A lengthy decision recently issued by the U.S. District Court for the Eastern District of Pennsylvania, Pennsylvania by Shapiro v. Mariner Fin., LLC, No. CV 22-3253, 2024 WL 169654 (E.D. Pa. Jan. 12, 2024) (Hodge, J.), may further embolden state regulators to assert claims in federal courts based on the Consumer Financial Protection Act (CFPA), 12 U.S.C. § 3501 et seq. As remarked by the Pennsylvania Attorney General's Office through a press release issued shortly after the decision was published, the decision "is one of the only cases to date where a court has weighed in on these issues, and it is hoped this well-reasoned opinion will positively impact future efforts by state attorneys general and bank regulators to protect consumers with enforcement actions."¹ This decision reinforces the growing need for financial institutions to ensure that their compliance policies, procedures and protocols account for requirements imposed by state laws.

The Ruling

In Mariner, Judge Kelley Brisbon Hodge rejected multiple arguments made by Mariner Finance LLC (Mariner) to the effect that regulators from four states and the District of Columbia lacked the authority to assert claims under the CFPA. All five regulators sought to enforce the CFPA's remedies on behalf of their respective citizens in connection with Mariner charging allegedly excessively high interest rates, its use of "live checks" in connection with loan closings, its sale of "add on" products and the practice of "loan flipping," whereby a lender allegedly persuades borrowers to refinance debt without receiving material benefit.

Mariner filed a motion to dismiss, arguing that the lawsuit demonstrated "'an extreme instance of government outreach' of states and localities seeking to enforce the CFPA as if 'collectively, they are the federal agency [the Bureau] created by the act with sole authority to engage in such nationwide enforcement.'" Id. at *3. Mariner raised various jurisdictional and venue arguments, including 1) that the plaintiff states' authority to enforce the CFPA is unconstitutional under the Tenth Amendment of the U.S. Constitution because the Consumer Financial Protection Bureau (Bureau) receives unconstitutional funding and therefore the Bureau itself and attendant enforcement authorities are also unconstitutional, 2) that the state regulators cannot comply with their statutory obligation to give the required notice in order to bring such claims because the Bureau receives unconstitutional sources of funding and, therefore, should not exist to receive that notice, and 3) that statutorily, the state regulators cannot proceed collectively in a single lawsuit in the Eastern District of Pennsylvania. Each argument was rejected.

First, the Court rejected Mariner's position that the CFPA's grant of enforcement authority to the states violates the Tenth Amendment, maintaining that "[a]s with many other federal consumer protection statutes, Congress conferred authority to enforce the CFPA to state attorneys general, including Plaintiffs" and "Plaintiffs' Amended Complaint is a legitimate exercise of that authority." Id. at *14. Mariner argued that the states, in acting collectively, were overreaching the limits of their authority because only the Bureau may enforce the CFPA nationwide, subject to presidential oversight. The Court disagreed, emphasizing that the legislative history of the CFPA made clear that Congress "enforced and expanded the role of the States in protecting consumers, recognizing that States have historically been 'much closer to abuses and are able to move more quickly when necessary to address them.'" Id. at *5 (quoting A. Rep. No. 111-176, at 174). Among the rights conferred on states was the right of any state attorney general to file suit to "enforce provisions of this title or regulations issued under this title." Id., citing 12 U.S.C. § 5552(a)(1). The Court noted, however, that this authority does not extend to national banks and federal savings associations because Congress further made clear that the concurrent authority granted to states does not apply to federally regulated institutions.

Second, the Court rejected the argument that it was impossible for state regulators to give the CFPB proper notice of an intent to bring suit because the CFPB's funding was unconstitutional, thereby making any notice "retroactively invalidated." Id., at *6. Although the issue of whether such funding is unconstitutional is currently before the U.S. Supreme Court in CFPB v. Com Fin. Services Ass'n, No. 22-cv-448, 2022 WL 16951308, at *1 (Nov. 14, 2022), where the U.S. Court of Appeals for the Fifth Circuit found that such funding was unconstitutional, the Court rejected Mariner's argument, noting that Mariner could not "cite a single case that supports the notion the if the Bureau receives unconstitutional funding, that will render the entire CFPB unenforceable by anyone, including the States …." Id. In so holding, the Court also rejected the argument that the notice requirement was jurisdictional, stymying the possibility of failure to provide notice as a defense in future actions.

Finally, the Court rejected Mariner's argument that venue was improper because the plaintiff states chose to sue together in one court rather than separately and the states' concurrent enforcement authority is expressly limited by 12 U.S.C. § 5552(a)(1), such that the states may bring an action under the CFPA only in their home state. Mariner claimed that "12 U.S.C. § 5552(a)(1) is not a permissive grant of authority that supplements the general venue provisions under 28 U.S.C. § 1391, but an exclusive provision that territorially restricts where State's actions may be brought under the CFPA." Id. at *7. However, the Court agreed with the state regulators, concluding that 12 U.S.C. § 5552(a)(1) is "unambiguously permissive and, consistent with precedent in this and other Circuits, should be read to supplement, not preempt" 28 U.S.C. § 1391.8. Id.

Conclusion

This decision reaffirms the authority of state attorneys general to join forces and bring federal claims against state-chartered banks, credit unions and nonbank lenders under the CFPA in addition to claims under each state's consumer protection laws. As a result, state regulators likely will feel further emboldened to assert claims in federal courts based on the CFPA.

Notes

¹ Press Release, "Court Denies Mariner Finance's Motion to Dismiss; Multistate Lawsuit against Installment Lender Headed to Trial," Pennsylvania Record (Jan. 26, 2024).