Integrity Advance, LLC v. Consumer Fin. Prot. Bureau

Decision Date15 September 2022
Docket Number21-9521
Citation48 F.4th 1161
CourtU.S. Court of Appeals — Tenth Circuit

Richard J. Zack (Michael A. Schwartz and Christen M. Tuttle, with him on the brief), of Troutman Pepper Hamilton Sanders LLP, Philadelphia, Pennsylvania, for Petitioners.

Lawrence DeMille-Wagman, Senior Litigation Associate (Stephen Van Meter, Acting General Counsel; Steven Y. Bressler, Acting Deputing General Counsel; and Kevin E. Friedl, Senior Litigation Counsel; Consumer Financial Protection Bureau, with him on the brief) Washington D.C., for Respondent.

Before TYMKOVICH, Chief Judge, PHILLIPS, and McHUGH, Circuit Judges.

PHILLIPS, Circuit Judge.

Integrity Advance, LLC operated as a nationwide payday lender offering short-term consumer loans at high interest rates. In 2015, the Consumer Financial Protection Bureau ("Bureau") brought an administrative enforcement action against Integrity and its CEO, James Carnes (collectively, "Petitioners"). The Notice of Charges alleged violations of the Consumer Financial Protection Act ("CFPA"), the Truth in Lending Act ("TILA"), and the Electronic Fund Transfer Act ("EFTA").

Between 2018 and 2021, the Supreme Court issued four decisions— Lucia v. SEC , Seila Law v. CFPB , Liu v. SEC , and Collins v. Yellen —that bore on the Bureau's enforcement activity in this case. These opinions decided fundamental issues such as the Bureau's constitutional authority to act and the appointment of its administrative law judges ("ALJ"). The series of decisions led to intermittent delays and restarts in the Bureau's case against Petitioners. For instance, two different ALJs decided the present case years apart, with their recommendations separately appealed to the Bureau's Director. Ultimately, the Director mostly affirmed the recommendations of the second ALJ.

Petitioners have appealed the Director's final order to our court under 12 U.S.C. § 5563(b)(4). They ask that we vacate the order, or at least remand for a new hearing, mainly arguing that the Director's order didn't give them the full benefit of the Supreme Court's rulings. For the reasons below, we reject Petitioners’ various challenges and affirm the Director's order.

I. Factual Background

From 2008 to 2013, Integrity operated nationwide as a payday lender. It was founded and run by James Carnes, its CEO.1 The company offered short-term, small-dollar consumer loans at high interest rates. Integrity's loans usually ranged from $100 to $1,000 and were its only financial product. Though the law usually allows for non-coercive contractual arrangements between private parties, it sometimes requires heightened disclosure for loan agreements between parties of disparate bargaining power.

As relevant here, TILA requires loan providers to disclose material terms about the structure of their offered loans. Though Integrity provided borrowers TILA disclosure documents, it misled borrowers about the loan structure. Its disclosure documents misleadingly implied that the loans were single-payment loans. In fact, the loans typically resulted in multi-payment installment loans that automatically renewed. So absent undoing the automatic renewal, borrowers were left paying more in fees than Integrity had disclosed.

In January 2012, the Bureau and the Federal Trade Commission ("FTC") entered a Memorandum of Understanding by which the two agencies agreed to share information about their enforcement activities and any consumer complaints received. In March 2012, the Bureau searched the FTC database for consumer complaints about Integrity. The search returned complaints revealing consumer confusion about the true cost of Integrity's loans. From this, the Bureau began investigating Integrity and its loan practices.

II. Procedural Background

A. The Bureau's Initial Investigation

In January 2013, the Bureau sent Integrity a civil investigative demand ("CID") to obtain more information on Integrity's practices, its officers, and employees.2 Included in this requested information were copies of Integrity's loan documents. Nine months later, in October 2013, Integrity produced its initial responses to the CID. It completed production in December 2013. In June 2014, the Bureau held an investigative hearing and took Carnes's testimony. During that hearing, Carnes described his role at Integrity and acknowledged that he had the ultimate say over all of Integrity's policies and procedures.

