January 31, 2020

MONTH-IN-BRIEF: Business Regulation & Regulated Industries

Lynette Hotchkiss

Consumer Finance

Bureau Announces Policy Regarding Abusive Acts or Practices

By Eric Mogilnicki and Lucy Bartholomew, Covington & Burling LLP

On January 24, 2020, the CFPB released a policy statement providing what it terms a “common-sense framework” on how it intends to apply the abusiveness standard in supervision and enforcement matters.  The Dodd-Frank Act broadly prohibits abusive acts or practices in connection with the provision of consumer financial products or services.  The policy statement follows a 2019 Bureau Symposium on Abusive Acts or Practices.

The CFPB’s policy statement identifies several principles it intends to follow in its enforcement and supervision activities including:

  • focusing on citing or challenging conduct as “abusive” in supervision and enforcement matters only when the harm to consumers outweighs the benefit;
  • generally avoiding dual pleading of both abusiveness and unfairness or deception on the basis of the same facts;
  • alleging abusive conduct in a way that will demonstrate the nexus between cited facts and the Bureau’s legal analysis; and
  • seeking Civil Monetary Penalties for abusiveness only when there has been a lack of a good-faith effort to comply with the law.

The CFPB’s policy statement does not provide substantive guidance on what "abusive" means.  Instead, the Bureau will continue on its current path of identifying and describing abusive conduct in enforcement pleadings and Supervisory Highlights. 

Additional Briefs Filed in Bureau Constitutionality Case

By Eric Mogilnicki and Lucy Bartholomew, Covington & Burling LLP

On January 22, 2020, Democratic Senators Sheldon Whitehouse, Richard Blumenthal, and Mazie Hirono filed an amicus brief at the Supreme Court in Seila Law v. Consumer Financial Protection Bureau, a case that will decide the constitutionality of the for-cause removal provision for the CFPB Director.  The Senators argue that Congress fully intended to insulate the CFPB from political influence, and that the current legal challenges reflect an effort to erode that independence. 

The same week, nearly two dozen state Attorneys General filed an amicus brief arguing for the severability of the for-cause removal position.  Attorneys General from New York, California, and the District of Columbia, among others, argue that even if the Supreme Court finds the provision unconstitutional, the proper remedy is to excise the unconstitutional portion and leave the rest of the statute and the Bureau standing.

Bureau Releases Report on Small Business Lending and the Great Recession

By Eric Mogilnicki and Lucy Bartholomew, Covington & Burling LLP

On January 23, 2020, the CFPB released a report entitled “Data Point: Small Business Lending and the Great Recession.”  The report analyzes the evolution of small business lending before, during, and after the Great Recession using data collected under the Community Reinvestment Act (“CRA”) and from the Census.  The report found that the Great Recession was so widespread that only one American county experienced small business lending growth during it.  The Report also found regional differences in increases in small business lending, with states on the East Coast and in the South recovering at a faster rate than states in the Great Plains and West.  The report notes that even by 2017, small business lending activity had not returned to pre-Great Recession levels.

Supreme Court to Decide Constitutionality of TCPA Exception for Government-Backed Debt Calls

By Kevin Liu, Pilgrim Christakis LLP

On January 10, 2020, the Supreme Court announced that it would review the Fourth Circuit’s opinion in William P. Barr v. American Association of Political Consultants, Inc., which concerned the constitutional validity of a recently enacted exemption under the Telephone Consumer Protection Act (TCPA) that permitted automated calls “made solely to collect a debt owed to or guaranteed by the United States.”

In Barr, a number of plaintiffs filed action against the FCC, arguing that the exemption contravened their free speech rights because it was a content-based restriction that failed to satisfy strict scrutiny review. On summary judgment, the district court found in favor of the government, and held that while the exemption was content-based, it did not subvert the privacy interests at issue under the TCPA.

On appeal, the Fourth Circuit reversed. First, the court held that the exemption was a content-based speech restriction subject to strict scrutiny (as opposed to a content-neutral speech restriction subject to intermediate scrutiny), as the exemption “facially distinguishes between phone calls on the basis of their content.” Like the district court, the Fourth Circuit rejected the government’s argument that the exemption was “premised principally on the relationship between the [federal] government and the person being called,” as the statutory text made no reference to that relationship.

