Integrity Advance, LLC and James R. Carnes

Documents in this case

• Document · 130 p.
• Document · 16 p.
• Dismissal · 7 p.
• Document · Mar. 2021 · 41 p.
• Order · Aug. 2021 · 3 p.
• Opinion · Sept. 2022 · 33 p.

Case summary

On November 18, 2015, the Bureau filed a notice of charges against an online lender, Integrity Advance, LLC, and its CEO, James R. Carnes. The Bureau alleges that they deceived consumers about the cost of short-term loans and that the company’s contracts did not disclose the costs consumers would pay under the default terms of the contracts. The Bureau also alleges that the company unfairly used remotely created checks to debit consumers’ bank accounts even after the consumers revoked authorization for automatic withdrawals. The Bureau is seeking injunctive relief, restitution, and the imposition of a civil money penalty. On September 27, 2016, the Administrative Law Judge (ALJ) issued a Recommended Decision finding liability and recommending injunctive and monetary relief. The Recommended Decision was appealed to the Director, but further activity on that appeal was held in abeyance pending a decision in PHH Corp. v. CFPB, No. 15-1177 (D.C. Cir.), and, subsequently, pending a decision in Lucia v. SEC, No. 17-0130 (S. Ct.). Subsequent to the Supreme Court’s ruling in Lucia that suggested that the ALJ that presided over the proceedings in this case may have been improperly appointed, the Director remanded the case for a new hearing and recommended decision by the Bureau’s ALJ. On March 26, 2020, Respondents moved to amend their answer, to reopen the record, and to dismiss the notice of charges. The ALJ denied these motions on April 24, 2020. In response to cross motions for summary disposition, on August 4, 2020, the ALJ issued a Recommended Decision finding in the Bureau’s favor on all counts. Respondents noticed an appeal to the Director and filed their opening appeal brief on September 3, 2020.

On January 11, 2021, the Director affirmed and reversed in part the Recommended Decision. She affirmed the ALJ’s conclusion that Integrity Advance violated TILA and EFTA and that both respondents violated the CFPA. With respect to the appropriate remedy, she concluded that Integrity Advance and James Carnes were jointly and severally liable for more than $38 million in restitution and imposed a $7.5 million civil money penalty against Integrity Advance and $5 million penalty against Carnes. The Director did not order restitution for conduct that pre-dated July 21, 2011, which is the Bureau’s designated transfer date. On September 15, 2022, the Tenth Circuit affirmed the Director’s order.

Document

PDF of this document (130 pages)

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UNITED STATES OF AMERICA Before the CONSUMER FINANCIAL PROTECTION BUREAU ADMINISTRATIVE PROCEEDING File No. 2015-CFPB-0029 In the Matter of:

INTEGRITY ADVANCE, LLC and JAMES R. CARNES Respondents RECOMMENDED DECISION Hon. Parlen L. McKenna, Presiding APPEARANCES: Alusheyi J. Wheeler, Wendy J. Weinberg, Vivian W. Chum, and Craig A. Cowle representing the Consumer Financial Protection Bureau Allyson B. Baker, Peter S. Frechette, Danielle R. Foley, Andrew T. Hernacki, and Hillary S. Profita, Venable LLP, representing Respondents Gerald S. Sachs on behalf of Edward Foster SUMMARY This Recommended Decision finds that Respondent Integrity Advance violated: the Truth in Lending Act (TILA) by disclosing incorrect finance fees and annual percentage rates in its loan agreements; the Electronic Funds Transfer Act (EFTA) by conditioning its loans on repayment by electronic means; and the Consumer Financial Protection Act (CFPA) by virtue of having violated a Federal consumer financial protection law. It finds that Respondents Integrity Advance and James R. Carnes violated the CFPA's prohibition on deceptive conduct by using a loan agreement that was likely to mislead consumers, and the CFPA's prohibition on unfairness by using remotely created checks to obtain funds from consumers' accounts after those consumers blocked authorization for electronic debits. It finds that a reasonable approximation of the total harm caused to consumers by the TILA violations and deceptive conduct (Counts I-III) is $38,164,153.31 and recommends that Respondents be held jointly and severally liable for paying restitution in that amount. It also finds that the total monetary harm to consumers caused by the unfair conduct (Count VII) is $115,024.50 and recommends Respondents be held jointly and severally liable in that amount. It recommends civil money penalties against Integrity Advance in the amount of $8,155,500.00 and against Mr. Carnes in the amount of $5,437,000.00. Finally, it recommends injunctive relief. 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 1 of 130

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TABLE OF CONTENTS I.

IN"TRODUCTION ................................................................................................. 7 II.

STANDARD OF PROOF ................................................................................... 11 III.

FINDIN"GS OF EACT ...................................................................................... .' .. 13 IV.

MOTION FOR RECONSIDERATION ........................................................... 22 V.

DISCUSSION AND CONCLUSIONS OF LAW ............................................. 28 A. Jurisdiction .......................................................................................................... 28 B. Count VII as to Integrity Advance .................................................................... 30 1.

Overview of Remotely Created Checks ....................................................... 30 2.

Legal Standard for Unfairness .................................................................... 31 3.

Was IntegrityAdvance's Use ofRCCs Unfair? .......................................... 33 C. Counts III and VII as to Mr. Carnes ................................................................. 39 1.

Standard for Finding Individual Liability ................................................... 39 2.

Analysis ....................................................................................................... 40 a.

Count III (Deception) .............................................................................. 48 b.

Count VII (Unfairness) ............................................................................ 55 VI.

SANCTIONS AND RELIEF .............................................................................. 56 A. Restitution for Counts I, II, and III and Monetary Relief for Counts V, VI, B.

C.

VII.

VIII.

and VII ................................................................................................................. 58 1.

The Parties' Arguments as to Methodology ................................................ 58 2.

Appropriate Amounts of Restitution and Monetary Relief ......................... 60 a.

Count I: TILA .......................................................................................... 63 b.

Count II: CFPA (TILA Violation) ...................................................... : ... 66 c.

Count III: CFPA (Deception) .................................................................. 68 d .. Counts V and VII (EFTA and CFPA) ..................................................... 69 e.

Count VII: CFPA (Unfairness) ...........•................................................... 70 Civil Penalty ............................................................. ; .......................................... 70 Injunctive Relief .................................................. , ............................................... 74 CONCLUSIONS OF LAW ................................................................................ 79 PROPOSED ORDER ................ : .............................................. ; ................... 80 Appendix A: List Of Witnesses And Exhibits ..................................................................... i Appendix B: Rulings On The Bureau's Proposed Findings Of Fact ............................... viii Appendix C: Rulings On The Bureau's Proposed Conclusions Of Law ....................... xxiii Appendix D: Rulings On Respondents' Proposed Findings Of Fact ............................ xxvii Appendix E: Rulings On Respondents' Proposed Conclusions Of Law ......................... xiii 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 2 of 130

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TABLE OF AUTHORITIES Cases Am. Fin. Servs. Ass'n v. FTC, 767 F.2d 957 (D.C.Cir.1985) ........................................... 31 Anderson v. City of Bessemer City, NC., 470 U.S. 564 (1985) ........................................ 12 Atkinson v. Anadarko Bank & Trust Co., 808 F.2d 438 (5th Cir. 1987), cert. denied 483 U.S. 1032 (1987) ......................................................................................................... 66 Borg-Warner Corp. v. FTC, 746 F.2d 108 (2d Cir. 1984) ................................................ 75 Butz v. Economou, 438 U.S. 478 (1978) ........................................................................... 12 CFPB v. Frederick J. Hanna & Assocs., P.C., 114 F. Supp. 3d 1342 (N.D. Ga. 2015), mot. to cert. appeal denied, 2015 WL 10551424 (N.D. Ga. Nov. 16, 2015) ............. 26 CFPB v. Gordon, 819 F.3d 1179 (9th Cir. 2016) ........................................................... _.. 61 CFPB v. ITT Educ. Servs., Inc., No. 1:14-CV-00292-SEB, 2015 WL 1013508 (S.D. Ind. Mar. 6, 2015) ......................................................................................................... 32, 33 Davis v. HSBC Bank Nevada, NA., 691 F.3d 1152 (9th Cir. 2012) ................................. 32 Davis v. Richmond, Fredericksburg & Potomac R. Co., 803 F.2d 1322 (4th Cir. 1986). 76 Decision ofthe Director, In the Matter of PHH Corp., et al., File No. 2014-CFPB-0002 (Jun. 4, 2015) ............................... ............................................................. 29, 71, 75, 77 Dir., Of ice of Workers' Comp. Prag. v. Greenwich Collieries, 512 U.S. 267 (1994) ..... 12 EEOC v. AutoZone, Inc., 707 F.3d 824 (7th Cir. 2013) .................................................... 75 Floersheim v. FTC, 411 F.2d 874 (9th Cir. 1969) ............................................................ 26 FTC v. Amy Travel Serv., Inc., 875 F.2d 564 (7th Cir. 1989) ..................................... 40, 61 FTC v. Bay Area Bus. Council, Inc., 423 F.3d 627 (7th Cir. 2005) .................................. 43 FTC v. Bishop, 425 F. App'x. 796 (11th Cir. 2011) ......................................................... 78 FTCv. BurnLounge, Inc., 584 F. App'x 315 (9th Cir. 2014) ........................................... 68 FTC v. Cantkier, 767 F. Supp. 2d 147 (D.D.C. 2011) ...................................................... 31 FTC v. Commerce Planet, Inc., 815 F.3d 593 (9th Cir. 2016) ................................... 40, 56 FTC v. Cyberspace.com LLC, 453 F.3d 1196 (9th Cir. 2006) .................................... 27, 52 FTC v. Direct Mktg. Concepts, Inc., 569 F. Supp. 2d 285 (D. Mass. 2008), afj'd, 624 F.3d I (lst.Cir. 2010) .......................................................................................................... 46 FTC v. Five-Star Auto Club, Inc., 97 F. Supp. 2d 502 (S.D.N.Y. 2000) .......................... 46 FTC v. FTN Promotions, Inc., No. 807-CV-I279-T-30TGW, 2008 WL 821937 (M.D. Fla. Mar. 26, 2008) ..................................................................................................... 42 FTC v. Garvey, 383 F.3d 891 (9th Cir. 2004) ................................................................... 47 FTC v. Gem Merch. Corp., 87 F.3d 466 (11th Cir. 1996) ................................................ 68 FTC v. Grant Connect, LLC, No. 2:09-CV-01349-PMP-RJ, 2009 WL 3074346 (D. Nev. Sept. 22, 2009) ............................................................................................................ 44 FTC v. lFC Credit C01p., 543 F.Supp.2d 925 (N.D. Ill. 2008) .................................. 32, 33 FTC v. lnc21.com C01p., 745 F. Supp. 2d 975 (N.D; Cal. 2010), afj'd, 475 F. App'x 106 (9th Cir. 2012) .................. ; .......................................................................................... 43 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 3 of 130

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FTC v. J.K. Publ 'ns, 99 F.Supp.2d 1176 (C.D. Cal. 2000) ............................ 32, 45, 47, 53 FTC v. Johnson, 96 F. Supp. 3d 1110 (D. Nev. 2015) ................................... 27, 32, 36, 69 FTC v. Kitco of Nevada, Inc., 612 F.Supp. 1282 (D. Minn. 1985) .................................. 42 FTC v. Lalonde, 545 F. App'x 825 (11th Cir. 2013) ..................... : .................................. 67 FTC v. Lanier Law, LLC, No. 3:14-CV-786-J-34PDB, 2016 WL 3632371 (M.D. Fla. July 7, 2016) ················································································································· 44, 55 FTC v. Magazine Solns., LLC, 432 F. App'x 155 (3d Cir. 2011) ..................................... 61 FTC v. Medicor, LLC., 217 F. Supp. 2d 1048 (C.D. Cal. 2002) ....................................... 45 FTC v. Millennium Telecard, Inc., No. CIV.A. 11-2479 JLL, 2011 WL 2745963 (D.N.J. July 12, 2011) .............................................................................................................. 46 FTC v. Neovi, Inc., 604 F.3d 1150 (9th Cir. 2010) ..................................................... 31, 32 FTC v. Network Servs. Depot, Inc., 617 F.3d 1127 (9th Cir. 2010) ................................. 44 FTC v. NHS Sys., Inc., 936 F. Supp. 2d 520 (E.D. Pa. 2013) ........................................... 44 FTC v. Oks, No. 05 C 5389, 2007 WL 3307009 (N.D. Ill. Nov. 2, 2007) ........................ 45 FTC v. Pantron I Corp., 33 F.3d 1088 (9th Cir. 1994) ................................................ : .... 32 FTC v. Publ'g Clearing House, Inc., 104 F.3d 1168 (9th Cir.1997) .......................... 40, 68 FTC v. Publishers Bus. Servs., Inc., 821 F. Supp. 2d 1205 (D. Nev. 2010) ............... 26, 47 FTC v. QT, Inc., 448 F. Supp. 2d 908 (N.D. Ill. 2006), amended on reconsideration in part, 472 F. Supp. 2d 990 (N.D. Ill. 2007), and affd, 512 F.3d 858 (7th Cir. 2008) . 47 FTC v. Ross, 897 F. Supp. 2d 369 (D. Md. 2012), affd, 743 F.3d 886 (4th Cir. 2014), cert. denied 135 S.Ct. 92 (2014) ................................................................................ 41 FTC v. Safety Plus, Inc., No. CIV. A. 91-352, 1993 WL 330656 (E.D. Ky. July 6, 1993) ····································································································································· 45 FTC v. Seismic Entm't Prods., Inc., 441 F. Supp. 2d 349 (D.N.H. 2006) ........................ 69 FTC v. Silueta Distributors, Inc., No. C 93-4141 SBA, 1995 WL 215313 (N.D. Cal. Feb. 24, 1995) ····················································································································· 39 FTC v. Sperry & Hutchinson Co., 405 U.S. 233 (1972) ............................................. 24, 33 FTC v. Stefanchik, 559 F.3d 924 (9th Cir. 2009) ........................................................ 61, 68 FTC v. Verity Int 'l, Ltd., 443 F.3d 48 (2d Cir. 2006) ................................................. 61, 78 FTC v. Washington Data Res., Inc., 704 F.3d 1323 (11th Cir. 2013) .............................. 61 FTC v. Wilcox, 926 F. Supp. 1091 (S.D. Fla .. 1995) ................................................... 42, 44 FTC v. WindwardMktg., Inc., No. 1:96-CV-615F, 1997WL 33642380 (N.D. Ga. Sept. 30, 1997) ····················································································································· 40 FTC v. World Media Brokers, 415 F.3d 758 (7th Cir. 2005) ..................................... 43, 53 Gallagher v. Nat'!. Transp. Safety Bd., 953 F.2d 1214 (10th Cir. 1992) ......................... 12 Glover Const. Co. v. Babbitt, 172 F.3d 878 (Table) (10th Cir. 1999) .............................. 76 Greenwich Collieries v. Dir., Office of Workers' Comp. Prag., 990 F.2d 730 (3d Cir. 1993) .................................................................................................................. , ........ 12 Hughey v. JMS Dev. Corp., 78 F.3d 1523 (11th Cir. 1996) ............................................. 76 In re Cliffdale Assocs., Inc., 103 F.T.C. 110 (1984) ......................................................... 26 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 4 of 130

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In re Int'! Harvester Co., 104 F.T.C. 949 (1984) ............................................................. 31 Jake's, Ltd, Inc. v. City of Coates, 356 F.3d 896 (8th Cir. 2004) .................................... 76 Landgraf v. USI Film Prods., 511 U.S. 244 (1994) .......................................................... 64 Mclendon v. Cont'! Can Co., 908 F.2d 1171 (3d Cir. 1990) ........................................... 76 Medina v. Dist. of Columbia, 643 F.3d 323 (D.C. Cir. 2006) .......................................... 66 NLRB. v. Greensboro News & Record, Inc., 843 F.2d 795 (4th Cir. 1988) ..................... 75 Orkin Exterminating Co., Inc. v. FTC, 849 F.2d 1354 (11th Cir.1988) ........................... 32 Payne v .. Travenol Labs., Inc., 565 F.2d 895 (5th Cir. 1978) ........................................... 76 Peregrine Myanmar Ltd v. Segal, 89 F.3d 41 (2d Cir. 1996) .......................................... 76 Perez v. Ohio Bell Tel. Co., No. 15-3303, 2016 WL 3755795 (6th Cir. July 14, 2016) .. 76 Price v. City of Stockton, 390 F.3d 1105 (9th Cir. 2004) ................................................. 75 Regina Corp. v. FTC, 322 F.2d 765 (3rd Cir.1963) .......................................................... 40 Sorenson v. Nat'!. Transp. Safety Bd, 684 F.2d 683 (10th Cir. 1982) ............................. 12 St. Claire Marine Salvage, Inc. v. Bulgarelli, No. 13-10316, 2014 WL 3827213 (E.D. Mich. Aug. 4, 2014), affd (July 22, 2015) ........................................................... 12, 13 Standard Educators, Inc. v. FTC, 475 F.2d 401 (D.C. Cir. 1973) .................................... 51 Steadman v. SEC, 450 U.S. 91 (1981) ................................................................ .' ............. 11 Tilcon Capaldi, Inc. v. Feldman, 249 F.3d 54 (1st Cir. 2001) .......................................... 68 US. v. W.T. Grant Co., 345 U.S. 629 (1953) ............ : ...................................................... 75 Statutes 12 U.S.C. § 5481(12)(C) ..................................................................................................... 7 12 U.S.C. § 5481(12)(0) ........ , ............................................................................................ 7 12 u.s.c. § 5481(14) ···································································································· 7, 65 12 u.s.c. § 5481(19) ········································································································ 29 12 u.s.c. § 5481(25) ............................................................ : ........................................... 30 12 u.s.c. § 5481(6) .................. , ....................................................................................... 29 12 U.S.C. § 551 l(c)(4) ..................... : ................................................................................... 7 12 U.S.C. § 5512(a) ............................................................................................................ 7 12 u.s.c. § 5514 ......................................................... :····················································· 29 12 u.s.c. § 5514(b)(l) ····································································································· 77 12 U.S.C .. § 553 l(c)(l) ..... :································································································ 31 12 U.S.C. § 553l(c)(2) ....................... : .............................................................................. 31 12 u.s.c. § 5563 ··········································································································· 7, 29 12 u.s.c. § 5564 ........................................................................................................... 7, 29 12 U.S.C. § 5565(a)(l) ...................................................................................................... 63 12 U.S.C. § 5565(a)(2) ................................................................................................ 63, 67 12 U.S.C. § 5565(c)(2)(A) ................................................................................................ 70 12 U.S.C. § 5565(c)(3) ...................................................................................................... 73 15 U.S.C. § 1601 ................................................................................................................. 7 15 U.S.C. § 1693 ........................................ : ........................................................................ 7 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 5 of 130

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I.

INTRODUCTION The Consumer Financial Protection Bureau (CFPB or Bureau) brought this administrative proceeding pursuant to the Consumer Financial Protection Act, 12 U.S.C. §§ 551 l(c)(4), 5512(a), 5563, 5564, which includes the Truth in Lending Act (TILA), 15 U.S.C. §§ 1601 et seq., and the Electronic Fund Transfer Act (EFTA), 15 U.S.C. §§ 1693 et seq., except with respect to Section 920 of EFT A. See 12 U.S.C. § 5481(12)(C), (0), (14). On Novemben 18, 2015, the CFPB filed a Notice of Charges against Respondents Integrity Advance and James R. Carnes. The Bureau alleged that Integrity Advance, a payday lender, violated several consumer financial protection laws and that Mr. Carnes, as CEO oflntegrity Advance, was also personally liable for certain unfair and deceptive acts and practices.

A payday loan is a type of short-term, small-dollar loan. A consumer who takes out one of these loans typically pays interest in the form of a finance charge, which covers the period until the consumer's next payday. Integrity Advance loans carried a finance charge of $30 per $100 borrowed for new customers, and $24 per $100 borrowed for returning customers. The finance charge was the same regardless of the length of the initial loan term based on the next payday (i.e., one week or two weeks). Expressed in terms of an annual percentage, these rates often exceeded several hundred percent; for example, one Integrity Advance loan of $100.00 carried a 576.316% APR if paid in full on the borrower's next payday. EC-EX-008. Three other loans of $300.00 carried APRs of 521.429%, 782.14%, and 684.38%, respectively. EC-EX-010, EC-EX-011, and EC­ EX-012.

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However, the actual cost of the loans was made higher still if the consumer did not pay off the loan on the next payday and it was renewed1 at the end the term. Each renewal resulted in additional finance charges. Finally, if the principal was repaid over time, rather than in one lump sum, additional finance charges and fees accrued. Integrity Advance's loan agreement permitted it to automatically renew its loans unless the consumer took additional action to stop the renewal process, and further permitted them to place the loans in "auto-workout" status, whereby the principal would be repaid in small increments along with associated finance charges and fees. In its Notice of Charges, the Bureau provided an example of the total amount a consumer would pay for a $300.00 loan if all automatic renewals and all auto-workout payments occurred as described in the Integrity Advance loan agreement: $90 $90 $0 $300 S90 $90 $90 $0 $300 $180 $90 $90 $0 $300 $270 $90 $90 $0 $300 $360 $90 S90 so $300 $450 $140 S90 S50 $250 $590 $125 $75.

$50 $200 $715 $110 $60 S50 $150 $825 $95 $45 S50 $100 $920 $80 $30 $50 $50 $1000 $65 $15 $50 $0 $1065 TOTAL $1065 $765 $300 $1065 Notice of Charges ,r 31. Respondents admitted that this was one possible scenario under which the loan could be repaid. Answer ,r 31.

1 Renewals are also referred to as rollovers. For the sake of clarity, I will only use the term renewal in this Recommended Decision.

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The Bureau initially brought seven counts against Integrity Advance, three of which were also against Mr. Carnes. The Notice of Charges focused on three main issues: first, whether the TILA disclosures in Integrity Advance's loan contracts were incorrect; second, whether the loan contract was deceptive as it concerned the costs of Integrity Advance's loans; and third, whether Integrity Advance's use ofremotely created checks (RCCs) to collect loan payments from certain customers was an unfair practice. On December 18, 2015, Respondents moved to dismiss the charges, claiming the Bureau never had jurisdiction over either Integrity Advance or Mr. Carnes; that the Bureau's structure violates the constitutional separation of powers; and that the Notice of Charges did not set out claims on which relief could be granted. I denied Respondents' Motion to Dismiss on April 22, 2016.

On May 10, 2016, both parties moved for summary disposition as to all charges. On July 1, 2016, I issued an Order granting partial summary disposition ip the Bureau's favor, and for purposes of this Recommended Decision, that Order is hereby incorporated herein by reference. My findings from the July 1, 2016 summary disposition Order are briefly summarized below for the reader's convenience. As to Count I, which alleged that Integrity Advance violated TILA, I determined that the contracts between Integrity Advance and its customers were ambiguous; whether Integrity Advance required consumers to make one payment in full to satisfy their loans or required them to make multiple payments over time. Importantly, because Integrity Advance drafted the contracts, I construed the ambiguous terms against Integrity Advance. Accordingly, I found that Integrity Advance offered multi-payment loans but 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 9 of 130

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disclosed the finance charges, annual percentage rate (APR), and total of payments on each loan as if it was a single-payment loan.

Count II asserted that Integrity Advance violated the Consumer Financial Protection Act (CFP A). The only element of this violation was the underlying TILA violation, found proved in Count I. I therefore found Count II proved. Count V alleged that Integrity Advance violated the EFTA by conditioning extensions of credit on repayment by electronic means. I found this count proved. Respondents argued that some consumers were able to receive a loan without signing an ACH Agreement authorizing electronic repayment, but I found this was merely an exception to the standard practice of requiring consumers to sign the form. Respondents also argued that the loan agreement permitted consumers to repay loans using alternate payment methods. However, for the majority oflntegrity Advance's customers, signing the ACH authorization was a condition for securing the loan in the first place, even if they could avoid having the ACH debits actually occur by sending a check or money order, or paying by credit card. Count VI alleged that Integrity Advance violated the CFP A by way of the EFT A violation. I also found this count proved. As to Count III, alleging deceptive acts or practices in connection with the TILA violations, I found the charge proved against Integrity Advance but deferred any decision about Mr. Carnes's liability until the record was fully developed after the hearing. The finding against Integrity Advance was predicated on the fact that its loan contract was facially deceptive. Specifically, the contract disclosed finance charges and APRs to loan applicants as though the loans would be repaid in a single payment, but for the 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 10 of 130

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overwhelming majority of Integrity Advance customers, the loans operated as multi­ payment loans with much higher charges and fees.

I denied summary disposition on Counts IV and VII, alleging unfair use ofRCCs, because there was not enough information in the record prior to the hearing for me to determine whether liability existed.

On July 11, 2016, the Bureau withdrew with prejudice Count N, which alleged unfair practices by both Integrity Advance and Mr. Carnes in connection with the TILA violations. Thus, the only counts remaining for decision after the hearing are whether (1) Mr. Carnes may be held individually liable for the deceptive practices described in Count III; (2) whether Integrity Advance's use ofremotely created checks was an unfair act or a practice prohibited by the CFPA (as alleged in Count VII); and (3) if Integrity Advance unfairly used RCCs, whether Mr. Carnes may be held individually liable for that act or practice, as alleged in Count VII. Once these matters are decided, I must make a determination about the appropriate sanctions and relief for each proved violation. II. STANDARD OF PROOF These proceedings are conducted under the Administrative Procedure Act (AP A), 5 U.S.C. § 551 et seq. Section 7(c) of the APA places the burden of proof on the proponent of a rule or order, unless otherwise provided by statute. The decision "shall be on a consideration of the whole record relevant to the issues decided, and shall be supported by reliable, probative, and substantial evidence." 12 C:.F.R. § 108I.400(c)(l); see also 5 U.S.C. § 556(d). The "preponderance of the evidence" standard is applied in administrative proceedings, meaning a party must prove that a "fact's existence is more likely than not." Steadman v. SEC, 450 U.S. 91, 98 (1981); Greenwich Collieries v. Dir., 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 11 of 130

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Office of Workers' Comp. Frog., 990 F.2d 730, 736 (3d Cir. 1993). The Bureau brought this proceeding and therefore it bears the initial burden of proving its prima facie case against Respondents by a preponderance of the evidence. See Dir., Office of Workers' Comp. Frog. v. Greenwich Collieries, 512 U.S. 267 (1994). Evidentiary rules under the AP A are less strict than in jury trials, and only irrelevant, immaterial, or unduly repetitious evidence need be excluded. See 5 U.S.C. § 556(d); Gallagher v. Nat 'l. Transp. Safety Bd, 953 F.2d 1214, 1214 (10th Cir. 1992); Sorenson v. Nat'!. Transp. Safety Bd., 684 F.2d 683, 688 (10th Cir. 1982). Moreover, evidence "need not be authenticated with the precision demanded by the Federal Rules of Evidence" in order to be admissible in an administrative proceeding. Gallagher at 1218. It is well-settled that determinations as to credibility and reliability are within the discretion of the trial judge, or the discretion of the Administrative Law Judge in an administrative hearing such as this. See, e.g., Anderson v. City of Bessemer City, NC., 470 U.S. 564, 565 (1985); Butz v. Economou, 438 U.S. 478, 513 (1978). As long as "the. account of the evidence is plausible in light ofthe record viewed in its entirety," the judge's determination is entitled to deference. Anderson at 564. "Traditional factors in assessing credibility include such things as (1) the demeanor of the witness, (2) the inherent plausibility of the witness's testimony, (3) the consistency of the testimony of the witness with prior statements of the witness, (4) the internal consistency of the witness's statements, (5) the consistency of the testimony with other evidence, (6) the accuracy of the witness's testimony, and (7) the interest of the witness in the outcome of the proceeding." St. Claire Marine Salvage, Inc. v. Bulgarelli, No. 13-10316, 2014 WL 3827213, at *6 (E.D. Mich. Aug. 4, 2014), ajfd (July 22U 2015). A judge may also apply 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 12 of 130

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other factors, and bases the credibility assessment on "the totality of the circumstances after considering any relevant facts that may impact the witnesses [sic] credibility." Id. III.FINDINGS OF FACT The findings of fact below are based on the entire record of this proceeding. See 12 C.F.R. § 1081.400(c)(l). My individual rulings on the parties' proposed findings of fact are attached as Appendix B (Enforcement Counsel or CFPB) and Appendix D (Respondents). My rulings on the parties' proposed conclusions oflaw are attached as Appendix C (CFPB) and Appendix E (Respondents). I have considered all of the parties' arguments, proposed findings and conclusions and rejected those inconsistent with this Recommended Decision. To the extent that each party proposed findings of fact and conclusions of law were accepted or accepted as modified, they are hereby incorporated into this Recommended Decision.

Background and Structure of Integrity Advance 1.

Integrity Advance, LLC was a Delaware licensed, short-term, small-dollar lender (payday lender). Tr. I-93:25-94:2; RX-007-RX-014. 2.

Integrity Advance's only product was a consumer loan. Tr. I-94:14-22; Tr. I- 232:18-22.

3.

Those loans were the sole source oflntegrity Advance revenues and operating profits. Tr. I-95:1-8.

4.

Respondent James Carnes (Mr. Carnes) founded Integrity Advance on July 2, 2007. Tr. I-94:3-4; EC-EX-068 at 7:12-13; RX-007. 5.

Integrity Advance is a wholly-owned subsidiary company of Hayfield Investment Partners (HIP). Tr. I-100:14-17; Tr. II-6:12-16; EC-EX-067. 6.

Willowbrook Marketing LLC owned a majority share, 50.3%, of HIP and acted as the manager for HIP. Tr. I-102:8-10; Tr. II-8:2-3; EC-EX-067. 7.

Mr. Carnes was the sole owner of Willowbrook Marketing LLC. Tr. I-102:8-9; EC-EX-067.

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8.

Integrity Advance's first consumer loan transaction occurred in May 2008 and its final loan transaction occurred on July 9, 2013. Tr. II-132:23-133:18. 9.

Integrity Advance's loan agreement did not change significantly between 2008 and 2013. Tr. II-38:20-39:1; EC-EX-061; EC-EX-063. 10.

Integrity Advance generated the most operating profits of all the HIP subsidiaries. Tr. I-110:11-12; EC-EX-068 at 88:24-89:6.

11.

Integrity Advance contributed more than 75% ofHIP's profits in 2010 (Tr. 1- 114:11-115:7; EC-EX-068 at 92:19-93:9), 2011 (Tr. 1-115:8-21; EC-EX-068 at 93:10-14), and 2012 (Tr. I-115:22-116:2; EC-EX-068 at 93:15-16). 12.

Integrity Advance originated 82,980 loans on or after July 21, 2011. EC-EX-097. 13.

Of the loans made on or after July 21, 2011, 28,001 were made to new customers. EC-EX-097.

14.

Integrity Advance ceased offering loans in December 2012. Tr. II-92:8-9. 15.

EZ Corp. purchased some oflntegrity Advance's assets, including a partial list of its customers, in December 2012. Tr. 1-237:22-238:13; Tr. II-70:22-23. 16.

EZ Corp. did not purchase Integrity Advance. Tr. 1-237:19-21. 17.

Integrity Advance still exists as a non-operational Delaware LLC. EC-EX-068 at 9:8-10:3.

Mr. Carnes's Role At Integrity Advance and Associated Companies 18.

Mr. Carnes was the CEO of both Integrity Advance and its parent company HIP. Tr. 1-94:5-12.

19.

Mr. Carnes was viewed as the primary decision maker at Integrity Advance. Tr. 1-51:4-7; Tr. I-82:2-4.

20.

Mr. Carnes "had ultimate authority over [Integrity Advance] and making sure that it complied with the Delaware law." Tr. 1-221 :24-222:1. 21.

Mr. Carnes's role at Integrity Advance did not change from 2008 until the EZ Corp. sale. Tr. 1-5:2-8.

22.

Mr. Carnes had the authority to make all decisions governing Integrity Advance's policies and procedures. Tr. 1-209:1-11; EC-EX-068 at 32:15-17. 23.

Mr. Carnes made the final decisions about Integrity Advance's underwriting policies. Tr. I-59:18-25; EC-EX-069 at 22:17-18. 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 14 of 130

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24.

Mr. Carnes signed contracts on behalf of Integrity Advance, including two lead purchase agreements (Tr. I-122:22-123:14; EC-EX-053 and Tr. I-126:17-127:13; EC-EX-054) and a debt collection vendor agreement (Tr. I-129:22-130:11; EC­ EX-085).

25.

Mr. Carnes was the signatory on the ACH origination agreement between MoneyGram and Integrity Advance. EC-EX-056.

26.

Mr. Carnes was an authorized signatory for the bank account used by Integrity Advance. Tr. I-141:16-20.

27.

Mr. Carnes ran monthly or quarterly meetings where HIP employees discussed all the entities under the HIP umbrella, including Integrity Advance. Tr. I- 78:10-80:12.

28.

Mr. Carnes also ran weekly IT meetings. Tr. I-76:2-3. 29.

Mr. Carnes had final say over what appeared on the company's website. Tr. I- 216:24-217:15; EC-EX-068 at 41 :1-6.

30.

Mr. Carnes communicated directly with the call centers used by Integrity Advance. Tr. I-64:3-6.

31.

Mr. Carnes did not see, review, edit, revise, or discuss call center scripts. Tr. II- 74:13-75:10.

32.

Mr. Carnes reviewed call logs from the caH centers used by Integrity Advance. Tr. I-179:18-180:1; EC-EX-088.

33.

Mr. Carnes made the decision to move Integrity Advance's business from one call center to another. Tr. I-64:13-19.

34.

Mr. Carnes was involved in resolving the issue of a call center employee who allegedly committed fraud against an Integrity Advance customer. Tr. I- 177:3-178:3; EC-EX-087.

35.

As CEO, Mr. Carnes had ultimate responsibility for approving everything related to Integrity Advance 's business. Tr. I-228:8-11. 36.

Outside counsel drafted the Integrity Advance loan agreement template. Tr. I- 226:20-227:9; I-231 :23-24.

37.

Mr. Carnes did not discuss the loan agreement template with its drafters. Tr. I- 227:10-12.

38.

Mr. Carnes could not recall whether Integrity Advance's in-house counsel explained the content of the loan agreement template to him. Tr. I-231 :11-12. 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 15 of 130

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39.

Mr. Carnes did not discuss the Integrity Advance loan agreement template with anyone from the Delaware State Banking Commission. Tr. II-96:21-23. 40.

Mr. Carnes may have seen and flipped through an Integrity Advance loan agreement template prior to its use. Tr. I-226:9-14; I-227:21-25. 41.

Mr. Carnes did not edit Integrity Advance's loan agreement template or any version of the agreement. Tr. II-75:11-25, II-76:1-13. 42.

HIP/Integrity Advance staff had Mr. Carnes's approval to use the loan agreement. Tr. I-232:11.:....12.

43.

Mr. Carnes had operated other payday lending companies before starting Integrity Advance. Tr. I-10-12.

44.

Mr. Carnes understood how Integrity Advance's loans worked when he was CEO. Tr. I-220:10-12.

45.

Mr. Carnes knew the fee structure oflntegrity Advance's loans and testified that it followed the industry standard. Tr. II-48:14-49:6. 46.

At all times Integrity Advance was operating, the loan agreement disclosed the finance fees as $30 per $100 lent to new customers, and $24 per $100 lent to returning customers. Tr. II-15:18-23; II-48:18-22. 4 7.

Mr. Carnes had the authority to change Integrity Advance' s fee structure. Tr. II- 49: 12-18.

48.

Mr. Carnes knew that if a consumer "didn't call or email, and it was their first payment ... they would be renewed." Tr. I-219:13-20. 49.

Mr. Carnes knew that if the consumer did nothing on the next payday, the loan would be renewed again. Tr. I-219:21-23.

50.

Mr. Carnes knew that an Integrity Advance loan would renew four times before it went to workout. Tr. I-219:24-220:3.

51.

At the time he was CEO of Integrity Advance, Mr. Carnes understood that most of the company's customers would experience at least one renewal. Tr. I-222: 17- 20; I-225:6-25.

52.

Mr. Carnes understood that consumers who had the loans renewed would pay more than what had been disclosed in their TILA disclosures. EC-EX-068 at 245:10-25.

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Integrity Advance Personnel and Operations 53.

All persons who worked for Integrity Advance, except for George Davis, worked from a location in Kansas. Tr. 1-73:15-17; 1-99:19-22; I-209:17-21. 54.

Four HIP employees provided services to Integrity Advance when it commenced operations in 2008. These employees were Mr. Carnes, Edward Foster, Hassan Shahin, and a receptionist. Tr. I-53:19-54:10.

55.

At its largest, in 2011, HIP employed between 20 and 30 people. Tr. II 92:2-6. 56.

Although a corporate reporting structure existed, HIP was a small company and there was no formal chain of command; employees "interacted with everybody as needed to support the business." Tr. I-39:16-40:3. 57.

Mr. Carnes was at the head of the reporting structure, meaning all employees directly or indirectly reported to him. EC-EX-065; EC- EX-068 at 32:4-9; EC­ EX-069 at 21:23-22:5.

58.

Mr. Carnes had an open door policy and was accessible to any Integrity Advance employee who wanted to talk to him. Tr. I-213:10-12; Tr. II-74:6-8; EC-EX-068 at 37:12-13.

59.

Mr. Foster was executive vice president, general counsel, secretary, and assistant treasurer oflntegrity Advance. Tr. II-7:24-8:4, II-8:10-12. 60.

In June of 2010, Mr. Foster also took on the role of Chief Operations Officer of HIP. Tr. II-12:3-8.

61.

Relating to Integrity Advance, Mr. Foster's job was primarily to provide corporate legal counsel to the Company. Tr. II-8:13-15. 62.

Mr. Carnes directly hired Mr. Foster and set Mr. Foster's salary. Tr. I-96:15-16; II-7:17-20.

63.

In his capacity as executive vice president, Mr. Foster reported to Mr. Carnes. Tr. II 9:19-22.

64.

Mr. Foster and Mr. Carnes spoke on a daily basis. Tr. I-214:13-14. 65.

At the beginning of Integrity Advance's operations, Mr. Foster and Mr. Carnes spent more time discussing the company than they did toward the end. Tr. II- 10:2-11 :9.

66.

In general, Mr. Foster and Mr. Carnes did not speak about Integrity Advance business daily; the frequency varied depending on business needs and whether there were any problems necessitating both men's involvement. Tr. I- 214:15-215:16.

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67.

Timothy Allen Madsen worked as Vice President of Marketing for HIP for approximately five years (2008-2013). Tr. I-27:10-14; I-28:4-8, I-29:6-8. 68.

Mr. Carnes and Mr. Foster together hired Mr. Madsen. Tr. I-98:4-6. 69.

Mr. Madsen's primary job function was to purchase leads and manage relationships with lead providers for Integrity Advance, as well as manage leads internally and coordinate with Integrity Advance's call center regarding leads. Tr. I-28:9-13, I-28:24-29:5.

70.

The term "lead" refers to information relating to potential loan applicants for Integrity Advance. Tr. I-28:15-16; I-116:20-21.

71.

Lead generators or lead providers are companies that use some methodology to contact a consumer, get the consumer to take an offer and fill out an application, and then sell the data. Tr. I-116:13-16.

72.

Leads are rated according to the quality of the applicant's financial status. The lead generators price leads on a sliding scale for sale to lenders such as Integrity Advance. Tr. I-120:20-122:21.

73.

Integrity Advance had a system, called the dashboard, which it used to monitor the performance of leads, including lead acceptance, purchase rates, and conversion rates. Tr. I 45:13-23.

74.

As part of his duties, Mr. Madsen monitored the dashboard. Tr. I-45:13-25. 75.

Mr. Madsen also coordinated interactions between Integrity Advance and its third party call center. Tr. I-63:6-7.

76.

Mr. Carnes and Mr. Madsen discussed information found on the dashboard, including conversion rates, performance of leads, first payment defaults, and lead generation. Tr. I-48:16-49:1; I-67:1-6; I-68:20-22. 77.

Mr. Madsen had to consult with Mr. Carnes about changes in the credit scores Integrity Advance would accept from its customers if they departed by more than a couple of points from set parameters. Tr. I-33:15-21. 78.

Mr. Carnes was knowledgeable about the factors that influenced the price of a lead, such as whether it was a "first look lead," meaning the company had the opportunity to view and purchase it before any other lender did (Tr. I-119:15-19); whether a consumer had direct deposit of their paycheck (Tr. I-121 :15-17); or whether the consumer's account was a savings account versus a checking account (Tr. I-122:16-18).

79.

Mr. Carnes had ultimate authority as to what Integrity Advance would pay for a lead. Tr. I-32:10-14; I-35:1-6.

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80.

Bruce Andonian worked for HIP for approximately two years (2011-2013) as Director of Software Development. Tr. I-70:12-13, I-71:5. 81.

Mr. Andonian reported directly to Mr. Foster, and ultimately to Mr. Carnes. Tr. I- 72:5-6.

82.

Mr. Andonian'sjob was to manage the software development team for HIP's Empower product. Tr. I-70:14-24; I-83:7-8.

83.

Mr. Andonian's work at Integrity Advance involved addressing issues with Integrity Advance's website and database. Tr. I-75:5-15; I-76:21-77:3; 89:10-16.

84.

Mr. Andonian first worked on the Integrity Advance website when Mr. Foster asked him to fill in for another employee, but gradually started performing more work for Integrity Advance. Tr. I-83:9-84:2.

85.

Mr. Carnes brought issues with Integrity Advance's website and database to Mr. Andonian's attention. Tr. I-75:8-15.; I-89:10-16 86.

Mr. Carnes directed Mr. Andonian to make certain changes to the website and database, such as removing states in which Integrity Advance could not lend (Tr. I-76:21-77:3) and changing parameters on credit scores Integrity Advance would accept on applications (Tr. I-77:4-78:5).

Regulation by the State of Delaware 87.

As a Delaware corporation engaged in making loans, Integrity Advance was regulated by the Delaware State Banking Commission. Tr. II-80:13-16; RX-8-13. 88.

Integrity Advance renewed its license annually until 2013, after which it stopped submitting applications for renewal. RX-8-13. 89.

E. Quinn Miller is an Investigative Supervisor in the non-depository unit of the Delaware Office of the State Bank Commission. Tr. III-116:3-11. 90.

In Delaware, the licensing process for non-depository lenders involves a review of an applicant's financial documents, business references, and the personal information of the applicant's executive officers. Tr. III-124:18_.:.126:15. 91.

The investigators also try to obtain a copy of the applicant's loan contract to include in the file. Tr. III-126:19-20.

92.

The investigators do not specifically approve the contract, but may ask questions about it. Tr. III-126:20-24.

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93.

Ms. Miller testified that the Delaware State Bank Commission "did not give anybody a blueprint, or a form, or anything like that. They sent us their form." Tr. III-148:9-11.

94.

Ms. Miller looked at agreements to make sure the TILA disclosures were presented in the correct format. Tr. III-150:24-151 :8. 95.

Ms. Miller or her staff also used a computer program to verify that the APR calculation in the TILA box was within the legally allowed tolerance for a hypothetical loan. III-151:18-152:18.

96.

The investigatory staff does not verify any other mathematical calculations. Tr. III-153:5-6.

97.

The investigatory staff does not verify compliance with other provision of TILA or with EFTA. Tr. III-149:1-21.

98.

During the period of time Integrity Advance was operating, the Delaware Commissioner did n:ot set the fees that non-depository lenders could charge their customers. Tr. III-148:12-14.

99.

During the period of time Integrity Advance was operating, Delaware law permitted non-depository lenders to offer a maximum of four renewals before principal repayments began. Tr. III-135:1-11; III-137:13; see also 5 Del. C. § 2235A(a)(2) (2009).

100.

During the period of time Integrity Advance was operating, neither Delaware law nor the Delaware Commissioner required non-depository lenders to offer the option of renewals. Tr. III-145:24-146:14; see also 5 Del. C. Subchapter III (2009).

101.

During the period of time Integrity Advance was operating, neither Delaware law nor the Delaware Commissioner required non-depository lenders to automatically renew their customers' loans. Tr. III-145:24-146:2. 102.

During the period of time Integrity Advance was operating, the Delaware Commissioner did not review non-depository lenders' loan agreements for compliance with the EFTA. Tr. III-149:1-3.

103.

The Delaware Commissioner has never denied a non-depository lender's application for a license. Tr. III-144:23-145:1. 104.

The Delaware Commissioner has only revoked a non-depository lender's license when its surety bond was "cancelled and not resolved by the licensee within the time limit." Tr. III-132:14-15.

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Remotely Created Checks 105.

Integrity Advance's ACH agreement contained a provision that allowed the company to execute RCCs on its customers' bank accounts. EC-EX-001-014; EC-EX- 063.

106.

The ACH agreement stated "[i]fyou revoke your authorization, you agree to provide us with another form of payment acceptable to us and you authorize us to prepare and submit one or more checks drawn on Your Bank Account so long as amounts are owed to us under the Loan Agreement." EC-EX-001-014; EC-EX- 063.

107.

The authorization to create RCCs appeared only once in the loan agreement on approximately page 9, at the end of a paragraph, in the middle of the ACH authorization section. EC-EX-001-014; EC-EX-063. 108.

The RCC provision was not separated out from the other text or emphasized in any way. EC-EX-001-014; EC-EX- 061; EC-EX-063. 109.

Integrity Advance did not require consumers to sign or initial the RCC provision separately. EC-EX-001-014; EC-EX-063.

110.

The RCC provision did not inform consumers that these checks could be submitted without the consumer's signature. EC-EX-001-014; EC-EX-063. 111.

The RCC provision did not inform consumers that these checks could be submitted without any additional notification to the consumer. EC-EX-001-014; EC-EX-063.

112.

Integrity Advance used RCCs to withdraw funds from some consumers' bank accounts after those consumers paid more than the disclosed "total of payments" and had attempted to halt ACH debits by Integrity Advance. Tr. I 235:19 - 236:3; II-84:6-11; II-84:25-85:8; II-142:15-148:4; II-152:15-153:11; EC-EX-072 at ,r,r9-11; EC-EX-97; see also EC-EX-95.

113.

Integrity Advance used RCCs after trying and failing to obtain payment in some other way from consumers who had blocked ACH transfers. Tr. II-85:3-6. 114.

Mr. Carnes knew that Integrity Advance used RCCs and the circumstances under which they were used. Tr. II 84:6 - 85:11; EC-EX-068 at 219:7-18. 115.

Mr. Carnes saw remotely created checks printed using a printer in the Kansas City office. Tr. 1-236:10-11, Tr. 1-236:20-22.

116.

Mr. Carnes testified that Integrity Advance printed remotely created checks on a weekly basis and regularly used remotely created checks to collect consumer debt. Tr. I 235:24-236:15.

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117.

Integrity Advance used remotely created checks 602 times on or after July 21, 2011, on consumers who had revoked or stopped their authorization for Integrity Advance to withdraw funds from their accounts and who had already paid an amount e.qual to the "Total of Payments" in the TILA box in the consumers' loan agreements. Tr. II-151 :6-11; EC-EX- 097; see also EC-EX-95. N. MOTION FOR RECONSIDERATION At the close of their post-hearing brief, Respondents moved for me to reconsider my determination that the loan agreements used by Integrity Advance were facially deceptive. While acknowledging that the CFPB Rules of Practice do not address motions for reconsideration, Respondents say Federal Rule of Civil Procedure 60 provides guidance and such motions are appropriate when new evidence is adduced at trial that contradict an earlier ruling.

Respondents rely on the testimony of E. Quinn Miller, a representative from the Delaware State Banking Commission, as evidence that my earlier finding was incorrect. Ms. Miller testified about the application and renewal process for Delaware lending licenses, such as those issued to Integrity Advance. Respondents argue her testimony showed that the loan agreement, including the TILA box, was "reviewed for accuracy by Ms. Miller and others on her staff as a condition for obtaining a lending license and reviewed by examiners as a condition for maintaining the license." Resp. Post-Hearing Brief at 35. They further contend that Delaware's lending laws expressly permitted renewals, and Integrity Advance's "loan agreement complied with the State of Delaware, which was its only regulator at the time it made loans to consumers." Id. at 36. In its responsive brief, the Bureau argues that Respondents' request for reconsideration lacks both a procedural and a substantive basis, and states that whether Delaware law allowed payday loans to be renewed is irrelevant. EC Opposition at 29. The Bureau also says Respondents' argument misstates Ms. Miller's testimony about the 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 22 of 130

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actions her office took when reviewing payday lenders' applications for licensure or license renewal. Id at 29-30.

As a procedural matter, the CFPB's Rules of Procedure do not cover every possible motion that could be made in a proceeding before the Bureau. Administrative law judges commonly look to the Federal Rules of Civil Procedure for guidance where an agency's specific rules are silent. The CFPB's rules give me "all powers necessary to conduct a proceeding in a fair and impartial manner," and specifically grant me the authority to "consider and rule upon .. . all procedural and other motions appropriate in adjudication proceedings." I therefore find I may consider Respondents' motion. However, I disagree with Respondents that Fed. R. Civ. P. 60 is most applicable here. Rule 60(a) permits courts to correct clerical mistakes or mistakes arising from oversight or omission, which is not at issue here. Rule 60(b) provides grounds for relief from a final judgment, order, or proceeding. My summary disposition Order, and indeed this Recommended Decision, are not final agency action. The Director is charged with issuing the final decision in this matter, whether by adopting this decision if neither party appeals and he is satisfied with my findings, or by issuing a decision after an appeal and de nova review. See 12 C.F.R. § 1081.402(b). I believe the most applicable provision of the Federal Rules is Rule 54(b ), which states, "any order or other decision, however designated, that adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties does not end the action as to any of the claims or parties and may be revised at any time before the entry of a judgment adjudicating all the claims and all the parties' rights and liabilities." Id Accordingly, as a procedural matter, I may consider whether revision of my earlier Order is appropriate.