From its investigation, the Bureau concluded that Integrity's loan documents violated federal law. The Bureau learned that Integrity charged a fixed price of $30 for first-time customers for every hundred dollars borrowed per pay period. For repeat customers, Integrity charged $24 per hundred dollars per pay period. Though Integrity provided each borrower TILA disclosures, the disclosures misled borrowers into believing that they would pay off the loan with a single payment. But if a borrower didn't call Integrity three days before his or her next payment was due and request to pay the loan in full, the loan would automatically default into four cycles of "auto-renewal" status. Dkt. 308 at 5. If the borrower failed to act after four renewals, the loan would enter an "auto-workout" status. Id. This meant that Integrity would debit the consumer's personal banking account for a "finance charge[ ]" plus a "principal payment of $50.00" Id. at 4. The loan would remain in auto-workout status until it had been paid off. As an example, the Bureau tells us that "it could take a borrower many months to repay a $300 loan, and the loan would cost that borrower $1065 even though [Integrity]’s TILA disclosures listed the total of payments as $390." Resp. Br. at 6.

The Bureau also learned that Integrity's loan documents required customers to provide direct automated-clearinghouse ("ACH") withdrawals from their bank accounts. If a customer tried to retract his or her ACH authorization, Integrity could remotely generate paper checks and withdraw payments directly from the customer's bank account.

On November 18, 2015, based on its gathered evidence, the Bureau filed a Notice of Charges against Petitioners. The Notice of Charges alleged that Integrity—as the loan provider—had violated TILA (Count I), EFTA (Count V), and CFPA (Counts II, III, IV, VI, and VII). The Bureau also alleged that Carnes had violated CFPA (Counts III, IV, and VII) given his knowledge of the misleading disclosures and his role as CEO.

a. The First Administrative Hearing

When the Bureau filed its Notice of Charges, the CFPB lacked an in-house ALJ. So the Bureau enlisted Parlen McKenna, an ALJ with the U.S. Coast Guard, to hear the case. In July 2016, ALJ McKenna held a three-day evidentiary hearing. The Bureau called six witnesses, and Petitioners called two. The parties also introduced documentary evidence. After considering all the evidence, ALJ McKenna ruled that the Bureau had proved all the active counts.3 ALJ McKenna recommended that the Director order Petitioners to pay $38 million of restitution, jointly and severally, plus "first-tier"4 civil penalties of $8.1 million from Integrity and $5.4 million from Carnes. Dkt. 176 at 74, 80–81.

In 2016, Petitioners appealed the ALJ's decision to the Bureau's Director.5 But the Director (and later the Bureau's Acting Director) held the appeal in abeyance pending the Supreme Court's decision in Lucia v. SEC , ––– U.S. ––––, 138 S. Ct. 2044, 201 L.Ed.2d 464 (2018). That case would soon decide the constitutional status of Securities & Exchange Commission administrative law judges.

In June 2018, the Supreme Court ruled that the SEC's ALJs were constitutional officers. That meant the Appointments Clause— U.S. Const. art. II, § 2, cl. 2 —required that the ALJs be appointed by the President, a court of law, or a department head. Lucia , 138 S. Ct. at 2051, 2053–54. In May 2019, the Director concluded that Lucia required that ALJ McKenna be appointed under the Appointment Clause too. Because he hadn't been, the Director remanded the case to a constitutionally appointed ALJ for a "new hearing."

b. The Second Administrative Hearing

By the time the Supreme Court decided Lucia , the Bureau had obtained an in-house ALJ, Christine Kirby. She had been appointed in conformity with the Appointments Clause. In remanding Integrity's case to ALJ Kirby, the Director instructed her to "give no weight to, nor presume the correctness of, any prior opinions, orders, or rulings issued by" ALJ McKenna. Dkt. 308 at 8.

Though Petitioners requested a "new hearing" in which they could further develop the record, ALJ Kirby determined that ALJ McKenna had given the parties an adequate opportunity to present their case. Thus, she announced her "intent[ion] to conduct a de novo review of the record—to the extent possible." Dkt. 269 at 5. She clarified that she "w[ould] consider the parties’ arguments as to whether the record need[ed] to be supplemented or whether portions of the record that were previously admitted should be struck." Id. But Petitioners wanted their proceedings before ALJ Kirby to include additional "pre-hearing discovery and an evidentiary hearing with the opportunity for both sides to present evidence and examine witnesses" beyond what they had presented before ALJ McKenna. Dkt. 295 at 12. Nevertheless, Petitioners (and the Bureau) each moved for summary disposition on the existing record.

In June 2020, while the summary-disposition motions were pending, the Supreme Court decided another case bearing on the Bureau's enforcement activities.6 In Seila Law LLC v. CFPB , ––– U.S. ––––, 140 S. Ct. 2183, 207 L.Ed.2d 494 (2020), the Court reviewed a challenge to the Bureau's authority to issue a CID for documents from the law firm of Seila Law. Id. at 2194. The law firm had refused to comply with the CID, based on its assertion that the Bureau was unconstitutionally structured.7 Id. Though the Bureau...

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