FYI: 11th Cir Holds Re-Scheduled Foreclosure Sale Does Not Extend RESPA Deadline for Submitting Loss Mit Application

The U.S. Court of Appeals for the Eleventh Circuit recently held that, under the federal Real Estate Settlement Procedures Act (RESPA), a mortgage loan servicer had no duty to evaluate a borrower's loan mitigation application submitted two days before the foreclosure sale, even though the sale was continued, affirming the district court's grant of summary judgment in the servicer's favor.

 

The Court also held that the borrowers had to present evidence that they suffered actual damages or were entitled to statutory damages in support of their claim based on the servicer's supposedly inadequate response to their "notice of error" under RESPA in order to survive summary judgment, but failed to do so.

 

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

 

The borrowers took out a loan secured by a mortgage on their residence in Boynton Beach, Florida, but defaulted three years later.

 

The loan servicer filed a foreclosure action and while the case was pending, servicing of the loan was transferred to a successor servicer. The state court entered a final judgment of foreclosure and the sale was scheduled for January 29, 2014.

 

The borrowers faxed a loan mitigation application and accompanying financial records to the successor servicer on January 8, 2014, three weeks before the foreclosure sale.

 

The parties communicated back and forth for two weeks and on January 24, 2014, the servicer told the borrowers that it would evaluate their application once they submitted an additional paystub, which the borrowers provided on January 27, 2014.

 

The successor servicer cancelled the foreclosure sale originally scheduled on January 28, 2014 and rescheduled it for March 14, 2015. Three days later, on January 31, 2014, the servicer asked for two more paystubs and thereafter, on two occasions, told the borrowers it needed more information to evaluate their application.

 

The borrowers submitted all of the information and documents requested on March 7, 2015.  The successor servicer denied their application two days later as untimely because the foreclosure sale was scheduled to take place one week later, on March 14, 2015.

 

The foreclosure sale went forward, but the borrowers remained in occupancy for several months, during which time they sent a notice of error to the successor servicer asserting that it violated Regulation X (implementing RESPA) by not evaluating their application within 30 days as required under 12 U.S.C. § 1024.41 and by supposedly needlessly delaying and drawing out the process then denying the application based on the delay it caused.

 

The successor servicer timely responded to the notice of error with a generic letter that did not specifically address the borrowers' concerns.

 

The borrowers sued in federal district court, alleging that the successor servicer supposedly violated Regulation X and RESPA by failing to evaluate the loss mitigation application on its merits within 30 days as required by 12 C.F.R. § 1024.41(c), and also that the servicer allegedly failed to respond properly to their notice error in violation of 12 C.F.R. § 1024.35(e).

 

The successor servicer moved for summary judgment and the district court granted the motion, finding that the servicer had no duty to evaluate the borrowers' loss mitigation application because § 1024.41 was not in effect when the borrowers submitted their application dated January 8, 2014.

 

Because there was no duty evaluate, the district court concluded that there was no liability under § 1024.41 as a matter of law. The district court also concluded on the notice of error claim that while the borrowers had shown a violation, they failed to show any actual or statutory damages as required by § 1024.35(e). The borrowers appealed.

 

On appeal, the Eleventh Circuit first reasoned that it did not need to decide whether a servicer must comply with § 1024.41 when an application was initially submitted before § 1024.41's effective date but became complete after the effective date because, even assuming that § 1024.41 applies to such an application, the application was untimely. "At the time the borrowers submitted their application, the foreclosure sale was scheduled to occur within 37 days."

 

Next, the Eleventh Circuit rejected the borrowers' argument that the district court erred by finding that the borrowers did not provide sufficient evidence that they suffered statutory damages on their notice of error claim because "RESPA requires proof of a pattern or practice to invoke statutory damages and the Borrowers submitted evidence of only one potential violation—[the servicer's] failure to respond sufficiently" to the notice of error.

 

As to the loss mitigation claim, the Court explained that "[a]lthough Regulation X requires a servicer to evaluate a loss mitigation application within 30 days, this duty is only triggered when the borrower submits a 'complete loss mitigation application more than 37 days before a foreclosure sale. 12 C.F.R. § 1024.41(c)(1)."

 

Because the borrowers submitted their complete application just two days before the foreclosure sale as originally scheduled, the servicer had no duty to evaluate.

 

Citing subsection 1024.41(b)(3) of Regulation X, the Eleventh Circuit further reasoned that "[t]o determine the date of the foreclosure sale, Regulation X directs us to use the date on which the foreclosure sale was scheduled when the borrower submitted her completed application…."