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Respondents' argument in support ofreconsideration, however, is unconvincing. First, while the State of Delaware may have been Integrity Advance's only state regulator at the time it was in operation, Integrity Advance was required to comply with certain Federal laws such as TILA and EFTA, and was subject to enforcement actions by the FTC for violations of those Federal laws. Compliance or non-compliance with state law may constitute one of many factors in determining whether deception occurred, but compliance with state law is not a bar to liability if other facts establish a violation occurred under the CFPA's prohibition on deceptive conduct. See, e.g., FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244 (1972) (FTC is authorized to prohibit conduct that, although legally proper, goes against "public values beyond simply those enshrined in the letter or encompassed in the spirit of the antitrust laws"). At the hearing, Ms. Miller testified that she and her staff "try to get the loan contract so we can have it on file" but do not approve the contract or "rubber-stamp" it. See Tr. III-126:19-21. Ms. Miller is familiar with the TILA disclosures, so she ensures that the TILA box is present on the first page of the contract and that it matches the format required by Federal law. See Tr. III-127:1-11. She or members of her staff also run calculations using hypothetical consumer data through a computer program from the Office of the Comptroller of the Currency, which ensures that the annual percentage rate is mathematically accurate within the legal tolerance. Tr. III-151:18-152:18. Ms. Miller testified that, at the time Integrity Advance was operating, Delaware permitted lenders to offer up to four renewals on a loan, but did not require them to do so. See Tr. III-145:24-146:14. She did not offer any testimony about the precise mechanisms for effectuating renewals, specifically whether there was a difference between contracts 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 24 of 130

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that required consumers to affirmatively renew their loans and contracts that utilized automatic renewal provisions. She did not offer any specific testimony about Integrity Advance, other than the company met the basic criteria for licensing and was therefore granted an initial license and renewals each year thereafter until 2012. Nothing in Ms. Miller's testimony, or anywhere else in the record, affects my finding that the loan agreement was deceptive. While it appears to have complied with the letter of the Delaware state statute governing short-term lenders, I never found it to have violated any Delaware laws. However, compliance with state law is not a defense to a charge of deceptive conduct under the CFP A. The State of Delaware did not provide sample or form contracts for lenders to use; instead, the regulators reviewed the lenders' contracts at a basic level to ascertain that specific aspects of the Delaware lending statute were present and accurately stated. The regulators also ensured that the APR displayed in a contract was mathematically accurate within the tolerance allowed by TILA. Due to her long experience and familiarity with the TILA requirements, Ms. Miller personally looked at the language and placement of the TILA box to ensure it was appropriate. The regulators did not review all of the terms in the contract to make sure they were clearly understandable and internally consistent. Nor did they analyze whether the amounts disclosed in the TILA box were actually what a consumer was required to pay under the terms of the contract.

An act or practice is deceptive if 1) there is a representation, omission, or practice that 2) is likely to mislead consumers acting reasonably under the circumstances, and 3) the representation, omission, or practice is material. See CFP B v. Frederick J. Hanna & Assocs., P.C., 114 F. Supp. 3d 1342, 1370 (N.D. Ga. 2015), mot. to cert. appeal denied, 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 25 of 130

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2015 WL 10551424 (N.D. Ga. Nov. 16, 2015). Respondents have asserted that, in order for me to find the contract deceptive, the Bureau must present a consumer survey or consumer testimony showing that a "reasonable consumer" would not understand the contract. This is incorrect. Certainly, empirical consumer survey data can be useful, but it is not required as a matter of law. FTC v. Publishers Bus. Servs., Inc., 821 F. Supp. 2d 1205, 1223 (D. Nev. 2010). To satisfy the second prong of this test, it is not necessary to show that an actual consumer was misled, only that a hypothetical consumer acting reasonably would be likely misled by the act, omission, or practice. The reasonable person determination is properly within the fact-finder's discretion, and is generally limited to "the relevant audience." Publishers Bus. Servs. at 1223. For instance, in Floersheim v. FTC, 411 F.2d 874, 877 (9th Cir. 1969), a collection form's disclaimer was found insufficient because the target consumer was often low­ income.and not well-educated. Here, there is no evidence in the record as to the intelligence, education level, or income bracket oflntegrity Advance's customers. Thus, I made my analysis based on a generic "reasonable person" standard and determined that an average person of average intelligence and education would likely be misled by the contract Integrity Advance used.

An act or practice is not deceptive if it is "unreasonably misunderstood by an insignificant and unrepresentative segment of the class of persons to whom the representation is addressed." In re Cliffdale Assocs., Inc., 103 F.T.C. 110, 175 (1984). Here, ninety percent or more oflntegrity Advance's customers experienced at least one renewal. The record does not establish exactly how many customers contacted the company to specifically request a renewal, nor does it establish how many consumers 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 26 of 130

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understood the automatic renewal provision and knowingly allowed it to happen. Even so, Integrity Advance originated 82,980 loans on or after July 21, 2011, with 28,001 of those made to new customers who would not yet have been familiar with Integrity Advance's business practices. See EC-EX-097. Thus, the number of consumers who misunderstood the confusing and ambiguous terms of the contract and, in consequence, experienced at least one renewal, is not likely to be insignificant or unrepresentative. Deception may be found based on the "net impression" created by a representation. FTC v. Cyberspace.com LLC, 453 F.3d 1196, 1200 (9th Cir. 2006). Moreover, the law does not require that all customers were deceived, and "the existence of satisfied consumers does not constitute a defense." FTC v. Johnson, 96 F. Supp. 3d 1110, 1119 (D. Nev. 7,015). In my Order granting partial summary disposition, I found that one version of the contract contained a single line stating that the consumer's payment of the "total of payments" was due on a specific date. The other version of the contract did not include that line. See Order dtd. Jul. 1, 2016 at 16, 20. The remainder of the contract set forth an extended payment structure and presented payment in full as merely one of several equally valid options for paying off the loan. It did not clearly disclose that consumers would pay substantially more than the TILA box disclosed if they chose an alternate option. Id. at 23. It is not difficult to see how a consumer acting reasonably under the circumstances would be confused, and ultimately misled, by the disclosure of a single finance charge juxtaposed with a labyrinthine payoff structure. If Integrity Advance had required its customers to ask for a renewal, instead of automatically renewing the loans until consumers intervened, there would have been little question as to whether consumers understood the contract. Consumers who wanted or 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 27 of 130

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needed the opportunity to extend their payment date would have contacted the company to seek renewal, while other consumers would have either paid their loans off in one lump sum or defaulted. Certainly, some oflntegrity Advance's customers did understand the nature of renewals, and did contact the company to avail themselves of that option. Respondents have also pointed to the large number of consumers who took out more than one loan as indicative of a high degree of consumer satisfaction. However, Respondents themsel,ves presented no evidence that consumers took additional loans because they were satisfied; repeat customers may simply have been caught in a cycle of debt and saw no other option than to take out multiple loans. Thus, I do not conclude that a high return rate necessarily shows consumer satisfaction with Respondents' product. In short, Ms. Miller's testimony provided nothing to convince me that my earlier findings were incorrect, nor did any other evidence adduced at the hearing. While the individual clauses in Integrity Advance's contract do not appear to violate the relevant Delaware state laws, when read as a whole, the contract's net impression is misleading. It appears to give consumers multiple, equally valid options for paying off the loan while not clearly stating that the costs disclosed in the TILA box apply only to. the "option" of payment in full on the consumer's next payday. I therefore DENY Respondent's Motion to Reconsider.

V. DISCUSSION AND CONCLUSIONS OF LAW A. Jurisdiction In the Order Denying Respondents' Motion to Dismiss dated April 22, 2016, I considered a number of jurisdictional arguments, which are incorporated by reference into this Recommended Decision. I determined that the Bureau had the authority to 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 28 of 130

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enforce Federal consumer financial protection laws, specifically TILA, EFT A, and the CFPA, against Respondents at all times on or after July 21, 2011. Relying on the Decision of the Director, In the Matter of PHH Corp., et al., File No. 2014-CFPB-0002 (Jun. 4, 2015), I also determined that the statutes of limitations contained in 12 U.S.C. §5564(g)(l), 15 U.S.C. §1640(e), and 15 U.S.C. §1693m(g) did not apply to this administrative proceeding. 2 The CFPA authorizes the Bureau "to conduct hearings and adjudication proceedings with respect to any person." See 12 U.S.C. § 5563(a) (emphasis added). A "person" is defined for purposes of the CFPA as "an individual, partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative organization, or other entity." 12 U.S.C. § 5481(19). The section of the CFP A entitled "Supervision of nondepository covered persons" sets out the scope of coverage, supervisory authority, enforcement authority, rulemaking and examination authority the Bureau is granted over such persons. See 12 U.S.C. § 5514. As a payday lender, Integrity Advance was specifically subjected to these provisions. See 12 U.S.C. § 5514(a)(l)(E). Integrity Advance is also a "covered person" for purposes of the CFP A, since it "engage[ d] in offering or providing a consumer financial product or service." See 12 U.S.C. § 5481(6). Likewise, the Bureau has authority to bring charges against Mr. Carnes. He is a "related person" as defined in the CFPA because he was an officer of Integrity Advance, had managerial responsibility, and was a controlling shareholder who materially 2 I did not reach the question of whether, eve$ if the statute of limitations did apply, the Bureau timely filed its Notice of Charges.

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participated in Integrity Advance's affairs. See 12 U.S.C. § 5481(25)(C). He is therefore a "covered person" for purposes of the CFPA. See 12 U.S.C. § 5481(25)(B). B. Count VII as to Integrity Advance 1.

Overview of Remotely Created Checks An RCC is a paper check, drawn against a bank account, in many respects identical to a check torn from a checkbook. See Tr. II 172:3-6; see also EC-EX-094 at 1. The key difference is, however, that the account holder does not prepare or sign the check, and generally never even sees it. See EC-EX-098 at 1; EC-EX-094 at 1-2. Instead, the payee-the person who will be receiving the funds from the RCC-uses the account holder's data to create the check using software designed for this purpose. See EC-EX-094 at 3. While the account holder must authorize the payee to create this check, he or she may not understand that such an authorization was given, how the RCC process works, and if or when a check will actually be created and deposited. RCCs are a legal device and serve legitimate purposes in the banking system. See EC-EX-094 at 5; EC-EX-098 at 1. Scenarios exist whereby the use of an RCC is mutually agreeable and beneficial to both the account holder and the payee. See EC-EX- 094 at 5; EC-EX-098 at 1-2. However, it is generally acknowledged that the potential for fraudulent, unfair, or abusive use of RCCs exists. See EC-EX-094 at 5-8; EC-EX- 098 at 2. While the law requires the creators ofRCCs to obtain authorization from consumers, this may happen days, weeks, or months in advance. Moreover, depository institutions do not always specifically identify RCC transactions on consumers' periodic statements, so consumers may not even realize that this device (as opposed to an ACH 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 30 of 130

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transfer or other electronic payment) was used to debit their accounts. See EC-EX-094 at 15.

2. Legal Standard for Unfairness An act or practice is unfair if: (1) it causes or is likely to cause substantial injury; (2) consumers themselves could not reasonably have avoided it; and (3) it is not outweighed by countervailing benefits to consumers or competition. See 12 U.S.C. § 553l(c)(l); see also 15 U.S.C. § 45(n), FTC v. Neovi, Inc., 604 F.3d 1150, 1155 (9th Cir. 2010). Here, I must determine whether Integrity Advance's use of RCCs was unfair, as the Bureau alleges. In general, the Bureau must show that consumers "were injured by a practice for which they did not bargain." Neovi at 1157 (citation and quotes omitted). "In determining whether an act or practice is unfair, the Bureau may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination." See 12 U.S.C. § 5531(c)(2).

It is also important to note that consumer financial protection laws treat unfairness differently than deception. See FTC v. Cantkier, 767 F. Supp. 2d 147, 153 (D.D.C. 2011) ("Deception and unfairness . . . provide two distinct rationales for FTC enforcement"); Am. Fin. Servs. Ass 'n v. FTC, 767 F.2d 957, 979 n. 27 (D.C.Cir.1985) ("The distinction between the deception rationale and the unfairness rationale tends to become obfuscated. Nonetheless the two rationales are distinct"); see also In re Int 'l Harvester Co., 104 F.T.C. 949, 1061 (1984) ("Unlike deception, which focuses on 'likely' injury, unfairness cases usually involve actual and completed harms.").

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The first prong of the test focuses on whether the harm is substantial. "Under the standard for unfair practices that the [CFPA] has borrowed from the FTC Act, a 'substantial' injury in the context of consumer protection is most often a financial one." CFPB v. ITT Educ. Servs., Inc., No. 1:14-CV-00292-SEB, 2015 WL 1013508, at *25 (S.D. Ind. Mar. 6, 2015). The financial harm to consumers does not need to be "massive on an annual basis to count as substantial." Id. Instead, it may be the aggregate of many small individubl injuries." FTC v. Johnson, 96 F. Supp. 3d at 1151 (citing FTC v. Pantron I Corp., 33 F.3d 1088, 1102 (9th Cir. 1994)). However, a "trivial or speculative" harm is insufficient to demonstrate substantial injury. See FTC v. IFC Credit Corp., 543 F.Supp.2d 925, 945 (N.D. Ill. 2008).

To make a determination about the second prong, whether consumers' injuries were reasonably avoidable, "courts look to whether the consumers had a free and informed choice." Neovi, 604 F.3d at 1158; see also Johnson at 1151; IFC Credit Corp. at 950. "An injury is reasonably avoidable if consumers 'have reason to anticipate the impending harm and the means to avoid it,' or if consumers are aware of, and are reasonably capable of pursuing, potential avenues toward mitigating the injury after the fact." Davis v. HSBC Bank Nevada, NA., 691 F.3d 1152, 1168-69 (9th Cir. 2012) (quoting Orkin Exterminating Co., Inc. v. FTC, 849 F.2d 1354, 1365-66 (11th Cir.1988)).

Finally, the last prong of the test focuses on whether "a practice produces clear adverse consequences for consumers that are not accompanied by an increase in services or benefits to consumers or by benefits to competition." FTC v. J.K Pub! 'ns, 99 F.Supp.2d 1176, 1201 (C.D. Cal. 2000).

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In analyzing an unfairness claim, it is important to bear in mind that "legality and unfairness are not necessarily congruent." CFPB v. ITT Educ. Servs., Inc., 2015 WL 1013508 at *27 (citing FTC v. IFC Credit Corp., 543 F.Supp.2d at 948, 953 and FTC v. Sperry & Hutchinson Co., 405 U.S. 233). As discussed above, Sperry stands for the proposition that conduct may be legal but nonetheless unfair when public policy is taken into consideration. See also IFC Credit Corp at 950.

3.

Was Integrity Advance 's Use of RCCs Unfair? Integrity Advance's loan agreement contains language authorizing the company to use RCCs in the ACH authorization section of the agreement. The operative language reads: "you authorize us to prepare and submit one or more checks drawn on Your Bank Account so long as amounts are owed to us under the Loan Agreement." It is important to note that the Bureau does not contend that any law forbade Integrity Advance from using RCCs in appropriate circumstances. Instead, it contends that the manner in which Integrity Advance obtained consumers' authorization to create these checks, coupled with the scenarios under which the company actually created and submitted RCCs, amounts to an unfair practice. The Bureau has identified 602 times after July 21, 2011 when Integrity Advance used an RCC to obtain money from consumers' bank accounts after those consumers had already paid more than the "total of payments" disclosed on the loan agreement and blocked Integrity Advance's ACH access to their accounts. See Tr. II- 151 :6-ll; EC-EX-095; EC-EX-097, EC-EX-101.

Respondents argue that the Bureau "seeks to impose a strict-liability standard and a finding that every instance in which Integrity Advance used an RCC after a consumer had withdrawn authorization for ACH debits constituted an unfair practice." See Resp. / / 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 33 of 130

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Post-Hearing Brief at 12. Respondents further state that the Bureau's "entire theory as to unfairness for RCCs rests on an unsupported assumption that every instance in which Integrity Advance used an RCC after a consumer had purportedly withdrawn authorization for ACH debits amounts to consumer harm." See Resp. Opposition at 11. I note that the Bureau's theory regarding the consumer harm caused by Integrity Advance's use of RCCs changed substantially between the hearing and the filing of post­ hearing briefs. At the hearing, enforcement counsel stated, "[f]or Count Seven, which is remotely created checks, we are seeking the total amount paid by consumers after the transfer date, July 21st, 2011 and the number is $265,452.50." See Tr. III-181 :1-4. If the Bureau continued to seek this amount, Respondents' strict liability argument may have had merit, since the Bureau would have been asking me to impose liability for every RCC used, regardless of the rationale for using it. However, in its post-hearing brief, the Bureau reduced the amount of monetary relief it seeks. Now, it only asserts the use of RCCs was unfair if the consumer had already paid more than the "total of payments" disclosed in the loan documents before blocking ACH authorization. See EC Post­ Hearing Brief at 15.

This serves to eliminate Respondents' concern about situations where "consumers could have been trying to renege on their obligation to pay." See Resp. Opposition at 12. Since I have found Integrity Advance was not entitled to collect more from consumers than the disclosed "total of payments," except certain fees stemming from consumer error such as NSF fees, the amounts it obtained from consumers above each loan's disclosed "total of payments" were not properly owed to them under the agreement. Thus, the use 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 34 of 130

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of RCCs on these consumers' accounts does not appear to have been authorized by the precise terms of the contract language.

Respondents also appear to argue that Integrity Advance was not directly involved in using RCCs because "[t]he decision to use RCCs was made by the third-party call center on a case-by-case basis." See Resp. Prop. Find. of Fact# 75. However, this proposed finding is wholly unsupported by the record. The first call center Integrity Advance used was located in Overland Park, Kansas and then it transitioned to one located in Delaware. See Tr. I-42:3-6. Integrity Advance's office was in Westwood, Kansas. See Tr. I-29:22-23. Mr. Carnes testified he saw RCCs being printed on approximately a weekly basis in Kansas City-area office. See Tr. I-236:10-22. Thus, the evidence leads to the inescapable conclusion that the call centers did not make any decisions regarding RCCs; instead, the decision to print and subrriit an RCC had to have been made by personnel working out of the main HIP/Integrity Advance office. In any event, regardless of where the RCCs were printed and submitted, I do not find Respondents' argument that Integrity Advance was not directly involved in using RCCs to be credible.

Turning to the three-pronged test for whether the use of RCCs was legally unfair, the Bureau argues that consumers were substantially injured by Respondents' conduct. While the amount Integrity Advance collected through each RCC was not itself massive, the company nevertheless used this mechanism 602 times between July 21, 2011 and the date it ceased operations. The total amount collected by RCC during this period was approximately $115,024.50. Neither the number of transactions nor the sum of money 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 35 of 130

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involved is trivial. Taken together, all these small injuries rise to the level of substantial harm. See Johnson, 96 F. Supp. 3d at 1151.

The next question is whether the harm was reasonably avoidable. Integrity Advance normally used ACH transfers to deposit loan proceeds and withdraw loan payments from customers' accounts. See Order <ltd. July 1, 2016 at 32; Answer at 12. However, some consumers blocked Integrity Advance's ACH access to their accounts. When this occurred, Integrity Advance used RCCs to collect loan payments. See Tr. II- 85 :3-6. The Bureau argues that consumers could not reasonably avoid having RCCs submitted against their accounts (1) because RCCs are not well-known or widely understood among the general population, and (2) the language in the contract was so obscure they could not have known what they were authorizing. Respondents' counterargument is that the Bureau failed to demonstrate that harm was not reasonably avoidable because there is no evidence about how: many consumers actually read the provision in the ACH authorization allowing Integrity Advance to use RCCs and no empirical data showing what consumers actually understood. Respondents state, "[i]n sum, there is simply no evidence in the record to support a finding that consumers did not understand the loan agreement and could not reasonably avoid the use of RCCs." See Resp. Opposition at 13-14.

Mr. Carnes's uncontroverted testimony is that Integrity Advance only used RCCs when consumers had not paid on the loan, had blocked ACH access, and could not be contacted. Without having entered any supporting evidence in the record, the Bureau claims consumers were only trying to protect their accounts after having paid more than the "total of payments" on their loans. In addition, the Bureau asserts that "Integrity 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 36 of 130

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Advance took money from consumer bank accounts through remotely created checks when consumers were specifically trying to protect those accounts. EC-EX-095, EX-EX- 097; EX-EX-100; EC-EX-101." See EC Post-Hearing Brief at 16.3 The Bureau has not provided any credible, sworn testimony in support of its claim that consumers blocked ACH access out of sheer self-preservation. The record merely contains several Better Business Bureau complaints. Had the Bureau called Integrity Advance customers to testify at the hearing about their experi@nce with RCCs, I could have credited such testimony, but I will not give weight to unsworn, largely anonymous consumer complaints. Certainly, the Bureau would have bolstered its case if it had presented credible testimony from persons who were actually harmed by Respondents' actions. But, the lack of such testimony is not fatal where the preponderance of all the evidence in the record establishes harm.

I agree with the Bureau that the contract did not adequately inform consumers they were authorizing Integrity Advance to use remotely created checks: it stated, "You authorize us to prepare and submit one or more checks drawn on Your Bank Account so long as amounts are owed to us under the Loan Agreement." This single sentence is the only provision in the loan agreement that relates to RCCs, and was buried in the fine print of the ACH Agreement. I also find that once consumers provided their bank account and routing numbers on the loan application, they were powerless to stop Integrity Advance from creating and submitting RCCs if the company believed all the conditions for RCC 3 The exhibits the Bureau has cited in support of their assertion that consumers were "specifically trying to protect" their bank accounts include a printout oflntegrity Advance transactional data and the Bureau's calculations of the amount of money Integrity Advance collected through RCCs. There is also a single breakdown of the payments made against loan# 54158546, showing that the consumer had blocked ACH access after paying $950 against a loan with a disclosed "total of payments" of$650. The next payment was returned due to ACH access being revoked by the consumer, and an RCC was used in the amount of $520. While the Bureau's conclusion is one logical explanation for the behavior, it is certainly not the only one.

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use had been met. The only way a consumer could avoid having an RCC used was to provide a different form of payment to Integrity Advance, thereby paying the very money the consumer did not believe he or she legitimately owed. The question, then, is whether blocking ACH access and refusing further contact with Integrity Advance was a reasonable step for consumers to take. I find it was. The Bureau does not allege that the use of remotely created checks was unfair in all circumstances; rather, only those RCCs used after the consumer had already paid more than the "total of payments." This eliminates any consumers who had not satisfied their indebtedness as disclosed in the TILA box on their loan documents. I find it reasonable that an average consumer, having experienced at least one renewal and having paid more than the amount disclosed, would seek to block the company's access to their bank account. The data the Bureau extracted from Respondents' database shows that this did, in fact, occur, and Respondents have not presented any credible evidence to rebut that data. Once a consumer blocked ACH access, he or she could not reasonably anticipate the company's use of an RCC, as the opaque language in the contract did not provide a clear and adequate description of how the company would continue to withdraw funds from the consumer's account. Consumers were also unable to mitigate the injury once they discovered an RCC had been used. By the time a consumer found out about an RCC, it was too late to try to stop payment and the money had already been debited from their accounts. The final question is whether Integrity Advance's use of RCCs was outweighed by countervailing benefits to consumers or competition. I find that it was not. There is no evidence in the record that RCC use benefitted competition, or that Integrity Advance 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 38 of 130

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would have been unable to compete in the payday lending marketplace without using this practice. This is particularly true because, as Mr. Carnes emphasized, RCCs were only used in a tiny fraction oflntegrity Advance's transactions. Moreover, the consumer saw no benefit to RCCs at all; assuming the consumer was trying to avoid paying additional monies to Integrity Advance-whether out of the belief that the amounts were not owed, or in an attempt to avoid paying the loan at alJ:...._the use of an RCC defeated the consumer's intent. In some cases, it may even have caused additional harm in the form of overdraft or other, similar fees. Count VII against Integrity Advance is PROVED. C. Counts III and VII as to Mr. Carnes I.

Standard for Finding Individual Liability The Bureau asks me to hold Mr. Carnes individually liable for the unfair and deceptive practices of Integrity Advance. "The policy behind the imposition of individual liability is to ensure that an individual defendant does not benefit from deceptive activity and then hide behind the corporation." FTC v. Silueta Distributors, Inc., No. C 93-4141 SBA, 1995 WL 215313, at *4 (N.D. Cal. Feb. 24, 1995). Cases interpreting the FTC Act (FTCA) provide some guidance for determining when an individual may be held liable for a corporation's unfair and deceptive acts and practices. Although the FTCA differs in many respects from the CFP A, the Bureau has borrowed the FTC's standards regarding unfairness and deception in all its enforcements to date. Moreover, since both the FTC and CFPB are permitted to enforce certain consumer financial laws, such as TILA and EFT A, and the two agencies are required to coordinate their enforcement efforts, it would be illogical for there to be separate 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 39 of 130

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standards. I therefore find FTC case law regarding individual liability for corporate violations to be applicable here.

In order to prove that an individual is liable for corporate violations of the CFPA, the Bureau must prove that the individual: "(1) participated directly in, or had the authority to control, the unlawful acts or practices at issue; and (2) had actual knowledge of the misrepresentations involved, was recklessly indifferent to the truth or falsity of the misrepresentations, or was aware of a high probability of fraud and intentionally avoided learning the truth." FTC v. Commerce Planet, Inc., 815 F.3d 593, 600 (9th Cir. 2016). Proof of intent to deceive is not an element in establishing liability. FTC v. Windward Mktg., Inc., No. l:96-CV-615F, 1997 WL 33642380, at *9 (N.D. Ga. Sept. 30, 1997). Nor is an explicit lie required-"[d]eception may be accomplished by innuendo rather than by outright false statements." Regina Corp. v. FTC, 322 F.2d 765, 768 (3rd Cir.1963).

2. Analysis Here, the threshold question of whether Mr. Carnes had the authority to control the unlawful practices is straightforward. This authority may be evidenced by "active involvement in business affairs and making of corporate policy, including assuming the duties of a corporate officer." FTC v. Amy Travel Serv., Inc., 875 F.2d 564, 573 (7th Cir. 1989). Signing documents on behalf of the company also demonstrates sufficient control. See, e.g., FTC v. Pub! 'g Clearing House, Inc., 104 F.3d 1168, 1170 (9th Cir.1997). Evidence that an individual developed or created, reviewed, altered and disseminated the deceptive materials goes to whether an individual directly participated in the unlawful practices, even absent proof of the authority to contrc:,1 them. FTC v. Ross, 897 F. Supp. 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 40 of 130

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2d 369, 383 (D. Md. 2012), ajfq, 743 F.3d 886 (4th Cir. 2014), cert. denied 135 S.Ct. 92 (2014).

The Bureau called as witnesses several former employees oflntegrity Advance's parent company HIP, who had performed duties for Integrity Advance. These witnesses established that Mr. Carnes was actively involved in the company's business affairs. He routinely discussed various issues stemming from Integrity Advance's operations with his employees, and signed contracts on behalf oflntegrity Advance. Mr. Carnes himself admitted that, as CEO of HIP and de facto CEO oflntegrity Advance, he had ultimate control over the businesses.

Mr. Carnes did not deal directly with Integrity Advance's customers, and was in fact many levels removed from this function. Integrity Advance did not technically have any employees, including Mr. Carnes, and the day-to-day consumer-facing operations were outsourced to a call center and a collections company. However, the Bureau does not have to separately prove direct participation in order to satisfy the first prong of the test, since either participation or control will suffice. See Ross, 897 F.Supp. 2d at 382-83. The second question is whether the Bureau proved that Mr. Carnes had actual knowledge of the illegal practices, was recklessly indifferent to those practices, or intentionally avoided learning about them. The parties fundamentally disagree as to the level of knowledge required to satisfy this prong of the test. The Bureau posits that a basic understanding of the way Integrity Advance's loan process worked is sufficient to show actual knowledge, since Mr. Carnes knew the agreement "disclosed an expensive multi-payment installment loan as if it was a much cheaper single payment loan." See EC Post-Hearing Brief at 11.

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Respondents, on the other hand, claim that "an individual must know that a representation deceived consumers or was otherwise unfair in order to be held personally liable" and that "requisite knowledge is shown by clear evidence that the individual defendant was integral to the creation of materials causing the misrepresentation or was alerted to the falsity of a representation or the potential for fraud." See Resp. Opposition at 4-5. They argue that the Bureau is asking me "to infer Mr. Carnes's knowledge of the misrepresentation from his general understanding of [Integrity Advance's loan] process." See Resp. Opposition at 7. Mr. Carnes has represented that he hired experts to handle certain business matters that required expertise he did not personally have; that he relied on outside counsel to create the loan agreement; and that he knew the company had satisfied all the requirements for licensure by the State of Delaware. My review of case law interpreting the knowledge requirement shows that there is no bright-line test for how much knowledge is enough for liability to attach. The analysis is always specific to the facts and circumstances of the case. See, e.g., FTC v. FTN Promotions, Inc., No. 807-CV-1279-T-30TGW, 2008 WL 821937, at *2 (M.D. Fla. Mar. 26, 2008) (the knowledge test is a 'judicially developed principle[] that should be flexibly applied as circumstances warrant."). However, while not determinative, an individual's "participation in corporate affairs is probative of knowledge." FTC v. Wilcox, 926 F. Supp. 1091, 1104 (S.D. Fla. 1995) (citing FTC v. Kitco of Nevada, Inc., 612 F.Supp. 1282, 1292 (D. Minn. 1985).

Moreover, although courts in the Ninth Circuit have questioned whether knowledge of deceptiveness is legally required before individual liability attaches· under the FTCA, those courts ultimately determined they did not need to analyze or reach a 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 42 of 130

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conclusion as to that question. See, e.g., FTC v. Pantron I Corp., 33 F.3d 1088, 1103 (9th Cir. 1994); FTC v. Sage Seminars, Inc., No. C 95-2854 SBA, 1995 WL 798938, at *5 (N.D. Cal. Nov. 2, 1995); FTC v. Silueta Distributors, Inc., No. C 93-4141 SBA, 1995 WL 215313, at *5 (N.D. Cal. Feb. 24, 1995). I was unable to find, and the parties did not cite, any cases from other jurisdictions that considered this specific issue. All available case law concerning deceptiveness indicates that the operative question is whether a person knew or should have known that a consumer was likely to be misled, not that a person knew or should have known that a court would rule the act or practice legally deceptive; and I will therefore apply such an analysis. In cases where individual liability was imposed, the defendants personally engaged in the deceptive conduct, and therefore clearly had knowledge of it. See, e.g., FTC v. Inc21.com Corp., 745 F. Supp. 2d 975, 1005-06 (N.D. Cal. 2010), affd, 475 F. App'x 106 (9th Cir. 2012) (defendants had filed two lawsuits against their own marketers for unauthorized billing practices, but still continued billing customers "acquired by the very entities they had sued" and also falsified LEC-billing applications and sold their "customers" to a third-party vendor so that they could get around an LEC billing suspension); FTC v. World Media !Jrokers, 415 F.3d 758, 765-66 (7th Cir. 2005) (individual's handling of financial matters required knowledge that the companies were illegally selling foreign lottery tickets, and she was personally named in a cease-and­ desist order from the United States Postal Service about the activity). Many cases use knowledge of consumer complaints as a proxy for actual knowledge of unfair or deceptive practices. See, e.g., FTC v. Bay Area Bus. Council, Inc., 423 F.3d 627, 638 (7th Cir. 2005) (the individual defendants were aware of the 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 43 of 130

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"near-constant stream of complaints"); FTC v. Lanier Law, LLC, No. 3:14-CV-786-J- 34PDB, 2016 WL 3632371, at *30 (M.D. Fla. July 7, 2016) (defendants were aware of consumer complaints; one was frequently copied on emails discussing how to respond to these investigations and complaints and the other was "kept up-to-date" on written and oral complaints from consumers, as well as complaints from the BBB and governmental agencies); FTC v. NHS Sys., Inc., 936 F. Supp. 2d 520, 535 (E.D. Pa. 2013) (one individual defendant sent emails demonstrating her knowledge of the business's operations, the receipt of complaints, and required consumer refunds; and another supervised and controlled the call centers); FTC v. Wilcox, 926 F. Supp. at 1104 .(individuals knew of the deceptive conduct because they saw notations on checks about the goods or services the consumers expected to receive in return and knew the consumers would not be receiving those things, and saw thousands of consumer complaints showing that their solicitations had misled the consumers). Other cases focus on the nature of the individual's involvement with the company to determine whether that person knew or should have known that certain practices were unfair or deceptive. See, e.g., FTC v. Network Servs. Depot, Inc., 617 F.3d 1127, 1141 (9th Cir. 2010) (defendants were recklessly indifferent where "[i]n the face of numerous warning signs-multiple customer complaints, admitted delays, BVC's suspicious financial practices, and Bevilacqua's false statements-[they] failed to undertake even modest due diligence on behalf of their customers"); FTC v. Grant Connect, LLC, No. 2:09-CV-01349-PMP-RJ, 2009 WL 3074346, at *10 (D. Nev. Sept. 22, 2009) (two defendants likely had actual knowledge because they knew of emails and an article published on the internet that discussed the company's fraudulent conduct, and another 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 44 of 130

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defendant was likely either recklessly indifferent or had an awareness of a high probability of fraud because she entrusted her businesses to people who were under permanent injunctions against future telemarketing activity related to prior violations of the Act); FTC v. Safety Plus, Inc., No. CIV. A. 91-352, 1993 WL 330656, at *3 (E.D. Ky. July 6, 1993) (company president essentially admitted he had knowledge of deceptive practices because he stated that he took steps to remedy them). Intensive day-to-day involvement in business practices is not always required. In FTC v. J.K. Publications, Inc., 99 F. Supp. 2d at 1206, one individual defendant argued that she had no knowledge of the illegal activities of the other defendants or the fact that she had been a participant, and attempted "to hide behind the shield erected by her claims that she did not read the documents that she signed." The court found that, even if this was true, she was liable because she was aware of the nature of the company's businesses; moreover, she had ample opportunity to review the documents she signed, and was aware of the legal significance of failing to do so. In FTC v. Oks, No. 05 C 5389, 2007 WL 3307009, at *6 (N.D. Ill. Nov. 2, 2007), the court found sufficient knowledge where one of the individual defendants was in the office every day; made sure that telemarketers placed sales calls; overheard the contents of those telephone calls; entered into contracts for telephone service on behalf of the corporate defendants that made the deceptive telephone solicitation possible; arranged for bank account debiting services for the corporate defendants; and used his credit card to open P .0. boxes for the corporate defendants. InFTCv. Medicor, LLC., 217 F. Supp. 2d 1048, 1055 (C.D. Cal. 2002), the court held two defendants who had high-level knowledge of the operations liable, but did not discuss with any specificity their degree of knowledge. 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 45 of 130

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A very low level of involvement in the corporation satisfied the knowledge test in FTC v. Five-Star Auto Club, Inc., 97 F. Supp. 2d 502, 539 (S.D.N.Y. 2000). There, the FTC did not prove by a preponderance of the evidence that an individual defendant was personally involved in creating or disseminating deceptive materials, and the tasks she performed were ministerial in nature. Nevertheless, "by virtue of her participation in the preparation of filings with and responses to State regulators" the court found she had "more than a minimal degree of knowledge concerning the various challenges to Five Star's legitimacy" and was at least recklessly indifferent to the company's conduct. Similarly, in FTC v. Direct Mktg. Concepts, Inc., 569 F. Supp. 2d 285, 311 (D. Mass. 2008), ajfd, 624 F.3d 1 (1st Cir. 2010), one defendant was considered a "driving force" in the deceptive conduct because he directed his employees to pursue producing an infomercial; provided his companies' studios to record it; and personally participated in it. As to ll:nother individual who "managed the Coral Calcium program and . .. procured placement of the infomercial," the court concluded it was likely he had actual knowledge of the misleading claims in the infomercial but, at the least, he was "willfully blind or recklessly indifferent to it." The court made a preliminary determination of liability in FTC v. Millennium Telecard, Inc., No. CIV.A. 11-2479 JLL, 2011 WL 2745963, at *9 (D.N.J. July 12, 2011), where the individual defendant participated in all central aspects of the company's business, admitted that its service providers controlled its rates and fees, and was responsible for day-to-day business operations at one of its main service providers.

In the relatively few cases where an individual did not have the requisite knowledge, that individual was generally tangential to the company's operations. For 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 46 of 130

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instance, in FTC v. Garvey, 383 F.3d 891, 901 (9th Cir. 2004), the paid spokesman for a weight-loss product was not individually liable where the representations he made about the product came from scripts he did not prepare and where he had personally experienced weight loss after taking the product. In FTC v. QT, Inc., 448 F. Supp. 2d 908, 973 (N.D. Ill. 2006), amended on reconsideration in part, 472 F. Supp. 2d 990 (N.D. Ill. 2007), and affd, 512 F.3d 858 (7th Cir. 2008) (7th Cir. 2008), the court held that the FTC failed to prove either prong against one of the individual defendants. Indeed, the court noted that since she had no authority to control the deceptive acts or practices and the record contained no information about her degree of knowledge, she could not be held liable. Similarly, in FTC v. JK Publications, Inc., 99 F. Supp. 2d at 1208, the court did not reach the knowledge prong of the analysis because it held that an individual's role as an officer or director on paper, without more, did not show sufficient control or direct participation in the acts or practices. Finally, it is important to note that the Ninth Circuit has held it to be an abuse of discretion where the district court found, without further explanation, that there was no evidence in the record to support liability against a number of individual defendants. Instead, because the record contained a sworn declaration by one defendant that he was "familiar with the business operations, policies and procedures of [Ed Dantuma Enterprises] and Publishers Business Services," and specifically attested to PBS's alleged efforts to "comply with the [Telemarketing Sales Rule], the FTCA, and debt collection laws," the Ninth Circuit remanded the case and directed the district court to hold those individuals liable. See FTC v. Publishers Bus. Servs., Inc., 540 F. App'x at 558 (substitutions in original). The Circuit Court did not discuss any additional evidence 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 47 of 130

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showing the individual defendants' level of knowledge, nor did it require the district court to conduct additional proceedings to supplement the record. Clearly, courts have found the knowledge prong satisfied in a wide array of circumstances. Respondents contend that "no cases have found knowledge sufficient to hold an individual personally liable without ... extensive and specific evidence. The court should not be the first to do so here." However, the defendants in some cases discussed here had no greater degree of knowledge than Mr. Carnes. As I will discuss in greater detail below, the evidence firmly establishes that Mr. Carnes was knowledgeable about Integrity Advance's loan processes and business operations; even if the proffered evidentiary record might not establish that he was aware at the time that the loan agreements were deceptive and the use ofRCCs was unfair. a.

Count III (Deception) As to the deception alleged in Count III, the Bureau must prove that Mr. Carnes knew or should have known of Integrity Advance's misrepresentations as to the amount of interest consumers were told they would pay versus the amount consumers actually paid. In my Order granting partial summary disposition, I held that the loan agreement itself was deceptive. Therein, I found that the payment provisions in the loan agreement to be ambiguous; while one version of the contract contained a single line stating "Your payment of $[total of payments] is due on [date]," the remainder of the contract set up an elaborate multi-payment structure that to;k effect automatically absent further action from the consumer. The follow-up emails Integrity Advance sent its customers were also consistent with a multi-payment loan, since they stated that paying the loan off or paying 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 48 of 130

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the principal down would constitute a change to the payment schedule. See Order <ltd. July l, 2016 at 22.

The evidence establishes that the HIP employees who worked on Integrity Advance business knew the loans were likely to involve multiple payments. Mr. Madsen testified that his conversations with Mr. Carnes about Integrity Advance business usually revolved around "conversion rates, performance, [and]first payment defaults." See Tr. 1- 50:8-9 (emphasis added). Likewise, Mr. Carnes said that if a consumer failed to call or email and it was their first payment, they would be renewed. See Tr. I-218:9-15. The term "first payment" necessarily anticipates a series of payments; it would be illogical for company personnel to use that term if they believed only a single payment was ever required to satisfy its loans.

Mr. Carnes subsequently testified that he was familiar with the auto-renewal and auto-workout process set up by the contract. See Tr. I-217:23-220:1. He also knew the majority oflntegrity Advance's loans renewed at least once. See Tr. I-224:20-224:24. At some point in time, he became aware that the percentage of renewals was at least ninety pe,rcent. See Tr. I-221 :19-222:9. Mr. Carnes also knew that Integrity Advance's loan agreement disclosed a single finance charge.

Integrity Advance received complaints from consumers, and Mr. Foster testified that these complaints were tracked on a spreadsheet. See Tr. II-29:20-21 and II-31:1-3. If consumers called to complain, the call center representatives were authorized to either resolve them or, if unable to do so, escalate matters to a call center manager. If the complaint escalated further, it was directed to the person in charge of collections and workouts, and then to the legal group in Kansas City. Mr. Foster was ultimately 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 49 of 130

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responsible because the legal team reported to him. See Tr. II-30:1-16. Integrity Advance also received written complaints. See Tr. II-31 :19-22. Mr. Foster testified that he was unable to say whether he and Mr. Carnes discussed these complaints because such discussions, if any occurred, were protected by attorney-client privilege. See Tr. II- 31:11:-17.

Mr. Carnes testified that he did not know that consumers complained about the product:

Q. Were there any complaints that you received about Integrity Advance's loan product? A. Complaints never rose to my level, so I don't know. Q. So you were unaware personally of any complaints? A. I wasn't aware of complaints.

Tr. I-233:16-22. However, this is directly contradicted by statements he made during his investigational interview in this matter: I'm aware that there are complaints out there ... one common complaint that people -- that consumers would have to try to get out of paying what they owed or paying less was to say, I didn't understand I was being -- that these payments weren't going towards principal and that they were going toward interest only .... So the common complaint was they would call and say, Well, I didn't understand it. They had their head buried in the sand and not listen to anything we gave them or talked to them on the phone. We answered the phone. We actually had very high very high customer satisfaction, which was evidenced by our returning customers. People will say anything to get out of paying, and my guess is some of those complaints were just that.

EC-EX-068 at 243 :6-244 :5. Mr. Carnes then clarified that he was not actually tracking complaints, but knew that this type of complaint existed. Id. at 244:9-11. When questioned later about who reviewed consumer complaints, he said that collections complaints would be reviewed by the head of collections, then escalated to Chris Pickett 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 50 of 130

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or Edward Foster, but he was not personally involved in the process. Id. at 264:1-25. For other types of complaints, "it would go through'the call center and their staff, and we had extremely few complaints on that side." Id. at 265:2-3. Mr. Carnes also knew that some Integrity Advance customers contested ACH charges submitted by the company, meaning they claimed to their banks that the charges were unauthorized. See EC-EX-068 at 246:21-247:2. Finally, he knew some Integrity Advance customers attempted to revoke the ACH authorization. Id. at 247:18-20. Clearly, even though Mr. Carnes was not responsible for reviewing and responding to individual complaints, he was generally aware that such complaints existed. Thus, I find his testimony at the hearing that he was not aware of any complaints about Integrity Advance's loan product inherently incredible.

Integrity Advance offered a single product: a payday loan. While Mr. Carnes was actively involved in running several companies at the time, at least two of those companies also offered other substantially similar products. Moreover, HIP (including its subsidiary companies) was a small, closely-held enterprise. Mr. Carnes was the driving force behind the companies and the controlling shareholder. A "heavy burden of exculpation rests on the chief executive and primary shareholder of a closely held corporation whose stock-in-trade is overreaching and deception." Standard Educators, Inc. v. FTC, 475 F.2d 401, 403 (D.C. Cir. 1973).

It strains credulity to believe that Mr. Carnes had only a "cursory knowledge of the disclosures in Integrity Advance's loan agreement," as Respondents would have me believe. See Resp. Post-Hearing Brief at 6. Integrity Advance was HIP's most profitable company, and the deceptive acts determined its profitability; thus they were an integral 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 51 of 130

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part of the whole operation. As a "competent CEO," to use Respondents' phrasing, Mr. Carnes would not have been ignorant of the matrix that would ultimately determine the failure or success of the enterprise.

At the very least, the record establishes that Mr. Carnes was familiar with the payday lending industry and its standard practices at the time he started Integrity Advance. He repeatedly referred to industry standards, such as charging $30 in interest per $100 ient to new customers and $24 per $100 to returning customers. See Tr. 11- 48:18-25. When asked why Integrity Advance used the industry standard, he said, "we were forming the company, prior companies we had charged the same amount, and that was justused." See Tr. 11-49:4-6.

Specifically, the evidence establishes that Mr. Carnes knew the contract disclosed a single finance charge and also knew that the majority of Integrity Advance 's loans would renew without any action on the consumer's part, causing those consumers to pay more than the amount disclosed. See Tr. 1-219:13-220:3; 1-222:17-20; 1-225:6-25; EC­ EX-068 at 245:10-25. Mr. Carnes also testified that outside _counsel drafted Integrity Advance's loan agreement and he did not change, edit, or meaningfully review the substance of the agreement, See Tr. I-226:20-227:911-75:1 l-25. However, I do not find it credible that he was unfamiliar with the terms of the agreement. Even assuming for the sake of argument it was credible, it would not be exculpatory. As the CEO, Mr. Carnes's "reliance on advice of counsel [is] not a valid defense on the question of knowledge required for individual liability." FTC v. Cyberspace.Com LLC, 453 F.3d at 1202. Moreover, even a cursory reading of the loan documents shows them to be, at the very least, confusing. Mr. Carnes had both the opportunity and the business acumen to 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 52 of 130

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read through the loan documents and form an opinion about them, even if I gave credence to his assertion that he did not actually do so-which I do not. See FTC v. J.K Publications, Inc., 99 F. Supp. 2d at 1206. Even if Mr. Carnes did not know that the fee and payment structure in the contract amounted to a legally deceptive practice, he nevertheless knew or should have known that the agreement would have a tendency to mislead consumers. He was also at least generally aware that some consumers complained about the product and the way in which Integrity Advance debited loan payments, but apparently dismissed it as a viable concern because "people will say anything to get out of paying." See EC-EX-068 at 243 :6-244:5. Moreover, while Mr. Carnes may not have spent a great deal of time on Integrity Advance business after the initial set-up was complete; this does not make it less probable that he knew about the deceptive nature of the loans. The loan agreement did not substantially change during the time Integrity Advance was in operation, so any knowledge he had at the outset as to the way the loans were disclosed and the way they actually worked would have carried through the entire time Integrity Advance was lending. The record establishes that Mr. Carnes actively reviewed numerous metrics related to Integrity Advance's business throughout the company's time in operation. It also establishes that he fully understood the type of loans Integrity Advance offered; the methods Integrity Advance used to make its money; and the roles of the third-party contractors who did the majority of Integrity Advance's day-to-day business transactions. This is similar to FTC v. World Media Brokers, 415 F.3d at 758, where the court found liability in part because the defendant's assertion that she did not know what the company was doing was incredible; she had to have understood the nature of the company's 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 53 of 130

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business in order to perform her duties. Likewise, Mr. Carnes could not have been a functional CEO without a sophisticated understanding of the business operations. This is especially true considering that Integrity Ad;vance had only one product; and that product contained crucial elements of previous loan agreements from other businesses. I do not agree with Respondents' contention that ''the generalized standard argued by Enforcement Counsel would hold all CEOs liable for any unlawful conduct where the CEO generally understands how the company's product works." I have thoroughly considered Mr. Cames's testimony about his role at Integrity Advance.and do not find it fully credible, particularly because some of it is contradicted by other sworn statements he made during the investigatory phase. I have also considered the testimony other HIP employees gave about their respective roles at Integrity Advance and their interactions with Mr. Carnes. I have considered that HIP was a small company with relatively few employees, and that the companies under HIP's umbrella engaged in similar enterprises. I have also considered that this was not the first payday lending company Mr. Carnes had operated.

The record as a whole establishes that Mr. Ca.mes was primarily interested in his companies' profitability. Yet, he could not have simultaneously known that the company's revenues far exceeded the interest payments disclosed on the loan agreements and also believed that consumers were not being misled by the terms of those agreements. The assertion that a CEO in his position would have no more than a cursory understanding of his most profitable company's only product is wholly unconvincing. Despite Mr. Carnes's protestations to the contrary, I find he either had actual knowledge that Integrity Advance's loan agreement made misleading representations 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 54 of 130

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while acting as CEO of the company, or he recklessly and intentionally avoided such knowledge. As in FTC v. Lanier Law, he attempted to insulate himself "through the use of a web of inter-related entities, each insulating him from any direct connection to the fraudulent activity. Nonetheless, the evidence places [him] squarely at the center of this deceptive enterprise, and the law holds [him] individually responsible for its conduct." Id, 2016 WL 3632371, at *30. Accordingly, I find Count III against Mr. Carnes PROVED.

b. Count VII (Unfairness) The Bureau argues Mr. Carnes should be held personally liable under the CFPA for Integrity Advance' s unfair use of RC Cs. I found Count VII proved against Integrity Advance because the company used RCCs to take funds from consumers' accounts after those consumers paid more than the disclosed "total of payments" on their loans and subsequently withdrew Integrity Advance's ACH authorizations. Furthermore, these RCCs could not be cancelled by consumers, who only became aware after the fact that the company was using a method other than ACH transfers to withdraw money from their accounts.

To find Mr. Carnes individually liable for these unfair practices, I must apply the same standard discussed above in Count III (deception). To reiterate, in order to hold an individual liable for corporate violations of the CFP A, the Bureau must prove that the individual: "(1) participated directly in, or had the authority to control, the unlawful acts or practices at issue; and (2) had actual knowledge of the misrepresentations involved, was recklessly indifferent to the truth or falsity of the misrepresentations, or was aware of 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 55 of 130

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a high probability of fraud and intentionally avoided learning the truth." FTC v. Commerce Planet, Inc., 815 F.3d 593, 600 (9th Cir. 2016). As CEO, Mr. Carnes had the authority to control this practice and the authority to make all decisions governing Integrity Advance's policies and procedures. See Tr. I- 209:1-11; Tr. II-84:6-14. Mr. Carnes could have altered or banned the use of RCCs ifhe saw fit. Mr. Carnes testified at the hearing that he had actual knowledge oflntegrity Advance's occasional use of RCCs. See Tr. II-84:6-14. Furthermore, Mr. Carnes knew that Integrity Advance used RCCs and the circumstances under which they were used: to withdraw funds from consumers' bank accounts when consumers revoked the company's ACH authorization and could not be contacted. See Tr. I-235:19-236:3; II-84:6- 85:11; II-142:15-148:4; II-152:15-153:11. Mr. Carnes observed RCCs being printed in the Kansas City office, and testified that these RCCs were printed by Integrity Advance on approximately a weekly basis to collect monies owed by consumers. See Tr. I-235:24- 236:15, I-236:10-11, I-236:20-22.

