Author: J. Lee

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.

Conclusion

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.

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.

The Consumer Financial Protection Bureau (“CFPB” or “Bureau”) or other agencies are faced with a choice: either pursue alleged violators one-by-one on the basis of their own acts, or impact hundreds or thousands of entities in a single action by pursuing the payment processor (or other service provider) upon which those other companies rely. The latter is the concept behind a chokepoint-style investigation. The legal basis is a statutory provision that would cause an ancillary or B2B business (i.e., processors) to be deemed liable for the conduct of the consumer-facing companies (i.e., the primary alleged violators). (Think of the latter as the rim and the former as the hub of a bicycle wheel.) In pursuing chokepoint-style matters, the CFPB or other agencies are able to dramatically expand its reach and pursue more market-changing enforcement actions, as opposed to going after the primary alleged violators in single cases. The concept here is that the processors enabled, or “facilitated and assisted,” the acts of the other.

The CFPB has pursued chokepoint-style investigations against payment processors since at least 2013. About three weeks ago, under the Biden administration, CFPB has filed its first public lawsuit of this type against BrightSpeed Solutions, Inc., and its founder/COO, Kevin Howard, in a matter involving a specified pattern of conduct by sellers and telemarketers of anti-virus software and tech support.

Hold on. How is an anti-virus software or IT service a consumer financial product or service? It’s not! But there are two aspects of the activity in question that triggered Bureau jurisdiction. First, the processing of payments (for the telemarketers) qualifies as a consumer financial product. (See Compl. para. 6.) Second, the Telemarketing Sales Rule (“TSR”) (which the CFPB has authority to enforce) applies to the telemarketing activities of the anti-virus software/IT services businesses. The TSR contains a provision that establishes “substantial assistance”-based liability. In the lawsuit, Consumer Financial Protection Bureau v. Brightspeed Solutions, Inc. et al., (N.D. Ill.), the Bureau alleged that BrightSpeed (the payment processor) provided (1) substantial assistance or support to the telemarketers and (2) knew or consciously avoided knowing” that the telemarketers were violating the TSR.

The Bureau continues to seek to hold executives or founders personally liable in enforcement actions for the conduct undertaken through the corporate entity, so long as there is close involvement by the individual in the entity’s operations that are the subject of the action.

Here are five key questions and their answers:

(1) What was the underlying conduct of the telemarketers that was alleged to have violated the TSR?

The TSR prohibits telemarketers or sellers from creating a remotely created payment order (remote checks) as payment for goods or services offered or sold through telemarketing. The Bureau alleged that the clients of BrightSpeed had done just that.

(2) Is the approach to payment processors used in this case unique to the CFPB?

No. Since 1996, the Federal Trade Commission has pursued payment processors (who served the needs of merchants) through the TSR or through the “unfair acts” prohibition in the UDAP authority of Section 5 of the Federal Trade Commission Act.

(3) Why are you using the words, “Operation Chokepoint,” when that term was specifically for payday lending cases and a line of DOJ matters?

Well, it’s true that “Operation Chokepoint” was the name of the 2013 DOJ (and DFS/FDIC) initiative to investigate financial institutions for their role in processing payments for small-dollar lenders (this received widespread media attention back in the day). In reality, though, the concept of a chokepoint-style investigation is not limited to that single DOJ matter. Moreover, the U.S. House of Representatives Committee on Oversight and Government Reform had also used the term “Operation Chokepoint” — five years after the DOJ matters — in connection with obtaining Congressional testimony regarding the FTC’s historic work involving payment processors under the UDAP authority.

(4). Other than BrightSpeed the entity, on what basis did the CFPB pursue the individual founder of BrightSpeed?

In the Complaint, the Bureau asserted that Mr. Howard had been “deeply involved” in the company’s day-to-day operations, was himself a covered person by virtue of his own conduct in providing payment processing services, and was also a “related person” because he owned BrightSpeed and had managerial responsibility for the company’s affairs. (See Compl. paras. 7-8).

This case indicates that under the Biden administration, the CFPB is continuing down the path (used under both the Obama and Trump administrations) of holding executives or founders personally liable in enforcement actions for the conduct of the corporate entity, so long as there is a basis on which to determine that the executives or founders had a sufficiently close level of involvement in the entity’s operations that are the subject of the action.

(5) Was there another path for “substantial assistance” liability available to the Bureau, besides the avenue it took? Is it a novel and newly aggressive thing to pursue that avenue?

