Companies that report consumer accounts to the credit reporting agencies are experiencing an unprecedented increase in so-called “Fair Credit Dispute” lawsuits. These hybrid consumer claims typically assert violations of the Fair Debt Collection Practices Act (“FDCPA”) and/or the Fair Credit Reporting Act (“FCRA”) arising from a similar factual pattern (discussed below). Due to the sheer volume of new cases filed nationwide, this surge of Fair Credit Dispute litigation is being compared to the thousands of cases the credit and collection industry faced recently with both Telephone Consumer Protection Act lawsuits and Hunstein lawsuits.

Consumer Form Letter Commences Dispute

Most of the recent Fair Credit Dispute cases follow a similar factual pattern: The consumer mails a form dispute letter to the furnisher (typically a creditor or debt collector). While these form letters vary, most assert that the consumer disputes all debts. The letters may also state that the consumer does not seek written verification of the debt. Further, some dispute letters indicate that the consumer may only be contacted during a brief time frame each week and only by certain means of communication, such as email or text. Some experts in our industry note that these recent consumer dispute letters are similar to form letters sent by many credit repair organizations.

Furnisher Investigates Consumer Dispute

After receipt of the consumer dispute, the furnisher (typically a creditor or debt collector) commences an investigation and reports the code “XB” to the credit reporting agencies (the credit bureaus) on the disputed account. “XB” denotes that the consumer disputed the account information “directly” to the furnisher and that the furnisher is “conducting its investigation.”* The furnisher then investigates the dispute and mails the consumer a written response advising on the outcome of its investigation.

Upon conclusion of the investigation, the furnisher then reports the code “XH” to the credit reporting agencies which denotes that the consumer’s account was “previously in dispute” and that the furnisher “completed its investigation.”

Consumer Commences Fair Credit Dispute Lawsuit

After the furnisher concludes its investigation, the consumer typically commences a so-called Fair Credit Dispute lawsuit against the furnisher, asserting violations of the FDCPA and often the FCRA due to the furnisher’s “failure” to report the account as disputed upon conclusion of the dispute investigation. Specifically, the consumer will allege that the furnisher should have reported the code “XC” to the credit reporting agencies when concluding the investigation, instead of “XH”. The “XC” code denotes that the investigation of the consumer’s dispute is “complete,” but that the consumer “disagrees” with the results.

The Plaintiffs in these matters will contend that they advised the furnisher of an “ongoing dispute” and thus the furnisher should have used the XC code to denote the ongoing dispute. Further these Plaintiffs allege that the XH code is misleading because it indicates the “previous dispute” and the furnisher’s “completed investigation” but is silent as to whether the consumer continues to dispute after the completion of the investigation.

Courts Uniformly Reject Consumer Claims of “Ongoing Dispute”

As noted in a previous edition of InsideARM, Courts have examined and rejected these Fair Credit Dispute claims.ii In Wood v. Security Credit Services (Case No: 2020-CV- 02369, N.D. Ill. 2023) the Court examined the very fact pattern described above in the context of an FDCPA case and dismissed the consumer’s claim completely, writing:

“. . . when a debt collector investigates a dispute and communicates the results to the consumer, the dispute is resolved unless the consumer indicates that it disagrees with the results.”

This result above was similar to the ruling of the in Foster v. AFNI No. 2:18-CV-12340 (E.D. MI March 31, 2020) where the Court reviewed a similar fact pattern, granted summary judgment in favor of the debt collector, completely dismissed the claims of the consumer and wrote:

“After receiving the letter from Defendant indicating that it concluded that debt was valid, Plaintiff did not communicate any disagreement with the investigation. Instead, she filed this lawsuit. On this record, Defendant could not have had knowledge that Plaintiff disputed the outcome of its investigation.

Plaintiff argues that Defendant should have understood her original dispute of the debt to mean that she also disputed the outcome of the investigation and also disputed any resolution that involved her owing the debt. But she did not communicate this to Defendant at any point. . . .”