 

The Court concluded that "[b]ecause we determine timeliness based on the scheduled date of the foreclosure sale as of the date the Borrower's complete application was received, it is irrelevant to our timeliness analysis that [the servicer] subsequently rescheduled the foreclosure sale for a later date."

 

The Eleventh Circuit rejected the borrowers' argument that "because § 1024.41 discusses when the foreclosure sale 'occurs,' the relevant date for measuring timeliness is the date the foreclosure sale actually transpires" because "this interpretation is inconsistent with the final clause of paragraph (b)(3), which plainly states that we must measure the proximity between the date of the foreclosure sale and the receipt of the complete loss mitigation application 'as of the date a complete loss mitigation application is received.'" Adopting the borrower's interpretation "would render this phrase in the regulation meaningless."

 

Because the Court found that paragraph (b)(3) was unambiguous, it explained that it did not need to consider the Consumer Financial Protection Bureau's interpretation of the regulation.  The Court held that its interpretation nonetheless was consistent with the CFPB's interpretation when it adopted the regulation. "The Bureau thus made clear that an untimely application should not become timely simply because the servicer rescheduled a foreclosure sale."

 

Because the borrowers' loss mitigation application was not timely, the Eleventh Circuit concluded that the district court did not err in granting summary judgment to the servicer on the borrowers' loss mitigation claim.

 

In addition, because the borrower could not show any actual damages absent a duty on the part of the servicer to evaluate their complete application, the Court then turned to whether the borrowers "presented evidence of a pattern or practice of RESPA noncompliance to support an award of statutory damages" and concluded they had not done so.

 

Citing its ruling in Renfroe v. Nationstar Mortg., LLC, which held that two RESPA violations were insufficient, the Court reasoned that "[a]lthough 'RESPA pattern-or-practice damages are not clearly defined by this Court's precedent,'… we can safely say that one RESPA violation, standing alone, does not constitute a pattern or practice."

 

Finally, the Court rejected the borrowers' argument that sending a form template in response to the borrowers' notice of error showed a pattern or practice of providing insufficient responses to notices of error sent by other borrowers, finding that "[s]imply using a template to respond to a notice of error does not violate RESPA" and the borrowers "presented no evidence from which we can infer that [the servicer] had a pattern or practice of issuing form letters that were unresponsive to borrowers' notices of error."

 

Because the borrowers could not present sufficient evidence of a pattern or practice, the Eleventh Circuit concluded that the trial court could did not err in entering summary judgment in the successor servicers' favor on the notice of error claim.

 

Accordingly, the trial court's judgment was affirmed in all respects in favor of the mortgage servicer.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: SCOTUS Grants Cert in Proof of Claim on Time Barred Debt Case

The Supreme Court of the United States recently granted certiorari to review the ruling of the U.S. Court of Appeals for the Eleventh Circuit in Johnson v. Midland Funding LLC.

 

As you may recall, Johnson was the second case decided by the U.S. Court of Appeals for the Eleventh Circuit addressing time-barred proofs of claim in Chapter 13 bankruptcy. In the first case, Crawford v. LVNV Funding, LLC, the Eleventh Circuit held that a debt collector violates the FDCPA when it files a proof of claim in a bankruptcy case on a debt that it knows to be time-barred. In Johnson, the Eleventh Circuit held that there is no irreconcilable conflict between the FDCPA and the Bankruptcy Code.

 

A copy of the docket is available at:  Link to Docket

 

In their briefs at the Writ of Certiorari stage, both sides urged the Supreme Court to grant the writ in order to resolve the circuit split created by rulings in the Fourth (Dubois v. Atlas), Seventh (Owens v. LVNV), and Eighth (Nelson v. Midland) Circuits. Those courts have held that the filing of a time-barred proof of claim does not violate the FDCPA.

 

An interesting wrinkle is that an earlier petition requesting review by the Supreme Court was filed from the Seventh Circuit's decision in Owens. As of this writing, the Court has not ruled on the request.

 

Appeals involving time-barred proofs of claim are still pending in the First, Third, Fifth, and Sixth Circuits.  It remains to be seen whether the courts might stay the remaining cases until the Supreme Court decides Johnson.

 

Crawford and Johnson Deny Creditors Due Process

 

The Crawford and Johnson rulings are far from benign. By making it unlawful for creditors holding a particular claim from participating in a Chapter 13 case, the rulings deny creditors their constitutional due process.

 

At the same time, to correct the due process violation, the decisions result in excepting the same debts from discharge. A debtor will not receive the "fresh start" a successful Chapter 13 case would have delivered.

