FYI: SDNY Rules CFPB is Unconstitutionally Structured

In the final few pages of a 108 page opinion ruling on a motion to dismiss a complaint jointly filed by the Consumer Financial Protection Bureau (CFPB) and the Attorney General of the State of New York (NYAG), a federal judge in the U.S. District Court for the Southern District of New York declined to follow an earlier ruling from the U.S. Court of Appeals for the District of Columbia Circuit but instead adopted the dissent which held that "the CFPB is unconstitutionally structured because it is an independent agency that exercises substantial executive power and is headed by a single Director."

 

A copy of the opinion is available here.

 

Judge Loretta Preska  acknowledged the existence of the en banc opinion of PHH Corp. v. CFPB, 881 F.3d 75 (D.C. Cir. 2018), which previously upheld the constitutionality of the CFPB but further noted that the decision was not binding on her in the Southern District of New York.  Rather, she adopted Sections I-IV of Judge Brett Kavanaugh's dissent with regard to the claims of unconstitutionality.

 

However, where Judge Kavanaugh's dissent provided a remedy to "invalidate and sever the for-cause removal provision and hold that the Director of the CFPB may be supervised, directed, and removed at will by the President," Judge Preska departed and instead agreed with another dissent from the PHH case (Judge Karen LeCraft Henderson), which found that "the presumption of severability is rebutted here. A severability clause does not give the court power to amend a statute.  Nor is it a license to cut out the heart of a statute.  Because [the clause] is at the heart of Title X (Dodd Frank), I would strike Title X in its entirety."

 

She also rejected the CFPB's attempt to ratify the suit after the fact, as the ratification does not cure the underlying constitutional deficiencies.  Because the CFPB "lacks authority to bring this enforcement action because its composition violates the Constitution's separation of powers," the CFPB's claims were dismissed.

 

 

 

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: 9th Cir Rejects ID Theft Putative Class Action for Lack of Spokeo Standing

The U.S. Court of Appeals for the Ninth Circuit recently held the plaintiff did not allege Article III standing for her claim under the federal Fair Credit Reporting Act ("FCRA") where there were no specific factual allegations plausibly tying the inclusion of her debit card expiration date on her receipt to her alleged identity theft. 

 

Moreover, the Court held, leave to amend would be futile because this action against the National Park Service was barred by sovereign immunity. 

 

Accordingly, the Ninth Circuit affirmed the ruling of the district court dismissing the complaint. 

 

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

 

The plaintiff ("Plaintiff") filed a complaint on behalf of herself and a putative class alleging that when she purchased an entrance pass to Yellowstone National Park, the National Park Service ("Park Service") printed a receipt bearing her full debt card expiration date.  The receipt otherwise complied with FCRA and did not include more than the last five digits of her debit card number. 

 

Plaintiff claimed that the Park Service violated FCRA's prohibition that "no person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction."  15 U.S.C. § 1681c(g). 

 

Plaintiff further alleged that after the transaction, and because of the inclusion of the expiration date on her receipt, her debit card was used fraudulently and she suffered damages from her stolen identity.

The Park Service filed a motion to dismiss which was granted by the district court on the grounds that FCRA does not waive the U.S. government's sovereign immunity.  This appeal followed. 

 

On appeal, the Ninth Circuit analyzed both whether Plaintiff had Article III standing to bring her claim, and whether sovereign immunity applied. 

 

For Article III standing, Plaintiff was required to allege that she "(1) suffered an injury in fact, (2) that is fairly traceable to the alleged conduct of [the Park Service], and (3) that is likely to be redressed by a favorable judicial decision."

   

The Ninth Circuit stated that although Plaintiff alleged a sufficient injury of identity theft and fraudulent charges, there was a question of whether that was "fairly traceable" to the Park Service's issuance of the receipt.

 

At the pleading stage, Plaintiff did "not need to prove proximate causation," but she had the burden of "demonstrating that her injury-in-fact [was] . . . fairly traceable to" the Park Service's issuance of the receipt.