Three Strategies for Avoiding “Fair Credit Dispute” Liability

The prevalence of these Fair Credit Dispute lawsuits nationwide cannot be understated. The author of this article is presently involved in defending furnishers against these consumer FDCPA and FCRA claims in jurisdictions including Alabama, District of Columbia, Florida, Georgia, New York, Pennsylvania, Tennessee and Texas. Below are three strategies every furnisher should consider to avoid liability in these lawsuits:

1. Investigate all Direct Disputes

The recent Fair Credit Dispute cases all begin with the consumer sending a form letter to the furnisher. Furnishers must have a written policy with procedures detailing how direct disputes are investigated and be aware of form letter disputes used by consumers. Often these form consumer disputes may include contradictory language such as “I dispute but don’t send me verification”.

Further, we expect that the consumer dispute form letters will continue to evolve to challenge even the recent Court rulings cited herein. Furnishers must continue to monitor these form consumer disputes for variations and new attempts to create liability.

2. Consider all Defenses

The Fair Credit Dispute claims are scripted and formulaic. Thus, these claims are susceptible to defenses including challenges to standing (because the consumer suffered no harm) and materiality.

Additionally, the written form disputes that the consumers use in these recent cases are often sent months after the debt collector sends the consumer a validation notice. At least one Federal Appellate Court has held that a consumer’s failure to articulate a dispute in response to the validation notice precludes subsequent challenges to the validity of the debt. Richmond v. Higgins 435 F.3d 825 (8th Cir. 2006).

3. Avoid Settlement if No Liability

Many companies have chosen to settle these recent Fair Credit Dispute cases for less than the anticipated cost of litigation defense. Unfortunately, settling these cases only results in more litigation, similar to the issues caused by settlements during the peak of the TCPA and Hunstein lawsuits. The plain language of the FCRA, the FDCPA and case law all support the furnishers in these cases as set forth above. Thus, we encourage furnishers to fight these cases where counsel advises that the facts and law warrant a vigorous defense.

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*  The codes XB, XH and XC — which are discussed in this article — are components of the Metro 2 Format, which was developed by the Consumer Data Industry Association for furnishers to report debts to the national credit reporting agencies.

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This article is provided only as a general discussion of legal principles and ideas. Every situation is unique and must be reviewed by a licensed attorney to determine the appropriate application of the law to any particular fact scenario. If you have a legal question, consult with an attorney. The reader of this publication will not rely upon anything herein as legal advice and will not substitute anything contained herein for obtaining legal advice from an attorney. No attorney-client relationship is formed by the publication or reading of this document. Rossman Attorney Group, PLLC assumes no liability for typographical or other errors contained herein or for changes in the law affecting anything discussed herein.

LOCKPORT, N.Y. — Spire Recovery Solutions, a respected and compliant collection agency headquartered in Lockport, NY, continued its community outreach efforts with another involved quarter focusing on veterans support and the local school district. 

In July, Spire donated to Taps, a national nonprofit organization providing compassionate care and comprehensive resources for all those grieving the death of a military or veteran loved one. In August, the Spire Recovery Solutions team supported The Freedom 13, an organization working closely with veterans and their families to honor every American Hero that made the ultimate sacrifice. In September, Spire kicked off the new school year by supporting the local Wrestling team at the Royalton-Hartland School District. 

“At Spire Recovery Solutions, we believe that success is not solely measured by financial achievements but also by the positive impact we have on the communities we serve,” said Joseph Torriere, President of Spire Recovery Solutions. “My brother and I began this organization both as veterans of the U.S. Military. Our commitment to community outreach is at the heart of our mission and veterans support will always be at the forefront of our minds.” 

TAPS

The Tragedy Assistance Program for Survivors or, TAPS, plays a vital role in our society by providing compassionate care and comprehensive resources for individuals grieving the loss of a military loved one. TAPS recognizes the unique and often challenging journey that bereaved military families and veterans endure. TAPS not only offers solace and support during these difficult times but also fosters a sense of community where individuals can connect with others who understand their pain. 

Through their services, they ensure that those who have sacrificed for our nation, and their families, are not left to navigate the grieving process alone. In 2022, TAPS connected with 8,849 newly bereaved loved ones, adding to the nearly 100,000 military survivors currently receiving support from the organization. TAPS answered over 25,623 calls, resolved over 6,397 casework challenges, secured over $3.9 million dollars in retroactive benefits for survivors and connected military survivors with over $215 million dollars in education benefits. 