Second, the Fourth Circuit found that the exemption was not “narrowly tailored to further a compelling governmental interest” and therefore failed strict scrutiny. The court determined that the exemption “undercut” the automated call ban that Congress had implemented, and “[ran] counter to the privacy interests that Congress sought to safeguard.” For instance, the court noted that by the end of fiscal year 2016, the federal government owned or guaranteed nearly 80% of all outstanding student loan debt owed by over 41 million Americans. The court further remarked that unlike other TCPA exemptions, such as the consent exemption and the emergency exemption, the debt collection exemption affirmatively impedes on the privacy interests of the TCPA and was therefore an “outlier.” Consequently, the court severed the government debt collection exemption as unconstitutional, but kept in place the remainder of the statute. 

Rotkiske v. Klemm: The FDCP's One-Year Limitations Period Runs From The Date Of The Alleged Violation, Not Discovery

By Alan Ritchie, Pilgrim Christakis LLP

On December 10, 2019, the U.S. Supreme Court decided Rotkiske v. Klemm, holding that the one-year statute of limitations for the Fair Debt Collection Practices Act ("FDCPA") begins to run when the alleged FDCPA violation occurs, not when the violation is discovered—absent the application of an equitable tolling doctrine. The decision resolves a split between the Third Circuit and the Fourth and Ninth Circuits.

Klemm & Associates filed a collection suit against Rotkiski and attempted service at an address where Rotkiske no longer resided. An individual other than Rotkiski accepted service and Klemm obtained a default judgment in 2009. Rotkiski claims that he did not learn of the default judgment until 2014, when his application for a mortgage was denied. In 2015, more than six years after the default judgment was entered, but less than one year after Rotkiske purportedly learned of the judgment, Rotkiske filed suit against Klemm alleging it violated the FDCPA.  Klemm moved to dismiss the action as untimely under the FDCPA's one-year statute of limitations. Rotkiske argued that the "discovery rule" should apply to delay the beginning of the limitations period until the date he knew or should have known of the alleged FDCPA violation. The district court rejected Rotkiske's argument and dismissed the action as time-barred. An en banc Third Circuit affirmed.

In an 8 to 1 decision, the Supreme Court affirmed, holding that the text of the FDCPA's statute of limitations is unambiguous and starts the limitations period on the date the alleged FDCPA violation actually occurred. The Supreme Court also held that the general "discovery rule" does not apply to the FDCPA's limitations period because Congress did not expressly include a discovery provision in the statute.  The Supreme Court declined to address the question of whether the FDCPA's limitations period is subject to tolling under a fraud-based equitable tolling doctrine because Rotkiske failed to preserve this issue on appeal. Thus, while the Rotkiske decision conclusively bars the application of the discovery rule to the FDCPA's one-year statute of limitations, it leaves the door open for the application of a fraud-based equitable tolling doctrine.

9th Circuit Holds Creditor Has Burden of Establishing a Permissible Purpose for Obtaining Credit Report

By Marielise Fraioli, Pilgrim Christakis LLP

On December 11, 2019 the U.S. Court of Appeals for the Ninth Circuit denied defendant’s petition for rehearing in Nayab v. Capital One, standing by its split panel decision reviving a putative class action Fair Credit Reporting Act (“FCRA”) claim that was previously dismissed for lack of standing and failure to state a claim.

The Ninth Circuit, in a case of first impression in that circuit, found that where a consumer alleged defendant had violated the FCRA by obtaining her credit report without her consent and not for a permissible purpose under the Act, she had alleged a concrete harm sufficient to confer Article III standing.  In doing so, the court reasoned that because the FCRA “prohibits obtaining a credit report for a purpose not otherwise authorized” this protects a “consumer’s substantive privacy interest” and violation of this interest is sufficient to confer standing.

Finding the plaintiff had standing to proceed, the court then turned to whether the consumer must “plead the third-party’s actual unauthorized purpose in obtaining the credit report to survive a motion to dismiss.” The court answered “no,” finding plaintiff’s complaint, silent as to defendant’s purpose for accessing her credit, was sufficiently pleaded because it gave “rise to a reasonable inference that the defendant obtained” her credit in violation of §1681b(f)(1). And so, the Ninth Circuit shifted the burden away from plaintiff to plead defendant’s unauthorized purpose, instead placing the onus on the defendant to plead that it had an authorized purpose when it acquired plaintiff’s credit report.

