In the wake of the 2008 financial crisis, Congress passed significant financial system reform legislation, the Dodd-Frank Act, which created a new regulator of financial institutions, the Consumer Financial Protection Bureau (CFPB). The Dodd-Frank Act also provided new avenues for enforcement of consumer laws, including partnerships between the CFPB and state attorneys general. The CFPB consolidates enforcement activities that were previously dispersed among 17 different government agencies. Moreover, because of the context from which the CFPB emerged, the mission, scope, and actions of the CFPB are decidedly focused on consumer protection and impose significant new regulatory burdens on financial institutions. Coupled with state-level consumer protection statutes and unfair trade practices laws, financial institutions today face significantly more compliance hurdles and potential litigation than they did five years ago.

For lawyers working with entities that provide financial services to consumers, including national and community banks, credit unions, auto lenders, mortgage companies, debt collectors, payday lenders, and others, the landscape is a shifting playing field. Many lawyers historically engaged in other types of commercial litigation now handle consumer financial services lawsuits due to an increase in this type of litigation. The CFPB has already indicated that it will release new regulations in 2014 for payday lenders, debt collectors, and many other entities. See Agency Rule List—Fall 2013, Consumer Financial Protection Bureau, Office of Information and Regulatory Affairs, Executive Office of the President. Developments over the last year have fundamentally altered the regulatory landscape for mortgage originators and servicers, and the CFPB has explained that additional mortgage rules and clarifications are on the way.

This article will discuss key implications of recent Supreme Court decisions and CFPB enforcement actions that shape the consumer finance landscape. It will discuss key Dodd-Frank Act provisions and CFPB regulations that financial services lawyers should have on their reference list. And it will explain additional concerns to keep in mind when defending against consumer finance-related litigation, whether initiated by lawsuits from plaintiffs’ attorneys or not.

Implications of Supreme Court Decisions and CFPB Enforcement Activities

Several recent decisions of the U.S. Supreme Court related to class actions and arbitration are important tools that consumer finance defense attorneys should know about so that they can use them.

Additionally, the CFPB litigation section has been active pursuing enforcement actions that provide insight into the agency priorities and instruction for the industry in managing compliance expectations and obligations.

Supreme Court of the United States

During the 2012 term, among other things, the U.S. Supreme Court addressed class action and arbitration issues that affect the consumer financial services industry. One decision under the Class Action Fairness Act and two decisions related to class arbitration issues are important for lawyers handling consumer matters to understand. Class actions are a common tool for plaintiffs’ lawyers in consumer financial services cases because (1) several of the federal debt collection statutes only allow relatively small statutory damages, and (2) often, numerous customers with accounts controlled by the same cardholder agreement allege a common factual scenario or the customers have received identical debt collection letters or advertisements.
 
Standard Fire Insurance Co. v. Knowles

The Supreme Court issued its first decision interpreting the Class Action Fairness Act (CAFA), which was enacted eight years ago. See Standard Fire Ins. Co. v. Knowles, 133 S. Ct. 1345 (2013). CAFA provides an avenue for removal of class action matters to federal court through diversity jurisdiction only if the “matter in controversy exceeds the sum or value of $5,000,000.” 28 U.S.C. § 1332(d)(6). Cases are removable under CAFA beyond the one-year limitation generally applicable to diversity jurisdiction cases. In Standard Fire Ins. Co., the named plaintiff purported to stipulate in the complaint that he and the putative class would not seek more than $5 million in damages, thus attempting to sidestep the jurisdictional monetary threshold. The defendant removed the case to a federal court and presented evidence to show that the amount-in-controversy would be “just above” $5 million. The district court enforced the stipulations and remanded the lawsuit to state court.

Justice Breyer, writing for a unanimous Court, reversed the district court because the plaintiff’s stipulation did not bind anyone except himself. 133 S. Ct. at 1346. The stipulation cannot definitively limit unnamed class members’ claims against the defendant. The Supreme Court explained that the district court must aggregate the claims of class members, named and unnamed, and the unnamed plaintiffs’ claims had not been capped. This decision closes a loophole for avoiding removal under CAFA and provides another tool to defendants.