The Freedom 13

The Freedom 13 is a unique nonprofit organization working to secure recreational retreats in each state, offering a place that veterans and their families can use, free of charge, to reconnect, bond, or strengthen old relationships and make new ones with families in similar situations. Each village will be unique and have additional assistance programs like PTSD counseling, job training, search, and placement, and service dog help and placement. 

The Freedom 13 began as an organization to remember a team of 13 U.S. military heroes who lost their lives on the front lines. Jared’s parents began the nonprofit to start the Recreational Villages Project and continue to honor the legacy of Jared, Nicole, David, Darin, Ryan, Hunter, Dylan, Kareem, Rylee, Daegan, Johanny, Maxton, and Humberto. 

Royalton-Hartland School District

Community involvement goes beyond business success; it’s about making a positive impact where we live and work. Supporting Spire’s local schools and youth sports programs helps foster a sense of unity and camaraderie within its community. It provides opportunities for young athletes to learn valuable life skills such as discipline, teamwork, and perseverance, which are integral to their personal and academic growth. By investing in initiatives like the wrestling team, Spire not only promotes physical fitness and sportsmanship but also nurtures the next generation of community leaders. 

In addition, with many of its employees’ families attending these schools, Spire thought it was important to continue to support our employees in every way possible. The team is one cohesive family in and out of the office. 

Learn More Online

To learn more about Spire Recovery Solutions, or read about the various other organizations it has supported in the past, please visit their website. Through collective efforts, Spire believes we can build stronger, more compassionate communities for the present and future generations.

About Spire Recovery Solutions

Spire Recovery Solutions, LLC was founded by U.S. Veterans Joseph Torriere and Jacob Torriere. Spire is a professional, nationally licensed full-service debt collection agency that assists creditors in the recovery of outstanding balances while providing consumers with exceptional customer service. Spire Recovery Solutions uses customized processes and state-of-the-art technology to provide transparency and compliance that clients and consumers trust and rely on while working together toward account resolution.

The statute of limitations in collections cases is crucial but complex. This statement applies equally to lawsuits filed to collect debts and to suits brought by consumers who allege a violation of the Fair Debt Collection Practices Act (FDCPA). Recently, a court in the Southern District of Georgia held that the triggering date for the statute of limitations in an FDCPA action against a debt collector was the date a consumer was served with the debt collector’s underlying debt collection suit, not the date the suit was filed.  

In Daiss v. Robert S.D. Pace, Civil Action 4:22-cv-236 (S.D. Ga. Aug 24, 2023), a consumer raised FDCPA claims alleging the debt collector attempted to collect a debt through false and deceptive means. Specifically, the consumer alleged that the debt collector’s filing of a debt collection suit was in and of itself an FDCPA violation. The debt collection action was filed with the court on August 16, 2021, and the consumer was served on August 20, 2021. The consumer’s FDCPA action was filed on August 19, 2022. 

The debt collector argued that the consumer’s FDCPA suit was time-barred because it was filed more than one year after the debt collection action was filed and was thus outside the applicable 1-year statute of limitations. The consumer responded that the statute of limitations did not start to run until he was served with the complaint. Since he was served on August 20, 2021, and filed his FDCPA action on August 19, 2022, he claimed his FDCPA suit was timely.

The court acknowledged that there is no consensus regarding when the statute of limitations begins to run in cases where the alleged violation is the filing of a debt collection lawsuit. Some courts have held that the limitations period commences when the underlying complaint is filed, while others have taken the view that it starts at the time of service of process. The court noted that though the 11th Circuit has not decided when the violation occurs when the claim arises out of a collection suit, it has held that the statute of limitations for FDCPA matters begins to run at “the debt collector’s ‘last opportunity to comply’ with the FDCPA.”

Thus, the court sided with the consumer and held that “when a plaintiff’s FDCPA claims arise out of a collection suit, the ‘violation occurs’ for purposes of Section 1692k(d) when the plaintiff is served because that is the debt collector’s last opportunity to comply with the statute.”

insideARM Perspective: 

This case highlights the importance of staying up to date not only on any changes to state laws regarding statute of limitations but also on the state and circuit court interpretations of those statutes. Further, This case also serves as a reminder to the collection community: In jurisdictions that follow this line of thinking, FDCPA violations stemming from filing a debt collection lawsuit can only be prevented until the consumer is served with that lawsuit. 

