2017 was a transformative year for the consumer financial services world. As we navigate an unprecedented volume of industry regulation and forthcoming changes from the Trump Administration, Troutman Sanders is uniquely positioned to help its clients find successful resolutions and stay ahead of the compliance curve.

In this report, we share developments on consumer class actions, background screening, bankruptcy, credit reporting and consumer reporting, debt collection, payment processing and cards, mortgage, auto finance, the consumer finance regulatory landscape, cybersecurity and privacy, and the Telephone Consumer Protection Act (“TCPA”).

We hope you find this helpful as you navigate the evolving consumer financial services landscape.

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On December 13, the U.S. Court of Appeals for the Eleventh Circuit affirmed the imposition of joint and several liability on a payment processor that had provided “substantial assistance” to another entity that violated a federal ban on improper telemarketing practices. The decision leaves the payment processor responsible for paying the $1.7 million judgment with its co-defendants.

Background

In 2011 and 2012, a group of individuals known as Treasure Your Success (“TYS”) allegedly operated a fraudulent scheme under which TYS promised to reduce consumer credit card interest rates in exchange for the consumer authorizing a charge to his or her credit card. TYS, however, never had the ability to honor its promises to lower interest rates. Using this approach, TYS amassed more than $2.5 million from the victims of its scheme.

To carry out this scheme, TYS relied on Universal Processing Services of Wisconsin, LLC, a payment processing company, to charge customers’ credit cards. After receiving an internal referral, Derek DePuydt, Universal’s president, personally reviewed TYS’s merchant application and, despite several red flags indicating TYS might constitute a fraud risk, approved two accounts for TYS.

The FTC Complaint and First District Court Decision

In October 2012, the FTC filed a complaint in the U.S. District Court for the Middle District of Florida, naming members of the TYS scheme as defendants and alleging violations of the Federal Trade Commission Act (“FTCA”), 15 U.S.C. § 41 et seq., the Telemarketing and Consumer Fraud and Abuse Prevention Act, 15 U.S.C. § 6101 et seq., and the Telemarketing Sales Rule (“TSR”), 16 C.F.R. § 310.1 et seq. The FTC later added other defendants, including Universal and DePuydt, and brought an additional count that alleged Universal and DePuydt provided substantial assistance to TYS and “knew, or consciously avoided knowing,” that TYS was violating the TSR.

After various settlements, only Universal and two other defendants remained. The FTC moved for summary judgment against the three defendants. The district court granted the motion and found Universal substantially assisted TYS in perpetrating the scheme by establishing the merchant accounts and knew, or consciously avoided knowing, about TYS’s fraud. The court ordered disgorgement in the amount of $1,734,972 and held that the three defendants were jointly and severally liable for the entire amount of restitution.

First Appeal and District Court Clarification

Universal appealed, and the Eleventh Circuit directed the district court to further explain why it subjected Universal to joint and several liability. In a new opinion, the district court reasoned that although Universal did not participate in the scheme, the language of the TSR, in conjunction with how such situations are treated in tort and securities law, allowed for joint and several liability where an entity provides substantial assistance to another that it knows, or consciously avoids knowing, is violating the TSR.

The Second Appeal and Affirmation of District Court’s Decision on Joint and Several Liability

The decision was appealed again and the Eleventh Circuit affirmed. In so doing, the Eleventh Circuit first rejected Universal’s claim that joint and several liability cannot exist absent a common enterprise, explaining no authority supported that conclusion.

Next, the court looked to the history behind the TSR’s adoption and noted that the FTC expressly relied on tort and securities concepts when it formulated the rule. Specifically, the FTC invoked § 876(b) of the Restatement (Second) of Torts, which contemplates imposing liability on a person who gives substantial assistance to another person whose conduct breaches a duty, resulting in harm to a third party, where the offeror of the assistance knows the other party’s conduct is a breach. According to the court, § 876(b) shares three elements with the TSR—a primary violation, substantial assistance and knowledge. As a result, the court found borrowing from tort law appropriate. The court also found noteworthy that the Second Restatement expressly allows for imposing joint and several liability on an aider-abettor.

The Eleventh Circuit additionally focused on the FTC’s reference to securities law in its explanation of the final TSR. Securities law also provides for joint and several liability in the same situation as tort law, but it expands the requisite mental culpability from “knowing” to reckless. Recklessness, the court believed, even more closely tracked the “consciously avoid[ing] knowing” language adopted by the FTC in the TSR.