Lawyers representing financial institutions should keep the Standard Fire Ins. Co. case in mind when defending lawsuits that plaintiffs’ attorneys file with a damages stipulation. Although the decision did not close every avenue that allows plaintiffs’ attorneys to avoid removal (i.e., effect of an allegation regarding damages instead of a stipulation), the Supreme Court analysis offers ammunition to defendants when a plaintiff’s counsel stipulates that the purported damages of unnamed plaintiffs would not exceed the $5 million threshold.

American Express Co. v. Italian Colors Restaurant

The Supreme Court continued to strictly enforce the terms of arbitration agreements and held that a contractual waiver of class arbitration is enforceable under the Federal Arbitration Act (FAA), even when the cost of presenting an individual claim in arbitration exceeded the likely recovery. American Ex. Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013). This decision will make class action waivers nearly impossible to challenge unless a specific statute states otherwise or the arbitration clause is unconscionable under state law. As long as the prospective litigant “effectively may vindicate” its statutory cause of action in the arbitral forum, the FAA makes class action waivers enforceable.

In this case, Italian Colors sued American Express under the Sherman Act on behalf of a putative class of merchants. Italian Colors could only hope to recover about $40,000 on its individual claim. American Express’s arbitration agreement with merchants includes a class arbitration waiver. The Supreme Court held that the class arbitration waiver was enforceable and could not be invalidated because of the high cost of individually prosecuting the merchants’ antitrust claims against American Express.

In essence, there is no congressional command that overrides the FAA mandate that arbitration agreements must be “rigorously enforced” according to their terms. The longstanding “effective vindication” doctrine was diminished through this decision, although the Supreme Court explained that this exception originated as dictum and remains dictum. 133 S. Ct. at 2310. The decision commented that the effective vindication exception could “perhaps” apply to when high arbitration filing and administrative fees precluded access to arbitration. The Supreme Court further noted that the Sherman Act does not require class actions; it was enacted well before Federal Rules of Civil Procedure 23 even existed, which shows that individual antitrust lawsuits were effective for seeking vindication. Id. at 2309.

This decision is important for consumer finance lawyers because it affirms that at the end of the day, the FAA is not concerned with preserving the prosecution of low-value claims, and courts should strictly enforce class arbitration waivers. Many financial institutions already include arbitration provisions governing individual claims in their contracts, promissory notes, and accountholder agreements. When a consumer’s total damages are small or actual damages are nonexistent, the American Express decision explains that high litigation costs do not inhibit effective vindication of the consumer’s statutory rights. When consumer agreements contain class arbitration waivers, the Supreme Court has explained that they will be enforced.

Oxford Health Plans, LLC v. Sutter

In a unanimous decision authored by Justice Kagan, the Supreme Court breathed new life into classwide arbitration. See Oxford Health Plans, LLC v. Sutter, 133 S. Ct. 2064 (2013). In 2010, the Supreme Court held in Stolt Nielsen S.A. v. Animal Feeds Int’l Corp. that the FAA bars class arbitration unless there is express consent to allow it. Stolt Nielsen S.A. v. Animal Feeds Int’l Corp., 559 U.S. 662 (2013). However, in Oxford Health Plans, the Supreme Court affirmed an arbitrator’s interpretation of an arbitration agreement as authorizing classwide arbitration despite any language to that effect. 133 S. Ct. at 2065. The parties agreed that the arbitrator would decide the availability of class arbitration, and the arbitrator permitted arbitration.

Justice Kagan explained that under the FAA “the sole question for us is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” Id. at 2068. In this case, the arbitrator clearly had purported to interpret the parties’ contract, even if it was incorrect. As the Court explained, “[s]o long as the arbitrator was ‘arguably construing’ the contract—which this one was—a court may not correct his mistakes under § 10(a)(4). . . . The arbitrator’s construction holds, however good, bad, or ugly.” Id. at 207–-71.

Thus, when the parties agree to submit a dispute to arbitration from the outset   instead of removing the case from civil court, Stolt Nielsen explains that class arbitration is permitted only if the parties have specifically consented to that scenario. However, Oxford Health Plans says that an arbitrator’s decision about whether the parties had agreed to classwide arbitration will not be overturned even if it is wrong. For consumer financial services lawyers initiating claims in arbitration, it is important to be mindful about the issues submitted to an arbitrator because the Supreme Court has explained that the FAA requires courts to defer to an arbitrator’s decision.

