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Another Court Rejects Rulemaking-by-Enforcement Action Attack on BCFP

On August 3, 2018, a federal district judge rejected the defendants’ motion to dismiss in Consumer Fin. Prot. Bureau v. Think Fin., LLC.  The motion, which was supported by a joint amicus curiae brief from The Native American Financial Services Association and the State of Oklahoma, asserted multiple grounds for dismissal, including:

  • that the structure of the CFPB is allegedly unconstitutional;
  • that the CFPB’s claims are not permitted by the Consumer Financial Protection Act (CFPA);
  • that the Complaint fails to, and cannot, join indispensable parties;
  • that the Court lacks personal jurisdiction over Think SPV;
  • that the Complaint fails to state cognizable claims under the CFPA; and
  • that certain claims against the Subsidiaries are time-barred.

In this enforcement action the CFPB (now, the “BCFP”) alleges that the defendants (Think  Finance, LLC, and a group of related entities). through the Tribal Lenders, collected loan payments that customers did not owe.  The Bureau’s claim is based on the contention that the loans at issue were void ab initio due to violations of state law. The Bureau also claims that Think Finance used unfair and abusive practices to collect on  the allegedly void loans and that the defendants provided substantial assistance to Tribal Lenders and other entities who, in turn, committed deceptive, unfair, and abuse acts or practices by demanding payment for and collecting the allegedly void debts.

In challenging the structure of the CFPB the defendants made the now-familiar argument that the Bureau’s structure violates the Constitution because the President may remove the Bureau’s Director only for cause. In making these arguments the defendants pointed out that the Acting Director of the Bureau and the Department of Justice also question the constitutionality of the CFPB’s structure.  Noting that nine district court decisions have determined that Congress did not violate the constitution in structuring the CFPB, and that in PHH Corp. v. Consumer Fin. Prot. Bureau, the en banc D.C. Circuit court of Appeals reversed a panel decision finding a lack of constitutionality, the district court rejected the defendants’ constitutionality arguments.

The argument that the Bureau’s claims are not permitted by the CFPA was based upon two primary contentions: first, that the CFPA does not allow the Bureau to bring unfair, deceptive, and abusive practice (UDAAP) claims based on state law; and second, that Congress explicitly prohibited the Bureau from imposing interest rate limits.  Rejecting the first of these arguments, the court stated:

The CFPA declares it unlawful for “any covered person or service provider . . . to engage in any unfair, deceptive, or abusive act or practice.” 12 U.S.C. § 5536(a)(1)(B). The fact that state law may underlie the violation—for example, to operate to void a loan, as alleged here—does not relieve Defendants, or any other covered person or service provider, of their obligation to comply with the CFPA.

Rejecting the second of the arguments, the court noted that two district courts have considered similar arguments and determined that “enforc[ing] a prohibition on collecting amounts that consumers do not owe” differs from “establish[ing] a usury limit.”  The court further stated:

The argument that CFPB seeks to enforce state law fails for similar reasons. The CFPA declares it unlawful for “any covered person or service provider . . . to engage in any unfair, deceptive, or abusive act or practice.” 12 U.S.C. § 5536(a)(1)(B). The fact that state law may underlie the violation—for example, to operate to void a loan, as alleged here—does not relieve Defendants, or any other covered person or service provider, of their obligation to comply with the CFPA.

The defendants further argued that the CFPA does not permit the Bureau to declare violations of federal law without prior rulemaking.  Again, relying on precedent, the district court noted that two district courts have determined that the CFPA imposes no requirement that the CFPB engage in rulemaking before bringing an enforcement action. Moreover, the “Supreme Court long has recognized that ‘the choice made between proceeding by general rule or by individual, ad hoc litigation is one that lies primarily in the informed discretion of the administrative agency.”  Addressing the due process aspect of the alleged rulemaking-by-enforcement action the court stated:

“[D]ue process requires fair notice of what conduct is prohibited.” . . . The CFPA provides fair notice that it prohibits “unfair, deceptive, or abusive act[s] or practice[s].” As other district courts have noted, other consumer protection statutes and regulations use these terms, and their meaning provides “the minimal level of clarity that the due process provision demands of non-criminal economic regulation.

Think also argued that the enforcement action should be dismissed because an indispensable party – the Tribal Lenders.  The lenders were alleged to be indispensable because: (a) the Tribal Lenders’ contractual interests would be impaired if the court determines that state law voids the loans at issue; and (b) the action could impair the Tribal Lenders’ ability to select tribal law to govern their contracts, and “would not address the Tribal Lenders’ contention that they are not ‘covered persons’ under the CFPA.”  However, the Tribal Lenders allegedly could not be joined because:

  • joinder was forbidden by tribal sovereign immunity; and
  • joinder was forbidden by immunity under the CFPA.

Acknowledging both the gravity of the tribal interests and the tribal sovereign immunity doctrine, the court nevertheless declined to “create a means for businesses to avoid regulation by hiding behind the sovereign immunity of tribes when the tribes themselves have failed to claim an interest in the litigation.”

In its rejection of all of the remaining grounds for dismissal the Court provided guidance for future efforts at dismissing a BCFP claim pursuant to the statute of limitations:

Defendants have failed even to attempt to establish when CFPB discovered the Subsidiaries’ alleged violations. Without such showing, Defendants cannot meet their burden to demonstrate that this action is time-barred.

Defendants seeking dismissals based upon the statute of limitations may want to take note of this portion of the decision and take pains to address (and negate) any application of the “discovery rule” to a statute of limitations defense.