 

In most instances, the expiration of a statute of limitations does not extinguish a consumer debt nor does it deprive a state court of jurisdiction over a claim to enforce the debt.  The FDCPA does not extinguish debts or regulate the contract rights of creditors and debtors. It only regulates a debt collector's conduct when collecting consumer debt.  Generally, creditors can continue to lawfully collect "time-barred" debts in complete compliance with the FDCPA most often if they do not threaten legal action and under other circumstances.

 

Every ruling since Crawford addressing the issue of proofs of claim for time-barred debts agreed that even these debts are claims within the meaning of the bankruptcy code. The Eleventh Circuit conceded the point in Johnson. In doing so, the Eleventh Circuit implicitly recognized that creditors holding these claims possess a property right; namely, the right to continue to collect the time-barred debt under state law.

 

A debtor's filing of a Chapter 13 case initiates a judicial proceeding designed to curtail, even strip this fundamental property right.  Once the case is initiated, the bankruptcy code imposes an automatic stay prohibiting the creditor from taking any action to collect "a claim." If the Chapter 13 case is successfully concluded, the court enters a discharge injunction permanently enjoining the creditor from exercising its right to enforce the claim, provided the claim received treatment in the bankruptcy case.

 

The impact is not limited to "debt collectors" subject to the FDCPA. Their creditor clients, who depend on debt collectors to file proofs of claim on their behalf, are also barred from participating in Chapter 13 cases within the Eleventh Circuit.

 

Crawford's Absurd Result Harms Consumers

 

Because of these adverse impacts on a creditor's property rights, every Chapter 13 case requires the creditor to be afforded constitutional due process – notice of the proceeding and an opportunity to be heard. Crawford and Johnson, by prohibiting the filing of a proof of claim against a debt they recognize as a valid claim, deny creditors the opportunity to be heard.

 

This produces an odd result because in instances where a creditor is denied due process in a bankruptcy case, the debts owed to it are not discharged.

 

The issue arises mostly when a debtor has not scheduled or inaccurately scheduled a creditor. As a result, the creditor lacked notice of the case and did not have the opportunity to file a proof of claim before the claim bar date. In such instances, courts will except the creditor's debt from discharge unless the debtor can demonstrate that despite his failure to properly schedule the creditor, the creditor did have actual notice of the bankruptcy filing in time to file its proof of claim.

 

Thus, even when there is a defect in bankruptcy noticing, due process is still satisfied when the creditor had the opportunity to be heard. But that opportunity is exactly what Crawford and Johnson prohibit. Debt collectors cannot file a proof of claim when the debt is subject to the defense of an expired limitations period. The remedy is to prevent discharge and allow the creditor to continue to collect the debt.

 

This absurd result is one of many created by barring creditor participation in Chapter 13 cases. Consumers seek bankruptcy protection to stop debt collection efforts and to relieve their debt burden. Crawford harms consumers because it takes these protections away from them. The bankruptcy code encourages creditor participation. Crawford prohibits and discourages it.

 

The Supreme Court will now have the opportunity to end the absurdity and allow the bankruptcy code to operate as Congress intended.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: CD Cal Holds Non-Bank Not "True Lender" on Allegedly Usurious Loans Extended in Name of Bank

The U.S. District Court of the Central District of California recently dismissed a borrower's putative class action complaint against a non-bank that supposedly was the "true lender" for allegedly usurious student loans that were extended in the name of a bank.

 

In so ruling, the Court held California law requires that it must look only to the face of a transaction when assessing whether a loan falls under a statutory exemption from the usury prohibition and not look to the intent of the parties.

 

Under this rule, the Court held that the loans were exempt from California's usury prohibition under the California Constitution exemption for loans made by banks. 

 

A copy of the opinion is attached.

 

On October 21, 2015, the borrowers filed a putative class action complaint claiming they had been illegally charged usurious interest rates on their private student loans in supposed violation of California law. 

 

The borrowers obtained private student loans in 2003 and 2004 using loan applications that identified a national bank as the "lender."  The borrowers alleged that the "actual lenders" of their loans were the Student Loan Marketing Association ("SLMA"), or subsidiaries of the SLM Corporation ("SLM Corp").

 

The borrowers alleged that the SLMA and the SLM Corp. subsidiaries originated, underwrote, funded and bore the risk of loss as to their loans under a confidential agreement (the "Agreement") between the SLMA and bank.

 

The borrowers also alleged that the Agreement provided that bank was required to sell the loans to SLMA at cost within 90 days of being funded. This arrangement then allegedly enabled SLMA and the SLM Corp. subsidiaries to make high-interest private loans to students like borrowers attending for-profit schools without the scrutiny of any bank regulatory body, and without the market restraints faced by regulated lenders.