While this was not mentioned in the Complaint, yes, besides the TSR provision, there is another provision in federal consumer financial law that allows for “substantial assistance”-based liability. This is Section 1036(a)(3) of the Dodd-Frank Act. This particular provision is much broader than the TSR equivalent, because it is a hook for which processors can be deemed liable for primary violators’ commission of any kind of UDAAP at all, not just for violations of the TSR in particular.

No, it is not novel and new under this administration. In fact, under the Trump administration, the CFPB used the Dodd-Frank provision to hold one party liable for the alleged harm caused by another party. This has been done in a novel manner beginning in the early years of the Bureau, and not just in payment processor enforcement actions. For example, in the Bluestem matter, which I previously addressed here, the Bureau found that Bluestem (a retailer) assisted debt buyers who engaged in misleading debt-collection activities. Similarly, in the Chase matter, brought during the Obama administration, the Bureau found that Chase bank had assisted debt buyers in committing misconduct, when Chase did not adequately confirm the amounts or existence of credit card debts before the debt sale transactions occurred.

What we see from the BrightSpeed enforcement action is that the CFPB is engaged in litigation activity against both corporate entities and individuals and continuing to build upon “substantial assistance” or “facilitating and assisting” precedents, creating greater potential market impact than through an approach pursuing telemarketers one-by-one.

Thanks for indulging me in departing from the Libre series to address the significant developments in BrightSpeed. More to come.

Consumer Financial Protection Bureau (“Bureau” or “CFPB”) commentators often distinguish between two classes of cases: “whack-a-mole” cases against small fringe entities vs. large fines imposed on mainstream institutions. This is, in some ways, a hollow distinction. The CFPB may use cases against non-traditional financial companies in order to pressure test CFPB’s novel authorities.

What does this mean for businesses and consumer-finance practitioners? To truly understand what’s coming down the pike as to CFPB enforcement, careful attention must be paid to both classes of cases. Do not pooh-pooh the small cases because an established brand is absent from the defendants’ list. What matters is that each case may reveal disruptive flex points, as CFPB attorneys apply relatively new laws to definitively new fact patterns. Which brings us to. . .

Libre by Nexus, Inc. (“Libre”). Libre is a bail bonds company whose business is tailored to serve a subset of consumers who may not have access to mainstream credit products: immigrants. Nevertheless, in the enforcement action, Consumer Financial Protection Bureau et al. v. Libre by Nexus, Inc., et al. (USDC, W.D. Va.), the Bureau brings forth a cornucopia of Dodd-Frank Act goodies to chew on for weeks (which we plan to do).

The litigation is groundbreaking as the first federal court case brought by the CFPB to assist detained immigrants and obtain redress for perceived consumer financial harm, without directly applying a usury cap or price-setting (which CFPB lacks authority to do). The abusiveness standard is a vehicle in which the CFPB is doing so.

Let us begin by discussing abusive. This is incredibly timely, by the way, because the popular press has reported earlier this week on the CFPB’s reversal of its prior abusiveness stance. (Was it really a stance to begin with? More on this to come.) As you may have seen, commentators have explained that under the Biden administration, the CFPB has rescinded the Trump administration policy statement on “abusive acts and practices,” and the CFPB now expressly states that enforcing the “abusive” standard is part of its Congressional mandate. Interesting.

What does “abusive” even mean? As Mark Cuban would say when describing aspects of the SEC’s regulatory sphere, there simply is no “bright line rule” in the form of a regulation at the CFPB, which would define abusive. Instead, here we must default to the statutory language. The statute states that the Bureau has no authority under the Dodd-Frank Act (its enabling statute) to declare an act or practice abusive with regard to providing a consumer financial product or service, unless the act or practice:

Prong 1: materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or

Prong 2: takes unreasonable advantage of (A) a lack of understanding by the consumer of the material risks, costs, or conditions of the product or service; (B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

While I was at the Bureau in the early years, I was the enforcement attorney, alongside my colleague and fellow CFPB alum, Meredith Osborn, who brought the first case in American history under the abusiveness standard, which was filed in May 2013. I also conducted training of examiners at the FDIC about how to detect an abusive practice. In my personal opinion and not based upon any confidential information from within the Bureau, an abusive act must be something different than a deceptive or unfair act. One approach is to decide that an abusive theory is available if the act seems predatory, but there is: a lack of reasonableness in the reliance by the consumer on the false statement, a lack of risk of substantial injury to consumers, or the presence of the consumer’s ability to avoid the harm. (These last three things are defenses to the deception or unfair elements in UDAAP.) Such an approach would ensure abusiveness is not superfluous by reason of redundancy with deception or unfairness. Nonetheless, deception facts may accompany abusiveness, because the untruthful statement can be the means through which the provider’s advantage is rendered “unreasonable.”

