Court Grants CFPB's Petition for Rehearing in PHH

The D.C. Circuit has vacated its prior order in PHH Corporation v. Consumer Financial Protection Bureau and ordered the matter be reheard en banc.  The parties have been specifically asked to  address the following issues in their briefs:

• Is the CFPB's structure as a single-Director independent agency consistent with Article II of the Constitution and, if not, is the proper remedy to sever the for-cause provision of the statute?
• May the court appropriately avoid deciding that constitutional question given the panel's ruling on the statutory issues in this case?
• If the en banc court, which has also ordered en banc consideration of Lucia v. SEC, concludes in Lucia that the administrative law judge who handled that case was an inferior officer rather than an employee, what is the appropriate disposition of this case?

PHH Corp. v. Consumer Fin. Prot. Bureau, 2017 U.S. App. LEXIS 2733 (D.C. Cir. Feb. 16, 2017).  Briefing is scheduled to begin March 10, 2017 and conclude April 10, 2017.  Argument is scheduled for May 24, 2017.  


The court's order sets aside the prior order of the court which held that the CFPB's structure was unconstitutional because it was an independent agency headed by a single director.  To cure the constitutional flaw, the court severed that for-cause provision and provided the president with power to remove the director at will and to supervise and direct the director.  See generally, PHH Corp. v. Consumer Fin. Prot. Bureau, 839 F.3d 1 (D.C. Cir. 2016).  The matter will be heard by the entire D.C. Circuit (with the exception of Chief Judge Garland), the majority of which were appointed by democratic presidents.

Bad System Conversion Leads to CFPB Consent Order for Prepaid Card Provider and its Vendor

The CFPB continues to flex its muscle and expand its reach, this time punishing a prepaid card provider and its vendor for a conversion to a new system that did not go as planned.  The consent order, which was entered into without any admission of liability, requires UniRush and its vendor/payment processor to pay an estimated $10 million in restitution to affected consumers and a civil monetary penalty of $3 million. 

According to the Consent Order, the problems began with a conversion by UniRush to a new payment processor owned by Mastercard.  Despite having engaged in pre-conversion testing and multiple mock tests in preparation for the actual conversion, the conversion did not go as planned. Instead, the conversion took longer than expected and led to a number of issues for consumers.  Further, despite having hired additional agents to meet an anticipated spike in customer needs, UniRush could not meet the increased customer service demand.   


Of concern is the CFPB’s finding that UniRush engaged in unfair and deceptive practices by failing to insure pre-conversion testing by its vendor.  The CFPB found UniRush had engaged in unfair and deceptive practices despite noting that:

·        UniRush tested the payment processing services provided by its vendor in the months prior to conversion; and

·        UniRush’s requests to conduct a full additional mock conversion to validate and process new data files was denied by the vendor and instead, the vendor confirmed the data was formatted properly.

Despite these findings, the CFPB found that “UniRush failed to prepare a contingency plan that would enable it to scale its customer service response to meet the increased demand on its customer service system that resulted from the service disruptions it experienced following the conversion.”  The CFPB concluded that “UniRush’s acts or practices in preparing for the payment processor conversion caused or were likely to cause substantial injury to consumers that was not reasonably avoidable or outweighed by countervailing benefits to consumers or to competition.”  Consent Order, ¶ 35.

The Consent Order focuses, among other things, upon what the CFPB deemed to be an inadequate incident response program.  The Order makes clear that the CFPB will not allowed covered entities to rely solely upon their vendors to insure system conversions go as planned and the need for businesses to have plans in place to deal with system failures or service disruptions. 

The Consent Order provides guidance for others in the financial services sector as to the CFPB’s expectations regarding response programs in place any time there is a system conversion which may impact consumers.   The Consent Order suggests that entities, at a minimum, should have:

·        An incident plan in place which includes the following documented phases:

·        A preparation phase that insures entities have a response plan in place prior to any incident;

·        A documented identification phase that verifies whether an incident has happened and details the incident;

·        A containment phase that insures that after the incident has been identified and confirmed, information from the incident handler is effectively shared with all relevant stakeholders, both internal and external;

·        An eradication phase that insures that after containment measures have been taken, the entity identifies the root cause of the incident and eradicates it; and

·        A recovery phase that insures affected systems or services are restored to the conditions specified in their service delivery objections or business continuity plan.