CFPB Enforcement Activity and Litigation

A review of the CFPB enforcement litigation to date provides direction to consumer finance lawyers on the agency’s highest priorities, as well as instruction on the claims that private plaintiffs’ attorneys may assert in lawsuits against financial institutions. The CFPB has filed several standalone enforcement actions related to credit card products, debt relief, mortgage-related kickbacks, and high cost mortgages investigations. Additionally, since the Dodd-Frank Act establishes a partnership to enforce federal consumer laws between the CFPB and state attorneys general, the CFPB has joined state attorney general litigation to prosecute financial institutions. The CFPB has also initiated a robust amicus program and has filed several appellate briefs, all of which have endorsed the position of consumers.

Although the CFPB rulemaking has assumed a vigorous pace, its enforcement actions to date have been modest. The CFPB has issued rules and procedures for examinations and civil investigative demands. See Rules of Practice for Adjudication Proceedings, Final Rule, Consumer Financial Protection Bureau, 77 Fed. Reg. 39,058 (June 29, 2012), available here (last visited Jan. 3, 2014). In addition to pursing litigation in federal courts, the CFPB also has an internal administrative process for addressing potential violations of federal consumer protection laws.

Credit Cards and Add-On Products

Credit card issuers have been under fire for several years for certain “add-on” products, such as payment protection, insurance, and credit monitoring. States with active attorneys general have seen these lawsuits filed against every major bank, and the CFPB has now asserted claims against Capital One, American Express, Discover, and JPMorgan Chase Bank related to the sale of credit card add-on products.

The CFPB alleged deceptive marketing by Capital One and Discover concerning payment protection and credit monitoring products sold to cardholders during activation calls for newly issued or reissued credit cards. See CFPB Admin. File No. 2012-CFPB-0001, Consent Order, Capital One Bank, N.A.; CFPB Admin. File No. 2012-CFPB-0005, Consent Order, Discover Bank, N.A. The CFPB based the claims on Sections 1031 and 1036 of the Consumer Financial Protection Act (CFPA), 12 U.S.C. § 5536, which prohibits financial institutions from engaging in “any unfair, deceptive, or abusive act or practice . . . .” The CFPB entered into consent orders and stipulations with both Capital One and Discover requiring the companies to develop compliance plans, provide increased disclosures to consumers, implement more rigorous internal controls, and pay significant penalties and restitution.

The CFPB enforcement action against American Express alleged various deceptive practices regarding award points, late fees, credit reporting, and debt collection. See CFPB Admin. File No. 2012-CFPB-0002, American Express Centurion Bank, CFPB Admin. File No. 2012-CFPB-003, American Express Bank, FSB, CFPB Admin. File No. 2012-CFPB-0004, American Express Travel Related Services (various consent orders). The CFPB and American Express also resolved their dispute through consent orders similar to the agreement reached with Capital One and Discover. Notably, the consent orders concluded that the board of directors of the banks and senior management exercised ineffective oversight and control over the compliance function, particularly the oversight of service providers to American Express. The consent orders concluded that the banks’ consumer protection functions were insufficient and that the bank had failed to monitor consumer complaints and inquiries adequately. The CFPB sent an unambiguous message from the American Express litigation that it will (1) hold the top-level decision makers responsible and (2) hold credit card issuers responsible for vendor actions and misconduct.

Finally, the most recent credit card add-on settlement involved JPMorgan Chase regarding billing and administration of identity protection production and alleged violations of particular laws. See CFPB Admin. File No. 2013-CFPB-0007, Consent Order, JPMorgan Chase Bank, N.A. & Chase Bank USA, N.A. Similar to the other credit card add-on cases, the consent order between JPMorgan and the CFPB requires significant ongoing compliance obligations, new responsibilities for the board of directors, and paying restitution and penalties.

