Consumer Compliance Outlook: Second Issue 2016

On the Docket: Recent Federal Court Opinions


The Sixth Circuit rules that a dealership participating in automobile loan credit decisions is subject to ECOA adverse action notice requirements. PDF Tyson v. Sterling Rental, Inc., 836 F.3d 571 (6th Cir. 2016). Regulation B defines a creditor as “a person who, in the ordinary course of business, regularly participates in a credit decision, including setting the terms of the credit.” The regulation also defines creditor to include “a person who, in the ordinary course of business, regularly refers applicants or prospective applicants to creditors, or selects or offers to select creditors to whom requests for credit may be made.” 12 C.F.R. §1002.2(l). Creditors that only satisfy the referral definition are solely subject to 12 C.F.R. §1002.4(a), which prohibits discrimination, and 12 C.F.R. §1002.4(b), which prohibits discouragement, and not to the regulation’s other requirements. As the court explained: “Under Regulation B, in other words, ‘creditors’ who act as mere middle-men between applicants and lenders have no affirmative obligation to provide applicants with notice stating the reasons for any adverse action.” The plaintiff financed the purchase of a vehicle from the defendant, used car dealer Car Source, which relied on the nonparty Credit Acceptance Corporation (CAC), an indirect lender, to fund loans and used its software to underwrite them. The software generated a retail installment contract (RIC) for the plaintiff’s loan, which was assigned to CAC. However, CAC declined to pay Car Source an advance on the loan because of a discrepancy between the plaintiff’s pay stubs and her stated monthly income, which occurred because of a software input error made by the defendant. Consequently, the defendant asked the plaintiff to return to the dealership and then demanded that she sign a revised RIC and provide an additional down payment. The plaintiff declined, and the vehicle remained at the dealership. Her lawsuit alleged that the defendant violated ECOA by failing to provide an adverse action notice after changing the terms of the existing credit agreement to her disadvantage. Car Source argued that it merely referred applicants to other creditors, and therefore it was not subject to the adverse action notice requirements. The Sixth Circuit rejected this defense because the record showed that Car Source regularly participated in credit decisions by setting the terms of the credit, including determining loan rates, monthly payments, and other loan terms so as to make them acceptable to CAC. Additionally, it was Car Source, and not CAC, that took adverse action against the plaintiff in this matter. The plaintiff also sought injunctive relief under ECOA against Car Source, which the district court denied because it stated that such relief is only available to the attorney general and not to private parties. However, the Sixth Circuit held that the district court’s reading of 12 CFR §1002.16(b)(4) as limiting such relief was inconsistent with ECOA’s statutory language: “[u]pon application by an aggrieved applicant, the appropriate United States district court or any other court of competent jurisdiction may grant such equitable and declaratory relief as is necessary to enforce the requirements imposed under [the Act].” 15 U.S.C. § 1691e(c) (emphasis added). The case was remanded to the district court for further action.


The Eleventh Circuit reverses dismissal of a qualified written request (QWR) claim because the servicer failed to explain reasons for its determination that no error occurred. PDF Renfroe v. Nationstar Mortgage, LLC, 822 F.3d 1241 (11th Cir. 2016). RESPA, as implemented by Regulation X, requires servicers to investigate and respond to a QWR from borrowers concerning the servicing of their loans. 12 U.S.C. §2605(e); 12 C.F.R. §§1024.35–36. Several years after the plaintiff refinanced a mortgage loan, the servicing rights were transferred to defendant Nationstar, and her monthly payment increased by $100. The plaintiff sent a QWR to Nationstar to investigate the increase because she believed that certain mistakes had been made and requested a refund as appropriate. The defendant merely replied that “[T]he loan and related documents were reviewed and found to comply with all state and federal guidelines that regulate them. As such, the above-mentioned loan account will continue to be serviced appropriate to its status.” It also attached several loan documents without any further explanation. The plaintiff sued, alleging that the defendant had failed to properly investigate and respond to her QWR, instead merely “provid[ing] boilerplate statements and objections ... [and a] general conclusion that it did nothing wrong,” and did not refund her overpayments. Nationstar, in turn, filed a motion to dismiss the lawsuit. The district court affirmed the recommendation of a magistrate judge, dismissing the case on the grounds that the defendant’s response to the QWR satisfied RESPA as it stated that related loan documents were reviewed and adding that, in any case, the plaintiff had not alleged any resulting actual damages. On appeal, the 11th Circuit reversed the lower court, finding that the Consumer Financial Protection Bureau’s (CFPB) 2013 amendments to Regulation X’s servicer obligations required the defendant after receiving a notice of error to conduct a reasonable investigation and to state the reason(s) for its determination, which it failed to do: “If servicers want to try to shelter behind their RESPA response letters, they must provide a more comprehensive, supported explanation of their findings[.]” Regarding the defendant’s argument that the plaintiff did not suffer damages, the court held “When a plaintiff plausibly alleges that a servicer violated its statutory obligations and as a result the plaintiff did not receive a refund of erroneous charges, she has been cognizably harmed.” Accordingly, the court of appeals reversed the district court and remanded the matter for further proceedings consistent with its opinion.


