Bureau of Consumer Financial Protection

In a June 21, 2018 opinion, Judge Loretta Preska of the U.S. District Court for the Southern District of New York held that the structure of the Bureau of Consumer Financial Protection (“BCFP” or the “Bureau”) is unconstitutional. This ruling is inconsistent with the D.C. Circuit’s en banc decision in PHH Corp. v. CFPB (“PHH”).

The case, CFPB v. RD Legal Funding, LLC, involves joint claims brought by the Bureau and the New York State Office of the Attorney General. RD Legal offers cash advances to consumers waiting on payouts from settlement agreements or judgments entered in their favor. The claims allege that the company defrauded 9/11 first responders and NFL retirees by misleading them regarding cash advances that were represented as valid sales but instead were loans made in violation of state usury law.

RD Legal argued that the BCFP’s structure as an independent bureau within the Federal Reserve System violates Article II of the United States Constitution, as the Bureau’s Director can be removed only “for inefficiency, neglect of duty, or malfeasance in office.” In reviewing that claim, Judge Preska sided with one of the dissenting opinions in PHH. Specifically, she noted that she “disagrees with the holding of the en banc court and instead adopts Sections I-IV of Judge Brett Kavanaugh’s dissent…, where, based on considerations of history, liberty, and presidential authority, Judge Kavanaugh concluded that the CFPB ‘is unconstitutionally structured because it is an independent agency that exercises substantial executive power and is headed by a single director.’” Continue Reading SDNY Finds BCFP Structure Unconstitutional, Breaking With DC Circuit

Nearly seven months into Mick Mulvaney’s tenure as Acting Director of the Bureau of Consumer Financial Protection (Bureau), the agency issued just its second enforcement action under his leadership on June 13, 2018. You may have missed it, as the press release was not pushed out through the Bureau’s email notifications and the cursory press release may have flown under your radar. The settlement is with a parent company and its subsidiaries that originated, provided, purchased, serviced, and collected on high-cost, short-term secured and unsecured consumer loans. The consent order contains allegations of violations of the prohibition on unfair practices under the Consumer Financial Protection Act and of the Fair Credit Reporting Act, and requires the respondents to pay a $5 million civil money penalty. Notably, the consent order does not require any consumer redress, despite Mr. Mulvaney’s stated intent to only pursue cases with “quantifiable and unavoidable” harm to consumers.

Debt Collection Practices

The Bureau alleges that respondents engaged in unfair in-person debt collection practices, including discussing debts in public, leaving the respondents’ “field cards” (presumably identifying the respondents) with third parties (including the consumers’ children and neighbors), and visiting consumers’ places of employment. The Bureau alleges that these practices were unfair because they caused substantial injury such as humiliation, inconvenience, and reputational damage; consumers could not reasonably avoid the harm because consumers were not informed of whether and when such visits would occur and could not stop respondents from engaging in the visits; and any potential benefit in the form of recoveries were outweighed by the substantial injury to consumers. The consent order notes that respondent attempted 12 million in-person visits to more than 1.3 million consumers over a five-year period, and requires respondents to cease in-person collection visits at consumers’ homes, places of employment, and public places.

The Bureau also alleges that the respondents made collection calls to consumers at their places of employment even after being told that the consumers could not receive calls at work, and called third parties in a manner that risked disclosing the debts. The Bureau further alleges that respondents did not heed cease-contact requests with respect to these parties. The Bureau alleges that such practices were unfair for the same reasons as the in-person collection practices described above.

Despite Mr. Mulvaney’s emphatic rejection of regulation by enforcement, the debt collection allegations in this consent order center around practices that lack any formal rulemaking. First, it appears that the Bureau is applying the guidance issued in its December 2015 bulletin, regarding unfair, deceptive and abusive acts and practices (UDAAP), which notes that in-person debt collection practices at consumers’ homes or places of employment can result in violations of the prohibition on UDAAP and the FDCPA due to the risk of disclosure of debts to third parties and the risk that such communications are at a time or place known to be inconvenient to the consumer. Second, the Bureau appears to be applying its July 2013 bulletin, which notes that prohibited practices under the FDCPA can be considered UDAAPs when employed by first-party debt collectors. Finally, the allegations suggest that the Bureau believes that debt collectors should inform consumers of their policies or practices regarding in-person collection visits despite no regulatory requirement to do so.

Credit Furnishing Practices

The Bureau alleges that respondents did not have in place any written policies and procedures regarding credit furnishing. The Bureau further alleges that the respondents furnished inaccurate information to credit reporting agencies, were slow to correct errors, overwrote corrected errors, and failed to furnish the date of first delinquency on certain accounts to credit reporting agencies. The consent order requires the respondents to consult an independent consultant to implement and maintain reasonable credit furnishing policies and procedures and to review all information furnished to a credit reporting agency since July 21, 2011.

More of the Same?

The settlement has many of the familiar trappings of the old Bureau in terms of the kind of conduct at issue and the corrective action required of the respondents (a Compliance Plan, etc.). But the consent order also reflects what appear to be new approaches to some issues. The consent order’s description of how the respondents’ actions were unfair, for example, is more fulsome than prior consent orders, including an acknowledgement that the collection tactics at issue may have a “marginal benefit in the form of more recoveries.” While this suggests that Mr. Mulvaney’s Bureau may be more thoroughly considering the third prong of unfairness (which requires a balancing of likely consumer injury with advantages to consumers or competition) than the previous leadership, the consent order still summarily concludes that the “marginal benefit” does not outweigh likely consumer injury. This conclusion is not supported by any empirical findings, notwithstanding Mr. Mulvaney’s assertion that the Bureau will engage in more quantitative analysis and his establishment of an Office of Cost Benefit Analysis. Time will tell whether the move to empirical analysis will be limited to rulemaking or will make its way to the enforcement realm as well.

Additionally, despite the allegations of substantial injury from the debt collection conduct at issue, the consent order does not require any financial consumer redress or cancellation of debts for impacted consumers. While the Bureau has been inconsistent in this regard in its past debt collection actions, it has typically required such consumer redress. For example, in a prior action involving in-person debt collection, the Bureau required that consumers be refunded any payments made within 90 days of an in-person collection visit.

It is dangerous to read too much into any one enforcement action, but what does appear clear is that the Bureau’s enforcement machinery is slowly creaking back to life after a near-freeze at the beginning of Mr. Mulvaney’s tenure. Future actions will reveal whether he was serious about there being “more math” (i.e., quantitative analysis) in the Bureau’s future and whether this action reflects a new approach to consumer redress.