The CFPB is using the Libre case to flesh out the boundary lines of prong one in the Dodd-Frank Act’s abusiveness standard.

So. . . how did the CFPB apply abusive in Libre? In its February 22, 2021 Complaint, the Bureau (and the State Attorneys General in Massachusetts, New York, and Virginia) alleged that Libre operates a business targeting immigrants held in federal detention. Libre also offers immigration bonds to help detainees (or families of the detainees) get them out of detention. Libre describes its services to consumers as an easy and affordable way to secure the release of detainees from federal custody. Since 2014, Libre’s contracts with consumers required up-front payments of 20%, a $420 advance payment, and an activation fee of up to $460. Consumers who use the services are required to “lease” GPS-tracking ankle monitors until the case is resolved. Unlike a fully-paid bond, the fees are not refunded. At bottom, the CFPB alleges that immigrants pay more in Libre fees than they would for a refundable U.S. Immigration and Customs Enforcement bond.

As to allegations of deception (distinct from abusive), the Complaint explains that Libre had committed the following: coercing non-English speakers to sign financial predatory contracts, misleading consumers to believe that Libre is affiliated with immigration authorities, making false threats to collect debt (such as threatening the accountholder will be deported), and incentivizing company employees to misrepresent consumers’ obligations and make improper collection threats.

What was alleged to be abusive? As stated in the Complaint, Libre knew that many of its clients and co-signers did not understand English and that some were unable to read (in any language). Libre knew this was the case, but proceeded to rush clients through the enrollment process and misrepresent material terms of the company’s written agreement to consumers before they enrolled.

Accordingly, the Bureau alleged, Libre had “materially interfered with the consumers’ ability to understand the terms and conditions of Libre’s offers of credit.” (See Compl. paras. 188-189.) While the Complaint is not a final finding or ruling that any entity violated the law, the CFPB is using the Libre case to flesh out the boundary lines of Prong 1 (listed above) of the Dodd-Frank Act’s abusiveness standard. The litigation is groundbreaking as the first federal court case brought by the CFPB to assist immigrants and obtain redress for perceived consumer harm, without directly applying a usury cap or price-setting (which CFPB expressly lacks the legal authority to do). The abusiveness law is the vehicle that is used to do so.

Although the “policy statements” of an agency are informative, case precedents are illustrative.

We will be back at this topic again soon, including with a discussion of a recent abusiveness case brought during the Trump administration (when the prior policy was in force) against a major bank. We will also be in touch with regard to the other key developments, from enforcement tactics and civil procedure perspectives, that are manifested in the Libre case, including in the motion to dismiss briefing.

Stay tuned.

[3/18 correction: a rocky start to the blog, whoops! The case was filed in the Western District of Virginia, as already flagged in the parenthetical, not in West Virginia. Thank you to a fastidious reader who raised this. We pledge to ensure any future references to John Denver songs are nice and tight.]

Consumer-financial-protection laws affect everyone. This field is also relatively new, as the Consumer Financial Protection Bureau is a young agency compared to other regulators in DC. This blog exists to flag nuances that may not be detectable to the naked eye.

These cases are also incredibly exciting. We are all students of title X of the Dodd-Frank Act (the Consumer Financial Protection Act), and of the collective incentives and human interactions that form the consumer finance ecosystem. Every day the statute is applied to real-life facts, yielding a new angle, vindication, or conundrum. I hope you enjoy digesting these articles as much as I enjoy dissecting the cases.

Tangential to consumer finance laws, however, are issues concerning tech and regulation, more broadly speaking. These issues are not within the purview of the Bureau (yet), but represent areas that present some of the most challenging issues for government and businesses (right where they intersect with consumer protection). Thus, I include those too.

Feel free to connect; nothing is more satisfying than intellectual rigor and engagement, and your dissenting perspective improves this craft.

Happy reading.

Certain lawmakers in recent months assert that technology companies should not be allowed to censure content. Due to displeasure with restrictions on speech or content blocked (or qualified) on such platforms, lawmakers have called for a repeal of Section 230 of the Communications Decency Act.

