Less than twenty-six business days after Kathy Kraninger become Director of the Consumer Financial Protection Bureau, the agency obtained an $11 million civil money penalty in a joint enforcement action filed in the United States District Court for Southern District of New York in conjunction with the Office of the New York Attorney General.
In our view, notable aspects of this case are:
- The case as a mirror reflective of other recent unauthorized credit cards cases.
- The federal legal exemption for retailers was no barrier.
- New York state enforces federal UDAAP law.
- The action showcases a duality of focus: the credit card product as well as ancillary “GAP insurance” product for jewelry.
Following the case background, we discuss each of the four observations in greater detail below.
Thumbnail Sketch of the Case
The Bureau’s authority, bestowed upon the Bureau by Congress in the Dodd-Frank Act, includes both banks and non-depository institutions (non-bank lenders). This case was brought pursuant to the latter authority.
On January 16, 2019, the Bureau and the New York Attorney General (“NY AG”) sued Ohio-based Sterling Jewelers Inc. (“Sterling”), which operates approximately 130 stores (in and outside malls) in New York and 1,500 such stores in all 50 states. Sterling operates the jewelry stores under several names, including Kay Jewelers, Jared The Galleria of Jewelry, JB Robinson Jewelers, Marks & Morgan Jewelers, Belden Jewelers, Goodman Jewelers, LeRoy’s Jewelers, Osterman Jewelers, Rogers Jewelers, Shaw’s Jewelers, and Weisfield Jewelers. Sterling is a wholly owned subsidiary of Signet Jewelers Limited, the largest specialty-jewelry retailer in the U.S., Canada, and the UK.
The alleged facts forming the basis of the claims were multi-faceted: (1) unauthorized enrollment of consumers into store credit-card accounts by use of deceptive practices; (2) unauthorized enrollment of consumers into the “Payment Protection Plan” account feature (an insurance plan financed at the time of the jewelry sale for debt forgiveness upon burglary, death, disability, or other conditions); and (3) misrepresentations to consumers regarding the terms of promotional financing on the store credit card.
As to the alleged deceptive practices relating to (1) and (3), the federal government and New York asserted that:
- Most consumers shopping at Sterling’s stores (60%) finance their purchases using in-house credit, i.e., a credit card providing a line of credit that may be used only at Sterling’s stores.
- Of the three million credit card accounts that were open from 2014 to 2017, a subset of those accounts involved deceptive practices, according to the allegations. For example, employees at the store misstated the reasons why they requested consumers’ personal information; stated that a “hard” negative inquiry on their credit will not be necessary because it is “in house” financing when in fact they pulled credit; stated that the consumer’s information was needed to permit signing up for a newsletter, mailing list, or store “rewards” card or the store was using information to collect “survey” information or to place a custom order for jewelry, when in fact the employees used such information to submit a credit application.
- The lawsuit further implied that employees’ training materials were designed to avoid allowing the consumer to be aware of the credit card process, stating that salespeople should offer credit “to every customer who visited a store, and they included tips that enabled salespeople to distract the consumer, such as ‘offer to clean your Guest’s jewelry while you fill out the credit application,’ ” or other tips.
On the basis of the above factual allegations, the Bureau and NY AG asserted multiple counts. The claims asserted against the retailer by the government in the SDNY matter were multi-faceted, including: (1) Sections 1036 and 1031 of the Dodd-Frank Act and the prohibition against Unfair, Deceptive, and Abusive Acts and Practices (“UDAAP”), (2) the Truth in Lending Act (“TILA”), 15 U.S.C. 1601, and its implementing regulation, Regulation Z; (3) prohibition of illegal acts or persistent illegality in transaction of business under New York Executive Law 63(12); (4) prohibition of repeated and persistent fraudulent conduct in operation of a business under New York Executive Law 63(12); and (5) prohibition of deceptive practices under New York General Business Law 249. The matter resolved in a settlement by Stipulated Final Judgment and Order the same day the complaint was filed, as consistent with the Bureau’s past practice under prior Director Richard Cordray for litigation brought in district courts.
1. Sterling Jewelers as Progeny of Recent Sales Practices Cases in Terms of CFPB Jurisprudence
What is notable about the Sterling case is that the Bureau is applying the same UDAAP and TILA theories that were in issue in another high-profile sale practices case to Sterling’s credit card and PPP products, though Sterling is not a financial institution.
As such, the Kraninger-led Bureau is working to enlarge the scope of sales practices cases to encompass both bank and non-bank cases alike. In Sterling, the Bureau and the NY AG alleged that the culture of the company pressured employees to enroll consumers in company credit card and sell its financing plans and PPP. The company also employed a variety of incentives practices to encourage employees to obtain credit-card applications, including quotas and bonuses. Such allegations appear to be an exact page torn out of the playbook used by the Bureau in the sales practices case.
2. The Federal Legal Exclusion for Retailers was No Barrier to Enforcement
When the enabling legislation of the Bureau was passed, the Congress provided an exclusion from the scope of the Bureau’s authority for merchants, retailers, and sellers of nonfinancial goods or services.
The Sterling case presents an interesting case study in how the merchant exclusion works, and is notable because it demonstrates the Kraninger-led Bureau is not shying away from less mainstream applications of the Bureau’s authority than one would expect. These are the reasons why:
Specifically, as the public press and industry news have reported, the Bureau was extremely controversial when it was born on July 21, 2011, because the federal government created for the first time in the country’s history a single agency that had power to discipline markets exclusively for consumer financial violations. Under the Trump administration, no law has changed to alter that broad scope and power. No policy change made by Kraninger’s predecessor, Acting Director Mick Mulvaney, is one that is irreversible.