Accordingly, in light of the fact that Mr. Carnes had actual knowledge that Integrity Advance used RCCs and why, I find Count VII against Mr. Carnes PROVED. VI. SANCTIONS AND RELIEF Having established liability, the Bureau is entitled to seek sanctions and other appropriate relief. As an initial matter, I note that Enforcement counsel did not lay out a theory of damages until the final day of the hearing. This delay was unhelpful to the court in the damages assessment. Enforcement counsel contends they did not set out their theory of damages earlier in the proceeding because Respondents did not turn over the database of loan transactions until well after the original date for production had 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 56 of 130

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passed. Respondents have argued that the Bureau's failure to state its theory of damages until the late stages of this proceeding has put them at a disadvantage and violated their due process rights. 4 I am not convinced by Respondents' due process arguments. At the outset of this proceeding, the Bureau indicated it would be seeking: A. Disgorgement of money, in an amount to be determined at trial;

B. Restitution in an amount to be determined at trial to compensate borrowers who were the victims of Respondents' practices;

C. Civil money penalties;

D. A permanent injunction preventing future violations of the Truth in Lending Act, 15 U.S.C. § 1601, et seq., Regulation Z, 12 C.F.R. § 226, et seq., the Electronic Funci Transfer Act, 15 U.S.C. § 1693, et seq., Regulation E, 12 C.F.R. § 205, et seq., the CPFA, 12 U.S.C. § 5536, or any provision of "Federal consumer financial law" as defined by 12 U.S.C. § 5481(14);

E. Other injunctive relief as the Court may deem just and proper;

F. Recovery of costs in connection with prosecuting this action; and G. Any other legal or equitable relief deemed appropriate. Notice of Charges at 14-15.

This was sufficient to place Respondents on notice of what theories the Bureau would be arguing, generic though they were. Importantly, Respondents were competently represented, including by lead counsel who is a former CFPB prosecuting attorney. Respondents were also able to call a very educated, mathematically trained rebuttal witness to refute the amounts proposed by the Bureau. Importantly, at the hearing, I gave Respondents the same opportunity as I had given the Bureau to make a 4 Certainly, the regulatory 300-day deadline for completing this proceeding necessitates a more compressed schedule than in an action brought in the courts. However, all parties-myself, the ALJ, included-are equally subject to any pressures the deadline may cause. 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 57 of 130

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determination about whether they were prejudiced by the Bureau's additional submissions and to propose whether to cure such through exhibits or additional cross­ examination. Tr. III-59:8-16. Respondents did not avail themselves of this opportunity. Moreover, Respondents do not have clean hands as to this issue, since they waited until the very last moment to turn over their datasets containing over 5.3 million lines of data, and then only after I was forced to intervene and order compliance. To the extent that the Bureau did not disclose its damages approximations until just before the hearing commenced, the fault does not entirely lie with enforcement counsel. Thus, I do not accept Respondents' assertion that the Bureau's final requested sanction amounts being disclosed after the hearing somehow violated their due process rights. In any event, the Bureau has now made a showing as to the relief it is seeking and has explained why it believes those damages are appropriate. Both parties have had the opportunity to develop the record and make reasoned factual and legal arguments in this matter. Accordingly, having found Counts I, II, III, V, VI, and VII proven, I must next decide what relief is appropriate for each of these counts. A. Restitution for Counts I, II, and III and Monetary Relief for Counts V, VI, and VII I.

The Parties' Arguments as to Methodology At the hearing, the Bureau called one of its data scientists, Robert Hughes, to present the Bureau's approximation of damages. Mr. Hughes analyzed Integrity Advance's transactional database to make these calculations, and testified about his methodology and results. Respondents then called as a rebuttal witness Dr. Xiaoling Ang, a research economist. Dr. Ang criticized some of Mr. Hughes' methodology and proffered a different set of damages calculations in somewhat lower amounts. 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 58 of 130

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Due to the late notice of Dr. Ang's testimony and the fact that the Bureau was unable to review her calculations until the hearing, I permitted the Bureau to submit a responsive declaration from Mr. Hughes. In that declaration, he defends his original methodology and critiques Dr. Ang's calculations. Neither Mr. Hughes nor Dr. Ang was proffered as an expert, and neither party called a damages expert to testify. Although the testimony given by both Mr. Hughes and Dr. Ang was highly technical, lengthy, and complex, the threshold issue of which loans should be included in the Bureau's harm analysis is fairly straightforward. Both Mr. Hughes and Dr. Ang were able to obtain the same values for the total amount paid on all Integrity Advance loans, and the total amount paid on Integrity Advance loans originated on or after July 21, 2011. 5 It was only when they attempted to calculate amounts based on subsets of these loans that their methodology and results diverged.

Mr. Hughes stated that, in determining the amount paid over the "total of payments" for each population, he limited his analysis to loans where the consumers paid more than the "total of payments" and experienced at least one renewal. In other words, he excluded all loans where the consumer did not pay more than the "total of payments," since these consumers paid less than they originally expected and therefore did not suffer any harm. See Hughes Declaration, July 29, 2016, at ,i 10. Mr. Hughes states, and the data supports, that Dr. Ang did not exclude loans where the consumer paid less than the "total of payments" from her calculations. Id. at ,i,i 14, 15, and 16. This had the effect of 5 To account for the fact that origination dates are not in the database, both Mr. Hughes and Dr. Ang considered only loans with a first payment date on or after August 13, 2011. This eliminates the possibility of loans originated after the transfer date being included in the calculation, since the maximum possible loan term under Integrity Advance's agreement was 23 days. In consequence, the calculation is conservative because the initial term of most Integrity Advance loans was two weeks or less, so many loans originated in the days immediately following the transfer date are excluded. 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 59 of 130

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reducing the total amount by the sum of the windfalls to consumers who did not suffer monetary harm; it "allowed consumers who underpaid to offset consumers who overpaid." Dr. Ang's testimony does not contradict this. See Tr. III-72:7-75:12. I find Mr. Hughes's methodology to be more reasonable. While Respondents did not financially benefit from those consumers who paid less than the total of payments, the proper analysis here is based on the actual harm to consumers who paid more than the contract provided, not the net amount oflntegrity Advance's gains. 2. Appropriate Amounts of Restitution and Monetary Relief In its post-hearing brief, the Bureau revised its figures from those presented at the hearing, and now requests the following amounts: Count Violation Liable Persons Amount How Calculated I TILA Integrity Advance $132,580,041.06 All sums paid over amounts disclosed for all loans II CFPA Integrity Advance $38,453,341.62 All sums paid over (TILA amounts disclosed for all violation) . post transfer date loans III CFPA Integrity Advance $38,453,341.62 All sums paid over (Deception) and Carnes amounts disclosed for all post transfer date loans V EFTA Integrity Advance (same as Count NIA I) VI CFPA Integrity Advance (same as Count NIA (EFTA II) violation) VII CFPA Integrity Advance $115,024.50 All remotely created (Unfairness). and Carnes check payments post transfer date where the consumer had already satisfied the amount disclosed 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 60 of 130

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In addition, the Bureau seeks a full first-tier civil penalty against Integrity Advance for Counts II, III, and VII and a full first-tier civil penalty against Mr. Carnes for Counts III and VII.

I also noted at the hearing that I was concerned about whether certain fees, such as a fee for insufficient funds (NSF), were appropriate for inclusion in the award of damages. The circuits are split on the proper measure of restitution in FTC cases, and this split has not yet been resolved. For instance,. the Sec.ond Circuit permits only equitable restitution, holding that restitution is not appropriately measured as the full amount lost by consumers, but rather as the benefit unjustly received by Respondents. FTC v. Verity Int 'l, Lid, 443 F.3d 48, 67 (2d Cir. 2006). The Ninth Circuit, on the other hand, permits restitution measured by the entire loss to consumers, see FTC v. Stefanchik, 559 F.3d 924, 931 (9th Cir. 2009), and has ext.ended this theory to CFPB cases. CFP B v. Gordon, 819 F.3d 1179, 1195 (9th Cir. 2016). The ElevE)nth Circuit held that "the amount of net revenue (gross receipts minus refunds), rather than the amount of profit (net revenue minus expenses), is the correct measure of unjust gains" is the proper · measure under section 13(b) of the FTCA. FTC v. Washington Data Res., Inc., 704 F.3d 1323, 1327 (11th Cir. 2013). In the· Third and Seventh Circuits, appropriate restitution under the FTCA is any amount up to gross revenues. See FTC v. Magazine Solns., LLC, 432 F. App'x 155, 158 (3d Cir. 2011); Amy Travel Serv., Inc., 875 F.2d at 571-72. I recognize that remedies under the CFP A are not identical to remedies under the FTCA, and that only one circuit has ruled on the proper scope ofrestitution under the CFP A. Thus, I believe I am bound to consider whether including fees incurred as the result of consumer error, as opposed to corporate wrongdoing, is appropriate. In its post- 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 61 of 130

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hearing brief, the Bureau contends that "any fees charged after consumers had satisfied the amount disclosed were improper and should be returned." See EC Post-Hearing Brief at 29. This does not specifically address my concern. In particular, a consumer who had insufficient funds in his or her account when Integrity Advance withdrew the first payment on that loan, and who then proceeded to pay more than the total of payments, would still properly owe the NSF fee and it should be deducted from the damages calculation.6 Nevertheless, the Bureau argues that "all of the fees represent a small portion of the harm ... such that the [amounts the Bureau is seeking] still reasonably approximate harm ... . " See EC Post-Hearing Brief at 29. Mr. Hughes stated that he ran the same calculations as before, but excluded the fields "feecharge_paid," "latecharge_paid," and "othcharge_paid" to obtain values that excluded those additional fees. See Hughes Aug. 29, 2016 Declaration at ,r 26. The relevant amounts are thus: Count Amount Without Fees $131,433,343.47 II $38,164,153.31 III $38,164,153.31 VII $103,623.00 EC Post-Hearing Brief at 29.

To ensure I am not recommending restitution amounts over what is actually due, I will consider the Bureau's "Amount Without Fees" calculations for Counts I, II, and III as the amounts the Bureau is actually seeking for these violations. Although! still do not know exactly what foes were assessed at what points in the life of the consumers' loans, this will eliminate the possibility of Respondents being held liable for amounts that were 6 The amount Integrity Advance withdrew for a first payment on a loan that was renewed was lower than the amount the company contends was actually "due" on that date, so logically, if the consumer had insufficient funds to make the lower payment, they also would have incun-ed an NSF fee if the company had attempted to withdraw the "total of payments" on that date. 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 62 of 130

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properly owed to the company. However; as to Count VII, the Bureau's original calculation only included amounts debited by RCC after the disclosed "total of payments" was satisfied. Therefore, fees do.not need to be extracted from this calculation, because there is no possibility of a first-payment NSF fee being included. For purposes of this decision, I therefore consider the Bureau to be seeking the following amounts:

Count Amount Without Fees I $131,433,343.47 II $38,164,153.31 III $38,164,153.31 VII $115,024.50 a. Count I: TILA The CFP A permits the Bureau to seek, in a court action or administrative proceeding, "any appropriate legal or equitable relief with respect to a violation of Federal consumer financial law, including a violation of a rule or order prescribed under a Federal consumer financial law." See 12 U.S.C. § 5565(a)(l). The types ofrelief may include, without limitation:

(A) rescission or reformation of contracts;

(B) refund of moneys or return of real property; (C) restitution;

(D) disgorgement or compensation for unjust enrichment; (E) payment of damages or other monetary relief; (F) public notification regarding the violation, including the costs of notification;

(G) limits on the activities or functions of the person; and. (H) civil money penalties, as set forth more fully in subsection (c).

12 U.S.C. § 5565(a)(2).

The Bureau seeks restitution for Integrity Advance's TILA violations for the entire period the company was in operation, for a total of $131,433,343.47. At the 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 63 of 130

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hearing, the Bureau asserted that "[b]ecause the FTC could obtain equitable relief including disgorgement and restitution under section 13(b) of the FTC Act prior to July 21st, 2011," the Bureau can equally obtain such relief. See Tr. II-102:7-13, see also Tr. III-204:11-16. Similarly, in its post-hearing brief the Bureau argues that recommending relief for the entire period Integrity Advance was in operation "does not have an impermissible retroactive effect, because the FTC was empowered to obtain equitable relief, and in particular restitution" for TILA violations during that time. See EC Post­ Hearing Brief at 32.

The Bureau also contends that, although Section 5565 became effective on July 21, 2011, this "does not prevent the Administrative Law Judge from recommending relief for violations that happened prior to the transfer date. Instead, the relevant consideration is when the Administrative Law Judge recommends the relief." See EC Post-Hearing Brief at 25. This decision is indisputably issued after the transfer date; thus, the Bureau believes I may issue any relief! find appropriate.

Respondents argue that it would violate due process if damages were awarded for conduct predating July 21, 2011, and this would be impermissibly retroactive under Landgrafv. US! Film Prods., 511 U.S. 244, 265 (1994). Respondents also point out that the Bureau relies on the FTCA to support its request for restitution, but the FTCA does not provide for monetary relief in administrative proceedings, only judicial ones. Moreover, they state that the FTCA is similar to the CFPA in some respects but is not identical; in particular, the statutory relief provided for in the CFPA does not exist in the FTCA and should not be retroactively applied.

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I find the Bureau's argument that I may impose monetary relief for conduct predating July 21, 2011 fatally flawed. The definition of "Federal consumer financial law" for purposes of the CFP A specifically excludes the Federal Trade Commission Act. See 12 U.S.C. § 5481(14). Thus, it is clear that the CFPB may not rely on the provisions of the FTCA to justify its damages calculations; Congress clearly intended to maintain separation between the two agencies' powers, even while permitting some overlap in jurisdiction. Instead, the CFPB may only rely on its own governing statutes and other · "Federal consumer financial laws" as defined therein. The Bureau has not cited, and I have not found, any other provision of the CFP A allowing the type of retroactive relief the Bureau seeks.

In light of this, it would not be appropriate for me to recommend relief premised on FTC's authority to enforce TILA and its own statutes. The CFPB had no independent authority to enforce TILA or EFT A prior to July 21, 2011 and has never had authority to enforce the, FTCA. The Bureau also conceded that the CFP A only applies to post­ transfer date conduct. Consequently, any relief! recommend may only arise from violations that occurred after the designated transfer date of July 21, 2011. The Bureau asserted that the proper value of damages suffered after the designated transfer date is $38,164,153.31, explaining that: Loan origination dates are not explicitly captured in the Integrity Advance datasets, which only include consumer transaction date, i.e., payments made to or from Integrity Advance. To ensure that all loan transactions connected to loans that had originated before July 21, 2011 were removed from consideration, any loans with first transaction dates prior to August 13, 2011 were removed from the calculation. Tr. II 128:13-129:19; EX-EX-097. As set forth in the Integrity Advance Loan Agreement, the first transaction on a loan occurs between 8 and 23 days 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 65 of 130

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after origination. To ensure that the loans considered had originated on or after July 21, 2011, any loans with transaction dates that occurred fewer than 23 days after July 21, 2011 were not considered. Tr. III 37:1-38:6. EC Post-Hearing Brief at 28 n. 12. In light of the fact that the data does not contain origination dates and there is no way to know for sure what date any loan agreement was signed, I agree with the Bureau's conservative approach and find this method of calculation appropriate. I therefore recommend that damages be assessed against Integrity Advance in the amount of $38,164,153.31 for its violation ofTILA. b. Count II: CFPA (TILA Violation) The Bureau has asked fot restitution of all amounts paid over the "total of payments" for loans made after the transfer date. However, the Bureau has not provided any justification for why restitution is the proper measure of damages for this violation. Respondents contend that granting restitution on Count II would amount to an impermissible double penalty for the same conduct as Count I. They cite Medina v. Dist. of Columbia, 643 F.3d 323, 326 (D.C. Cir. 2006) and Atkinson v. Anadarko Bank & Trust Co., 808 F.2d 438, 441 (5th Cir. 1987), cert. denied 483 U.S. 1032 (1987) for the proposition that a party cannot recover the same damages multiple times, even if different theories apply.

Restitution is defined as "the set of remedies associated with that body of law, in which the measure ofrecovery is usu[ally] based not on the plaintiffs loss, but on the defendant's gain" or the "return or restoration of some specific thing to its rightful owner or status." RESTITUTION, Black's Law Dictionary (10th ed. 2014). Restitution may form all or part of an award of damages, defined as the total amount of money due to a 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 66 of 130

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person as compensation for loss or injury. DAMAGES, Black's Law Dictionary (10th ed. 2014).

Here, restitution is clearly not an appropriate remedy for Count II because it would result in recovery above either the company's actual gain or the consumers' actual loss. 7 This principle is succinctly described by Professor Dan 13. Dobbs: The familiar principle of damages law is that the remedy should not provide more than one full compensation. The analogous principle ofrestitution law is that restitution should not force disgorgement of more than the unjust enrichment. If the two remedies are to be combined in one recovery, those limiting principles require that the combined recovery must not exceed the greater of (a) full compensation or (b) full disgorgement. If the combination does not exceed full compensation, or full disgorgement of the unjust enrichment, then it should be permitted. Dan B. Dobbs, Law of Remedies, § 4.5(b). The restitution ordered for the TILA violation in Count I accounts for Integrity Advance's gain from its illegal activities, and accomplishes the return of a specific thing-money-to the consumers who were harmed as a result of the violation.

The Bureau could have sought various other forms ofrelief under its statute, see See 12 U.S.C. § 5565(a)(2), including but not limited to the civil penalty separately discussed below. Alternately, if the Bureau had proved that the appropriate amount of restitution for Count II was greater than that for Count I, it could have sought the balance. See, e.g., FTC v. Lalonde, 545 F. App'x 825,842 (11th Cir. 2013) (defendant was ordered to pay restitution in connection with a criminal case and to disgorge funds in connection with the FTCA violation, but the total judgment against him subtracted the 7 As discussed above, it is not yet established for purposes of the CFPA which of these is the correct method of measuring restitution and I have chosen to use the more conservative method-Respondents' actual gain-for purposes of this decision.

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payments he made in connection with the cricinal case). However, the Bureau has not made either showing. The Bureau's request for restitution stemming from the CFPA violation proved in Count II proved is denied.

c.

Count III: CFP A (Deception) I have found that both Integrity Advance and Mr. Carnes violated the CFPA's prohibition against deceptive acts or practices. The Bureau again seeks restitution in the amount of the payments above the "total of payments" for all loans originated on or after July 21, 2011. As above, Respondents have argued that restitution should not be granted for this violation because it would amount to yet another recovery for the same conduct. Respondents also argue that repeat consumers should not be included in the calculations because those consumers were aware of how Integrity Advance's loans worked and therefore cannot have been deceived.

When "each defendant repeatedly participated in the wrongful acts and each defendant's acts materially contributed to the losses suffered, all defendants [may be] held jointly and severally liable." FTC v. Gem Merch. Corp., 87 F.3d 466, 468 (11th Cir. 1996); see also FTC v. BurnLounge, Inc., 584 F. App'x 315,318 (9th Cir. 2014); F.TC. v. Stefanchik, 559 F.3d at 927, 930-31; FTC v. Publ'g Clearing House, Inc., 104 F.3d at 1170-71. Joint and several liability means that each defendant is independently liable for the full amount of the judgment, but the plaintiff cannot recover more than the total amount of the judgment, regardless of how the payments are apportioned between the defendants. Tilcon Capaldi, Inc. v. Feldman, 249 F.3d 54, 62 (1st Cir. 2001). Here, Mr. Carnes and Integrity Advance may be held jointly and severally liable as long as the total restitution paid by both parties, collectively, does not exceed the appropriate amount of 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 68 of 130

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restitution discussed in detail above. See FTC v. Seismic Entm't Prods., Inc., 441 F. Supp. 2d 349, 354 (D.N.H. 2006).

The Bureau argues that the proper scope of damages for this violation is the amount of money Respondents gained through their deceptive practices, in other words, the amount collected above the "total of payments " for loans made after the transfer date or $38,164,153.31. I find this to be a reasonable approximation of the amount consumers are due for the violations found proved in Count III. I do not accept Respondents' argument for extracting all repeat customers from the calculation. The proper test for deceptive conduct is not whether an actual consumer was deceived, but rather whether the act or practice had the potential to deceive. See FTC v. Johnson, 96 F. Supp. 3d at 1119. Each loan agreement offered had the potential to deceive a consumer, whether or not that consumer actually understood the contract. I therefore recommend that . Respondents Integrity Advance and James R. Carnes be held jointly and severally liable for $38,164,153.31, with the caveat that the total amount of restitution due for Counts I­ III may not exceed that amount, however Respondents choose to apportion it. d. Counts V and VII {EFT A and CFP A) The Bureau has not sought any additional damages for Counts V and VII, stating "Enforcement Counsel Believes disgorgement would be the most appropriate remedy for the violations of EFTA ... However, given the relief being provided to consumers pursuant to Counts I-III would largely encompass any disgorgement amounts, Enforcement Counsel is not seeking additional equitable monetary relief or damages." See EC Post-Hearing Brief at 30. I therefore will not recommend any additional relief on these counts.

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e. Count VII: CFPA (Unfairness) As discussed above, a reasonable approximation of the amount of monetary harm consumers suffered through Integrity Advance's unfair use of RCCs is $115,024.50. I have already set out the principles of joint and several liability above, and those principles are equally applicable here. I therefore recommend Integrity Advance and Mr. Carnes be held jointly and severally liable for this amount for the violation alleged in Count VII and found proved herein.

B. Civil Penalty The Bureau seeks a first-tier civil penalty against Respondents for their CFP A violations. Under 12 U.S.C. § 5565(c)(2)(A), "[f]or any violation of a law, rule, or final order or condition imposed in writing by the Bureau, a civil penalty may not exceed $5,000 for each day during which such violation or failure to pay continues." However, the Bureau adjusted its penalty schedule in accordance with the Federal Civil Penalties Adjustment Act of 1990, as amended by the Debt Collection Improvement Act of 1996 and further amended by the Federal Civil Penalties Inflation Adjustment Act Improvement Act of 2015, 20 U.S.C. § 2461 note. See 12 C.F.R. § 1083.1. Accordingly, the maximum civil penalty now permitted for a first-tier violation is $5,437 per day; this amount applies to all civil penalties assessed after July 14, 2016 even if the violation took place while a prior penalty schedule was in effect. Id. The Bureau seeks imposition of a civil penalty for each of the CFPA counts. At the hearing, the Bureau asserted that the relevant time period was 530 days. This appears to be the number of days between the designated transfer date, July 21, 2011, and December 31, 2012, inclusive of those dates. However, in its post-hearing brief, the 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 70 of 130

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Bureau asserts the relevant number of days is 720 because the last transaction in the database Respondents provided took place on July 9, 2013. I do not accept the Bureau's civil penalty calculation. The threshold problem is that the Bureau has not established the relevant date on which Respondents' illegal conduct ceased. Implicit in their calculation is an argument that each loan payment constituted a separate violation. However, I have found that the illegal conduct Respondents engaged in was disclosing a finance fee and APR inconsistent with the terms of the loan. The improper disclosure occurred only once, at the moment the consumer accepted and signed the documents Integrity Advance provided. The Bureau did not allege, and I did not find, that each loan renewal or loan payment was a separate violation of either TILA or the CFPA. See Notice of Charges 'if 57 ("Integrity Advance's inaccurate disclosures violated the Truth in Lending Act, 15 U.S.C. §§ 1631, 1638, and Regulation Z, 12 C.F.R. § 1026.17 and 1026.18"); 'i[61 ("By virtue of its violation of the Truth in Lending Act and Regulation Z, Integrity Advance has violated the CFPA"); 'if 70 ("Respondents' disclosures were false and misleading and constituted a deceptive act or practice in violation of the CFPA, 12 U.S.C. §§ 5531(a) and 5536(a)(l)(B)") (emphasis added).

This contrasts with the Director's Decision in PHH, but the two cases are distinguishable. There, the Director held that each time the mortgage company received an illegal kickback, it constituted a separate violation of the prohibition fees, kickbacks, or things of value stemming from real estate settlement services involving a federally related mortgage loans; the violation was not limited to the date a particular loan closed. Id. at 22-26. However, I do not read PHH to stand for the proposition that every 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 71 of 130

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transaction associated with a deceptive practice is itself a violation in all circumstances. Here, the Bureau did not allege or prove that each separate debit on a consumer's account, or attempt to debit such account, involved a separate illegal disclosure. Thus, the legal and factual analysis is inapposite to that in PHH. I therefore find that the relevant date on which Respondents' illegal conduct ceased was the last day on which a consumer took out a loan from Integrity Advance. Unfortunately, this date is not established in the record; all we know is that the company stopped making new loans in mid-December 2012. Indeed, the Bureau's data scientist testified that "we did not actually have the date of origination in that data set. Origination was not one of the events that was provided in the transaction table." See Tr. III-7:7-10. Accordingly, I will use July 21, 2011 through December 1, 2012 as the relevant time period for calculating the civil penalty. The record establishes that Integrity Advance was still making loans at least as late as December 1, but I cannot say with any certainty how far into December the company continued making loans. 8 I therefore find this to be a reasonable time frame which will yield an appropriate civil penalty. The unfair use of RCCs was also transaction-specific. However, the Bureau has not provided me with the last date on which an RCC was actually used.9 In the absence of this information, I will not assume that the last transaction in the Integrity Advance 8 Mr. Carnes testified that one condition of the sale ofHIP to EZCorp was that Integrity Advance would stop making loans. The transaction between HIP and EZCorp closed on December 20, 2012. However, the origination date of the final loan is not recorded. It is unclear specifically what the Bureau is relying on to support its claim Integrity Advance continued making loans into 2013. Mr. Hughes stated that the database demonstrates that Integrity Advance originated loans through May 2013, but did not explain how he arrived at that conclusion. EC-EX-072 at i[3. I note that it was possible for a consumer who took out a loan in December 2012 to still be paying down that loan in July 2013 if all rollovers and auto-workout payments occurred. See the graphic on page 8 of.this Recommended Decision. 9 The database provided as EC-EX-101 may contain the relevant information, however, I do not have the technological capabilities to sort through the millions oflines of data. As the Bureau itself noted, "[t]he size of the datasets, which contained approximately 5.3 million lines of transaction data, required that the calculations be conducted using a computer programming language that could manage large datasets." Brief at 27 n. 10.

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database, which occurred on July 9, 2013, was an RCC. While I recognize that RCCs were likely used after December 1, 2012, I will use this date to calculate the civil penalty for Count VII, as well as Counts II and III, because it will prevent penalties from being assessed for dates after the illegal conduct had ceased. At $5,437.00 per day for 500 days, the maximum civil penalty the Bureau may seek in connection with each individual violation is $2,718,500. Respondents argue that enforcement counsel did not articulate any reason for seeking the maximum civil penalty. They also argue that the mitigating factors show that no civil penalty is appropriate. These mitigating factors, which I must consider pursuant to 12 U.S.C. § 5565(c)(3), include:

(A) the size of financial resources and good faith of the person charged;

(B) the gravity of the violation or failure to pay;

(C) the severity of the risks to or losses of the consumer, which may take into account the number of products or services sold or provided;

(D) the history of previous violations; and (E) such other matters as justice may require.

12 U.S;C. §5565(c)(3).

I recognize that Integrity Advance has virtually no financial resources and it has not been the subject of any previous civil actions or administrative proceedings. However, as discussed above, I find that the violations were grave and resulted in severe losses to consumers. As to Mr. Carnes, I have no information about his current financial resources, and I do not believe he acted in good faith. He was clearly aware of the predatory nature of payday loans, and he was not fully candid with the court during t]is proceeding. Integrity Advance made hundreds of thousands of loans during its period of operations, tens of thousands of which were made after the transfer date. That a loophole 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 73 of 130

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in Delaware state law permitted Integrity Advance to repeatedly renew its loans without affirmative action on consumers' part to stop them does not demonstrate that the company acted in good faith by taking "all the steps expected of an institution in a highly regulated industry." It merely shows that Respondents had the resources and acumen to exploit that loophole. I therefore do not find any mitigating factors, and will award the maximum first-tier penalty.

For three counts of violating the CFP A, the total civil penalty assessed against Integrity Advance is $8,155,500. For two counts of violating the CFPA, the total civil penalty assessed against Mr. Carnes is $5,437,000.

C. Injunctive Relief In addition to monetary relief, the Bureau also seeks six types of injunctive relief. Specifically, the Bureau asks me to recommend that Respondents and any successors be (1) permanently enjoined from taking any action that would result in the collection, sale, assignment, or transfer of any consumer debt Integrity Advance still holds as the result of its payday lending operations; and (2) enjoined from any future violations of Federal consumer financial laws, including but not limited to TILA, EFT A, and the CFP A. The Bureau b]so asks me to order Respondents to (3) make all reasonable and appropriate efforts to correct consumer credit reports damaged by information Integrity Advance provided to reporting agencies, and (4) assist the Bureau in determining the identify, location, and amount due to each consumer entitled to relief. Finally, the Bureau asks me to (5) order Mr. Carnes to provide an accounting of all funds received from Integrity Advance, either directly or indirectly, and (6) order disgorgement of any funds Mr. Carnes received from Integrity Advance in excess of the restitution and civil penalty 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 74 of 130

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amounts recommended herein. Each of these requests requires a separate analysis of whether that precise form of relief is appropriate in this matter. 10 Respondents contend there is no basis for injunctive relief because, at the outset, the Bureau failed to articulate until its post-hearing brief what relief it would seek, why such relief is justified, and the legal standard it believes applies here. They argue that the Bureau has not shown any possibility that Mr. Carnes or Integrity Advance will engage in any conduct in the future that would violate the TILA, EFT A or CFP A. In general, injunctions must be narrowly tailored to remedy only the specific harms the Bureau has proved. See, e.g., Price v. City of Stockton, 390 F.3d 1105, 1117 (9th Cir. 2004). However, Respondents' arguments that injunctive relief is inappropriate because the company has ceased its lending operations are unconvincing. In PHH, the Director held that a cognizable danger of future violations existed where the company could easily resume its once-profitable business at any time, and that the Bureau was not required to show that the company had any actual intent to resume operations. Id. at 33. The Director determined that injunctions can therefore be appropriate even if the illegal conduct has ceased. Id. at 32-33 (citing U.S. v. W.T. Grant Co., 345 U.S. 629,633 (1953); EEOC v. AutoZone, Inc., 707 F.3d 824, 841-44 (7th Cir. 2013); Borg-Warner Corp .. v. FTC, 746 F.2d 108, 110 (2d Cir. 1984)). One factor a judge should consider, which is "germane but not dispositive" is that there are no ongoing violations. PHH at 33 (citing NLRB. v. Greensboro News & Record, Inc., 843 F.2d 795, 798 (4th Cir. 1988). As to the first request, I note that Integrity Advance is still technically in existence, though not currently operational. If, as the Bureau alleges, Integrity Advance 10 I note that the Bureau did not cite to any law, whether it be a statute, regulation, or case law, in its request for injunctive relief 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 75 of 130

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still holds approximately $18 million in consumer debt on its books, it would be appropriate to enjoin the company or its successors from attempting to collect that debt, at least to the extent it represents amounts above the "total of payments" due on any loan. Unfortunately, the Bureau has not cited to any evidence in the record showing where this number came from or demonstrating what portion is attributable to loans where the payments have already exceeded the "total of payments." I therefore find the Bureau has not adequately supported its request, but note that any attempt by Integrity Advance or its successors to collect on debt incurred through the deceptive ana' unfair practices established during this proceeding may constitute a separate violation which could be the subject of a separate proceeding.

The second request for injunctive relief, which seeks to prohibit Respondents from violating any Federal consumer financial protection law, including but not limited to TILA, EFTA, and the CFP A in the future, is rejected as overbroad. The Supreme Court has cautioned against "sweeping injunction[s] to obey the law," Swift & Co. v. United States, 196 U.S. 375, 401 (1905), and most federal circuit courts have likewise adopted a rule against them. See, e.g., Peregrine Myanmar Ltd v. Segal, 89 F.3d 41, 51 (2d Cir. 1996); McLendon v. Cont'! Can Co., 908 F.2d 1171, 1182 (3d Cir. 1990); Davis v. Richmond, Fredericksburg & Potomac R. Co., 803 F.2d 1322, 1328 ( 4th Cir. 1986); Payne v. Travenol Labs., Inc., 565 F.2d 895, 898 (5th Cir. 1978); Perez v. Ohio Bell Tel. Co., No. 15-3303, 2016 WL 3755795, at *6 (6th Cir. July 14, 2016); Jake's, Ltd, Inc. v. City of Coates, 356 F.3d 896, 904 (8th Cir. 2004); Glover Const. Co. v. Babbitt, 172 F.3d 878 (Table) (10th Cir. 1999); Hughey v. JMS Dev. Corp., 78 F.3d 1523, 1531 (11th Cir. 1996).

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Here, preventing future violations of Federal consumer financial protection laws is a noble goal, but as worded in the Bureau's request for relief, it is unenforceable. I therefore cannot find it narrowly tailored to the violations found proved herein. However, I find that an injunction prohibiting Integrity Advance and Mr. Carnes from engaging in payday lending operations for a period of time would be enforceable, narrowly tailored, and in keeping with the Bureau's mandate to ensure compliance with Federal consumer financial protection laws. See PHH at 32-33 ("'Fencing in' is important because, if the Bureau 'is to attain the objectives Congress envisioned, it cannot be required to confine its road block to the narrow lane the transgressor has traveled; it must be allowed effectively to close all roads to the prohibited goal, so that its order may not be by-passed with impunity."' (Internal citations omitted)). In PHH, the Director determined that a 15-year injunction was appropriate, and I will follow his reasoning in recommending the same length of time.

Accordingly, even though I will not grant the Bureau's proposed injunction against an indefinite prohibition on violating any Federal consumer financial protection laws, I find that imposing a 15-year injunction on engaging in payday lending operations is appropriate as to both Integrity Advance and Mr. Carnes . . I find the third and fourth requests, which require Respondents to assist the Bureau in returning funds to consumers and removing damaging information supplied by Integrity Advance to consumer reporting agencies from such consumers' credit reports, are reasonable. Respondents are covered persons under the CFP A, therefore the Bureau has the authority to require them to provide information such as this. See 12 U.S.C. § 5514(b)(l). Respondents are in the best position to supply company data regarding the 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 77 of 130

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names of its customers and their last known contact information. Respondents are also in the best position to know what data were supplied to consumer reporting agencies, and to notify those agencies that the data should be removed. If Respondents were not ordered to cooperate with the Bureau's efforts to achieve these goals, it is likely that consumers who were injured by Respondents' actions would not be made whole. I will therefore grant the relief sought in requests three and four, limited to consumers who originated loans or were subject to withdrawals by RCC on or after July 21, 2011. Requests 5 and 6 concern Mr. Carnes's liability for damages, and the issue of disgorgement. Disgorgement is an equitable remedy that requires a violator to give up ill-gotten gains causally related to the proven wrongdoing. See FTC v. Bishop, 425 F. App'x. 796, 797-98 (11th Cir. 2011). It returns the violator to where he or she would have been if the misconduct had not occurred, and serves as a deterrent to others who may engage in similar conduct. The initial burden is on the Bureau to set out a disgorgement calculation that reasonably approximates the amount of unjust enrichment; the burden then shifts to Respondents to de1nonstrate that the calculation is not a reasonable approximation. FTC v. Verity Int 'l, Ltd, 443 F.3d at 67. Here, the Bureau tried at the hearing to establish the flow of money from Integrity Advance, through the various corporate entities, and finally to Mr. Carnes. See Tr. I- 143 :3-208:24; I-237:5-251:20. Although the path was clear, the precise amounts at issue remained unresolved. The Bureau did not present any evidence as to Mr. Carnes's current financial status, and did not establish with any precision the amount of money Mr. Carnes obtained from the sale of HIP/Integrity Advance assets to EZCorp. The Bureau now asks me to order Mr. Carnes to provide an accounting of all funds received directly 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 78 of 130

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or indirectly from Integrity Advance, and to order disgorgement of any funds in excess of the restitution, monetary relief, and civil penalty ordered herein. I find the Bureau's efforts on this point to be too late. While I agree that disgorgements of any funds received as a result of Mr. Cames's CFPA violations would be appropriate, that conduct is specifically limited to the deceptive disclosures contained · in loan agreements for loans originated on or after July 21, 2011, or RCC use on or after July 21, 2011. The Bureau has not established what this amount is, or how it would differ in any way from the restitution I have already found appropriate. Moreover, to make such calculations after the decision in this matter has already been issued would present both procedural problems and potential due process issues. I therefore find I cannot grant requests 5 or 6.

VII.

CONCLUSIONS OF LAW 1.

Integrity Advance violated the Truth in Lending Act by disclosing inaccurate finance fees and annual percentage rates in its loan agreements. 2.

Integrity Advance violated the Consumer Financial Protection Act by virtue of its TILA violations.

3.

Integrity Advance and James R. Carnes violated the CFPA's prohibition on deceptive conduct because the net impression of its loan agreement was misleading. The loan agreement was ambiguous as to whether it was due in a single payment or multiple payments; it disclosed finance charges as if it were a single-payment loan but automatically renewed loans so consumers would incur multiple finance charges.

4.

Integrity Advance and James R. Carnes violated the CFPA's prohibition on unfair conduct by using remotely created checks to withdraw money from consumers' bank accounts after those consumers had already paid the disclosed "total of payments" on their loans and blocked Integrity Advance's ACH authorization to debit their accounts.

5.

The CFPA does not permit the Bureau to seek retroactive relief prior to the statutory designated transfer date of July 21, 2011. 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 79 of 130

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6.

A reasonable approximation of the restitution due to consumers for the practices described in Counts I, II, and III is $38,164,153.31. 7.

A reasonable approximation of the monetary harm suffered by consumers in connection with the practices described in Count VII is $115,024.50. 8.

The Consumer Financial Protection Bureau is authorized to seek a civil penalty for any violations of the CFPA found proved.

9.

The most reasonable calculation of the civil penalty for the CFPA violations found proved herein is $2,718,500.00 for each count. 10.

Injunctive relief is appropriate to ensure that consumers are properly compensated for their injuries and that any negative credit reports resulting from Integrity Advance's violations are mitigated.

11.

Injunctive relief is appropriate to prevent further violations of Federal consumer financial protection laws.

VIII.

PROPOSED ORDER.

It is hereby ORDERED that Counts I, II, and III against Respondent Integrity Advance are found PROVED, as previously determined in the Order Granting In Part Summary Disposition, and Respondents' Motion for Reconsideration is DENIED; and It is further ordered that Count VII against Respondent Integrity Advance is found PROVED; and If is further ordered that Counts III and VII against Respondent James R. Carnes are found PROVED.

It is ORDERED that the total amount of restitution due to Integrity Advance consumers stemming from the violations found proved in Counts I, II, and III is $38,164,153.31. Respondents Integrity Advance and James R. Carnes are jointly and severally liable for the violation alleged in Count III. Respondents shall therefore make restitution in the amount of $38,164,153.31; and It is ORDERED that the total amount of monetary harm suffered by consumers as a result of Respondents' unfair practices described in Count VII is $115,024.50. Respondents are jointly and severally liable for this amount; and It is ORDERED that a civil penalty be assessed against each Respondent in the amount of $2,718,500.00 for each violation of the CFPA. For three counts of violating the .CFP A, the total civil penalty against Integrity 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 80 of 130

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Advance shall be $8,155,500.00. For two counts ofviolating the CFPA, the total civil penalty against James R. Carnes shall be $5,437,000.00; and It is ORDERED that Respondents bY enjoined from operating or participating in a payday lending operation for 15 years; and It is ORDERED that Respondents assist the Bureau in returning funds to consumers and removing damaging information supplied by Integrity Advance to consumer reporting agencies from such consumers' credit reports.

The parties are hereby notified that a notice of appeal may be filed within ten days after service of the recommended decision. Unless a party timely files and perfects a notice of appeal of the recommended decision, the Director may adopt the recommended decision as the final decision and order of the Bureau without further opportunity for briefing or argument. See 12 C.F.R. § 1081.400(c)(l). SI- '3.. \·U./SO .... , .... -- Hon. Parlen L. McKenna Administrative Law Judge United States Coast Guard Done and dated this 27th day of September, 2016, at Alameda, California.

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APPENDIX A:

LIST OF WITNESSES AND EXHIBITS Agency Witnesses:

1.

Timothy Madsen 2. Bruce Andonian 3.

James R. Carnes 4. Edward Foster 5. Robert Hughes 6.

Joseph Baressi Respondents' Witnesses:

1. Xiaoling Ang 2. Elizabeth Quinn Miller Agency Exhibits:

Exhibit Exhibit Description Status Redacted or Number Under Seal Completed consumer application and loan agreement Admitted Redacted Completed consumer application and loan agreement Admitted Redacted Completed consumer application and loan agreement Admitted Redacted Completed consumer application and loan agreement Admitted Redacted Completed consumer application and loan agreement Admitted Redacted Completed consumer application and loan Admitted Redacted agreement Completed consumer application and loan Admitted Redacted agreement Completed consumer application and loan Admitted Redacted agreement Completed consumer application and loan . Admitted Redacted agreement Completed consumer application and loan Admitted Redacted agreement Completed consumer application and loan Admitted Redacted agreement Completed consumer application and loan Admitted Redacted agreement 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 82 of 130

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Completed consumer application and loan Admitted Redacted agreement Completed consumer application and loan agreement Admitted Redacted September 2010 Hayfield balance sheet Admitted Under Seal January 2011 Hayfield income statement · Admitted Under Seal February 2011 Hayfield income Admitted Under Seal statement March 2011 Hayfield income statement Admitted Under Seal April 2011 Hayfield income statement Admitted Under Seal May 2011 Hayfield income statement Admitted Under Seal June 2011 Hayfield income statement Admitted Under Seal July 2011 Hayfield income statement Admitted Under Seal August 2011 Hayfield income statement Admitted Under Seal September 2011 Hayfield income Admitted Under Seal statement October 2011 Hayfield income statement Admitted Under Seal November 2011 Hayfield income statement Admitted Under Seal December 2011 Hayfield Income Admitted Under Seal Statement January 2012 Hayfield income statement Admitted Under Seal February 2012 Hayfield income Admitted Under Seal statement March 2012 Hayfield income statement Admitted Under Seal April 2012 Hayfield income statement Admitted Under Seal May 2012 Hayfield income statement Admitted Under Seal June 2012 Hayfield income statement Admitted Under Seal July 2012 Hayfield income statement Admitted Under Seal August 2012 Hayfield income statement Admitted Under Seal September 2012 Hayfield income Admitted Under Seal statement October 2012 Hayfield income statement Admitted Under Seal November 2012 Hayfield income Admitted Under Seal statement Hayfield 2011 income statement Admitted Under Seal 2012 Hayfield income statement Admitted Under Seal Hayfield 2012 balance sheet Admitted Under Seal 2010 Integrity Advance income Admitted statement and balance sheet 2011 Integrity Advance income Admitted statement and balance sheet 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 83 of 130

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2012 Integrity Advance income Admitted statement and balance sheet Hayfield 2011 tax return Admitted Under Seal Hayfield 2011 partnership income tax Not Admitted filing Hayfield 2012 partnership income tax Not Admitted filing 2011 Hayfield partnership distributions to Not Admitted Willowbrook 2012 Hayfield partnership distributions to Not Admitted Willowbrook Asset purchase agreement between Not Admitted Hayfield and EZ Corp Lead purchase agreement between Not Admitted Integrity Advance and LeadPile Lead purchase agreement between Not Admitted Integrity Advance and lncent Media Lead purchase agreement between Admitted Integrity Advance and T3 Leads Lead purchase agreement between Partner Admitted Weeklv and Inte!lritv Advance signature card for First Bank of Admitted Redacted Louisburg ACH origination agreement between Admitted MoneyGram and Integrity Advance Invoice from ClearVox to Integrity Admitted Advance Invoice from ClearVox to Integrity Admitted .

Advance Arbitration provision template Admitted Integrity Advance application template Admitted Loan agreement template Admitted Application template Admitted Application and loan agreement template Admitted ACH authorization template Admitted Integrity Advance organizational chart Admitted Description of Hayfield entities Admitted Hayfield organizational chart Admitted James Carnes investigational hearing Admitted Redacted transcript Edward Foster investigational hearing Admitted Redacted transcript iii 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 84 of 130

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November 25, 2013 interrogatory Not Admitted responses Integrity Advance's October 25, 2013 Not Admitted interrogatory responses to January 7, 2013 Civil Investigative Demand Declaration of Robert J. Hughes Admitted Declaration of Christopher Albanese Admitted Nov. 1, 2011-Dec.9, 2011 emails regarding Not Admitted a consumer refund requested by the New Hampshire Banking Department 75-A Consumer complaint produced by the Better Admitted Redacted Business Bureau on June 10, 2014 75-B Consumer complaint produced by the Better Admitted Redacted Business Bureau on June 10, 2014 75-C Consumer complaint produced by the Better Admitted Redacted Business Bureau on June 10, 2014 75-D Consumer complaint produced by the Better Admitted Redacted Business Bureau on June 10, 2014 June 10, 2014 email to Alusheyi Admitted Wheeler attaching Better Business Bureau complaints ClearVox Facilitators Guide Not Admitted Integrity Advance procedures manual Not Admitted Loan Management System Operations Not Admitted Manual Data dictionary produced by Integrity Admitted Advance on April 22, 2016 in response to February 19, 2016 subpoena for data Section 7.9 of Loan Management Admitted System Operations Manual NACHA Table of ACH Return Reason Admitted Codes July 22, 2008 Lead Purchase Insertion Not Admitted Order between Partner Weekly and Integrity Advance Hayfield Investment Partners, LLC Not Admitted Consolidated Income Statement YTD Thru September 2010 iv 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 85 of 130

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January 19, 2009 Debt collection agreement between Integrity Financial Partners, Inc. and Hayfield Investment Partners, LLC for the benefit of its subsidiaries including Integrity Advance, LLC March 21-23, 2011 emails between ClearVox and Integrity Advance employees February 21-25, 2011 emails between James Carnes, Edward Foster, and ClearVox employees regarding potential fraud November 13-14, 2008 emails James Carnes and ClearVox employees and between ClearVox employees February 21, 2008 email from ClearVox employee to James Carnes regarding Outbound Call Agreement February 20, 2008 emails between James Carnes and ClearVox employee Hayfield Investment Partners, LLC 2012 Tax Return Expert Report of Dr. Manoj Hastak Respondents' December 11, 2015 Answer and Affirmative Defenses to Notice of Charges "An Examination of Remotely Created Checks" by Ana R. Cavazos-Wright Excel spreadsheet entitled "Check Draft Cleared - - - Payments" produced on May 5, 2016 in response to February 19, 2016 subpoena for data 16 CFR Part 310: Telemarketing Sales Rule: Federal Register Notice Containing Notice of Proposed Rulemaking and Request for Public Comment Charts containing Integrity Advance values from transaction data produced in response to February 19, 2016 subpoena for data "A Guide to Remotely Created Checks" by Dave Mercurio and Angie Spitzley V Admitted Not Admitted Admitted Admittecl Not Admitted Not Admitted Admitted Under Seal Admitted Admitted Admitted Admitted Admitted Admitted Admitted 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 86 of 130

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May 5, 2016 email from Allyson Baker to Admitted Vivian Chum and others attaching Excel spreadsheet "Check_ Draft_ Cleared Payments"

Consumer #21292653 Transactions on Admitted Integrity Advance $500 Loan #54158546 in which Integrity Advance uses an RCC to obtain funds from a consumer after the consumer revokes ACH authorization Integrity Advance consumer transaction data Admitted produced in response to February 19, 2016 subpoena for data First-time and one-time loans chart Admitted Declaration of Robert J. Hughes Admitted Respondents' Exhibits:

Exhibit Status Redacted or Number Exhibit Description Under Seal IA Reporting Structure Admitted IA Amended Operating Agreement Admitted Novemsky Report (Mar. 25, 2016) Admitted Novemsky CV June 2016 Admitted List of Documents and Materials Admitted Considered in Novemsky Report Attachments to Declaration of Chris Carson Not Admitted DE LLC Formation Admitted DE License Renewal Application (2011) Admitted Redacted DE License Renewal Application (2012) Admitted Redacted DE License Renewal Application (2013) Admitted Redacted DE License Renewal Acceptance Letter (2011) Admitted DE License Renewal Acceptance Letter (2012) Admitted DE License Renewal Acceptance Letter (2013) Admitted DE Report of Delaware Assets (2011) Admitted Vl 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 87 of 130

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January 25, 2010 Emails between E. Not Admitted Quinn Miller and Edward Foster January 29, 2010 Letter to E. Quinn Not Admitted Miller from Claudia Callaway January 11, 2012 Email from Kelley R Not Admitted Jones to Edward Foster, and attachments 2012 Report of Exam from the Delaware Not Admitted State Bank Commissioner Adjusted versus CFPB Comparison All Loans Admitted Counts of Repeat Customers by Number of Loans Admitted Repeat Borrowers as a Percent of All Admitted First Loans ' Admitted One Time Loans Admitted Exclude Repeat Borrowers Who Renew Admitted vu 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 88 of 130

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APPENDIXB:

RULINGS ON THE BUREAU'S PROPOSED FINDINGS OF FACT The Administrative Procedure Act (APA) and the CFPB Rules of Practice entitle parties to a reasonable opportunity to file proposed findings and fact and conclusions of law and any supporting reasons before the issuance of an initial decision. See 5 U.S.C. § 557 ( c) and 12 C.F.R. § 108 l .305(a). After the hearing in this matter, each party filed proposed findings of fact and conclusions of law, and argument in support thereof. The parties also filed responsive briefs pursuant to 12 C.F.R. § 1081.305(b). If I have designated a proposed finding of fact or conclusion of law as "accepted and incorporated" it means I have found it to be supported by the record as a whole and have incorporated it, to the extent it is relevant, into the Recommended Decision. Not all proposed findings or conclusions are relevant, and thus some designated as "accepted and incorporated" in my rulings are not specifically discussed in the Recommended Decision. I have also designated some proposed findings of fact as accepted with modifications, which are described herein. Finally, ifl rejected a proposed finding of fact, I have set forth my reasoning.

1.

Integrity Advance started originating loans to consumers in May 2008. Tr. II 132:23-24.

Ruling: ACCEPTED AND INCORPORATED.

2.

As a part of its purchase of Hayfield Investment Partners, EZ Corp. Inc. purchased some of the assets oflntegrity Advance in December 2012. Tr. II 70:22-23.

Ruling: ACCEPTED AND INCORPORATED.

3.

Integrity Advance's first consumer loan transaction occurred in May 2008 and its final loan transaction occurred on July 9, 2013. Tr. II 132:23 -133:18; see also EC-EX-072; EC-EX- 101.

Ruling: ACCEPTED AND INCORPORATED.

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4.

Respondent James Carnes (Carnes) founded Integrity Advance. EC-EX-068 at 7:12-13; Tr. I 94:3-4.