 

The borrowers asserted that under the Agreement, SLMA and SLM Corp. subsidiaries made thousands of loans to California borrowers using banks as the nominal lender, with either SLMA or an SLM Corp. subsidiary functioning as servicer.

 

The borrowers alleged the non-bank defendants had been illegally charging and collecting interest at a rate greater than 10%.  The borrowers' loans were originally assigned to SLMA or an SLM Corp. subsidiary after their disbursement and were subsequently sold to various other parties. 

 

The SLMA was created pursuant to federal statute and chartered by the federal government as a government sponsored enterprise. In or about 1994, Congress required the SLMA to transition to a wholly private company no later than September 30, 2008. As part of the transition, various segments and subsidiaries of the SLMA were acquired by the SLM Corp., which continued the SLMA's operations during the transition period and after the SLMA's dissolution. 

 

The borrowers alleged that in an effort to circumvent federal restrictions on its ability to originate loans and to circumvent state usury laws, the SLMA, and the SLM Corp. and its wholly-owned subsidiaries entered into forward purchase agreements with national bank partners, supposedly to make it appear that the lender was a national bank.

 

The borrowers asserted that the SLMA was effectively the "actual lender" of the loans in a number of ways. First, according to the borrowers, the bank did not have any risk of loss with respect to the loans because the SLMA provided the funds for the loans and agreed in advance to purchase the loans from the bank.  Moreover, the borrowers asserted, the SLMA controlled all aspects of marketing loans to student borrowers, and required bank to print, package and distribute application materials in forms acceptable to the SLMA, based on a design template for such materials provided by the SLMA.

 

According to the borrowers, the bank was not allowed to alter the content or description of these application materials without the SLMA's express written consent.  Instead, the borrowers asserted, the bank's role was to add its name, state, logo and OE number to the applications, which made it appear as if the bank were the lender. In addition, the SLMA allegedly set the terms of the private loans; controlled the schools at which the loans could be made; determined which students would be approved for loans and for what amounts; and determined the interest rate on a borrower's loan based on proprietary credit criteria established by the SLMA.

 

In 2004, the SLMA was dissolved and merged into the SLM Corp.  At this time, the Agreement was amended, and the SLMA's role was assigned to two wholly-owned subsidiaries of the SLM Corp.

 

Based on the foregoing allegations, the borrowers asserted five state law claims: (1) unlawful and unfair business practices in violation of the California Unfair Competition Law ("UCL"); (2) usury in violation of Article XV, Section 1, of the California Constitution; (3) violation of California's Usury Law (i.e. Cal. Civ. Code § 1916-1); (4) claim for money had and received; and (5) conversion.

 

The borrowers' claims for money had and received and for conversion and violation of the UCL were predicated on the borrowers' theory that the non-banks had violated California's usury prohibition.  The borrowers sought restitution, compensatory and statutory damages, and injunctive relief, and sought to represent a putative class of individuals residing in California who obtained student loans and were similarly charged usurious interest rates. 

 

The defendant non-banks argued that the borrowers' complaint should be dismissed because: (1) the borrowers' loans are exempt from California's usury prohibition; and (2) the borrowers' claims are preempted by the National Bank Act.

 

The Court found that the borrowers' loans were exempt from California's usury prohibition, and did not reach the question of whether borrowers' claims were preempted by the National Bank Act. 

 

The borrowers' usury claims were based on Article XV § 1 of the California Constitution, which provides that interest charged on an obligation in excess of 10% is usurious and therefore cannot be collected, and the California "Usury Law," Cal. Civ. Code § 1916-1.

 

Because the California constitutional provisions supersede any conflicting language in the state Usury Law, the Court looked to the controlling language of the California Constitution when assessing the borrowers' usury claims.

 

The essential elements of a claim of usury in California are: (1) the transaction must be a loan or forbearance; (2) the interest to be paid must exceed the statutory maximum; (3) the loan and interest must be absolutely repayable by the borrower; and (4) the lender must have a willful intent to enter into a usurious transaction.

 

The intent sufficient to support a judgment of usury does not require a conscious attempt, with knowledge of the law, to evade it. The conscious and voluntary taking of more than the legal rate of interest constitutes usury and the only intent necessary on the part of the lender is to take the amount of interest which he receives; if that amount is more than the law allows, the offense is complete.

 

The usury prohibition is subject to numerous exemptions. In particular, the California Constitution exempts from the usury prohibition loans made by any bank created and operating under and pursuant to any laws of the state or of the United States of America.

 

The non-bank defendants argued that the borrowers' usury claims should be dismissed because the borrowers' loans fell within the California Constitution's exemption for loans made by banks.  The non-bank defendants noted that the complaint itself alleged that the borrowers' loans were originally issued by a bank.