Moving forward, it is likely that other credit card issuers will face similar enforcement actions. In light of the consent orders and settlements reached thus far, the CFPB’s approach to these matters is now known to other financial institutions. Although the CFPB appears to be focusing on other areas for new enforcement activities, is it likely that the CFPB will continue to pursue actions against other institutions related to credit card add-on products. These types of cases, which have also been brought by state attorneys general, have become routine because the alleged misconduct is now well-established through the multiple enforcement actions. Consumer finance attorneys involved in credit card add-on product litigation should review the above CFPB decisions to distinguish their clients’ actions, marketing materials, and disclosures.

Consumer Debt Assistance Services—Debt Relief and Loan Modification

The CFPB enforcement activities in debt relief and loan modification have addressed business practices that are difficult to justify, allowing the CFPB to tout its role as a consumer watchdog. The first joint enforcement action brought by the CFPB with state attorneys general (New Mexico, North Carolina, North Dakota, Wisconsin, and Hawaii) involved claims against Payday Loan Debt Solution, Inc. (PLDS) for improper charges associated with debt-relief services. See CFPB v. Payday Loan Debt Solution, Inc. et al., No. 1:12-CV-24410 (S.D. Fla.). PLDS charged consumers advance fees totaling $100,000, but then provided no debt settlement services by the time that the consumers’ accounts were closed. The consent order resolving the case required repayment of fees to consumers and a penalty payment to the CFPB.

The CFPB also filed and quickly settled a similar lawsuit against American Debt Settlement Solutions, Inc. (ADSS) in May 2013. See CFPB v. American Debt Settlement Solutions, Inc., No. 9:13-CV-80548 (S.D. Fla.). The CFPA prohibits unfair, deceptive, or abusive acts or practices by institutions offering or providing consumer financial products or services, but up until the ADSS case, the CFPB had not identified how it would apply the “abusive” standard. Every state has a statute related to “unfair” and “deceptive” acts, but the “abusive” aspect of institutional conduct remained undefined. The CFPA description of “abusive” focuses on consumers’ lack of understanding, consumers’ inability to protect their interests in selecting a financial product, or consumers’ reasonable reliance on a financial institution to act in their interests. See 12 U.S.C. § 5531(d)(2). Additionally, because ADSS engaged in sales calls and telemarketing, the lawsuit implicated the Federal Trade Commission Telemarketing Sales Rule (TSR). The TSR also prohibits “abusive” telemarketing practices. See 16 C.F.R. § 310.4.

Two other actions against debt-relief companies are presently pending, which arise out of the TSR, and the CFPB has also filed complaints against entities that were allegedly conducting mortgage loan modification scams. Clearly, certain abhorrent practices rise to the level of “abusive” and will justify regulatory action. However, all institutions should ensure that their disclosures and marketing techniques do not interfere with a consumer’s ability to understand the terms and conditions of financial products and services. Consumer finance lawyers defending abusive acts and practices claims asserted under the CFPA should review these CFPB decisions  to understand better the potential pitfalls of their clients’ marketing materials and disclosures.

Real Estate Settlement Procedures Act-Prohibited Kickbacks

The CFPB has filed multiple enforcement actions due to kickbacks to mortgage insurance industry participants. In April 2013, the CFPB announced settlements with four national mortgage insurers. See The CFPB Takes Action Against Mortgage Insurers to End Kickbacks to Lenders, Consumer Protection Finance Bureau, (Apr. 4, 2013), http://www.consumerfinance.gov/newsroom/the-cfpb-takes-action-against-mortgage-insurers-to-end-kickbacks-to-lenders/ (last visited Jan. 3, 2014). The companies at issue in this instance were not big banks that the public generally associates with CFPB enforcement practices, and the settlements required the four insurers to pay $15 million in penalties to the CFPB. The CFPB filed complaints against Genworth Mortgage Insurance Corporation, Mortgage Guaranty Insurance Corporation, Radian Guaranty Inc., and United Guaranty Corporation, alleging violations of section 8 of the Real Estate Settlement Procedures Act (RESPA) associated with kickback arrangements for lenders across the country. See e.g., CFPB v. Genworth Mortgage Ins. Co., 1:13-CV-21183 (S.D. Fla.). The CFPB alleged that the mortgage insurers paid lenders through “captive reinsurance arrangements.” “Reinsurance,” insurance for insurance companies is often purchased by insurers to cover the insurers’ own risk of unexpectedly high losses. A “captive” arrangement is when the lender both originates a loan and through its own subsidiary provides the reinsurance.