A New York federal district court has denied a motion to dismiss the lawsuit filed in January 2022 by the CFPB against three companies that purchase portfolios of defaulted debts (Corporate Defendants) and three individuals who are owners and/or officers of the Corporate Defendants (Individual Defendants). 

The lawsuit alleges that the Corporate Defendants contracted with debt collectors to collect consumer debts on their behalf either directly or through other debt collectors or sold consumer debts to debt collectors, some of whom were contractually required to make ongoing payments to the Corporate Defendants.  The CFPB alleges that both debt collectors who collected debts on the Corporate Defendants’ behalf and debt collectors to whom the Corporate Defendants sold debts used deceptive collection tactics, including false threats of lawsuits, arrest, and jail, and false statements about credit reporting.  

The CFPB also alleges that the Corporate Defendants received complaints from consumers about the debt collectors’ unlawful practices but took no meaningful action to prevent or preclude it.  The CFPB’s claims against the Corporate and Individual Defendants consist of claims for Consumer Financial Protection Act (CFPA) and Fair Debt Collection Practices Act (FDCPA) violations based on vicarious liability for the debt collectors’ CFPA and FDCPA violations and claims for substantially assisting CFPA and FDCPA violations by the debt collectors.

In denying the motion to dismiss filed by the Corporate and Individual Defendants, the rulings made by the court include the following:

• The defendants can be “covered persons” or “related persons” under the CFPA even if only the third-party debt collectors actually collected the debts. Under the CFPA, a “covered person” includes “any person that engages in offering or providing a consumer financial product or service.”  A “consumer financial product or service” includes “collecting debt related to any consumer financial product or service.”  A “related person” includes “any director, officer or employee charged with managerial responsibility” for a covered person.

• CFPA liability can be based on vicarious liability and is not precluded by the existence of “substantial assistance” liability in the CFPA.  Therefore, the CFPB can proceed under both a vicarious liability and a substantial assistance liability theory.  The Corporate Defendants can be vicariously liable for unlawful acts taken by the debt collectors with actual authority to act on their behalf.

• The Individual Defendants can be liable for the debt collectors’ unfair or deceptive acts or practices if they had actual knowledge of the unlawful conduct and the authority to control it.

• Federal Rule of Civil Procedure 9(b), which requires a party alleging fraud or mistake to state with particularity the circumstances constituting fraud or mistake, does not apply to the CFPB’s substantial assistance claims.  A claim of deceptive acts or practices under the CFPA does not require proof of the same essential elements as common-law fraud and the knowledge or recklessness standard required for substantial assistance liability under the CFPA does not transform a substantial assistance claim into the sort of fraud-based claim that would trigger Rule 9(b).

• The CFPB’s allegations that the Corporate and Individual Defendants placed debts for collection with or sold debts to the debt collectors who engaged in CFPA violations, helped those debt collectors succeed in violating the CFPA by taking steps to conceal the violations, and profited from their business relationships with the debt collectors is sufficient to allege that the Corporate and Individual Defendants substantially assisted the underlying CFPA violations.

• FDCPA claims brought by the CFPB are governed by the CFPA’s three-year statute of limitations and not the FDCPA’s one–year statute of limitations.

• A company that is a “debt collector” under the FDCPA can be vicariously liable for FDCPA violations committed by other debt collectors in connection with collecting debts on the company’s behalf.  A company that purchases portfolios of defaulted consumer debt and derives the majority of its revenues from debt collection can be a debt collector under the FDCPA because the principal purpose of its business is the collection of debts.

When it was filed, we observed that the CFPB’s claims in this enforcement action seemed particularly aggressive because rather than taking action against the debt collectors used by the Corporate Defendants or the debt buyers to whom they sold debts, the CFPB was seeking to hold the Corporate and Individual Defendants directly and separately responsible for the violations committed by these third parties.  While the CFPB will ultimately have to produce evidence to support its theories of liability and prove its claims to win on the merits of its lawsuit, the denial of the motion to dismiss means that the Corporate and Individual Defendants will be required to invest additional time and resources to defend the lawsuit.  As such, the takeaway for debt sellers (including first-party creditors) is that they should consider taking steps to reduce the risk of similar claims of vicarious liability or substantial assistance.  Such steps include performing appropriate due diligence when selecting debt collectors or debt buyers, monitoring debt collectors and debt buyers for compliance with applicable consumer protection laws and regulations, and promptly taking appropriate action when compliance issues arise to ensure full remediation of any issues.

