Consumer Financial Protection Bureau v. Future Income Payments, LLC
Docket: CASE NO. 8:17-cv-00303-JLS-SS
Court: District Court, C.D. California; May 17, 2017; Federal District Court
The Court has granted the Consumer Financial Protection Bureau's (CFPB) Petition to Enforce a Civil Investigative Demand directed at Future Income Payments, LLC, while denying Future Income Payments' Motion to Stay the case. The backdrop of this action involves scrutiny on the income stream market for allegedly imposing undisclosed, high-interest loans on vulnerable populations, including veterans and the elderly. Future Income Payments has been under investigation by various state regulators and is facing a lawsuit from the City of Los Angeles, which accuses it of charging exorbitant interest rates, preventing loan termination, and engaging in abusive collection practices.
The CFPB's Civil Investigative Demand, served on November 23, 2016, requests extensive information about Future Income Payments' business practices related to income-stream-advance transactions, aiming to assess potential violations of federal consumer financial laws. The demand includes nine interrogatories, requests for written reports, and document requests concerning the company’s structure, marketing, financial dealings, and involvement in other investigations. Future Income Payments attempted to challenge the demand but was unsuccessful, leading to its legal action in the District of Columbia to prevent CFPB enforcement and seek anonymity.
The district court denied Future Income Payments' request to prevent the CFPB from taking action against it but temporarily restricted the agency from naming the company in public filings until March 3, 2017. After this date, the D.C. Circuit denied an emergency stay pending appeal. The CFPB filed a Petition to Enforce a Civil Investigative Demand (CID) under seal on February 21, 2017, which was unsealed after the district court's injunction lapsed, leading to a revised briefing schedule.
To decide on enforcing an administrative subpoena, the court evaluates three factors: (1) whether Congress authorized the investigation, (2) whether procedural requirements were met, and (3) whether the evidence sought is relevant and material. If these conditions are satisfied, the subpoena should be enforced unless the party demonstrates that the inquiry is unreasonable due to being overly broad or unduly burdensome. The party can also challenge the CFPB's authority on constitutional grounds, which the court reviews comprehensively.
Future Income Payments argues against the enforcement of the CID on three bases: (1) the CFPB's structural unconstitutionality, (2) the request for information outside the CFPB's jurisdiction, and (3) the CID's overbreadth. The court will first assess the statutory arguments under the principle of constitutional avoidance before addressing constitutional issues.
A party cannot block enforcement of an administrative subpoena by raising specific factual challenges related to jurisdiction unless there is a clear lack of jurisdiction. The court's focus is on whether there is a plausible ground for jurisdiction, maintaining that as long as the agency's jurisdiction isn't obviously absent, the subpoena should be enforced. This approach is designed to prevent courts from being burdened with complex hypotheticals prior to an agency's enforcement action. The Ninth Circuit has applied this standard in various cases, particularly involving challenges from Native American tribes regarding their status under different statutes.
The Ninth Circuit's decision in Karuk Tribe Housing Authority established that a Native American tribe's challenge to the EEOC's authority was jurisdictional, concluding the agency lacked authority. The court distinguished the tribe's claim regarding the Age Discrimination in Employment Act's inapplicability to tribal governments from other cases where parties might be found in violation of federal law. In contrast, the Ninth Circuit's en banc ruling in Children’s Hospital Medical Center of Northern California clarified that a res judicata defense does not prevent enforcement of an administrative subpoena, even if it raises significant questions.
Future Income Payments argued that the CFPB lacked jurisdiction over its future-income streams, contending these do not constitute a consumer financial product or service. However, this argument essentially requires a factual determination about whether the company's products are classified as loans under the Truth in Lending Act, which does not serve to obstruct compliance with the CFPB's administrative subpoena. Moreover, the unpublished district court decisions cited by Future Income Payments do not convincingly demonstrate the CFPB's jurisdiction is plainly lacking, as they pertain to different transactions. Notably, multiple state regulators and the City of Los Angeles have determined that the company's products are indeed loans, providing the CFPB with plausible grounds for jurisdiction over these transactions.
Future Income Payments also contended that the CID requested information beyond its control, was temporally overbroad, sought irrelevant information, and imposed undue burden; however, these arguments were unpersuasive.
Future Income Payments (FIP) argues that the Civil Investigative Demand (CID) is overly broad by requesting documents from affiliated companies that are unrelated to the CID's stated purpose. The CID defines 'Company, you, and your' to include FIP and various related entities and persons. Although the definition might suggest requests for information beyond FIP's direct control, Instruction I clarifies that the CID encompasses materials within FIP's possession, custody, or control, including those held by its agents and affiliates. Under traditional agency principles, an entity can establish control through a principal-agent relationship or contractual rights. Therefore, the CID does not require FIP to produce documents beyond its control, as long as the requested information is responsive and within its reach.