The D.C. Circuit holds that CFPB’s leadership structure is unconstitutional. PDF PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (D.C. Cir. 2016). Title X of the Dodd–Frank Act (the Consumer Financial Protection Act of 2010) created the CFPB as an independent federal agency headed by a single director, who can only be removed for “inefficiency, neglect of duty, or malfeasance in office,” and who has final authority over, among other things, enumerated federal consumer financial law rulemakings and enforcement actions. In 2014, the CFPB initiated an enforcement action against PHH, a mortgage lender, for violating Section 8 of RESPA (“[p]rohibition against kickbacks and unearned fees”). An administrative law judge (ALJ) ordered PHH to pay $6.44 million for referring mortgage customers to mortgage insurers that purchased mortgage reinsurance from a wholly owned PHH subsidiary. PHH appealed the ALJ’s decision to Richard Cordray, the CFPB’s director. He affirmed the ALJ’s RESPA findings and increased the disgorgement order to approximately $109 million. PHH sought review by the U.S. Court of Appeals for the D.C. Circuit, arguing that the structure of the CFPB as an independent agency with a single director who could only be removed by the president for cause violated the Constitution’s separation of powers. A divided panel of the D.C. Circuit granted PHH’s petition, finding that the CFPB was unconstitutionally structured as an independent agency led by a single agency head. In reaching its decision, the court distinguished between independent and executive agencies. Independent agencies, such as the CFPB, are led by agency heads who can only be removed by the president for cause, whereas executive agencies, such as the Department of Justice, are led by officers who can be removed by the president without cause. The court noted that, although executive agencies are sometimes led by a single officer, they operate under the executive branch chain of command and are therefore accountable to the president. As the head of an independent agency can only be removed for cause, the court explained, independent agencies, such as the Federal Trade Commission and the Securities and Exchange Commission, have historically been headed by multiple board members, commissioners, or directors so as to diffuse power and make arbitrary decisions less likely. “The CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency.” Although it determined that the CFPB’s leadership structure was unconstitutional, the court declined to invalidate the CFPB and instead severed the provision specifying that the president can only remove the CFPB’s director for cause. This allows the CFPB to continue performing its responsibilities but “as an executive agency akin to other executive agencies headed by a single person.” In its decision, the court also addressed two other issues raised by PHH concerning the statute of limitations for CFPB enforcement actions and whether the CFPB’s RESPA Section 8 determination was legally correct. Update: On November 18, 2016, the CFPB petitioned the D.C. Circuit for an en banc review of the above decision.


The Eighth Circuit holds that a plaintiff alleging a procedural violation of a privacy statute without suffering concrete and particularized harm lacks Article III legal standing. PDF Braitberg v. Charter Communications, Inc., 836 F.3d 925 (8th Cir. 2016). The plaintiff alleged in a lawsuit, on behalf of himself and a putative class of former customers, that the defendant, his cable services provider, violated the Cable Communications Policy Act (CCPA) by retaining customers’ personally identifiable information (PII) for long periods after they closed their accounts. The CCPA states that “[a] cable operator shall destroy personally identifiable information if the information is no longer necessary for the purpose for which it was collected and there are no pending requests or orders for access to such information [by the subscriber] or pursuant to a court order.” The plaintiff claimed that the defendant’s retention of the customers’ PII represented a “direct invasion of their federally protected privacy rights” and served to deprive customers of the full value of the services they had purchased from the defendant. The district court dismissed the case on the grounds that the plaintiff lacked legal standing and for failure to state a claim because the plaintiff did not allege any actual damages. On appeal, the Eighth Circuit affirmed, citing the Supreme Court’s recent decision in Spokeo, Inc., v. Robins, 136 S. Ct. 1540 (2016), in which it held that “[a] concrete injury must ‘actually exist,’ and it must be ‘real,’ not ‘abstract’” and that a plaintiff cannot “allege a bare procedural violation [of a statute], divorced from any concrete harm, and satisfy the injury-in-fact requirement of Article III.” For the standing requirement, the Eighth Circuit explained: “Article III of the Constitution limits the jurisdiction of the federal courts to cases or controversies. A plaintiff invoking the jurisdiction of the court must adequately allege an injury in fact, an essential element of the ‘irreducible constitutional minimum of standing.’” The court found that “the plaintiff does not allege that [the cable provider] has disclosed the information to a third party, that any outside party has accessed the data, or that [it] has used the information in any way during the disputed period. He identifies no material risk of harm from the retention; a speculative or hypothetical risk is insufficient.” The Eighth Circuit therefore affirmed dismissal of the case.