·        A disaster recovery plan reasonably designed to insure it can restore data in the event of a systems failure in a manner that minimizes program or service disruptions likely to have an adverse impact on consumers;

·        A contingency plan reasonably designed to insure that its customer service can respond within a reasonable time to increased consumer calls or emails in the event of a systems failure or service disruption that will adversely impact consumers; and

·        Policies and procedures reasonably designed to insure the dissemination of timely and accurate information necessary for consumers in the event of a systems failure or service disruption.

CFPB Monthly Report Spotlights Mortgage Products

The CFPB has issued its monthly complaint report and is shining its spotlight on mortgage products.  The Monthly Complaint Report provides a high level snap shot of trends in consumer complaints, using a three month rolling average of complaints.  Each month, the report focuses on a category of consumer financial products.  Here are the highlights of the most recent report:

 IN GENERAL

·       Student loans showed the greatest increase in complaints comparing October -December 2015 with October-December 2016, showing a 109% increase.  In February 2016, the CFPB updated its student loan intake form to accept complaints about federal student loan servicing.  The CFPB attributes a portion of this increase to the increased scope of complaints accepted.

·       Complaints about prepaid products showed the greatest decrease in complaint volume comparing October-December 2015 with October-December 2016, showing a 59% decrease in complaint volume.

·       Debt collection, credit reporting and mortgage remain the most complained about products for December 2016.  Together, the three complaint categorizes comprise 65% of all complaints submitted.  Of note, both credit reporting and mortgage complaints were down a bit, each showed a 5% decrease in complaints from the prior month.  Meanwhile, debt collection complaints increased 7% over the prior month. 

PRODUCT SPOTLIGHT: MORTGAGE

·       49% of the complaints submitted regarding mortgage products concerned problems when consumers were unable to pay. This category includes loan modification, collection and foreclosure issues.  The Report notes that within this category, consumers complained about their efforts to obtain loss mitigation and specifically, that servicers were slow to respond, made repeated requests for documents that had already been submitted and provided denial reasons that were ambiguous.

·       33% of the complaints submitted concerned payment issues.  Consumers complained their mortgage servicers “lost their timely payments” and reported the accounts as delinquent to consumer reporting agencies.  Consumers also complained about bill pay services not correctly crediting payments.

·       The report also indicates that consumers reported issues involving escrow accounts.  Two issues were identified specifically:  the handling of shortages in the accounts and the use of escrow for paying insurance premiums.  As to the former, consumers complained that funds paid towards escrow shortages were not properly applied leading to increased monthly payments.  Consumers also complained of no explanations being provided for escrow shortages.  As to the latter, consumers reported servicers failing to submit timely payments to insurers.

·       Finally, the report indicates consumers reported mortgage loan processing delays that resulted in expiration of rate lock agreements.  Consumers attributed the delays to inaccurate documents requirements, lack of communication from lenders and inexperienced loan officers.

Ninth Circuit Weighs in on Prior Express Consent and Revocation of Consent

The Ninth Circuit recently weighed in on the limitations of prior express consent and revocation under the Telephone Consumer Protection Act (the “TCPA”).  In Van Patten v. Vertical Fitness Group, LLC, the consumer provided his cell number when meeting with a fitness gym about joining.  Van Patten v. Vertical Fitness Group, LLC, 2017 U.S. App. LEXIS 1591 (9^th Cir. Jan. 30, 2017.  The gym was owned by the defendant but was operated as a Gold’s Gym franchise.  Shortly after joining, the plaintiff cancelled his membership and moved to California, but kept his cell number.  After a brand change, the defendant worked with its marketing partner to announce the change of brand and invite former members to return.  The plaintiff received two text members from the defendant as part of this marketing campaign and filed a putative class action asserting the text messages violated the TCPA.