 

Additionally, the non-bank defendants argued that the SLMA should not be considered the actual lender of borrowers' loans, because although the SLMA contracted with the bank to purchase the loans after they were issued and was involved in their issuance and disbursement, this does make SLMA the actual "lender" for purposes of the exemption from the usury prohibition.

 

The non-bank defendants also argued that under California law, the court could not consider whether the SLMA intended to circumvent the usury prohibition through its agreement with the bank when determining whether borrowers' loans were exempted from the prohibition. 

 

Countering, the borrowers argued that the court must look to the substance of the transaction rather than to its form when assessing whether a loan falls into the exemption from California's usury prohibition.  The borrowers further argued that the SLMA's intent is relevant to whether borrowers' loans were exempt from the usury prohibition.

 

The borrowers contended that although the bank was the lender of borrowers' loans "in form," the complaint sufficiently alleged that the SLMA was for practical purposes the actual lender and that the SLMA intended to skirt the usury prohibition through its agreement to purchase the loans from the bank. Consequently, the borrowers argued, their loans did not fall under the exemption from the usury prohibition for loans issued by banks.

 

The Court rejected the borrowers' arguments, noting that, even assuming the allegations in the complaint were true, the borrowers' loans fell under the California Constitution's exemption for loans issued by banks, and the borrowers' complaint alleged that the loans were issued by a bank.

 

Although the borrowers argued the exemption did not apply to their loans because their "lender" was effectively the SLMA, they failed to cite any authority supporting this proposition.

 

Instead, the borrowers cited a number of cases for the proposition that the court should look to substance over form to assess whether a loan, that on its face appears non-usurious, is in fact usurious, arguing that these decisions permitted the court to look at the "substance" of the SLMA's agreement with the bank and the SLMA's intent in order to determine whether the borrowers' loans were exempted from the usury prohibition.

 

The Court noted, however, that the cases cited by the borrowers only held that a court may consider the "substance" of a transaction over its "form" and the parties' intent when assessing whether a transaction satisfies the elements of usury or falls under a common law exemption to the usury prohibition, and not when assessing whether the transaction or a party to the transaction fall under a constitutional or statutory exemption from the usury prohibition. 

 

Because the Court found borrowers' loans were exempted from the usury prohibition, the Court concluded that borrowers' remaining claims for money had and received, conversion, and violation of the UCL were also subject to dismissal.

In reaching its decision, the Court relied upon Jones v. Wells Fargo Bank, 112 Cal. App. 4th 1527, 1539 (2003) and WRI Opportunity Loans II LLC v. Cooper, 154 Cal. App. 4th 525, 533 (2007), two California appellate decisions that held that the court must look only to the face of a transaction when assessing whether it falls under a statutory exemption from the usury prohibition and not look to the intent of the parties.

 

In Jones, the California Court of Appeal, considering a plaintiff's claim that a shared loan appreciation agreement was usurious, noted that cases where intent to evade the usury law is at issue typically involve situations where the lender claims a transaction is not a loan at all and that defendants' intent was irrelevant where the agreement fit within a legally authorized exception to the general usury law.

 

In WRI, where two plaintiffs claimed a loan provided to their company was usurious, the California Court of Appeal re-affirmed Jones, noting that when a loan meets the requirements for a statutory exemption to the usury law, courts will not look beyond those requirements.

 

The borrowers attempted to distinguish Jones and WRI, arguing that those cases pertained to exempt transactions – i.e., shared appreciation loans.  The borrowers contended that that when the exemption belongs to an entity in what otherwise would be a usurious transaction, the intent of the parties is critical.

 

The Court again rejected the borrowers' argument. The Court noted that the borrowers cited no authority supporting the proposition that the court's inquiry into a transaction subject to a usury exemption differs based on whether the exemption pertains to the character of the transaction or to that of a party to the transaction.

 

The Court concluded that the cases cited in support of borrowers' contentions were inapposite because they did not concern statutory or constitutional exemptions to the usury prohibition, and found Jones and WRI to be controlling.

 

The district court found Jones particularly on-point because it addressed a statutory exemption for certain national banks comparable to the constitutional exemption at issue in this case.  Consequently, the district court looked only to the face of the transactions at issue when assessing whether borrowers' loans were exempted from the usury prohibition.

 

Because borrowers' complaint alleges that the loans were issued by a bank, the district court concluded that the loans were exempted from California's usury prohibition.