CLEVELAND, Ohio — Revenue Group welcomes Chris Taylor as its new Chief Information Officer. Chris spent the last eighteen years as the Director of Operations and Technology followed by the Controller and CIO at National Enterprise Systems (NES). Starting in IT, he progressed to become a dual professional in Financial Services and Information Technology, taking a special interest in debt collections. 

Over the course of his career, Chris has gained experience across all collection portfolios including student loans, credit cards, retail cards, mortgages, lines of credit, DDA, and medical accounts. Being that technology is an integral part of the overall collections operation, Chris was managing the technology component while also directly involved in all aspects of operations including implementation, compliance, dialer management, analytics, reporting, and more. 

Chris received his Bachelor’s in Information Science from the University of Pittsburgh and his MBA in Executive Management from Ohio University. During his time at NES, he became a member of Ontario Systems Hall of Fame and received Manager of the Year in 2007 and 2008, recognized for Outstanding Contribution. 

Speaking on Chris joining Revenue Group, COO Eric Boone said, “Our success as a company is built on the talent and dedication of our team. We’re thrilled to welcome Chris Taylor aboard, as his expertise and passion will undoubtedly contribute to our continued growth and innovation.”

As CIO, Chris will oversee the people, processes and technologies at Revenue Group while driving a technology strategy that brings innovation and performance to drive growth for their clients. 

About Revenue Group

Revenue Group is a leading revenue cycle management company with over 29 years of experience serving clients in a wide variety of industries. We merge industry-leading technology with premier customer service to help our clients generate revenue while ensuring a positive experience for their customers. Recognizing that every client is unique, Revenue Group offers tailored strategies and services to align with the client’s specific business model, customer demographic, and goals to deliver proven results.

Arrears Inc., the leading name in AI-driven debt collection and account receivables solutions, proudly announces the launch of its cutting-edge A.I. Summarizer. This groundbreaking feature is engineered to empower collection agencies and businesses with instant information, bringing to focus key data that significantly enhances their ability to tailor effective strategies with pinpoint precision.

In the competitive world of debt collection and accounts receivable management, staying one step ahead with real-time insights into client behaviors is crucial. Arrears’ A.I. Summarizer serves as a pivotal tool in this endeavor, offering a quick yet comprehensive overview of client actions and trends. This is a game-changer for collection strategies, enabling businesses to ultimately foster better client relationships and improve recovery rates.

The A.I. Summarizer’s prowess lies in its ability to sift through vast amounts of data swiftly, condensing it into concise, insightful reports. With just a click, collection teams can now have a clear snapshot of client payment histories, communication preferences, and interaction trends. This immediate access to crucial information not only expedites the decision-making process, but also refines the collection strategy, aligning it more closely with client behaviors and expectations.

Trent McKendrick, CEO of Arrears.com, expressed his enthusiasm, “The A.I. Summarizer is not merely a feature; it’s a significant stride towards data-driven collection strategies. In an era where information is power, providing instant, actionable insights to our clients is paramount. This innovation is a reflection of Arrears’ commitment to equip businesses with intelligent tools that drive success in collections and accounts receivable management.”

The seamless integration of the A.I. Summarizer with the existing robust platform of Arrears further amplifies its efficiency. Now, extracting valuable insights and tracking client behaviors is a seamless process, enabling businesses to react swiftly to evolving scenarios, thus optimizing their collection efforts.

The A.I. Summarizer feature is included in Arrears’ affordable $99 monthly subscription, making cutting-edge A.I technology easily accessible to businesses of all shapes and sizes. This pricing model underscores Arrears’ commitment to democratizing AI technology, ensuring businesses can leverage intelligent tools to optimize their collection efforts without breaking the bank.

The enthusiastic team at Arrears.com extends an invitation to all B2B2C enterprises to explore the new A.I. Summarizer feature and experience firsthand the transformative impact it brings to collections and client relationship management.

For more information about the A.I. Summarizer and other innovative solutions by Arrears, visit www.arrears.com or connect with them on LinkedIn: https://www.linkedin.com/company/arrears

Embark on a journey towards enriched insights and enhanced collection strategies with the A.I. Summarizer by Arrears.com. The future of intelligent, data-driven collections is here.