In addition to the significant monetary penalties associated with the settlements, the four insurers agreed to end their practices and engage in compliance monitoring and reporting.  Financial institutions making mortgage loans clearly will face a heightened level of scrutiny of all aspects of the lending process, and these institutions need to review risks associated with underwriting processes and referrals carefully.

On May 17, 2013, the CFPB announced an enforcement action against a homebuilder who allegedly violated section 8 of the RESPA through joint venture arrangements. See The CFPB Takes Action Against Real Estate Kickbacks, Consumer Financial Protection Bureau (May 17, 2013), http://www.consumerfinance.gov/newsroom/the-cfpb-takes-action-against-real-estate-kickbacks/ (last visited Jan. 3, 2014). The CFPB claimed that the Texas homebuilder set up two joint ventures: one with a state bank (Benchmark Bank) and one with a nondepository institution (Willow Bend Mortgage Company). See CFPB Admin. File No. 2013-CFBP-0001, Consent Order, In the matter of Paul Taylor, Paul Taylor Homes, Ltd., and Paul Taylor Corp., available here. The CFPB alleged that both entities were “shams” designed to allow the homebuilder to receive kickbacks through profit distributions and as payments under a “service agreement.” RESPA prohibits giving and receiving kickbacks for services involving federally related mortgages, and this CFPB enforcement action highlights these provisions.

Consumer finance lawyers involved in defending businesses with operations that are ancillary to residential finance, such as mortgage insurers, should review the CFPB administrative decisions to verify that the businesses’ internal risk allocation and reinsurance arrangements do not run afoul of consumer protection laws. Additionally, businesses involved in joint ventures with banking institutions must review their compliance obligations to ensure they are not engaged in a payment arrangement that violates federal consumer statutes or regulations.

Auto Lending

In late June 2013, the CFPB reached a settlement with U.S. Bank and a nonbank partner company, Dealers’ Financial Service (DFS), related to allegedly deceptive marketing and lending practices for active duty military service members. See CFPB Admin. File No. 2013-CFPB-0003, Consent Order, U.S. Bank National Association; CFPB Admin. File No. 2013-CFPB-0004, Consent Order, Dealers’ Financial Services, LLC. U.S. Bank and DFS created the Military Installment Loans and Educational Services (MILES) auto loans program to finance subprime auto loans to active-duty military. While the program expanded beyond U.S. Bank being its only lender, U.S. Bank is still responsible for financing the substantial majority of the MILES program loans. DFS manages the consumer-facing aspects of the MILES program. The CFPB administrative settlement identified violations of the Dodd-Frank Act and the Truth-in-Lending Act (TILA) by U.S. Bank, as well as illegal marketing activities by DFS. U.S. Bank agreed to return $6.5 million to service members, and both companies agreed to alter challenged practices and to increase reporting requirements moving forward.

This CFPB enforcement action underscores that the CFPB will scrutinize  disclosures and marketing materials and practices. The CFPB will examine the specific language of written materials and the actual outcome of procedures and regulations. As the CFPB and state attorneys general file additional enforcement actions in the years ahead, they will likely focus on auto lending and its implications for consumers.

Payday Lending

The CFPB announced an enforcement action in November 2013 against payday lender Cash America International, Inc. (Cash America). See CFPB Admin. File No. 2013-CFPB-0008, Consent Order, Cash America International, Inc., available here. Payday loans, sometimes called “cash advances” or “check loans” are for short terms, generally for $500 or less, and are typically due on a customer’s next payday. This area has become one focus of the CFPB, and as mentioned above, the CFPB has already indicated that it will issue new regulations for payday lenders during the first half of 2014.

An examination of Cash America’s operations identified frequent “robo-signing,” meaning that employees manually stamped attorney signatures on legal pleadings and department manager signatures on balance-due and military-status affidavits without prior review, and that legal assistants notarized documents without following proper procedures. Also, Cash America allegedly destroyed records relevant to a CFPB onsite compliance examination. Cash America deleted telephone call recordings with consumers, shredded documents, and withheld audit reports.

