Update on state AGs/regulator lawsuits using Dodd-Frank authority

by Ballard Spahr LLP
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Below is an update on the lawsuits we have been following that state attorneys general and a state regulator have brought using their Dodd-Frank enforcement authority. Under Dodd-Frank Section 1042, a state AG or regulator is authorized to bring a civil action to enforce provisions of Dodd-Frank Title 10 or regulations issued under Title 10, including the Dodd-Frank prohibition of unfair, deceptive or abusive acts or practices (UDAAP).

Illinois. The Illinois AG filed two lawsuits using her Section 1042 authority. In March 2014, the Illinois AG filed a state court lawsuit against a small loan lender alleging violations of the Dodd-Frank UDAAP prohibition as well as state law violations. In April 2014, the defendant removed the case to an Illinois federal court. In May 2014, the defendant filed a motion to dismiss.

Since our prior update, the court entered an order on December 9, 2014 denying the defendant’s motion to dismiss. The court rejected the defendant’s arguments that (1) the AG’s claims were barred by res judicata  based on the prior administrative proceedings brought by the Illinois Department of Financial and Professional Regulation, and (2) the disclosures in the defendant’s revolving credit plan regarding the minimum payment barred any claims based on misrepresentations. The defendant must file an answer to the complaint by February 4, 2015.

The Illinois AG’s second use of Section 1042 was in a lawsuit initially filed in state court against a for-profit college and its owners. In March 2014, the state court granted the AG’s motion to further amend her complaint to add new counts alleging that the defendants’ practices were unfair and abusive under Dodd-Frank and in May 2014, the defendants removed the case to a federal district court in Illinois.

Since our prior update, the defendants filed a motion for partial summary judgment on December 22, 2014. The motion seeks summary judgment on the AG’s Illinois Consumer Fraud Act claim to the extent it relies on internet marketing allegations. The AG alleged that because the defendants’ internet advertisements appeared in response to google searches that involved terms relating to the FBI or Illinois state troupers, they misled consumers about the type of employment available to graduates of the defendant college’s criminal justice program.

Among the defendants’ argument for summary judgment on the ICFA claim is that the AG cannot satisfy the ICFA requirement that any confusion or deception of consumers must relate to a material fact. According to the defendants, the AG did not produce any evidence that any consumer considered the appearance of one of their advertisements in response to a google search to be a material factor in deciding whether to enroll. With regard to the AG’s Dodd-Frank UDAAP claims, the defendants argue that the court should enter partial summary judgment in their favor to the extent the AG is seeking remedies for alleged conduct that occurred before July 21, 2011, the effective date of Dodd-Frank. The AG must respond to the motion by January 30, 2015 and the defendants have until February 11, 2015 to file a reply.

New York. In April 2014, Benjamin Lawsky, the Superintendent of the New York Department of Financial Service, using his Section 1042 authority, brought a civil action in a New York federal court for a violation of the Dodd-Frank UDAAP prohibition against a large subprime auto lender and its CEO and president. In his lawsuit, Mr. Lawsky alleged that the lender had systematically concealed from its customers the fact that they had refundable positive credit balances and failed to make refunds except when expressly requested by a customer. The complaint also included the allegation that the lender had violated TILA by calculating interest based on a 360-day year and applying the resulting daily interest rate to its customers’ loan accounts each of the 365 days during the year. According to the complaint, this practice resulted in customers paying interest in excess of the disclosed APR. As we reported, in December 2014, Mr. Lawsky announced a settlement that included a $3 million civil penalty and required the defendants to refund all positive credit balances and interest charged in excess of the disclosed APR, plus nine percent interest on such amounts.

Florida/Connecticut. On July 29, 2014, a Section 1042 lawsuit was filed jointly by the Attorneys General of Florida and Connecticut in a Florida federal court. The lawsuit alleges that four individuals and their four businesses formulated and participated in a mortgage rescue scam that deceived consumers into paying upfront fees to be included as plaintiffs in so-called “mass-joinder” lawsuits against their mortgage lenders or servicers.

In addition to asserting claims under their states’ unfair trade practices acts, the AGs allege in their amended complaint that the defendants’ conduct violated the federal Mortgage Assistance Relief Services Rule (MARS Rule). The AGs assert their MARS Rule claim pursuant to Section 1097 of Dodd-Frank (12 USC Section 5538), which authorizes a state AG to bring civil actions on behalf of his or her state’s residents to enforce the MARS Rule. The AGs also assert a UDAAP claim under Section 1042 of Dodd-Frank. Dodd-Frank Section 1097 further provides that a violation of the MARS Rule “shall be treated as a violation of a rule prohibiting unfair, deceptive, or abusive acts or practices under the Consumer Financial Protection Act of 2010.” The AGs assert that pursuant to Section 1097, a violation of the MARS Rule is a UDAAP violation under Dodd-Frank.

Since our prior update, the court approved settlements with several of the defendants under which they are permanently banned from engaging in various activities such as telemarketing and providing mortgage or debt relief services.

Mississippi. In May 2014, the Mississippi AG filed a lawsuit against Experian in Mississippi state court alleging widespread federal and state law violations. (While the AG’s complaint did not expressly allege that his claim of alleged UDAAP violations by Experian was brought under Section 1042, his complaint seeks various remedies under Dodd-Frank Section 1055 (12 U.S.C. 5565).) In June 2014, Experian removed the case to a federal district court in Mississippi. There have been no significant developments since our prior update.

 

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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