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On January 19, a federal district court judge closed the damages phase of the CFPB’s long-running challenge to CashCall’s tribal-lending operation by ordering the company and its associates to pay a $10 million penalty.  While the $10 million penalty is substantial, the order stands as an impressive victory for CashCall, as the CFPB requested a $52 million penalty and an additional $236 million in restitution. 

In the earlier liability phase of the litigation, U.S. District Court Judge John F. Walter granted the CFPB’s motion for partial summary judgment, finding that CashCall engaged in unfair, deceptive, and abusive acts or practices when it serviced and collected on loans made by Western Sky Financial, a lending operation owned by an enrolled member of the Cheyenne River Sioux Tribe.  Invoking a contested doctrine, Judge Walter found that CashCall was the “true lender” of the loans and, therefore, had deceived consumers by creating the false impression that the loans were enforceable and that borrowers were required to repay them.  

But in the damages phase of the litigation, Judge Walter softened his earlier ruling.  He rejected the CFPB’s request for $236 million in restitution, finding that the CFPB failed to present any evidence that CashCall “set out to deliberately mislead consumers” or “otherwise intended to defraud them.”  In the same vein, he rejected the CFPB’s reliance on evidence that CashCall structured its lending operation to avoid state licensing and usury laws, noting that “companies frequently structure business operations and transactions to minimize exposure to unfavorable laws and regulations.”   He also found that CashCall “plainly and clearly disclosed the material terms of the loans to consumers,” and that “the evidence indicated quite clearly that consumers received the benefit of their bargain—i.e., the loan proceeds.”  

In addition, Judge Walter rejected the CFPB’s request for a $52 million penalty.  In seeking that award, the CFPB argued that CashCall “knowingly” engaged in unfair, deceptive, and abusive acts or practices.  But Judge Walter found that the CFPB failed to prove that CashCall knowingly engaged in any misconduct; in fact, he noted that, “at its inception, there was nothing inherently unlawful about” CashCall’s lending operation.   

Moreover, Judge Walter also rejected the idea that CashCall was reckless.  “[T]here was no evidence [CashCall] decided to create and implement an unlawful scheme to defraud consumers, which would have been relatively easy to accomplish given their sophistication and experience in the lending business,” Judge Walter wrote.  “Instead, [CashCall] sought out highly regarded regulatory counsel to assist them in structuring the Western Sky Loan Program.”

On January 16, the Consumer Financial Protection Bureau announced its intention to reconsider a controversial rule affecting the short-term (payday) and auto-title lending industries.  This reconsideration could signal that a stripped down rule that omits a number of the rule’s more controversial provisions could be in the offing.

The original rule was finalized in October 2017, when Richard Cordray was still the head of the Bureau, and required lenders to determine whether a borrower could afford his or her loan payments while still meeting basic living expenses and other financial obligations.  For short-term or auto-title loans due in a lump sum, lenders must determine whether a borrower can make a full payment of the total loan amount, plus any fees and finance charges, within two weeks or a month.  For loans with a longer term and a balloon payment, lenders must determine whether a borrower can afford the highest total payments.  The rule also includes additional requirements, including a principal-payoff option for certain short-term loans, loan options, and debit attempt cutoff.  The rule officially took effect on January 16, yet the majority of key provisions are not scheduled for implementation until August 19, 2019.

The rule has proved controversial, as consumer advocates fully supported the measure while lenders contended that the rule’s restrictions would result in a number of lenders going out of business and reduced credit options for many borrowers.  Members of Congress have introduced measures to repeal the rule under the Congressional Review Act, a tactic that proved effective with the arbitration rule.

The CFPB’s announcement did not offer any details regarding the scope of its reconsideration or any timeline for changes to the rule.

On December 27, the Consumer Financial Protection Bureau released “The Consumer Credit Card Market,” its report on the state of the industry. Mandated to be released every two years by the Credit Card Accountability and Disclosure Act, the report was last released in 2015. The 2017 report focused on tracking credit card market trends and developments.

The CFPB has found that since the release of its last report there has been growth in the credit industry. Outstanding credit card debt increased by nine percent, and the total value of consumer credit lines is now $4 trillion, an increase from 2015, but still below the $4.4 trillion high of 2008. 2016 saw 110 million new credit card accounts being opened by consumers – the most cards opened in any year since 2007. In addition, there was a 21 percent increase in secured card applications in 2016, with 6.4 million consumers applying for a secured card. The amount of new secured accounts opened also increased from 2015 to 2016 by seven percent.

