CFPB: Settlement Agreements, Call for Payday Lending Rule, New Ombudsman

Manatt, Phelps & Phillips, LLP

In Consumer Financial Protection Bureau (CFPB or Bureau) news, the battle over its constitutionality continues in a New York federal court, the Bureau announced more enforcement activity, student lending remained a hot-button issue and Sen. Sherrod Brown (D-Ohio) called for the CFPB to move forward with enforcement of certain provisions of the payday lending rule.

What happened

Recent highlights at the CFPB include:

  • CFPB constitutionality. The current battleground in the ongoing fight over the constitutionality of the Bureau is located in the U.S. Court of Appeals, Second Circuit. Last year, a New York federal court judge ruled that the structure of the CFPB is unconstitutional in CFPB v. RD Legal Funding, LLC.

    RD Legal purchased benefits to which consumers were entitled under the NFL Concussion Litigation Settlement Agreement, paying a discount to provide the sellers with cash up front. When the Bureau filed suit alleging violations of the Consumer Financial Protection Act (CFPA), the company countered with a challenge to the constitutionality of the Bureau.

    When the district judge agreed, the CFPB appealed to the Second Circuit. The parties recently filed their briefs with the federal appellate panel in anticipation of oral argument. The CFPB reiterated its position that the Bureau’s structure is constitutional and that if the Second Circuit decides that the for-cause removal provision is unconstitutional—as the lower court found—it should simply sever that section.

    Alternatively, RD Legal told the Second Circuit that the district court correctly determined that the CFPB structure is unconstitutional and that severing the provision will not solve the problem.

    Similar issues are working their way through other courts. In April, the Fifth Circuit heard oral argument on a case involving the constitutionality of the Bureau, while in May, the Ninth Circuit declared that the structure of the CFPB is constitutional, relying heavily on the D.C. Circuit’s 2018 en banc opinion in PHH Corp. v. CFPB.

    The question continues to work its way up to the Supreme Court for review.
  • Broker settlement. In a joint effort, the CFPB and the Arkansas attorney general filed a proposed settlement with an individual and the three companies he owned and operated as brokers of contracts offering high-interest credit to veterans. The defendants allegedly misrepresented to consumers that the contracts were valid and enforceable when they were actually void under federal and state law.

    The offers were marketed as purchases of consumers’ future pension or disability payments, providing a lump sum payment to consumers who were then obligated to repay a much larger amount by assigning part of their monthly pension or disability payments. The defendants falsely represented to consumers the products were sales of payments and not high-interest credit offers, the regulators alleged.

    In addition, the defendants often misrepresented to consumers when they would receive funds and failed to inform them of the applicable interest rate on the credit offer. The defendants also required consumers to purchase life insurance policies so that if the consumer died and the income stream stopped, the outstanding amount on the contract would still be paid.

    But both federal and South Carolina law (the law governing the contracts according to their choice-of-law provision) prohibit such agreements, rendering the contracts void from inception, the CFPB and AG said. Federal law prohibits agreements under which another person acquires the rights to receive a veteran’s pension payments, while South Carolina bans sales of unpaid earnings and prohibits assignments of pensions as security on payment of a debt.

    To settle the charges of violations of the CFPA and the Arkansas Deceptive Trade Practices Act, the defendants will be permanently banned from brokering, offering or arranging agreements between pension recipients and third parties and liable for redress of $2.7 million.

    Full payment of the judgment will be suspended upon payment of $200,000 to the Bureau, a $1 civil money penalty to the CFPB and a $75,000 payment to the Arkansas AG’s Consumer Education and Enforcement Fund.
  • Private loan program settlement. In a second enforcement effort, the for-profit educational institute faces a $60 million judgment over allegedly unfair and abusive practices in connection with its private loan program. The Bureau filed suit against the institute in 2014, alleging that it engaged in predatory lending by pushing students into high-cost student loans the school knew were likely to end in default.