Finally, the court rejected Universal’s various arguments that the unjust gains could be fairly apportioned between the three remaining defendants, which Universal argued precluded joint and several liability. The court’s decision left Universal (with its potentially deeper pockets) on the hook for the $1.7 million judgment.

The case is Federal Trade Commission v. WV Universal Management, LLC, et al., No. 16-17727 (11th Cir. Dec. 13, 2017), and the opinion can be located here.

Troutman Sanders will monitor whether other federal courts follow the Eleventh Circuit and adopt this expansion of liability. Updates will be provided as they become available.

On December 8, the United States Supreme Court agreed to decide whether the tolling rule adopted in American Pipe & Construction Co. v. Utah i.e., that the filing of a class action tolls the limitations period for a purported class member’s individual claims – permits a previously absent class member to bring a subsequent and otherwise untimely class action.

The federal appellate courts have split on that question.  The First, Second, Third, Fifth, Eighth, and Eleventh circuits have held that American Pipe tolling only permits subsequent individual actions.  However, the Sixth, Seventh, and Ninth circuits have held that American Pipe tolling also permits subsequent class actions.

In the case before the Supreme Court, China Agritech Inc. v. Resh, shareholders of China Agritech filed a putative class action alleging that the company committed securities fraud.  China Agritech moved to dismiss, arguing that the putative class action was filed after the applicable two-year limitations period had lapsed and was thus untimely.  In response, the plaintiffs argued that, under American Pipe, the action was timely because the limitations period was tolled during the pendency of two earlier-filed but defective class actions against the same defendants based on the same underlying events.

The district court granted China Agritech’s motion to dismiss, finding that the putative class action was untimely, but the Ninth Circuit reversed the district court’s decision.

The Ninth Circuit noted that the American Pipe tolling rule was adopted to “promote economy in litigation” and that, absent tolling, “[p]otential class members would be induced to file protective motions to intervene or to join in the event that a class was later found unsuitable.”  Relying in large part on that rationale, the Ninth Circuit then held that “once the statute of limitations has been tolled, it remains tolled for all members of the putative class until class certification is denied,” and that, at that point, members of the putative class are entitled to bring individual suits “either separately or jointly.”

In urging the Court to grant certiorari, China Agritech argued that the Ninth Circuit’s decision would lead to forum shopping.  The U.S. Chamber of Commerce agreed, arguing that the Ninth Circuit’s decision “erroneously extends a judicially created tolling doctrine to effectively eliminate Congressionally mandated statutes of limitations.”

The Court is expected to issue a decision in the case before the end of its term in June 2018.

Just shy of one year as the N.C. Attorney General, Josh Stein has reorganized NC DOJ – eliminating one prior Division (the Administrative Division), shifting responsibilities within DOJ, and renaming certain Divisions. Additionally, several recent retirements, new hires and promotions have significantly altered the senior attorneys at the helm of the DOJ’s legal services.

Under the reorganization, the eight Divisions providing legal services at NC DOJ consist of Civil (education; insurance; labor; property control; revenue; and legal services to state agencies); Consumer; Criminal; Environmental; Health and Human Services; Litigation; Medicaid Investigations; and Transportation. The functions of the previous Administrative Division have been shifted to other Divisions.

With President Trump’s pick, Mick Mulvaney, remaining as the Acting Director of the Consumer Financial Protection Bureau, the CFPB has filed a motion asking the United States District Court for the District of Kansas to extend briefing deadlines on a motion to dismiss filed in CFPB v. Golden Valley Lending, Inc., et al., No. 2:17-cv-02521.  The Court granted the extension.

The CFPB “s[ought] additional time to consult with new leadership before filing its briefs,” given the “recent leadership changes at the Bureau.”  This could prove to be a significant development as the change in administrations has led to delays in other cases, wherein an agency has had to reconsider its posture in litigation under the priorities of new leadership.  Commentators have anticipated a less aggressive CFPB under Acting Directory Mulvaney than under outgoing Director Richard Cordray, an appointee of President Obama.

Still, an opposition filed by Golden Valley Lending stated that “the Bureau has indicated to Defendants that it does not expect to change its position in any way,” and it will remain to be seen if or how the CFPB changes its posture under Mulvaney’s leadership.