Ruling: ACCEPTED AND INCORPORATED. 5.

Carnes was the sole owner of Willowbrook Marketing LLC. EC-EX-067; Tr. I 102:4-6.

Ruling: ACCEPTED AND INCORPORATED. 6.

Willowbrook Marketing LLC owned a majority share of Hayfield Investment Partners. EC- EX-067; Tr. I 102:8-10. Ruling: ACCEPTED AND INCORPORATED. 7.

Hayfield Investment Partners was the sole owner oflntegrity Advance. EC-EX­ ·067; Tr. II 6:12-16.

Ruling: ACCEPTED AND INCORPORATED. 8.

Carnes was the CEO of Hayfield Investment Partners, the parent company of Integrity Advance, and the chief executive of Integrity Advance. Tr. I 93 :22 - 94:12; EC-EX-068 at 31:1-3. Ruling: ACCEPTED AND INCORPORATED. 9.

Carnes was the president and chief executive of Integrity Advance throughout the entire time that it offered short term, or payday, loans to consumers. EC-EX-065; EC-EX-068 at 31:1-3.

10 ..

11.

12.

13.

14.

15.

Ruling: ACCEPTED AND INCORPORATED. Carnes received an annual salary of $250,000 when he was the chief executive of Integrity Advance. Tr. I 167:11-17. Ruling: ACCEPTED AND INCORPORATED. Integrity Advance was the most profitable company of all of the Hayfield subsidiaries. EC- EX-068 at 88:24-89:6. Ruling: ACCEPTED AND INCORPORATED. Integrity Advance contributed more than 75% of Hayfield's profits in 2010. EC­ EX-068 at 92:19-93:9; Tr. I 114:11-25. Ruling: ACCEPTED AND INCORPORATED. ) Integrity Advance contributed more than 75% of Hayfield's profits in 2011. EC­ EX-068 at 93:10-14; Tr. I 115:8-21. Ruling: ACCEPTED AND INCORPORATED. Integrity Advance contributed more than 75% of Hayfield's profits in 2012. EC­ EX-068 at 93:15-16; Tr. I 115:22 -116:2. Ruling: ACCEPTED AND INCORPORATED. Carnes received approximately twenty-three to twenty .. five million dollars from the sale of Integrity Advance and other Hayfield entities to EZ Corp. Tr. I 239:4- IX 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 90 of 130

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8; and Tr. I 245:16 - 246:12.

Ruling: ACCEPTED AND INCORPORATED as modified herein. 16.

Ruling: ACCEPTED AND INCORPORATED. 17.

Ruling: ACCEPTED AND INCORPORATED. 18.

All persons who worked for Integrity Advance, except for George Davis, worked from a location in Kansas. Tr. I 73:15-17. Ruling: ACCEPTED AND INCORPORATED. 19.

Carnes directly or indirectly supervised all Integrity Advance employees. EC-EX- 065; EC- EX-068 at 32:4-9; EC-EX-069 at 21:23-22:5. Ruling: ACCEPTED AND INCORPORATED. 20.

The four people who performed services for Integrity Advance when the company commenced operations in 2008 were Carnes, Edward Foster (Foster), Hassan Shahin, and a receptionist. Tr. I 53:19- 54:10. Ruling: ACCEPTED AND INCORPORATED. 21.

At its largest, in 2011, Hayfield employed between 20 and 30 people. Tr. II 92:2- 6.

Ruling: ACCEPTED AND INCORPORATED. 22.

Timothy Madsen (Madsen), the Vice President of Marketing for Integrity Advance, worked at Integrity Advance from August 2008 until some of Integrity Advance's assets were purchased by EZ Corp. Tr. I 28:4-6; Tr. I 29:6-12. Ruling: ACCEPTED AND INCORPORATED. 23.

After he was originally hired, Madsen reported directly to Carnes. Tr. I 39:3-7. Ruling: ACCEPTED AND INCORPORATED. 24.

Carnes spoke with Madsen on a daily basis. Tr. I 35:8-10. Ruling: ACCEPTED AND INCORPORATED. 25.

Foster worked for Integrity Advance as its executive vice president, general counsel, secretary, and assistant treasurer. Tr. II 8:10-12. Ruling: ACCEPTED AND INCORPORATED. 26.

Foster reported to Carnes. Tr. II 9:19-22. Ruling: ACCEPTED AND INCORPORATED. 27.

Carnes spoke with Foster on a daily basis. EC-EX-069 at 22:19-24; EC-EX-068 at 35:15-17.

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Ruling: ACCEPTED AND INCORPORATED. 28.

Carnes met with Foster "a few times a week" about Integrity Advance business. EC-EX-068 at 35:18-21.

Ruling: ACCEPTED AND INCORPORATED. 29.

Foster spoke to Carnes if there "was a significant problem" with Integrity Advance. Tr. I 215:5-18.

Ruling: ACCEPTED AND INCORPORATED. 30.

. Carnes set Foster's salary. Tr. II 9:17-18. Ruling: ACCEPTED AND INCORPORATED. 31.

Carnes made the final decision to hire all Integrity Advance employees. EC-EX- 068 at 40:24-25; EC-EX-069 at 22:17-18. Ruling: ACCEPTED AND INCORPORATED. 32.

Carnes directly hired Foster. Tr. I 96: 15-16. Ruling: ACCEPTED AND INCORPORATED. 33.

Carnes and Foster together hired Madsen. Tr. I 98:4-6. Ruling: ACCEPTED AND INCORPORATED. 34. · Carnes and Foster together hired Stephanie Schaller, Integrity Advance's Vice President of Decision Science. Tr. I 98:17-20. Ruling: ACCEPTED AND INCORPORATED. 35.

Carnes directly hired George Davis, the Delaware Office Manager. Tr. I 98:24- 99:1.

Ruling:ACCEPTED AND INCORPORATED. 36.

· Carnes directly hired Hassan Shahin, Integrity Advance's Vice President of Technology. Tr. I 99:6-7.

Ruling: ACCEPTED AND INCORPORATED. 37.

Carnes and Foster together hired Mark Rondeau, Integrity Advance's Director of IT Operations. Tr. I 99:15-18. Ruling: ACCEPTED AND INCORPORATED. 38.

Carnes worked in the office with other Integrity Advance executives on a daily basis. EC- EX-068 at 32:2-3; Tr. I 29:24 - 30:1; Tr. I 74:13-17. Ruling: ACCEPTED AND INCORPORATED. 39.

Carnes had an open door policy and was accessible to any Integrity Advance employee who wanted to talk to him. EC-EX-068 at 37:11-13; Tr. I 213:10-12; Tr. II 74:6-8.

Ruling: ACCEPTED AND INCORPORATED. Xl 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 92 of 130

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40.

Carnes spoke to Madsen, the Vice President of Marketing for Integrity Advance, about "the behavior of the lead purchase systems that we had in place, how well they were performing, our different partners, and any adjustments that we need to make sure that it backed out for us what it needed to from a business perspective." Tr. I 31:11-16.

Ruling: ACCEPTED AND INCORPORATED.

41.

The adjustments that Carnes spoke to Madsen about included how much Integrity Advance would pay for a lead and whether the company needed to change its underwriting model in order to purchase more leads. Tr. I 31 :19-23. Ruling: ACCEPTED AND INCORPORATED.

42.

Madsen and Carnes discussed "lead volume conversion rates, long-term performance of any particular sources that we had" as well as default rates. Tr. I 47:13-21.

Ruling: ACCEPTED AND INCORPORATED.

43.

Carnes was knowledgeable about the factors that influenced the price of a lead, such as whether it was a 'first look lead,' "where the lead came to you as a lender first before it went to any other lender" (Tr. I 119:15-19); whether a consumer had direct deposit of her paycheck (Tr. I 121 :15-17); or whether the consumer's account was a savings account versus a checking account (Tr. I 122:16-18). Ruling: ACCEPTED AND INCORPORATED.

44.

Carnes ultimately made the call on what Integrity Advance would pay for a lead. Tr. I 35:1- 6; Tr. I 32:10-14.

Ruling: ACCEPTED AND INCORPORATED.

45.

Madsen had to consult with Carnes about changes in the credit scores Integrity . Advance would accept from its customers if they departed by more than a couple of points from set parameters. Tr. I 33:15-21. Ruling: ACCEPTED AND INCORPORATED.

46.

Integrity Advance had a system, called the dashboard, which it used to monitor the performance of leads. Tr. I 45:13-19.

Ruling: ACCEPTED AND INCORPORATED.

47.

Sometimes Carnes reported results from the dashboard to Madsen, and sometimes Madsen reported resulted from the dashboard to Carnes. Tr. I 48:16-49:1; Tr. I 68:20-22.

Ruling: ACCEPTED AND INCORPORATED.

48.

Carnes was the main decision-maker regarding Integrity Advance' s underwriting policies. EC-EX-069 at 22:17-18; Tr. I 59:18-25. Ruling: ACCEPTED AND INCORPORATED.

49.

Bruce Andonian (Andonian) worked for Integrity Advance as its Director of Software Development. Tr. I 70:10-13.

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Ruling: ACCEPTED AND INCORPORATED.

50.

Andonian worked for Integrity Advance from February 2011 through May of 2013. Tr. I 71 :2-5.

Ruling: ACCEPTED AND INCORPORATED.

51.

Carnes would direct Andonian to make changes in Integrity Advance's website to reflect adjustments in the credit score that the company would accept from its potential customers. Tr. I 77:19 -78:5. Ruling: ACCEPTED AND INCORPORATED.

52.

Carnes spoke to Andonian when "something wasn't working properly. So it was if the database was running slow or ifwe weren't accepting leads or the conversion rate was low and there would be an in investigation on why that was happening." Tr. I 75:7-12; Tr. I 216:2-9. Ruling: ACCEPTED AND INCORPORATED.

53.

Carnes would direct Andonian to remove states from Integrity Advance's website. Tr. I 77:1- 3.

Ruling: ACCEPTED AND INCORPORATED.

54.

Carnes held weekly meetings in his office with Foster, Andonian, and a project manager in which they discussed Integrity Advance IT issues. Tr. I 75:16-76:1. Ruling: ACCEPTED AND INCORPORATED.

55.

Carnes ran the weekly IT meetings. Tr. I 76:2-3. Ruling: ACCEPTED AND INCORPORATED.

56.

"Most of the time" Carnes set the priorities for the tasks that were addressed at the weekly IT meetings. Tr. I 76:2-13.

Ruling: ACCEPTED AND INCORPORATED.

57.

Carnes had final say over what appeared on the company's website. EC-EX-068 at 41:1-6; Tr. I 217:1-8.

Ruling: ACCEPTED AND INCORPORATED.

58.

Carnes ran the monthly meetings where all of the employees who did work for Integrity Advance would discuss Integrity Advance as well as other companies owned by Hayfield. Tr. I 78:10-80:12.

Ruling: ACCEPTED AND INCORPORATED.

59.

As chief executive, Carnes had the authority to make all decisions governing Integrity Advance's policies and procedures. Tr. I 209:1-11; EC-EX-068 at 32:15- 17.

Ruling: ACCEPTED AND INCORPORATED.

60.

Carnes "had ultimate authority over [Integrity Advance] and making sure that it complied with the Delaware law." Tr. I 221 :24-222:1. xiii 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 94 of 130

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Ruling: ACCEPTED AND INCORPORATED. 61.

Carnes was the primary decision maker at Integrity Advance. Tr. I 51 :4-7; Tr. I 82:2-4.

Ruling: ACCEPTED AND INCORPORATED. 62.

Carnes was a director and officer of Integrity Advance charged with managerial responsibility for the company. EC-EX-068 at 32:15-17; Tr. I 209:9-11. Ruling: ACCEPTED AND INCORPORATED. 63.

Carnes's role as primary decision maker at Integrity Advance did not change from 2008 until the EZ Corp. sale. Tr. I 51:4-15; Tr. I 28:9-29:12. Ruling: ACCEPTED AND INCORPORATED. 64.

Carnes signed a contract with a debt collection vendor on behalf oflntegrity Advance. EC- EX-085: Tr. I 129:22 -130:11. Ruling: ACCEPTED AND INCORPORATED. 65.

Carnes was the signatory on the lead purchase agreement between Integrity Advance and T3 Leads. EC-EX-053; Tr. I 122:22-123:14. Ruling: ACCEPTED AND INCORPORATED. 66.

Carnes was the signatory on the lead purchase agreement between Integrity Advance and Partner Weekly. EC-EX-054; Tr. I 126:17 -127:13. Ruling: ACCEPTED AND INCORPORATED. 67.

Carnes was the signatory on the ACH origination agreement between MoneyGram and Integrity Advance. EC-EX-056. Ruling: ACCEPTED AND INCORPORATED. 68.

Carnes was an authorized signatory for the bank account used by Integrity Advance. EC-EX- 055; Tr. I 141 :16-20. Ruling: ACCEPTED AND INCORPORATED. 69.

Carnes had communications with the call centers used by Integrity Advance. Tr. I 64:3-6.

Ruling: ACCEPTED AND INCORPORATED. 70.

Carnes analyzed call logs from the call centers used by Integrity Advance. EC­ EX-088; Tr. I 179:18 -180:1.

Ruling: ACCEPTED AND INCORPORATED. 71.

Carnes was involved in the decision to move Integrity Advance's business from one call center to another. Tr. I 64:13-19. Ruling: ACCEPTED AND INCORPORATED. 72.

Invoices from ClearVox, LLC, a call center used by Integrity Advance, were directed to Carnes's attention. EC-EX-057; EC-EX-058. xiv 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 95 of 130

Page 97

Ruling: ACCEPTED AND INCORPORATED.

73.

When a call center used by Integrity Advance had an employee who was allegedly committing fraud, Carnes directed the resolution of the problem. EC­ EX-087; Tr. I 177:3- 178:3.

Ruling: ACCEPTED AND INCORPORATED.

74.

Integrity Advance made loans to consumers. Tr. I 94:14-18. Those loans were the sole source oflntegrity Advance revenues and operating profits. Tr. I 94:14- 95:8.

Ruling: ACCEPTED AND INCORPORATED.

75.

Integrity Advance did not offer any products other than consumer loans. Tr. I 94:19-22.

Ruling: ACCEPTED AND INCORPORATED.

76.

The fees that Integrity Advance charged its customers did not change over time. Tr. II 15:24- 25; Tr. II 48:14-22.

Ruling: ACCEPTED AND INCORPORATED.

77.

When Integrity Advance's loan agreement template was created and first used in 2008, only four people worked for Integrity Advance. Tr. I 230:25 - 231 :5; Tr. I 53:19- 54:23.

Ruling: ACCEPTED AND INCORPORATED.

78.

In addition to Carnes, the other Integrity Advance employees in 2008 were Edward Foster, the Executive Vice President and General Counsel, Hassan Shahin, the Vice President of Technology, and a receptionist. Tr. I 53:19- 54:23; see also EC-EX-065.

Ruling: ACCEPTED AND INCORPORATED.

79.

As the chief executive, Carnes was ultimately responsible for approving everything related to Integrity Advance's business when the loan agreement was created and first used in 2008. Tr. I 228:8-11. Ruling: ACCEPTED AND INCORPORATED.

80.

Integrity Advance's loan agreement did not change significantly between 2008 and 2013. Tr. II 38:20-39:1; EC-EX-061; EC-EX-063. Ruling: ACCEPTED AND INCORPORATED.

81.

Carnes understood how Integrity Advance's loans worked when he was CEO of Integrity Advance, testifying, "Sure it was our product." Tr. I 220: 12. Ruling: ACCEPTED AND INCORPORATED.

82.

Carnes knew that for a "fictional consumer ... who had $100 loan ... their TILA disclosure would say $130." Tr. II 50:21 - 51 :3. Ruling: ACCEPTED AND INCORPORATED.

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83.

Carnes knew that if a consumer "didn't call or email, and it was their first payment, [the loan] ... would be renewed." Tr. I 219:13-20; EC-EX-068 at 227. Ruling: ACCEPTED AND INCORPORATED.

84.

Carnes knew that if the consumer did nothing on the next payday, the Joan would be renewed again. Tr. I 219:21-23.

Ruling: ACCEPTED AND INCORPORATED.

85.

Carnes knew that an Integrity Advance loan would rollover four times before it went to workout. Tr. I 219:24 -220:3.

Ruling: ACCEPTED AND INCORPORATED.

86.

Carnes understood that about ninety percent oflntegrity Advance's loans experienced at least one rollover. Tr. I 222:17-20. Ruling: ACCEPTED AND INCORPORATED.

87.

Carnes understood that most Integrity Advance consumers would experience at least one rollover. Tr. 219:11 - 222:20.

Ruling: ACCEPTED AND INCORPORATED.

88.

Carnes understood that consumers who had the loans rolled over would pay more than what had been disclosed in their TILA disclosures. EC-EX-068 at 245:10-25. Ruling: ACCEPTED AND INCORPORATED.

89.

Carnes understood that consumers who did not contact the company would have their Joans renewed repeatedly, which would result in much higher costs than what had been disclosed. Tr. 219:13 -220:3. Ruling: ACCEPTED AND INCORPORATED.

90.

Carnes had the authority to change Integrity Advance's fee structure. Tr. II 49:15- 18.

Ruling: ACCEPTED AND INCORPORATED.

91.

Carnes testified that he "possibly" saw an Integrity Advance loan agreement in 2008 when the company was being formed and started loaning. Tr. I 226:9-14. Ruling: ACCEPTED AND INCORPORATED.

92.

Carnes's attorneys had his approval to use the loan agreement. Tr. I 232:7-12. Ruling: ACCEPTED AND INCORPORATED.

93.

Based on an assessment of all the evidence in the record and of the credibility of the witnesses who testified, Carnes approved Integrity Advance's use of its loan agreement. Tr. I 228:6-9; Tr. II 96:2-14.

Ruling: ACCEPTED AND INCORPORATED.

94.

The Delaware Office of the State Bank Commissioner's Licensing Office (Delaware Commissioner) does not approve the loan contracts that non­ depository lenders use with their customers. Tr. III 126: 19-24. xvi 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 97 of 130

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Ruling: ACCEPTED AND INCORPORATED.

95.

From 2008-2013, the Delaware Commissioner did not require the use of particular loan agreements between non-depository lenders and their customers. Tr. III 148:2-6.

Ruling: ACCEPTED AND INCORPORATED.

96.

From 2008-2013, the Delaware Commissioner did not review changes to a loan application that a non-depository lender used with its customers. Tr. III 131 :8-15. Ruling: ACCEPTED AND INCORPORATED.

97.

From 2008-2013, the Delaware Commissioner did no.t set the fees that non­ depository lenders could charge their customers. Tr. III 148:12-14. Ruling: ACCEPTED AND INCORPORATED.

98.

From 2008-2013, the Delaware Commissioner did not require non-depository lenders to automatically roll over their customers' loans. Tr. III 145 :24 -146:2. Ruling: ACCEPTED AND INCORPORATED.

99.

From 2008-2013, the Delaware Commissioner did not require short.term lenders to offer the option ofrollovers. Tr. III 146:7-10. Ruling: ACCEPTED AND INCORPORATED.

100.

The Delaware Commissioner "permitted [rollovers], we didn't prohibit it in the statute, nor did we require it." Tr. III 147:16-18. Ruling: ACCEPTED AND INCORPORATED.

101.

From 2008-2013, the Delaware Commissioner did not review non-depository lenders' loan agreements for compliance with the Electronic Funds Transfer Act. Tr. III 149:1-3.

Ruling: ACCEPTED AND INCORPORATED.

102.

From 2008-2013, the Delaware Commissioner's review of Truth in Lending compliance for non-depository lenders consisted of determining whether there was a separate Truth in Lending box in the loan agreement (Tr. III 150:24 - 151 :2), and checking the lenders' calculations of the APR in the Truth in Lending box to determine if it was mathematically correct (Tr. III 153:5-6). Ruling: ACCEPTED AND INCORPORATED.

103.

The Delaware Commissioner has never denied a non-depository lender's application for a license. Tr. III 144:23 -145:1. Ruling: ACCEPTED AND INCORPORATED.

104.

The Delaware Commissioner has never denied the renewal of a non-depository lender's license. Tr. III 129:25 -130:10.

Ruling: ACCEPTED AND INCORPORATED.

105.

The Delaware Commissioner has only revoked a non-depository lender's license xvii 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 98 of 130

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when its surety bond was "cancelled and not resolved by the licensee within the time limit." Tr. III 132:14-15.

Ruling: ACCEPTED AND INCORPORATED.

106.

Integrity Advance's ACH agreement contained a provision that allowed the company to execute remotely created checks on its customers' bank accounts. EC-EX-001-014; EC-EX- 063.

Ruling: ACCEPTED AND INCORPORATED.

107.

The ACH agreement stated "[i]fyou revoke your authorization, you agree to provide us with another form of payment acceptable to us and you authorize us to prepare and submit one or more checks drawn on Your Bank Account so long as amounts are owed to us under the Loan Agreement." EC-EX-001-014; EC-EX- 063.

Ruling: ACCEPTED AND INCORPORATED.

108.

The remotely created check provision appeared only once in the loan agreement on approximately page 9, at the end of a paragraph, in the middle of the ACH authorization section. EC-EX-001-014; EC-EX-063. Ruling: ACCEPTED AND INCORPORATED.

109.

The remotely created check provision was not emphasized by any balded, underlined, capitalized, or enlarged font. EC-EX-001-014; EC-EX-063. Ruling: ACCEPTED AND INCORPORATED.

110.

Integrity Advance did not require consumers to sign or initial the remotely created check provision separately. EC-EX-001-014; EC-EX-063. Ruling: ACCEPTED AND INCORPORATED.

111.

The remotely created check provision made no explicit mention of remotely created checks and did not state that the checks to be drawn on a consumer's bank account did not have to be signed by the consumer. EC-EX-001-014; EC-EX-063. Ruling: ACCEPTED AND INCORPORATED.

112.

The remotely created check provision did not state that the checks to be drawn on a consumer's bank account could be submitted'without prior warning to the consumer. EC- EX-001-014; EC-EX-063.

Ruling: ACCEPTED AND INCORPORATED.

113.

Integrity Advance used remotely created checks to withdraw funds from consumers' bank accounts after consumers had revoked the company's authorization to electronically debit their accounts using the ACH network or stopped ACH withdrawals made by the company, and after those consumers had already paid over the disclosed "Total of Payments." Tr. II 84:6-11; Tr. II 84:25 - 85:2; 142:15 -148:4; 152:15 -153:11; Tr. I 235:19-236:3; EC-EX-072 at ,r,r9- 11; EC-EX-97; see also EC-EX-95; EC-EX-101.

Ruling: ACCEPTED AND INCORPORATED.

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114.

Integrity Advance continued to attempt to use remotely created checks on consumers who had revoked the company's ACH authorization or stopped ACH debits by Integrity Advance even after consumers' bank accounts had insufficient funds. Tr. II 142:15-148:4; EC-EX- 097; EC-EX-100; see also EC-EX-95; EC­ EX-101.

Ruling: ACCEPTED AND INCORPORATED.

115.

Integrity Advance used remotely created checks 3,545 times on consumers who had revoked ACH authorization to withdraw funds from their accounts or stopped ACH withdrawals by Integrity Advance. Tr. II 149:4-9, 14-16; EC-EX-097; see also EC-EX-95; EC-EX-101.

Ruling: ACCEPTED AND INCORPORATED._ 116.

Integrity Advance used remotely created checks 1,271 times on or after July 21, 2011, on consumers who had revoked ACH authorization to withdraw funds from their accounts or stopped ACH withdrawals by Integrity Advance. Tr. II 150:24- 151 :3; EC-EX-097; see also EC-EX-95; EC-EX-101. Ruling: ACCEPTED AND INCORPORATED.

117.

Integrity Advance used remotely created checks 1,826 times on consumers who had revoked ACH authorization or stopped ACH withdrawals by Integrity Advance and who had already paid an amount equal to the "Total of Payments" in the TILA box in the consumers' loan agreements. Tr. II 149:4-9, 19-22; EC-EX- 097; see also EC-EX-95; EC- EX-101.

Ruling: ACCEPTED AND INCORPORATED.

118.

Integrity Advance used remotely created checks 602 times on or after July 21, 2011, on consumers who had revoked or stopped their authorization for Integrity Advance to withdraw funds from their accounts and who had already paid an amount equal to the "Total of Payments" in the TILA box in the consumers' loan agreements. Tr. II 151 :6-11; EC-EX- 097; see also EC-EX-95; EC-EX-101. Ruling: ACCEPTED AND INCORPORATED.

119.

Carnes knew that Integrity Advance used remotely created checks to withdraw money from the accounts of some of the consumers who had withdrawn ACH authorization. EC-EX-068 at 219:7-18; Tr. II 84:6- 85:11. Ruling: ACCEPTED AND INCORPORATED.

120.

Carnes saw remotely created checks printed using a printer in the Kansas City office. Tr. I 236:10-11, Tr. I 236:20-22.

Ruling: ACCEPTED AND INCORPORATED.

121.

Carnes testified that Integrity Advance printed remotely created checks on a weekly basis and regularly used remotely created checks to collect consumer debt. Tr. I 235:24-236:15.

Ruling: ACCEPTED AND INCORPORATED.

122.

From May 2008 through July 2013, Integrity Advance obtained $132,580,041.06 XIX 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 100 of 130

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more from its consumers than the amount disclosed in the "Total of Payments" boxes in their TILA disclosures, excluding all payments denoted as refunds or rebates. Attch. A, Hughes Deel. ,r 8; see also EC-EX-101. Ruling: ACCEPTED AND INCORPORATED. However, the Bureau may not seek relief for pre-transfer date TILA violations. 123.

From May 2008 through July 2013, Integrity Advance obtained $131,433,343.47 more from its consumers than the amount disclosed in the "Total of Payments" box in their TILA disclosures, excluding all fees charged by Integrity Advance and payments denoted as refunds or rebates. Attch. A, Hughes Deel. ,r 18; see also EC-EX-101.

Ruling: ACCEPTED AND INCORPORATED. However, the Bureau may not seek relief for pre-transfer date TILA violations. 124.

Loans where the first transaction occurred on or after August 13, 2011 originated on or after July 21, 2011. Tr. III 37:1-38:6; Tr. II 128:13-129:19. Ruling: ACCEPTED AND INCORPORATED.

125.. For loans originated on or after July 21, 2011, Integrity Advance obtained $38,453,341.62 more from its consumers than the amount disclosed in the "Total of Payments" box in their TILA disclosures, excluding all payments denoted as refunds or rebates. Attch. A, Hughes Deel. ,r 8a; see also EC-EX-101. Ruling: ACCEPTED AND INCORPORATED.

126.

On loans originated on or after July 21, 2011, Integrity Advance obtained $38,164,153.31 more from its consum(;)rs than the amount disclosed in the "Total of Payments" box in their TILA disclosures, excluding all fees charged by Integrity Advance and payments denoted as refunds or rebates. Attch. A, Hughes Deel. ,r 18a; see also EC-EX-101.

Ruling: ACCEPTED AND INCORPORATED.

127.

On or after July 21, 2011, Integrity Advance used remotely created checks to obtain $115,024.50, excluding all payments denoted as refunds or rebates, from consumers who had revoked or stopped their authorization for Integrity Advance to withdraw funds from their accounts after having paid an amount equal to the "Total of Payments" in the TILA box in the consumers' loan agreements. Attch. A, Hughes Deel. ,r 9a; EC-EX-097; Tr. II 152:15 - 153 :1; see also EC-EX-095; EC-EX-101.

Ruling: ACCEPTED AND INCORPORATED.

128.

On or after July 21, 2011, Integrity Advance used remotely created checks to obtain $103,623.00, excluding all fees charged by Integrity Advance and payments denoted as refunds or rebates, from consumers who had revoked or stopped their authorization for Integrity Advance to withdraw funds from their accounts after having paid an amount equal to the "Total of Payments" in the TILA box in the consumers' loan agreements. Attch. A, Hughes Deel. ,r 19a; EC­ EX-097; Tr. II 152:15 - 153:1; see also EC-EX-095; EC-EX-101. xx 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 101 of 130

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Ruling: ACCEPTED AND INCORPORATED.

129.

For all first-time loans from May 2008 through July 2013, Integrity Advance obtained $69,232,170.39 more from its consumers than the amount disclosed in the "Total of Payments" box in their TILA disclosures, excluding all payments denoted as refunds or rebates. Attch. A, Hughes Deel. ,r 11; see also EC-EX-101. Ruling: ACCEPTED AND INCORPORATED.

130.

For all first-time loans from May 2008 through July 2013, Integrity Advance obtained $68,477,934.28 more from its consumers than the amount disclosed in the "Total of Payments" box in their TILA disclosures, excluding all fees charged by Integrity Advance and all payments denoted as refunds or rebates. Attch. A, Hughes Deel. ,r 21; see also EC- EX-101.

Ruling: ACCEPTED AND INCORPORATED.

131.

For all first-time loans originated on or after July 21, 2011, Integrity Advance obtained $12,141,593.76 more from its consumers than the amount disclosed in the "Total of Payments" box in their TILA disclosures, excluding all payments denoted as refunds or rebates. Attch. A, Hughes Deel. ,r 11 a; see also EC-EX-101. Ruling: ACCEPTED AND INCORPORATED.

132.

For all first-time loans originated on or after July 21, 2011, Integrity Advance obtained $11,999,322.85 more from its consumers than the amount disclosed in the "Total of Payments" box in their TILA disclosures, excluding all fees charged by Integrity Advance and all payments denoted as refunds or rebates. Attch. A, Hughes Deel. ,r 21a; see also EC- EX-101.

Ruling: ACCEPTED AND INCORPORATED.

133.

For all one-time loans from May 2008 through July 2013, Integrity Advance obtained $39,734,832.39 more from its consumers than the amount disclosed in the "Total of Payments" box in their TILA disclosures, excluding all payments denoted as refunds or rebates. Attch. A, Hughes Deel. ,r 13; see also EC-EX-101. Ruling: ACCEPTED AND INCORPORATED.

134.

For all one-time loans from May 2008 through July 2013, Integrity Advance obtained $39,105,182.12 more from its consumers than the amount disclosed in the "Total of Payments" box in their TILA disclosures, excluding all fees charged by Integrity Advance and all payments denoted as refunds or rebates. Attch. A, Hughes Deel. ,r 23; see also EC- EX-101.

Ruling: ACCEPTED AND INCORPORATED.

135.

For all one-time loans originated on or after July 21, 2011, Integrity Advance obtained $8,934,859.59 more from its consumers than the amount disclosed in the "Total of Payments" box in their TILA disclosures, excluding all payments denoted as refunds or rebates. Attch. A, Hughes Deel. ,r 13a; see also EC-EX-101. Ruling: ACCEPTED AND INCORPORATED.

136.

For all one-time loans originated on or after July 21, 2011, Integrity Advance XXl 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 102 of 130

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obtained $8,807,265.56 more from its consumers than the amount disclosed in the "Total of Payments" box in their TILA disclosures, excluding all fees charged by Integrity Advance and all payments denoted as refunds or rebates. Attch. A, Hughes Deel. ,r 23a; see also EC- EX-101.

Ruling: ACCEPTED AND INCORPORATED.

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APPENDIXC:

RULINGS ON THE BUREAU'S PROPOSED CONCLUSIONS OF LAW 1.

As the chief executive in charge of Integrity Advance, Carq_es is a related person under the Consumer Financial Protection Act (CFPA). 12 U.S.C. § 5481(25)(C)(i).

Ruling: ACCEPTED AND INCORPORATED.

2.

As the ultimate majority owner of Integrity Advance, Carnes is a related person under the CFPA. 12 U.S.C. § 5481(25)(C)(i).

Ruling: ACCEPTED AND INCORPORATED.

3.

As a related person, Carnes is a covered person under the CFPA. 12 U.S.C. § 5481 (25)(B).

Ruling: ACCEPTED AND INCORPORATED.

4.

A covered person can be held liable for an unfair or deceptive act or practice when he "engages" in that practice. 12 U.S.C. § 5536(a)((l)(B) ("It shall be unlawful for-(1) any covered person or service provider-(B) to engage in any unfair, deceptive, or abusive act or practice."). Ruling: ACCEPTED AND INCORPORATED.

5.

A covered person engages in a deceptive practice when "(1) he participated directly in the deceptive acts or had authority to control them, and (2) he had knowledge of the misrepresentations, was recklessly indifferent to the truth or falsity of the misrepresentations, or was aware of a high probability. of fraud along with an intentional avoidance of the truth." CFPB v. Gordon, 819 F.3d 1179, 1193 (9th Cir. 2016) (emphasis in original) (quoting F.T.C. v. Stefanchik, 559 F.3d 924,931 (9th Cir. 2009)).

Ruling: ACCEPTED AND INCORPORATED.

6.

By virtue of his direct control over all Integrity Advance operations, policies, and procedures, Carnes participated directly in Integrity Advance's use of a facially deceptive loan agreement.

Ruling: ACCEPTED AND INCORPORATED.

7.

By virtue of his position of CEO oflntegrity Advance, Mr. Carnes controlled all management decisions. As such, he either approved or had his subordinates approve the company's loan agreement template. Mr. Carnes participated directly in Integrity Advance's use of a facially deceptive loan agreement. Ruling: ACCEPTED AND INCORPORATED AS MODIFIED.

8.

Carnes exercised authority over Integrity Advance and had authority to control the company's actions, including the use of the facially deceptive loan agreement. Ruling: ACCEPTED AND INCORPORATED.

9.

Carnes knew or should have known that the Integrity Advance loan agreement xxm 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 104 of 130

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misrepresented the loans that consumers had accepted. Ruling: ACCEPTED AND INCORPORATED AS MODIFIED. 10.

Carnes knew that Integrity Advance disclosed the terms of a multi-payment payday loan as if the loan were a single-payment loan. Ruling: ACCEPTED AND INCORPORATED.

11.

In light of his knowledge, Carnes was "recklessly indifferent to the truth or falsity of the misrepresentations[.]" CFPB v. Gordon, 819 F.3d at 1193. Ruling: ACCEPTED AND INCORPORATED.

12.

Based on an assessment of all the evidence in the record and of the credibility of the witnesses who testified, Carnes engaged in deceptive acts in violation of the CFPA.

Ruling: ACCEPTED AND INCORPORATED.

13.

An act or practice is "unfair" if it "causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers" and that "substantial injury is not outweighed by countervailing benefits to consumers or to competition." 12 U.S.C. § 5531(c).

Ruling: ACCEPTED AND INCORPORATED.

14.

Integrity Advance used remotely created checks against consumers when those consumers had blocked electronic access to their accounts, even when those · consumers had satisfied the amount disclosed as the "Total of Payments" in their loan agreement.

Ruling: ACCEPTED AND INCORPORATED.

15.

The language in the Integrity Advance loan agreement which allegedly authorized Respondents' use ofremotely created checks was not clear and conspicuous. Ruling: ACCEPTED AND INCORPORATED.

16.

The language in the Integrity Advance loan agreement which allegedly authorized Respondents' use of remotely created checks did not adequately inform consumers of the rights it conferred upon Integrity Advance. Ruling: ACCEPTED AND INCORPORATED.

17.

Respondents' use ofremotely created checks caused substantial injury to consumers.

Ruling: ACCEPTED AND INCORPORATED.

18.

The injury caused to consumers by Respondents' use of remotely created checks was not reasonably avoidable.

Ruling: ACCEPTED AND INCORPORATED.

19.

The injury caused to consumers by Integrity Advance's use ofremotely created checks was not outweighed by countervailing benefits to consumers or to competition.

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Ruling: ACCEPTED AND INCORPORATED.

20.

Based on an assessment of all the evidence in the record and of the credibility of the witnesses who testified, Integrity Advance's use of remotely created checks was unfair.

Ruling: ACCEPTED AND INCORPORATED.

21.

By virtue of his direct control over all Integrity Advance operations, policies, and procedures, Carnes participated directly in Integrity Advance's use ofremotely created checks.

Ruling: ACCEPTED AND INCORPORATED.

22.

By virtues of his role of the chief executive oflntegrity Advance, Carnes had authority to control the company's use of remotely created checks. Ruling: ACCEPTED AND INCORPORATED.

23.

Carnes knew that Integrity Advance employed remotely created checks when customers had satisfied the "Total of Payments" in their loan agreements and revoked their ACH authorizations.

Ruling: ACCEPTED AND INCORPORATED.

24.

Based on an assessment of all the evidence in the record and of the credibility of the witnesses who testified, Carnes engaged in unfair acts in violation of the CFPA.

Ruling: ACCEPTED AND INCORPORATED.

25.

The Administrative Law Judge has authority to grant broad relief in this matter, including monetary restitution and civil money penalties. 12 U.S.C. § 5565. Ruling: ACCEPTED AND INCORPORATED.

26.

Restitution in this;matter shall be determined using Enforcement Counsel's proposed methodology of calculating the amount, if any, that each Integrity Advance consumer paid in excess of the amount disclosed in the "Total of Payments" boxes in the TILA disclosures in their loan agreements, excluding all payments denoted as refunds or rebates.

Ruling: ACCEPTED IN PART. I have generally accepted Enforcement Counsel'.s proposed methodology, but have recalculated certain amounts as described more fully in the Recommended Decision. 27.

Restitution in this matter shall include the amounts of any fees collected by· Integrity Advance.

Ruling: REJECTED for the reasons described more fully herein. 28.

Payments collected from consumers who had more than one loan with Integrity Advance shall not be excluded from the restitution calculation. Ruling: ACCEPTED AND INCORPORATED.

29.

Respondent Integrity Advance, LLC is liable for restitution for payments XXV 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 106 of 130

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collected between May 2008 through July 2013.

Ruling: REJECTED for the reasons described more fully in the Recommended Decision. Restitution is available only for payments collected on loans originated after July 21, 2011.

30.

Respondent James R. Carnes is liable for restitution for payments collected on loans that originated on or after July 21, 2011. Ruling: ACCEPTED AND INCORPORATED.

31.

Based on the violations of law found herein as well as those violations found in the Order Granting in Part and Denying in Part Bureau's Motion for Summary Disposition and Denying Respondents' Motion for Summary Disposition, Respondent Integrity Advance, LLC is liable for restitution in the amount of $132,580,041.06, which includes all payments made from May 2008 through July 2013 that were in excess of the "Total of Payments" boxes in the TILA disclosures in the relevant loan agreements, excluding all payments denoted as refunds or rebates but including all fees charged and appropriate payments by consumers who had more than one loan with Integrity Advance, LLC. Ruling: REJECTED. As described more fully in the Recommended Decision, the proper scope of restitution is the payments collected on loans originated after July 21, 2011 which exceeded the "total of payments." 32.

Based on the violations of law found herein, Respondent James R. Carnes is liable for restitution in the amount of $38,164,153.31, which includes all payments made on loans that were in excess of the "Total of Payments" boxes in the TILA disclosures in the relevant loan agreements, excluding all payments denoted as refunds or rebates but including all fees charged and appropriate payments by· consumers who had more than one loan with Integrity Advance, LLC, for loans where the first payment was made on or after August 13, 2011. Ruling: ACCEPTED AND INCORPORATED AS MODIFIED. 33.

Carnes' s violations of the consumer financial laws warrant the imposition of a civil money penalty.

Ruling: ACCEPTED AND INCORPORATED.

34.

Integrity Advance's violations of the consumer financial laws warrant the imposition of a civil money penalty.

Ruling: ACCEPTED AND INCORPORATED.

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APPENDIXD:

RULINGS ON RESPONDENTS' PROPOSED FINDINGS OFF ACT Respondents' Proposed Findings of Fact and Conclusions of Law contained footnotes. I have incorporated certain footnotes as individual findings of fact herein, and the numbering is therefore different than in the original. Specifically, footnote 1 is now Finding of Fact 12; footnote 2 is now Finding of Fact 18; footnote 3 is now Finding of Fact 21; footnote 4 is now Finding of Fact 48; footnote 5 is now Finding of Fact 59; footnote 6 is now Finding of Fact 81; and footnote 7 is now Finding of Fact 102. 1.

Integrity Advance, LLC was a Delaware licensed, short-term, small-dollar lender. See Hr'g Tr. I-93:25 -I-94:2; RX-007 -RX-014.

Ruling: ACCEPTED AND INCORPORATED.

2.

Integrity Advance was formed on July 2, 2007. RX-007. Integrity Advance is a subsidiary company to Hayfield Investment Partners ("HIP"). Id. at I-100:14-17. Ruling: ACCEPTED AND INCORPORATED.

3.

EZ Corp. purchased a set of assets from HIP in December of 2012. Id. at I- 238:9- 11. EZ Corp. did not purchase Integrity Advance, id at I-237:19-21, but did purchase a partial customer list from the Company, id at I-237:22- I-238:13. Ruling: ACCEPTED AND INCORPORATED.

4.

Integrity Advance ceased offering loans in December 2012. Dkt. 111, Order Granting In Part and Denying In Part Bureau's Mot. for Sum. Disp. and Denying Respondents' Mot. for Sum. Disp. at 5; Hr'g Tr. II-92:8-9. Ruling: ACCEPTED AND INCORPORATED.

5.

On November 18, 2015, Enforcement Counsel filed a Notice of Charges ("Notice") against Respondents Integrity Advance and James R. Carnes. Dkt. 1. Ruling: ACCEPTED AND INCORPORATED.

6.

The Notice claims violations against Integrity Advance solely of the Truth-in­ Lending Act ("TILA") (Count One); the Electronic Fund Transfer Act ("EFTA") (Count Five); and corresponding violations of the Consumer Financial Protection Act ("CFPA") (Counts Two and Six).

Ruling: ACCEPTED AND INCORPORATED AS AMENDED.

7.

The Notice claims violations against Integrity Advance and Mr. Carnes, of the CFPA for deceptive loan agreement disclosures (Count Three) and unfair use of remotely-created checks (Count Seven).

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Ruling: ACCEPTED AND INCORPORATED AS AMENDED. 8.

The Court granted Enforcement Counsel's Motion for Summary Disposition against Integrity Advance as to liability on Counts One, Two, Five, and Six. Id. at 44. The Court granted Enforcement Counsel's Motion for Summary Disposition as to liability on Count Three solely against Integrity Advance. Id. Ruling: ACCEPTED AND INCORPORATED AS AMENDED. 9.

On July 12, 2016, the Court granted Enforcement Counsel's stipulated Motion to Withdraw Count Four with prejudice. Dkt. 133, Order Granting Enforcement Counsel's Stipulated Motion to Withdraw Count IV with Prejudice Ruling: ACCEPTED AND INCORPORATED.

10.

Timothy Allen Madsen worked for HIP for approximately five years (2008-2013) as Vice President of Marketing. Id. at I-c7:10-14; 1-28:4-8, 1-29:6-8. Ruling: ACCEPTED AND INCORPORATED.

11.

Mr. Madsen's job was to purchase leads and manage relationships with lead providers for Integrity Advance, as well as manage leads internally and coordinate with Integrity Advance's call center regarding leads. Id. at 1-28:9-13, 24-25; id. at 1-29:1-5. As part of his duties, Mr. Madsen monitored lead acceptance, purchase rates, and conversion rates through a dashboard system. Id. at 1-45:13-25. Mr. Madsen coordinated interactions between Integrity Advance and its third party call center. Id. at 1-63:6-7.

Ruling: ACCEPTED AND INCORPORATED.

12.

The term "lead" refers to information relating to potential applicants for Integrity Advance loans. See id. at 1-116:6-23.

Ruling: ACCEPTED AND INCORPORATED.

13.

Mr. Madsen's job did not involve any aspect oflntegrity Advance's loan agreement. Id. at 1-67:7-20 ..

Ruling: ACCEPTED AND INCORPORATED.

14.

Mr. Madsen did not draft, edit, revise, or review Integrity Advance's loan agreement. See id. (stating that none of Mr. Madsen's job duties involved the loan agreement).

Ruling: ACCEPTED AND INCORPORATED.

15.

Mr. Madsen discussed conversion rates, performance of leads, first payment defaults, and, generally, lead generation with Mr. Carnes as part of his job duties. Id. at 1-67:1-6.

Ruling: ACCEPTED AND INCORPORATED.

16.

Mr. Madsen did not discuss Integrity Advance's loan agreement with Mr. Carnes. Id. at I-67 :21-24. Mr. Madsen similarly testified that he never discussed the language of loan disclosures with Mr. Carnes. Id. at 1-67 :25 - I-68: 1-6. Ruling: ACCEPTED AND INCORPORATED. However, this Finding does xxviii 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 109 of 130

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not preclude the fact that Mr. Carnes was the Chief Executive Officer. As such, he set the terms of the loan agreement, or at a minimum, had the authority to set or change its terms.

17.

Bruce Andonian worked for HIP for approximately two years (2011-2013) as Director of Software Development. Id. at I-70: 12-13, I-71 :5, I-75:11-12. Ruling: ACCEPTED AND INCORPORATED.

18.

Willowbrook Partners owns 50.3% of HIP. EC-EX-067. Willowbrook served as the manager for HIP. See Hr'g Tr. II-8:2-3.

Ruling: ACCEPTED AND INCORPORATED.

19.

Mr. Andonian reported directly to Mr. Foster, and ultimately to Mr. Carnes. Id. at I-72:5-6.

Ruling: ACCEPTED AND INCORPORATED.

20.

Mr. Andonian's job was to manage the software development team for HIP's Empower product. Id at I-83:7-8. Related to Integrity Advance, Mr. Andonian's job was to address issues with Integrity Advance's website and database. See id. at I-89:10-16. Mr. Andonian did not begin working on the Integrity Advance website until Mr. Foster asked him to fill in for another employee. Id. at I-84:3-6. In conjunction with his duties, Mr. Andonian attended weekly IT meetings to discuss the different products covered under the Willowbrook/HIP umbrella. Id. at I-75 :16-25 - I-76:1-17.

Ruling: ACCEPTED AND INCORPORATED.

21.

Integrity Advance was not the focus of the weekly IT meetings. Mr. Andonian testified that "there wasn't [sic] a lot oflntegrity Advance topics on our task list." Id. at I-76:21-22. In fact, Integrity Advance's business took up merely five minutes out of an hour-long monthly meeting, id. at I-85 :20-23 - equating to roughly two hours out of the total 4,000 hours that Mr. Andonian spent working on Willowbrook-related matters, id. at I-87:15-19 (representing 0.05% of Mr. Andonian's time at Willowbrook/HIP).

Ruling: REJECTED AS IRRELEVANT. See discussion of the required elements to prove that an individual is liable for corporate violations of the CFPA.

22.

Mr. Andonian did not draft, edit, revise, or review Integrity Advance's loan agreement. See id. at I-:87:24 - I-88:12.

RULING: ACCEPTED AND INCORPORATED. However, this Finding does not preclude the fact that Mr. Carnes was the Chief Executive Officer. As such, he set the terms of the loan agreement, or at a minimum, had the authority to set or change its terms. Also, see Ruling on Proposed Finding 21, above.

As part of his job duties, Mr. Andonian discussed with Mr. Carnes issues with Integrity Advance's website and database. Mr. Andonian testified that Mr. Carnes xxix 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 110 of 130

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would be involved with Integrity Advance issues when "[s]omething wasn't working properly." Id at I- 75:8-9. Mr. Andonian specified that he typically discussed issues regarding Integrity Advance's database with Mr. Carnes when "the data base was running slow or if we weren't accepting leads or the conversion rate was low .... " Id at I-75:7-12. Ruling: ACCEPTED AND INCORPORATED.

24.

Mr. Andonian did not discuss the language oflntegrity Advance's loan agreement, the disclosures in the loan agreement, edits, or revisions to the loan agreement or its disclosures, with Mr. Carnes. Id at I-87:24 - I-88:12. Ruling: ACCEPTED AND INCORPORATED as modified in the Ruling for Proposed Finding 16, above.

25.

Mr. Andonian did not discuss scripts used by call center representatives, or edits or revisions to such scripts, with Mr. Carnes. Id at I-88:13-21. Ruling: ACCEPTED AND INCORPORATED.

26.

Edward Foster worked for HIP as General Counsel, Executive Vice President, Secretary, and Assistance Treasurer. Id at II-7:24-II-8:4, II-8:10-12. In June of 2010, Mr. Foster also took on the role of Chief Operations Officer of HIP. Id at II-12:3-8.

Ruling: @CCEPTED AND INCORPORATED.

27.

Relating to Integrity Advance, prior to June of 2010, Mr. Foster's job was primarily to provide corporate legal counsel to the Company. Thereafter, Mr. Foster took on additional operational duties as the chief operations officer. Id at II-8: 13-15.

RULING: ACCEPTED AND INCORPORATED AS MODIFIED. Importantly, Respondents take the position neither Mr. Foster (as General Counsel) nor Mr. Carnes (as Chief Executive Officer) can discuss issues surrounding the terms of the loan agreement based on attorney-client privilege. Both Mr. Foster and Mr. Carnes testified that outside counsel prepared the loan agreement. Under this circumstance, they both invoked the privilege and would not discuss any matters pertinent to the setting of the terms of the loan agreement.

28.

Mr. Foster discussed all of the HIP subsidiaries with Mr. Carnes as part of his job duties. While Mr. Foster and Mr. Carnes discussed Integrity Advance more often towards the beginning of the business, the time spent on Integrity Advance matters eventually became "a very small percentage of the time spent on things." See id at II-10:2 - II-11 :11.

Ruling: ACCEPTED AND INCORPORATED. However, once the terms of the loan agreement were set, there would be little need to spend additional time on such discussions.

29.

Mr. Carnes worked for HIP as Chief Executive Officer. Id at I-94:7-12." Ruling: ACCEPTED AND INCORPORATED.

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30.

The evidence shows that Mr. Carnes' job focused on the external business aspects oflntegrity Advance, including business relationships with vendors and customer intake (i.e., lead generation and conversion), as well as troubleshooting high priority issues that rose to his attention. See supra ,i,i 12, 18; infra ,i,i 35-38 (discussing instances of Mr. Carnes' specific involvement in Integrity Advance's business).

Ruling: ACCEPTED AND INCORPORATED to the extent that this finding does not exclude the fact that Mr. Carnes permitted the adoption of the terms set forth in the loan agreement. In addition, Mr. Carnes could have changed the terms of the loan agreement at anytime. Also see my Ruling on Proposed Finding 27, above.

31.

Mr. Carnes' job did not involve Integrity Advance's loan agreement, other than possibly "flipping through it." See id. at I-229:2-6. Ruling: REJECTED. As the Chief Executive Office, Mr. Carnes permitted the terms of the loan agreement to be employed, and could have changed any of its terms at any time. Also see my Ruling on Proposed Finding 27, above. 32.

