Since the inception of the Consumer Financial Protection Bureau (CFPB or Bureau), much debate has occurred over a key threshold question: how should regulators or lawmakers decide that a novel product constitutes a “lending product”? Is the product at issue in the bailiwick of banking or insurance regulators? Not only has the question (“is it credit”?) been unfolding recently in regards to potential regulation of fintech providers and certain earned wage access products, this classification question also often arises with respect to brick-and-mortar outlets, point-of-sale transactions, or products that have otherwise been around for some time, e.g., rent-to-own or pension-advance services and structured settlements.
When the Dodd-Frank Act (the CFPB’s enabling statute) was enacted in 2010, Congress created a mechanism for the CFPB to decide, through rulemaking, how to best carve out categories of businesses that were not historically subject to “bank-style” supervisory exams, but should be. (Meaning, the rulemaking authority for CFPB to define “larger participants” in the markets for consumer finance.) In years following, of course the CFPB did in fact embark on new supervisory programs to oversee markets that previously had not been examined that way at the federal level, e.g., consumer credit reporting, for example.
What about enforcement? From at least 2012 to present, the CFPB’s Office of Enforcement and CFPB’s Legal Division have been routinely dealing with the question. Under all four directors, Director Cordray, Acting Director Mulvaney, Director Kraninger, and Acting Director Uejio, the Bureau staff have taken positions on the issue: whether a particular non-bank consumer product constitutes “lending” or not?
Two months ago, the defendants sued by the CFPB and multiple state attorneys general had raised this question as well. See Consumer Fin. Protection Bureau, et al. v. Libre by Nexus, Inc. et al. The motion to dismiss briefing in the Libre matter, filed by the parties in March 2021, reignites the baseline lending debate–but this time as applied to immigration bonds.
Are they lending products?
Congress structured the authority for the Bureau to act as against a “covered person.” In title x of the Dodd-Frank Act, the Bureau generally can not exercise its enforcement power with respect to acts that are allegedly “deceptive” or “abusive,” unless they have been committed by a “covered person” (or others like service providers to covered persons, etc.). As applied to that case, then, the defendants asserted in support of its motion to dismiss that the CFPB is permitted to bring that litigation only if the defendants constitute “covered persons.” The Dodd-Frank Act also exempts from the Bureau’s power any company that is regulated by a State insurance regulator, the defendants correctly argued. Thus, because the Bureau’s power to act was constrained by the insurance exemption, the defendants implied (at least in the opening brief) that the analysis could stop there, and there’s no need to squarely confront a lending analysis under Dodd-Frank.
The Bureau in response had several arguments. The Bureau agreed with Libre that it could not pursue deceptive or abusive acts against defendants unless they are “covered persons.” Libre, however, allegedly engaged in offering or providing extensions of credit, which is one type of “covered person.” Specifically, the Bureau argued (at least in the opposition brief) that defendants created an “impression” to consumers that they offered or provided “extensions of credit to pay for consumers’ immigration bonds,” so as to make defendants qualify to be covered persons. (I previously wrote about the difference between an impression that it is a loan, versus actually being a loan, in this post.)
What is the federal civil procedure issue?
The parties’ debate in the motion to dismiss briefing sheds light on a relatively untrodden path.
In a CFPB enforcement matter, is the fact that the product is not a financial services product an issue of (i) a lack of subject matter jurisdiction, or (ii) a failure to state a claim for which relief can be granted? The former presents an argument under Rule 12(b)(1) of the Federal Rules of Civil Procedure, whereas the latter implicates Rule 12(b)(6). In Libre, this question is front and center in the motion to dismiss. Why is this a big deal for future cases in enforcement? Several reasons.
First, it is interesting that the CFPB action against Libre, a matter to protect immigrant-consumers, is the place where one can find this primer on the rules of federal civil procedure, as applied to consumer finance. Second, any financial services practitioner who appears before the CFPB would benefit from staying apprised of this court case, insofar as it helps flesh out the Dodd-Frank Act. Third, as a tactical litigation move, the choice of whether to file under Rule 12(b)(1) or Rule 12(b)(6) matters, because this influences the availability of the fastest path to win the case, including procedures such as the reliance on extrinsic evidence and jurisdictional discovery. This in turn is important because it determines how cost-effectively the legal team representing a business can dispose of a case.
So, in Libre, what were the two sides of the civil procedure issue?
From the defendants’ standpoint, the argument took a two-step approach: (i) the plaintiffs CFPB and Virginia’s Office of the Attorney General lacked jurisdiction over the defendant; and (ii) by virtue of the CFPB’s and Virginia’s lack of jurisdiction, plaintiffs Attorneys General of Massachusetts and New York correspondingly lacked supplemental jurisdiction over the remaining state law claims. (See Brief iso MTD, at 1-2.) Further, the defendants explained that Rule 12(b)(1) was the correct path, because a motion to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1) raises “the fundamental question of whether a court has jurisdiction to adjudicate the matter before it.” (Id. at 8) (case citation omitted).
From the CFPB’s standpoint, the court had requisite subject-matter jurisdiction because:
- the enforcement action was brought under Federal consumer financial law;
- it presented a federal question; and
- it was brought by the Bureau, an agency of the United States.
The Bureau also argued that the court had supplemental jurisdiction over the claims brought by the Massachusetts and New York AGs, because the state-law claims were “so related to the [Dodd-Frank Act UDAAP] claims that they form[ed] part of the same case or controversy.” (See Brief opposing MTD, at 5).
The Bureau noted that the defendants’ motion to dismiss was incorrectly styled as a Rule 12(b)(1) motion and should have been a Rule 12(b)(6) motion. Why? Because the status of a defendant as a “covered person” (or as one who provides a consumer financial product) is a required element of the UDAAP claim. To the extent that a challenger wishes to argue that the CFPB has failed to establish that it is a “covered person,” this goes to the heart of whether a claim for the CFPB exists, not whether the court has jurisdiction to hear the claim.
It remains to be seen how the court will rule on the question, as the motion to dismiss is still pending (as of the date of this blog post). In my view, the reason why the civil procedure issue arises as a novel issue of first impression in this litigation is in part because the interplay in the Dodd-Frank Act between the “covered person” definition and the insurance exemption is not as explicit in the statute as it could have been, leaving parties to resort to judicial decisions to clarify the issue.
To the extent that the question of whether the company provides a consumer finance product is one implicating Rule 12(b)(6), this is a key issue in CFPB litigation because it influences the standard by which the providers’ motion to dismiss would be decided by a court. As CFPB enforcement matters continue to increase under the new administration, we will likely see more frequent examples of the intersection between Dodd-Frank Act and federal civil procedure rules, given the likely rise in enforcement activity coming down the pike.