The report found that credit card issuers are also changing the way they communicate with existing and potential customers. As technology continues to evolve, more consumers are engaging online with credit card companies. In 2016 more than 60 percent of active accounts were established by consumers using an online portal. More issuers are providing incentives such as free credit scores to encourage consumers to use their online services. The CFPB reports that as of April 2017, more than 100 financial institutions were providing free credit scores to their consumers.

A copy of the report can be found here.

On December 14, the Consumer Financial Protection Bureau officially withdrew a proposal to conduct a web-based consumer survey on the various debt collection disclosures required by the Fair Debt Collection Practices Act. According to the accompanying Notice of Action, the proposal was withdrawn at the CFPB’s request because the “Bureau leadership would like to reconsider the information collection in connection with its review of the ongoing related rulemaking.”

Published in June 2017, the purpose of the survey was to “explore consumer comprehension and decision making in response to debt collection disclosure forms” by collecting 8,000 completed surveys from targeted groups of participants. These groups would have included both individuals who have experienced debt collections in the past 24 months as well as a random sample of those with no such debt collections in the same timeframe. The CFPB expected the results of the survey to yield information regarding the clarity of debt disclosure forms as well information that would benefit the future development of effective debt collection disclosures. The estimated cost of the survey was set at just over $371,500.

Public comments on the proposal included submissions from the Association of Credit and Collection Professionals, the Consumer Bankers Association, the National Consumer Law Center, and the American Bankers Association. Most comments were critical of the proposed survey for failing to include the specific disclosures it was using as a basis for the survey questions. The commentators also pointed to certain methodological flaws within the survey that should be improved prior to implementation. In the end, the CFPB decided to scrap the proposed survey rather than implement the suggested changes.

Troutman Sanders will continue to monitor the activities of the CFPB under its new leadership and will report on any future developments.

Until last week, the CFPB was accepting comments on its proposal to conduct a survey on debt collection disclosures. This survey was closely linked to the CFPB’s planned debt collection rule that would impose additional restrictions and burdensome regulations on the debt collection industry. However, on December 14, 2017 – the last day to submit comments – the CFPB abruptly withdrew its proposal to survey consumers. In explaining the reason for the withdrawal, the CFPB stated that its leadership decided to reconsider collecting information in connection with its “ongoing related rulemaking” – a clear reference to the debt collection rule.

The CFPB had planned for this survey as early as December 3, 2013, when the CFPB announced that it was assessing the need for regulations in debt collection and would test consumer disclosures in connection with that aspect of its rulemaking agenda. The consumer disclosures survey was a long-standing endeavor and was mentioned along with the development of the debt collection rule in CFPB’s rulemaking agenda blog posts during 2014 to 2016. This web-based survey of 8,000 individuals was intended to “explore consumer comprehension and decision making in response to debt collection disclosure forms.”

The rule on debt collection as a totality was justifiably viewed with trepidation by the industry when it was first announced over four years ago. According to the CFPB’s outline of proposals issued on July 28, 2016, debt collectors would become subject to new strict limits and prohibitions in virtually all areas of debt collection:

  • Substantiation of Debt: Debt collectors would be required to substantially prove a debt is valid before starting collection, which would include obtaining information on the complete chain of title from the debt owner at the time of default to the collector and each charge for interest or fees imposed after default and the contractual and statutory authority source for such interest and fees.
  • Limits on Contact: The new rules would limit live communications to once per week if the collector has confirmed consumer contact. A collector would also be limited to no more than six communication attempts per week if the collector does not have confirmed consumer contact or three per week if the collector has confirmed consumer contact.
  • Consumer Disputes: The proposed rules would also require collectors to provide clearer and easier ways for that person to communicate the grounds for their dispute. This includes a proposed “tear off” portion of a collection notice or a telephone call. Additionally, under the proposed rules, if a disputed debt is sold, the new collector would inherit the dispute and would still have to provide validation.