Mr. Carnes did not draft, edit, or revise Integrity Advance's loan agreement template or any version of the agreement. Id. at II-75:11-25, II-76:1-13. Ruling: ACCEPTED AND INCORPORATED to the extent that, although Mr. Carnes did not engage .in these specific activities, it does not preclude his knowledge of the agreement's content and his overarching authority to implement it. See Rulings on Proposed Finding of Facts 27 and 31, above. 33.

Mr. Carnes did not discuss the loan agreement template with its drafters (legal counsel from an outside law firm) or Integrity Advance personnel. Id. at I-227:10- 12. Mr. Carnes testified that he did not recall Integrity Advance's in-house counsel, Mr. Foster, ever explaining Integrity Advance's loan agreement to him. Id. at I-231:11-12. Mr. Carnes did not recall specific conversations with Integrity Advance personnel about the loan agreement. Id. at I-232:14-17. Ruling: REJECTED as incredible. See my Ruling on Proposed Finding 27, above.

34.

Mr. Carnes did not discuss the Integrity Advance loan agreement with the Delaware regulator. Id. at II-96:21-23. Further, Mr. Carnes testified that he was not aware of any discussions the other Integrity Advance personnel may have had with the Delaware regulator. Id. at II-96:24- II-974. Ruling: ACCEPTED AND INCORPORATED.

35.

Mr. Carnes approved Integrity Advance's loan agreement to the extent that he, as CEO of HIP, effectively approved everything. Mr. Carnes testified that, while, "as CEO you are ultimately approving everything.'' Id. at I-228:8-9, I-232:1-3. Ruling: ACCEPTED AND INCORPORATED as modified. Mr. Carnes assertion that he, in effect, never substantively reviewed nor put his stamp of approval on Integrity Advance's loan agreement template is REJECTED as xxxi 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 112 of 130

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not credible.

36.

Mr. Carnes did not substantively approve oflntegrity Advance's website or website contents. Id. at I-216:24 - I-217: 15. Mr. Carnes testified that he only approved Integrity Advance's website "at a high level"). Id. at 1-217:13-15. Ruling: ACCEPTED AND INCORPORATED as to the nature of his testimony.

37.

Mr. Carnes did not review, edit, revise, or discuss call center scripts. Id at 11- 74:13-25, 11-75:1-9. Indeed, Mr. Carnes never saw any call center scripts. Id. at 11-75:10.

Ruling: ACCEPTED AND INCORPORATED.

38.

Mr. Carnes testified that, as CEO of HIP, he was "de facto" CEO oflntegrity Advance, id at 1-94:7-9, 1-105:10-12, 1-210:3-5, 11-49:10-11, 11-63:6-8, and was in charge of Integrity Advance merely to the extent that "any CEO is in charge ... . " Id. at 1-210:8.

Ruling: ACCEPTED AND INCORPORATED.

39.

HIP is the parent company of Integrity Advance, as well as approximately thirty other entities, at various times, EC-EX-067; Hr'g Tr. 1-100:20 - 1-101 :21. Ruling: ACCEPTED AND INCORPORATED.

40.

As CEO of HIP, Mr. Carnes was the "de facto" CEO ofHIP's subsidiary businesses. Id at 11-63:6-8. HIP's subsidiaries included fourteen distinct business interests. Id. at 11-64:22- 11-65:8.

Ruling: ACCEPTED AND INCORPORATED.

41.

In addition, Mr. Carnes' time was also taken up by business interests outside of HIP. See id. at 11-66:9-19.

Ruling: ACCEPTED AND INCORPORATED.

42.

Mr. Carnes' active involvement with HIP, as well as with Integrity Advance, changed over time. Mr. Carnes spent 75% of his time on all HIP businesses in 2008, 70% in 2009, 60% in 2010, 50% in 2011, and 80-90% in 2012 (which involved HIP's asset sale to EZ Corp.). Id. at 11-67:8-12, 11-68:23 - 11-69:9. Ruling: ACCEPTED AND INCORPORATED.

43.

Of Mr. Carnes' time spent on HIP businesses, he focused a percentage on Integrity Advance: 66% in 2008, 50% in 2009, 25% in 2010, 15% in 2011, and 15% in 2012. Id. at 11-67:8-12, 11-69:10 - 11-71 :3. Ruling: ACCEPTED AND INCORPORATED.

44.

The percentage of Mr. Carnes' total time that was focused on Integrity Advance issues can be seen in the chart below:

Year Time Focused on HIP Time Focused on Integrity xxxii Total Time Focused on Inte ri Advance 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 113 of 130

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Advance 75% 66% 49.5% 70% 50% 5% 60% i5% 15% 50% 15% 7.5% 80-90% 15% 12-13.5% . Ruling: ACCEPTED AND INCORPORATED.

45.

Mr. Carnes was not an absentee CEO and did not ignore problems when they arose. Mr. Carnes testified that he would discuss a "significant problem" with Mr. Foster, but that, "[i]f it was a problem that Mr. Foster could handle on his own, and I .. . didn't need to be brought into the loop that is what he was there to do." Id. at 1-215:15-18. During his testimony, Mr. Andonian agreed that "if there was a problem with the website or with the software," he would address the issue with Mr. Carnes. Id. at I-90:12-15.

Ruling: ACCEPTED AND INCORPORATED.

46.

Mr. Carnes testified that if Integrity Advance's "data base [sic] become [sic] very slow for some reason and was causing us problems in approving consumers, that is something that I would be brought into the database so I would be aware, because that would [have far] reaching effects throughout the rest of the business." Id. at I-216:4-9.

Ruling: ACCEPTED AND INCORPORATED.

47.

The evidence shows that Mr. Carnes helped resolve issues that rose to his attention. In a chain of e-mails from February 2011, Mr. Carnes responded to the fraudulent actions of a rogue employee from the third party call center by instructing Integrity Advance personnel to:

1) Take care of customers who had been wrongfully charged and refund any fees and bank charged the customers incurred;

2) Perform further investigation to uncover any other potential harm; and 3) Instruct the call center to alert the authorities.EC-EX-087; Hr'g Tr. I-176:1-1- 178:11.

Ruling: ACCEPTED AND INCORPORATED.

48.

Enforcement Counsel's claims cannot, as a matter of law, apply to conduct prior to July 21, 2011, and Respondents generally objected to the introduction of evidence pre-dating this time period. See, e.g., Dkt. 132, Resp'ts' Omnibus Mot. in Limine to Exclude Evid. at 4-5; Hr'g Tr. 1-127: 17-23, I-128:18-23, I-131 :6-17. Respondents specifically objected to EC-EX-087. Id. at I- 17 6 :21-23. Ruling: REJECTED as a conclusion of law rather than finding of fact, but ACCEPTED as to the nature of Respondents' objections. 49.

In another instance, Mr. Carnes provided input on a problem with the third-party call center's performance under its contract with Integrity Advance. See Hr'g Tr. I-178:12-1- 180:21. In an e-mail chain from November 2008, Mr. Madsen xxxm 2015-CFPB-0029 Document 176 Filed 09/27/2016 Page 114 of 130

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UNITED STATES OF AMERICA Before the CONSUMER FINANCIAL PROTECTION BUREAU

ADMINISTRATIVE PROCEEDING File No. 2015-CFPB-0029 __________________________ ) ) In the Matter of:

)

)

)

)

) INTEGRITY ADVANCE, LLC and )

JAMES R. CARNES,

)

) ) Respondents.

)

) _________________________ )

The Consumer Financial Protection Bureau (“Bureau” or “CFPB”) hereby submits the following Notice of Charges against Respondents, Integrity Advance, LLC (“Integrity Advance”), and its former chief executive James R. Carnes (“Carnes”) related to a small dollar lending operation which systematically misled consumers regarding the terms of its loans, wrongfully required electronic access to consumer bank accounts, and unfairly undermined consumers’ ability to contest withdrawals from their accounts. In support of its Notice of Charges, the Bureau alleges and submits as follows: JURISDICTION AND LEGAL AUTHORITY 1. The Bureau has jurisdiction over this matter pursuant to Sections 1053 and 1055 of the Consumer Financial Protection Act (“CFPA”), 12 U.S.C. §§ 5563, 5565. 2. Under Section 1053 of the CFPA, the Bureau may bring an adjudication proceeding to enforce federal consumer financial law. NOTICE OF CHARGES SEEKING RESTITUTION, DISGORGEMENT, OTHER EQUITABLE RELIEF, AND CIVIL MONEY PENALTIES 2015-CFPB-0029 Document 1 Filed 11/18/2015 Page 1 of 16

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PARTIES 3. The Bureau is an independent agency of the United States that is authorized to take enforcement action to address violations of federal consumer-financial law, 12 U.S.C. §§ 5511(c)(4), 5512(a), 5563, 5564, which includes the Truth in Lending Act (“TILA”), 15 U.S.C. §§ 1601 et seq., and the Electronic Fund Transfer Act (“EFTA”), 15 U.S.C. §§ 1693 et seq., except with respect to Section 920 of EFTA. 12 U.S.C. § 5481(12)(C), (O), (14).

4. Respondent Integrity Advance, LLC (“Integrity Advance”) is a limited liability company organized under the laws of Delaware that had its principal place of business at 300 Creek View Road, Newark, Delaware. Integrity Advance originated online payday loans throughout the United States through its website, www.iadvancecash.com. 5. Integrity Advance was a wholly owned subsidiary of Hayfield Investment Partners, a privately held company that was also organized under Delaware law. 6. Respondent James R. Carnes is a natural person residing in Kansas. At all times relevant to this Notice of Charges, Carnes functioned as the chief executive officer (“CEO”) and president of Integrity Advance.

7. Carnes owned 52% of Hayfield Investment Partners, Integrity Advance’s parent company.

8. At all relevant times, the senior executives of Integrity Advance reported directly or indirectly to Carnes.

9. Carnes was an active and involved CEO who was personally responsible for all of Integrity Advance’s policies and procedures. Carnes had authority to control Integrity Advance’s practices and knew about its deceptive and unfair practices. Therefore, 2015-CFPB-0029 Document 1 Filed 11/18/2015 Page 2 of 16

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Carnes engaged in the deceptive and unfair practices alleged herein along with Integrity Advance.

INTEGRITY ADVANCE AND CARNES ARE COVERED PERSONS 10. Integrity Advance is a covered person because it extended credit and serviced loans. 12 U.S.C. § 5481(5), (6), (15)(A)(i).

11. As a director with managerial responsibility, Carnes is a “related person” under the CFPA, 12 U.S.C. § 5481(25). Therefore, Carnes is a “covered person” for purposes of the CFPA, 12 U.S.C. § 5481(25)(B).

STATEMENT OF FACTS Integrity Advance Operations 12. From May 15, 2008 through December 2012, Integrity Advance offered short term loans to consumers residing in numerous states around the country. 13. The company offered loans in amounts ranging from $100 to $1000. 14. During 2007 and 2008, Integrity Advance developed its policies and procedures governing its application process and forms, disclosures, and underwriting. 15. As the CEO of Integrity Advance at that time, Carnes was directly responsible for all of the policies and procedures developed and implemented by the company. 16. These policies and procedures were used throughout the time that Integrity Advance originated loans.

The Application Process 17. Consumers typically applied for loans with Integrity Advance by entering their personal information into a lead generator website. 18. Consumers applied for loans from Integrity Advance without knowing the terms of the loans.

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19. Integrity Advance did not allow consumers to see the loan agreement, which contained all of the loan terms, until after they had completed the online application. 20. Integrity Advance instructed call center representatives working on its behalf not to disclose the cost of a loan to a consumer until the consumer had completed an application.

21. In order to complete the online loan application process, Integrity Advance required consumers to agree to an Automated Clearing House (“ACH”) authorization, which enabled the company to deposit and withdraw funds from the consumer’s bank account electronically.

22. Once the application was completed, if it was approved, Integrity Advance would deposit the loan funds within 24 hours after receiving electronic consumer signatures, unless the consumer affirmatively contacted Integrity Advance to decline the loan. The Contract 23. Integrity Advance’s contract prominently stated the cost of the loan “as scheduled” by assuming that the borrower would repay the loan in full in only one payment and thereby pay only a single finance charge. 24. The fine print of the contract, however, provided that unless the borrower took additional action, Integrity Advance would not debit the borrower once to pay the loan in full. Instead, Integrity Advance would debit the borrower’s account multiple times, charging multiple finance charges, and automatically would renew the loan each pay period. As a result, many borrowers paid significantly more than the amount disclosed on the first page of the contract.

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25. The first page of the six page contract contained the Truth in Lending Act disclosures in bold print in the middle of the page, outlining the loan APR, finance charge, amount financed, and total of payments.

26. Integrity Advance would calculate each part of those disclosures by assuming that the loan would be fully repaid in one payment on the consumer’s first payday after loan origination.

27. However, the true repayment schedule and costs were hidden in fine print that appeared on the second page of the agreement, as illustrated below:

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28. The single repayment assumed in the TILA disclosures did not comport with the default repayment schedule that Integrity Advance used for all of its consumers. 29. Absent affirmative action by the consumer, Integrity Advance would ‘rollover’ the loan four times. Each time, Integrity Advance would debit the entire finance charge, “renew” the loan, and add another finance charge to the consumer’s account. Integrity Advance would apply nothing to the borrower’s principal. 30. After the fourth rollover, absent affirmative action by the consumer, Integrity Advance would continue to take finance charges from the consumer’s account every two weeks and in addition withdraw $50 which was applied to the loan principal. 31. Integrity Advance would continue to take the $50 principal payment plus the finance charge every two weeks until the loan was paid off. As represented below, this automatic repayment schedule would result in at least eleven separate payments by the consumer to Integrity Advance for a $300 loan:

PAYDAY PAYMENT FINANCE CHARGE (30% OF REMAINING PRINCIPAL BALANCE) AMOUNT APPLIED TO PRINCIPAL REMAINING PRINCIPAL BALANCE

TOTAL PAID TO DATE $90 $90 $0 $300 $90 $90 $90 $0 $300 $180 $90 $90 $0 $300 $270 $90 $90 $0 $300 $360 $90 $90 $0 $300 $450 $140 $90 $50 $250 $590 $125 $75 $50 $200 $715 $110 $60 $50 $150 $825 $95 $45 $50 $100 $920 $80 $30 $50 $50 $1000 $65 $15 $50 $0 $1065 TOTAL $1065 $765 $300 - $1065

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32. Complaints submitted by consumers indicate that the consumers thought the company would debit only the total amount disclosed in the TILA disclosure and did not understand that their loans would rollover four times before the company credited any of their payments to principal.

33. Consumers who had their loans rolled over repeatedly paid significantly more in finance charges than the finance charge amount stated in the TILA disclosure. 34. Integrity Advance’s forms never disclosed to consumers the total amount of finance charges that they would pay over the course of their loan with the company if they made only the default payments.

35. Consumers who had their loans rolled over repeatedly paid a much higher interest rate than the interest rate stated in the TILA disclosure. 36. Integrity Advance’s forms never disclosed to consumers the interest rate they would pay over the course of their loan with the company if they made only the default payments.

37. Consumers who had their loans rolled over repeatedly paid considerably higher ‘total payments’ than the total of payments stated in the TILA disclosure. 38. Integrity Advance’s forms never disclosed to consumers the total sum of all the loan payments they would have to make over the course of their loan with the company if they made only the default payments.

Preauthorized Electronic Fund Transfers 39. Integrity Advance required consumers to sign a form authorizing automatic, electronic withdrawals from their accounts in order to pay off the loan (the ACH authorization form).

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40. Consumers could only receive loan proceeds by way of an electronic deposit which was authorized by the ACH authorization form. 41. Approximately 95% of Integrity Advance’s consumers signed the ACH authorization.

42. The online application contained no indication that a consumer might be able to secure a loan from Integrity Advance without completing an ACH authorization form. 43. The ACH authorization form gave Integrity Advance the ability to execute repeated electronic withdrawals from a consumer’s bank account pursuant to the default repayment plan that anticipated multiple rollovers: You also authorize us to initiate an ACH debit entry to Your Bank Account:

. . . (b) for the Finance Charge plus any accrued fees on the Payment Due Date, or on any subsequent Renewal Payment Due Date, if you contact us at least three (3) business days prior to such date and select Payment Option (b) in the Loan Agreement (RENEWAL), or if you fail to contact us to confirm your payment option; (c) for the accrued finance charges and fees, plus $50.00 on each Pay Date after the fourth (4th) Renewal Payment Due Date, until all amounts owed under the Loan Agreement are paid in full.

44. These ACH withdrawals occurred at regular intervals. 45. The ACH authorization form also contained language dictating that the consumer remained obligated to allow electronic access to her account until all indebtedness to IA was satisfied:

The ACH Authorizations set forth in the Loan Agreement are to remain in full force and effect for this transaction until your indebtedness to us for the Total of Payments, plus any other charges or fees incurred and described in the Loan agreement is fully satisfied. (Emphasis added)

46. If, nonetheless, a consumer was able to withdraw their consent to Automated Clearing House withdrawals by Integrity Advance, the contract provided that the 2015-CFPB-0029 Document 1 Filed 11/18/2015 Page 8 of 16

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company could create checks that would enable Integrity Advance to withdraw funds from the consumer’s bank account without the signature or permission of the consumer: If you revoke your [ACH] authorization, you agree to provide us with another form of payment acceptable to us and you authorize us to prepare and submit one or more checks drawn on Your Bank Account so long as amounts are owed to us under the Loan Agreement. (Emphasis added)

47. This unclear and confusing provision was hidden in the fine print of one of the numerous forms that consumers were required to complete in order to obtain a loan with Integrity Advance.

48. Integrity Advance utilized this provision to execute remotely created checks when consumers were contesting the company’s right to those funds by withdrawing the consumer’s consent to ACH withdrawals.

VIOLATIONS Count I (Against Integrity Advance)

The Truth in Lending Act

49. The allegations in paragraphs 1-48 are incorporated by reference. 50. TILA and Regulation Z require that creditors disclose “clearly and conspicuously” in writing “the terms of the legal obligation between the parties.” 12 C.F.R. § 1026.17(a), (c).

51. Respondent Integrity Advance was a creditor under TILA and Regulation Z. 52. Respondent extended closed-end credit to consumers under TILA and Regulation Z.

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53. Integrity Advance calculated its TILA disclosure by assuming that the borrower would pay in full with a single payment.

54. Integrity Advance did not debit the entire amount owed in a single payment unless the borrower took additional action.

55. If the borrower did not take additional action, Integrity Advance would debit the consumer’s account repeatedly and would charge multiples of the finance charge disclosed before the consumer had paid in full.

56. Indeed, for many of its borrowers, Integrity Advance debited more than the total cost disclosed in the TILA disclosure.

57. Integrity Advance’s inaccurate disclosures violated the Truth in Lending Act, 15 U.S.C. § § 1631, 1638, and Regulation Z, 12 C.F.R. § 1026.17 and 1026.18. Count II (Against Integrity Advance)

CFPA

58. The allegations in paragraphs 1-48 are incorporated by reference. 59. The CFPA defines enumerated statutes to include the Truth in Lending Act. 12 U.S.C. § 5481(12)(O).

60. Under the CFPA, covered persons’ and service providers’ violations of an enumerated statute are considered violations of the CFPA. 12 U.S.C. § 1036(a)(1)(A). 61. By virtue of its violation of the Truth in Lending Act and Regulation Z, Integrity Advance has violated the CFPA.

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Count III (Against Integrity Advance and Carnes) CFPA (Deception) 62. The allegations in paragraphs 1-48 are incorporated by reference. 63. Integrity Advance calculated its disclosures by assuming that the borrower would pay in full with a single payment.

64. Integrity Advance did not debit the entire amount owed in a single payment unless the borrower took additional action.

65. If the borrower did not take additional action, the company would debit the consumer’s account repeatedly and would charge multiples of the finance charge disclosed before the consumer had paid in full.

66. Indeed, for many of its borrowers, Integrity Advance debited more than the total cost disclosed in the TILA disclosure.

67. The net impression of Respondents’ disclosures misled reasonable consumers into believing that their total finance charges and APR were much lower than they actually were.

68. Respondents’ documents never accurately disclosed the total finance charge, APR, or total of payments that a consumer would pay if the consumer made only the default payments under the contract.

69. These misleading disclosures were material to consumers in assessing the cost of a loan from Integrity Advance.

70. Respondents’ disclosures were false and misleading and constituted a deceptive act or practice in violation of the CFPA, 12 U.S.C. §§ 5531(a) and 5536(a)(1)(B).

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Count IV (Against Integrity Advance and Carnes)

CFPA (Unfairness)

71. The allegations in paragraphs 1-48 are incorporated by reference. 72. Respondents caused substantial injury to consumers by supplying deceptive disclosures and withholding information about the costs of its loans during the application process.

73. Respondents caused substantial injury to consumers by misleading consumers about their repayment obligations and failing to disclose clearly the costs of a loan that rolled over repeatedly as envisioned by the contract. 74. These practices prevented consumers from properly assessing the actual cost of a loan from Integrity Advance.

75. Consumers could not reasonably avoid these injuries. 76. Respondents’ practice of supplying deceptive disclosures did not produce any benefits to consumers or competition that outweighed the substantial injury that the practice caused.

77. Respondents’ disclosure practices constituted an unfair practice under the CFPA, 12 U.S.C. §§ 5531(c) and 5536(a)(1)(B).

Count V (Against Integrity Advance)

The Electronic Fund Transfer Act

78. The allegations in paragraphs 1-48 are incorporated by reference. 79. Consumers were required to complete Integrity Advance’s ACH authorization to complete the loan application process.

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80. Taken together, Integrity Advance’s contracts and ACH authorizations stated that by signing the documents consumers authorized repeated electronic fund transfers every payday until the principal reduced to zero. 81. Those electronic fund transfers were preauthorized under the definition contained in Regulation E.

82. There was no indication in Integrity Advance’s documents that a consumer could obtain a loan without signing the ACH agreement. 83. Integrity Advance’s practices conditioned extensions of credit on repayment by preauthorized electronic fund transfers in violation of EFTA, 15 U.S.C. § 1693k, and Regulation E, 12 C.F.R. § 1005.10(e).

Count VI (Against Integrity Advance)

CFPA

84. The allegations in paragraphs 1-48 are incorporated by reference. 85. The CFPA defines enumerated statutes to include the Electronic Fund Transfer Act. 12 U.S.C. § 5481(12)(C).

86. Under the CFPA, covered persons’ and service providers’ violations of an enumerated statute violate the CFPA. 12 U.S.C. § 1036(a)(1)(A). 87. By virtue of its violation of the Electronic Fund Transfer Act and Regulation E, Integrity Advance has violated the CFPA.

Count VII (Against Integrity Advance and Carnes)

CFPA (Unfairness)

88. The allegations in paragraphs 1-48 are incorporated by reference. 2015-CFPB-0029 Document 1 Filed 11/18/2015 Page 13 of 16

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89. Integrity Advance’s contracts with consumers included a provision allowing the company to create remotely created checks (demand drafts) if a consumer successfully canceled their authorization for ACH withdrawals. 90. Respondents used this provision to take consumers’ funds when those consumers believed that they did not owe money to Integrity Advance. 91. The remotely created checks created by Respondents caused substantial injury to consumers by causing an unexpected loss of funds and precluding consumers from stopping debits from their accounts for amounts they did not believe they owed. 92. This injury was not reasonably avoidable by consumers. 93. Respondents’ practices did not produce any benefits to consumers or competition that outweighed the substantial injury caused. 94. Respondents’ practice of obtaining authorization for demand drafts in a confusing manner, and then initiating such demand drafts, constituted an unfair practice under the CFPA, 12 U.S.C. §§ 5531(c) and 5536(a)(1)(B). PRAYER FOR RELIEF Wherefore, as permitted by 12 U.S.C. § 5565 et seq., the Bureau requests an Order granting:

A. Disgorgement of money, in an amount to be determined at trial; B. Restitution in an amount to be determined at trial to compensate borrowers who were the victims of Respondents’ practices; C. Civil money penalties;

D. A permanent injunction preventing future violations of the Truth in Lending Act, 15 U.S.C. § 1601, et seq., Regulation Z, 12 C.F.R. § 226, et seq., the Electronic Fund Transfer Act, 15 U.S.C. § 1693, et seq., Regulation E, 12 C.F.R. 2015-CFPB-0029 Document 1 Filed 11/18/2015 Page 14 of 16

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§ 205, et seq., the CPFA, 12 U.S.C. § 5536, or any provision of “Federal consumer financial law” as defined by 12 U.S.C. § 5481(14); E. Other injunctive relief as the Court may deem just and proper; F. Recovery of costs in connection with prosecuting this action; and G. Any other legal or equitable relief deemed appropriate. TIME AND PLACE OF THE HEARING

Pursuant to 12 C.F.R. § 1081.203(d), the time and place of the hearing shall be determined by the hearing officer in the scheduling order. 2015-CFPB-0029 Document 1 Filed 11/18/2015 Page 15 of 16

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TIME TO FILE AN ANSWER

Within fourteen (14) days of service of this notice of charges, the answer must be filed and served in accordance with 12 C.F.R. § 1081.201(a).

Respectfully submitted, Attorneys for Plaintiff Consumer Financial Protection Bureau

ANTHONY ALEXIS Enforcement Director

DEBORAH MORRIS Deputy Enforcement Director

CRAIG COWIE Assistant Litigation Deputy

/s/ Alusheyi J. Wheeler Alusheyi J. Wheeler Wendy J. Weinberg Vivian W. Chum 1700 G Street NW Washington, DC 20552 Phone: (202) 435-7786 Facsimile: (202) 435-7722 Email: [email protected]

Enforcement Counsel

2015-CFPB-0029 Document 1 Filed 11/18/2015 Page 16 of 16

Dismissal

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UNITED STATES OF AMERICA Before the BUREAU OF CONSUMER FINANCIAL PROTECTION ADMINISTRATIVE PROCEEDING File No. 2015-CFPB-0029 _______________________________________ ) In the Matter of:

) ORDER DENYING ) RESPONDENTS’

INTEGRITY ADVANCE, LLC and ) MOTION TO DISMISS JAMES R. CARNES, ) )

Respondents.

) _______________________________________ Procedural History On March 26, 2020, Respondents filed Respondents’ Motion to Dismiss and Respondents’ Brief in Support of their Motion to Dismiss (Doc 260) and requested oral argument. On April 9, 2020, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) filed Enforcement Counsel’s Consolidated Opposition to Respondents’ Motion to Dismiss and Respondents’ Motion to Amend Answer (Doc. 264). On April 15, 2020, Respondents filed a consolidated reply brief which addressed inter alia Respondents’ Motion to Dismiss (Doc. 265). Respondents’ Motion Counsel for Respondents (“RC”) assert that the CFPB does not have legal enforcement authority over Respondents. They contend that the CFPB did not obtain the ability to regulate nonbanks until there was a lawfully appointed Director; that the CFPB’s first Director was not lawfully appointed until July 16, 2013; that Respondents never engaged in conduct within the CFPB’s jurisdiction; and that the CFPB’s lack of authority cannot be cured. Doc. 260 at 5-13. RC also argue that Counts I and II should be dismissed because the Notice of Charges fails to state a claim under the Truth in Lending Act (TILA) and its implementing regulation, Regulation Z. Id. at 13-16. Lastly, RC argue that Counts III, IV, and V should be dismissed because the CFPB failed to provide fair notice of the prohibited conduct. Id. at 16-18. CFPB’s Response Enforcement Counsel (“EC”) for the CFPB assert that the Bureau had a confirmed Director and was vested with the full powers granted by Congress on the date that this proceeding was initiated, and there is no basis to argue that the Bureau can only enforce laws against those who continued violating the law after a Director was confirmed. Doc. 264 at 5-9. They also argue that the Notice of Charges properly states a claim for violations of TILA. Id. at 9-13. Lastly, EC argue 2015-CFPB-0029 Document 268 Filed 04/24/2020 Page 1 of 7

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that Respondents have forfeited a fair notice defense after more than four years into the proceeding and even if it has not been forfeited, Respondents had fair notice of the prohibited conduct. Id. at 13-15.

ANALYSIS

I.

Legal Standard

Pursuant to the Bureau’s Rules of Practice for Adjudication Proceedings (“Rules”), “[a] respondent may file a motion to dismiss asserting that, even assuming the truth of the facts alleged in the notice of charges, it is entitled to dismissal as a matter of law.” 12 C.F.R. § 1081.212(b). RC argue that a motion to dismiss should be granted if an agency cannot show that Congress has delegated authority over the defendant. Doc. 260 at 4 (citing FTC v. Compagnie De Saint-Gobain- Pont-a-Mousson, 636 F.2d 1300, 1315 (D.C. Cir. 1980)). Additionally, they argue that a motion to dismiss should be granted if the complaint does not allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). EC argue, in opposition, that administrative proceedings are governed by different standards and that “[a]n administrative agency merely has to show that respondents ‘understood the issue’ and were ‘afforded full opportunity’ to defend their conduct.” Doc. 264 at 3 (quoting Aloha Airlines, Inc. v. Civil Aeronautics Bd., 598 F.2d 250, 262 (D.C. Cir. 1979)).

Since there is no case law analyzing the Bureau’s standard for dismissal under Rule 212(b), and Federal Rule of Civil Procedure (FRCP) 12(b)(6) is sufficiently similar, the case law regarding FRCP 12(b)(6) will be generally relevant to my analysis. I note, however, that if the Notice of Charges is sufficiently pled under the standards set forth for FRCP 12(b)(6), it will necessarily survive review under the broader standard set forth by EC.

II.

Does the CFPB have legal enforcement authority over Respondents?

RC assert that the CFPB did not have legal enforcement authority over Respondents, or any nonbank, until a Director was lawfully appointed. Doc. 260 at 5. They assert that the Treasury Secretary was only authorized to execute the functions enumerated in Subtitle F of the Consumer Financial Protection Act (“CFPA”), which includes transferred authorities but not enforcement over nonbanks. Id. Rather, they contend that the Director was lawfully appointed on July 16, 2013, according to the Supreme Court’s analysis in NLRB v. Canning.1 Id. at 8-9. They further argue that Respondents were never a “covered person” under the CFPA because Integrity Advance ceased operations in December 2012, before any lawfully appointed Director had enforcement authority. Id. at 10. Finally, they argue that Director Cordray’s Notice of Ratification did not and cannot create authority that never existed in the first place and therefore, the lack of legal authority cannot be cured. Id. at 11-13.

EC assert that the Bureau had authority to enforce the law when it filed the Notice of Charges and that it is irrelevant whether the Bureau could have brought the proceeding earlier. Doc. 264 at 5-6. They assert that Respondents’ view that the Bureau only has authority over

1 NLRB v. Canning, 573 U.S. 513, 517-21, 556-57 (2014) 2015-CFPB-0029 Document 268 Filed 04/24/2020 Page 2 of 7

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Respondents at the time they acted as “covered persons” and thus cannot be held liable now for unlawful actions committed before is nonsensical. Id. at 6.

The parties do not dispute that at least by July 16, 2013, and certainly by November 18, 2015, when the CFPB filed the Notice of Charges, the CFPB had a lawfully appointed Director and was vested with all of the powers prescribed by Congress in the Dodd-Frank Act. EC do not address the question of whether the Director was lawfully appointed before July 16, 2013. There is no reason that the Supreme Court’s analysis in NLRB v. Canning, finding President Obama’s recess appointments of three NLRB members to be unconstitutional, would not apply to the Bureau where the recess appointment of the Director was made on the same day and in the same manner. The question, therefore, is whether the CFPB could have initiated this proceeding before the Director was lawfully appointed on July 16, 2013, and if not, whether the CFPB has authority to initiate proceedings for unlawful conduct that occurred before the Director was lawfully appointed.2

RC’s analysis of the Dodd-Frank Act language to argue that the Treasury Secretary was only authorized to execute functions enumerated in Subtitle F of the CFPA is compelling. 12 U.S.C. § 5586(a) states that “[t]he Secretary is authorized to perform the functions of the Bureau under this part until the Director of the Bureau is confirmed by the Senate in accordance with section 5491 of this title.” (emphasis added). As RC note, the power to bring Enforcement actions was established under Subtitle E of the CFPA, a different “part” than that recognized in the quoted language above (Subtitle F). “It is a cardinal rule of statutory construction that significance and effect shall, if possible, be accorded to every word.” Market Co. v. Hoffman, 101 U.S. 112, 115 (1879).

One may argue that the functions that the Secretary was authorized to perform include “all authority to . . . issue orders . . . pursuant to any Federal consumer financial law,” 12 U.S.C. § 5581(a)(1)(A), which would necessarily include orders promulgated from hearings or adjudication proceedings pursuant to 12 U.S.C. § 5563. However, a closer reading of the rest of 12 U.S.C. § 5581 makes clear that while § 5581(a) could allow for a broader definition of “consumer financial protection functions” to include “orders” promulgated through administrative proceedings, § 5581(b) limits the consumer financial protection functions to those transferred from the enumerated transferor agencies. Supervision of nonbank lenders, including Respondents, was not one of these transferred functions.

Additionally, the Inspectors General of the Department of the Treasury and Board of Governors of the Federal Reserve System interpreted this same section to grant “authority to the Secretary of the Treasury (Secretary) to perform the Bureau’s functions included under subtitle F of title X of the Dodd-Frank Act.”3 Until a director was confirmed, the Inspectors General found

2 I note that RC do not specify to which counts their arguments concerning jurisdiction apply. Since they rely on an analysis of the CFPA language and the definition of “covered person,” and never discuss whether the CFPB had jurisdiction under TILA and EFTA (Counts I and V, respectively), I assume these arguments apply only to Counts II, III, IV, VI, and VII.

3 Letter, Joint Response by the Inspectors General of the Department of the Treasury and Board of Governors of the Federal Reserve System: Request for Information Regarding the Bureau of Consumer Financial Protection, 2 (Jan. 10, 2011), available at https://oig.federalreserve.gov/reports/Treasury_OIG_Posted_PDF_-_Response_CFPB.pdf. 2015-CFPB-0029 Document 268 Filed 04/24/2020 Page 3 of 7

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that the Secretary had the authority to carry out only the functions described in Subtitle F, the transferred authorities found at 12 U.S.C. §§ 5581(b), 5583. Id. at 5, 5 n.3.

Thus, I conclude that the Secretary was not authorized to initiate this proceeding before the Director was lawfully appointed on July 16, 2013. So, the remaining question is whether the CFPB can bring a proceeding for unlawful conduct that occurred before the Director was lawfully appointed. RC argue that because the CFPB could not have brought an enforcement action against Respondents before July 16, 2013, Respondents never offered or provided a consumer financial product or service or otherwise engaged in any business activities over which the CFPB has jurisdiction, and therefore were never a “covered person” under 12 U.S.C. § 5481(6). Doc. 260 at 10; see also Doc. 265 at 1. Here, RC conflate the CFPB’s lack of authority to initiate an enforcement proceeding at a certain time with the existence of laws prohibiting certain conduct during that same time.

A “covered person” is defined as “(A) any person that engages in offering or providing a consumer financial product or service; and (B) any affiliate of a person described in subparagraph (A) if such affiliate acts as a service provider to such person.” 12 U.S.C. § 5481(6). RC argue that because it is defined in the present tense, the definition does not extend to past actions and a “covered person” cannot include “a person or entity that provided a consumer financial product or service in the past.” Doc. 260 at 10; see also Doc. 265 at 1. RC are correct to the extent that the present tense definition means that a person or entity cannot be deemed a “covered person” for actions that occurred before the definition was effective. However, the definition of “covered person” went into effect on July 22, 2010.4 This means that beginning on that date, Respondents were “covered persons,” in the then-present tense.

The substantive provisions under which the CFPB brought this action went into effect on July 21, 2011, the designated transfer date.5 Regardless of whether the Bureau had the authority to enforce the law, the prohibition against conduct deemed unlawful under the CFPA was effective on that date. As EC note, there is “no principle . . . that a substantive prohibition does not take effect until a federal government agency gains the power to enforce it.” Doc. 264 at 8. Respondents were “covered persons” who were subject to the CFPA’s prohibitions on “covered persons” by July 21, 2011. It would render the law’s effective dates meaningless to find that the CFPB could not enforce violations of the law that occurred prior to the constitutional appointment of a Director.

Therefore, I find that the Bureau has legal enforcement authority over Respondents for alleged violations of the CFPA beginning on July 21, 2011. As such, I need not reach RC’s argument regarding ratification.

III.

Does the Notice of Charges fail to state a claim under TILA and Regulation Z for Counts I and II?

4 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203 § 4, codified at 12 U.S.C. § 5301 note.

5 Id. § 1037, codified at 12 U.S.C. § 5531 note (“This subtitle [subtitle C (§§ 1031–1037), enacting this part] shall take effect on the designated transfer date.”); 75 Fed. Reg. 57252, 57252 (Sept. 20, 2010) (designating July 21, 2011, as the “designated transfer date”).

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RC assert that the Notice of Charges fails to state a claim under TILA and Regulation Z for Counts I and II because Integrity Advance’s TILA disclosure reflects the single-payment legal obligation between Integrity Advance and consumers, complying with TILA’s strict disclosure requirements under 12 C.F.R. §§ 1026.17, 1026.18. Doc. 260 at 14. They assert that the Notice of Charges attempts to create a new TILA disclosure standard that accounts for the likely extension of the contract after consummation, which is not required under TILA or Regulation Z. Id.

EC assert that because “Regulation Z requires that loan disclosures ‘reflect the terms to which the consumer and creditor are legally bound as of the outset of the transaction,’” and Integrity Advance’s contracts were designed to automatically roll over without any additional action from consumers, that Respondents’ disclosures violated TILA as a matter of law. Doc. 264 at 9.

Whether the loan contracts were for a single payment obligation with the option to renew or whether they were multi-payment installment loans is an issue I need not address here. For the purpose of Rule 212(b), we assume as true that the loans were multi-payment installment loans while the disclosures were for single-payment loans. As such, I find that the Notice of Charges “state[s] a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570.

The Notice of Charges describes in detail over twenty-two paragraphs the application process to obtain a loan from Respondents and the contract utilized for the loans. These pleadings represent more than “threadbare recitals” and are supported by more than “mere conclusory statements,” as it describes in an additional nine paragraphs how Respondents’ alleged conduct violates TILA. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 555). The pleadings contain sufficient factual content to allow for the “reasonable inference that the [respondent] is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556).

As noted above, by virtue of meeting the pleading requirements outlined in Twombly and Ashcroft, I find that the Notice of Charges also meets the requirements outlined in the Bureau’s Rules and gives Respondents sufficient notice to understand the issue and afford them full opportunity to defend their conduct. See Aloha Airlines, Inc., 598 F.2d at 262.

IV.

Should the UDAAP claims in Counts III, IV, and VII be dismissed for failure to provide fair notice?

RC assert that the claim alleging unfairness in Count III and the claims alleging deception in Counts IV and VII should be dismissed because Respondents were not provided fair notice of the prohibited conduct. Doc. 260 at 16.

EC counter that this defense should be rejected because Respondents have forfeited it and even if they could assert it, Respondents did have fair notice of the Bureau’s unfairness and deception claims. Doc. 264 at 13.

As I described in my Order Denying Motions to Stay and Dismiss (Doc. 257), the D.C. Circuit Court has analyzed the timeliness of affirmative defenses under FRCP 8(c), and stated that 2015-CFPB-0029 Document 268 Filed 04/24/2020 Page 5 of 7

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“it is well-settled that a party’s failure to plead an affirmative defense generally results in the waiver of that defense and its exclusion from the case.”6 Additionally, while “some circuits permit parties to raise affirmative defenses for the first time in dispositive motions where no prejudice is shown,” the D.C. Circuit held that “Rule 8(c) means what it says: a party must first raise its affirmative defenses in a responsive pleading before it can raise them in a dispositive motion.”7 As I concluded previously, the Bureau’s Rule 201(b) is clear that affirmative defenses must be set forth in the answer absent any special circumstances. I do not find any such special circumstances in the matter at hand, and RC assert none.8 On the contrary, I find that since Respondents themselves note that a number of courts have previously considered and rejected such fair notice arguments regarding the unfairness and deception provisions of the CFPA, even if RC could make a case that there were circumstances in this case that should allow them to assert this defense at this stage of the proceedings, their defense is without merit. I see no reason to depart from the well-established precedent that the CFPA provides fair notice of its prohibition against unfair and deceptive acts or practices.9 Additionally, “other consumer protection statutes and regulations use these terms, and their meaning provides ‘the minimal level of clarity that the due process provision demands of noncriminal economic regulation.’”10 ORDERS 1.

Respondents’ request for oral argument is DENIED.

2.

Respondents’ Motion to Dismiss is DENIED.

SO ORDERED this 24th day of April 2020.

_________________________________ HON. CHRISTINE L. KIRBY Administrative Law Judge Signed and dated on this 24th day of April 2020 at Washington, D.C.

6 Harris v. Sec’y, U.S. Dep’t. of Veterans Affairs, 126 F.3d 339, 343 (D.C. Cir. 1997) (quoting Dole v. Williams Enters., Inc., 876 F.2d 186, 189 (D.C. Cir. 1989) (emphasis in original, internal quotation marks and alterations omitted)); see also Wood v. Milyard, 566 U.S. 463, 470 (2012) (“An affirmative defense, once forfeited, is excluded from the case.”).

7 Harris, 126 F.3d at 344-345.

8 I have also addressed this issue further in my Order Denying Respondents’ Motion to Amend Answer (issued simultaneously with this Order).

9 See Think Finance, LLC, No. CV-17-127-GF-BMM, 2018 WL 3707911, at *3 (D. Mont. Aug. 3, 2018); CFPB v. Navient Corp., No. 17-101, 2017 WL 3380530, at *7 (M.D. Penn. Aug. 4, 2017); CFPB v. D&D Mktg., No. 15-9692, 2017 WL 5974248, at *5 (C.D. Cal. Mar. 21, 2017).

10 Think Finance, 2018 WL 3707911, at *3 (quoting CFPB v. CashCall, Inc., CV15-7522, 2016 WL 4820635, at *12 (C.D. Cal. Aug. 31, 2016)); see also CFPB v. ITT Educ. Servs., Inc., 219 F. Supp. 3d 878, 906 (S.D. Ind. 2015). Christine L.

Kirby Digitally signed by Christine L.

Kirby Date: 2020.04.24 15:00:19 -04'00' 2015-CFPB-0029 Document 268 Filed 04/24/2020 Page 6 of 7

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CERTIFICATE OF SERVICE

I hereby certify that I have served a true and correct copy of the Order Denying Respondents’ Motion to Dismiss upon the following parties and entities in Administrative Proceeding 2015- CFPB-0029 as indicated in the manner described below:

Via Electronic Mail to Representatives for Consumer Financial Protection Bureau Benjamin Clark, Esq.

1700 G Street, NW Washington, DC 20552 [email protected]

Stephen C. Jacques, Esq., Email: [email protected] Alusheyi J. Wheeler, Esq., Email: [email protected] Deborah Morris, Esq., Email: [email protected]

Via Electronic Mail to Representatives for Respondent Richard J. Zack, Esq.

Pepper Hamilton, Esq.

3000 Two Logan Square Philadelphia, PA 19103 [email protected]

Michael A. Schwartz, Esq., Email: [email protected] Christen M. Tuttle, Esq., Email: [email protected] Saverio S. Romeo, Esq., Email: [email protected]

________________________

Jameelah Morgan

Docket Clerk

Office of Administrative Adjudication

Bureau of Consumer Financial Protection

Signed and dated on this 24th day of April 2020 at Washington, D.C.

Jameelah Morgan Digitally signed by Jameelah Morgan Date: 2020.04.24 15:08:42 -04'00' 2015-CFPB-0029 Document 268 Filed 04/24/2020 Page 7 of 7

Document (Mar. 2021)

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UNITED STATES OF AMERICA Before the CONSUMER FINANCIAL PROTECTION BUREAU

ADMINISTRATIVE PROCEEDING File No. 2015-CFPB-0029 _________________________________________

) In the Matter of

)

)

INTEGRITY ADVANCE, LLC and

) DECISION OF THE DIRECTOR JAMES R. CARNES.

)

)

_________________________________________ )

INTRODUCTION

When lenders fail to comply with all applicable consumer protection statutes, consumers can suffer substantial harms. Integrity Advance (IA) was a payday lender, and it violated the law. In particular, it failed to comply with the Truth in Lending Act (TILA), the Consumer Financial Protection Act (CFPA), and the Electronic Fund Transfer Act (EFTA). IA violated TILA by making disclosures as if its loans were single payment loans, but then structuring its loan agreements so that the loans functioned as multi-payment installment loans. IA violated the CFPA through its unfair and deceptive loan disclosure practices, as well as by using remotely created checks (RCCs) to withdraw funds from the accounts of consumers who had attempted to block access. And it violated EFTA by conditioning its loans on repayment by preauthorized electronic fund transfers.

The Consumer Financial Protection Bureau (Bureau) initiated this case by filing a Notice of Charges in November 2015 naming both IA and its CEO, James Carnes, as Respondents. In 2016, Administrative Law Judge Parlen L. McKenna conducted a trial. However, after he had issued his Recommended Decision (and both Respondents and the Bureau’s Enforcement Counsel had filed appeals), this case was put on hold pending the Supreme Court’s decision in Lucia v. SEC, 138 S. Ct. 2044 (2018). As a result of that decision, it was apparent that Judge McKenna had not been appointed in a manner that was consistent with the Constitution’s Appointments Clause. Accordingly, in May 2019, I directed that this case be remanded to Administrative Law Judge Christine Kirby (ALJ), who was then the Bureau’s Administrative Law Judge, and who had been appointed in a manner consistent with the Constitution. In the course of the proceedings before Judge Kirby, both parties filed motions for summary disposition. She resolved those motions when she issued her Recommended Decision on August 4, 2020, granting the motion filed by Enforcement Counsel, and denying the motion filed by Respondents. She held that IA had violated TILA and EFTA. She also held that both Respondents had violated the CFPA.

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Respondents appealed the ALJ’s Recommended Decision, and both parties filed briefs. Case Documents (Docs.) 295-297.1 On December 8, 2020, the parties presented oral argument.

I affirm the ALJ’s conclusion that IA violated both TILA and EFTA. I also affirm her holding that both Respondents violated the CFPA. With respect to the appropriate remedy, I conclude that Respondents should be jointly and severally liable for restitution amounting to $38,453,341.62. I further hold that IA is liable for a civil penalty of $7.5 million, and Mr. Carnes is liable for a civil penalty of $5 million. With respect to injunctive relief, I order that Respondents assist the Bureau in identifying and locating the consumers who are entitled to redress.

To the extent that the ALJ’s findings and conclusions are consistent with this decision, I adopt them as my own.

FINDINGS OF FACT AND LEGAL BACKGROUND

The following facts are not disputed.

A.

Integrity Advance and James Carnes

IA was licensed by the state of Delaware as a short-term, small-dollar lender. Case Document (Doc.) 273 at 1. It had a single store in Delaware, but made most of its loans online. Enforcement Counsel Exhibit (ECX) 68at 10, 24; Doc. 173 at 42.2 These loans ranged in amount from $100 to $1000. Doc. 56 at 2. IA offered only one product – consumer loans – and these loans were its sole source of revenue. Doc. 172 at 94-95. IA made its first consumer loan in May of 2008, and its last in December of 2012, but it continued processing loan payments until July of 2013. Doc. 173 at 132-33, Doc. 273 at 2. IA was a wholly owned subsidiary of Hayfield Investment Partners, Doc. 165 at 1, but had no employees of its own, Doc. 173 at 6. Instead, it was operated by individuals who, for the most part, were paid by Hayfield. Id. At the time IA began making loans to consumers, it was operated by four Hayfield employees. Doc. 172 at 53. When it reached its maximum size in 2010 or 2011, approximately 20 employees operated IA. ECX 68 at 11-12. Although Hayfield owned other companies, most of its profits came from IA. Doc. 172 at 114-115. IA is no longer offering loans. ECX 68 at 9.

Respondent James Carnes was both a founder of IA and its de facto CEO. Doc. 172 at 94. He owned more than 50% of IA. Doc. 172 at 100-103. Mr. Carnes was the ultimate decision maker for IA, id. at 51, and he had the responsibility for approving everything related to IA’s business, id. at 209. For example, he had final say over what appeared on IA’s website, id. at 217; he made the final decision regarding IA’s underwriting policies, id. at 59; and he was involved in the decision as to which call center IA would use, id. at 64. As he explained, he had authority to make all decisions

1 Documents on the docket of this case are available at https://www.consumerfinance.gov/ administrative-adjudication-proceedings/administrative-adjudication-docket/integrity-advance/.

2 In her Scheduling Conference Order (Doc. 227), the ALJ indicated that she would rely on exhibits that were admitted during the hearing conducted by Judge McKenna. The parties have not objected to this, and I will rely on those exhibits as well.

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regarding IA’s policies and procedures, Id. at 209. Mr. Carnes’ role with respect to IA did not change throughout the time period relevant to this proceeding. Id. at 52.

B.

IA’s loans

IA provided short-term loans to consumers. Doc. 56 at 2. To get a loan, the consumer had to provide IA with employment information, length of pay period, and pay dates. Doc. 88B at 2. Consumers were also required to provide an ACH authorization. ECX 2. This authorization gave IA access to the consumer’s bank account, thereby allowing IA to deposit the money that the consumer borrowed directly in the consumer’s bank account, and also allowing IA to make withdrawals directly from that account. Nearly all payments on IA loans were made automatically through ACH authorization. Doc. 87D at 3.

IA had a standard price for its loans. It charged new customers $30 per hundred dollars borrowed, and it charged repeat customers $24 per hundred dollars borrowed. ECX 1. To illustrate, the following is a portion of IA’s loan agreement, including the TILA disclosure and description of the consumer’s obligation to repay, that IA provided to a first-time borrower who was borrowing $300:

FEDERAL TRUTH IN LENDING DISCLOSURES ANNUAL PERCENTAGE RATE The cost of your credit as a yearly rate.

644.12% FINANCE CHARGE Amount Financed Th d II t th The amount of credit e o ar amoun e .

d·t .11 t provided to you or on ere I w1 cos you.

b h If $90 00 your e a .

.

$300.00 Total of Payments The amount you will have paid after you have made all payments as scheduled.

$390.00 our Payment Schedule will be: One (1) payment of$390.00 due on 7/15/2011 ("Payment ate").

ecurity: You are giving a security interest in the ECHECK/ ACH Authorization. Prepayment: If you pay off early, you will be entitled to a refund of the unearned portion of the mance charge.

