Challenges to Consumer Debt Regulations Have Legal Scholars on High Alert

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Why the fate of the Consumer Financial Protection Bureau and Supreme Court cases involved with the Fair Debt Collection Practices Act are worth watching.

The political winds involving regulatory oversight have already shifted in Washington, and there’s a Supreme Court nominee that Congress must approve that could change the balance of power when it comes to consumerism, so it’s not surprising that legal scholars are watching a number of federal court cases that could affect how Americans borrow, repay debt and deal with their employers.

Already, President Trump has signed an executive order that could doom the Consumer Financial Protection Bureau (CFPB), which an appellate court has raised constitutional issues about.

Meanwhile, there are three cases before the Supreme Court at various stages that not only deal with the CFPB, but with federal regulations that some fear that Trump’s nominee, Neil McGill Gorsuch, currently a judge on the U.S. Court of Appeals for the Tenth Circuit, will have no patience with.

Certainly, Trump has shown no tolerance for the CFPB, which was a creation of Sen. Elizabeth Warren (D-Mass.) as part of the Dodd-Frank Act effort in 2010.

 

Even before Trump came to Washington, an appellate court cast doubts on CFPB’s future. PHH Corporation, a mortgage lender, filed a lawsuit against CFPB on June 19, 2015, in the U.S. Circuit Court of Appeals for the District of Columbia Circuit, after being fined by the agency for alleged wrongdoing in the manner it referred its customers to mortgage insurers.

PHH, in seeking to vacate the order, argued that the CFPB—established as part of the Dodd-Frank Act as an independent agency—violates Article II of the Constitution because it’s headed by a single director rather than a commission.

The circuit court agreed. CFPB “lacks that critical check and structural constitutional protection, yet wields vast power over the U.S. economy,” wrote Judge Brett Kavanaugh for the court on Oct. 11, 2016.

He opined that the agency’s structure “marks a major departure from the settled historical practice requiring multi-member bodies at the helm of independent agencies.”

According to the Washington Times, the PHH ruling didn’t shutter the CFPB but did “direct Congress to amend the statute creating it.”

The issue at hand is the power of Congress to create an agency “that is beyond the control of the Executive Branch,” said Marie T. Reilly, professor of law at Penn State University, in a phone interview.

But Congress may not get the chance, because on Feb. 5, Trump singled out the CFPB as a reason he has signed an executive order to end Dodd-Frank.

Since its inception, the CFPB has “had a tremendous impact on a lot of aspects of the economy,” according to Reilly, who points to how the agency has regulated payday loans, altered the mortgage market, and attempted to regulate the auto industry, among other impacts.

Alas, among the CFPB’s enforcement powers is keeping an eye on debt buyers, such as those that buy car and other loans.

But the mandates involving debt buyers isn’t as clear for some other federal regulations, such as the Fair Debt Collection Practices Act, or FDCPA.

That’s why scholars are watching Henson v. Santander Consumer USA, a case that the Supreme Court on Jan. 13 decided to hear and whose centerpiece is the FDCPA’s relevance to debt buyers.

The purpose of the FDCPA is to protect consumers against debt collection abuse and eliminate abusive debt collection practices, according to the Federal Trade Commission.

Four Maryland residents who defaulted on their car loans sued Santander Consumer USA, which had purchased the defaulted loans from the original lender and tried to collect on them. In their lawsuit, the four borrowers cited FDCPA and alleged violations of debt collection law, Reuters reported.

After reaching the U.S. Circuit Court of Appeals for the Fourth Circuit in Richmond, Va., on Nov. 29, 2012, the court dismissed the suit last March. But the Maryland borrowers argued that the Supreme Court needed to take the case because some federal courts are viewing debt buyers as creditors while others are viewing them as debt collectors.

“That’s an important issue because debt buyers buy and collect on many debts and if they are not subject to the FDCPA, they may be able to avoid liability for certain conduct prohibited by the statute,” Jeff Sovern, professor of law at St. John’s University School of Law writes said via email. “The Consumer Financial Protection Bureau would still have the power to proceed against debt buyers under its power to prohibit deceptive, unfair and abusive practices, and state statutes may prohibit some conduct, but the debt collection landscape would change dramatically if the Court were to rule that the FDCPA doesn’t apply to debt buyers. Consumers could no longer sue debt buyers for violating the FDCPA.”

And the FDCPA’s impact isn’t limited to the Santander case. The regulation is a focal point of another Supreme Court case, Midland Funding v. Johnson.

Oral arguments were heard on Jan. 18 in that case, which looks at whether a debt collector violates the FDCPA by filing a claim for a debt that is not collectible due to a statute of limitations, writes Ronald Mann at SCOTUS Blog, a publication of the Supreme Court.

When Aleida Johnson filed for bankruptcy in Alabama in 2014, she didn’t list in her petition a $1, 879.71 defaulted credit card debt that had previously been purchased by Midland Funding LLC. After Midland filed a claim, she was put on a repayment plan. However, the last credit card transaction had been in 2003, making collection on the debt beyond Alabama’s six-year statute of limitations.

Johnson filed a class-action suit in the U.S. District Court for the Southern District of Alabama, Southern Division, on July 14, 2014, against Midland, alleging that the creditor had violated the FDCPA for filing a claim on a debt that was beyond the statute of limitations.

But Midland, in its Supreme Court brief, argues that it shouldn’t face penalties as a result of the suit because the federal bankruptcy code “plainly entitles a debtor collector to file a proof of claim” even for an old debt, and thus supersedes the FDCPA.

One case that hasn’t yet gotten a date for oral argument before the Supreme Court is National Labor Relations Board v. Murphy Oil USA Inc., which is a case that considers whether arbitration agreements with individual employees that bar them from pursuing work-related claims as a group are prohibited as an unfair labor practice under the National Labor Relations Act (NLRA), according to SCOTUS Blog.

The NLRB “did not address the question whether an employer could avoid violating the NLRA when requiring employees to agree to individually arbitrate all employment claims, if the employees were afforded an opportunity to opt-out of the provision,” writes Boston College law professor Christine O’Brien in a paper forthcoming in the University of Pennsylvania Business Law Journal. “Thus, the question was whether giving an employee an initial chance to opt-out of the arbitration provision rendered it acceptable since the mandatory aspect was ameliorated to a degree, making the arbitration alternative a choice, rather than a condition of, employment.”

O’Brien said that Gorsuch—if confirmed—would likely break a tie vote on this case.

“I think he would vote against the NLRB because he’s pro-business and he has not shown deference to agencies in the past,” O’Brien added.

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