Alston & Bird Consumer Finance Blog

Consumer Finance

CFPB Petitions High Court to Consider Decision Holding Funding Structure Unconstitutional

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A&B Abstract:

On November 14, 2022, the Consumer Financial Protection Bureau (“CFPB”) filed a petition for a writ of certiorari in connection with the Fifth Circuit’s recent decision in Community Financial, which held that the CFPB’s funding structure violated the Constitution’s Appropriations Clause.  (For a full discussion of the Community Financial decision, click here.)

The CFPB is asking that the Supreme Court set the case for argument this term during its April 2023 sitting.

The CFPB’s Petition

According to the CFPB, the Fifth Circuit’s ruling constituted an “unprecedented and erroneous understanding of the Appropriations Clause.”  In the CFPB’s view, the Appropriations Clause requires only that “Congress enact[] a statute explicitly authorizing . . . [the] use [of] a specified amount of funds from a specified source for specified purposes,” which Congress did in establishing the CFPB’s funding.  For support, the CFPB relied on the constitutional text, historical practice, and the Supreme Court’s precedent.  And it argued that “[n]o other court has ever held that Congress violated the Appropriations Clause by passing a statute authorizing spending.”

The CFPB also asserts that the Fifth Circuit “compounded its error by adopting a sweeping remedial approach that calls into question virtually every action the CFPB has taken in the 12 years since it was created.”  This remedy, the CFPB argues, “raises grave concerns not just for the CFPB and consumers, but for the entire financial industry,” as the vacatur of past CFPB actions could have “destabilizing consequences.”

The CFPB asked the Supreme Court to review the Fifth Circuit’s decision for several reasons.  First, the Fifth Circuit held an Act of Congress violates the Constitution, and there is a strong presumption in favor of granting writs of certiorari to review decisions holding federal statutes unconstitutional.  Second, the Fifth Circuit’s decision conflicts with the D.C. Circuit’s decision on the same issue, creating a circuit split that the Supreme Court should resolve.  Third, the Fifth Circuit’s decision has “immense legal and practical significance” that should be addressed promptly because it “threatens the validity of all past CFPB actions,” which, if unwound, could result in harm to consumers and the “entire financial industry.”

For these reasons, the CFPB asked the Supreme Court to set the case for argument this term.   Given what is at stake, the CFPB explained that it filed its petition “less than one month after the [Fifth Circuit’s] decision,” and “plans to waive the 14-day waiting period after the brief in opposition is filed,” so that the Supreme Court may “consider the petition at its January 6, 2023 conference and hear the case during its April 2023 sitting.”

Takeaways

The CFPB has acknowledged the significant existential threat that the Fifth Circuit’s Community Financial decision poses to its future, and has petitioned the Supreme Court for relief.  Stay tuned for further updates on whether the Supreme Court grants the CFPB’s petition.

The CFPB’s Funding Structure Held Unconstitutional: The Practical Implications

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A&B ABstract:

In another existential challenge to the CFPB, last week the Fifth Circuit held in the Community Financial[1] case that the CFPB’s funding structure is unconstitutional. On this ground, it vacated the CFPB’s Payday Lending Rule. The decision’s rationale, however, is expected to have much further-reaching implications. Simply put, many believe that the Fifth Circuit’s analysis invalidates practically all actions the CFPB has taken since its inception.

The CFPB’s Unconstitutional Funding Structure

The CFPB is an executive agency with sweeping authority to issue regulations, conduct administrative hearings, wage civil litigation, and impose penalties on private citizens for a host of issues related to consumer finance. To exercise this authority, the CFPB requires funding, which it receives from a unique mechanism outside the Congressional appropriations process. By statute, the CFPB Director has the right to draw up to 12% of the Federal Reserve’s annual budget without seeking approval from Congress.

The Fifth Circuit held that this funding structure violated the Constitution’s Appropriations Clause, which requires that all expenditures of federal funds be approved by Congress. Specifically, the Fifth Circuit held that the CFPB’s extensive mandate combined with the inability of Congress to subject the agency to oversight via the appropriations process improperly concentrated the power of both “purse and sword” in the Executive Branch.

The Remedy

As important, unlike the challenge to the CFPB’s leadership structure in Seila Law, which led the Supreme Court to essentially rewrite the unconstitutional director-removal provision to salvage the CFPB’s ability to operate, the Community Financial decision held that there was no similar way to fix the Bureau’s unconstitutional funding. Fundamental to the Community Financial ruling was its interpretation of Collins v. Yellen, 141 S Ct. 171 (2021)—the Supreme Court’s most recent take on the proper remedy when an agency’s actions are tainted by an unconstitutional structure. Looking to Collins, the Fifth Circuit held that to obtain the holy grail of relief—vacatur of the agency action in its entirety—a party must show that: (1) a provision of the agency’s enacting statute is unconstitutional, and (2) the unconstitutional provision inflicted harm.

