PHILADELPHIA (Legal Newsline) - The Consumer Financial Protection Bureau has again infiltrated an area where its jurisdiction may be questionable, despite a reprimand in a recent case involving the accreditation of for-profit colleges.
Last week, the CFPB filed a federal lawsuit in Pennsylvania against J.G. Wentworth, a company that provides liquidity to its customers by purchasing future streams of income, such as structured settlement and annuity payments.
The CFPB – established by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 and tasked with overseeing the consumer financial services industry – seeks to enforce a civil investigative demand issued to J.G. Wentworth “to determine whether persons involved in advancing funds in exchange for the rights to future payments from structured settlements or annuities” violates federal consumer financial laws.
J.G. Wentworth has argued that the CFPB lacks jurisdiction over the structured settlement and annuity payment purchasing activities that are the subject of the CID, and as a result, lacks the authority to continue its investigation.
“J.G. Wentworth's business of purchasing structured settlement and annuity payments is not a consumer financial product or service within the CFPB’s Unfair Deceptive and Abusive Acts and Practices ("UDAAP") jurisdiction and could not possibly give rise to a violation of the Truth in Lending Act ("TILA''),” J.G. Wentworth wrote in an earlier petition to set aside the demand.
A spokesperson for J.G. Wentworth declined to comment on the case.
“I don’t know why the CFPB thinks this fits into the definition of their jurisdiction under Dodd-Frank, but they do,” said Alan Kaplinsky, a partner in the Philadelphia office of Ballard Spahr and leader of the consumer financial services group at the firm.
“There will be further litigation and another situation where the CFPB seems to have taken an interest in an area that doesn’t seem to be within their jurisdiction.”
Kaplinsky contends that when the CFPB was created, it focused on residential mortgages and issued regulations involving residential mortgage loan origination and servicing. In recent years, he says, the agency has become more aggressive and virtually no area of the consumer financial services industry escapes its attention.
He refers to the CFPB’s recent lawsuit against the Accrediting Council for Independent Colleges and Schools as another example of the agency trying to expand its jurisdiction. The federal district court in Washington, D.C., agreed in April, ruling that the CFPB was attempting to conduct an investigation outside of its statutory authority.
The CFPB has also recently been criticized by some for allegedly overreaching its authority in actions against mobile phone providers, collection law firms and data security companies.
“I think really what it comes down to is, if they don’t like something, they will try to figure out a way to push the envelope so they can try to cover it,” Kaplinsky said.
Jonathan Pompan, a partner in the D.C. office of Venable and co-chair of the Consumer Financial Protection Bureau Task Force at the firm, points out that the CFPB has used enforcement actions to regulate debt buying and collection activities, auto lending, small dollar loans and other areas despite neither having plans for a notice and comment rulemaking on the same activities, or no intention to write black and white rules at all.
“It’s a young agency that has taken its mandate for consumer protection very seriously, and at the same time, been far more focused on achieving specific goals and market changes than it has on following a particular set of processes,” he said. “They’ve been very outcome-focused.”
Kaplinsky cites a rule the CFPB proposed in early June that would require lenders to determine whether consumers are able to repay payday loans, auto title loans, deposit advance products and certain high-cost installment and open-end loans.
The complex proposal includes a “full-payment” test that would push lenders to determine upfront whether or not consumers can afford to repay their loans without reborrowing.
“If that proposed rule becomes final, it will put out of business a large segment of the industry because they won’t be able to operate under these very stringent regulations,” Kaplinsky said.
The CFPB recently proposed other rules that would prevent banks and financial companies from including mandatory arbitration clauses in new contracts that prevent class action lawsuits. While companies could still use arbitration clauses under the proposal, the clauses would have to explicitly say that they cannot stop consumers from joining class action lawsuits.
“If this proposal becomes final, I believe that most companies will abandon the use of arbitration,” Kaplinsky said. “That will not only hurt the companies, but also hurt consumers.
“Unfortunately, the only people who really benefit from what they’re doing here are the class action lawyers who make a lot of money out of filing class action lawsuits.”
Kaplinsky adds that the CFPB has recently targeted the auto finance industry through enforcement rather than issued regulations.
In February, the CFPB and the Department of Justice announced a settlement agreement with Toyota Motor Credit Corp., to resolve charges that the company violated the Equal Credit Opportunity Act. A consent order required the company to change its “dealer compensation policy” and pay up to $21.9 million in remediation to affected customers.
“There have been a lot of investigations claiming that the very old, and tried and true, method of compensating dealers is a violation of the Equal Credit Opportunity Act,” Kaplinsky said.
“They are getting most companies to agree to enter into a consent order to resolve the matter, because in most situations, companies can’t afford to litigate with the federal government.”
Other auto finance companies, including American Honda Finance Corp., have also agreed to change their auto dealer compensation policy and pay millions in restitution after entering into settlements with the CFPB.
Pompan predicts that the CFPB will continue to take an aggressive approach to enforcing and regulating the consumer financial services industry since agency director Richard Cordray only has a limited amount of time left in his first term.
“Companies that fall within the CFPB jurisdiction and even some that don’t can find themselves contending with a bureau that very much is set on leaving its stamp before either Congress or a new president potentially changes its makeup or structure,” he said.