 

In the Complaint, Plaintiff alleged only that "[a]fter this debit card transaction Plaintiff['s] [] personal debit card was used fraudulently and she suffered damages from the stolen identity," and "[b]ased on information and belief, the fraudulent use of Plaintiff['s] [] debit card was caused in part by the inclusion of the expiration date of her debit card on the receipt of her purchase from Defendant National Park Service." 

 

The Ninth Circuit concluded that the latter allegation was a legal conclusion that was not entitled to the presumption of truth at the pleading stage, and the former allegation presented "no specific factual allegations plausibly tying the Park Service receipt to her identity theft." 

 

The Ninth Circuit noted that Plaintiff did not allege another copy of the receipt existed, that her copy was lost or stolen, or that anyone other than her lawyers ever viewed the receipt.

 

The Court therefore concluded that it was "left with an allegation of a 'bare procedural violation' of the FCRA and a generic allegation of later harm that is 'divorced from' that violation." 

 

Thus, the Ninth Circuit held that Plaintiff failed to allege standing.

 

The Court went on to explain that in a typical appeal it would consider whether amendment to the complaint could cure the defects in the standing allegations, but it did not reach the question here because it also held that Plaintiff's "suit [was] also barred by sovereign immunity," so any amendment would be futile.

 

In reaching this conclusion, the Ninth Circuit first noted that sovereign immunity shields the United States from suit "absent a consent to be sued that is 'unequivocally expressed' in the text of a relevant statute." 

FCRA defines a "person" as "any individual, partnership, corporation, trust, estate, cooperative, association, government or governmental subdivision or agency, or other entity." 

 

As the Park Service is an agency of the United States, "the sovereign immunity question boils down to whether the inclusion of 'governmental . . . agency' in the FCRA's definition of 'person' constitutes an unequivocal waiver of the federal government's immunity from money damages and subjects the United States to the various provisions directed at 'any person' who violates the law."

 

The Ninth Circuit determined that "[c]onstruing the FCRA as a whole – including the different contexts in which 'person' is used, and the inclusion of a clear waiver of sovereign immunity in an unrelated provision," the FCRA was "ambiguous as to whether Congress waived immunity for [Plaintiff's] suit." 

 

Moreover, because "[a]ny ambiguities in the statutory language are to be construed in favor of immunity," the Court held that Plaintiff's suit was properly dismissed. 

 

Accordingly, the Ninth Circuit affirmed the ruling of the district court dismissing the lawsuit.

 

 

 

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   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

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FYI: BCFP Consent Order With Lenders Uses UDAAP to Address FDCPA-Like Allegations

The Bureau of Consumer Financial Protection recently issued a consent order with a holding company and its affiliated operating entities engaged in consumer lending.

 

The consent order reflects the parties' settlement of an administrative enforcement action that focused on the lenders' debt collection and credit reporting practices that supposedly violated the Dodd-Frank Act's UDAAP provisions. More specifically, and among those practices declared to be UDAAPs, were in-person collection visits supposedly utilized by the lenders in public places that supposedly placed the consumers at risk of having their delinquency revealed to third parties.

 

Specifically, the Bureau alleged that the lenders discussed debts and demanded and took payments in public places, including at restaurants, grocery stores, and big-box retailers, where third parties could see or hear the exchange.

 

The lenders neither admitted nor denied the Bureaus' findings or conclusions, but as part of the settlement they are required, among other things, to pay a civil money penalty of $5 million and to refrain from making in-person visits for collection purposes.

 

This is the second consent order entered by the Bureau under Acting Director Mick Mulvaney.

 

The full consent order is available here:  Link to Consent Order

 

Debt Collection

 

The lenders were collecting their own debt, and their principal purpose is consumer lending and not debt collection, thus their collection activities were not governed by the federal Fair Debt Collection Practices Act (FDCPA). 

 

Instead, the Bureau used its authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act to find a that number of the lenders' collection activities were "unfair, deceptive, or abusive acts or practices" (UDAAP).

 

Among those practices declared to be UDAAPs were in-person collection visits utilized by the lenders. According to the Bureau, those in-person collection attempts were conducted in such a way that the consumers were at risk of having their delinquency revealed to third parties.

