Texas Federal Judge Upholds CFPB’s Investigative Authority in Denying Stay Pending Appeal of CFPB CID Dispute

Burgeoning federal enforcement efforts relating to the consumer data and credit reporting industry have led to another key legal development: a federal court in Dallas ruled in favor of the Consumer Financial Protection Bureau (“CFPB”) by upholding the agency’s investigative authority. After U.S. Magistrate Judge David L. Horan first granted the CFPB’s petition to enforce a civil investigative demand (“CID”) against The Source for Public Data, L.P. (“Public Data”) on June 6, 2017, Judge Horan then denied Public Data’s stay pending appeal of the ruling on June 30, 2017. Consumer Financial Protection Bureau v. The Source for Public Data, L.P., Case No. 3:17-mc-00016-G-BN (N.D. Tex.).

By way of background, the CFPB issued its CID to Public Data on January 5, 2017. The company, which compiles public records for customers to access for background checks, first sought to limit the CFPB’s request, informing the CFPB that its request for information was overbroad. The CFPB denied the request, but invited Public Data to provide input on modifying it. The company did not do so, and also did not produce the information. On March 6, 2017, the CFPB petitioned the court for an order to compel Public Data to produce the records. (The filing of a petition to enforce in federal district court is the sole legal mechanism through which the CFPB can seek compliance with CIDs, since CIDs are not self-executing in any CFPB administrative proceeding.) Judge Horan’s June 6 ruling ordered Public Data to turn over records sought by the CFPB, finding that the CFPB has a lower bar when requesting information than when it seeks to enforce a law. On June 26, 2017, Public Data filed its application for a stay of the court’s order pending appeal.

In the June 30 opinion denying the stay, Judge Horan methodically considered each of the factors relevant in the Fifth Circuit for deciding a stay pending appeal: (1) the movant must establish a likelihood of success on the merits; (2) the movant would suffer irreparable injury if a stay is not granted; (3) a showing that the stay would not substantially harm the other party; and (4) a demonstration that the stay would serve the public interest. The movant, however, need only present a “substantial case on the merits” (as opposed to a likelihood of success) when a serious legal question is involved and show that the balance of equities weighs in favor of a stay.

As to the first factor, Judge Horan found that even the company’s “best point” wasn’t enough to overcome the balance of the equities in the court’s application of the Fifth Circuit’s four-factor test. Public Data unsuccessfully relied on Consumer Financial Protection Bureau v. Accrediting Council for Independent Colleges and Schools (ACICS), 854 F.3d 683 (D.C. Cir. 2017), for the proposition that its business activities fell outside the jurisdiction of the CFPB, and, thus, the CFPB had no authority to issue a CID in the first instance. Judge Horan distinguished ACICS, reasoning that, unlike in ACICS, “the Notification of Purpose in this CID issued to Public Data does not . . . fail to state adequately the unlawful conduct under investigation or the applicable law.” In other words, the language set forth in the CID’s Notification of Purpose issued to Public Data was more precise and justified under the CFPB’s enabling statute than that of the CID issued to ACICS.

Notably, Public Data opted not to argue a substantial likelihood of success, but instead argued that the four-factor test was modified by the Fifth Circuit to require merely a “substantial case” on the merits which “involves serious legal questions” so long as the other three factors militate in favor of a stay. Judge Horan agreed with the statement of law but, in applying it, found that there were no serious legal questions involved here. Again, Judge Horan based this conclusion on the fact that “the Notification of Purpose in this CID issued to Public Data does not, unlike the one in ACICS, fail to state adequately the unlawful conduct under investigation or the applicable law.” Furthermore, as opposed to the CFPB’s ability to undertake an enforcement action against Public Data, Judge Horan concluded that the agency’s authority to merely issue the CID to Public Data is not plainly lacking in light of the fact that the CID’s Notification of Purpose was not deficient on its face.