 

Accordingly, the Court granted the non-bank defendants' motion to dismiss insofar as it contended the borrowers' loans were exempted from California's usury prohibition, and dismissed the action with prejudice.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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FYI: DC Cir Holds CFPB "Unconstitutionally Structured," Overrules CFPB's Statute of Limitations and Captive Reinsurance Interpretations

The Consumer Financial Protection Bureau (CFPB) narrowly escaped a constitutional challenge today in a ruling by the U.S. Court of Appeals for the District of Columbia Circuit.

 

Although the DC Circuit found the CFPB is "unconstitutionally structured," this defect according to the Court did not warrant dissolution of the CFPB.

 

A link to the opinion is available here:  Link to Opinion

 

This action arose from a CFPB enforcement action against PHH Mortgage (PHH) alleging the company had violated Section 8 of the federal Real Estate Settlement Procedures Act. The CFPB ultimately imposed a $109 million penalty against PHH, which resulted in this appeal.

 

The DC Circuit's ruling vacates the penalty, reverses the CFPB's administrative ruling, and remands the case back to the CFPB.

 

The ruling provides a significant blow to the CFPB, offering several paths to challenge past CFPB actions.  The opinion also holds that the CFPB's enforcement actions are subject to statutory limitations periods, a position the CFPB has resisted.

 

PHH's Constitutional Challenge to the CFPB's Structure

 

One of the challenges made by PHH was to the constitutionality of the CFPB.  The Court noted that the CFPB is unaccountable to the president, and its structure offers no checks or balances to the unbridled discretion of the sole director, which PHH argued violates the separation of powers doctrine.

 

Executive agencies like the CFPB are considered "independent" because the agency heads can only be removed by the president "for cause," and not at will.  As a result, the agencies are not supervised or directed by the president.

 

Examples of such independent agencies are the Federal Communications Commission, the Federal Trade Commission and the Securities and Exchange Commission. Not only are they able to make rules, but they can also conduct enforcement actions against private citizens, and "pose a significant threat to individual liberty and the constitutional system of separation of powers and checks and balances."

 

CFPB's Director Was Accountable to No One

 

Although the CFPB director's rulings are subject to judicial review, the DC Circuit noted that this does not remedy a separation of powers violation posed by the single director structure of an independent agency like the CFPB. Likewise, the Court noted, there is no historical precedent for a single director, independent agency.

 

The Court found that the unique structure of the CFPB creates a "greater risk for arbitrary decision making and abuse of power, and a far greater threat to individual liberty," as opposed to the traditional commissioner structure.

 

Because the CFPB's director may only be removed by the president "for cause," the structure provides no check on his powers and the CFPB's director remains unaccountable to the president or any other person.

 

A 1935 Supreme Court of the United States ruling permitted the creation of independent agencies so long as their structure prevents a single person from exercising authority that is neither supervised nor accountable. Having multiple commissioners as independent agency heads, as is the case with the FCC, FTC and SEC, provides such a check.

 

Although the independent agency heads are not accountable to or supervised by the president, the commissioner structure makes each commissioner accountable to and checked by their fellow commissioner.  No single person can unilaterally exercise unsupervised authority free from accountability to any other person.

 

As the opinion notes, no independent agency has ever been headed by a single person – until the CFPB was created.

 

CFPB Survives Shutdown but is No Longer an Independent Agency

 

The DC Circuit declined PHH Mortgage's request to declare the CFPB void as unconstitutional.

 

Instead, the Court struck from the Dodd-Frank Act the provision that only permitted the director to be removed "for cause."  Under this ruling, the CFPB's director can now be removed by the president "at will," essentially stripping the CFPB of its independent status. Now, the Court noted, the CFPB will function like other single director executive agencies, such as the State Department, Department of Justice and Department of Treasury. Because these agency heads can all be removed by the president at-will, they remain accountable to the president and under the president's supervision.

 

In declining to declare the CFPB itself as unconstitutional, the DC Circuit reasoned that by removing the "for cause" provision, the remaining provisions of Dodd-Frank could remain "fully operative as a law." The Court also found that Congress would have preferred the remaining provisions of Dodd-Frank remain in effect.

 

The ruling allows the CFPB to continue its operations, albeit no longer as an independent agency.

 

Impact on the CFPB

 

Any president can now remove the CFPB director for any reason.  This would not have been the case prior to today's ruling.

 

The ruling also confirms that the CFPB's structure provided no accountability to any elected official.

 

Although the opinion may arguably remove the constitutional defect, it does underscore the extraordinary power still exercised by its director, noting that "the CFPB possesses enormous power over American business, American consumers, and the overall U.S. economy."

 

The DC Circuit considered and rejected as beyond its authority its own restructuring of the CFPB into a commission, but noted, "if Congress prefers to restructure the CFPB as a multi-member independent agency rather than as a single-Director executive agency, Congress may enact new legislation that creates a Bureau headed by multiple members instead of a single Director."