    The college chain filed for Chapter 7 bankruptcy protection in 2016, and the parties reached an agreement on the asserted violations of the CFPA. Because the defendant was not operating its business and is proceeding with a liquidation, the Bureau agreed not to seek certain injunction, compliance and reporting requirements.

    Pursuant to the deal, the defendants agreed to permanently cease enforcing, collecting or receiving any payment on the institute’s loans and are prohibited from offering or providing private educational loans to consumers, as well as offering or providing financial advisory services to consumers related to private educational loans.

    A judgment for equitable money relief of $60 million was entered.
  • Payday rule provisions. Requesting that the Bureau implement the payment provisions of the payday rule, Brown sent a letter to Director Kathleen Kraninger, arguing that the provisions would provide “substantial and much-needed protections to consumers from predatory payday lenders.”

    Just a few months after the Payday, Vehicle Title and Certain High-Cost Installment Loans Rule was issued in October 2017, the Bureau announced that it would initiate a rule-making process to reconsider the.

    A group of payday lenders then filed suit against the CFPB, challenging the payday rule. “From the outset, the Bureau has been joined at the hip with the payday lender plaintiffs to delay the implementation of the Payday Rule,” Brown wrote, agreeing to a joint filing asking the court to stay the litigation and the compliance date of August 19, 2019. The Texas federal court overseeing the case granted the motion last year.

    Although the CFPB has since told the court that no legal basis exists to stay the compliance date for the payment provisions, it has simultaneously declined to seek a lift of the stay, Brown said.

    “The Bureau’s refusal to request to lift the stay of the compliance date for the payment provisions makes no sense and exposes consumers to continued withdrawal requests, resulting in unnecessary fees,” he wrote. “The Bureau’s inaction is also contrary to the plain language of the Administrative Procedures Act, which provides that a court may only postpone the effective date of an agency action ‘to the extent necessary to prevent irreparable injury’ or ‘to preserve status or rights pending conclusion of review proceedings.’ Here, as the Bureau itself argued, the payday lender plaintiffs have not even attempted to show that they would be irreparably harmed by the implementation of the payment provisions.”

    Brown “strongly” urged the CFPB to immediately request that the court lift the stay.
  • Student lending. Finally, the Bureau has a new private education loan ombudsman, and Congress continued to demand more. Robert G. Cameron, a colonel and staff judge advocate for the Pennsylvania Army National Guard, will join the CFPB from the Pennsylvania Higher Education Assistance Agency, where he was responsible for litigation, compliance and risk mitigation efforts. Cameron also spent time in Pennsylvania’s Treasury Department and in the Governor’s Office of General Counsel.

    The ombudsman position was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, tasking the Treasury Secretary—in consultation with the Director of the Bureau—to tap an ombudsman responsible for receiving, reviewing and attempting to resolve complaints from private student loan borrowers.

    Also on the ombudsman’s to-do list: compiling and analyzing complaint data on private education loans and making appropriate recommendations to the Secretary of the Treasury, the Director of the Bureau, the Secretary of Education and Congress.

    Meanwhile, on Capitol Hill, congressional leaders think much more needs to get done. Democratic leaders in the House (namely, Maxine Waters, Elijah Cummings and Bobby Scott) published letters they sent to both the CFPB Director and the Secretary of Education to express their concerns that the two agencies are not doing enough to protect students against predatory lending.

To read the CFPB and AG’s complaint against the debt brokers, click here.

To read the CFPB and AG’s stipulated final judgment and order with the debt brokers, click here.

To read the CFPB’s stipulated final judgment and order with the for-profit educational institute, click here.

To read the letter from Sen. Brown, click here.

To read the congressional letter to CFPB director Kraninger, click here.

To read the congressional letter to Betsy DeVos at the Department of Education, click here.

Why it matters
Although the CFPB remains active, its constitutionality remains in the headlines, and Democrats in Congress continue to put pressure on the Bureau to do more. Stay tuned.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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