It does not work like that. Passed in 1996, Section 230 of the Communications Decency Act provided an exemption for Internet companies to be free from liability. Meaning, no matter what another person or entity posts on the Internet platform, the platform itself should not be held at fault for any trouble caused by the poster. So, for example, a fraudulent statement by a seller about antique furniture on eBay could very well cause a buyer harm. But eBay would not be liable, if it qualifies as an entity that can invoke Section 230. In the late 1990’s, when the World Wide Web was the Wild Wild West, Congress felt that it was important to allow innovation on the Internet to flourish. As such, the liability exemption was intended to encourage new and then-fledgling technologies to develop, unshackled from fear of legal action based on the conduct of others whom they presumably could not control.

That was then. Now, as politicians, policymakers, and businesses look ahead, it’s important to understand how Section 230 would work. If the liability exemption therein were outright appealed, this would encourage Internet companies to become more vigilant at policing content on their sites. It would not facilitate more freewheeling flow of content; it would do the opposite, and potentially incentivize Internet platforms to restrict users from posting statements that would place the Internet company at risk of litigation or regulatory fines.

To be even-handed, certain other lawmakers in recent months assert that technology companies should do more to moderate harmful content. They, too, have called for a repeal of Section 230. But repealing Section 230 will not cause specific categories of speech to exit the Internet; instead, it would take away liability-shields from businesses and make it harder for new entrants to compete, given the skyrocketing costs of defending litigation (even meritless litigation).

Regardless of one’s ultimate opinion of the relationship between tech and politics, one thing is certain: before good policy reforms can be reached, it’s crucial to understand provisions of the law, i.e., what it is we’re reforming.

As opposed to an outright repeal of Section 230, the recently proposed Safe Tech Act takes a more incremental approach. It permits Internet platforms to keep the liability exemption, but creates carveouts for the exemption for certain types of litigation (e.g., injunctive relief, civil rights violations). We’ll be watching this space, including the March 25, 2021 hearing of tech companies before the Consumer Protection and Commerce Subcommittee, and report back on the key developments as they arise relating to Section 230.

The CFPB recently finalized its debt-collection rule, governing third-party collections. The need for this regulatory update arises because the existing protocols governing consumer debt-collection previously existed in an antiquated law. Meaning, the Fair Debt Collection Practices Act, enacted in 1977. The new CFPB rule was issued in late 2020.

This rule manifests a larger movement by regulators to try updating old laws to conform to new business practices in the digital age. In the 70’s, we had Studio 54 and the summer of love, but no SMS messaging technology, no Internet, and no email for consumers.

In the November 2020 Final Rule, the Bureau explained that yes, a debt collector who communicates with (or tries to communicate with) a consumer may use electronic communications. Namely, communications via email, text messages, or other electronic mediums are permissible, so long as the debt collector includes in “clear and conspicuous” language the method by which the consumer can opt out of further electronic communications by the debt collector to that email or phone number. See 85 Fed. Reg. 76734, 76890 (Nov. 30, 2020).

Stay tuned. More such updates to come, as regulators attempt to modernize longstanding federal rules to accommodate new ways of delivering consumer financial products and services.

Last month, it was my great honor to see our manuscript published, “Consumer Finance Law: Understanding Consumer Financial Services Regulations.” Mad props to the 18 authors of 46 chapters, and to my co-editor, the inimitable Nate Viebrock.

Although several federal consumer finance laws have been around for over four decades, there has not been a published resource containing high-level explanations of each pertinent law, until this book. This is a practical resource guide for any stakeholder who desires an introductory treatment of consumer finance laws, addressing both technical requirements and policy rationales.

The reality is that in this day and age, now over ten years after passage of the Dodd-Frank Act, this book is timely. It flags for practitioners the environment in which businesses now operate, and the potential of consumer finance issues giving rise to parallel multi-state/multi-agency investigations, even as to one product line or single issue.

Consumer finance regulations are, let’s be real, susceptible to distortion in the public eye, due to partisan influence. This book is politically neutral on policy issues, and trustworthy.

Chapters in the book cover: the regulators (Consumer Financial Protection Bureau, prudential bank regulators, Federal Trade Commission, state and banking agencies); Unfair, Deceptive, and Abusive Acts or Practices; Truth in Lending Act; consumer privacy; information security; Fair Credit Reporting Act; fair lending; consumer deposit accounts and electronic fund transfers; prepaid accounts; remittances; debt collection practices; consumer bankruptcy; Servicemembers Civil Relief Act; Military Lending Act; and Real Estate Settlement Procedures Act.

See more information and purchase a copy here: https://www.americanbar.org/products/inv/book/410689178/