The CFPB asserts that FIP operates through a complex structure of entities, which includes at least three marketing affiliates identified in a consent decree with the New York State Department of Financial Services. Additionally, the City of Los Angeles claims that FIP’s owner, Scott Kohn, manages various entities in a network that could circumvent compliance with the CID. The CFPB argues for a broad interpretation of the CID to include information from these entities to prevent FIP from evading compliance. Ultimately, FIP's objections to this interpretation are unconvincing.
The company failed to specify a legal entity subject to the CID that lacks relevant information. It argues that limiting the CID's scope to Future Income Payments and its predecessors regarding lending or financial advisory services could yield no production, as it claims not to offer consumer financial products. The temporal scope of the CID is contested, with Future Income Payments asserting it is overly broad, extending from December 1, 2011, to the date of compliance. They propose narrowing it to December 1, 2018, based on the statute of limitations. However, this argument is flawed as the statute of limitations under 12 U.S.C. 5564 begins upon the discovery of a violation, which may not align with the CFPB's knowledge of potential violations. Furthermore, the appropriateness of the CID's temporal scope is determined by the relevance of the requested information to conduct liable under applicable laws, allowing for a two-year extension beyond the actionable period.
Regarding the relevance of the information sought, Future Income Payments claims the CID requests irrelevant data, citing Interrogatory No. 5 and Request for Written Report No. 1. However, the financial details related to income-stream-advance transactions and company bank accounts are deemed relevant for assessing potential illegal practices and the public interest in enforcement actions, as they reflect the company's financial activities.
Lastly, the company claims that compliance with the CID would impose an undue burden, but it may have waived this argument by not raising it during the administrative discussions or appeal process, as established in N. Plains Res. Council, Inc. v. Surface Transp. Bd., which states that failure to present arguments during the administrative process can lead to waiver.
Future Income Payments has not sufficiently demonstrated that the Civil Investigative Demand (CID) is overbroad or unduly burdensome. The burden of proving undue burden lies with the opposing party, which, in this case, requires providing evidence that compliance would significantly disrupt normal business operations. Merely citing the extensive nature of requests or potential costs is inadequate. Future Income Payments argues that the agency's request for 'all' documents is excessive and should be limited to specific practices; however, it fails to provide concrete evidence, such as cost estimates or operational impacts, to support its claims of undue burden. The CFPB's requests are deemed proportionate to the potential violations under investigation. Consequently, the Court finds the CID appropriate in scope and not unduly burdensome.
Regarding constitutional challenges, the Court concludes that the CFPB Director’s for-cause removal protection is constitutional. Citing the Take-Care Clause and relevant Supreme Court precedents, such as Myers v. United States and Humphrey’s Executor v. United States, the Court supports the constitutionality of limitations on the President’s removal authority over officials in quasi-legislative or quasi-judicial agencies.
Congress has the authority to mandate that administrative agencies operate independently of executive control, which includes the power to determine their duration and restrict their removal to instances of cause. The distinction made by Humphrey’s Executor between executive and quasi-judicial roles is no longer sufficient, as the Supreme Court has clarified that the key issue is whether an officer's for-cause removal protection obstructs the President's constitutional obligation to ensure laws are executed faithfully. While Congress can establish independent prosecutors with for-cause protection, it cannot create multiple layers of such protection, as that would dilute accountability and interfere with the President's responsibilities.
The Consumer Financial Protection Bureau (CFPB) shares similar powers to those of the Federal Trade Commission (FTC) as recognized in Humphrey’s Executor, including the ability to conduct investigations and issue regulations. The CFPB is led by a Director appointed by the President and confirmed by the Senate, who can only be removed for specific reasons, akin to FTC commissioners. A court ruling in CFPB v. Morgan Drexen determined that this for-cause removal protection does not infringe upon the President's execution authority. The structural differences between the CFPB and FTC, including the leadership format and term lengths, do not render the CFPB's constitutional standing any less sound than that of the FTC, as both are designed to ensure adherence to the law while maintaining necessary independence.
No constitutional text mandates that independent agencies must be led by multimember commissions. Future Income Payments contends that the court should reconsider its decision in Morgan Drexen, citing a belief that the Bureau's structure is unconstitutional, supported by a mischaracterization of legal precedents as a "wall of precedent." The reference to PHH Corp. v. CFPB is misleading, as it was a vacated 2-1 decision, and subsequent cases do not provide sufficient basis for overturning existing Supreme Court precedent. The PHH majority acknowledged no significant difference in accountability between a commission-led agency and one led by a director. Under Supreme Court rulings, a for-cause removal provision is constitutional unless it obstructs the President's executive powers. The PHH ruling's assertion that the CFPB's for-cause removal protection lacks historical precedent and that multimember agencies better prevent arbitrary decision-making is unconvincing. Examples of other director-led independent agencies, such as the Social Security Administration, the Office of Special Counsel, and the Federal Housing Finance Agency, demonstrate that the CFPB's structure is not unique. Furthermore, the simplification of distinguishing between multimember boards and single directors overlooks that many multimember agencies have chairs who exert significant control over decision-making processes.