We will continue to monitor the case for further developments.

Recently, a Manhattan federal jury convicted Richard Moseley Sr., the head of an online network of payday lenders and loan servicers, on charges of wire fraud, aggravated identity theft, and violating the Racketeer Influenced and Corrupt Organizations Act and Truth in Lending Act, among other counts.

Moseley was convicted due to his leadership role over a vast and complicated system of interrelated companies that collected over $220 million from more than  600,000 borrowers and deceived regulators in the process.  Convincing state and federal regulators and even his own lawyers that his companies were based offshore and not bound by U.S. law, Moseley coordinated a network of lenders and loan servicers that routinely misled both consumers and regulators.  At the time of his indictment, then-United States Attorney Preet Bharara stated, “As alleged, Richard Moseley, Sr., extended predatory loans to over six hundred thousand of the most financially vulnerable Americans, charging illegally high interest rates to people struggling just to meet their basic living expenses.”

The indictment alleges that Moseley-related lenders went so far as to autodebit accounts in ways unanticipated by borrowers and lend money to borrowers who did not request it after their personal information was sent to various Moseley companies.  Moreover, important terms were hidden in small print, interest rates were charged that violated the laws of the states in which the businesses were operating, and lenders and loan servicers made “deceptive and misleading” fee disclosures to borrowers.  The case was originally referred to prosecutors by the Consumer Financial Protection Bureau.

Although Mosely claimed to incorporate his companies in the Caribbean and New Zealand beginning in 2006, the indictment states that Moseley’s companies operated out of Kansas City, Missouri instead.  Based on these incorporation claims, Moseley’s attorneys told state regulators that loans from Moseley’s network of lenders and loan servicers originated exclusively from overseas offices.  In reliance on this materially false and misleading correspondence, many state attorneys general and regulators closed their investigations on the mistaken belief that they lacked jurisdiction over Moseley’s companies as they supposedly had no presence or operations in the United States.

Moseley, 73, is not scheduled to be sentenced until April 2018, and his RICO and wire fraud convictions carry 20-year maximum sentences.  Following news of the jury’s conviction, Acting United States Attorney Joon H. Kim stated, “Moseley can no longer take advantage of those already on the brink, and he now faces significant time in prison for his predatory ways.”

The Board of Governors of the Federal Reserve System recently issued a Consent Order against Peoples Bank, based in Lawrence, Kansas, to settle claims of deceptive residential mortgage origination practices that arose from the bank’s charging of fees in mortgage originations.  The Federal Reserve alleged that Peoples told mortgage borrowers that certain additional fees that the borrowers paid as discount points would lower the borrowers’ interest rates.  The Federal Reserve’s investigation determined that many borrowers did not, in fact, receive a reduced interest rate.  The Federal Reserve alleged this practice violated Section 5 of the Federal Trade Commission Act (“FTC Act”).

The Consent Order requires Peoples to pay approximately $2.8 million into an account to be used to provide restitution to the borrowers.  Additionally, Peoples must develop a plan that provides for restitution to each borrower who, in the course of obtaining a mortgage loan from Peoples, paid discount points that did not reduce the borrowers’ interest rate.  The Consent Order also requires Peoples to avoid any future violation of Section 5 of the FTC Act.

On Tuesday, December 12, from 3-4 p.m. ET, Join Troutman Sanders for a webinar focused on a practical issue of great importance to mortgage loan originators and servicers: how to ensure confidential information is protected, when faced with an investigation by state or federal regulators.

The webinar will (1) outline the common law principles and statutory provisions implicating confidentiality for companies being investigated by federal and state regulators; (2) provide practical guidance on how to secure confidentiality agreements from regulators; and (3) discuss key provisions that should be incorporated into any confidentiality agreement with a regulator. This webinar will benefit counsel providing advice and analysis in litigation, compliance, and regulatory matters.

To register, click here.

Mick Mulvaney, President Donald J. Trump’s choice to head the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) until a permanent director can be appointed, will remain in place as Acting Director of the Bureau, following a ruling by Judge Timothy J. Kelly of the U.S. District Court for the District of Columbia on Tuesday denying a motion for a temporary restraining order (“TRO”) filed by Leandra English, the hand-picked choice of outgoing CFPB Director Richard Cordray.

English, who had been Cordray’s Chief of Staff, was named Acting Director by Cordray as he departed his office on Friday. Following Cordray’s announcement, President Trump quickly announced his own appointment of Mulvaney to head the Bureau.