The district court granted the defendants’ motions for summary judgment and the plaintiff appealed.  In reviewing the TCPA claims, the court first determined that the plaintiff had standing under Article III.  In doing so, the court held that the plaintiff had established the concrete injury-in-fact necessary to pursue his TCPA claim.  The court held that “[t]he TCPA establishes the substantive right to be free from certain types of phone calls and texts absent consumer consent.  Congress identified unsolicited contact as a concrete harm, and gave consumers a means to redress this harm.  We recognize that Congress has some permissible role in elevating concrete, de fact injuries previously inadequate in law “to the status of legally cognizable injuries.”  Id. at *10-11.  The court distinguished Spokeo by noting that Spokeo dealt with a procedural requirement which might not actually case actual harm while the telemarketing messages at issue in this case, absent consent, presented the precise harm the statute was enacted to protect against.

Moving on to the merits of the TCPA claims, the court looked at two issues: prior express consent and revocation of consent.  As most know, prior express consent is an affirmative defense to TCPA claims and is not defined within the statute.  The court therefore turned to the FCC interpretation of prior express consent in its prior rulings and orders.  Relying in part on the FCC’s prior orders discussing the scope of prior express consent, the court concluded that “an effective consent is one that relates to the same subject matter as is covered by the challenged calls or text messages.”  Id. at *14.    In doing so, the court did not read the 1992 FCC Order to mean that by providing a cell number, a consumer consented to be contacted for any purpose whatsoever.  Instead, the court read it to be more restrictive, holding that transactional context matters in determining a consumer’s consent to contact.  Applying its conclusion to the facts in the case before it, the court concluded that the consumer had provided express consent to be contacted about reactivating his gym membership.  In giving his phone number for the purpose of his gym membership agreement, the plaintiff “gave his consent to be contacted about some things, such as follow-up questions about his gym membership application, but not to all communications.  The scope of his consent included the text messages’ invitation to ‘come back’ and reactivate his gym membership.”  Id. at *19.

Having concluded that the plaintiff had provided his prior express consent to receive the text messages, the court turned its attention to the plaintiff’s argument that by cancelling his gym membership, he had effectively revoked his consent to be contacted.  The court, while acknowledging consent can be revoked, concluded that revocation of consent “must be clearly made and express a desire not to be called or texted.”  Id. at *23-24.   The court concluded that plaintiff, in cancelling his gym membership, did not clearly express his desire not to receive further text messages.   The court therefore affirmed the lower court’s ruling.

The opinion should be welcomed by defense counsel defending TCPA actions in the Ninth Circuit as it provides a fairly expansive interpretation of prior express consent while setting a restrictive view on revocation of consent.

District Court Opinion Serves as a Reminder of the Limitations of Spokeo

A district court out of Missouri has served up a reminder as to the limitations of a motion to dismiss based upon subject matter jurisdiction.  In May v. Consumer Adjustment Co., the consumer filed an FDCPA complaint is state court alleging that the initial demand letter violated 15 U.S.C. §1692g.  May v. Consumer Adjustment Co., 2017 U.S. Dist. LEXIS 7401 (E.D. Mo. Jan. 19, 2017).  Specifically, the plaintiff alleged that defendants had failed to disclose the amount they sought to collect included accruing interest.  The plaintiff, however, failed to allege that she incurred any actual harm as a result.  Instead, Ms. May alleged only a statutory violation.  The debt collector removed the case to federal court and then proceeded to file a motion to dismiss asserting that the federal court lacked subject matter jurisdiction because the plaintiff had failed to allege a concrete injury.

In reviewing the substance of the complaint, the court agreed with the debt collector that Ms. May had failed to show a concrete injury.  While the court acknowledged that violations of the FDCPA disclosure requirements might result in concrete injuries, the plaintiff had pled none in this matter.  “[H]er only alleged injury is that Defendants failed to include in the collection letter that interest was continuing to accrue.  Such a bare procedural violation does not constitute an intangible harm that satisfies the injury-in-fact requirement.” Id. at *12.

