CFPB Litigation on Merchant Exemption in UDAAP Has Potential to Set Precedent for Retailers (Libre, part 2)

Recent motion to dismiss briefing in federal court illuminates the grant by Congress of exemptions to the CFPB’s authority to pursue market participants for alleged violations of the prohibition against Unfair, Deceptive, or Abusive Acts and Practices (“UDAAP”) set forth in the Dodd-Frank Act.

In the Libre matter, which was previously addressed here, the Consumer Financial Protection Bureau (“Bureau” or “CFPB”), along with co-plaintiffs, the attorneys general of New York, Massachusetts, and Virginia, sued defendants who offered assistance to immigrants in federal detention. The defendants argued, in support of their motion to dismiss (filed March 1, 2021), that the CFPB simply lacked the power to pursue the matter, based on an overall lack of authority to pursue UDAAP violations if committed by businesses that (i) are regulated by state insurance regulators or (ii) sell nonfinancial goods. Item (ii) is ye auld merchant exemption.

Given the recent proliferation of consumer financing options offered at check-out, the merchant exemption is extremely salient today.

Although the context in which the lawsuit arose–protection of immigrants–is new for the Bureau, the legal exemptions at play are as old as the Bureau itself. It is also worth noting that the exemptions for merchants and insurance are less frequently asserted than other Dodd-Frank exemptions to the CFPB’s authority (such as the practice-of-law exemption). Nonetheless, the former amount to fundamental boundaries of the CFPB’s power to litigate specific UDAAP theories.

Why is the merchant exemption more relevant now than ever?

Given the recent proliferation of consumer financing options offered at check-out for retail goods purchases, the merchant exemption–which was intended to cabin the CFPB’s significant authority to exert enforcement, supervision, or rulemaking efforts against–is extremely salient today. The greater flexibility that consumers can enjoy is made apparent by the rising popularity of novel financing options. As inserted by Congress, the merchant exemption is a potential legal barrier to CFPB activity, in the context of financing decisions at point-of-sale, buy-now-pay-later arrangements, retail-installment lending, and other similar consumer financing structures, so long as the exemption applies. Some have asserted that the CFPB’s interpretation of its authority “appears unlimited” and they “govern by divine right.” Divinity aside, Congress did impose guardrails.

Below, I’ll discuss the background of the exemption, and how it played out in the briefing in the Libre matter.

Background on the Merchant Exemption

While this topic is a complicated statutory matter and this article is not legal advice, the merchant exemption is a very special part of the CFPB’s enabling statute.

The Dodd-Frank Act provides that “the Bureau may not exercise any rulemaking, supervisory, enforcement, or other authority” with respect to a “merchant, retailer, or seller of any nonfinancial good or service,” unless the merchant is offering or providing a consumer financial product or service, or is otherwise subject to any enumerated consumer law or any law for which authorities were transferred to the CFPB (when it was formed in 2011). There are, however, exceptions to the exemption.

The merchant exemption is also, at least at a high level, consistent with other parts of the CFPB’s enabling statute, which separately authorizes the CFPB to act in enforcement, but only so long as the target of the action is a “covered person,” which is in turn defined to include a provider of a “consumer financial product.”

Taken together, the merchant exemption and the Bureau’s “covered person” authority are not inconsistent; they are harmonious, because each provision emphasizes that the power of the CFPB is to act when it (is anyone surprised?) comes to financial products or services. Even the exceptions to the exemption are carved out to maximize the ability of the CFPB to still pursue retailers or merchants for potential violations, so long as the retailer is itself acting as a covered person (i.e., is itself providing a consumer financial product).

(While the merchant exemption is an explicit carveout to the Bureau’s power to act, it did not come up in public filings on an enforcement matter brought against . . . online retailers. For example, even during the era heralded as one of financial deregulation, which involved myths that are debunked here, the exemption was no impediment to filing an enforcement action against mail-order/online-shopping businesses. In the Bluestem matter, the CFPB’s consent order did not (and typically would not) walk through the reasons why it triggered the exceptions to the merchant exemption, but it is not unusual that the authority to proceed was presented in that matter as a fait accompli. But I digress. . . )

Arguments in Libre Regarding the Merchant Exemption

In its opposition brief (filed March 15, 2021), the Bureau argued that “what begins with a seemingly broad exclusion is followed by a carveout ‘to the extent that such person is engaged in offering or providing any consumer financial product or service.'” (Opp. Br. at 8.) On a motion to dismiss standard in federal court, all that is measured is the adequacy of the pleading, not the truth of the claim. Thus, the Complaint of the government agency plaintiffs had adequately alleged that Libre “engaged in offering or providing a consumer financial product or service,” the CFPB explained.