English filed the lawsuit and sought a TRO based on language in the Dodd-Frank Act (the statute that created the CFPB), which provides that the deputy director “shall…serve as acting Director in the absence or unavailability of the Director.” 12 U.S.C. § 5491(b)(5).

Judge Kelly ruled from the bench that this language in Dodd-Frank was not the exclusive means by which an acting director could be appointed; the President also had the option of appointing an acting director under the Vacancies Reform Act of 1998 (“VRA”), 5 U.S.C. § 3341 et seq., which applies when “an officer of an Executive agency…whose appointment to office is required to be made by the President, by and with the advice and consent of the Senate, dies, resigns, or is otherwise unable to perform the functions and duties of the office.” 5 U.S.C. § 3345(a).

Judge Kelly’s ruling was consistent with another case involving competing appointment powers under the VRA and the federal statute governing the National Labor Relations Board, Hooks ex rel. NLRB v. Kitsap Tenant Support Servs., 816 F.3d 550, 555 (9th Cir. 2016). The ruling was also consistent with a legal opinion issued by the Department of Justice, as well as an opinion by the CFPB’s own general counsel.

Judge Kelly also pointed out that Dodd-Frank mentions “absent” directors, but not vacant positions, while vacancies are addressed by the VRA.

In addition, Judge Kelly observed that Mulvaney was appointed by the President and confirmed by the Senate, while English was not. So, of the two competing acting directors, Mulvaney was the only one qualified under the VRA to head the CFPB.

With the court ruling against English on the request for a TRO, English’s attorney indicated that she would not proceed with seeking a preliminary injunction, which, in all likelihood, would share the fate of the TRO.

Judge Kelly indicated that, given the constitutional implications of the case, he intended to proceed with full briefing on the merits before reaching a final decision, which could then be appealed to the D.C. Circuit Court of Appeals.

The case has significant ramifications for businesses regulated by the CFPB, because commentators believe Trump’s appointee, Mulvaney, who has called the CFPB a “joke…in a sick, sad kind of way,” will rein in some of the CFPB’s regulatory efforts. English, on the other hand, likely would carry on her predecessor’s policies.

The case is English v. Trump, No. 1:17-cv-02534, in the U.S. District Court for the District of Columbia.

On November 27, New Mexico Attorney General Hector Balderas joined the ranks of amici curiae in Consumer Financial Protection Bureau v. Golden Valley Lending, Inc., et al. (No. 2:17-cv-02521, pending in the United States District Court for the District of Kansas) filing a brief supporting the efforts of four tribal entities (“Tribal Defendants”) to dismiss claims brought against them by the Consumer Financial Protection Bureau.

In filing the amicus brief, Balderas voiced support for the Tribal Defendants’ argument that, as tribal entities, they are not subject to the CFPB’s enforcement authority:  “In this and other actions, [the CFPB] has asserted the authority to regulate other sovereigns—both States and Tribes—when providing financial services to consumers.”

The amicus brief argues that the CFPB’s position is flawed because the Consumer Financial Protection Act of 2010 does not clearly subject states or tribes to enforcement.  The brief also notes that the CFPB’s position would lead to anomalous results.  While the Act anticipates regulatory coordination among the CFPB, states, and tribes, by attempting to enforce the Act against a tribal entity, the CFPB attempts to treat its co-regulator as a regulated entity.

Balderas also points out the sweeping consequences of the CFPB’s position for the State: “[T]he CFPB asks to both be allowed to sue sovereign entities for money damages (including civil penalties) and injunctive relief, … and to force state and tribal officials to testify and create records for federal investigations … .”  As specifically concerns the State, “New Mexico has numerous government programs, such as the student loans issued by its universities and the lending assistance offered by the New Mexico Finance Authority and the New Mexico Mortgage Finance Authority, that are subject to suit—and even injunction—under the CFPB’s interpretation.”

With this filing, Balderas becomes the second attorney general to submit his views on the litigation.  As earlier noted on this blog, Oklahoma Attorney General Mike Hunter also filed an amicus brief in support of the Tribal Defendants’ motion to dismiss.  All other amici to weigh in on the case have supported the Tribal Defendants.

Further briefing on the motion to dismiss is expected from the parties.  We will continue to monitor the case for further developments.