 

Recent legislation seeks to replace the CFPB director with a bi-partisan commission. This ruling may provide fodder to move the legislation through Congress.

 

Time Does Run Against the King – CFPB Enforcement Actions Subject to Limitations Periods

 

In several enforcement actions, the CFPB has argued it is not subject to the limitations periods of the statutes it is seeking to enforce.

 

For example, in an enforcement action against a law firm for violation of the federal Fair Debt Collection Practices Act, the CFPB argued the FDCPA's one-year limitations period did not apply to it because "time does not run against the King."

 

The DC Circuit disagreed, providing a significant blow to future CFPB enforcement actions.

 

PHH argued enforcement action as to many of the alleged violations was time-barred because the alleged violations occurred outside RESPA's three-year limitations period. The CFPB argued its efforts against PHH were not barred because the Dodd-Frank Act does not impose a statute of limitations against its efforts to enforce "any" consumer protection statute.  Alternatively, the CFPB argued no limitations period is applicable to its enforcement of RESPA's Section 8. 

 

The DC Circuit disagreed on both points finding that the Dodd-Frank Act incorporated the statutes of limitations of "the underlying statutes enforced by the CFPB in administrative proceedings."  

 

In addition, the Court specifically held that RESPA's three-year limitations period is applicable to the CFPB's enforcement actions, whether brought in a court or in a CFPB administrative proceeding.

 

Impact on Captive Reinsurance Arrangements

 

The DC Circuit reversed the CFPB's finding that Section 8 of the federal Real Estate Settlement Procedures Act prohibits any "captive" reinsurance arrangements.  According to the Court, "[i]n a captive reinsurance arrangement, a mortgage lender (such as PHH) refers borrowers to a mortgage insurer.  In return, the mortgage insurer buys reinsurance from a mortgage reinsurer affiliated with (or owned by) the referring mortgage lender."

 

The Court disagreed with the CFPB's interpretation of RESPA Section 8 and found that the "captive reinsurance" practice is permissible if the reinsurance were purchased at market rates.

 

The DC Circuit also found the CFPB violated PHH's due process rights when it retroactively applied the CFPB's own interpretation concerning the practice that was in direct contradiction to prior guidance issued by the Department of Housing and Urban Development.

 

On remand, the CFPB must demonstrate that the reinsurance rates paid to PHH's affiliate exceeded reasonable market rates. Simply engaging in the practice is not a violation, according to the Court.

 

Contesting Constitutionality of the CFPB's Prior Actions

 

It is possible that if the CFPB were unconstitutionally structured, it should void or make voidable the CFPB's prior actions, at least those where the director's authority was required to undertake an action.  In this case the Court did not reach the issue.

 

The DC Circuit avoided the issue of whether the CFPB's unconstitutional structure was alone sufficient to vacate the PHH penalty because it ruled that PHH had not violated the RESPA in the first place.

 

The Court ultimately had to address the constitutional argument because it could not remand the case back to the CFPB unless the constitutional defect was corrected. By deleting the "for cause" provision of the Dodd-Frank Act, the Court solved for itself the dilemma and allowed the remand. It also saved the CFPB from a shutdown.

 

However, the Court's finding that the CFPB was constitutionally defective may provide others with opportunities to challenge CFPB rulings, bulletins, and enforcement actions, particularly where these actions are tied to the director's authority.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Ill App Ct (2nd Dist) Holds Erroneous Advertisement Not UDAP Violation

The Appellate Court of Illinois, Second District, recently held that an erroneous advertisement that misstated the price of a vehicle did not constitute an offer that could be accepted to form a contract, and did not constitute a UDAP violation. 

 

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

 

The plaintiff car buyer saw an advertising online for a vehicle and contacted the defendant car dealership to purchase the vehicle at the advertised price.  The car dealer explained to her that the price of the vehicle was $36,991 and the price of $19,991 as shown in the advertisement was a mistake.  The car dealer offered to sell the vehicle "at cost" but the plaintiff did not agree to that price.

 

The plaintiff filed suit alleging breach of contract for allegedly failing to honor the advertised .price, or in the alternative, that the car dealer's advertisement was deceptive in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/2, et seq. ("ICFA"). 

 

As you may recall, to establish a breach of contract claim, the plaintiff must allege and prove "(1) the existence of a valid and enforceable contract; (2) performance by the plaintiff; (3) breach of contract by the defendant; and (4) resultant injury to the plaintiff."  Henderson-Smith & Associates, Inc. v. Nahamani Family Service Center, Inc., 323 Ill. App. 3d 15, 27 (2001).  "A valid and enforceable contract requires a manifestation of agreement or mutual assent by the parties to its terms, and the failure of the parties to agree upon or even discuss an essential term of a contract may indicate that the mutual assent required to make or modify a contract is lacking. Deacon Group., Inc. v. Northern Trust Corp., 187 Ill. App. 3d 635, 643 (1989).