In total, the proposed rule, at least as it was envisioned in July 2016, would have created a long list of compliance requirements for debt collectors. Furthermore, in the outline of its proposals, the CFPB emphasized that it considered “future rulemaking … [that] would apply to first-party debt collectors (i.e., creditors collecting their own debt excluded from coverage of the FDCPA).” The CFPB thus encouraged these “first-party debt collectors [to] carefully consider their own business practices in light of the proposals.”

What has changed is the control of the CFPB. The CFPB’s inaugural Director, Richard Cordray, resigned, and President Trump appointed Mick Mulvaney, director of the Office of Management and Budget, as interim director. Mulvaney immediately put all rulemaking on pause, and had made critical comments of the CFPB’s activism.

This pivot on the survey could well indicate a reversal of plans to develop the rule, at least on a pace that could have led to the rule being issued early next year.

A group of 17 state attorneys general issued a letter to the White House on December 12, promising that they will “continue to vigorously enforce consumer protection laws regardless of changes to the [Consumer Financial Protection] Bureau’s leadership or agenda.”  The letter, coupled with other efforts, shows that regulatory relief in Washington may be offset by increased activity at the state level.

Expressing concerns regarding President Trump’s appointment of Mick Mulvaney as Acting Director of the CFPB, the attorneys general noted that they “retain broad authority to investigate and prosecute those individuals or companies that deceive, scam, or otherwise harm consumers.  If incoming CFPB leadership prevents the agency’s professional staff from aggressively pursuing consumer abuse and financial misconduct, we will redouble our efforts at the state level to root out such misconduct and hold those responsible to account.”

Led by New York A.G. Eric Schneiderman, the coalition includes attorneys general from California, Connecticut, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Mexico, North Carolina, Oregon, Vermont, Virginia, Washington, and the District of Columbia.  The coalition formed in response to a November 27 letter supporting Mulvaney from attorneys general from West Virginia, Texas, Alabama, Arkansas, and Oklahoma.  The earlier letter supported President Trump’s appointment, saying Mulvaney would help curb “the CFPB’s practice of overreaching regulation that harms the interests of consumers and small financial institutions.”

The December 12 letter foreshadows a new wave of state enforcement of consumer protection laws following the election of President Trump.  Among other powers, states can taking advantage of a little-known provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the CFPB, that gives state attorneys general the authority to enforce the CFPB’s rules and its broad ban on “unfair, deceptive, and abusive acts or practices,” commonly referred to by the acronym “UDAAP”.

There are other signs of plans for increased state-level enforcement activity.  For example, Pennsylvania A.G. Jack Shapiro has been quickly building up his own consumer finance unit since taking office nearly a year ago.  The Pennsylvania unit is staffed with more than a dozen people and led by a former senior CFPB attorney.  Shapiro and his team have already filed cases against a student loan servicer, which is accused of deceiving borrowers in order to drive up profits, and are leading a 48-state investigation into the security hacking of a consumer credit bureau.

“We’re demonstrating a capacity to handle these big, complex, consumer financial protection cases,” Shapiro told Reuters, adding that attorneys general from both parties have asked about how they can “mimic our efforts.”

In Washington state, Attorney General Bob Ferguson has enlarged his consumer finance division to 27 attorneys, compared to 11 attorneys in place four years ago.  Similarly, California A.G. Xavier Becerra has promised to “carry the torch and build on [former CFPB] Director Cordray’s good work to protect and empower consumers.”

“Regardless of what President Trump and the CFPB do moving forward,” said Virginia A.G. Mark R. Herring, “my fellow attorneys general and I remain committed to fighting to protect consumers across the country, and we will not waver from that commitment.”  Herring, like many of his counterparts nationwide, has also reorganized and expanded his state consumer protection organization in the wake of the election of President Trump.

On Tuesday, December 5, 2017, the Government Accountability Office (“GAO”) levelled a heavy blow on a major regulatory initiative of the Consumer Financial Protection Bureau (“CFPB”): its highly controversial “disparate impact” discrimination theories as applied to pricing in the indirect automobile financing industry. The specific GAO ruling finds that a 2013 “Bulletin” stating the CFPB’s interpretation of the Equal Credit Opportunity Act (“ECOA”) as applied to indirect automobile lending should have been issued as a rule and hence be subject to Congressional review. Under the ruling, the CFPB should have transmitted the Bulletin to Congress for evaluation, but failed to do so.