The Fifth Circuit then found that making the showing Collins required was “straightforward” in the case before it because “the funding employed by the Bureau to promulgate the Payday Lending Rule was wholly drawn through the agency’s unconstitutional funding scheme.” From the court’s perspective, this created “a linear nexus between the infirm provision (the Bureau’s funding mechanism) and the challenged action (promulgation of the rule). In other words, without its unconstitutional funding, the Bureau lacked any other means to promulgate the rule.”

The Implications

Problematically for the CFPB, the logic of this “linear nexus” between the CFPB’s funding mechanism exists for practically all of the agency’s actions. Pursuant to the Dodd-Frank provisions that created the CFPB, all of its operations have been funded out of the “Bureau Fund” into which quarterly draws from the Federal Reserve are deposited. That is the funding mechanism the Fifth Circuit rejected as unconstitutional. Indeed, while Dodd-Frank also created the agency’s Civil Penalty Fund, the CFPB cannot by statute use those monies other than for limited purposes having to do with victim compensation and financial literacy.

There’s lots of speculation about what will happen next. The CFPB has not indicated whether it will seek en banc review, try its luck with the Supreme Court, or perhaps seek a legislative fix. None of these routes is without substantial risk for the Bureau. Seven of the sixteen judges on the Fifth Circuit who would hear the case en banc have already authored or joined opinions concluding that the CFPB’s funding structure is unconstitutional. The Supreme Court, which already invalidated the CFPB’s leadership structure in Selia Law, now has an even more solid majority that appears poised to closely scrutinize federal agencies on these very issues. And voters have yet to decide the makeup of the 118th Congress.

Takeaway

Given this, covered persons under the CFPB’s regulatory umbrella may consider striking while the iron is hot.

Parties subject to rules issued by the CFPB may consider challenging the CFPB’s activity as the invalid product of the agency’s constitutionally infirm funding structure. Any such challenge has the greatest likelihood of success in the Fifth Circuit: where Community Financial is binding, but as yet stands as the only circuit court to have held the CFPB’s funding structure unconstitutional. While the D.C. Circuit addressed the issue several years ago in In re PHH,[2] numerous questions remain about the viability of its prior ruling. Not only was the majority’s decision there regarding the director-removal provision abrogated by the Supreme Court in Selia Law, many observers believe that its brief, cursory treatment of the appropriations issue cannot be relied upon. Indeed, as the Fifth Circuit also noted, if anything, the subsequent Selia Law cure for the director-removal provision, which vests even more power in the Executive Branch, only exacerbated the separation of powers problem presented by the CFPB’s self-funding mechanism. And while several district courts have also upheld the CFPB’s funding structure, including the Districts of Rhode Island, Maryland, and Montana, the Middle District of Pennsylvania, the Southern District of Indiana, and the Central District of California, none dealt directly with the post-Selia Law issue or meaningfully grappled with the separation of powers arguments that carried the day in the Fifth Circuit.

Similarly, Parties currently subject to CFPB investigation may consider whether to object on the grounds that the investigation is improvidently funded. Some parties engaged in enforcement litigation with the CFPB, both within and even outside the Fifth Circuit, have already pressed for dismissals based on the Fifth Circuit’s decision.

In short, parties should consider their options. While no one can say as yet that the Fifth Circuit’s decision in Community Financial will become law nationwide, it is clear that the decision has exposed a significant threat to the very existence of the CFPB.

[1] Cmty. Fin.l Servs. Ass’n of Am., Ltd. v. Consumer Fin. Prot. Bureau, No. 21-50826 (5th Cir. Oct. 19, 2022), available at http://www.ca5.uscourts.gov/opinions/pub/21/21-50826-CV0.pdf.

[2] PHH Corp. v. Consumer Fin. Prot. Bureau, 881 F.3d 75, 95 (D.C. Cir. 2018) (en banc), overruled in part by Seila Law LLC v. Consumer Fin. Prot. Bureau, 140 S. Ct. 2183 (2020).

CFPB Sues MoneyLion over Membership Program, Uses Military Lending Act as Hook

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A&B Abstract:

On September 29, 2022, the Consumer Financial Protection Bureau (“CFPB”), sued MoneyLion Technologies Inc. and 37 of its subsidiaries (“MoneyLion”) in New York federal court for violations of the Military Lending Act (the “MLA”) and Consumer Financial Protection Act (“CFPA”).

