CFPB News: A Settlement, a Loss and More Leadership Fights

Financial Services Law

The Bureau of Consumer Financial Protection (CFPB or Bureau) settled with a Minnesota-based bank for $30 million over the marketing and sale of its overdraft practices, and lost its suit against a law firm accused of violating the Consumer Financial Protection Act (CFPA) and Fair Debt Collection Practices Act (FDCPA).

In other Bureau news, the continuing saga over CFPB leadership remained on hold after the Senate postponed a vote on the nomination of Kathy Kraninger to take the helm.

What happened

Bank settlement—In January 2017, the Bureau commenced an action against a Minnesota-based bank, accusing it of violating the prohibitions on deceptive and abusive conduct in the CFPA and the Electronic Fund Transfer Act (EFTA) with regard to the bank’s overdraft fees on one-time debit purchases and ATM withdrawals. According to the CFPB, the bank made consent to the overdraft fees appear mandatory for new customers and hid the fees that were charged.

The bank—with more than 300 retail branches across Arizona, Colorado, Illinois, Michigan, Minnesota, South Dakota and Wisconsin—reached an agreement with the Bureau without admitting or denying any of the allegations in the complaint.

To settle the charges, the bank agreed to send all current customers who opted in before May 1, 2015, a letter with information about overdrafts and overdraft fees, and reach out to all consumer reporting agencies to which it furnished information reflecting the overdraft fees of affected consumers within the past seven years to request that the information be corrected.

Going forward, the bank represented that it will not require its employees to generate a specific number or percentage of opt-ins or provide employees direct or indirect financial incentives based on achieving a set goal of opt-in customers.

The bank will also set aside $25 million to provide restitution to affected consumers, obtaining approval from the CFPB for a plan that will ensure customers receive a pro rata share based on the number of overdraft fees incurred and paid. The Bureau assessed a $5 million civil penalty against the bank but agreed to remit $3 million in recognition of the bank’s $3 million penalty payment to the Office of the Comptroller of the Currency in connection with the same conduct.

Law firm wins battle—The Bureau did not fare as well in another enforcement action. According to a complaint filed by the CFPB under prior leadership, an Ohio law firm allegedly violated the CFPA and FDCPA with debt collection letters that falsely implied that attorneys were “meaningfully involved” in the collection of debts.

While a letter may be deemed deceptive even if the statements contained therein are literally true, both an advisory jury and U.S. District Judge Donald C. Nugent determined that the letters were not deceptive because lawyers at the firm actually were meaningfully involved in the collection of debts.

The advisory jury found for the law firm after a four-day trial, and while the court was not bound by this determination, it agreed with the conclusion in an opinion and order, noting that what constitutes “meaningfully involved” requires an analysis of the individual facts and totality of the circumstances in each case.

Owned by shareholders, who are all attorneys, the law firm sent out letters that were generated from attorney-approved templates that include the name of the firm. The lawyers—who oversaw all departments and were responsible for the training and oversight of non-attorney staff—were also involved in drafting client contracts, making the decision to accept a client, reviewing clients’ policies and procedures, obtaining warranties as to the validity of the debts collected, and creating data “scrubbing” procedures and the criteria used to identify consumers who should not receive collection letters.

While the attorneys did not form a professional judgment about the validity of a debt or the appropriateness of sending a demand letter before it was sent, the procedures used by the law firm were previously approved by the state’s attorney general at the time, Richard Cordray, before he became the head of the CFPB and filed suit against the firm, the defendant pointed out.

In his opinion and order, Judge Nugent concluded that the CFPB offered no evidence to show that any consumer was harmed by the law firm’s practice of identifying itself as a law firm in the demand letters, that any consumer did or would be inclined to prioritize payment for the debts referenced in the demand letters over any other debt they may have owed, or that any consumer was or would be induced to pay the amount sought in the demand letters even if they did not owe the debt.

Further, the Bureau’s expert witness did not present credible evidence from which to infer that any consumers were misled by the demand letters, which were truthful on their face, the court said. The law firm’s “attorneys were meaningfully and substantially involved in the debt collection process both before and after the issuance of the demand letters,” the court wrote. “Even if [the law firm’s] letters had misrepresented the level of attorney involvement, Plaintiff could not prevail because there is no evidence that any consumer’s decision on when and whether to pay a debt was influenced by the inclusion of the attorney identifiers in [the law firm’s] demand letters.”

Holding that the CFPB failed to prove its case by a preponderance of the evidence, the court entered judgment in favor of the law firm.

Kraninger delays—While the Bureau plugged along with enforcement actions, the ongoing drama with regard to leadership at the CFPB has quieted down for the time being.

In June, President Donald Trump nominated Kathy Kraninger, currently an associate director at the Office of Management and Budget and a relative unknown. Kraninger appeared before the Senate Banking Committee but faced an additional list of questions from Democrats after the hearing with regard to her involvement in the president’s immigration policy.

The Committee postponed its vote on Kraninger’s nomination until Aug. 13, pushing back consideration by the full Senate even further, possibly after midterm elections.

To read the proposed stipulated final judgment and order, click here.

To read the opinion and order, click here.

Why it matters

The late summer lull seems to be in effect with regard to the Kraninger nomination, with a postponement of the Committee vote and, in turn, a delay on a vote by the full Senate. One thing remains clear: The Bureau under Kraninger would look a lot like that under Acting Director Mick Mulvaney’s watch, particularly with the continuing presence of Acting Deputy Director Brian Johnson. As Charles Washburn, co-chair of Manatt’s consumer financial services practice, explained to Bloomberg Law, Johnson’s guiding principle “has been that the Bureau should stay within the parameters of Dodd-Frank, no more and no less.”