The GAO’s conclusion that the guidance qualifies as a rule means that the Bulletin must be re-submitted to Congress for review in order for it to become effective. As a result, the Bulletin can no longer be used by government examiners. Given the shift in control of the CFPB to a Trump appointee, chances seem slim that the CFPB would reissue the guidance. Hence, by its narrow finding, the GAO appears to have dealt the Bulletin a death blow.

In March 2013, the Bureau issued CFPB Bulletin 2013-02 to target dealer markups, a practice where an automobile dealer charges a consumer a higher interest rate than the rate by which an indirect lender is willing to purchase the consumer’s retail installment sales contract. The CFPB expressed concern that dealers were being allowed by the indirect lenders to exercise too much pricing discretion, opening the door to discrimination. In the Bulletin, the CFPB contended that it was “likely” to consider an indirect auto lender a “creditor” within the meaning of ECOA, if an indirect lender purchased a contract at an interest rate lower than the rate on the consumer’s contract. The Bureau also announced that it intended to use a disparate treatment or disparate impact theory to examine an indirect auto lender’s ECOA liability for prohibited pricing differences created by the dealer’s pricing activities. Under this view, indirect lenders would have liability for disparate pricing – even though they did not set the pricing and even without evidence that either the lender or the dealer intended to discriminate against anyone. The Bureau’s guidance has had considerable implications for financial institutions, as banks and lenders have seen significant increase in the cost of compliance, not to mention numerous and expensive investigations and settlements with the CFPB, banking regulators, and the U.S. Department of Justice.

The Bulletin has long been the subject of controversy, as many indirect lenders contended that they should not be penalized for unintentional discrimination by dealers. Many also attacked the methodology used to prove disparate impact. In March 2017, Senator Pat Toomey (R-PA) asked the GAO, Congress’ investigative wing, to determine whether the financial guidance issued by the Bureau in 2013 qualified as a “rule.” The GAO concluded that the guidance did qualify as a rule, even though Bulletin 2013-02 is not legally binding. Specifically, the GAO found that:

The Bulletin provides information on the manner in which the CFPB plans to exercise its discretionary enforcement power. It expresses the agency’s views that certain indirect auto lending activities may trigger liability under ECOA. For example, it states that an indirect auto lender’s own markup and compensation policies may trigger liability under ECOA if they result in credit pricing disparities on a prohibited basis, such as race or national origin. It also informs indirect auto lenders that they may be liable under ECOA if a dealer’s practices result in unexplained pricing disparities on prohibited bases where the lender may have known or had reasonable notice of a dealer’s discriminatory conduct. In sum, the Bulletin advised the public prospectively of the manner in which the CFPB proposes to exercise its discretionary enforcement power and fits squarely within the Supreme Court’s definition of a statement of policy.

In conclusion, the GAO found that the Bulletin was subject to the requirements of the Congressional Review Act because it served as “a general statement of policy designed to assist indirect auto lenders to ensure that they are operating in compliance with ECOA and Regulation B, as applied to dealer markup and compensation policies.”

The GAO’s decision renders the Bulletin a nullity until the CFPB properly submits the measure to Congress. Bank examiners, and CFPB examination and enforcement personnel, cannot rely on the Bulletin to guide their supervisory and enforcement activity. Once the CFPB submits the rule – if ever – then Congress is free to challenge the rule under the Congressional Review Act.

“GAO’s decision makes clear that the CFPB’s back-door effort to regulate auto loans, which was based on a dubious legal justification, did not comply with the Congressional Review Act,” said Senator Toomey in a statement. “GAO’s decision is an important reminder that agencies have a responsibility to live up to their obligations under the law. When they don’t, Congress should hold them accountable. I intend to do everything in my power to repeal this ill-conceived rule using the Congressional Review Act.”

However, it is doubtful that the measure will ever make its way to Congress. Under the leadership of Acting Director Mick Mulvaney, it is highly unlikely that the CFPB will work to revive the rule. The Bulletin has long been vilified by many Republicans, as well as some Democrats. In 2015, the House of Representatives passed a bill that would have eliminated the Bulletin, though the measure was not taken up by the Senate.

Troutman Sanders routinely advises clients on the compliance risks posed by direct and indirect auto lending. We will continue to monitor these regulatory developments.

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.

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.