The CFPB enforcement action resulted in $14 million in refunds, a $5 million fine and dismissal of pending collections lawsuits. Id.

Plaintiffs’ attorneys and the CFPB will continue to focus on actions against payday lenders. Defense attorneys should verify client procedures in filing debt collection lawsuits that run afoul of court rules, and they should take steps to mitigate misconduct. This industry is a target of litigation and enforcement activities, and proactive conduct inspired by review of the Cash America settlement could save payday lenders millions of dollars.

High Cost Mortgages

In July 2013, the CFPB filed a lawsuit in a federal district court in Utah against a mortgage company that allegedly paid bonuses to mortgage officers based on borrowers’ interest rates. In light of the recent issuance of significant updates to mortgage originator compensation rules, financial institutions engaged in mortgage lending should heed the CFPB’s warning that it will address this issue. The CFPB alleged in the complaint that the mortgage company Castle & Cooke violated the Federal Reserve Board Loan Originator Compensation Rule that had a mandatory compliance date of April 6, 2011 (2011 Originator Rule). See CFPB v. Castle & Cooke Mortgage, LLC, No. 2:13-CV-684 (D. Utah). Castle & Cooke allegedly violated the 2011 Originator Rule with a quarterly bonus program that paid 150 loan officers bonuses based on consumers’ election of more expensive loans. Allegedly, the average quarterly bonus ranged from $6,100 to $8,700, and those loan officers who failed to charge higher interest rates received no bonuses. The lawsuit was settled in November 2013 with an agreement  that Castle & Cooke, its president, and another senior executive would  refund $9 million in restitution to consumers and to pay $4 million in civil penalties. See CFPB Takes Action Against Castle & Cooke For Steering Consumers Into Costlier Mortgages, Consumer Financial Protection Bureau (Nov. 7, 2013), http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-castle-cooke-for-steering-consumers-into-costlier-mortgages/ (last visited Jan. 3, 2013).

This lawsuit, which could have taken the form of an administrative action, is clearly a signal that the CFPB will aggressively pursue violations of the mortgage loan originator compensation rules. Defense attorneys working with financial institutions should ensure that bonus programs and loan originator compensation complies with the requirements of the mortgage loan originator compensation rules.

The Telephone Consumer Protection Act

Although the CFPB is altering the regulatory and enforcement landscape of consumer financial services, additional challenges by plaintiffs’ attorneys continue to face the industry in private litigation. A favorite tool of plaintiffs’ lawyers in recent months is the Telephone Consumer Protection Act (TCPA), 47 U.S.C. 227, et seq., which has prompted class action and individual lawsuits across the country. The TCPA restricts telemarketing and the use of automated telephone equipment and limits the use of automatic dialing systems, artificial or prerecorded voice messages, SMS text messages, and fax machines. With total damages uncapped and damages per violation ranging from $500 to $1,500, these claims have spawned a cottage industry of new consumer class actions, as well as individual claims.

Moreover, on October 16, 2013, a new Federal Communications Commission (FCC) rule went into effect that required financial institutions and businesses to obtain express written consent to place (1) any autodialed or prerecorded call or text message to a cell phone or (2) any prerecorded call to a residential land line for marketing purposes. See Federal Communications Commission, In the Matter of Rules and Regulations Implementing the Telephone Consumer Protection Act of 1991, C.G. Docket No. 02-278, Report and Order No. 12-21. Businesses must obtain express, written consent that is unambiguous and conspicuous, making it clear that the consenting consumer will receive autodialed or prerecorded phone solicitations.

Further, the FCC has eliminated the “established business relationship” exception for prerecorded telemarketing calls to residences. Although businesses could previously avoid TCPA liability for prerecorded telemarketing calls by claiming that they had an established business relationship with the consumer by virtue of a previous purchase or other business interactions, the new regulations have eliminated this exemption. Therefore, businesses must obtain written consent for all prerecorded telemarketing to residential phone numbers, even those that are for previous customers.

Consumer finance attorneys should ensure that clients have implemented these changes that affect TCPA liability and, in turn, the bottom line. With the new regulations, plaintiffs’ attorneys now have an additional tool for pursuing businesses engaged in telemarketing and debt collection activities. Although the CFPB