On September 28, 2023, the Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) (collectively, the agencies) filed an amici curiae brief urging the U.S. Court of Appeals for the Second Circuit to reverse a district court’s decision finding a furnisher’s investigation of a consumer’s dispute and subsequent furnishing of the disputed information to be reasonable under the Fair Credit Reporting Act (FCRA).

As discussed here, in Suluki v. Credit One Bank, N.A., a New York federal district court granted summary judgment for the defendant holding that the plaintiff was unable to prove that a reasonable investigation of her dispute alleging identity theft would have shown that information in her credit report was inaccurate. “The evidence shows at most that [the plaintiff’s] mother opened the account in [the plaintiff’s] name. There is no alternative investigation that would have allowed [the defendant] to determine that [the plaintiff] did not give her mother permission to open the account, short of relying on a police or FTC report to that effect which [the plaintiff] never provided.” Because the plaintiff did not allege any additional steps the defendant could have taken, the court granted summary judgment in the defendant’s favor.

But the agencies argue in their brief that the district court’s holding overlooks the fact that furnishers are required to remove disputed information when it is unverifiable. Section 1681s-2(b)(1)(E) of the FCRA states that when disputed information “is found to be inaccurate or incomplete or cannot be verified,” the furnisher must delete, modify, or permanently cease reporting the disputed information. Thus, the agencies argue that the plaintiff should not have been required to make a showing that the reporting was inaccurate. Instead, “if [the defendant] did not have sufficient evidence to show that the disputed information was true yet reported that its investigation verified the accuracy of the disputed information and continued to report that information, then [the plaintiff] could have sustained damages as a result of its improper continued reporting of the disputed information.”

In the press release announcing the filing of the agencies’ brief, the FTC stated, “[i]naccurate information on a consumer report can hamper people’s ability to get housing, employment, and credit. The FTC and CFPB maintain that the lower court’s decision could impact consumers’ rights under the FCRA to dispute the completeness or accuracy of information and have it removed if a furnisher cannot verify that it is accurate.”

The CFPB appears well poised to rebuff a challenge to its funding structure after the Supreme Court held oral argument on the issue on October 3.  I attended the oral argument and summarized some of my observations, thoughts, and predictions here.  

At issue in the case is the manner in which the CFPB is funded.  The agency is organized under the Federal Reserve System and is not subject to Congress’s annual appropriations process.  Instead, the director requests operating funds from the Federal Reserve each year up to a statutory cap of 12% of the Fed’s overall budget.  The Federal Reserve System, in turn, is funded mainly through assessments on financial firms and certain interest income on investments; it too is not subject to regular Congressional appropriations.  

Trade associations led by the Consumer Financial Services Association (CFSA) challenged the Bureau’s payday lending rule by arguing, among other things, that the CFPB’s unique funding structure violates the constitutional provision requiring Congress to appropriate funds for executive agencies.  As the litigation moved through the federal courts, the Fifth Circuit accepted CFSA’s argument and castigated Congress for “abandoning” its responsibility under the appropriations clause by creating a funding framework that is “double-insulated” from Congress.  CFSA v. CFPB, 51 F.4th 616, 639 (5th Cir. 2022).  The Fifth Circuit went further, concluding that the constitutional defect demanded vacatur of the payday rule.  The Supreme Court granted the CFPB’s request for review.

After oral argument, the high court seems likely to reverse the Fifth Circuit’s decision on the appropriations clause issue, and I doubt it will be close.  Justices Barrett, Thomas, and Kavanaugh all seemed skeptical of CFSA’s position.  Chief Justice Roberts asked probing questions of the solicitor general, but I would not be surprised if he ultimately sided with the CFPB.  Justice Gorsuch, sitting next to Barrett, seemed to align with her.  He has a history of cynicism toward the administrative state generally, but he seemed to appreciate the novelty of the appropriations clause challenge and I would not pigeon-hole him here.  Justice Alito was the most critical of CFPB’s position but even he appeared nonplussed at times with CFSA’s arguments. 

