the RFI on which the CFPB seeks comments, the CFPB asks commenters to describe “any differences in your answers as they pertain to lending to businesses (especially small businesses) rather than consumers.”  (The CFPB notes the ECOA’s coverage of consumer and business credit and that it has begun the process of writing regulations to implement Dodd-Frank Section 1071, which requires data collection and reporting for lending to women-owned, minority-owned, and small businesses.)  Comments on the RFI must be received on or before May 19, 2017.

The Supplementary Information includes a discussion of alternative data and modeling techniques in which the CFPB provides examples of the types of data and modeling techniques that have been labeled “alternative.”  It also discusses prior research by other federal regulators, such as the FTC’s report on big data.  (The CFPB notes that the non-traditional data that might be used to assess borrower creditworthiness could include “big data.”  To address the growing interest in the use of “big data” and “machine learning” by a wide range of businesses, we recently held a webinar, “Big Data and Computer Learning – Lots of Opportunity and Lots of Legal Risk.”)

In the Supplementary Information, the CFPB lists potential consumer benefits and risks it has identified and states that it intends to use the information gleaned from the RFI’s questions “to help maximize the benefits and minimize the risks” from the use of alternative data and modeling techniques.  The RFI contains 20 specific questions (most of which have numerous subsidiary questions) that are divided into four sections: alternative data, alternative modeling techniques, potential benefits and risks to consumers and market participants, and specific statutes and regulations as they pertain to alternative data and modeling techniques.  The CFPB notes that although each question speaks generally about all decisions in the credit process, “answers can differentiate, as appropriate, between uses in marketing, fraud detection and prevention, underwriting, setting or changes in terms (including pricing), servicing, collections, or other relevant aspects of the credit process.”

The CFPB states in the RFI that it not only seeks to understand the benefits and risks stemming from the use of alternative data and modeling techniques, but “also to begin to consider future activity to encourage their responsible use and lower unnecessary barriers, including any unnecessary regulatory burden or uncertainty that impedes such use.”  We hope the CFPB’s issuance of the RFI reflects its recognition of the complexity of the issues involved in the use of alternative data and modeling techniques and the need for it to carefully consider the interests of all stakeholders.

 

 

Fate of House bill to change class action procedures could be barometer for CFPB arbitration rule

Posted in Arbitration

On February 9, 2017, the House Judiciary Committee by a vote of 19-12 passed the Fairness in Class Action Litigation Act of 2017, a bill that would make significant changes to the procedures for class actions in federal court.  The bill’s passage by the House and Senate with strong Republican support would seem to augur well for the adoption of a joint resolution of disapproval under the Congressional Review Act to nullify a final arbitration rule should one be issued by the CFPB.

Intended to combat abuses in class action and mass tort litigation, the bill includes provisions that would:

  • Prohibit a court from certifying a class action seeking monetary relief for personal injury or economic loss unless “the party seeking to maintain such class action affirmatively demonstrates that each proposed class member suffered the same type and scope of injury as the named class representative or representatives.”
  • Prohibit a court from certifying a class action “in which any proposed class representative or named plaintiff is a relative of, is a present or former employee of, is a present or former client of (other than with respect to the class action), or has any contractual relationship with (other than with respect to the class action) class counsel.
  • Prohibit a court from certifying a class action seeking monetary relief unless the class is defined with reference to objective criteria and the party seeking to maintain the class action “affirmatively demonstrates that there is a reliable and administratively feasible mechanism (a) for the court to determine whether putative class members fall within the class definition and (b) for distributing directly to a substantial majority of class members any monetary relief secured for the class.”
  • Prohibit payment of attorneys’ fees in a class action seeking monetary relief until the distribution of monetary recovery to class members has been completed and limit the portion of an attorneys’ fee award to class counsel that is attributed to the monetary recovery to a reasonable percentage of any payments directly distributed to and received by class members, with the attorneys’ fee award in no event to exceed the total amount of money directly distributed to and received by class members.
  • Allow appeals to a circuit court from an order granting or denying class action certification under Rule 23 of the Federal Rules of Civil Procedure

A group of public interest and consumer advocacy groups have sent a letter to Representative Bob Goodlatte, Chairman of the House Judiciary Committee, and Representative John Conyers, Jr., the Ranking Member, expressing their strongly opposition to the bill.  In their letter, the groups reference the requirement that “each proposed class member suffered the same type and scope of injury as the named class representative or representatives” for a court to certify a class action and state that “[t]his alone would sound the death knell for most class actions.”

D.C. Circuit grants CFPB’s petition for rehearing en banc in PHH case

Posted in CFPB Enforcement

The D.C. Circuit has entered an order granting the CFPB’s petition for rehearing en banc in the PHH case.  Because the order was issued per curiam, it does not indicate which of the active judges voted to grant the petition but only indicates that Chief Judge Garland did not participate.

The order vacates the panel’s October 2016 judgment, sets a briefing schedule, and sets May 24, 2017 as the date for oral argument.   The order also provides that “[w]hile not otherwise limited,” the parties are directed to address the following three issues in their briefs:

  • Is the CFPB’s structure as a single-Director independent agency consistent with Article II of the Constitution and, if not, is the proper remedy to sever the for-cause provision of the statute?
  • May the court appropriately avoid deciding that constitutional question given the panel’s ruling on the statutory issues in this case?
  • If the en banc court, which has today separately ordered en banc consideration of Lucia v. SEC, 832 F. 3d 277 (D.C. Cir. 2016), concludes in that case that the administrative law judge who handled that case was an inferior officer rather than an employee, what is the appropriate disposition of this case?