The Federal Reserve Chair has significant influence over monetary policy, with the ability to impact markets through public statements, as evidenced by empirical research showing that a change in the Fed chair can alter monetary policy. PHH attempted to compare the Consumer Financial Protection Bureau (CFPB) with the Social Security Administration (SSA), arguing that the latter does not possess law enforcement authority. However, PHH failed to demonstrate why the CFPB’s civil enforcement authority is more integral to executive power than the SSA’s role in determining benefits for millions. The SSA, with over 65,000 employees and a budget exceeding $1 trillion, manages millions of claims for retirement, disability, and Medicare benefits.
The excerpt reflects on the challenges of defining 'core' executive functions, as duties may be perceived differently depending on context. It posits that constitutional principles of separated powers are not breached by innovative structures or functions of new agencies. Historical references illustrate that Congress has adapted to evolving societal needs by creating modern administrative agencies. The text notes that the notion of novelty as a measure of legality would hinder Congress's ability to establish contemporary agencies, especially those with protections against removal as recognized in prior Supreme Court rulings.
Furthermore, the argument that multi-member agencies better protect individual liberties over director-led agencies lacks empirical support. While multi-member bodies are seen as more deliberative, director-led organizations are perceived as more agile. The accountability of these structures does not correlate straightforwardly with their design; for instance, a commission may be less responsive due to internal conflicts. The overall impact of an agency's leadership structure on the risk of industry capture remains uncertain.
PHH highlights the distinctions between independent commissions and independent directorships, arguing that structures like these can help prevent the misuse of law enforcement authority within agencies. They suggest that either model would be better than an agency subject to political influences. The Consumer Financial Protection Bureau (CFPB) has multiple accountability mechanisms, including annual audits by the Government Accountability Office, a capped budget from the Federal Reserve, and oversight from the Financial Stability Oversight Council, which can stay or override CFPB rules. Furthermore, the CFPB cannot initiate criminal prosecutions and has limited authority to represent itself before the Supreme Court. It is required to submit detailed semi-annual reports to Congress and the President concerning its operations and expected regulatory actions. The CFPB must also create a responsive system for consumer complaints related to financial products. The choice between a multimember or director-led agency should consider the pros and cons of each structure; however, there is no constitutional basis for differentiating between them, leaving the decision to the political branches. Even if the CFPB Director's for-cause removal protection were deemed unconstitutional, enforcement of the CFPB's administrative subpoenas should still be upheld. For a challenge to succeed, a company would need to demonstrate that only the Executive Branch can demand information from regulated entities, a position unsupported by Supreme Court precedents which affirm Congress's authority to issue subpoenas.
The Commission possesses investigative and informative powers, which it can exercise as currently structured, according to Supreme Court precedent (424 U.S. 1, 137). Congress has authorized independent agencies, including the CFPB, to issue administrative subpoenas under various statutes (5 U.S.C. 1212(b)(2); 12 U.S.C. 4641; 42 U.S.C. 405(d)). A ruling against the CFPB's subpoena authority would similarly affect other agencies. Even if the CFPB Director's removal protection is deemed unconstitutional, the CFPB can still lawfully issue subpoenas.
Future Income Payments requests a stay in the proceedings pending appeals in related cases (CFPB v. CashCall and PHH Corp. v. CFPB). Following the Ninth Circuit’s denial of interlocutory review in CashCall, the court finds no basis for a stay regarding PHH Corp. The court evaluates three factors when considering a stay: the potential damage from granting the stay, the hardship on the party required to proceed, and the overall impact on the orderly course of justice. A stay poses risks of fading witness memories and stale evidence, particularly in government investigations, emphasizing the public interest in enforcing consumer protection laws.
Future Income Payments must demonstrate significant hardship to justify a stay, but previous court rulings have rejected claims that participation in a government investigation constitutes irreparable harm, further undermining their request for a stay.
In Tilton v. SEC, the Second Circuit ruled that the “expense and disruption” of undergoing an unconstitutional administrative process does not constitute irreparable harm. This precedent, along with the ruling in FTC v. Standard Oil Co. of California, establishes that such hardships in protracted proceedings are insufficient to claim irreparable harm. Future Income Payments' situation is less compelling as the CFPB has not initiated an enforcement action against it; its only obligation is to comply with an administrative subpoena. The company is unlikely to succeed in its separation-of-powers challenge because the Executive Branch does not have exclusive control over subpoena power. Furthermore, Future Income Payments has not clearly articulated the benefits of a stay, and the Ninth Circuit has denied interlocutory review in related cases. The DC Circuit's potential decisions would only provide persuasive authority and may avoid constitutional questions. The courts have indicated that Future Income Payments' constitutional challenge is best addressed within this proceeding or a future enforcement action by the CFPB. Therefore, the potential prejudice from a lack of a stay does not outweigh the significant prejudice that a stay would impose on the ongoing government investigation. Consequently, Future Income Payments' Motion to Stay Case is denied, and it is ordered to comply with the Civil Investigative Demand within fifteen days or as directed by the CFPB or the Court.