Bottom line: I see the CFPB winning this case easily.  In the immediate aftermath of the argument, I suggested the vote could be 9-0 but more likely 8-1 or 7-2.  After a few days of reflection, I stand by that prediction.  I add, however, another prediction—that we’ll see some number of concurring opinions among the majority.  This is a novel area; no court has ever struck down an act of Congress on the theory that it violates the appropriations clause, and there are few cases even to consider it.  The justices were plainly intrigued by the concept and at argument explored through hypotheticals how such a challenge could succeed in the future.  I expect several justices will attempt to articulate some standard for analyzing appropriations clauses challenges, even though most if not all of them will view the CFSA funding structure as safely within constitutional limits.  

My vote tally prediction flows from my assessment of the justices’ questions, comments, and demeanor at argument.  Beyond that, it was telling that the issue of remedy was barely touched upon.  I suspect that was because the entire room understood that the CFPB will be winning on the appropriations clause issue and any talk of remedy is moot.  It was Justice Sotomayor who raised the remedy issue, once to each advocate.  She will certainly side with the CFPB here.  Her raising the remedy issue was less an attempt to earnestly determine what the Court should do after striking the down the funding scheme, and obviously more an effort to demonstrate that ruling for the CFPB on the merits carries an important fringe benefit for the Court—the ability to side-step the weighty task of determining whether to strike down as unconstitutionally tainted not just the payday rule but everything the CFPB has done since it opened its doors in 2011.  

The solicitor general argued that the retroactive remedy employed by the Fifth Circuit “would be profoundly disruptive” and pointed to the Mortgage Bankers Association amicus brief for support (it warned that nationalizing the Fifth Circuit’s rationale would trigger chaos in the mortgage markets).  She also noted that a prospective remedy alone would halt enforcement of the payday rule, amounting to a “meaningful form of relief” for CFSA.  Counsel for CFSA distanced the trade association from the Fifth Circuit’s decision on remedy.  He said the circuit court’s rationale did not “stand[] on its own terms” because a win for CFSA on the appropriations clause will require going back to Congress for “a valid appropriation,” which in turn, he argued, will provide Congress an opportunity to “ratify” prior Bureau actions.  The discussion on remedy never went far and, again, I view that as a harbinger for a CFPB victory on the appropriations clause issue. 

Throughout the argument, the solicitor general was very persuasive and knowledgeable on Congress’s historical practice going back to the founding of the country (something this Court emphasizes at every opportunity when it comes to constitutional interpretation).  On rebuttal in particular she was very effective.  She made numerous references to the funding arrangement for early executive agencies, especially the Customs Service, which received a standing appropriation without a cap.  She also liberally invoked the constitutional provision limiting Congress’s ability to fund the Army beyond two years.  That provision demonstrates that the founders had no durational concerns with other (non-Army) appropriations, she argued.  

Counsel for CFSA landed a few rhetorical points but struggled to articulate a governing principle that results in vitiating the CFPB’s funding framework without affecting other agencies like the FDIC and the Federal Reserve.  The SG called this CFSA’s attempt to “gerrymander a rule” in their favor.  CFSA’s counsel held to the position that to be a constitutionally valid appropriation, Congress must specify the amount of the appropriation.  On rebuttal, the SG noted that the government counted 400 instances this year alone where Congress declined to specify a spending amount but instead set a cap (as it did with the CFPB).  CFSA also argued that by arranging to fund the CFPB “in perpetuity” Congress wrongly gave up its authority to serve as “a continuing check on executive power.”  Justice Kavanaugh’s questioning on this issue made clear that Congress could change the CFPB funding mechanism any time, and CFSA conceded as much.  At that point, none of the justices seemed concerned with the “perpetual” nature of the funding.  Counsel for CFSA was left to lean solely on the notion that Congress must specify an appropriation amount—a limp argument in light of the historical record. 

The discussion at times centered on a hypothetical situation (discussed initially in the briefs) in which Congress grants the president power to spend one quadrillion dollars however he sees fit—the implication being that at some point Congress could be seen as unconstitutionally transferring the power of the purse to another branch.  There was a sense among all justices that we are a long, long way from that.  The CFPB is among the smallest executive agencies, its funding (about $700M per year) is still subject to a cap, and Congress can change it at any time.  Justice Kagan may have previewed the prevailing opinion when she noted that history reveals “enormous variation” in how Congress makes appropriations, implying that the uniqueness of any one approach does not render it unconstitutional.  Whether and how Congress could ever run afoul of any constitutional restraints on its appropriations power will remain the quadrillion dollar question.  But in this case at least, it seems the CFPB has avoided another existential threat.  