See the terms of the Loan Agreement below for any additional information about nonpayment, ilUvJLU.UU, and refunds.

Itemization of Amount Financed: Amount given to you directly: $300.00. Amount paid on Loan#:-with us: $390.00.

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ECX 2. (Footnote “1” in the loan agreement refers to the following sentence that appears several pages later: “The term ‘Pay Date’ refers to the next time following the Payment Due Date, that you receive regular wages or salary from your employer. Because Renewals are for at least fourteen (14) days, if you are paid weekly, your loan will not be Renewed until the next Pay Date that is at least fourteen days after the prior Payment Due Date.”)

As the above example shows, IA calculated and disclosed the annual percentage rate (APR), the finance charge, and the total of payments based on the assumption that the loan would be paid off in a single payment on the consumer’s next payday. But as a result of the way in which IA structured PAYMENT OPTIONS: You must select your payment option at least three (3) business days prior to your Payment Due Date by contacting us at (800) 505-6073. At that time, you may choose:

(a) Payment in full: You may pay the Total of Payments shown above, plus any accrued fees, to satisfy your loan in full. When you contact us and choose this option, we will debit Your Bank Account (defined below) for the Total of Payments plus any accrued fees, in accordance with the ACH Authorization below; OR (b) Renewal: You may renew your loan (that is, extend the Payment Due Date of your loan until your next Pay Date1) by authorizing us to debit Your Bank Account for the amount of the Finance Charge, plus any accrued fees. If you choose this option, your new Payment Due Date will be your next Pay Date1, and the rest of the terms of the Loan Agreement will continue to apply.

AUTO-RENEWAL: If you fail to contact us to confirm your Payment Option at least three (3) business days prior to any Payment Due Date, or otherwise fail to pay the loan in full on any Pay Date, Lender may automatically renew your loan as described under (b) above, and debit Your Bank Account on the Payment Due Date or thereafter for the Finance Charge and any accrued fees. Your new Payment Due Date will be your next Pay Date1, and the rest of the terms of the Loan Agreement will continue to apply. You must contact us at least three (3) business days prior to your new Payment Due Date to confirm your payment option for the Renewal. If you fail to contact us, or otherwise fail to pay the loan in full on your new Payment Due Date, we may automatically renew the loan until your next Pay Date. 1 After your initial loan payment, you may obtain up to four (4) Renewals. All terms of the Loan Agreement continue to apply to Renewals. All Renewals are subject to Lender's approval. Under Delaware law, if you qualify, we may allow you to enter into up to four (4) Renewals, also known as a "refinancing" or a "rollover". The full outstanding balance shall be due upon completion of the term of all Renewals, unless you qualify for Auto-Workout, as described below.

AUTO-WORKOUT. Unless you contact us to confirm your option for Payment in Full prior to your Fourth Renewal Payment Due Date, your loan will automatically be placed into a Workout Payment Plan. Under the Workout Payment Plan, Your Bank Account will automatically be debited on your Pay Date1 for accrued finance charges plus a principal payment of $50.00, until all amounts owed hereunder are paid in full. This does not limit any of Lender's other rights under the terms of the Loan Agreement. All Workout Payment Plans are subject to Lender's approval 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 4 of 41

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repayment options, that rarely happened. Although the line captioned “Your Payment Schedule” described a one-payment loan, the “Payment Options” paragraph described things somewhat differently. That paragraph explained that the consumer must, at least three days prior to the payment due date, select one of two payment options. If the consumer selected the “Payment in full” option, then IA would debit the consumer’s account for the full amount of the principal and finance charge on the due date in a single payment.

If the borrower made no selection (or selected the “renewal” option), then the loan defaulted to “auto-renewal” status. The loan agreement provides that when a loan went into auto-renewal status, IA would debit the consumer’s account for only the finance charge ($90 in the above example), and would then renew the loan until the consumer’s next pay date. See Doc. 172 at 219-220. There is no indication in the record that IA would provide the consumer with new TILA disclosures when it “renewed” the loan and began withdrawing multiple payments.

At the end of this first renewal, i.e., the consumer’s next payday, the pattern would repeat unless the consumer took affirmative action: IA would again debit the finance charge from the consumer’s account and would again “renew” the loan for another term. Id. Unless the consumer took affirmative action to stop the process, IA would automatically renew the loan four times. (Delaware law precludes any additional renewals. 5 Del. Admin. Code 2210-3.1.2; see Doc. 172 at 219-220.) If the consumer continued to take no action after four renewals, the loan would automatically switch from “auto-renewal” status into “auto-workout” status. Doc. 172 at 220. This meant that IA would debit the consumer’s account for the finance charge plus $50 of principal (i.e., $140 in the above example). Doc. 88D at 239. And if the consumer continued to take no action, then IA would continue, each subsequent payday, to debit the (declining) finance charge and $50 of principal until the loan was paid in full. Id.

Although the loan agreement described two payment options (Payment in full; Renewal), IA sent borrowers a “welcome email” that described the options differently. Doc. 91A at 24. IA sent this email after approving loans, but before disbursing loan proceeds. Doc. 90 at 2. This email described three repayment options:

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Doc. 91A at 24. But just like the loan agreement, if the consumer took no action, the loan would renew four times, and then go into auto-workout status. The following chart shows the debits that IA would deduct from the consumer’s account (assuming a $300 loan to a first-time borrower) if the consumer took no action:

Dear CUSTOMER_FIRST_NAME, CONGRATULA TIONSJ Your loan for LOAN_AMOUNT has been approved. This email confirms your loan has been processed. It will be sent to your bank tonight and the funds will be available to you within 1 to 2 business days. Your first due dale will be LOAN_DUE_DA TE.

Remember you have 3 options of paying the loan back:

1) YOU CAN LET THE LOAN AUTOMATICALLY RENEW. All renewals are on your pay dates. After the first initial paymen~ the next 4 renewals will only require payment of the finance charge. Starting with the 5th renewal, in addition to the finance charge, we will also take out $50 of principal. This will continue until the loan- is repaid in full, unless of course you select either option 2 or 3 below. NOTE: PLEASE REMEMBER, YOU CAN SELECT OPTIONS 2 OR 3 AT ANYTIME DURING YOUR LOAN REPAYMENT PROCESS 2) PAY THE LOAN DOWN fN PART. If you want to increase your payment so you pay the loan back faster, you may do so in any amount ($50 incre,ments required) which will bring down the principal of your loan. Just call us 3 business days in advance of your pay date so we can make the change.

3) PAY THE LOAN IN FULL. Once again, just call us 3 business days in advance so we may make tha change on your account. If you pay your loan off before your next pay date, you only pay the finance charge for the days the loan remains unpaid. Thank You and Have a Great Day! Integrity Advance Gust Svc: (800) 505-6073 Fax: (800) 581-8148 PAYDAY PAnlEl\'T l $90 $90 $90 $90 $90 $140 $125 $110 $95 $80 $65 TOTAL $1065 Fl:'IIA.~ CE CHARGE (30°/o OF REMAINil\'G PRI:\'CIP AL BALA. ~ CE) $90 $90 $90 $90 $90 $90 $75 $60 $45 $30 $15 $765 ,UIOUl'ff REI\IAINI:\'G APPLIED PRil\'CIP AL TOT.AL PAID TO BALANCE TO DATE PRil\'CIPAL $0 $300 $90 $0 $300 $180 $0 $300 $270 $0 $300 $360 so $300 $450 $50 $250 $590 $50 $200 $715 $50 $150 $825 $50 $100 $920 $50 $50 $1000 $50 $0 $1065 $300 - $1065 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 6 of 41

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See Doc. 1 at 6; Doc. 21 at 5. Thus, this table shows that, if the consumer took no action with respect to the loan, the total amount of the finance charge and the total of payments that the consumer would ultimately pay would far exceed the amounts disclosed on the TILA disclosure.

To get a loan from IA, a borrower had to initial or sign the loan agreement in seven places. See ECX 2. The borrower’s fourth signature accepted the ACH authorization. That portion of the agreement included the following paragraph:

ECX 2. Pursuant to this paragraph, if the consumer attempted to revoke the ACH authorization, IA could create paper checks (remotely created checks or RCCs) (“you authorize us to prepare and submit one or more checks drawn on Your Bank Account”) and use them to withdraw payments from the consumer’s account. See Doc. 172 at 235-236. The consumer would not prepare or sign the RCC, nor would the consumer even see the RCC. See ECX 94 at 1-2.

C. Procedural history

1. The Notice of Charges

The Bureau’s Enforcement Counsel filed its Notice of Charges with the Bureau’s Office of Administrative Adjudication on November 18, 2015. Doc. 1. The Notice contained seven counts. Count I alleged that IA violated TILA because it based its TILA disclosures on the assumption that the consumer would pay off the loan in a single payment on the consumer’s first post-loan payday, even though that would happen only if the consumer took affirmative action. Count II alleged that IA’s violations of TILA also violated the CFPA. Count III alleged that both IA and Mr. Carnes had engaged in a deceptive act or practice in violation of the CFPA because the net impression created by the loan agreement misled consumers to believe that the finance charge and the total of payments were lower than the amounts consumers would actually pay. Count IV alleged that both IA and Mr. Carnes had prevented consumers from assessing the actual costs of the loans they entered into, and that this was unfair, in violation of the CFPA. Count V alleged that, by requiring consumers to accept the ACH authorization as a condition of getting a loan, IA had conditioned its loans and the extension of credit on repayment by preauthorized electronic fund transfer, in violation of EFTA and its implementing Regulation E (Reg. E). Count VI alleged that IA’s violations of EFTA and Reg. E also violated the CFPA. Count VII alleged that IA and Mr. Carnes had committed an unfair practice in violation of the CFPA when they used RCCs to withdraw money from the accounts of consumers who believed they did not owe money to IA.

You agree that we may re-initiate a debit entry for the same amount if the ACH debit entry is dishonored or payment is returned for any reason. The ACH Authorizations set forth in the Loan Agreement are to remain in full force and effect for this transaction until your indebtedness to us for the Total of Payments, plus any other charges or fees incurred and described in the Loan Agreement, is fully satisfied. You may only revoke the above authorizations by contacting us directly. If you revoke your authorization, you agree to provide us with another form of payment acceptable to us and you authorize us to prepare and submit one or more checks drawn on Your Bank Account so long as amounts are owed to us under the Loan Agreement. 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 7 of 41

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The Notice sought a variety of remedies, including a permanent injunction prohibiting future violations of TILA, its implementing Regulation Z, EFTA, its implementing Reg. E, the CFPA, and any other federal consumer financial law. The Notice also sought an award of restitution to compensate injured consumers, as well as disgorgement, and a civil penalty.

2. Proceedings before Judge McKenna

This matter was originally assigned to the Administrative Law Judge Office of the U.S. Coast Guard because in 2015 the Bureau did not have an administrative law judge of its own. Doc. 8. The matter was then heard by Coast Guard Administrative Law Judge Parlen McKenna. At the conclusion of several days of hearings, Judge McKenna issued his Recommended Decision. Doc. 176. Both IA and the Bureau’s Enforcement Counsel filed notices of appeal. Docs. 177, 178. However, resolution of those appeals was delayed, first pending a decision by the D.C. Circuit in PHH Corp. v. CFPB, 881 F.3d 75 (D.C. Cir. 2018), and then pending a decision by the Supreme Court in Lucia v. SEC, 138 S. Ct. 2044 (2018). Docs. 208, 210. As a result of the Court’s decision in Lucia, I concluded that Judge McKenna had not been constitutionally appointed. Doc. 216. Accordingly, I directed that the matter be remanded to the Bureau’s Administrative Law Judge, Christine Kirby, for a new hearing and Recommended Decision. Id. I further directed that Judge Kirby “give no weight to, nor presume the correctness of, any prior opinions, orders, or rulings issued by Judge McKenna.” Id.

3. Proceedings before the Bureau’s ALJ, Christine Kirby

On October 28, 2019, the ALJ issued an order denying further discovery regarding Respondents’ statute of limitations argument. Doc. 238. Then, on January 24, 2020, she issued an order denying IA’s Motion to Dismiss. Doc. 249. Finally, she issued her Recommended Decision on August 4, 2020. Doc. 293. All three of these decisions are relevant to this appeal.

a. Order denying further discovery

On October 28, 2019, the ALJ denied Respondents’ motion for additional discovery. Doc. 238. Respondents had requested that the ALJ issue a subpoena requiring Enforcement Counsel to provide 1) all consumer complaints regarding IA; 2) all external correspondence regarding IA; 3) all internal correspondence regarding IA; and 4) any other internal documents regarding IA. With respect to the first two requests, the ALJ concluded that Enforcement Counsel had already provided those documents to Respondents when it fulfilled its obligation to make disclosures pursuant to Bureau Rule 206, 12 C.F.R. § 1081.206. She denied the third and fourth requests because she concluded that Respondents were seeking documents that were privileged and could be withheld pursuant to Rule 206.

b. Order denying IA’s motion to dismiss

On November 15, 2019, Respondents filed a Motion to Dismiss and/or for Summary Disposition. Doc. 239. On January 24, 2020, the ALJ denied that motion in its entirety. Doc. 249. First, she rejected Respondents’ argument that Enforcement Counsel were precluded from asserting the allegations in Count IV of the Notice of Charges. (Count IV alleged that IA’s loan disclosures were unfair in violation of the CFPA.) During the proceedings before Judge McKenna, Respondents and 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 8 of 41

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Enforcement Counsel filed a joint stipulation agreeing to dismiss Count IV with prejudice. Doc. 127. A week before the parties filed the stipulation, Judge McKenna had entered an order granting in part Enforcement Counsel’s motion for summary disposition. Doc. 111. In that order, he granted summary disposition with respect to Count III of the Notice of Charges, which alleged that IA’s loan agreement was deceptive. In the stipulation, the parties agreed that the consumer harm resulting from Count III was coextensive with the harm caused by Count IV. Accordingly, in the interest of judicial economy, the parties agreed to the dismissal of Count IV. Judge Kirby observed that the stipulation was based on Judge McKenna’s order on the motion for summary disposition, and that, pursuant to my remand (Doc. 216), I had directed that she give no weight to that order. Because the parties had agreed to the dismissal based on an order that no longer has any effect, the ALJ held that Enforcement Counsel was not precluded from pursuing the allegations in Count IV.

Next, Judge Kirby addressed Respondents’ contention that the three counts in the Notice of Charges that applied to Mr. Carnes (Counts III, IV, and VII) were time-barred. (Counts that apply to IA were not time-barred because Enforcement Counsel had entered into tolling agreements with IA that tolled the statute of limitations with respect to IA, but those agreements did not apply to Mr. Carnes. See Docs. 200, 201.) The relevant statute of limitations, 12 U.S.C. § 5564(g)(1), provides that the Bureau may not bring an action “more than 3 years after the date of discovery of the violation.” Respondents argued that the statute of limitations should be interpreted to run for three years from the time the Bureau discovers, or should have discovered, the violations. The ALJ declined to decide whether the statute of limitations incorporates a constructive discovery rule. Doc. 249 at 23. However, she held that even if it did, the statute of limitations had not expired with respect to Mr. Carnes by November 18, 2015, when the Bureau filed its Notice of Charges. She recognized that, prior to November 18, 2012 (three years before the Bureau filed its Notice of Charges), the Bureau had information regarding IA’s violations. But it was only after that date that the Bureau either knew, or should have known, of evidence supporting the conclusion that Mr. Carnes was liable for IA’s misrepresentations. This was, in part, because IA took 11 months to comply with the Bureau’s civil investigative demand. Finally, the ALJ concluded that the CFPA’s statute of limitations also applied to the allegations that IA violated TILA and EFTA (Counts I, V), as well as to Counts II and VI, which alleged CFPA violations derived from the TILA and EFTA violations.

c. Recommended decision

On May 15, 2020, both Enforcement Counsel and Respondents filed motions for summary disposition. Docs. 272, 275. On August 4, 2020, the ALJ issued her Recommended Decision granting Enforcement Counsel’s motion and denying the one filed by Respondents. Doc. 293. With respect to the first two counts of the Notice of Charges, the TILA count and the associated CFPA count, the ALJ concluded that, because IA’s loans would automatically roll over unless the consumer took affirmative steps, the loan was actually a multi-payment loan. Because IA made disclosures as if the loan were a single payment loan, it violated TILA, and thus also committed the associated violation of the CFPA. Id. at 22-29.

Next, the ALJ concluded that, not only did IA’s loan disclosures violate TILA, but they were also deceptive and unfair (Counts III and IV). She held that the net impression of the loan agreement was that the loan was a single payment loan, thereby misrepresenting the costs of the loan. She concluded that this misrepresentation of costs was material. With respect to unfairness, she held that consumers were injured when they paid more than they expected to pay, that they could not 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 9 of 41

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avoid the injury because the costs were never revealed to them, and that IA’s disclosure practices did not benefit consumers. Id. 29-50.

Counts V and VI alleged a violation of EFTA and an associated CFPA violation. The parties agreed that, by signing the ACH authorization in the loan agreement, the consumer was thereby agreeing to a preauthorized electronic fund transfer in the form of both credits to, and debits from, the consumer’s bank account. The ALJ observed that there was nothing in the loan agreement indicating that the ACH authorization was optional. Further, IA disbursed funds electronically and provided no alternate means whereby consumers could receive the money they borrowed. This meant that consumers had to sign the ACH authorization to receive funds. As a result, the ALJ concluded that IA had conditioned its loans on consumers’ repayment by preauthorized electronic fund transfer, thereby violating EFTA and the CFPA. Id. at 50-56.

The ALJ held that IA’s use of remotely created checks (RCCs) was unfair, as alleged in Count VII. She held that, because IA used RCCs only when consumers attempted to block IA from accessing their bank accounts, RCCs substantially harmed consumers. She held that consumers could not avoid the injury caused by the RCCs because the single sentence in the loan agreement that authorized RCCs was unclear. She also held that RCCs did not provide offsetting benefits when used to collect payments for loans whose costs were never adequately disclosed. Id. at 56-64.

The ALJ next held that Mr. Carnes could be held liable for IA’s violations of the CFPA as alleged in Counts III, IV, and VII. She reviewed undisputed facts and concluded that there was overwhelming evidence that Mr. Carnes had authority to control both IA and the practices at issue in those three counts. She also concluded that Mr. Carnes knew and understood the contents of the loan agreement, knew that the TILA boxes disclosed the loans that IA offered as if they were single payment loans, and also knew that the vast majority of loans would default into auto-renewal and auto-workout status. Accordingly, she held that Mr. Carnes had both the requisite authority to control and the knowledge sufficient to hold him liable for IA’s violations. Id. at 64-76.

Finally, the ALJ addressed the appropriate remedy. She held that IA should be held liable for restitution related to its TILA violations, and that this restitution should be used to provide redress for consumers who borrowed from IA because they did not get the benefit of the bargain they thought they had entered into – they paid a substantially higher cost for loans than disclosed by IA. She rejected Respondents’ contention that repeat borrowers were not entitled to restitution because she concluded that there was insufficient evidence for her to conclude that repeat customers understood those costs any better than first-time borrowers. She also held that Enforcement Counsel did not have to show that a particular consumer had suffered actual damages before that consumer could receive restitution. She held that the appropriate amount of restitution was the amount that each consumer had paid over and above the amount disclosed in the loan agreement, and that, because the FTC could have obtained restitution for TILA violations committed prior to July 21, 2011 (the date that TILA enforcement authority transferred to the Bureau), IA should be held liable for restitution for all the loans that it made going back to 2008. This amount totaled $132.5 million. Mr. Carnes’ liability for restitution was different because he was only named in Counts III and IV, which alleged violations of the CFPA. The FTC could not enforce the CFPA and as a result, no restitution was appropriate with respect to these counts for violations that occurred before July 21, 2011. Thus, the ALJ recommended that Mr. Carnes be held jointly liable with IA for $38.4 million. (This did not increase IA’s liability because consumers who were 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 10 of 41

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entitled to redress pursuant to Counts III and IV were also entitled to redress as a result of IA’s TILA violation. Thus, IA was liable for $94.1 million for consumers who entered into loans before July 21, 2011, and was jointly liable with Mr. Carnes for $38.4 million with respect to consumers who borrowed after that date.) She also recommended that Mr. Carnes and IA be held jointly liable for restitution for the amount of the RCCs – $115,024.50. Id. at 76-86.

The ALJ denied most of Enforcement Counsel’s request for injunctive relief because she concluded that monetary relief would be adequate to remedy Respondents’ violations. However, she did recommend that Respondents be ordered to assist the Bureau in identifying and locating consumers who are entitled to restitution. Id. at 89.

Finally, the ALJ held that there were three distinct practices that warranted civil money penalties: 1) the use of a loan agreement that violated TILA and that was deceptive and unfair; 2) the EFTA violations; and 3) the use of RCCs. She held that IA was liable for all three practices, and Mr. Carnes was liable for the first and third. The relevant time period for each of the violations was 500 days (from July 21, 2011, until IA ceased offering loans in December 2012) and the appropriate penalty was $5000 per day. Accordingly, she recommended that IA be liable for a civil penalty of $7.5 million and Mr. Carnes be liable for $5 million. Id. at 90-94.

c. Respondents’ Appeal

On August 11, 2020, Respondents filed their Notice of Appeal. Doc. 294. Respondents argued that: 1) the ALJ erred in holding that I could ratify this action; 2) the ALJ erred by failing to hold that the statute of limitations had expired with respect to all claims against Mr. Carnes, and all but three of the claims against IA; 3) the ALJ denied Respondents due process; 4) the ALJ’s holding that Respondents were “covered persons” was erroneous; 5) the ALJ erred in concluding that summary disposition was appropriate with respect to all seven counts of the Notice of Charges; and 6) the ALJ’s recommendations with respect to remedies were erroneous. Respondents’ Opening Appeal Brief, Doc. 295. Enforcement Counsel filed an Answering Brief, Doc. 296, and Respondents filed their Reply, Doc. 297. Respondents requested the opportunity to present oral argument, and I conducted an argument on December 8, 2020.

ANALYSIS

I.

STANDARD OF REVIEW

As explained in the Decision of the Director in In the Matter of PHH Corp., File No. 2014-CFPB- 0002 (June 4, 2015), rev’d on other grounds sub nom. PHH Corp. v. CFPB, 881 F.3d 75 (D.C. Cir. 2018), the Bureau’s rules provide that when a party appeals an ALJ’s recommended decision, “the Director will consider such parts of the record as are cited or as may be necessary to resolve the issues presented and, in addition, will to the extent necessary or desirable, exercise all powers which he or she could have exercised if he or she had made the recommended decision.” 12 C.F.R. 1081.405(a). That means my review as to both facts and law is de novo.

Pursuant to the CFPA, the Bureau conducts its administrative adjudications “in the manner prescribed by chapter 5 of Title 5, United States Code.” 12 U.S.C. § 5563(a). That is, this adjudication is on the record, and is governed by a preponderance of the evidence standard. See 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 11 of 41

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Steadman v. SEC, 450 U.S. 91, 95-102 (1981) (holding that when hearings are held on the record, the Administrative Procedure Act requires a preponderance of the evidence standard).

II.

LIABILITY

Respondents have appealed the ALJ’s Recommended Decision. They raise nineteen separate arguments, challenging the Bureau’s authority, the ALJ’s holdings with respect to liability, and the recommended relief. I disagree with most of Respondents’ arguments, although I agree that it should not be held liable for violations that occurred prior to the date that enforcement authority was transferred to the Bureau.

A.

Preliminary arguments

1.

Mr. Carnes may be held liable for IA’s violations of the CFPA as alleged in Counts III, IV, and VII of the Notice of Charges

Count III alleges that IA’s disclosures were deceptive, Count IV alleges that those disclosures were also unfair, and Count VII alleges that IA’s use of RCCs was unfair. Each of those counts named not only IA but also Mr. Carnes. Before I address IA’s liability with respect to those allegations, I will explain why Mr. Carnes may be held liable.

a. Standard of liability

In CFPB v. Gordon, 819 F.3d 1179 (9th Cir. 2016), the court held that an individual may be held liable for a corporation’s violations of the CFPA:

if “(1) he participated directly in the deceptive acts or had the authority to control them and (2) he had knowledge of the misrepresentations, was recklessly indifferent to the truth or falsity of the misrepresentations, or was aware of a high probability of fraud along with an intentional avoidance of the truth.”

Id. at 1193, quoting FTC v. Stefanchik, 559 F.3d 924, 931 (9th Cir. 2009). In Gordon, as well as in other cases brought by the Bureau, courts have held that cases interpreting the FTC Act provide guidance as to when an individual may be held liable under the CFPA. See, e.g., CFPB v. Mortg. L. Grp., LLP, 366 F. Supp. 3d 1039, 1058 (W.D. Wis. 2018); CFPB v. NDG Fin. Corp., No. 15-cv- 5211, 2016 WL 7188792, at *17 (S.D.N.Y. Dec. 2, 2016). Indeed, the parties have also relied on FTC Act cases to assess Mr. Carnes’ liability. See Enforcement Counsel’s Answering Brief, Doc. 296 (EC Br.) at 11-13; Doc. 272 at 35-36. I will do so as well.

As the court explained in FTC v. Amy Travel Services, Inc. 875 F.2d 564, 574 (7th Cir. 1989), it is not appropriate for an individual to enjoy benefits from violating the FTC Act, but then insulate himself from liability by contending that he did not participate directly in the illegal conduct. Accordingly, the court established a two-part test to determine individual liability for corporate violations. That test is described in detail in FTC v. Freecom Communications, Inc, 401 F.3d 1192 (10th Cir. 2005), where the court explained the significance of both parts. Once the FTC has shown that the corporate defendants had violated the FTC Act, “it only had to show [that the individual defendant] had the authority to control [the corporate] defendants to establish its case for injunctive 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 12 of 41

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relief against [the individual].” Id. at 1205. Thus, if the FTC, or the Bureau, establishes that a corporation has violated the law, and also establishes that an individual has the authority to control the corporation’s wrongful acts, the FTC, or the Bureau, is entitled to forward-looking injunctive relief against the individual.

As to the second part of the test, Freecom held that:

to hold an individual personally liable for consumer redress, the FTC must show a heightened standard of awareness beyond the authority to control. This awareness, however, need not rise to the level of an intent to defraud. In particular, the FTC need only show the individual had or should have had knowledge or awareness of defendants’ misrepresentations. The FTC may fulfill its burden by showing the individual had actual knowledge of material misrepresentations, reckless indifference to the truth or falsity of such misrepresentations, or an awareness of a high probability of fraud along with an intentional avoidance of the truth.

Id. at 1207. Thus, to obtain monetary relief from an individual defendant, the FTC or the Bureau must make an additional showing: that the individual knew, or should have known of, the corporate defendant’s wrongful acts. As the court explained in Amy Travel, this means that the FTC (or the Bureau) must show that “the individual had some knowledge of the practices.” 875 F.2d at 573. But if the Bureau can show that the individual knew of the acts or practices that constitute the violation of the CFPA, that is, the elements of the violation, the Bureau need not also show that the individual knew that the acts or practices violated the law. See id. at 575.

b. Mr. Carnes is liable for IA’s unfair and deceptive practices

The ALJ held that Mr. Carnes satisfied the first part of the test – participation in, or authority to control IA’s unlawful conduct – and I agree. As explained above, the evidence shows that Mr. Carnes had ultimate control over all aspects of IA’s business, even though he was not necessarily directly involved in every aspect. See, e.g., Doc. 172 (Hearing Transcript) at 51 (testimony of Timothy Madsen) (“any large decision [at IA] would have been made by Mr. Carnes”); id. at 221 (testimony of James Carnes) (“I had ultimate authority over the company”); id. at 228 (testimony of James Carnes) (“Q. As CEO, did you have to approve the loan agreement template? A. Again, as CEO you are ultimately approving everything”); ECX 68 (Deposition Transcript of James Carnes) at 32 (“Q. As the CEO, I assume you had ultimate say over the company’s policies and procedures; is that correct? A. Yes.”).

With respect to the first part of the test, IA argues that Mr. Carnes did not have the authority to control IA’s violations because he “did not draft, edit, or substantively review the loan agreement.” Respondents’ Opening Appeal Brief (Resp. Br.) at 16; Transcript of Proceedings on Appeal, Dec. 8, 2020 (Appeal Tr.), at 8-9. But this argument focuses only on the “participation” element of the first part of the test. Thus, Respondents have not disputed that Mr. Carnes had control over IA’s conduct. See also Respondents’ Reply Brief in Support of Appeal (Resp. Reply) at 3 n.2 (focusing on who wrote the loan agreement). The fact that Mr. Carnes could control IA’s conduct (and, in particular, that he authorized use of IA’s loan agreement) is sufficient to satisfy the first part of the test. See FTC v. AMG Servs., Inc., No. 2:12-cv-0536, 2016 WL 5791416, at *6 (D. Nev. Sept. 30, 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 13 of 41

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2016), aff’d 910 F.3d 417 (9th Cir. 2018), cert. granted, No. 19-508, 141 S. Ct. 194 (2020) (“[a]n individual’s position as a corporate officer … is sufficient to show requisite control”).

I also agree with the ALJ that Enforcement Counsel has shown that Mr. Carnes had sufficient knowledge to hold him liable for monetary relief. IA offered only one product, short-term consumer loans, and that product was its sole source of revenue. Doc. 172 at 94-95 (testimony of James Carnes). Although Mr. Carnes did not personally draft the loan agreement that IA used for those loans, he approved its use. Doc. 172 (testimony of James Carnes) at 232 (“Q. But isn’t it true that they had your approval to implement this loan agreement? … A. Did they have my approval to use the loan agreement? Yes.”) Mr. Carnes knew that IA’s loan agreement made disclosures as if IA’s loans were single-payment loans. Doc. 173 (Hearing Transcript) (testimony of James Carnes) at 50-51 (“A. Are you saying, did I understand that on the – in the TILA box [for a consumer who borrowed $100] that it said, sum of payments was $130? … Yes.”) He was aware that, unless a consumer took affirmative action, the loans would not be paid off in a single payment, but would renew, and would continue to renew, until the loans went into auto-workout status. Doc. 172 at 218-220; Appeal Tr., at 10 (Mr. Carnes “was aware of the structure of the loan”). Mr. Carnes also knew that a large portion of IA’s loans would renew at least once, Doc. 172 at 222, and that as a result of those renewals, consumers would pay more than the amount disclosed in the loan agreement. ECX 68 at 245 (“Q. And in most cases they would pay substantially more than the amount that’s reflected in the total amounts of payments box; is that right? A. They would pay more.”). As explained below, I have concluded that IA’s loan agreement was deceptive on its face. Because Mr. Carnes’ testimony establishes that he was aware of the elements of IA’s deceptive conduct – that the loan agreement made disclosures as if the loan were a single payment loan when the loan was actually a multi-payment loan – Mr. Carnes had sufficient knowledge to hold him personally liable for IA’s unfair and deceptive practices.

Mr. Carnes also had sufficient knowledge to hold him liable for the unfair acts or practices that resulted from IA’s use of RCCs. He testified that he knew what RCCs were, he knew that IA used RCCs, and he knew the circumstances in which IA used RCCs. Doc. 173 at 84-85 (testimony of James Carnes). In particular, he knew that IA used RCCs when consumers revoked ACH authorization and IA was unable to induce payment by any other means. Id.

Thus, I conclude that Mr. Carnes had sufficient knowledge to hold him liable for monetary relief as a result of the conduct challenged in Counts III, IV, and VII of the Notice of Charges.

None of the arguments raised by IA convinces me otherwise. IA’s central argument is that Mr. Carnes did not know the specific contents of the loan agreement. Resp. Br. at 17; Resp. Reply at 5; Appeal Tr. at 12 (Mr. Carnes reviewed the loan agreement for the first time in connection with the trial of this proceeding). But as explained above, Mr. Carnes had ample knowledge of how IA’s loans worked. In particular, he was aware that the disclosures in the loan agreement did not comport with the default repayment process that the vast majority of IA’s borrowers experienced. That is the basis of Counts III and IV, and it is sufficient knowledge to hold Mr. Carnes liable for restitution.

Respondents also argue that, because the loan agreement was drafted by an attorney (in 2008), Mr. Carnes was entitled to assume that the agreement complied with all laws, even the CFPA (which was not enacted until 2010). Based on this, Respondents claim that Mr. Carnes did not have 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 14 of 41

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sufficient knowledge to hold him liable for IA’s violations. Doc. 173 at 27-28 (testimony of IA’s vice president, Edward Foster) (the loan agreement was drafted by outside counsel); Resp. Br. at 18, Resp. Reply at 3; Appeal Tr. at 10. While Respondents resist the label, see Doc. 172 at 230, this is an advice-of-counsel defense. But no such defense is available here. See CFPB v. CashCall, Inc., No. 15-cv-7522, 2016 WL 4820635, at *12 (C.D. Cal. Aug. 31, 2016) (“‘reliance on advice of counsel is not a valid defense on the question of knowledge required for individual liability’”), quoting FTC v. Grant Connect, LLC, 763 F.3d 1094, 1102 (9th Cir. 2014); FTC v. J.K. Publ’ns, Inc. 99 F. Supp. 2d 1176, 1206 (C.D. Cal. 2000) (court held individual defendant liable even though she claimed that she had not read the documents she signed); Amy Travel, 875 F.2d at 575 (“reliance on advice of counsel was not a valid defense on the question of knowledge”). The reason for this is that the relevant question is whether Mr. Carnes “had some knowledge of the practices” that harmed consumers, Amy Travel, 875 F.2d at 573, not whether he knew that those practices violated the law. See CFPB v. CashCall, 2016 WL 4820635, at *12 (“‘We have long recognized the common maxim, familiar to all minds, that ignorance of the law will not excuse any person, either civilly or criminally’”), quoting Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA, 559 U.S. 573, 581 (2010). As explained above, there is ample evidence that Mr. Carnes knew that IA’s loan agreement misrepresented the amount that consumers were likely to pay, and also knew that consumers were likely to pay more than the amount disclosed unless they took affirmative action. Thus, he was aware of the essential facts that form the basis of the violations of the CFPA alleged in Counts III and IV. It is irrelevant that he may have (incorrectly) believed that the loan agreement complied with the law, and it also irrelevant that he reached this belief because the agreement was drafted by a lawyer.3 What counts is what he knew would occur, not what he believed regarding the law.

Respondents also argue that Mr. Carnes did not have sufficient knowledge because state regulators reviewed IA’s loan agreement as a part of Delaware’s annual licensing process. Resp. Reply at 3 & n.3; Appeal Tr. at 10. But just as Mr. Carnes cannot escape liability because a lawyer drafted the loan agreement, he cannot escape liability for the deception in IA’s loan agreement merely because it was reviewed by an employee of the Office of the State Bank Commissioner of Delaware. This would be so even if Delaware had reviewed the agreement for compliance with the CFPA, and there is no evidence that it did.

Finally, Respondents argue that it was reasonable for Mr. Carnes to conclude that IA’s customers were not deceived because IA had so many repeat customers. Resp. Reply at 4; Appeal Tr. at 8. But this argument assumes its own conclusion – that if a consumer sought a second loan from IA, then that consumer was not deceived. This argument also ignores that IA had a substantial number of customers who were one-time customers. Indeed, there were more than 120,000 customers who borrowed once, but only once, from IA. Doc. 173 (testimony of Robert Hughes) at 158. Even if it

3 Even if advice of counsel were a valid defense, that defense has been waived by Respondents. Throughout the administrative trial in this matter, they repeatedly asserted attorney-client privilege and refused to permit the disclosure of any advice they were actually given by their outside counsel who drafted the loan agreement, or by IA’s in-house general counsel. See, e.g., Doc. 172 at 230; Doc. 173 at 20, 22, 27-28, 86, 95. The attorney-client privilege “may not be used both as a sword and a shield.” Columbia Pictures Television, Inc. v. Krypton Broad. of Birmingham, Inc., 259 F.3d 1186, 1196 (9th Cir. 2001). By repeatedly asserting the privilege, they waived the defense. See id.

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were proper for Mr. Carnes to assume that repeat customers were not deceived (but see the discussion of repeat customers below), he could not make the same assumption regarding IA’s onetime customers. What is relevant is that Mr. Carnes had sufficient knowledge of facts that established that customers were likely to be deceived by IA’s loan agreement. Thus, he may be held liable for IA’s violations even if there may have been some customers who were not deceived.4

Similarly, Respondents argue that Mr. Carnes did not have sufficient knowledge to hold him liable for the RCCs because he was not familiar with how RCCs were disclosed in the loan agreement. Resp. Br. at 18; Resp. Reply at 5. As explained above, the authorization for RCCs was set forth in one sentence of the loan agreement that was buried in the ACH authorization. But Mr. Carnes was aware that IA used RCCs, and he knew the circumstances under which they were used. Doc. 173 at 84-85. That is, he knew that IA used RCCs in situations where consumers had withdrawn ACH authorization, presumably to block IA from gaining access to their bank accounts, and that IA used the RCCs to evade that block. While Mr. Carnes asserts that as CEO he was not familiar with the details of IA’s loan agreement, I conclude that he was at least recklessly indifferent to those details, and that is sufficient to hold him liable. Amy Travel, 875 F.2d at 574.

2.

The Bureau’s TILA and EFTA claims are not time-barred

Respondents contend that both TILA and EFTA impose a one-year statute of limitations on Bureau enforcement actions and that as a result, the Bureau’s TILA and EFTA claims (Counts I and V) are time-barred. Resp. Br. at 9, citing 15 U.S.C. § 1640(e) (TILA) and 15 U.S.C. § 1693m(g) (EFTA). Respondents claim that these one-year limitations periods also apply to the two CFPA claims brought under 12 U.S.C. § 5536(a)(1)(A) (Counts II and VI) that derive from IA’s violations of TILA and EFTA. These arguments fail because both 15 U.S.C. § 1640(e) and 15 U.S.C. § 1693m(g) specify that the prescribed one-year statute of limitations applies only to actions “under this section.” Administrative enforcement actions of TILA and EFTA are governed by different sections of those statutes. See 15 U.S.C. § 1607 ((TILA); id. § 1693o (EFTA); see also BCFP v. Citizens Bank, N.A., No. 20-cv-044, 2020 WL 7042251, at *6 (D.R.I. Dec. 1, 2020) (“In sum, TILA’s plain language dictates that § 1640 governs civil suits brought by individuals and state attorneys general, while § 1607 provides the cause of action for federal enforcement agencies such

4 Respondents claim that Mr. Carnes did not receive customer complaints. Resp. Reply at 4; see Doc. 172 (testimony of James Carnes) at 233 (“Q. So you were unaware personally of any complaints? A. I wasn’t aware of complaints.”). However, when Enforcement Counsel sought to probe whether consumer complaints had been brought to Mr. Carnes attention, Respondents asserted the attorney-client privilege and refused to provide any information. Doc. 173 (testimony of Edward Foster) at 29-31. Respondents may not argue that Mr. Carnes never received consumer complaints when they refuse to provide necessary evidence to support or refute that argument. In any event, although knowledge of consumer complaints may be probative of an individual’s knowledge, there are other ways to establish knowledge, and there is ample evidence here showing that Mr. Carnes was well aware of the essential facts of IA’s violations. See also FTC v. NHS Sys., Inc., 936 F. Supp. 2d 520, 535 (E.D. Pa. 2013) (individual defendant, who may not have had actual knowledge of misrepresentations, was nonetheless liable because of his degree of involvement in corporate affairs).

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as the CFPB.”). Respondents do not claim that either § 1607 or § 1693o restricted Enforcement Counsel’s ability to bring any of the claims asserted in the Notice of Charges.5

Even if the one-year statute of limitations in § 1640(e) or § 1693m(g) somehow applied to Bureau enforcement actions notwithstanding the clearly contrary statutory text, the Bureau’s related claims (Counts II and VI), which are brought under 12 U.S.C. § 5536(a)(1)(A), would not be affected. Actions brought by the Bureau are governed by the CFPA’s general three-year limitations period, id. § 5564(g)(1), unless those actions are brought “solely under” one of the other laws (such as TILA or EFTA) that the Bureau enforces, id. § 5564(g)(2)(A). But actions brought under § 5536(a)(1)(A) (such as Counts II and VI), do not arise “solely under” TILA or EFTA. Accordingly, these claims are governed by the CFPA’s general three-year limitations period, see id. § 5564(g)(1).

3.

The Bureau satisfied the statute of limitations with respect to Mr. Carnes

Respondents argue that the CFPA’s three-year statute of limitations bars Enforcement Counsel’s claims against Mr. Carnes because the Bureau either discovered or should have discovered Mr. Carnes’ violations more than three years before the filing of the Notice of Charges.6 I disagree. Like the ALJ, I find that Respondents have failed to demonstrate that there is a genuine question whether the Bureau discovered or with due diligence should have discovered Mr. Carnes’ violations three years before the Notice of Charges was filed on November 18, 2015. As a result, I do not need to address the question of whether the CFPA’s statute of limitations begins to run when a reasonably diligent agency plaintiff could have discovered a violation as opposed to when the Bureau actually discovered the violation.

Under 12 U.S.C. § 5564(g)(1), “no action may be brought under [the CFPA] more than 3 years after the date of discovery of the violation to which an action relates.” Here, as discussed more fully above, Mr. Carnes’ violations of the CFPA were based on his liability for IA’s deceptive and unfair conduct. To obtain consumer redress for Mr. Carnes’ violations of the CFPA on this theory, the Bureau had to prove that “(1) he participated directly in the deceptive acts or had the authority to

5 Respondents have not, for instance, claimed that relief sought pursuant to Counts I and II is restricted by 15 U.S.C. § 1607(e). I find that Respondents have intentionally waived any such arguments by failing to present them either to the ALJ or in their appeal. A finding of waiver is particularly appropriate because Respondents have long been on notice that § 1607(e) could potentially be relevant, see, e.g., Doc. 193 at 1; Doc. 199 at 1, and because any effect of § 1607(e) might have depended on factual matters that, due to Respondents’ waiver, were not addressed by the ALJ or by the parties on this appeal, see, e.g., 15 U.S.C. § 1607(e)(3)(C) (setting time limitation on certain relief except with respect to “a willful violation which was intended to mislead the person to whom credit was extended”).

6 Respondents have not identified any evidence concerning the Bureau’s discovery of IA’s unfair practices in connection with RCCs, let alone Mr. Carnes’ knowledge or participation in that conduct. As a result, even if I accepted Respondents’ arguments regarding the Bureau’s discovery of Mr. Carnes’ violations related to the loans’ costs, Mr. Carnes would still be liable for IA’s use of RCCs. Mr. Carnes would also be liable for restitution (and the related injunctive relief) for all of IA’s unfair and deceptive conduct that occurred after November 18, 2012. 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 17 of 41

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control them and (2) he had knowledge of the misrepresentations, was recklessly indifferent to the truth or falsity of the misrepresentation, or was aware of a high probability of fraud along with an intentional avoidance of the truth.” Gordon, 819 F.3d at 1193; see also Resp. Br. at 17.

Because it is undisputed that the Bureau could not recover from Mr. Carnes (or obtain injunctive relief requiring Mr. Carnes to cooperate in identifying consumers entitled to redress) without proving participation in or authority over the unlawful conduct as well as his knowledge, recklessness, or intentional avoidance of the truth, I find that these are important and necessary elements of the “violation” that must be discovered before the statute of limitations clock begins to run. See Merck & Co., Inc. v. Reynolds, 559 U.S. 633, 648-49 (2010) (holding that scienter is a fact constituting a § 10(b) securities violation because it is “an important and necessary element” of such a violation without which “[a] plaintiff cannot recover”); Doc. 249 at 19 (“[T]he CFPB claims against Respondent Carnes could not have accrued until the CFPB discovered evidence that he participated directly in or had actual knowledge of the misrepresentations involved, was recklessly indifferent to the truth or falsity of the misrepresentations, or was aware of a high probability of fraud and intentionally avoided learning the truth.”).

Respondents have not identified any reason to suggest that the Bureau discovered, or that a reasonably diligent agency would have discovered, Mr. Carnes’ violations of the CFPA before November 18, 2012 (i.e. three years before the filing of the Notice of Charges). Instead, Respondents identify evidence that pertains, at most, to the discovery of IA’s violations. Respondents point to five pieces of evidence, one concerning the Bureau’s focus on the payday lending industry, one about the Office of Enforcement’s general investigatory policies, and three related to the Bureau’s awareness of consumer complaints about IA’s conduct. See Resp. Br. at 7-8; accord Appeal Tr. at 15-16. Because Respondents failed on appeal to identify a genuine factual issue concerning the Bureau’s discovery of Mr. Carnes’ violations, I find that Mr. Carnes’ affirmative statute of limitations defense fails.

In their brief to the ALJ (but not on appeal), Respondents asserted that the Bureau obtained IA’s loan agreement and learned that Mr. Carnes’ was IA’s CEO (or should have done so) before November 2012. Doc. 239 at 9-10. Even if these arguments had not been waived for failure to press them on appeal, they do not suggest that the Bureau discovered (or should have discovered) Mr. Carnes’ liability, i.e., his participation in, or knowledge of, IA’s violations more than three years before the filing of the Notice of Charges. Indeed, as the ALJ explained (and Respondents have failed to dispute in this appeal), Mr. Carnes’ individual liability “would not have been evident merely from the loan agreement, Carnes’ title as CEO of the company, and complaints against Integrity Advance.” Doc. 249 at 24. Instead, such a conclusion “required further documentation and investigational testimony.” Id.

Under the CFPA, the Bureau obtains that kind of documentation and investigational testimony through administrative subpoenas. Here, the Bureau sent IA an administrative subpoena on January 7, 2013. Doc. 234, ¶ 3. IA provided an initial, partial production on October 25, 2013, and a largely complete production in December 2013. Id. ¶ 5. Enforcement counsel conducted investigational hearings in June 2014. Id. ¶¶ 7-8. As a result, I find that even based on their arguments to the ALJ, IA failed as a matter of law to show that the Bureau discovered Mr. Carnes’ violation before November 18, 2012. I likewise find that Respondents did not show that a reasonably diligent agency in the Bureau’s position would have discovered Mr. Carnes’ violations 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 18 of 41

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before November 18, 2012. After all, even if the Bureau had sent IA an administrative subpoena as fast as possible – for instance, immediately after an enforcement attorney accessed complaints concerning IA’s conduct on March 29, 2012, id. ¶ 2 – the Bureau would not have even had any documents relevant to Mr. Carnes liability until 2013 given the time it took IA to respond to the Bureau’s administrative subpoena.

4.

Ratification provides Respondents with an appropriate remedy for the CFPA’s unconstitutional for-cause removal provision

As is apparent from the conclusions I have reached here, I ratify the Bureau’s decision to file the Notice of Charges and to prosecute this action. See Guedes v. BATFE, 920 F.3d 1, 13 (D.D.C. 2019). This provides Respondents with an appropriate remedy for the CFPA’s unconstitutional removal restriction. See FEC v. Legi-Tech, Inc., 75 F.3d 704, 708 (D.C. Cir. 1996).

Respondents cite FEC v. NRA Political Victory Fund, 513 U.S. 88 (1994), and argue that I cannot ratify this action because, if the Bureau were to bring this action now, the statute of limitations would have expired. This is incorrect for three reasons. As explained above, the statute of limitations in the CFPA is satisfied once the Bureau has “brought” an action. 12 U.S.C. § 5564(g)(1). Nothing in the CFPA’s statute of limitations suggests that it can be satisfied only if the action is brought at a time when the Bureau is headed by a Director who can be removed by the President at will. Here, the Bureau brought an action against Respondents when it filed the Notice of Charges in 2015. Because the Bureau has already satisfied the statute of limitations, my ratification is timely.

Second, if the Bureau did not satisfy the statute of limitations when it filed the Notice of Charges, then the statute of limitations has not yet expired. Pursuant to the CFPA, the limitations period is triggered by the date that the Bureau discovers the violation. By tying the limitations period to the discovery of the violation, Congress indicated that it did not want violations of the CFPA to be placed beyond the reach of the Bureau’s diligent enforcement efforts. Respondents’ argument flies in the face of Congress’s will. Respondents essentially contend that the Bureau was constitutional enough to discover their violations and thereby begin the ticking of the statute of limitations clock, but not constitutional enough to issue a Notice of Charges that would satisfy the limitations period. There is no reason to believe that Congress intended this kind of heads-I-win, tails-you-lose result. Accordingly, if the statute of limitations was not satisfied when the Bureau issued the Notice of Charges, then the limitations period has yet to expire, and my ratification is timely.

Third, the CFPA’s statute of limitations expressly states that the limitations period applies “[e]xcept as otherwise permitted … by equity.” 12 U.S.C. § 5564(g)(1). So even if the statute of limitations might have otherwise run, the limitations period should be equitably tolled. See Holland v. Fla., 560 U.S. 631, 649 (2010) (holding that a party is entitled to equitable tolling if it pursued its rights diligently and some extraordinary circumstance prevented timely filing). As I have explained above, the Bureau has pursued its rights diligently. Indeed, it filed a timely Notice of Charges. And, to the extent that the filing did not satisfy the statute of limitations, that was only because of an extraordinary circumstance – the unconstitutionality of the for-cause removal provision, a circumstance over which the Bureau had no control.

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Respondents argue that the equitable tolling of the statute of limitations would be to their detriment. Resp. Br. at 3. But “statutes of limitations are designed to insure fairness to defendants by preventing the revival of stale claims in which the defense is hampered by lost evidence, faded memories, and disappearing witnesses, and to avoid unfair surprise.” Johnson v. Ry. Express Agency, Inc., 421 U.S. 454, 473 (1975) (Marshall, J., concurring in part, dissenting in part). None of those purposes would be served here since Respondents have long had notice of the Bureau’s claims. Accordingly, if the statute of limitations has not been satisfied, but has nonetheless expired, it should be equitably tolled.

Respondents cite the district court’s decision in CFPB v. RD Legal Funding, LLC, 332 F. Supp. 3d 729, 785 (S.D.N.Y. 2018), vacated and remanded for further proceedings, No. 18-2743, 2020 WL 6372988 (2d Cir. Oct. 30, 2020), and argue that ratification would be impossible because the Bureau’s structure was unconstitutional at the time of the filing of the Notice of Charges. Resp. Br. at 4. But the district court in RD Legal reached that decision because it concluded that, as a result of the for-cause removal provision, the entire CFPA should be struck down. The Supreme Court rejected this conclusion in Seila Law LLC v. CFPB, 140 S. Ct. 2183 (2020). Indeed, it held that even though the for-cause removal provision was unconstitutional (and severable from the remainder of the CFPA), “[t]he provisions of the [CFPA] bearing on the [Bureau’s] structure and duties remain fully operative.” Id. at 2209 (emphasis added); see BCFP v. Citizens Bank, N.A., No. 20-cv-044, 2020 WL 7042251, at *8 (D.R.I. Dec. 1, 2020) (“This Court thus interprets the Supreme Court’s use of the word ‘structure’ to refer to attributes of the CFPB’s top brass, not deeper issues with the authority or makeup of the Bureau as a whole.”). That is, despite the unconstitutional removal restriction, the Bureau had the authority to file the Notice of Charges.

