The Consumer Financial Protection Bureau’s (CFPB) latest enforcement action suggests that the CFPB may seek to use its administrative enforcement authority to pursue claims of unfair or deceptive conduct that would otherwise be time-barred and that pre-date the agency’s formation. The CFPB Director’s ultimate decision on these issues—and any court decisions that may result from any appeal—are likely to have widespread implications for the agency’s enforcement powers.
On November 18, the CFPB filed a Notice of Charges (essentially an administrative complaint) against Integrity Advance, LLC and its CEO and president, James R. Carnes. The Notice of Charges, which was made public last week, alleges that from May 15, 2008 through December 2012, Integrity Advance and Carnes engaged in unfair and deceptive conduct, and that Integrity Advance also committed violations of the Truth in Lending Act (TILA) and the Electronic Funds Transfer Act (EFTA) in the origination of online payday loans.
The Dodd-Frank Act provides the CFPB the authority to pursue enforcement actions either in federal court or administratively, and provides the same remedies in either forum.[1] The Notice of Charges is only the third contested administrative proceeding ever filed by the CFPB[2]—in contrast to nearly two dozen contested enforcement cases that the agency has filed in federal court. While the CFPB has not articulated why it chose to proceed administratively as opposed to in federal court, the allegations in the Notice of Charges suggest that the agency may have chosen the administrative forum because the alleged conduct at issue ended in December 2012. The CFPB may believe that the administrative forum offers it a better chance to pursue alleged conduct outside the otherwise-applicable three-year statute of limitations period, as well as alleged unfair and deceptive conduct that occurred prior to the agency’s gaining enforcement authority in July 2011.
Statute of Limitations
The Dodd-Frank Act contains a catch-all three-year statute of limitations period for actions brought by the CFPB.[3] If that three-year statute of limitations applied to the CFPB’s claims against Integrity Advance and Carnes, then virtually all of the alleged conduct would fall outside the limitations period. The limitations provision, however, is a subsection of the statutory section that provides the CFPB with “litigation authority” in federal court, and provides that “no action” may be brought by the CFPB more than three years after the date of discovery of the violation to which an action relates.[4] In his recent ruling in the CFPB’s administrative action against PHH Corp., CFPB Director Richard Cordray held that similar statute-of-limitations language in the Real Estate Settlement Procedures Act (RESPA) did not apply to enforcement actions brought administratively, as opposed to in federal court. While PHH involved the question of whether an administrative proceeding to enforce RESPA was subject to the three-year limitations period set forth in that statute, Director Cordray’s reasoning is equally applicable to administrative proceedings brought to enforce the Dodd-Frank Act’s prohibition against unfair, deceptive, and abusive acts and practices.
In PHH, Director Cordray noted that “an administrative proceeding is not a ‘civil action,’ and this matter is brought pursuant to a different section of the [Dodd-Frank Act] (12 U.S.C. § 5563, not 12 U.S.C. § 5564). Indeed, the Bureau's authority to bring ‘civil actions’ clearly indicates that the ‘forum’ for such actions is a court of law. See 12 U.S.C. § 5564(f).” That same reasoning would apply to the CFPB’s claims against Integrity Advance. Similarly, Director Cordray noted in PHH that “[t]he section of the [Dodd-Frank Act] that authorizes the Bureau to enforce laws through administrative proceedings does not contain a statute of limitations. See 12 U.S.C. § 5563” (emphasis added). In light of this precedent, it may be that the CFPB chose to proceed administratively against Integrity Advance with the expectation that no statute of limitations would apply to its claims.
The PHH case is currently on appeal to the D.C. Circuit, where PHH has challenged the CFPB’s “no statute of limitation” ruling, among other things. Depending on the rationale of any ruling by the D.C. Circuit in PHH, it may have substantial impact on the CFPB’s ability to pursue out-of-statute claims against Integrity Advance.
Pre-Transfer Date Conduct
It is also possible that the CFPB chose to proceed administratively because it intends to seek to impose liability for unfair and deceptive conduct that occurred prior to July 21, 2011. The Dodd-Frank Act prohibits covered persons from engaging in unfair, deceptive, or abusive acts or practices (UDAAP) in connection with the offering or provision of consumer financial products or services, and authorizes the CFPB to enforce that prohibition.[5] Those provisions are set forth in a part of the statute with an effective date of July 21, 2011—the “transfer date” on which the CFPB gained its authorities.[6] While the CFPB has settled actions involving allegedly unfair or deceptive conduct that pre-dated the transfer date, it has not, to date, argued in court that it is allowed to do enforce those prohibitions with respect to pre-transfer-date conduct without a defendant’s consent. In some instances, the CFPB’s pleadings expressly base the agency’s unfairness or deception claims on post-transfer-date conduct.[7] In other cases, the CFPB’s pleadings have not specified whether it was seeking to impose liability for pre-transfer-date conduct. But it has not yet argued that it is entitled to do so.