As to the second factor, Judge Horan rejected Public Data’s claim of irreparable harm. Judge Horan followed the Fifth Circuit’s opinion in United States v. Transocean Deepwater Drilling, Inc., 537 F. App’x 358, 362 (5th Cir. 2013), to find that where documents are provided pursuant to a subpoena later found to be unlawful, a court can provide meaningful relief by ordering the documents returned because the owner of such documents “retains an obvious possessory interest in [its] records.”

Addressing the third factor, Judge Horan stated, “Public Data’s arguments as to this factor all assume that the Court erred in rejecting its challenges to the Bureau’s investigative authority and depend on its irrelevant assertions that the Bureau has not received any complaints against Public Data.” As Judge Horan suggests, Public Data’s arguments may have been more persuasive in this regard had it provided an independent rationale for a lack of harm to the CFPB.

Finally, Judge Horan explained, citing Transocean, that the injury to other parties and the “public interest” factors merge when the opposing party is a governmental agency. The court also explained that the private interest in preventing excessive government reach must be considered against the injury that the stay would work upon the government and the public when the authority of an agency to conduct an investigation is hamstrung. Overall, Judge Horan found that the factors for a stay had not been met.

In conclusion, Judge Horan’s June 30 order provides important guidance to the consumer financial services industry:

  • It underscores the fact that, despite the D.C. Circuit’s adverse ruling in ACICS, the CFPB currently retains significant investigative authority to issue CIDs, even to parties that may arguably be outside its jurisdiction.
  • Additionally, it provides guidance on the question of what a reviewing court will require from the CFPB in a CID and, perhaps more meaningfully, on how a company can successfully seek a stay pending appeal in challenging a CID.
  • A stay pending appeal is an extraordinary remedy and it therefore appears necessary to provide a separate rationale for the stay―folded into the relevant four-factor test―that is independent of and in addition to the generic assertion that the CFPB lacks investigative authority to issue the particular CID.
  • Along those lines, Judge Horan’s order—while denying the stay—nevertheless seemed open to the notion that a company could argue irreparable harm (the second factor) by showing the potential magnitude of economic injury that will occur from compliance with the CID pending appeal. The court noted that Public Data had not ultimately challenged the CID on the grounds of undue burden, but―in disagreeing with the CFPB’s position regarding harm―acknowledged that “[t]his Court is not so sure that, in this context, Public Data could fully recover the economic costs it would incur to comply with the CID while its appeal is pending.” In doing so, the court demonstrated receptivity to the legitimate practical concerns that businesses face (and the policy concerns of the public) when private entities must litigate disputes on CID validity while the status quo presents an immediate obligation to comply with the requests of that CID.

In light of the CFPB’s steady pursuit of regulation by enforcement, companies facing similar CID disputes should keep the undue burden argument and Judge Horan’s statement in mind for future investigations, particularly where the business can easily and quickly quantify the burdens and costs of CID compliance. What’s more, given the economic reality that CID compliance costs continue to accrue while CID litigation is in flux, Congress should address potential inequities and consider drafting legislation to establish fee- and cost-shifting mechanisms between the CFPB and regulated entities for defending any investigations that result in a finding of no violation.

J.H. Jennifer Lee

J.H. Jennifer Lee

Jenny represents large and regional banks, card issuers, mortgage bankers or mortgage insurance companies, online lenders, Fin Tech firms, private equity firms with consumer-facing specialty finance strategies, or any “covered person” delineated in the Bureau’s statute, title X of the Dodd-Frank Act. As a lawyer who worked inside the Consumer Financial Protection Bureau (Bureau) Office of Enforcement for several years beginning with the Bureau’s founding, Jenny possesses unique experience that she draws upon to provide clients with defense strategies for enforcement by or litigation with the Bureau....

Chad Richards

Chad Richards

As an associate in Dorsey’s Regulatory Affairs Group, Chad assists clients in a wide range of matters, including complex energy litigation, enforcement, and compliance. Chad also assists clients on corporate and regulatory matters in the energy sector.

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