 

Specifically, the Bureau alleged that the lenders discussed debts and demanded and took payments in public places, including at restaurants, grocery stores, and big-box retailers, where third parties could see or hear the exchange.

 

The Bureau also alleged that the lenders' representatives threatened consumers with jail, shoved consumers or physically prevented them from leaving, visited consumers' places of employment despite knowing that the employer prohibited personal visits or that the visit could jeopardize the consumer's employment, made multiple visits in a manner that would reveal that the contact was for debt collection, visited the homes of consumers' neighbors, and directly told third parties about consumers' delinquency.

 

The Bureau also took issue with collection calls that the lenders made to consumers' places of employment, alleging that the lenders routinely called consumers at work in a manner that risked disclosing the consumers' delinquency to co-workers and employers.

 

In addition, the Bureau claimed that the lenders made calls to third parties who were listed as references in a consumer's loan application and to other third parties who had a relationship with the consumer.

 

According to the Bureau, the lenders would make these calls to places of employment and to third parties despite prior requests to stop calling.

 

Credit Reporting

 

With respect to credit reporting, the Bureau alleged that the lenders regularly furnished consumer information to the national credit reporting agencies even when they did not have written policies or procedures as required by Regulation V.

 

The Bureau also asserted that the lenders made furnishing errors that were systematic and pervasive, that the lenders were slow to update or correct information, and that they reported information that they knew to be inaccurate due to a failure to coordinate their furnishing system with their consumer dispute process.

 

Fine and Conduct Provisions

 

The consent order provides for a civil money penalty in the amount of $5 million. In addition, the order prohibits the lenders from (1) making in-person visits for collection purposes, (2) calling third parties after receiving an oral or written request to cease communication, (3) calling consumers' workplaces if the lenders know or should know that the calls are inconvenient to the consumer or prohibited by the employer, and (4) disclosing the existence of a consumer's delinquent debt to a third party without the consumer's written, voluntary, affirmative, specific, and (importantly) post-default permission.

 

The lenders are also required to implement and maintain reasonable written policies and procedures relating to information they furnish to CRAs, to take specific steps to correct inaccurate or incomplete information furnished to CRAs, and to assist consumers who were affected by the lenders' inaccurate or incomplete information.

 

Takeaways

 

Although it appears that the pace of enforcement actions has slowed since the departure of former director Richard Cordray, this consent order serves as a reminder that the Bureau continues to investigate and punish what it views to be egregious and systemic violations of consumer protection laws.

 

Also noteworthy is that the Bureau under Acting Director Mulvaney continues to use its UDAAP authority to apply the FDCPA's conduct provisions to creditors collecting their own debt.

 

In fact, the consent order neatly aligns with two Compliance Bulletins issued by the Bureau.  The first bulletin, issued in 2013, explained that creditors can commit UDAAPs if they engage in conduct similar to that prohibited by the FDCPA, providing specific examples.  The second bulletin, issued in 2015, warned creditors and debt collectors of the risks of engaging in in-person collection, including heightened risk of third-party disclosure, negative employment consequences, and harassment.

 

A 2015 consent order required another lender to refund payments received within 90 days of an in-person visit, a requirement that is absent from this recent consent order.

 

However, perhaps the biggest difference between this order and consent orders entered during former Director Cordray's tenure is not in the order itself, but in the Bureau's accompanying press release. For years, businesses and trade associations complained that the Bureau's press releases tended toward hyperbole, exaggerating and mischaracterizing the underlying facts of the investigation and order. By contrast, the June 13 press release is a relatively short, plain-language summary of the consent order itself.

 

Finally, while the FDCPA doesn't directly apply to creditor collections, except in specific circumstances, the majority of states have adopted their own debt collection practices acts.  Many use definitions that include creditor collections and impose restrictions comparable to those that apply to third-party debt collectors.  Some states' trade practices acts similarly restrict creditor collection practices.

 

Accordingly, any business plan and compliance management system should include a thorough analysis of the applicability of theses state laws.

 

 

 

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   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

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