Had that been the end of the story, it would have been good news: case dismissed.  In fact, had the case been originally filed in federal court that would have been the end of the story and the case would have been dismissed.  However, because the case had been removed from state court based upon the federal court’s jurisdiction, the court (now divested of subject matter jurisdiction) had no alternative but to remand the matter to state court. 

The case brings home a couple of key points about the Supreme Court’s decision in Spokeo v. Robins:

1.       Spokeo v. Robins makes mere statutory violations difficult to prevail upon and therefore, require more specificity in pleading statutory violations in order to satisfy the concrete injury requirement.

2.      A favorable analysis under Spokeo v. Robins divests the federal court of subject matter jurisdiction under Article III.  It, however, does not divest a state court of jurisdiction.  Defense counsel using motions to dismiss for lack of subject matter jurisdiction need to keep this in mind and be judicious in their use. A case that has been removed to federal court from state court is not a good candidate for a motion under Rule 12(b)(1) as the likely result, as seen in May, is a remand to state court.

Objection to Proof of Claim Not Barred by Res Judicata

A Virginia bankruptcy court recently ruled that an objection to a proof of claim was not barred by the doctrine of res judicata when an order of confirmation was entered prior to the objection being filed.  In re Haskins, No. 15-60644 (W.D. Va. Jan. 27, 2017) [Dkt No. 31].  The creditor, a debt buyer, filed its unsecured proof of claim prior to confirmation of the debtor’s Chapter 13 plan.  The proof of claim conformed with the requirements of Rule 3001 of the Bankruptcy Rules of Procedure, including the provisions requiring the creditor to state the date of the last transaction and the date of last payment.  On its face, the proof of claim disclosed the claim was time barred.  The debtor’s Chapter 13 plan was confirmed after the filing of the proof of claim.  Three months later, the debtor objected to the debt buyer’s proof of claim as time barred.  At the hearing, the debt buyer contended the confirmation of the debtor’s Chapter 13 plan had a res judicata effect on the disposition of the claim and the objection should be denied on that basis.

In upholding the objection to the claim, the court first noted the distinction between the treatment of secured and unsecured claims in the context of a Chapter 13 confirmation.  Secured claims are individually treated and valued.  By contrast, unsecured claims are treated collectively with no consideration given to each claim’s individual value.  Instead, unsecured claims are treated in a single class and the plan must provide a pool of funds to be distributed pro rata to the class.  In keeping with this, the Bankruptcy Code provides a mechanism by which secured claims may be challenged in conjunction with confirmation of the plan.  There is no similar mechanism for unsecured claim.  The court therefore concluded that the debtor did not have a statutory mechanism to initiate a proceeding to determine the allowed amount or validity of an unsecured claim until the proof of claim is filed.

The court continued its analysis by reviewing the conclusive nature of a confirmation order. The court took notice that “[s]ection 1327 of the Bankruptcy Code provides that ‘[t]he provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.’”  Id. at p.9.  Confirmation, therefore, has a “preclusive effect foreclosing relitigation of ‘any issue actually litigated by the parties and any issue necessarily determined by the confirmation order.’”  Id. (emphasis supplied).  The court therefore concluded that the confirmation order only precludes an issue or matter which was previously litigation or determined by confirmation.

Turning to the facts of the case, since the court did not at confirmation determine the amount of each general unsecured claim, it concluded that the issue of the claim’s validity had not been previously litigated, particularly since the deadline to file proofs of claim was subsequent to the deadline to object to confirmation.  Moreover, given that neither the claims process set forth in 11 U.S.C. 502 nor the objection process set forth in Rule 3007 set a deadline for objecting to a proof of claim, providing a confirmation order with a res judicata effect as to an objection to a general unsecured claim would “conflate the confirmation process with the claims allowance process.” Id. at p. 12.    The court therefore determined that the objection was not precluded by res judicata.