Bureau Releases Special Consumer Reporting Edition of Supervisory Highlights

By Eric Mogilnicki and Cody Gaffney, Covington & Burling LLP

On December 9, 2019, the Bureau released a special edition of its Supervisory Highlights  focusing on consumer reporting issues.  The report describes a number of the Bureau’s supervisory observations made during recent examinations of furnishers and consumer reporting agencies (“CRAs”). 

With respect to furnishers, the report notes that some furnishers, including auto loan, debt collection, deposit account, and mortgage furnishers, have not adopted written policies and procedures regarding the accuracy and integrity of consumer credit information that meet the requirements of the Fair Credit Reporting Act (the “FCRA”) and Regulation V.  In addition, the report describes recent examples where furnishers reported information with actual knowledge of errors, failed to correct and update incorrect information previously reported, and failed to respond appropriately to accuracy-related disputes from consumers, among other issues.

With respect to CRAs, the report noted that one or more nationwide specialty CRAs had not followed reasonable procedures to assure maximum possible accuracy.  CFPB examiners also found weaknesses in at least one CRA’s procedures to limit the furnishing of consumer reports to permissible purposes, and to block the reporting of information resulting from identity theft, among other issues.

Director Kraninger Marks First Year at the CFPB

By Eric Mogilnicki and Cody Gaffney, Covington & Burling LLP

Tuesday, December 10, 2019, marked the close of CFPB Director Kathleen Kraninger’s first year as CFPB Director.  To commemorate the occasion, the Director released a statement in which she commended the Bureau’s employees, and looked forward to the Bureau’s continued work over the remainder of her five-year term.

Accompanying Director Kraninger’s statement is a lengthy list of accomplishments over the past year, grouped in the following categories: (i) providing clear rules of the road through rulemaking, (ii) creating a culture of compliance, (iii) enforcing the law against bad actors, (iv) educating and empowering consumers to make better informed financial decision, (v) enhanced interagency coordination, and (vi) promoting a more inclusive, effective, and efficient organization.

PayPal Files Suit Challenging Bureau’s Prepaid Rule

By Eric Mogilnicki and Cody Gaffney, Covington & Burling LLP

On December 11, 2019, PayPal, Inc. filed a lawsuit in the U.S. District Court for the District of Columbia challenging the Bureau’s Prepaid Rule (the “Rule”) on administrative and constitutional grounds.  The Rule, which was implemented in April 2019, imposes disclosure requirements with respect to general purpose reloadable cards (“GPR cards” or “prepaid cards”).  PayPal's complaint alleges that the application of the Rule’s required disclosures to digital wallet products is inappropriate and has caused confusion among PayPal’s customers.

In its suit, PayPal alleges that the Rule exceeds the Bureau’s statutory authority under the Electronic Fund Transfer Act and Truth in Lending Act, and that the Rule is arbitrary and capricious in failing to consider the unique characteristics of digital wallets, and to appropriately weigh the burdens of the Rule against its benefits.  Finally, PayPal alleges that the Rule violates the First Amendment by requiring PayPal to make misleading and inapplicable disclosures.  PayPal seeks declaratory and injunctive relief, as well as litigation costs and attorney’s fees.

Lynette Hotchkiss

EVP/General Counsel & Corporate Secretary; Rabobank, N.A

Lynette Hotchkiss is EVP/General Counsel & Corporate Secretary for Rabobank, N.A., where she also previously served as Associate General Counsel. Prior to joining Rabobank, Lynette was with OneWest Bank, N.A, where her responsibilities included monitoring and reporting on regulatory developments impacting the bank’s operations and providing legal support for regulatory compliance matters. Before that, Lynette was an attorney in the Financial Practices Division of the Federal Trade Commission, where she focused on mortgage servicing issues. For much of her career, Lynette used her knowledge and experience in consumer finance laws and regulations to build compliance tools to help financial institutions comply with the complex array of federal and state requirements, first acting as the lead compliance attorney at CFI ProServices Inc. (now Finastra) to develop the Laser Pro® loan documentation system and later leading the legal team at Mavent Inc. (now part of Ellie Mae) to develop the Mavent Expert System, an automated compliance system for mortgage origination.