5.

Respondents have not been denied due process

Respondents make two arguments in which they contend they were denied due process. First, they argue that they were denied due process when the ALJ refused to grant their request for additional discovery. Second, they contend that they were denied due process because the ALJ did not conduct a new hearing with witnesses and an opportunity for cross-examination. I reject both of those arguments.

a. Respondents’ request for issuance of a subpoena

First, on August 23, 2019, Respondents filed a request with the ALJ pursuant to Bureau Rule 208, 12 C.F.R. § 1081.208, seeking to have her issue a subpoena directed to the Bureau that required the production of:

1) All consumer complaints received by the Bureau from July 21, 2011, to November 18, 2012, regarding IA or Mr. Carnes;

2) Records of all communications (from July 21, 2011, to November 18, 2012) between anyone employed by the Bureau and any other person regarding IA or Mr. Carnes;

3) Records of all internal Bureau communications (from July 21, 2011, to November 18, 2012) regarding IA or Mr. Carnes;

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4) Any document drafted by any Bureau employee regarding IA or Mr. Carnes.

Doc. 232. Respondents argue that they sought this information in support of their contention that, by the time the Bureau filed its Notice of Charges, the statute of limitations had expired. Appeal Tr. at 17, 43. They contend that their proposed subpoena was narrowly tailored, and that pursuant to the Bureau’s rules, the ALJ was required to issue the subpoena unless the subpoena was “unreasonable, oppressive, excessive in scope, or unduly burdensome.” Resp. Br. at 10.

As explained above, I have concluded that the statute of limitations set forth in the CFPA applies to all the violations alleged in the Notice of Charges. On June 2, 2014, and on March 16, 2015, the Bureau and IA entered into tolling agreements. Docs. 200, 201. Because enforcement authority was not transferred to the Bureau until July 21, 2011, and because the Bureau entered into the tolling agreements less than three years after that date, the statute of limitations did not expire with respect to IA. However, the Bureau and Mr. Carnes never entered into a tolling agreement. So the issue is whether the ALJ’s denial of Respondents’ subpoena request denied them due process with respect to their argument that the statute of limitations had expired as to Mr. Carnes.

Bureau Rule 206, 12 C.F.R. § 1081.206, seeks “to ensure that respondents have prompt access to the non-privileged documents underlying enforcement counsel’s decision to commence enforcement proceedings, while eliminating much of the expense and delay often associated with pre-trial discovery in civil matters.” 77 Fed. Reg. 39058, 39059 (June 29, 2012). Rule 206 therefore required Enforcement Counsel to make available to Respondents those documents obtained by the Bureau’s Office of Enforcement from outside sources in connection with its investigation of Respondents. Enforcement Counsel state (and Respondents do not dispute) that they complied with Rule 206 and provided Respondents all consumer complaints and all external correspondence upon which Enforcement Counsel might have relied, regardless of which office in the Bureau initially received those documents. EC Br. at 23. Nonetheless, Respondents now speculate that other offices at the Bureau might have received consumer complaints or other documents regarding IA and Mr. Carnes, that these documents might never have come to the attention of the Office of Enforcement, and that if these other offices had received these documents, this might have triggered the running of the statute of limitations.

Respondents’ request for additional discovery is based on far too many assumptions. They ask me to assume: 1) that there are consumer complaints (or other external communications) regarding IA or Mr. Carnes that were received by the Bureau but that never came to the attention of the Office of Enforcement (and thus were not turned over to Respondents pursuant to Rule 206); 2) that these documents contained information regarding Mr. Carnes’ role as the CEO of IA; and 3) that the Bureau received these documents prior to November 18, 2012 (i.e., more than three years before the Bureau filed its Notice of Charges). Even assuming that there are complaints or other external documents that never came to the attention of Enforcement Counsel, I am unwilling to assume that these documents might have contained the sort of information regarding Mr. Carnes that would be relevant to Respondents’ statute of limitations argument. Pursuant to Rule 206, Respondents have already received complaints and other communications that came from external sources. And yet, Respondents have not pointed to anything in those documents to support the claim that the Bureau did discover or should have discovered Mr. Carnes’ violations (as opposed to IA’s violations) before November 18, 2012. There is thus no reason for me to assume that any documents 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 21 of 41

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responsive to the first two specifications of Respondents’ proposed subpoena, documents that are of the same character as the documents that Respondents have already received, would be relevant to their statute of limitations argument. Respondents’ request flouts the purpose of Rule 206. Accordingly, these two specifications are excessive in scope and unreasonable.

The third and fourth specifications of Respondents’ proposed subpoena seek internal Bureau communications and documents. Pursuant to Bureau Rule 206(b), as part of its initial production to Respondents, the Office of Enforcement was not required to provide privileged documents, internal memoranda, other notes or writings prepared by Bureau employees, or documents subject to the work-product privilege. Respondents do not dispute that the documents requested by the third and fourth specifications are exempt from disclosure under Rule 206. Instead, they argue that the exemptions in Rule 206 do not apply to documents requested by subpoena pursuant to Rule 208, and that even if the documents are exempt, the ALJ should have required Enforcement Counsel to provide a privilege log for those documents. Resp. Br. at 11.

As the Bureau explained when it issued Rule 206, the purpose of that rule is to:

provide the respondent with access to, in effect, the documents they would likely seek and obtain in the course of a protracted discovery period soon after service of the notice of charges. … By automatically providing respondents with the factual information gathered by the Office of Enforcement in the course of the investigation leading to the institution of proceedings, this provision helps ensure that respondents have a complete understanding of the factual basis for the Bureau’s action and can more accurately and efficiently determine the nature of their defenses or whether they wish to seek settlement. Because this approach renders traditional document discovery largely unnecessary, it will lead to a faster and more efficient resolution of Bureau administrative proceedings, saving both the Bureau and respondents the resources typically expended in the civil discovery process.

77 Fed. Reg. 39058, 39070 (June 29, 2012). By seeking a subpoena for documents that do not have to be disclosed under Rule 206, Respondents seek to thwart the purpose of that rule. Such a subpoena undermines the goal of a faster and more efficient resolution of the administrative proceeding. Thus, to the extent that a respondent seeks issuance of a subpoena to obtain from Enforcement Counsel documents that are specifically protected from disclosure by Rule 206, that subpoena is “excessive in scope” pursuant to Rule 208, and a request for issuance of such a subpoena is properly denied.

In connection with their request for a subpoena, Respondents also requested that, if the ALJ were not willing to issue a subpoena, she should require Enforcement Counsel to provide a list of withheld documents. Resp. Br. at 11-12. The ALJ denied that request because she concluded that requiring Enforcement Counsel to produce such a list would be “an unnecessary and dilatory exercise.” Doc. 238 at 9. I agree. Bureau Rule 206(c) states that the administrative law judge “may require the Office of Enforcement to produce a list of documents or categories of documents” that were not provided to the respondent in connection with the disclosures required by Rule 206. It is not clear to me whether Respondents’ request is even appropriate when it is made not at the time Enforcement Counsel complied with Rule 206, but in conjunction with a meritless request for a subpoena pursuant to Rule 208. In any event, the ALJ correctly denied the request because there is 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 22 of 41

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no question that the documents requested by specifications 3 and 4 are privileged. Respondents claim that if Enforcement Counsel provided the date of each of the requested documents, this would be relevant to when the Bureau discovered Respondents’ violations. Resp. Br. at 11. But disclosure of the date on which documents responsive to specifications 3 and 4 were created would not advance Respondents’ argument regarding when the Bureau should have discovered Mr. Carnes’ role in connection with IA’s violations. Nor would it advance this argument even if Respondents were able to show that the Bureau had access to IA’s loan agreement prior to November 2012, see Resp. Br. at 11 n.9, because the loan agreement does not reveal Mr. Carnes’ role. Accordingly, the ALJ did not err when she denied IA’s request for issuance of a subpoena, and Respondents were not thereby denied due process.

b. Respondents’ request for a second evidentiary hearing

On May 29, 2019, I remanded this matter to the ALJ “for a new hearing and recommended decision in accordance with Part 1081 of the Bureau’s Rules.” Doc. 216. I further directed that the ALJ was to “seek submissions from the parties regarding the conduct of further proceedings.” Id. The ALJ ultimately resolved this matter based on the parties’ cross motions for summary disposition. However, Respondents argue that they were denied due process because the ALJ did not conduct a second evidentiary hearing “with the opportunity for both sides to present evidence and examine witnesses.” Resp. Br. at 12; see Appeal Tr. at 44. (Respondents had an evidentiary hearing before Judge McKenna, and the transcript of that hearing is part of the record of this proceeding. See Docs. 172-174.) Respondents contend that Lucia v. SEC, 138 S. Ct. 2044 (2018), entitles them to such a hearing. Resp. Br. at 12-13.

In Lucia, the Court held that the appropriate remedy for an administrative adjudication conducted by an administrative law judge who had not been appointed in a manner consistent with Article II of the Constitution was a new hearing before a properly appointed official. 138 S. Ct. at 2055. But the Court did not indicate the nature of the new hearing that the properly appointed official was required to conduct. See Kornman v. SEC, 592 F.3d 173, 181-82 (D.C. Cir. 2010) (upholding SEC’s use of summary disposition as consistent with statutory requirement for an “opportunity for hearing”). Indeed, the Constitution does not automatically require an in-person evidentiary hearing whenever an agency such as the Bureau makes an adjudicative determination. See Blumenthal v. FERC, 613 F.3d 1142, 1145 (D.C. Cir. 2010). Rather, “[a]dministrative summary judgment is not only widely accepted, but also intrinsically valid.” Puerto Rico Aqueduct & Sewer Auth. v. EPA, 35 F.3d 600, 606 (1st Cir. 1994). Respondents received the process due under the Constitution: notice of the charges against them and a meaningful opportunity to be heard before an impartial tribunal. See Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950).

Nor did my order require the ALJ to conduct the sort of hearing that Respondents seek. It is true that the hearing Respondents seek is provided for by Bureau Rules 300-306, 12 C.F.R. §§ 1081.300-306. But my order directed the ALJ to “seek submissions from the parties regarding the conduct of further proceedings.” Doc. 216. I thus implicitly left it to her to determine the scope of further proceedings, so long as those proceedings were consistent with the Bureau’s rules. Those rules permit an administrative law judge to resolve a proceeding on motions for summary disposition. 12 C.F.R. § 1081.212(c). Here, both Respondents and Enforcement Counsel filed such motions. See Docs. 272, 275. A motion for summary disposition may be supported by “documentary evidence, which may take the form of admissions in pleadings, stipulations, 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 23 of 41

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depositions, investigatory depositions, transcripts, affidavits and any other evidentiary materials that the moving party contends support his or her position.” 12 C.F.R. § 1081.212(d). Thus, it was wholly appropriate, and consistent with Bureau Rule 212(d), for the ALJ to consider documentary evidence from the proceedings in this matter held before Administrative Law Judge McKenna. Respondents complain that the ALJ was not able to consider the demeanor of the witnesses who testified at the evidentiary hearing held before Judge McKenna. Resp. Br. at 13-14. Nothing in the Bureau’s rules required that she do so. Puerto Rico Aqueduct, 35 F.3d at 606 (“Due process simply does not require an agency to convene an evidentiary hearing when it appears conclusively from the papers that, on the available evidence, the case only can be decided one way.”). In any event, Respondents have not raised any argument that calls the veracity of any witness into question.

B.

IA violated TILA (Counts I and II)

As relevant here, TILA requires that before closed-end credit is extended, the creditor must disclose to the consumer the “finance charge,” and the “total of payments” (which is the sum of the amount the consumer financed and the finance charge). 15 U.S.C. § 1638(a)(2)(A), (3), (5). Accurate disclosure of the finance charge and total of payments is foundational to the Congressional scheme: A primary purpose of TILA is “to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uniformed used of credit.” Id. § 1601(a).

Regulation Z specifies that these required “disclosures shall reflect the terms of the legal obligation between the parties.” 12 CFR § 1026.17(c)(1). The Bureau’s official interpretation of Regulation Z further clarifies that “[t]he disclosures shall reflect the terms to which the consumer and creditor are legally bound as of the outset of the transaction.” Comment 17(c)(1)-1.

In this case, IA disclosed the finance charge and the total of payments as if consumers were obligated to repay the loans in full by the consumer’s next pay date. I find that consumers were not under any such obligation.

Under IA’s contract, immediate repayment was purely optional. The contract says that the consumer “may choose” either the “option” of fully repaying the loan by her next pay date “OR” the “option” of “renew[ing] [the] loan,” which meant “extend[ing]” the payment due date until the consumer’s following pay date. When consumers entered into an agreement with IA, they were not obligated to immediately repay the loan in full. Instead, consumers would only have that obligation if they affirmatively chose the immediate repayment option by contacting IA three business days before the payment due date. As a result, IA’s TILA disclosures did not “reflect the terms of the legal obligation between the parties,” 12 C.F.R. § 1026.17(c)(1), “as of the outset of the transaction,” comment 17(c)(1)-1. See United States v. Moseley, 980 F.3d 9, 26 (2d Cir. 2020) (affirming TILA conviction because the evidence showed that “the ‘total of payments’ disclosure included just one finance charge in addition to the loan principal amount … notwithstanding Moseley’s knowledge (and in fact, his intention) that, unless the borrower acted, the total she would pay would amount to much more than a single finance charge”).7

7 At argument, Respondents attempted to distinguish Moseley by claiming that the rest of IA’s contract clearly disclosed the consumer’s obligations. Appeal Tr. at 15. But even if that were true 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 24 of 41

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Respondents argue that IA’s TILA disclosures were lawful because “consumers had a legal obligation to pay the loan in full on the Payment Due Date or to set up an alternative payment option, including electing to renew the loan, by contacting IA.” Resp. Br. at 19. This argument is wrong. Consumers did not have a legal obligation to pay the loan in full on the payment due date because, as Respondents concede, unless consumers took affirmative action, IA automatically renewed the loans and deducted multiple payments from their accounts. Thus, consumers’ legal obligation was to pay the loan according to the contractually-defined renewal and auto-workout schedule. Under TILA therefore, IA was required to provide consumers with disclosures that reflected consumers’ ultimate legal obligation to complete repayment of the loan by the end of the renewal and auto-workout schedule. Contrary to Respondents’ suggestion, Resp. Br. at 20, disclosures based on the full renewal and auto-workout term would not reflect consumers’ “postconsummation choices,” but rather consumers’ legal obligation at the time loans were issued. See also Moseley, 980 F.3d at 27 (rejecting similar argument).

Allowing IA to make disclosures that reflected consumers’ option to repay the loan immediately would neuter TILA’s requirements that creditors prominently disclose a closed-end loan’s finance charge and total payments. After all, closed-end loans commonly permit a consumer to repay the loan ahead of schedule, often without a penalty for prepayment. See, e.g., 12 C.F.R. § 1026.18(k) (requiring disclosures about prepayment of closed-end loans). On Respondents’ theory, lenders who offer consumers a 30-year home mortgage with a prepayment option would only need to disclose a tiny fraction of the finance charge and total payments that consumers are obligated to repay.

To the extent that there were any doubt about whether consumers had a legal obligation to immediately repay the loans based on the terms of the contracts alone, the undisputed evidence concerning the parties’ course of conduct removes it. Most significantly, Respondents admitted in their answer “that unless a consumer contacted Integrity Advance to change the terms of the loan – through one of several available means – Integrity Advance renewed the consumer’s loan.” Doc. 21, at ¶ 29 (emphasis added); accord id. ¶ 30 (Respondents admit that “$50 would be automatically applied to a consumer’s loan principal after four loan renewals, unless a consumer contacted Integrity Advance – through one of several available means – to change the terms of payment.” (emphasis added)). See, e.g., AT&T Corp. v. Lillis, 970 A.2d 166, 172 (Del. 2009) (“It is hornbook law that the contracting parties’ course of conduct may be considered as evidence of their intended meaning of an ambiguous contractual term. In this case, that course of conduct included the undisputed fact that AT&T made certain admissions in its original answer, which it later withdrew.”). Consistent with this admission, Respondents do not point to any evidence to suggest that IA could or did treat consumers as having an obligation to immediately repay the loans. Unless a consumer affirmatively chose to repay her loan right away, IA would not debit the consumer’s account for the full amount of the loan. Nor would IA treat the consumer as if she had breached the agreement for failing to either repay the loan or affirmatively renew the loan. Indeed, the first repayment option that IA identified for consumers in their welcome was: “YOU CAN LET THE LOAN AUTOMATICALLY RENEW.” Doc. 274A at 24. Instead, as Respondents concede in their brief on appeal, the contract “informed consumers that their loans would be automatically

(and it is not, for the reasons discussed in the next section), the alleged clarity of the remainder of IA’s contract is irrelevant to whether IA’s mandatory TILA disclosures were accurate. 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 25 of 41

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renewed if they failed to select a payment option, and … allowed consumers to decline renewals ….” Resp. Br. at 21.

Accordingly, I find that IA’s disclosures violated TILA as implemented by Regulation Z. Because IA is a covered person,8 I find that IA also violated 12 U.S.C. § 5536(a)(1)(A) by providing consumers disclosures that violated Federal consumer financial law.

C.

Through IA’s use of the loan agreement, IA and Mr. Carnes engaged in deceptive practices (Count III)

Under the CFPA, “an act or practice is deceptive if (1) there is a representation, omission, or practice that, (2) is likely to mislead consumers acting reasonably under the circumstances, and (3) the representation, omission, or practice is material.” Gordon, 819 F.3d at 1192 (quotation marks omitted); see also id. at 1192 n.7.

Here, the ALJ concluded that IA’s loan agreement was deceptive as a matter of law because it was likely to mislead reasonable consumers about how much the loans cost. Doc. 293, at 40-41. The loan agreement’s TILA disclosures identified the total of payments that applied only to those consumers who affirmatively chose, at least three days before the first payment due date, to pay the loan in full. Id. at 8 ¶¶ 37, 38, 46. But neither in the TILA disclosures nor elsewhere in the loan agreement did IA disclose to consumers how much they would have to pay under the loan’s default payment schedule pursuant to which IA made ACH withdrawals according to the auto-renewal and auto-workout process. Id. at 8, ¶ 47. As the Ninth Circuit recently concluded in affirming summary judgment on the FTC’s deception claim in a case involving a very similar loan agreement, a reasonable consumer who received the loan agreement “might expect to pay only” the amount listed in the “total of payments.” FTC v. AMG, 910 F.3d at 423 (2018); cf. also Moseley, 2020 WL 6437737, at *12 (“[A] jury could rationally have found that Moseley’s “total of payments” disclosure of just the loan principal plus one finance charge – despite the fact that no such payment was actually scheduled – was inaccurate and misleading.”).

On appeal, Respondents challenge the ALJ’s deception conclusion in three ways.

8 In a two-sentence paragraph, Respondents assert that they were not covered persons “during the period of the CFPB’s authority,” by which they mean the period after the CFPA took effect but before the Senate confirmed Richard Cordray as the Bureau’s first director in July 2013. Resp. Br. at 14. This argument has been waived. To the extent that this drive-by assertion is not waived, I reject it. The definition of covered person became effective on July 21, 2010, and the prohibition on unfair, deceptive, and abusive acts or practices by covered persons took effect on July 21, 2011. See 12 U.S.C. § 5301 note (setting the general effective date of the Dodd-Frank Act that is applicable to 12 U.S.C. § 5481’s definition of covered person); id. § 5531 note (providing that subtitle C of the CFPA, which includes 12 U.S.C. §§ 5531, 5536’s prohibitions on unfair, deceptive, or abusive acts and practices would take effect on the designated transfer date); 75 Fed. Reg. 57252, 57252 (Sept. 20, 2010) (establishing July 21, 2011 as designated transfer date). Accordingly, as of July 21, 2011, Respondents were covered persons subject to the CFPA’s requirements and restrictions, including the prohibitions on unfair and deceptive acts or practices. 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 26 of 41

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First, they say that Enforcement Counsel failed to establish as a matter of law that IA’s misrepresentations about the full cost of the loans were material to consumers. In support of this argument, Respondents note that Enforcement Counsel did not present any extrinsic evidence of materiality. Resp. Br. at 21-22. But Respondents’ argument misunderstands the law of materiality.9 A misrepresentation is “material if it involves information that is important to consumers and, hence, likely to affect their choice of, or conduct regarding, a product.” FTC v. Cyberspace.Com LLC, 453 F.3d 1196, 1201 (9th Cir. 2006). Not surprisingly, the FTC and the courts have long treated misrepresentations about how much a product or service costs as presumptively material. See, e.g., FTC Policy Statement on Deception, appended to In re Cliffdale Assocs., Inc., 103 F.T.C. 110, 1984 WL 565319, at *49; In re Sanctuary Belize Litig., Civ. No. 18- 3309, 2020 WL 5095531, at *11 (D. Md. Aug. 28, 2020); accord FTC v. Freecom, 401 F.3d at 1203 (10th Cir. 2005) (“Misrepresentations concerning anticipated income from a business opportunity generally are material and likely to mislead consumers because such misrepresentations strike at the heart of a consumer’s purchasing decision.”). Where the presumption of materiality applies, additional evidence of materiality is unnecessary. See FTC Policy Statement on Deception, 1984 WL 565319, at *49-50; Kraft, Inc. v. FTC, 970 F.2d 311, 322 (7th Cir. 1992). I find that the application of this presumption was particularly appropriate here because IA’s misrepresentation concerned a nearly $700 discrepancy in the total cost of a $300 loan. Accordingly, Enforcement Counsel was not required to provide additional evidence to prove that IA’s misrepresentation was material.

Respondents also attempt to rebut the presumption of materiality by noting that IA had repeat customers. Resp. Br. at 22-23. But as the court explained in FTC v. AMG, “[i]t is equally plausible that the repeat borrowers were just as confused as those taking out their first loans.” 910 F.3d at 425; see also discussion below. Indeed, Respondents have no evidence that a cost difference of several hundred dollars would somehow be less important to the decision of a repeat borrower. After all, materiality does not require proof that, but for the misrepresentation, no consumer would ever purchase a product. Instead, the question is whether the misrepresentation was likely to affect consumer behavior. The existence of some consumers willing to repay more than $1000 in order to borrow $300 does not mean that price is irrelevant to IA’s borrowers, even to repeat borrowers. All it shows is that some consumers were willing to pay that price.

Second, Respondents dispute, in passing, the ALJ’s conclusion that the net impression of the loan agreement was deceptive as a matter of law. They claim that IA “took steps” to ensure consumers understood the loan, and that there was “ample other evidence” establishing a genuine issue of fact on this issue. Resp. Br. at 22. But Respondents’ brief on appeal did not specify the “steps” or the “evidence” on which Respondents hoped to rely, citing instead pages of argument that it made to the ALJ. To the extent that Respondents have not waived this argument, I reject it. As the Ninth Circuit explained in AMG, “the TILA box suggested that the value reported as the ‘total of payments’ … would equal the full cost of the loan,” but in fact, “under the default terms of the loan, a consumer would be required to pay much more.” 910 F.3d at 423. None of the steps or evidence Respondents identified in the proceeding before the ALJ could have even arguably corrected that misimpression. See Doc. 272 at 9-11. Indeed, the closest IA came to disclosing to consumers that,

9 Notably, Respondents failed in their opening brief to specifically identify any basis to rebut the presumption of materiality, instead citing to various pages of their briefs to the ALJ. Resp. Br. at 21-22.

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as a result of the loan’s default terms, consumers “would be required to pay much more” than the amount disclosed in the total of payments box was a generic statement in the loan agreement in all capital letters that “Additional fees may accrue if the loan is refinanced or ‘rolled over.’” Doc. 293 at 9, ¶ 50. But as the ALJ pointed out (and Respondents have failed to meaningfully dispute, see Appeal Tr. at 46-47) this disclosure “did not clearly set forth what those additional fees would be for a loan that followed the default renewal procedure or explain how a reasonable consumer was to calculate these additional fees.” Doc. 293 at 38. Even worse, this disclosure was itself “misleading” because it “present[ed] the accrual of additional fees upon renewal as a possibility rather than the certainty that it was, further contributing to the overall impression that consumers could expect to pay only the ‘Total of Payments’ disclosed.” Id.

Finally, Respondents contend that because IA had repeat customers, this shows that the loan agreements would not have misled reasonable consumers. This misstates the standard for proving deception. To prove that an act or practice is deceptive, the Bureau did not need to prove that every consumer was, in fact, misled. See, e.g., FTC v. Johnson, 96 F. Supp. 3d 1110, 1119 (D. Nev. 2015) (“The FTC is not required to show that all consumers were deceived, and the existence of satisfied consumers does not constitute a defense.”). Rather, all Enforcement Counsel had to show was that the act or practice was likely to mislead reasonable consumers. Here, consistent with the Ninth Circuit’s decision in AMG, I find that as a matter of law IA’s loan agreement was likely to mislead reasonable consumers, and as explained above, Mr. Carnes is liable for that violation of the CFPA.

D.

Through IA’s use of the loan agreement, IA engaged in unfair practices (Count IV)

Under the CFPA, an act or practice is “unfair” if it is likely to cause substantial injury that is not reasonably avoidable by consumers and that is not outweighed by countervailing benefits to consumers or to competition. 12 U.S.C. § 5531(c)(1). The ALJ held, and I agree, that IA’s use of loan agreements that misrepresented the total cost of credit was unfair, and as I explain above, Mr. Carnes was liable for that violation of the CFPA.

First, IA’s practice was likely to cause (and did cause) substantial injury because many consumers paid significantly more than they would have anticipated based on the loan agreement. This harm easily clears the “substantial injury” bar, which can be satisfied by showing that an act or practice does “a ‘small harm to a large number of people, or if it raises a significant risk of concrete harm.’” FTC v. Neovi, Inc., 604 F.3d 1150, 1157 (9th Cir. 2010) (quoting Am. Fin. Servs. Ass’n v. FTC, 767 U.S. 957, 972 (D.C. Cir. 1985)).

Second, the injury consumers suffered was not reasonably avoidable because it was not properly disclosed in the loan agreement. See Orkin Exterminating Co. v. FTC, 849 F.2d 1354, 1365 (11th Cir. 1988) (“Consumers may act to avoid injury before it occurs if they have reason to anticipate the impending harm and the means to avoid it….”). And once consumers realized that IA had deducted more money from their bank accounts than the amount disclosed in the loan agreement’s total of payments box, they still could not avoid injury because, as illustrated by the example set forth above in the Findings of Fact and Legal Background, at that point they still owed IA more than the principal amount of the loan. Respondents claim, Resp. Br. at 24, that the evidence would support the inference that reasonable consumers “did understand that they would incur additional costs if they did not pay off the loans in full on the Payment Due Date” because the loan agreement said 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 28 of 41

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that “additional fees may accrue if the loan is refinanced or ‘rolled over.’” Id. But as explained above in connection with Respondents’ liability pursuant to Count III, the mere fact that the loan agreement stated that there may be some unspecified additional fees does not permit the inference that consumers understood that they were actually authorizing IA to charge them more than twice as much as the loan agreement actually disclosed. Nor is it persuasive that IA had repeat customers. See id. Even if there were a subgroup of IA customers who understood IA’s loan agreement well enough to avoid paying more than the total of payments (and IA has not demonstrated that there were such customers), that would not excuse IA’s violations with respect to other customers.

Third, whatever benefits IA’s loans might have provided to consumers, there is no evidence that the challenged practice of misrepresenting or otherwise obscuring the material terms of those loans provided a countervailing benefit to consumers or competition. As the ALJ observed (and Respondents do not challenge), “the benefit of the loans could have been provided to consumers while accurately disclosing the costs. There is no plausible argument that can be made that IA had to misrepresent the costs in order for consumers to receive the benefit of a payday loan.” Doc. 293 at 49.

Respondents attempt to avoid liability for their unfair practice by asserting that the Bureau is estopped from pursuing its unfairness claim because when this matter was being considered by Judge McKenna, Enforcement Counsel agreed to dismiss this claim (i.e., Count IV) with prejudice in light of Judge McKenna’s summary disposition order. See Doc. 127. But dismissal of the unfairness claim came before I ordered that Respondents be given a new hearing in light of the Supreme Court’s decision in Lucia and before I directed Judge Kirby to “give no weight to, nor presume the correctness of, any prior opinions, orders, or rulings issued by Judge McKenna.” Doc. 216. Consistent with that order, the parties were permitted to proceed as if Judge McKenna had not issued any opinions, orders, or rulings.

In this context, I find that it was appropriate for Judge Kirby to allow Enforcement Counsel to pursue a claim that it had abandoned in reliance on a now-inoperative opinion by Judge McKenna. That decision makes particular sense because Respondents have not shown that the stipulated dismissal in the proceeding before Judge McKenna provided an unfair advantage to Enforcement Counsel in the proceeding before Judge Kirby or imposed an unfair detriment on Respondents. Cf. New Hampshire v. Maine, 532 U.S. 742, 751 (2001) (observing that one consideration in a claim of judicial estoppel is “whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped”). Nor can the stipulated dismissal be understood to have persuaded Judge McKenna to adopt the Bureau’s position on a contested matter. Cf. id. at 750 (courts ask “whether the party has succeeded in persuading a court to accept that party’s earlier position, so that judicial acceptance of an inconsistent position in a later proceeding would create the perception that either the first or the second court was misled” (quotation marks omitted)).

E.

IA violated EFTA (Counts V and VI)

Count V of the Notice of Charges alleged that IA violated a provision of EFTA, 15 U.S.C. § 1693k, and its implementing Regulation E, 12 C.F.R. § 1005.10(e), when IA conditioned extensions of credit on repayment by preauthorized electronic fund transfers. Count V alleged that IA required consumers to complete IA’s ACH Authorization as part of the loan application process. By doing 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 29 of 41

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this, consumers authorized repeated electronic fund transfers every payday until the principal reduced to zero. This ACH authorization constituted a “preauthorized electronic fund transfer” as that term is defined in Regulation E, and there was no indication in IA’s documents that a consumer could obtain a loan without signing the ACH Agreement.

Count VI of the Notice of Charges alleged that by virtue of its violation of EFTA and Regulation E, IA also violated the CFPA. In particular, the CFPA provides that when a covered person violates an enumerated statute, that covered person also violates the CFPA. 12 U.S.C. § 5536(a)(1)(A). Respondents have not disputed that if they violated EFTA, they also violated the CFPA. See Resp. Br. at 25.

I conclude that IA violated EFTA and Regulation E, and as a result, also violated the CFPA.

EFTA provides that “No person may … condition the extension of credit to a consumer on such consumer’s repayment by means of preauthorized electronic fund transfers.” 15 U.S.C. § 1693k. Regulation E has a similar prohibition: “No financial institution or other person may condition an extension of credit to a consumer on the consumer’s repayment by preauthorized electronic fund transfers[.]” 12 C.F.R. § 1005.10(e). Regulation E defines an “electronic fund transfer” as “any transfer of funds that is initiated through an electronic terminal, telephone, computer, or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit a consumer’s account.” 12 C.F.R. § 1005.3(b)(1). A “preauthorized electronic fund transfer” is defined as “an electronic fund transfer authorized in advance to recur at substantially regular intervals.” 12 C.F.R. § 1005.2(k). The parties do not dispute that the payments that IA extracted from consumers’ bank accounts were “preauthorized electronic fund transfers.”

As an initial matter, there is no dispute that IA is a “person” for purposes of EFTA and Regulation E. Regulation E defines a person to mean “a natural person or an organization, including a corporation, government agency, estate, trust partnership, proprietorship, cooperative, or association.” 12 C.F.R. § 1005.2(j). The parties jointly stipulated that IA is a Delaware limited liability company. Doc. 56 at 1. Respondents have also not disputed that IA extended credit to consumers.10 EFTA does not specifically define the term “credit,” but that term is defined elsewhere in the Consumer Credit Protection Act (of which EFTA is Title IX) as the right to “incur debt and defer its payment.” 15 U.S.C. § 1602(e). The parties jointly stipulated that IA made loans to consumers. Doc. 56 at 2.

10 It has been argued that Regulation E limits the scope of EFTA’s prohibition to extensions of credit granted by financial institutions. See McCready v. eBay, Inc., No. 03-cv-2117, 2005 WL 6082528, at *5 (C.D. Ill. Feb. 4, 2005), aff’d, 453 F.3d 882 (7th Cir. 2006). Respondents have not made this argument, and it is accordingly waived. In any event, I would reject the argument because a regulation cannot limit the scope of a violation defined by a statute. See Zuniga v. Barr, 946 F.3d 464, 470 (9th Cir. 2019) (court must reject an interpretation of a regulation if it is inconsistent with the statute under which the regulation has been promulgated). See also 61 Fed. Reg. 19662, 19667 (May 2, 1996) (promulgating what is now codified as 12 C.F.R. § 1005.10(e) and noting that the provision applies not just to financial institutions).

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The question that remains is whether IA conditioned its extensions of credit on the consumer’s repayment by preauthorized electronic fund transfers. I conclude that it did.

The following provisions of the loan agreement (ECX 2) demonstrate that IA required consumers to agree to preauthorized electronic fund transfers to repay their loans as a condition of getting the loans:

• “In order to complete your transaction with us, you must electronically sign the Loan Agreement by clicking the ‘I Agree’ button at the end of the Loan Agreement, as well as all the other ‘I Agree’ buttons that appear within the Loan Agreement and related documents that appear below.” ECX 2 at 4. (The ACH Authorization was one of these buttons.) Id. at 11.

• “By entering your name and clicking the ‘I Agree’ button below, you are electronically signing and agreeing to all the terms of the Loan Agreement, the Arbitration Provision, and the ACH Authorization (‘the Loan Documents’) as providing or confirming your electronic signature on all of the Loan Documents….” Id. at 15.

• “The ACH Authorizations set forth in the Loan Agreement are to remain in full force and effect for this transaction until your indebtedness to us for the Total of Payments, plus any other charges or fees incurred and described in the Loan Agreement, is fully satisfied.” Id. at 10.

• “You grant us a security interest in your ECheck/ACH Authorization in the amount of the Total of Payments (the ‘ECheck/ACH’) which we may negotiate on the Payment Due Date or thereafter…. Pursuant to the ECheck/ACH Authorization, you have directed us to initiate one or more ECheck/ACH debit entries to Your Bank Account for the amounts owed to us under the Loan Agreement on the Payment Due Date or thereafter and for certain fees that may be assessed in the event of dishonor when presentment is made to your bank on your ECheck/ACH Authorization.” Id. at 4-5.

There is no indication in the loan agreement that a borrower could obtain a loan from IA without agreeing to the ACH authorization. Accordingly, I conclude that the loan agreement violates EFTA.

Respondents argue that the loan agreement did not condition the extension credit on repayment by recurring electronic fund transfer because the ACH Authorization indicated that consumers could repay their loan through other means. Resp. Br. at 25; Resp. Reply at 13. Indeed, a provision of the ACH Authorization did say, “You understand and agree that this ACH authorization is provided for your convenience, and that you have authorized repayment of your loan by ACH debits voluntarily. You agree that you may repay your indebtedness through other means, including by providing timely payment via cashier’s check or money order directed to: Integrity Advance, 300 Creek View Road, Suite 102, Newark, DE 19711.” ECX 2.

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While this provision allowed borrowers, at least in theory, to make payments by a means other than preauthorized electronic fund transfer, it did not allow the borrower to obtain credit from IA without agreeing to allow IA to make preauthorized electronic fund transfers from the borrower’s account to repay the loan. Although IA made loans to a small number of borrowers who, despite the provisions of the loan agreement did not agree to the ACH Authorization, Doc. 272 at 34, there is no clear explanation in the record as to why. (I do not read the Notice of Charges to allege that IA violated either EFTA or Regulation E with respect to this small number of borrowers who were the exception to the rule.)

I disagree with Respondents’ interpretation of the relevant provisions of EFTA and Regulation E. EFTA and Regulation E prohibit a lender from conditioning a loan on repayment by preauthorized electronic fund transfers. Respondents, however, would apparently permit a creditor to require that a consumer agree to repayment by preauthorized electronic fund transfer, but contend that the creditor would not violate EFTA so long as the creditor does not then require the consumer to actually make every single payment by preauthorized electronic fund transfer. There is no evidence that Congress intended such a result and IA has offered none. Indeed, the legislative history of EFTA is to the contrary. Two bills that were precursors to EFTA contained the same language that was ultimately enacted as section 1693k. See S. 3499, 95th Cong. § 913 (1978); S. 3156, 95th Cong., § 913 (1978). The Senate reports explained that these bills provided that “a creditor could not condition the extension of credit on a consumer’s agreement to repay by automatic EFT payments.” S. Rep. No. 95-915, at 7 (1978); S. Rep. No. 95-1273, at 14 (1978) (emphasis added). That, of course, is exactly what IA required.

The court in De La Torre v. CashCall, Inc., 56 F. Supp. 3d 1073 (N.D. Cal. 2014), considered, and rejected, the same argument made by Respondents here. The defendant in that case argued that what EFTA actually prohibited was “conditioning the extension of credit upon a requirement to make all loan payments by [electronic fund transfer] during the life of the loan.” Id. at 1088. However, the court concluded that EFTA’s language is “unambiguous” that a violation of EFTA’s compulsory use provision “occurs at the moment of conditioning – that is, the moment the creditor requires a consumer to authorize EFT as a condition of extending credit to the consumer.” Id. at 1089. The court also concluded that the legislative history of EFTA confirmed its unambiguous meaning. Id. It further held that the mere fact that a borrower may revoke an agreement to repay by preauthorized electronic fund transfer does not allow a creditor who conditions the extension of credit on entering into such an agreement to avoid liability under EFTA and Regulation E. Id. at 1089-91. Other court decisions have reached a similar conclusion. See Doc. 111 at 34-35 (citing O’Donovan v. CashCall, Inc., No. 08-cv-3174, 2009 WL 1833990, at *3 (N.D. Cal., June 24, 2009), and FTC v. PayDay Financial LLC, 989 F. Supp. 2d 799, 811-13 (D.S.D. 2013)).

I therefore conclude that EFTA’s text is best read as prohibiting a person from conditioning a loan on a consumer’s agreement to authorize repayment by preauthorized electronic fund transfers and reject Respondents’ contrary argument.

As explained above, because IA violated EFTA and Regulation E, it also violated the CFPA, as alleged in Count VI.

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F.

As a result of IA’s use of RCCs, both IA and Mr. Carnes engaged in unfair practices (Count VII)

Count VII of the Notice of Charges alleged that Respondents engaged in an unfair practice in violation of the CFPA when IA obtained authorization for RCCs in a confusing manner and then initiated the RCCs. IA’s loan agreement included a provision allowing IA to create RCCs if consumers successfully canceled their authorization for ACH withdrawals. But IA buried this provision in the section of the loan agreement regarding ACH authorization, and, even if a consumer had focused on the provision, that consumer would not have reasonably known that the provision also authorized IA to use RCCs. IA then used this provision to withdraw funds from consumers’ bank accounts in situations where consumers had cancelled the ACH authorization. I conclude that IA’s use of RCC was unfair – it caused substantial injury to consumers that they could not reasonably avoid, and that injury was not offset by benefits to consumers or competition.

I conclude that IA’s use of RCCs imposed two types of injury on consumers. As I explained above in connection with Count IV, IA caused substantial injury to consumers whenever IA debited consumers’ accounts for amounts in excess of what was disclosed in the total of payments box in the loan agreement. IA used RCCs to make such withdrawals 602 times on or after July 21, 2011. These withdrawals totaled $115,024.50. ECX 97 at 4-5. I also conclude that consumers suffered substantial injury because IA withdrew funds from consumers’ accounts when, as explained below, consumers reasonably believed that IA no longer had access to their accounts. See FTC v. Neovi, Inc., 604 F.3d 1150, 1157-58 (9th Cir. 2010) (facilitating unauthorized access to consumers’ bank accounts constitutes substantial injury). This second type of injury would occur regardless of whether the consumers had already paid the amount disclosed in the total of payments box – consumers might have other reasons for withdrawing ACH authorization. Nonetheless, Enforcement Counsel have only alleged violations for those RCCs that IA used after consumers had paid the amount in the total of payments box. Accordingly, I will only consider the violations caused by those RCCs.

This injury is enhanced by the fact that consumers are not likely to be aware that, by entering into the loan agreement, they have authorized IA to create RCCs. The authorization for RCCs is buried in the loan agreement’s ACH authorization. The ACH authorization is more than a page of dense text that begins in the middle of the lengthy loan agreement. The main purpose of the ACH authorization section is to permit IA to deposit borrowed funds into the consumer’s bank account and then to withdraw funds in amounts and at times as agreed to in the loan agreement. ECX 92 at 22-23. However, approximately half-way through the ACH Authorization, there is a paragraph that grants IA powers that are distinct from the central purposes of the ACH authorization. One sentence in that paragraph authorizes RCCs: “If you revoke your authorization, you agree to provide us with another form of payment acceptable to us and you authorize us to prepare and submit one or more checks drawn on Your Bank Account so long as amounts are owed to us under the Loan Agreement.” Nothing in this sentence, or anywhere else in the loan agreement, explains that by signing the ACH Authorization, consumers are also authorizing IA to write checks on consumers’ accounts without notifying consumers about the checks, and without obtaining their signatures. And the only instruction in the ACH authorization regarding revocation reads as follows: “You may only revoke the above authorizations by contacting us directly.” This does nothing to inform consumers that, if they contact their bank and revoke ACH authorization, this will have no impact on IA’s authority to use RCCs. I conclude that as a matter of law the sentence authorizing RCCs is 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 33 of 41

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neither clear nor conspicuous, and not likely to be read or understood by borrowers. See ECX 92 at 26.

Although Respondents argue that “consumers did consent to the use of RCCs when they signed the Loan Agreement,” Resp. Br. at 26, they did not do so knowingly. Respondents also argue that extrinsic evidence is necessary to show that consumers did not understand the authorization. Id. Given the placement of the RCC authorization, and given its wording, extrinsic evidence is unnecessary to support my conclusion that consumers were not likely to understand that they had authorized IA to use RCCs. See Frendreis v. Blue Cross Blue Shield, 873 F. Supp. 1153, 1157 (N.D. Ill. 1995) (“[j]udges need not check their common sense at the door when interpreting” contractual agreements).

Consumers could not reasonably avoid this injury because, as explained above, it was unlikely that consumers even knew that they had authorized IA to use RCCs. Even if consumers somehow did know that they had authorized IA to use RCCs, it would have been very difficult for them to revoke that authority. Consumers could have contacted their financial institutions to stop payment of RCCs, but this might not have been successful since it is doubtful they would have the basic information (such as the check number) necessary for the financial institution to stop payment. And of course, even if the financial institution did stop payment, the financial institution might impose stop-payment fees. Consumers could also have closed their accounts at the financial institutions, but that could have resulted in fees for overdrafts and nonsufficient funds on items outstanding at the time the account was closed, as well as the other potential costs and inconvenience of such a process. Further, even if consumers had contacted their financial institutions after discovering the unauthorized RCCs and sought reimbursement by asserting the RCCs were not properly payable, see Uniform Commercial Code § 4-401, obtaining reimbursement would likely have required a “substantial investment of time, trouble, aggravation, and money.” See F.T.C. v. Neovi, Inc., 604 F.3d at 1158. And consumers still would have incurred injury during the time they lost access to and use of the funds taken using RCCs. Id. So even if consumers’ financial institutions eventually restored the consumers’ money, consumers likely would have suffered unavoidable injuries that could not be fully mitigated. Id.

Respondents argue that consumers could have avoided the injury by contacting IA and offering another form of payment. Resp. Br. at 26. But consumers cancelled ACH authorization because, as I have determined, IA was attempting to collect amounts that exceeded what was disclosed in the total of payments box, amounts that consumers did not owe. Offering payment in some other form would not have diminished that injury.

I also conclude that the substantial injury was not outweighed by countervailing benefits to consumers or to competition. It is hard to imagine a situation in which policy considerations would justify withdrawing money from consumers’ accounts without authorization. Here, the only benefit that has been suggested is that, because of RCCs, IA made loans to some consumers who would not otherwise have been eligible for credit. See Resp. Br. at 26. But this argument fails given the minuscule number of instances in which IA actually used RCCs. See Doc. 278 at 22. Nor does this justify IA’s failure to provide adequate disclosure of the RCC authorization. Finally, if consumers were actually delinquent, IA had other means at its disposal, such as bringing a lawsuit to collect the debt. Accordingly, I conclude that, as a result of IA’s use of RCCs, IA engaged in an unfair practice in violation of the CFPA, and as explained above, Mr. Carnes is liable for that violation. 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 34 of 41

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REMEDIES

The ALJ recommended restitution, monetary civil penalties, and injunctive relief. I agree.

A.

Restitution

The ALJ recommended that IA and Mr. Carnes be ordered to pay restitution. In particular, as a result of the TILA and CFPA violations stemming from the loan agreement, she ordered IA to pay $132,580,041.06. This amount included restitution for loans that IA originated both before and after July 21, 2011. Part of that total, $38,453,341.62, was for loans that IA originated after July 21, 2011, and she held that Mr. Carnes was jointly and severally liable with IA for that amount. I have decided not to impose restitution for loans that IA originated before July 21, 2011, but I do order that it pay restitution for loans it originated on or after that date. That amount – $38,453,341.62 – is the amount paid by consumers to IA that exceeded what was disclosed to them in IA’s TILA disclosures. I also conclude that Mr. Carnes should be held jointly and severally liable for this amount because, as explained above, the loans agreements for loans originated on or after July 21, 2011, violated the CFPA’s prohibition of unfair and deceptive practices, violations for which both IA and Mr. Carnes are liable.

The CFPA authorizes the Bureau in a proceeding such as this one “to grant any appropriate legal or equitable relief with respect to a violation of Federal consumer financial law.” 12 U.S.C. § 5565(a)(1). Appropriate legal or equitable relief includes “restitution.” 12 U.S.C. § 5565(a)(1). Here, Enforcement Counsel sought restitution as “measured by the amount consumers paid to Integrity Advance above what the company disclosed in its loan agreements.” Doc. 276 at 2. As the ALJ found, because consumers made payments directly to IA, this amount captures both consumer losses and Respondents’ unjust gains. Doc. 293 at 81; see also Gordon, 819 F.3d at 1195; FTC v. Stefanchik, 559 F.3d 924, 931-32 (9th Cir. 2009). As explained above, I have determined that IA’s loan agreement violated TILA and was unfair and deceptive. As a result, consumers who did not take affirmative steps to pay their loans in full prior to the first payment-due date paid IA more than the amount disclosed in the loan agreement. Whether as a matter of equity or law, see Doc. 293 at 79, I find that an award of restitution is justified both to remedy the losses consumers suffered as a result of Respondents’ unlawful practices and to deprive Respondents of the amounts that they gained as a result of their unlawful conduct.

The ALJ recommended that restitution be awarded for IA’s TILA violations that occurred prior to the date that TILA enforcement authority was transferred to the Bureau. She based this on her belief that the FTC could have sought such relief pursuant to its authority under 15 U.S.C. § 53(b). Doc. 293 at 83-84. However, the Supreme Court has granted certiorari in AMG v. FTC, No. 19- 508, and the only question presented by the petitioner in that case is whether § 53(b) authorizes the FTC to obtain monetary equitable relief. Rather than further delay this proceeding by waiting for a decision in AMG, I have decided to drop all charges against IA to the extent that they apply to acts that occurred prior to July 21, 2011, the date that enforcement authority was transferred to the Bureau. Similarly, Counts III, IV, and VII allege violations of the CFPA, and because the CFPA did not take effect until July 21, 2011, I will award restitution only for loans that IA originated, or for RCCs that IA issued, on or after that date. (Enforcement Counsel does not dispute that restitution for pre-transfer date CFPA violations would be inappropriate.) Thus, the same loans that 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 35 of 41

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give rise to restitution as a result of TILA violations – loans originated on or after July 21, 2011 – also give rise to restitution as a result of CFPA violations.

The record shows that IA originated 55,661 loans on or after July 21, 2011, on which the borrower paid more than the amount disclosed in the total of payments box. Doc. 163B at 2. In connection with those loans, I award restitution only for the amounts that consumers paid to IA over and above the amount disclosed in the total of payments box on IA’s loan agreement – that is the amount IA gained as a result of its wrongful conduct. The record in this case shows that this amount totals $38,453,341.62. Doc. 163B at 2. With respect to Count VII, the record shows that, in connection with loans that IA originated on or after July 21, 2011, IA used 602 RCCs to withdraw money from the accounts of consumers who had already paid an amount that was at least equal to the amount disclosed in the total of payments box of their loan agreements. Doc. 163B at 3. Those RCCs totaled $115,024.50. Id. Because these RCCs collected amounts over and above the amounts disclosed in the total of payments box, any separate award of restitution would duplicate amounts encompassed by the award of $38,453,341.62. Because both IA and Mr. Carnes are liable for the violations alleged in Counts III, IV, and VII, the ALJ correctly held that they are jointly liable for the restitution.11 Doc. 293 at 85. “If an individual may be held personally liable for corporate violations … nothing more need be shown to justify imposition of joint and several liability for the corporation’s restitution obligations.” FTC v. Commerce Planet, Inc., 815 F.3d 593, 600 (9th Cir. 2016). This is particularly appropriate because IA was merely a shell. See Doc. 173 at 6.