As to the pertinent facts supporting the allegation, the CFPB’s opposition brief explained that the Complaint had also asserted:

  • Libre engaged in offering or providing extensions of credit; Libre created the impression to consumers in detention that “it is offering or providing extensions of credit to pay for consumers’ immigration bonds.”
  • Libre falsely told consumers that it paid the full amount of the bond to U.S. Immigration and Customs Enforcement to secure the consumer’s release and the $420 monthly repayments to Libre was to satisfy the bond it paid.
  • Consumers believed their monthly payments went toward paying the bond, which was an inaccurate belief that Libre was aware of but failed to correct.

In the reply brief in support of the motion to dismiss (filed March 26, 2021), the Libre defendants argued that the Complaint’s allegations failed to allege the requisite “covered person” status (and fail to allege defendants offered or provided a consumer financial product). According to the reply brief, this is because the Complaint’s allegations only stated that Libre “falsely told” consumers the product was credit; the government’s allegations fell short of pleading that Libre actually provided extensions of credit.

In other words, Libre’s argument was: because–according to the well-plead allegations in the Complaint–Libre was “falsely” telling consumers that the offer is for a loan, the defendants’ motion to dismiss should be granted because–as revealed by the Complaint’s own word choice–it is apparent that the defendants were not really offering a loan. The defendants’ reply brief explained that “it is axiomatic that the CFPB knows that Libre is not, in fact, offering consumers a loan,” and “the CFPB’s argument is more than a little deceptive.”

“As stated, pretending to offer a loan is not offering a loan,” the reply brief explained.

There can be no successful UDAAP claim without an adequate pleading of “covered person”

Ultimately, if there are pleading deficiencies in federal litigation matters generally, there could be opportunity to amend the claims such that the overall impact on the enforcement action is not one that is dispositive. However, the Libre matter does offer an interesting case study regarding both (i) substantive UDAAP claim pleadings, and (ii) the precision that is necessary to plead the status of a “covered person” (against whom UDAAP claims can be pursued to begin with) under the federal Iqbal/Twombly standard.

First, the underlying harm for which the CFPB and three states filed the suit to begin with is focused on deceptive acts (the second prong, or the “D,” in UDAAP). For example, the Complaints’ first eight counts pertained to alleged deceptive statements by defendants regarding: monthly payments, deportation, sending consumers to debt collectors, harm to consumers’ credit, lawsuits to collect debt, GPS monitoring, refunds of collateral payments, and legal representation. In a case of deception brought under Sections 1036/1031 of the Dodd-Frank Act, the government plaintiff cannot prevail unless the following three legal elements are met: a misrepresentation existed, the misrepresentation was material, and the consumer’s reliance thereon was reasonable.

Second, the CFPB’s opposition brief stated that: “Libre leads consumers to reasonably believe that it has offered or provided them an extension of credit.” But in doing so, the brief may have been conflating (i) the requirements to adequately plead a substantive deception claim with (ii) the requirements to adequately plead an entity’s “covered person” status.

The irony of course is, from an advocate’s standpoint, that if the reply brief’s argument prevails, then a litigant will have successfully wielded the existence of an allegation of a false claim to demonstrate the lack the government’s ability to pursue that false claim. Another irony is that in the course of deflecting a claim of deception, the litigant is arguing that the plaintiff’s argument is itself deceptive.

More alluring, however, is the implication of this issue for future cases.

Implications for future stakeholders, including those who are merchants or retailers

The applicable legal rules, both in terms of Congress’s intent to carve out merchants if they are not covered persons and the prerequisite of a well-pleaded Complaint to withstand a motion to dismiss, are all requirements that should be adhered to (with laser-like focus and without prejudice). Federal courts are well-positioned to apply these longstanding rules. (As of the preparation of this post, the court had not yet ruled on the motion to dismiss.)

Furthermore, although the Libre matter is specific to immigrants and detention bonds, the implications of this case are far-reaching, because a precedent that is made here can be leveraged in public actions or internal negotiations in future enforcement matters governing retailers catering to more mainstream consumer segments. As just one example, if the merchant exemption is inaccurately applied in this litigation, it could cause an expansion of Bureau authority beyond what Congress had in mind when the enabling statute granted the agency its powers.

For all these reasons, students of the Dodd-Frank Act, practitioners who have matters before the Bureau, and advocates or policymakers who follow new species of UDAAP and the power of government to pursue them, will need to closely watch this space.

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