In Lucia, the decision cited in the third issue, a panel of the D.C. Circuit held that because the SEC’s ALJ was an “employee” rather than “inferior officer” who must be appointed in accordance with the Appointments Clause of the U.S. Constitution, the ALJ’s appointment by the SEC’s Office of Administrative Law Judges rather than an SEC Commissioner was constitutional.  In its brief to the D.C. Circuit filed in connection with its appeal from Director Cordray’s order affirming the ALJ’s decision that PHH had violated RESPA, PHH argued that the ALJ was an “inferior officer” whose appointment did not satisfy the Appointments Clause.  PHH indicated in its brief that it was preserving an Appointments Clause challenge to the CFPB’s use of an ALJ for review by the en banc D.C. Circuit or the U.S. Supreme Court.  Nevertheless, the panel’s October 2016 decision included a concurring opinion from Senior Judge Randolph in which he stated that because the ALJ used by the CFPB was an “inferior officer” who had not been appointed in accordance with the Appointments Clause, “[t]his in itself rendered the proceedings against petitioners unconstitutional.”

Because Chief Judge Garland will not be participating, ten active judges will sit on the en banc court, six of whom were appointed by either President Obama or President Clinton.  Since he was on the original panel, Senior Judge Randolph, appointed by President George H.W. Bush, can also sit on the en banc court should he wish to do so.

 

 

New CFPB webinar available on 2015 HMDA final rule

Posted in Mortgages

On October 15, 2015, the CFPB released a final rule amending Regulation C, which implements the Home Mortgage Disclosure Act (HMDA), requiring certain data on mortgage applications and loans to be collected beginning in 2017 by “covered institutions.”

The CFPB has previously made various resources available for HMDA filers, including a recording of a webinar conducted by the CFPB staff that provides an overview of the 2015 HMDA final rule.  Last week, the CFPB posted a recording of a new webinar on the final rule that discusses identifiers and other data points, including those related to applicants and borrowers.

 

 

 

FTC sends letter to CFPB on 2016 debt collection activities

Posted in Debt Collection, FTC

The FTC has sent a letter to the CFPB summarizing the FTC’s debt collection activities in 2016.  The letter is intended to provide the CFPB with information for its annual report to Congress on the federal government’s FDCPA activities.

The letter includes a discussion of the FTC’s collaboration with the CFPB on two amicus briefs in cases involving FDCPA issues.  In one such case, the FTC and CFPB argued in the Seventh Circuit that an unpaid parking fee is a “debt” within the meaning of the FDCPA.  In the other such case, the FTC and CFPB argued in the Ninth Circuit that the FDCPA requirement for a debt collector to provide certain information to the consumer “after the initial communication” does not apply only to the first debt collector that contacts a consumer to collect a particular debt but applies to each debt collector that contacts the consumer to collect that debt.

The letter’s centerpiece is the FTC’s description of its enforcement activities.  The FTC stated that in 2016, it brought or resolved 12 debt collection cases that included the following:

  • Three actions involving “phantom debt collection” in which the defendants were charged with such activities as selling portfolios of fake payday loans used by debt collectors to get people to pay on debts they did not owe, threatening consumers to collect debts they did not owe, and attempting to collect on debts known to be bogus.
  • Three actions against debt collectors for allegedly using text messages, emails and phone calls to falsely threaten consumers with arrest or and lawsuits.
  • An action against debt collectors for allegedly sending letters in connection with the collection of utility bills and government debts that contained threats of arrest appearing to come from a court

The letter also discussed the FTC’s education and public outreach initiatives, such as its work with community-based organizations and national groups that order and distribute FTC information, its development of a series of fotonovelas in Spanish, and its development and distribution of business education materials.  The FTC also described its research and policy development activities, which consisted of holding conferences and workshops and coordination with the CFPB.

 

Plaintiffs in another case challenging CFPB’s constitutionality move to intervene in PHH case

Posted in CFPB Enforcement

The plaintiffs in State National Bank of Big Spring, Texas, et al. v. Lew have filed a “Motion To Intervene In Any En Banc Proceeding That May Be Granted” in the PHH case.  The motion follows the D.C. federal district court’s denial of the plaintiffs’ attempt to consolidate their case with PHH on appeal to the D.C. Circuit.

In July 2016, the D.C. federal district court rejected the plaintiffs’ attempt in State National Bank of Big Spring to invalidate the actions taken by Director Cordray while he was a recess appointee.  The district court deferred ruling on the plaintiffs’ separation of powers constitutional challenge pending a decision by the D.C. Circuit in PHH.  The D.C. Circuit subsequently ruled in PHH that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional.  In their motion seeking consolidation filed last month, the plaintiffs argued that judicial economy would be served by having the district court enter partial summary judgment in their favor on their claim that the Dodd-Frank Act’s for-cause removal provision is unconstitutional and then certify the partial summary judgment order for interlocutory appeal to the D.C. Circuit.

In their motion to intervene, the plaintiffs argue that if the D.C. Circuit grants the CFPB’s petition for rehearing en banc but decides the case on RESPA grounds, their “constitutional claims will be left unresolved, and the district court will be left without binding guidance from this Court as to how the constitutional question should be answered.”  According to the plaintiffs, a decision on RESPA grounds would delay the resolution of their case, “prolonging the harm they suffer from being subject to unconstitutionally promulgated regulations and ensuring that they will wait even longer for an eventual, inevitable merits determination from this Court.”

The plaintiffs argue that they meet the standard for intervention of right, which includes a requirement that no party to the action can adequately protect their interests.  According to the plaintiffs, they cannot rely on PHH to defend the panel’s constitutionality holding as vigorously as the plaintiffs would.