The Allegations

The CFPB alleges that MoneyLion offered installment loans that consumers could not access unless they enrolled in a membership program with monthly membership fees.  While MoneyLion represented to consumers that they “had the right to cancel their memberships for any reason,” it “maintained a policy prohibiting consumers with unpaid loan balances from canceling their memberships.”

According to the CFPB, MoneyLion’s membership model resulted in violations of the MLA’s 36% APR cap.  Under the MLA’s implementing regulation, APR is calculated as including “fee[s] imposed for participation in [an] arrangement for consumer credit.”  Based on this, the CFPB argues that the membership fees MoneyLion required servicemembers to pay to gain access to installment loans must be included in those loans’ APR.  If correct, those loans’ APR would unlawfully exceed 36%.

The CFPB also alleges that the installment loans to servicemembers violated the MLA by containing unlawful arbitration clauses and failing to contain required disclosures.

Lastly, the CFPB alleges that MoneyLion’s membership model resulted in unfair, deceptive, and abusive acts or practices under the CFPA. Particularly, the CFPB alleges that MoneyLion misled and injured consumers by representing to consumers that they had the right to cancel their memberships when, in fact, they did not.

Takeaways

The MoneyLion suit serves as a good reminder that every lending program should: (i) account for the additional protections provided to uniquely situated borrowers, such as servicemembers under the MLA; (ii) scrutinize any fees paid by consumers that could be viewed as increasing a loan’s APR; and (iii) review representations they make to consumers to align with the commercial realities and the regulatory requirements of the products they offer.

California Settlement Offers Reminder that Buy Now Pay Later Participants are Subject to California Financing Law

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In August 2022, the California Department of Financial Protection and Innovation (“Department” or “DFPI”) entered into a consent order with a company offering point of sale financing products that the DFPI deemed to be buy now, pay later (“BNPL”) financing, for which a California Financing Law (“CFL”) license is required. The company is required to pay a penalty, refund previously collected fees from California residents, and obtain a CFL license.

The settlement follows an annual report released in October of 2021 in which the DFPI noted a sharp increase in BNPL “consumer loans.” In the accompanying press release to that report, the DFPI stated:

BNPL loans are an increasingly common type of short-term financing that allows consumers to make purchases and pay for them at a future date, often interest-free. Sometimes referred to as point-of-sale installment loans, BNPL products are becoming a popular payment option. The report shows a surge in BNPL unsecured consumer loans reported to the DFPI. This product has grown in recent years and has come under the DFPI regulatory umbrella.

The press release also noted that the Department had rendered prior legal opinions and entered into settlements with three separate BNPL / point-of-sale financers in 2019 and 2020 that were deemed to be structuring their BNPL products in a manner designed to evade regulation under the CFL. These companies had agreed to refund fees to consumers and obtain CFL licenses, and among other requirements, must: (i) consider consumers’ ability to repay loans, (ii) comply with rate and fee caps, and (iii) respond to consumer complaints

In one of those prior opinions, the DFPI (formerly, the Department of Business Oversight) asserted that the CFL applies to making consumer loans and noted that the CFL defines “consumer loan” as a loan “the proceeds of which are intended by the borrower for use primarily for personal, family, or household purposes.” (Note that loans in the principal amount of $5,000 or less for other than personal, family, or household purposes are also included in the definition, bringing certain commercial or business-purpose loans within the scope of the CFL). The Department further stated that the CFL incorporates certain aspects of the common law, including that merchants may sell goods in exchange for cash or in exchange for a consumer’s promise to pay later (a “credit sale”) and that a merchant may charge a premium for credit sales without the transaction being subject to the state’s loan laws and without the premium being subject to the state’s usury limit. The DFPI concluded, however, that “[e]xtensive third-party involvement may cause transactions to be deemed loans even if the underlying credit sale is bona fide.”

Taken together, the Department’s prior statements, opinions, and enforcement actions signal a broad interpretation of the CFL that could potentially apply to many lenders and third parties involved in point-of-sale financing, including the offering of buy now, pay later products. In the press release accompanying the most recent enforcement action, the DFPI concluded that it “continues investigating other companies offering Buy Now, Pay Later products.”

NMLS Seeks Comments on Proposed Revisions to Company and Individual Disclosure Questions

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A&B Abstract:

The Nationwide Multistate Licensing System & Registry (NMLS) Policy Committee is inviting comments on the NMLS Disclosure Questions Proposal. The comment period is now open and runs until August 22. Among other revisions, the proposal details suggested revisions to the disclosure questions on the Company (MU1) and Individual (MU2) forms.

