Saturday, January 21, 2023

FYI: 9th Cir Holds "Net Impression" Test Applies to CFPA Actions for Deceptive Solicitations

The U.S. Court of Appeals for the Ninth Circuit recently affirmed a trial court's ruling in favor of the Consumer Financial Protection Bureau (CFPB) against a company and its owner that provided fee-based scholarship and financial aid services to prospective and current college students.


In so ruling, the Ninth Circuit held:


1) The defendants here met the definition of a "covered person" under the Consumer Financial Protection Act (CFPA) because they provided "financial advisory services to consumers on individual financial matters or relating to proprietary financial products or services"; and


2) The Federal Trade Commission's "net impression" test applies when determining whether a solicitation is deceptive under the CFPA.

A copy of the opinion is available at:  Link to Opinion


The defendants were the founder and operator of a company that solicited thousands of prospective and current college students by sending them a letter that generally advised students to avoid taking out student loans until the student applied for all of the available and free financial aid programs. The letters included an information sheet, demographic form, and instructions on how to pay a "processing fee" in exchange for enrollment in a financial aid program and provide as many targeted financial aid opportunities as possible to all students. 


Over 75,00 students paid a total of nearly $5 million dollars in processing fees. In exchange for the fee, the only service provided to the students was a booklet that contained general overview on student financial aid, federal student loans, tax implications, and federal and state financial aid programs. Hundreds of consumers filed complaints that promoted an investigation.


As a result of the investigation, the CFPB filed an enforcement action alleging that the defendants' conduct was deceptive because it misled students into believing that: (1) the company would provide a program to assist them in applying for scholarships; (2) the company would match them to individually targeted scholarship opportunities; and (3) the students would miss financial aid opportunities by not complying with the filing deadline.


The CFPB moved for summary judgment against individual defendant and a default judgment against the defendant company. The trial court granted the CFPB'S motion for summary judgment against the individual defendant by first ruling that his conduct fell under the CFPB's enforcement authority and that his actions deceived students by falsely implying that the defendants had a program for financial aid applications, falsely implying students would be matched with scholarships, and falsely implying that students would forfeit the services if they failed to comply with the arbitrary deadlines.


The trial court awarded restitution of all company revenues totaling $4,738,028 in and imposed a civil penalty of $10 million and injunctive relief. The individual defendant appealed.


The individual defendant raised three (3) issues on appeal. First, he argued that he was not subject to the CFPB's authority because he provided nonfinancial advice about "free scholarships."  Second, he argued that the net impression of the solicitations was not deceptive.  Lastly, he argued that the trial court erred in calculating the restitution and civil penalty sums. 


Appellant first argued that he is not a "covered person" under the Consumer Finance Protection Act ("CFPA") because he merely provided nonfinancial advice on free, gift-based scholarships. 12 U.S.C. § 5481(6). As a result, he argued, the CFPB did not have proper authority under the CFPA.


As you may recall, under the CFPA, it is unlawful for a covered person 'to engage in any unfair, deceptive, or abusive act or practice.'" CFPB v. CashCall, Inc., 35 F.4th 734, 746 (9th Cir. 2022). One of the ways that a business can be a "covered person" is if it provides "financial advisory services to consumers on individual financial matters or relating to proprietary financial products or services".  12 U.S.C. § 5481(15)(A)(viii).


The individual defendant argued that he was not a covered person because he did not provide "financial advisory services" as defined by the CFPA because scholarships are not financial in nature because they do not have to be repaid. Additionally, he argued that he did not hold himself out as an expert in finance.


The Ninth Circuit disagreed.  The Court noted that the ordinary meaning of finance is broad and encompasses both cash financing and debt financing and the definition of "finance" specifically contemplates raising funds, regardless of their origin, for college tuition. Moreover, the Ninth Circuit found that the individual defendant implied expertise in the field of student loan financial aid. As a result, the Court held that provided "financial advisory services" as defined in 12 U.S.C. § 5481(15)(A)(viii) and the trial court did not err in classifying the appellant as a "covered person" under the CFPA.


Next, the individual defendant argued that the trial court erred by failing to consider the net impression of his solicitations when it determined they were deceptive.


An unlawful "`deceptive' practice is one `tending to deceive,' that is, `to cause to believe the false.'" CashCall, Inc., 35 F.4th at 746 (quoting Deceive & Deceptive, WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY (2002)). In similar cases brought under similar wording in the Federal Trade Commission Act, a "solicitation may be likely to mislead by virtue of the net impression it creates even though the solicitation also contains truthful disclosures." FTC v. LLC, 453 F.3d 1196, 1200 (9th Cir. 2006).


The Ninth Circuit expressly adopted the net impression test brought in enforcement actions under the CFPA.


The individual defendant argued that a reasonable student should have assumed that by responding to the requests for information that they were proceeding with his program to help them finance their college education, and this could not have been deceiving.


The Ninth Circuit disagreed and held that based on the record as a whole the individual defendant promised to proceed with a program and apply for the maximum financial aid of those programs when the student submitted the demographic form and paid the processing fee. In return the students only received a booklet with generalized information. Additionally, the Court noted, the letter created a false sense of urgency by listing deadlines to apply.


Based upon the net impression created by his entire solicitation packet, the Ninth Circuit held that the trial court did not err by concluding that no genuine issue of material fact existed as to the deceptive nature of the defendant's conduct.


The defendant also argued that the trial court's calculation of restitution and civil penalties was improper. However, the Court of Appeals did not consider this argument because it was not properly raised at the trial court.


Accordingly, the Ninth Circuit concluded that the individual defendant was subject to the CFPB's authority and that no genuine issue of material fact existed to counteract the deceptive nature of his conduct, and upheld the trial court's summary judgment ruling in favor of the CFPB. 





Ralph T. Wutscher
Maurice Wutscher LLP
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