As many would recall, the exclusions to the Bureau’s power at its inception were deemed an essential safety valve to balance the goal of market discipline against the goal of government accountability, as a large federal agency was designed to enforce previously non-existent laws (e.g., the prohibition against federal abusive practices) in previously non-existent ways (e.g., conducting banking style examinations for non-bank entities). To clarify the boundaries of authority, the Congress settled on exclusions of large swaths of the industries. Such exclusions were passed in the final enabling legislation for: auto dealers, entities regulated by the securities commissions (whether Securities and Exchange Commission, the Commodity Futures Trading Commission, or state securities commissions); persons regulated by a state insurance regulator; manufactured home retailers; accountants; and—of course—merchants, retailers, and sellers of nonfinancial goods or services.
Sterling is a merchant, retailer, or seller of nonfinancial goods or services. Arguably, one might take the position that the Bureau’s SDNY case contravened the merchant exclusion on this basis. The exclusion states: “The Bureau may not exercise any. . . enforcement or other authority under this title with respect to a person who is a merchant, retailer, or seller of any nonfinancial good or service.” 12 USC 5517(a)(1).
However, in the Complaint filed by the Bureau and the NY AG, the plaintiffs alleged that “Sterling engages in offering a ‘consumer financial product or service’ under the [Dodd-Frank Act].” The provisions of the Dodd-Frank Act cited in the Complaint provide the Bureau with jurisdiction over products that are (among other things): “extending credit. . . . , including acquiring, purchasing, selling, brokering, or other extensions of credit.” (12 USC 5481(5) and 5481(15)(A).) Further, the exclusion goes on to state that the Bureau may not bring enforcement activity, “except to the extent such person is engaged in offering or providing any consumer financial product or service.” 12 USC 5517 (a)(1). In this fashion, the merchant exclusion is one of the murkiest aspects of the Bureau’s enabling authority.
Therefore, the governments’ position—potentially supported by the statutory language—implicitly appears to be that even though a merchant or a retailer is excluded from the purview of the Bureau’s authority, if the retailer is itself engaging in credit-offering activities, then the company is no longer able to avail itself of the merchant exclusion.
Nevertheless, many questions remain. How much of the retailer’s business revenues must comprise financial activities in order for the exception to kick in? Without more guidance, all we know is that the retailer’s exclusion comes with an exception, and—in our view—this reading is deserving of clarification. Otherwise, the regulatory framework written by Congress provides an exception that swallows the rule of exclusion altogether. This presents a dilemma for merchants: what is the point of carving out from a consumer financial products law that group of businesses (granting an exclusion for retailers) if the government can still pursue through an exception (if you engage in consumer financial products, then no exclusion) those exact businesses, where the exception is identical to the activity of the original law in the first place (a law for consumer financial products)?
The Complaint and the Consent Order filed in January 2019 did not get into these issues. What’s certain is that the Kraninger-led Bureau is not very dissimilar from the Cordray-led Bureau insofar as pursuing retailers despite the statute’s merchant exclusion.
3. New York State Enforces Federal UDAAP Law
While the NY AG chose to enforce its own jurisdiction under New York law, it did not stop there. In a particularly unique aspect of federal banking agency law, the Dodd-Frank Act grants the states the power to enforce the federal consumer financial protection law. Leaving aside the implications for federalism and state-federal balance of powers, the Congress has granted that right to the states in the Bureau’s enabling legislation. Under the Trump administration, that power has not changed.
In the Sterling case, the NY AG actually enforced title X of the Consumer Financial Protection pursuant to this grant of power, and this matter demonstrates that under the Kraninger-led Bureau, Bureau-state collaboration is ongoing and that the states will continue to enforce federal law as they see fit.
4. Action Showcases Duality of Focus: Credit Card Product and Ancillary “GAP Insurance” for Jewelry
Under the previous administration, the Bureau’s enforcement docket has been filled with cases that are multi-faceted with respect to their coverage of products in investigations of a single entity. Under Kraninger, that approach has not changed, as manifested in the Sterling case.
The Sterling case shows that the Bureau’s enforcement activity encompasses not only a credit card product, but also the debt-protection insurance product, PPP. (This style of focus on “ancillary products” was first developed under the Cordray era when the Bureau brought its first three cases against large institutions for similar debt-protection products on credit cards.)
Furthermore, from a UDAAP perspective, the Sterling case demonstrates the agency’s continued adherence to the fact-based, flexible framework offered by the UDAAP law in the Dodd-Frank Act. Meaning, the agency has discretion to decide which specific “flavor” of UDAAP—Unfair, Deceptive, or Abusive—to charge in any given case. Stated differently, there is no enforcement requirement in the enabling statute or any regulations that will bind the Bureau’s enforcement staff to bring all three types of claims (Unfair, Deceptive, and Abusive) as to each fact pattern, or for certain fact patterns to necessarily implicate any given type of claim but not another. Instead, the Enforcement office has full discretion to choose, based on the facts of the case, and to “mix and match” as appropriate.
Notably, therefore, the Bureau acted consistent with past practice in how the charges were defined in the Complaint against Sterling. The Bureau brought Deception claims as to the practices involving the credit-card product, and brought Unfairness claims as to the practices involving the PPP ancillary product, as the Bureau and NY AG alleged facts specific to the different elements required under each type of claim. In short, the case demonstrates overall the federal and state enforcement mechanism that is moving forward in a manner that is consistent with the fact-dependent nature of the UDAAP law. UDAAP activity at the Bureau is ongoing under the new leadership.