Proposed Revisions to NMLS Disclosure Questions

In key part, the proposed revisions include:

Company Disclosure Questions:

  • Adding a new question to incorporate a requirement of the Money Transmission Modernization Act, g., companies disclosing “material litigation” (which would be a newly defined term) in the past 10 years;
  • Expanding the civil judicial disclosures to include whether companies have been found in the past 10 years: (1) to have made a false statement or omission or been dishonest, unfair, or unethical, or (2) to have been a cause of another financial services business having its license or authorization denied, suspended, revoked, or restricted;
  • Amending the civil judicial disclosure question to include whether there are any pending financial services civil actions alleging that a company has made a false statement or omission, or had been dishonest, unfair, or unethical;
  • Requiring the criminal disclosure of any pending felony charges against companies, instead of any past felony charges;
  • Broadening the bankruptcy disclosure to include whether a company or control affiliate filed a bankruptcy petition in the past 10 years (in addition to being the subject of a bankruptcy petition) and clarifying that disclosure of either voluntary or involuntary petitions is required;
  • Adding a question whether companies have ever been denied issuance of a bond;
  • Introducing a new question asking whether a third-party service provider has notified a company of its intent to modify or cancel an arrangement that would materially alter the company’s ability to conduct business activities, and relatedly, defining “third-party service provider” to include lines of credit, whether warehouse or operation, technology solutions, etc.; and
  • Separating out into two sections under the existing regulatory action disclosures for: (1) companies that hold or have ever held an authorization to act as a contractor for a federal, state, or local government entity, (2) companies who have “key individuals” (which would be a newly defined term) or control individuals who are or have been licensed as attorneys or accountants or who hold or have been licensed as financial services professionals, and (3) added that dismissal of an action pursuant to a settlement agreement requires disclosure.
    • Regarding the last point in (3), this proposed revision is added in Question 14.e. which, according to the NMLS Policy Committee, is intended to broaden the question to account for how regulatory actions may be brought, including dismissal of an action pursuant to a settlement agreement. However, by including the term “settlement agreement”, which is not separately defined in the NMLS Policy Guidebook, Question 14.e. may potentially require the disclosure of nonpublic settlement agreements, which would be a significant change and perhaps an unintended result. The original questions are limited by the terms “found” (in Question 14.a-c.) and “order” (in Question 14.e.), both of which are defined terms indicating that only public settlement agreements and orders are required to be disclosed. Thus, we recommend that industry members consider whether to submit comments on this question to seek clarification.

Individual Disclosure Questions:

  • Making conforming proposed revisions relating to civil judicial and financial disclosures as described above in the Company Disclosure Questions;
  • Limiting the time period for the disclosure of misdemeanors to the past 10 years;
  • Making clarifications to require disclosure of judicial and non-judicial foreclosures on either commercial or residential property;
  • Adding new questions relating to pending regulatory actions against a holder of a financial services license or other professional license that could result in the restriction, revocation, debarment, or suspension of the license; and
  • Adding new questions regarding any pending financial services civil actions alleging a violation of a financial services statute or regulation for a company over which an individual exercised control, or a prior finding of the same.

Additional Proposed Revisions

In addition to proposed revisions to Company (MU1) and Individual (MU2) disclosure questions, the proposed revisions include amendments to the NMLS Policy Guidebook Glossary Terms.  Significantly, definitions for nine new terms are proposed: (1) Consumer Protection; (2) Court; (3) Efforts to Foreclose; (4) Governmental Entity; (5) Key Individual; (6) Lien; (7) Material Litigation; (8) Third Party Service Provider; and (9) Unsatisfied.  Amendments to existing terms include revising “financial services” to include consumer protection laws or regulations that pertain to enumerated financial services items, and clarifying the term “found” to cover agreements or settlements that are a matter of public record including those in which the findings are neither admitted or denied. The existing term “order” would be amended to add language to cover orders agreed to by the parties such as consent orders and stipulated orders, and to clarify that agreements relating to payments, limitations on activity, or other restrictions are excluded from the definition unless they are in a written directive that otherwise qualifies as an order.

Takeaway

We recommend that industry members, both licensees and applicants on NMLS, review the proposed revisions to the disclosure questions and consider whether to submit comments.  In particular, and as highlighted above, the proposed changes to Question 14.e. would appear to potentially require the disclosure of nonpublic settlement agreements, which would be a significant change from Question 14.e as currently worded.  If so, this may require companies to update their responses to the disclosure questions and submit additional information to NMLS regarding nonpublic settlement agreements.  Comments may be submitted via e-mail to comments@csbs.org by August 22.