It may be that the CFPB prefers to make such an argument in an administrative forum where the CFPB Director gets to make the initial decision with respect to this issue. While any such ruling would be subject to further appeal to a Circuit Court, such an appeal would require Integrity Advance to expend the funds to pursue such an appeal, and may be subject to judicial deference.
One indication that the CFPB may be considering making such an argument is the fact that the CFPB did not allege that the conduct at issue was abusive. In other similar cases, the CFPB has alleged that misrepresentations to consumers concerning the terms of their loans or other consumer credit products were not only unfair and deceptive, but also abusive.[8] The Dodd-Frank Act’s prohibitions on unfair, deceptive and abusive conduct are all contained in the same statutory sections. The prohibition on unfair and deceptive conduct, however, pre-dated the CFPB’s existence, codified in the FTC Act. Integrity Advance, therefore, would have been subject to the FTC Act’s prohibition on unfair and deceptive acts prior to July 21, 2011. That fact is likely to figure prominently in any argument the CFPB makes that applying the Dodd-Frank Act’s prohibitions on deception and unfairness to such conduct is not impermissively retroactive. That is, the CFPB is likely to argue that because federal law prohibited unfair and deceptive conduct prior to July 21, 2011, there is nothing unfair about the CFPB seeking to impose liability for such conduct (although the CFPB would be enforcing the Dodd-Frank Act’s provisions, as opposed to the FTC Act’s provisions, and the CFPB does not have statutory authority to enforce the FTC Act). The CFPB could not, however, make a similar argument regarding abusiveness, as neither the FTC Act, nor any other federal law, prohibited the “abusive” conduct referred to in the Dodd-Frank Act. Had the CFPB asserted an abusiveness claim, it would have had to limit that claim to the time period after July 21, 2011. And, indeed, in all but one of its litigated cases in which it has alleged abusive conduct, the CFPB’s complaint makes clear that the conduct at issue began in 2011.[9] That the CFPB chose not to assert an abusiveness claim in this case suggests it may be planning to argue that it can enforce the other UDAAP provisions with respect to pre-transfer-date conduct.
Conclusion
It is difficult to predict how any litigation may proceed, but it is worth keeping a close eye on the Integrity Advance case as it may signal a new assertiveness by the CFPB with respect to its administrative authority and its ability to enforce the prohibitions against unfair and deceptive acts or practices for conduct that occurred prior to July 21, 2011. Should the CFPB ultimately prevail on both the statute-of-limitations and pre-transfer-date arguments, it arguably could have unbounded authority to bring unfairness and deception cases administratively without regard to when the underlying conduct occurred.
Notes:
[1] 12 U.S.C. §§ 5563-65.
[2] The other two contested cases were against 3D Resorts-Bluegrass, LLC, which settled, and against PHH Corp., which is currently on appeal to the D.C. Circuit. The CFPB still does not have its own Administrative Law Judge (ALJ). The PHH case was tried before an ALJ on loan from the SEC. The Integrity Advance case has been assigned to an ALJ from the Coast Guard, pursuant to an Interagency Agreement between the CFPB and the Coast Guard.
[3] 12 U.S.C. § 5564(g).
[4] Presumably, the CFPB would argue that the limitations period—if it applies—did not begin to run until the agency “discover[ed]” the alleged violations.
[5] 12 U.S.C. §§ 5531, 5536.
[6] See Dodd-Frank Act § 1031.
[7] For example, the CFPB’s complaint against ITT makes clear that its deception claims apply solely to conduct beginning on July 21, 2011.
[8] For example, see the CFPB’s complaints against Nationwide Biweekly Administration, Inc., and S/W Tax Loans, Inc.
[9] See the CFPB’s complaints against Pension Funding, LLC; NDG Financial Corp.; SNAAC; Nationwide Biweekly Administration, Inc.; and ITT. The only exception is the CFPB’s complaint against CashCall, Inc., in which the CFPB did not specify the applicable time period for its abusiveness claim.
