We have recently blogged about two other actions in which this issue has been raised (one being a declaratory judgment action filed against the CFPB on July 23, 2024 in the E.D. Tex. and the other being an enforcement action filed in the N.D. Tex. in which a motion to dismiss was filed on July 31, 2024).
On July 30,2024, the issue has been raised for yet a third time within an 8-day period in connection with motion for judgement on the pleadings (the “JOP Motion”) in the D. SC in a case that we previously blogged about when the lawsuit was filed on August 23, 2023.
The CFPB filed this lawsuit against Heights Finance Holding Co. f/k/a Southern Management Corporation and a group of its wholly-owned, state-licensed subsidiaries (collectively, “Southern”) in which the CFPB alleges that Southern violated the Consumer Financial Protection Act’s UDAAP prohibition by “churning payment-stressed borrowers in fee-laden refinances.”
The JOP Motion describes Southern’s version of its business in a markedly different manner:
The Complaint is novel because it alleges that certain practices, which are lawful under applicable federal and state laws (e.g., charging origination fees and insurance premiums, requiring borrowers to make timely payments, and offering refinancing in certain situations), are unfair and abusive under the CFPA. (ECF 1, ¶¶ 97-128). It also alleges that Defendants’ refinancing offers are abusive under the CFPA because they allegedly take unreasonable advantage of consumers’ lack of understanding and consumers’ inability to protect their interests. (ECF 1, ¶¶ 109-119). The Complaint, however, does not assert any TILA violations or allege deception under the CFPA. It also fails to explain how consumers lacked information to make informed decisions about their initial loans or their subsequent loans. Finally, the Complaint fails to identify any federal law that requires Defendants to assess a prospective borrower’s ability to repay before making a loan because TILA and Regulation Z only impose ability-to-repay requirements for certain types of consumer credit, but not for installment loans.
Installment loans, like Defendants’ loans, are nothing new. They have existed for decades and are heavily regulated under state law, TILA, and Regulation Z. These laws and regulations govern the lending process from disclosures to fees, methods for computing interest, and collections. The CFPB cannot amend TILA and Regulation Z or supplant state laws to impose new disclosure, ability-to-repay, and other requirements, which would be sweeping regulatory changes, by judicial fiat.
While the JOP Motion raises a potpourri of other dispositive arguments based on the facts described in the two paragraphs appearing immediately above, my blog will focus only on Southern’s argument that the lawsuit must be dismissed because the CFPB prosecuted it with funds obtained from the Federal Reserve Board unlawfully in violation of the Dodd-Frank Act because there have been no “combined earnings of the Federal Reserve System” since September 2022 and Dodd-Frank mandates that the CFPB can only be funded out of such “combined earnings.” We will prepare a second blog which deals with the other arguments.
Southern bases the lion’s share of its argument on the plain meaning of “earnings” as that term is used in Dodd-Frank in mandating that the CFPB may be funded only out of “combined earnings of the Federal Reserve System.” Southern cites to a number of dictionaries and other sources that uniformly define “earnings” as “profits”. Southern also argues that “earnings” means “profits” under well-established accounting principles, including the Federal Reserve Bank’s own Financial Accounting Manual.
Finally, Southern argues that courts have similarly used “earnings” to refer to profits. Southern, citing Collins v. Yellen, 594 U.S. 220, 258 (2031) and Seila Law, LLC v. CFPB, 591 U.S. 187, 233 (2020) as authority, then argues that “[c]ourts have held as unconstitutional the acts of government agents lacking lawful authority and have invalidated such unconstitutional acts Congress has also codified this principle in the Antideficiency Act, which prohibits agency action when an agency lacks appropriated funds or spends in excess of its funding.”
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