On September 19, the CFPB published a recent decision and order denying the petition of one of the nation’s largest private student loan servicers to set aside the CFPB’s civil investigative demand (CID) in connection with its investigation into potential violations of the CFPA’s prohibition of unfair, deceptive, and abusive acts and practices for attempting to collect on loans that had been previously discharged in bankruptcy. The order instructs the servicer to “comply in full” with the requests for documents and information set forth in the Bureau’s June 2023 CID.

The servicer objected to the CFPB’s investigation, arguing, among other things, that the Bureau lacks authority to enforce the U.S. Bankruptcy Code.  The servicer also argued that the Bankruptcy Code displaces the CFPA if the reason a debt is not owed is due to a bankruptcy discharge.

The Bureau rejected the servicer’s arguments, stating “[t]he Bureau seeks to determine whether a student loan servicer violated the prohibition on unfair, deceptive, and abusive acts and practices not just by making individual attempts to collect discharged debts from individual debtors, but also, more globally, by having no policies and procedures in place to determine whether loans in the servicer’s portfolio are dischargeable in bankruptcy via standard bankruptcy orders, a practice that could put entire populations of borrowers at risk of harmful and unlawful collection efforts.”  It went on to say “[t]he bureau does not seek to investigate potential violations of the Bankruptcy Code, but rather potential violations of the CFPA.”  The CFPB also noted that courts have “repeatedly held that the Bureau can bring CFPA claims based on companies’ attempts to collect debts that consumers do not owe due to the impact of some other statute.”

Last week, a group of consumer advocate organizations filed a Petition for Rulemaking with the CFPB that would prohibit the use of pre-dispute arbitration clauses in consumer contracts in favor of arbitration clauses that would permit consumers to choose between arbitration and litigation only after a dispute has arisen. We published a blog last Friday in which we enumerated the many flaws in the Petition and urged the CFPB to reject it.

After we published our blog, Evan Weinberger of Bloomberg received the following response from the CFPB in response to Evan’s request for comments on the filing of the Petition:

“Americans are overwhelmed by increasingly lengthy, complex, and one-sided fine print in form contracts. The CFPB is focused on companies that use fine print to extract extra money, lock people into unwanted business relationships, gain advantages they could not obtain in fair and competitive markets, or circumvent the rule of law. For example, in January the CFPB proposed to create a public registry of nonbank financial companies that purport to limit consumer rights or protections in form contracts, including arbitration clauses.

We welcome participation in our rulemaking petition program, on the part of the consumer groups who filed this petition or any other members of the public. We are carefully considering the proposal relating to arbitration clauses, and will be opening a public docket and taking comment from the public on the proposal.”

This is an alarming and rapid reaction by the CFPB. We would have expected a much shorter reaction to the filing of the Petition, something like “We will take the filing of the Petition into consideration and respond to you in due course.” Instead, it almost looks like the CFPB invited these consumer advocacy groups to submit the Petition. At a minimum, it certainly appears as if the groups have been discussing this with the CFPB for some period of time

At this point, we don’t know when the Petition will be published in the Federal Register or what the deadline for submitting comments to the CFPB will be.

While simply re-publishing the Petition will not create a lot of work for the CFPB, it will create a large volume of work for their staff to read and analyze the comments and then decide whether to launch a rulemaking. It seems to us that before publishing an Advance Notice of Proposed Rulemaking or Proposed Regulation, the CFPB would need to do a new study since the prior study (which took three years from launch date until publication) concluded that pre-dispute arbitration provisions are fair to consumers. While we believe that the Petition is precluded by the Congressional Review Act, if the CFPB were to rely on the results of the prior study, it would come close to conceding that the Petition is substantially the same as the former arbitration regulation promulgated by the CFPB and then overruled by Congress under the Congressional Review Act.

As we also pointed out in our earlier blog about the Petition, it seems irresponsible for the CFPB to devote significant resources to this Petition until the Supreme Court issues its opinion in the CFSA case and reverses the Fifth Circuit opinion. There are storm clouds hanging over the Bureau and this is NOT the time for it to launch a new rulemaking (particularly a major one involving arbitration) which is likely to be very contentious and controversial as this one will be.