 

The Appellate Court noted that "[a]n advertisement is not an offer to a contract but rather constitutes an invitation to deal on the terms described in the advertisement." Steinburg v. Chicago Medical School, 69 Ill. 2d 320, 330 (1977).  See also O'Keefe v. Lee Calon Imports, Inc., 128 Ill. App. 2d 410, 413 (1970) (court held a newspaper advertisement which contains an erroneous purchase price through no fault of the defendant advertiser and which contains no other terms, is not an offer, but an invitation, and cannot be accepted so as to form a contract).

 

The Court disagreed with the plaintiff, ruling that no contract formed between the parties as there was no mutual assent.  The plaintiff believed the purchase price was $19,991 and the car dealer believed the same car was being sold for $36,991.

 

Accordingly, the Appellate Court held that the advertisement on its own could not serve as the basis of a binding contract.  The Court noted that the car dealer never intended to sell the vehicle at the advertised price.  Therefore, the Court held that the advertised price was not an offer and plaintiff's acceptance did not establish a contract.

 

The Court also agreed with the car dealer that it had not violated the ICFA. 

 

The trial court had held that there was no consumer fraud "because the defendant did not intend the plaintiff to rely on a deceptive practice in which the defendant never intended to engage."

 

As you may recall, "[t]o establish a claim under the [ICFA], a plaintiff must prove: (1) a deceptive act or practice by the defendant, (2) the defendant's intent that the plaintiff rely on the deception, (3) the occurrence of the deception in a course of conduct involving trade or commerce, and (4) actual damage to the plaintiff that is (5) a result of the deception." Martinez v. River Park Place, LLC, 2012 IL App (1st) 111478, ¶ 34.  Recovery may be had under the ICFA for unfair as well as deceptive conduct.  Robinson v. Toyota Motor Credit Corp., 201 Ill. 2d 403, 417 (2002).

 

In addition, "[i]n a cause of action for fraudulent misrepresentation brought under the [ICFA], a plaintiff must prove that he or she was actually deceived by the misrepresentation in order to establish the elements of proximate causation." Avery v. State Farm Mutual Automobile Insurance Co., 216 Ill. 2d 100, 199 (2005).

 

Here, the Appellate Court held that the plaintiff was unable to prove she suffered any damages.  The plaintiff attempted to claim her damages were the difference between the price at which the car was advertised and the appraised value of the car. However, the plaintiff did not actually purchase the car.

 

The Court noted that only a person who suffers actual damages as a result of a violation of the ICFA may bring a private action. 815 ILCS 505/10a(a); Mulligan v. QVC, Inc., 382 Ill. App. 3d 620, 626-27 (2008).  The failure to allege specific, actual damages precludes a claim brought under the ICFA. White, 368 Ill. App. 3d at 287. The purpose of awarding damages to a consumer fraud victim is not to punish the defendant or bestow a windfall upon the plaintiff, but rather to make the plaintiff whole.  Mulligan, 382 Ill. App. 3d at 629.

 

Here, the Appellate Court held that the plaintiff was in the same position she was in before she saw the advertisement and suffered no damages. 

 

The Court also rejected plaintiff's argument that the car dealer's advertising the vehicle at a price that it did not intend to honor was a "per se violation" of the ICFA that entitled her to relief.

 

The Appellate Court explained that the cases on which the plaintiff relied all involved deceptive "bait and switch" situations.  The Court held that a "a 'bait and switch' occurs when a seller makes an alluring but insincere offer to sell a product or service, which the advertiser in truth does not intend or want to sell. Its purpose is to switch customers from buying the advertised merchandise to buying something else, usually at a higher price or on a basis more advantageous to the advertiser."

 

Here, the Court held, the car dealer "did not engage in any 'bait and switch,' as it did not try to induce the plaintiff to buy a vehicle other than the one that was advertised."

 

In addition, the Appellate Court noted that, "[a]lthough even negligent or innocent misrepresentations are actionable under the [ICFA], that still does not alleviate a plaintiff's obligation to prove her damages."

 

Accordingly, the Appellate Court affirmed the trial court's ruling in favor of the car dealer.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Maryland   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:

 

Financial Services Law Updates

 

and

 

The Consumer Financial Services Blog™

 

and

 

Webinars

 

and

 

California Finance Law Developments

 

and

 

Insurance Recovery Services