Respondents argue that restitution is not appropriate because there was no showing of fraudulent intent, and because Respondents used the loan agreement with advice of counsel. Resp. Br. at 27. These arguments are based on a misunderstanding of the purpose of restitution. The “primary purpose of restitution is to restore the victims to their position prior to the deceptive sale.” FTC v. Bronson Partners, LLC, 674 F. Supp. 2d 373, 386 (D. Conn. 2009), aff’d 654 F.3d 359 (2d Cir. 2011). Restitution is not based on any particular degree of culpability of the wrongdoer, other than responsibility for the deceptive conduct. See Orkin Exterminating Co. v. FTC, 849 F.2d 1354, 1368 (11th Cir. 1988) (“a practice may be deceptive without a showing of intent to deceive”). It is true that knowledge is relevant when assessing whether an individual may be held responsible for a corporation’s violations, but that knowledge need not rise to the level of fraudulent intent. And, as explained above, “[o]btaining the advice of counsel did not change the fact that the business was engaged in deceptive practices.” FTC v. Amy Travel, 875 F.2d at 575. That is because the degree of knowledge is irrelevant with respect to IA, and as to Mr. Carnes, “counsel could not sanction something that the [individual defendant] should have known was wrong.” Id. To the extent that CFPB v. CashCall, Inc., No. 15-cv-07522, 2018 WL 485963, at *12 (C.D. Cal. Jan. 19, 2018), suggests that advice of counsel may be relevant to a determination of whether an award of restitution is appropriate, see Resp. Reply at 14, I conclude that case is inconsistent with the cases discussed above and will follow the weight of authority.

Respondents argue that restitution was inappropriate because there was no showing that consumers failed to receive the benefit of the bargain. Resp. Br. at 27. But as I have explained, consumers contracted to pay the amount in the loan agreement’s total of payments box. Respondents were not entitled to whatever they collected in excess of that amount. Respondents argue that Enforcement

11 Respondents have raised no argument regarding my authority to hold them jointly and severally liable, and have therefore waived any such challenge.

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Counsel failed to present testimony from consumers who were deceived by IA. Resp. Br. at 27. No such testimony is necessary. FTC v. Colgate-Palmolive Co. 380 U.S. 374, 391-92 (1965) (holding that no consumer testimony is necessary to establish deception); American Home Prods. Corp. v. FTC, 695 F.2d 681, 687 n.10 (3d Cir. 1982) (same); FTC v. Medlab, Inc., 615 F. Supp. 2d 1068, 1078 (N.D. Cal. 2009) (same).

Respondents cite FTC v. Verity Int’l, Ltd., 443 F.3d 48, 67 (2d Cir. 2006), and CFPB v. CashCall, 2018 WL 485963, at *13, and argue that any award of restitution must be limited to unjust gains. Resp. Br. at 28. Even assuming that the redress in this case must be limited to Respondents’ unjust gains (as opposed to consumers’ losses), Respondents’ argument does not apply here. As the court explained in CFPB v. Gordon, 819 F.3d at 1195, the first step in calculating an award of restitution is calculating the defendant’s unjust gains. The problem in Verity was that the district court based its calculation on consumer losses, not on the defendants’ gains. As a result, the district court ordered the defendants to pay, as part of an award of restitution, money that they had never received. Nothing like that happened here. Respondents have never disputed that IA actually received the amounts that consumers paid in excess of what was disclosed in the total of payments box. That is, Respondents’ unjust gains equaled consumers’ losses. In CashCall, the court faulted the Bureau for failing to present any evidence that the award the Bureau sought approximated defendants’ unjust gains. 2018 WL 485963, at *14. The court was concerned that the Bureau was seeking restitution for loans that were legal, and that the proposed restitution might thereby have created a windfall for certain consumers. Whatever the merits of the concerns raised in CashCall, they are not applicable here because the restitution I have awarded is based on amounts that consumers paid above and beyond the total of payments disclosed in IA’s TILA disclosures. No consumer will get a windfall.

Respondents argue that IA’s repeat customers are not entitled to restitution. Resp. Br. at 28. In particular, Respondents suggest that repeat customers understood, and were satisfied with, the loans they got from IA, and this explains why they were repeat customers. See Resp. Reply at 6. In FTC v. AMG, 910 F.3d at 428, the court rejected a very similar argument. That case involved a loan agreement and loan repayment arrangement that were nearly identical to what was involved in this case. See id. at 422. Defendants in AMG argued that repeat customers demonstrated that AMG’s loan agreement was not deceptive. Unlike Respondents here, the defendants in AMG presented evidence regarding repeat customers – a study conducted by an economist, Dr. David Scheffman. Id. at 425. This study purported to show that repeat borrowers behaved the same as first-time borrowers when it came to paying off their loans. Id. at 425. Because Dr. Scheffman assumed that repeat borrowers could not be misled (based on experience gained from their first loan), he concluded that no borrowers had been misled. Id. But the court held otherwise: “Dr. Scheffman’s reasoning begs the question. … While Dr. Scheffman concludes that first-time borrowers were just as well informed as the repeat ones, it is equally plausible that the repeat borrowers were just as confused as those taking out their first loans.”12 Id. Respondents here have provided no evidence that IA’s repeat borrowers were any less confused than its first-time borrowers.

12 Respondents note that AMG used a variety of different corporate names, and they contend that AMG’s repeat borrowers did not know they were dealing with the same company. Appeal Tr. at 45. However, regardless of the corporate name, AMG used the same loan agreement, with the same repayment terms, for all its customers. 910 F.3d at 421.

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Respondents also cite FTC v. Publishers Business Services, Inc., 540 F. App’x 555 (9th Cir. 2013), and FTC v. Kuykendall, 371 F.3d 745 (10th Cir. 2004), Resp. Br. at 28, but those cases merely recognize that a defendant charged with engaging in deceptive practices should have the opportunity to show that certain customers suffered no injury. Here, there is no dispute that Respondents used the same loan agreement for all its borrowers, both first-time and repeat. That means that Respondents made the same misrepresentations with respect to all their borrowers, firsttime as well as repeat. It is Respondents’ burden to show that repeat borrowers were not deceived. FTC v. Ewing, No. 2:14-cv-0683, 2017 WL 4797516, at *11 (D. Nev. Oct. 24, 2017); FTC v. Bronson Partners, 674 F. Supp. 2d at 386; FTC v. Nat’l Urological Grp., Inc., 645 F. Supp. 2d 1167, 1213 (N.D. Ga. 2008). Respondents had ample opportunity to satisfy that burden but failed to do so. For instance, Respondents apparently assumed that all repeat borrowers necessarily understood how much they were agreeing to pay IA without providing evidence to support this assumption, particularly with respect to consumers who may have ended up paying more for their second or third loan than they did for their first. Accordingly, I reject their argument that repeat customers are not entitled to restitution.

B.

Civil Money Penalty

The CFPA provides that “[a]ny person that violates, through any act or omission, any provision of Federal consumer financial law shall forfeit and pay a civil penalty ….” 12 U.S.C. § 5565(c)(1). The CFPA establishes three tiers of penalties with statutory maxima ranging from $5000 to $1 million (before adjustments for inflation) for each day during which a violation continues. I conclude that IA and Mr. Carnes are separately liable for civil penalties for violations that occurred on or after July 21, 2011.

Enforcement Counsel has sought only first tier penalties ($5000 per day), and the ALJ accepted that recommendation. She identified three distinct practices that merited civil penalties: 1) the use of the loan agreement that violated the CFPA (as well as TILA); 2) EFTA violations; and 3) the use of RCCs. She held that IA and Mr. Carnes were separately liable for civil penalties with respect to the first and third of those practices, and that only IA was liable for the second. She concluded that the relevant time period for each of these practices was from July 21, 2011, until December 1, 2012, inclusive, a total of 500 days. Accordingly, she recommended that IA pay a penalty of $7.5 million (500 (days) x $5000 (penalty amount) x 3 (practices)), and that Mr. Carnes pay a penalty of $5 million (500 x $5000 x 2). Enforcement Counsel have not challenged this amount. Respondents’ only argument is that the amount recommended with respect to the RCCs was excessive because there was no showing that IA actually used RCCs on each of the 500 days. Resp. Br. at 30. They also argue that the award should be reduced based on their good faith and on their lack of history of violations of federal consumer laws. Id.

I agree with the ALJ that the relevant time period for violations relating to the use of the loan agreement (practices 1 and 2 above) is from July 21, 2011, until December 1, 2012, inclusive, a total of 500 days. During that period, IA originated 82,980 loans. ECX 97 at 1. I could impose a $5000 penalty for each of those loans, an amount that far exceeds the $2.5 million recommended by the ALJ. However, as an exercise of my discretion, I will limit the award to a single $5000 per each of the 500 days during which Respondents consummated loans using the loan agreement. Thus, I determine that the appropriate penalty is $5000 x 500 = $2,500,000 for each of the first two practices. Since both IA and Mr. Carnes are responsible for the CFPA violations in the loan 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 38 of 41

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agreement, I hold each of them separately liable for $2,500,000. (I do not impose any additional civil penalty on IA as a result of its TILA violations.) With respect to the second distinct practice, EFTA violations, I hold IA liable for a penalty of $2.5 million. As to the third practice, Respondents argue that the record does not show that they used RCCs on each of the days from July 21, 2011, until December 1, 2012. Resp. Br. at 30. But the record does show that, during that period, IA used RCCs on 602 occasions. I could impose a $5000 for each of those 602 RCCs. However, as an exercise of discretion, I will limit the award to a single $5000 for each of days during which Respondents consummated loans that authorized the use of those RCCs. This again totals $2,500,000, and again I hold IA and Mr. Carnes separately liable for this amount. Thus, the total award imposed on IA is $7,500,000, and the total award imposed on Mr. Carnes is $5,000,000.

There are five factors in the CFPA that I must consider in determining an appropriate civil penalty. 12 U.S.C. § 5565(c)(3). I conclude that the amount I award – substantially less than the statutory maximum – is appropriate in light of those factors. The first factor is the size of the financial resources and good faith of the person charged. With respect to the financial resources, although IA may no longer have financial resources, it is not apparent that the same is true with respect to Mr. Carnes. Indeed, information with respect to Mr. Carnes’ resources is within his control and since he has not attempted to justify mitigation on this basis I will not do so. Respondents do argue, however, that they acted in good faith because they consulted with a lawyer, they provided the loan agreement to Delaware state regulators, and they “intended to act lawfully.” Resp. Br. at 30. As explained above, consulting with counsel provides no excuse for conduct that Mr. Carnes should have known was wrong. (Otherwise, patently unreasonable, incompetent, or corrupt legal advice could shield a wrongdoer. But that is not the law.) Moreover, in April 2012, the FTC filed a complaint against AMG Services alleging that a loan agreement very similar to the one used by Respondents was deceptive and violated TILA and EFTA. FTC v. AMG Servs., Inc., No. 2:12-cv536 (D. Nev. Filed Apr. 2, 2012). And yet Respondents’ practices continued unabated. There is also no reason to believe that Delaware state regulators evaluated compliance with all the statutes that are at issue in this case. Accordingly, I decline to conclude that Respondents acted in good faith or that their financial resources render any further reduction in the amount of the recommended penalty amount appropriate.

The next factor is the gravity of the violation. Respondents committed their violations over an extended period of time, and their violations affected thousands of consumers. This factor does not favor any further reduction in the penalty amount. The third factor looks to the severity of the violations and the number of “products or services sold.” Again, Respondents’ violations were extensive. Thus, this factor does not favor mitigation. The fourth factor considers the history of previous violations. Respondents conceded that, prior to the filing of the Bureau’s Notice of Charges, IA was subject to an enforcement action brought by the State of Minnesota. Doc. 239 at 17; see Minnesota v. Integrity Advance, LLC, 846 N.W.2d 435, 438 (Minn. Ct. App. 2014), aff’d 870 N.W.2d 90 (Minn. 2015). It is irrelevant that, since the filing of the Notice of Charges, IA has not engaged in any additional violations because IA has not functioned since 2013. ECX 68 at 9- 10. The final factor looks to such other matters as justice may require. I am not aware of any, and Respondents have not brought any to my attention. Accordingly, there is no reason to further reduce the award of civil monetary penalties.

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C.

Injunctive relief The ALJ ordered Respondents to cooperate in assisting the Bureau in determining the identity, location, and amount of restitution due to each consumer who was entitled to redress. I agree that this is appropriate injunctive relief. The ALJ did not impose other conduct prohibitions, and I agree that this is appropriate because there is no evidence that Respondents are engaging in the conduct that led to this proceeding, or that they have done so for many years. Respondents make one argument: They contend that because IA ceased operations seven years ago and sold its assets, they should not be ordered to assist the Bureau. However, one of the goals of injunctive relief is to promote compliance with other terms of the order. FTC v. Direct Mktg. Concepts, 648 F. Supp. 2d at 2 I 2. The Order that I am entering includes an award of restitution, and the injunctive provision will assist in effectuating that award. Even if lA's assets have been sold, there may be assistance that Respondents (including Mr. Carnes) can provide to the Bureau in locating consumers who are entitled to relief.

CONCLUSION For these reasons, I AFFIRM the Recommended Decision in part, and REVERSE it in part. i(~ Director Consumer Financial Protection Bureau January ~ ' 2021 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 40 of 41

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CERTIFICATE OF SERVICE I hereby certify that I have served a true and correct copy of the Decision of the Director upon the following parties and entities in Administrative Proceeding 2015-CFPB-0029 as indicated in the manner described below:

Via Electronic Mail to Representatives for Consumer Financial Protection Bureau Benjamin Clark, Esq.

1700 G Street, NW Washington, DC 20552 [email protected] Stephen C. Jacques, Esq., Email: [email protected] Alusheyi J. Wheeler, Esq., Email: [email protected] Deborah Morris, Esq., Email: [email protected] Kevin E. Friedl, Esq., Email: [email protected] Via Electronic Mail to Representatives for Respondent Richard J. Zack, Esq.

Pepper Hamilton, Esq.

3000 Two Logan Square Philadelphia, PA 19103 [email protected] Michael A. Schwartz, Esq., Email: [email protected] Christen M. Tuttle, Esq., Email: [email protected] Saverio S. Romeo, Esq., Email: [email protected]

________________________ Jameelah Morgan Docket Clerk Office of Administrative Adjudication Bureau of Consumer Financial Protection Signed and dated on this 11th day of January 2021 at Washington, D.C.

Jameelah Morgan Digitally signed by Jameelah Morgan Date: 2021.01.11 14:37:28 -05'00' 2015-CFPB-0029 Document 308 Filed 1/11/2021 Page 41 of 41

Order (Aug. 2021)

PDF of this document (3 pages)

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UNITED STATES OF AMERICA Before the CONSUMER FINANCIAL PROTECTION BUREAU ADMINISTRATIVE PROCEEDING File No. 2015-CFPB-0029 _________________________________________

) In the Matter of

)

) INTEGRITY ADVANCE, LLC and

) FINAL ORDER JAMES R. CARNES,

)

) _________________________________________ ) IT IS ORDERED that, within 30 days after service of this Final Order, Respondents Integrity Advance LLC and James R. Carnes must pay restitution of $38,453,341.62. They shall make this payment by wire transfer to the Bureau, or to the Bureau’s agent. The Bureau may use these funds to provide redress to consumers who borrowed money from Respondent Integrity Advance on or after July 21, 2011, in the amount that each consumer paid in excess of the amount disclosed in the Total of Payments box of Integrity Advance’s loan agreement. If funds remain after this redress has been completed, the Bureau will deposit any remaining funds in the U.S. Treasury as disgorgement. Respondents will have no right to challenge any actions that the Bureau or its representatives may take under this portion of this Order. However, if either of the Respondents appeals this decision pursuant to 12 U.S.C. § 5563(b)(4), Respondents may, within 30 days after service of this Order, pay the award of restitution into an escrow account in lieu of making the payment to the Bureau. The escrow account shall be held by an entity that is chosen by Respondents and is acceptable to the Bureau. The escrow account shall be established so that if all or any portion of the restitution award is upheld on appeal, that amount shall be released to the Bureau within 30 days after the mandate issues on that appellate decision. Once the mandate has issued and the Bureau has received the portion of the restitution award to which it is entitled, any funds remaining in escrow shall be released to Respondents.

IT IS FURTHER ORDERED that, within 30 days after the service of this Final Order, Respondent Integrity Advance shall pay a civil penalty of $7,500,000 to the Bureau by sending those funds by wire transfer to the Bureau or to the Bureau’s agent in compliance with the Bureau’s wiring instructions. The civil money penalty paid under this Consent Order will be deposited in the Civil Penalty Fund of the Bureau as required by § 1017(d) of the CFPA, 12 U.S.C. § 5497(d). If Integrity Advance appeals this decision pursuant to 12 U.S.C. § 5563(b)(4), Integrity Advance may, within 30 days after service of this Order, pay the civil penalty into an escrow account in lieu of making the payment to the Bureau. The escrow account shall be held by an entity that is chosen by Integrity Advance and is acceptable to the Bureau. The escrow account shall be established so that if all or any portion of the civil penalty is upheld on appeal, that amount shall be released to the Bureau within 30 days after the mandate issues on that appellate decision. Once the mandate has issued and the Bureau has received the portion of the restitution award to which it is entitled, any funds remaining in escrow shall be released to Integrity Advance. 2015-CFPB-0029 Document 309 Filed 1/11/2021 Page 1 of 3

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IT IS FURTHER ORDERED that, within 30 days after service of this Final Order, Respondent James R. Carnes shall pay a civil penalty of $5,000,000 to the Bureau by sending those funds by wire transfer to the Bureau or to the Bureau’s agent in compliance with the Bureau’s wiring instructions. The civil money penalty paid under this Consent Order will be deposited in the Civil Penalty Fund of the Bureau as required by § 1017(d) of the CFPA, 12 U.S.C. § 5497(d). If Mr. Carnes appeals this decision pursuant to 12 U.S.C. § 5563(b)(4), Mr. Carnes may, within 30 days after service of this Order, pay the civil penalty into an escrow account in lieu of making the payment to the Bureau. The escrow account shall be held by an entity that is chosen by Respondent and is acceptable to the Bureau. The escrow account shall be established so that if all or any portion of the civil penalty is upheld on appeal, that amount shall be released to the Bureau within 30 days after the mandate issues on that appellate decision. Once the mandate has issued and the Bureau has received the portion of the restitution award to which it is entitled, any funds remaining in escrow shall be released to Integrity Advance.

IT IS FURTHER ORDERED that Respondents Integrity Advance and James R. Carnes, their successors and assigns, and their officers, agents, representatives, and employees, directly or through any corporation, subsidiary, division, or other device, shall cooperate in assisting the Bureau in determining the identity, location, and amount of restitution due to each consumer entitled to redress.

SO ORDERED. / ‘ .

Kathleen L. Kraninger Director Consumer Financial Protection Bureau

January 8 , 2021

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 CERTIFICATE OF SERVICE I hereby certify that I have served a true and correct copy of the Final Order upon the following parties and entities in Administrative Proceeding 2015-CFPB-0029 as indicated in the manner described below:

Via Electronic Mail to Representatives for Consumer Financial Protection Bureau Benjamin Clark, Esq.

1700 G Street, NW Washington, DC 20552 [email protected] Stephen C. Jacques, Esq., Email: [email protected] Alusheyi J. Wheeler, Esq., Email: [email protected] Deborah Morris, Esq., Email: [email protected] Kevin E. Friedl, Esq., Email: [email protected] Via Electronic Mail to Representatives for Respondent Richard J. Zack, Esq.

Pepper Hamilton, Esq.

3000 Two Logan Square Philadelphia, PA 19103 [email protected] Michael A. Schwartz, Esq., Email: [email protected] Christen M. Tuttle, Esq., Email: [email protected] Saverio S. Romeo, Esq., Email: [email protected] ________________________ Jameelah Morgan Docket Clerk Office of Administrative Adjudication Bureau of Consumer Financial Protection Signed and dated on this 11th day of January 2021 at Washington, D.C.

Jameelah Morgan Digitally signed by Jameelah Morgan Date: 2021.01.11 14:38:24 -05'00' 2015-CFPB-0029 Document 309 Filed 1/11/2021 Page 3 of 3

Opinion (Sept. 2022)

PDF of this document (33 pages)

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FILED United States Court of Appeals

PUBLISH Tenth Circuit

UNITED STATES COURT OF APPEALS September 15, 2022 Christopher M. Wolpert

FOR THE TENTH CIRCUIT Clerk of Court

INTEGRITY ADVANCE, LLC; JAMES R. CARNES,

Petitioners, Vv. No. 21-9521

CONSUMER FINANCIAL PROTECTION BUREAU,

Respondent.

Petition for Review of an Order from the Consumer Financial Protection Bureau (Consumer No. 2015-CFPB-0029)

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.

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Integrity Advance, LLC operated as a nationwide payday lender offering shortterm 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

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Court’s rulings. For the reasons below, we reject Petitioners’ various challenges and affirm the Director’s order.

BACKGROUND

I. Factual Background

From 2008 to 2013, Integrity operated nationwide as a payday lender. It was founded and run by James Carnes, its CEO.’ The company offered short-term, smalldollar 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 noncoercive 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

' Integrity was owned by Hayfield Investment Partners. Carnes was technically employed by Hayfield. The Bureau tells us that Carnes called himself Integrity’s “de facto” CEO because Integrity had no employees of its own. Resp. Br. at 4 n.4.

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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.

Il. 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.’ 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

? CIDs work like civil subpoenas, and executive-branch departments or agencies commonly issue them in their investigations. The Bureau has statutory authority to issue CIDs under 12 U.S.C. § 5562(c)(1).

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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. Jd. 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,

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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.? ALJ McKenna recommended that the Director order

Petitioners to pay $38 million of restitution, jointly and severally, plus “first-tier’™ civil

3 The Bureau had earlier stipulated to dismiss Count IV with prejudice before ALJ McKenna because it was duplicative of Count III. See Resp. Br. at 9-10 n.8 (“[T]he parties agreed that the consumer harm resulting from Count III was coextensive with Count IV.”). This was because Count III alleged that Petitioners violated CFPA because Integrity’s loan disclosures were deceptive and Count IV alleged that they violated CFPA because the loan disclosures were unfair. However, under the terms of the remand from the Director, the earlier dismissal of Count IV had no effect. Still, while the Director held that the Bureau properly pursued Count IV before ALJ Kirby, Count IV appears to make no difference to the ordered remedy. We assume it does not, because Petitioners make no argument explaining whether the revival of Count IV affects the resolution of the issues they raise on appeal.

* CFPA provides that “[a]ny person that violates, through any act or omission, any provision of Federal consumer financial law shall forfeit and pay a civil penalty[.]” 12 U.S.C. § 5565(c)(1). CFPA establishes three tiers of penalties with statutory maximums ranging from $5000 to $1 million (before adjustments for inflation) for each day during which a violation continues. “A first-tier penalty requires no showing of scienter; a second-tier penalty applies to ‘any person that recklessly engages in a violation’ of the CFPA; and a third-tier penalty applies to ‘any person that knowingly violates’ the CFPA.” See CFPB v. CashCall, 35 F.4th 734, 741 (9th Cir. 2022) (citing 12 U.S.C. § 5565(c)(2)(A)-(C)).

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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.* 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, 138 S. Ct. 2044 (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

° Parties may appeal an ALJ’s recommendation to the Director under 12 C.F.R. § 1081.402(a)(1). Otherwise, the Director can accept or reject the recommendation under 12 C.F.R. § 1081.402(b).

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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.” Jd. 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.° In Seila Law LLC v. CFPB, 140 S. Ct. 2183 (2020), the Court reviewed a challenge

to the Bureau’s authority to issue a CID for documents from the law firm of Seila

® Liu v. SEC, 140 S. Ct. 1936 (2020), is another important case decided a week before Seila Law. The case is relevant to Petitioners’ challenge to the Director’s ordered remedies. Though Petitioners preserved their arguments challenging the ordered remedies, they didn’t cite Liu in their appeal before the Director. Nor did the Director discuss Liu. See generally, Dkt. 308.

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Law. Id. at 2194. The law firm had refused to comply with the CID, based on its assertion that the Bureau was unconstitutionally structured.’ Jd. Though the Bureau prevailed in the Ninth Circuit, the Supreme Court reversed. Jd. at 2195-97. It held that Congress had structured the Bureau by making its director removable by the President only for “inefficiency, neglect, or malfeasance” in violation of the separation of powers. Jd. at 2197; see also 12 U.S.C. §5491(c)(3) (“The President may remove the Director for inefficiency, neglect of duty, or malfeasance in office.”’).

By the time the Supreme Court heard the case, Congress had revised the Bureau’s structure to authorize the President to remove the Bureau’s Director without cause. Jd. at 2208. And by then, the newly, properly appointed Director had ratified the previously issued CID.* Jd. In this circumstance, the Court declared that the ratification issue “turn[ed] on case-specific factual and legal questions not addressed below and not briefed|.]” Jd. Thus, it remanded the case for the Ninth Circuit “to

consider whether the civil investigative demand was validly ratified.” Jd. at 2211.

7 Throughout this opinion, our references to the Bureau’s unconstitutional “structure” relate to Congress’s having limited the President’s authority to remove the Bureau’s Director by requiring that the removal be for cause.

8 On remand, the Ninth Circuit held that the Director’s ratification “remedies

any constitutional injury that Seila Law may have suffered due to the manner in which the CFPB was originally structured.” CFPB v. Seila Law LLC, 984 F.3d 715, 718 (9th Cir. 2020). That enabled the Bureau to enforce the disputed CID. Jd. at 720.

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In August 2020, ALJ Kirby recommended that Petitioners be held liable on all counts. She recommended that the Director hold Integrity responsible for $132.5 million in equitable restitution. Of this amount, she recommended that Carnes be held responsible for $38.4 million, jointly and severally. ALJ Kirby spared Carnes the $95.1 million difference for two reasons: (1) the Bureau hadn’t charged him under all CFPA counts, and (2) the Bureau lacked statutory authority to enforce CFPA against Carnes until July 21, 2011, the date that the Bureau obtained its full range of authorities under CFPA. See Dkt. 308 at 26 n.8 (identifying the effective date of most of the Bureau’s statutory authority as July 21, 2011).° She also recommended that the Director impose civil monetary penalties of $7.5 million against Integrity and $5 million against Carnes.

Petitioners appealed ALJ Kirby’s recommendation to the Director. Petitioners contend that they “took exception to the Recommended Decision in its entirety,

including but not limited to, all findings of liability, all relief recommended by the

° In creating the Bureau, Congress afforded the agency time to implement its statutory functions. 75 Fed. Reg. 57252, 57252 (Sept. 20, 2010). Agencies previously enforcing consumer-protection laws needed to transfer their responsibilities to the Bureau. Jd. Congress concluded that a “transfer date of July 21, 2011... will provide the CFPB an appropriate period of time to hire and assign employees to support its new functions, as well as to plan and make important decisions necessary to build a strong foundation for the new agency.” Jd. at 57253. On this “designated transfer date, the ‘consumer financial protection functions’ currently carried out by the Federal banking agencies, as well as certain authorities currently carried out by the Department of Housing and Urban Development and the Federal Trade Commission” were transferred to the Bureau. Jd. (footnote omitted).

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ALJ, and the ALJ’s decision to deny [their] motion for Summary Disposition.” Op. Br. at 9.

In January 2021, the Director adopted ALJ Kirby’s recommendations on Petitioners’ liability. The Director concluded that Integrity had violated TILA by using disclosures that misled borrowers into believing that their loans were singlepayment loans, not multi-payment installment loans. The Director also determined that Integrity had violated EFTA by requiring consumers to accept the ACH authorization as a loan condition. The Director concluded that both Petitioners had violated CFPA (1) by providing deceptive loan disclosures, and (2) by using checks that Integrity created remotely, with the consumers’ identifying information and without authorization, to withdraw their funds from their personal bank accounts if the ACH authorization failed.

The Director mostly adopted ALJ Kirby’s recommended restitution award and civil penalties. The Director reduced the restitution award against Integrity from $132.5 million to $38.4 million, the sum needed to compensate Petitioners’ borrowers for harms suffered after July 21, 2011. The Director also imposed this restitution amount jointly and severally. But the Director departed from ALJ Kirby’s

characterization of the restitution award as an equitable, not legal, remedy.'° Instead,

10 Addressing the Petitioners’ request for legal, not equitable, restitution, ALJ Kirby noted that the Bureau “d[id] not cite to any authority or cases applying this theory in the context of a CFPB case and [Integrity and Carnes] argue that no such authority exists.” Dkt. 293 at 79. ALJ Kirby was “not convinced that [the Bureau’s] theory of ‘legal’ restitution is applicable to the present matter.” Jd. She concluded

1]

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the Director chose both, concluding that “[w]hether as a matter of equity or law... an award of restitution is justified both to remedy the losses consumers suffered . . . and to deprive Respondents of the amounts that they gained as a result of their unlawful conduct.” Dkt. 308 at 35 (emphasis added). Finally, the Director agreed with ALJ Kirby’s recommendation to impose civil penalties of $7.5 million from Integrity and $5 million from Carnes.

Acknowledging Seila Law, the Director ruled that in November 2015 (when the Notice of Charges was filed) the Bureau had been unconstitutionally structured because of the statutory limits on the President’s removal authority. But the Director concluded that she could cure any associated problems by ratifying the Notice of Charges. Thus, the Director “ratif[ied] the Bureau’s decision to file the Notice of Charges and to prosecute th[e] action.” Dkt. 308 at 19.

Petitioners appeal the Director’s final decision to our court.

Ill. Standard of Review

“We review agency action under the Administrative Procedure Act.” Ukeiley v. EPA, 896 F.3d 1158, 1163 (10th Cir. 2018). Our review requires us to determine whether the agency’s actions were “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law.” WildEarth Guardians v. Conner, 920 F.3d 1245, 1256 (10th Cir. 2019) (quoting 5 U.S.C. § 706(2)(a)(A)). We review purely legal questions de novo.

Karki v. Holder, 715 F.3d 792, 800 (10th Cir. 2013). And we review factual findings for

that she “need not decide this issue because .. . an award of ‘equitable’ restitution is nevertheless appropriate.” Jd.

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substantial evidence. Forest Guardians v. U.S. Fish and Wildlife Serv., 611 F.3d 692, 704 (10th Cir. 2010). Evidentiary rulings and the agency’s chosen remedies are reviewed for abuse of discretion. United Steelworkers of Am. v. NLRB, 376 F.2d 770, 773 (D.C. Cir. 1967); Cintas Corp. v. NLRB, 589 F.3d 905, 913 (8th Cir. 2009). DISCUSSION

Petitioners challenge the Director’s final order on three primary grounds. First, they argue that we should set aside the Bureau’s entire enforcement action because the Bureau was unconstitutionally structured when it filed its charges. Second, they argue that the enforcement action resulted in multiple due-process violations, chief among them being a deprivation of their right under Lucia to a “new hearing.”'! Third, they argue that the Director’s restitution award is unlawful because it concerns an equitable remedy that must account for Petitioners’ business expenses.

I. The Bureau’s Structure

Petitioners argue that an unconstitutionally structured agency lacks authority to act. And as mentioned, Sei/a Law held that in 2015 the Bureau was in fact unconstitutionally structured (as limiting the President’s removal power) when it filed its Notice of Charges. From this, Petitioners conclude that the Bureau’s enforcement action against them must be set aside entirely.

In June 2021, after Petitioners filed their opening appellate brief, the Supreme

Court rejected a similar argument in Collins v. Yellen, 141 S. Ct. 1761 (2021). First, after

'! Petitioners also present a handful of arguments that pertain only to Carnes. We address these arguments in their own section of this opinion.

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concluding that Seila Law was “all but dispositive,” the Court ruled that a “for cause” restriction on the President’s ability to remove the Federal Housing Finance Agency (“FHFA”) Director (a principal officer) violated separation of powers. Jd. at 1783-84. Next, the Court considered whether that defect rendered the FHFA’s prior actions void ab initio. Jd. at 1787. The Court ruled that it did not, noting that the FHFA’s leadership had been properly appointed when they took the disputed actions. Jd. Because “there was no constitutional defect in the statutorily prescribed method of appointment of that office,” the Court concluded that “there is no reason to regard any of the actions taken by the FHFA in relation to the [the disputed actions] as void.”’? Id.

In addition, Co//ins put to rest another of Petitioners’ present arguments. In response to the argument that the agency’s ratification of its earlier decisions wasn’t timely, the Court in Co/lins ruled that an agency need not even ratify the actions it took while it was unconstitutionally structured. Jd. at 1788. In reaching this conclusion, the Court rejected their claim that Sei/a Law said otherwise. Jd. That resolves Petitioners’ contention that the ratification here was impermissible for occurring after the three-year limitations period for filing the Notice of Charges had supposedly expired. See 12 U.S.C.

§ 5564(g)(1); see also CashCall, 35 F.4th at 742 (“We find it unnecessary to consider

Just two days before issuing Collins, the Court cautioned against any approach that would invalidate swaths of administrative decisions. See generally United States v. Arthrex, Inc., 141 S. Ct. 1970, 1986-88 (2021) (reaffirming the general principle that “when confronting a constitutional flaw in a statute, we try to limit the solution to the problem” (quoting Ayotte v. Planned Parenthood of N. New Eng., 546 U.S. 320, 328-29 (2006))).

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ratification because [Collins v. Yellen] has made clear that despite the unconstitutional limitation on the President’s authority to remove the Bureau’s Director, the Director’s actions were valid when they were taken.”).

Still, Collins left open an avenue of relief for potential injuries stemming from the actions of an unconstitutionally structured agency. On the issue of relief, the Court remanded “for further proceedings to determine what remedy, if any, the shareholders are entitled to receive on their constitutional claim.” 141 S. Ct. at 1770. It observed that “the possibility that the unconstitutional restriction on the President’s power to remove a Director of the FHFA could have such an effect cannot be ruled out.” Jd. at 1789. So the Court concluded that a future plaintiff may be able to challenge actions taken by an unconstitutionally structured agency by alleging “compensable harm.” Jd. As possible instances, the Court raised situations in which the President had wanted to remove the director but was stopped by a lower court decision or by heeding a statute disallowing it. Id. Petitioners in our case don’t point to any such “compensable harm” resulting from the Bureau’s unconstitutional structure. We therefore find no avenue of relief available to them under Collins.

We heed Sei/a Law’s admonition that we are to use a “scalpel rather than a

bulldozer” in remedying a constitutional defect. See Seila Law, 140 S. Ct. at 2210-11. So,

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because the Director’s actions weren’t unconstitutional, we reject Petitioners’ argument to set aside the Bureau’s enforcement action in its entirety. I. Petitioners’ Due-Process Claims

Petitioners next complain of what they characterize as due-process violations. They argue that ALJ Kirby’s proceeding fell short of the “new hearing” referenced in Lucia. They also challenge some of the ALJ’s evidentiary rulings. We address these arguments in turn.

A. A “New Hearing” Under Lucia v. SEC

In Lucia, the Supreme Court provided a remedy for the Appointments Clause violation, namely, a “new hearing” before a constitutionally appointed ALJ. 138 S. Ct. at 2055. Petitioners argue that a “new hearing” must allow additional evidence and arguments—it can’t just be a de novo review of the existing record. Unfortunately, Lucia offers little guidance on the constitutional requirements of a “new hearing.” In fact, it simply cites Ryder v. United States, 515 U.S. 177 (1995), for the proposition that a new hearing is required. See Lucia, 138 S. Ct. at 2055. But Ryder doesn’t help us much either, as it simply requires “a hearing before a properly appointed panel” of military court judges. 515 U.S. at 188.

We do find helpful a D.C. Circuit case applying Ryder and rejecting an argument that a “new hearing” must be more than de novo review by a different ALJ. In Intercollegiate Broadcasting System, Inc. v. Copyright Royalty Board, 796 F.3d 111 (D.C. Cir. 2015), the court noted that appellant’s sole support for re-opening an

administrative proceeding on remand was “‘a single sentence at the end of the [Ryder]

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opinion,” but “[n]othing in that sentence suggests that a new hearing would have been required if the reviewing court had possessed de novo authority.” Jd. at 120.

Petitioners have provided no support for a bright-line rule against de novo review of a previous administrative hearing. Nor do we see a reason for a more extensive hearing. The Appointments Clause violation notwithstanding, Petitioners had a full opportunity to present their case in the first proceeding. ALJ Kirby independently reviewed the existing record before relying on it. And she permitted Petitioners to challenge ALJ McKenna’s previous determinations. Ultimately, she agreed with most of ALJ McKenna’s recommendations and rejected Petitioners’ various challenges. We see no error.

B. Evidentiary Rulings

Petitioners raise a handful of evidentiary challenges to the Bureau’s decision. They argue that ALJ Kirby erred by not permitting evidence about Integrity’s operational expenses,!? about their reliance on counsel, and about the credibility of certain witnesses. 4 Petitioners must show that the Bureau abused its discretion by excluding this evidence. See Manna Pro Partners, L.P. v. NLRB, 986 F.2d 1346, 1353 (10th Cir. 1993).

Petitioners’ position lacks support, as they cite no case reversing based on similar

alleged error. And even without deferential review, Petitioners’ arguments would still

'3 We address Petitioners’ argument to present evidence of their expenses in Section III of this opinion discussing the Supreme Court’s decision in Liu v. SEC.

4 Petitioners also argue that it was legal error for ALJ Kirby to deny their motion to amend their answer to challenge as vague the Bureau’s characterization of

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fail. Petitioners argue that ALJ Kirby prevented them from presenting their advice-ofcounsel defense. They say that this defense would have negated the restitution award and civil penalties. In support, they assert that Carnes “did not draft, revise, or substantively review or approve the Loan Agreement, but instead relied on [his] legal counsel.” Op. Br. at 4, 35-36. But we don’t see where ALJ Kirby prevented Carnes from presenting his defense—she just ruled that Carnes’s testimony sufficed on this point. See Dkt. 269 at 9 (“Respondents state in their brief that Respondent Carnes previously testified that he relied upon his outside counsel to draft the loan agreement and to ensure it complied with the law .... Additional testimony ... appears unnecessary and, at best, would merely corroborate Carnes’ sworn testimony.”).

Further, Petitioners’ asserted advice-of-counsel defense isn’t relevant to the restitution award. Petitioners’ contrary argument relies on two district court cases. But the Ninth Circuit has reversed one of their cases on grounds that reliance on counsel is neither an appropriate basis to deny CFPA liability nor to deny restitution. See CashCall,

Inc., 35 F.4th at 749. Nor is advice of counsel relevant to the appropriateness of civil

their practices as unfair, deceptive, or as abusive acts or practices (“UDAAP”). A UDAATP results in the violation of the CFPA. See 12 U.S.C. § 5531(a). Petitioners make no effort to brief this argument or explain why it was legal error for ALJ Kirby

to deny their request. So we decline to consider it. See Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 679 (10th Cir. 1998).

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penalties under 12 U.S.C. § 5565, unless “heightened” civil penalties are imposed. See id. at 750. Petitioners weren’t subject to heightened civil penalties.

Petitioners also challenge ALJ Kirby’s decision to forgo live testimony despite its help in evaluating the credibility of witnesses. But nothing requires an ALJ to “observe a witness’ [s] live testimony,” and Integrity never “articulated sufficient grounds for [ALJ Kirby] to recall any of the witnesses for this purpose.” See Dkt. 269 at 7. So we find no abuse of discretion.

II. Carnes’s Due-Process Claims

Carnes alleges three due-process violations pertaining solely to himself: (1) CFPA’s statute of limitations had expired before the November 2015 Notice of Charges; (2) the Director wrongly upheld ALJ Kirby’s denial of Carnes’s discovery request seeking information relating to the statute of limitations; and (3) that ALJ Kirby granted summary disposition over Carnes’s liability despite the existence of genuine factual disputes.'!* These arguments lack merit.

A. Statute of Limitations

Petitioners argue that the Notice of Charges was filed outside the limitations period because the Bureau either did discover or could have discovered Carnes’s violations more than three years before it filed its Notice of Charges. Under CFPA, “no action may be brought under this title more than 3 years after the date of

discovery of the violation to which an action relates.” 12 U.S.C. § 5564(g)(1). We

'S The statute-of-limitations arguments apply to Carnes alone, because the Bureau signed tolling agreements with Integrity to toll the limitations period.

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conclude that § 5564(g)(1)’s limitations period commences when the Bureau either knows of a violation or, through reasonable diligence, would have discovered the violation.

In Merck & Co., Inc. v. Reynolds, 559 U.S. 633 (2010), the Court considered “the timeliness of a complaint filed in a private securities fraud action.” Jd. at 637. The Court noted that “[t]he complaint was timely if filed no more than two years after the plaintiffs ‘discover[ed] the facts constituting the violation.’” Jd. (quoting 28 U.S.C. § 1658(b)(1)). The Court held that a claim for relief “accrues (1) when the plaintiff did in fact discover, or (2) when a reasonably diligent plaintiff would have discovered, ‘the facts constituting the violation’—whichever comes first.” Jd. The Court further held that “the ‘facts constituting the violation’ include the fact of scienter, ‘a mental state embracing intent to deceive, manipulate, or defraud.’” Jd. (citation omitted).

A fraud claim accrues “once a plaintiff has a ‘complete and present cause of action.’” Jd. at 644 (citation omitted). Otherwise, “a defendant’s deceptive conduct may prevent a plaintiff from even knowing that he or she has been defrauded.” Jd. Thus, in considering accrual, we are mindful of the Court’s pronouncement that “unless a § 10(b) plaintiff can set forth facts in the complaint showing that it is ‘at least as likely as’ not that the defendant acted with the relevant knowledge or intent, the claim will fail.” Jd. at 649 (citation omitted). Accrual and knowledge go together.

Importantly, the Court rejected Merck’s argument that “facts that tend to show

a materially false or misleading statement (or material omission) are ordinarily

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sufficient to show scienter as well.” Jd. As support, the Court noted that “[a]n incorrect prediction about a firm’s future earnings, by itself, does not automatically tell us whether the speaker deliberately lied or just made an innocent (and therefore nonactionable) error.” Jd. at 650.

The Court also rejected Merck’s argument that the limitations period accrued when a plaintiff is on “inquiry notice,” meaning “the point ‘at which a plaintiff possesses a quantum of information sufficiently suggestive of wrongdoing that he

should conduct a further inquiry.’” Jd. (citation omitted). The Court saw nothing in the statutory limitations period signifying “that the limitations period should occur at some earlier moment before ‘discovery,’ when a plaintiff would have begun investigating|.]” Jd. at 651.

Petitioners’ statute-of-limitations arguments fail just as Merck’s did. Petitioners make a debatable argument that by May 18, 2012, the Bureau could have learned from public information that Carnes was Integrity’s CEO. But the limitations period still wouldn’t have run by November 18, 2015, when the Bureau filed its Notice of Charges. Before the limitations period would commence, the Bureau needed to know not only that Carnes was Integrity’s CEO but also that he had sufficient knowledge of those violations. See CFPB v. Gordon, 819 F.3d 1179, 1193 (9th Cir. 2016). As discussed further below, the Bureau couldn’t successfully charge Carnes personally without showing that he “had knowledge of the

misrepresentations, was recklessly indifferent to the truth or falsity of the

misrepresentation|[s|, or was aware of a high probability of fraud along with an

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intentional avoidance of the truth.” Jd. After all, “scienter is assuredly a fact” that the Bureau would need to prove. Merck, 559 U.S. at 648 (cleaned up). We reject the argument that the receipt of consumer complaints triggered the statute of limitations. As Merck says, consumer complaints generally serve only as a “storm warning” that an agency might want to start investigating. 559 U.S. at 653.

Here, the limitations period wouldn’t have commenced earlier than October 2013, when the Bureau received Integrity’s responses to the CIDs and deposed Carnes. Carnes hasn’t identified what public information would have established his knowledge of Integrity’s illegal conduct before then. Petitioners didn’t provide the information about Carnes’s role and knowledge until late 2013. So the Bureau’s November 2015 Notice of Charges is timely.

B. Discovery Requests

Petitioners argue that the ALJ violated their due-process rights by denying Carnes additional discovery on the statute-of-limitations issue. They conclude that “(t]he Director’s denial was an abuse of discretion and, under the circumstances, a denial of Petitioners’ due process rights.” See Op. Br. at 31. But Petitioners cite no authority supporting their view that the ALJ abused her discretion. And the Bureau couldn’t have learned of Petitioners’ violations until they complied with the Bureau’s CID, so additional discovery would have been pointless. Our conclusion might have been different had Petitioners pointed us to public documents that, for example, evinced Carnes’s knowledge of Integrity’s misleading practices. But, based on the

record before us, we reject Petitioners’ argument.

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What’s more, the Bureau complied with Petitioners’ valid discovery requests. It produced the consumer complaints and related external communications about Petitioners. Though Petitioners argue that they should have received the Bureau’s “internal correspondence” too, Op. Br. at 31, the ALJ didn’t err by denying their request. Under 12 C.F.R. § 1081.206(b)(1)(i), “[t]he Office of Enforcement may withhold a document if: .. . The document is an internal memorandum, note, or writing prepared by a person employed by the Bureau[.]’” Nonetheless, Carnes complains that he never received a privilege log for any withheld documents. But the ALJ needn’t order a privilege log. See 12 C.F.R. § 1081.206(c) (“The hearing officer may require the Office of Enforcement to produce a list of documents or categories of documents withheld[.]”) (emphasis added)).

C. Summary Disposition

Petitioners argue that the Director erred by ruling on summary disposition that Carnes acted with knowledge of Integrity’s illegal practices.

Under CFPA, an individual may be held liable for a corporation’s violations if (1) he participated directly in the deceptive acts or had the authority to control them and (2) he had knowledge of the misrepresentations, was recklessly indifferent to the

truth or falsity of the misrepresentation[s], or was aware of a high probability of

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fraud along with an intentional avoidance of the truth.” Gordon, 819 F.3d at 1193 (citation omitted).!®

Petitioners don’t challenge the finding that Carnes controlled Integrity—the first requirement under Gordon. They challenge only the Director’s finding under the second requirement of Gordon about knowledge. We note that the Director found that Carnes knew about Integrity’s misrepresentations and, alternatively, found that Carnes was at least recklessly indifferent to the misrepresentations. See Dkt. 308 at 15 (“[T]here is ample evidence that Mr. Carnes knew that [Integrity]’s loan agreement misrepresented the amount that consumers were likely to pay, and also knew that consumers were likely to pay more than the amount disclosed unless they took affirmative action.”); see also id. at 16 (“While Mr. Carnes asserts that as CEO he was not familiar with the details of [Integrity]’s loan agreement, I conclude that he was at least recklessly indifferent to those details[.]”). Yet, Petitioners’ opening brief mentions the words “recklessly” and “indifferent” only when stating the legal standard. See Op. Br. at 25, 33. Petitioners’ brief provides no basis for why the Director’s finding of reckless indifference would be erroneous. See Bronson v.

Swensen, 500 F.3d 1099, 1104—05 (10th Cir. 2007) (parties must adequately brief the

‘© In Gordon, the Ninth Circuit adopted the test for individual liability for a corporation’s actions used under the FTC Act. 819 F.3d at 1193 n.8. Petitioners don’t object to importing the Ninth Circuit’s test for individual liability from Gordon. And the parties all cite Gordon in their briefing. We thus follow the Ninth Circuit’s articulation of the relevant test in Gordon. We note that other courts have similarly relied on the FTC Act to interpret CFPA. See, e.g., CFPB v. NDG Fin. Corp., No. 15ev-5211, 2016 WL 7188792, at *17 (S.D.N.Y. Dec. 2, 2016).

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arguments they want our court to consider). So we hold that the Director’s order properly found Carnes liable for being recklessly indifferent to Integrity’s practices. Nevertheless, the Director didn’t err in also finding that Carnes knew about Integrity’s misrepresentations. Petitioners argue that Carnes’s reliance on counsel precludes a finding that Carnes was sufficiently knowledgeable. They contend that the Director improperly “disregard[ed] other evidence that Mr. Carnes did not substantively approve the loan agreement and instead relied on outside counsel.” Op. Br. at 34. But reliance on counsel isn’t a defense to liability. See CashCall, 35 F.4th at 749 (Under CFPA, individual liability requires knowledge of the practices that misled consumers, not knowledge that the misleading practices were illegal). Addressing Carnes’s review and approval of the loans, the Director had a solid basis to find that “[a]lthough Mr. Carnes did not personally draft the loan agreement that [Integrity] used for those loans, he approved its use.” Dkt. 308 at 14; see also id. (Carnes testified: “Did they have my approval to use the loan agreement? Yes.”); id. (“Q. And in most cases they would pay substantially more than the amount that’s reflected in

the total amounts of payments box; is that right? A. They would pay more.”).!”

'’ Petitioners contest the illegality of Integrity’s practice of using remotely created checks to withdraw funds from customer accounts. We agree with the Director that Petitioners’ practice was “unfair” under CFPA.

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In short, we find the Director’s analysis consistent with the applicable standard in Gordon. We therefore reject Petitioners’ arguments.!® IV. Remedies Order

Petitioners challenge the remedies order on the basis that the ALJ and Director didn’t allow them to present evidence of their good-faith reliance on counsel (as to restitution and civil penalties) and evidence of their expenses (as to the Director’s residual disgorgement order). We reject Petitioners’ challenges.

A. Evidence of Good Faith

Petitioners argue that the ALJ erred by disallowing evidence of their good faith through their advice-of-counsel defense. They contend that the Director should have denied restitution or civil penalties based on this evidence. As earlier discussed in Section IL.B. of this opinion, Petitioners’ advice-of-counsel argument opposing restitution lacks merit. As “developing case law,” they cite two district-court decisions from the Ninth Circuit concluding that advice of counsel is relevant to restitution. But since Petitioners’ briefing, the Ninth Circuit has ruled otherwise. See CashCall, 35 F.4th at 750—51 (finding that reliance on counsel is not an appropriate basis for denying restitution.).

As for the civil penalties under CFPA, the Director must consider five possible

mitigating factors before imposing a civil-penalty order. See 12 U.S.C. § 5565(c)(3). The

'8 In support of their argument that Carnes didn’t know that Integrity’s loans were misleading, Petitioners rely on the State of Delaware’s approval of their application to do business there. But this didn’t include a legal review of the loan document under federal law.

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Director considered all these factors, including good faith, and rejected Petitioners’ challenge to the ALJ’s recommended civil penalties. As earlier discussed, the ALJ considered Carnes’s own testimony on this point and deemed that sufficient. See Section IIL.C., supra. This is all that was required.!%

B. Net Profits and Business Expenses

Petitioners complain that the ALJ kept them from introducing evidence of Integrity’s legitimate business expenses. In their opening brief, Petitioners claim an offset for these expenses for any “disgorgement,” but not an offset against the restitution award itself. Op. Br. at 39. They acknowledge that “[t]hroughout the proceedings, the CFPB sought restitution rather than disgorgement.” Jd. After that, they note that the Director further ordered that “the Bureau will deposit any remaining funds in the U.S. Treasury as disgorgement” after restitution amounts are transferred to individual consumers. Dkt. 309 at 1.

Because the Director referred to a “disgorgement” remedy, Petitioners seek an offset for expenses on disgorged amounts under Liu v. SEC. In that case, the Supreme Court held that “ta disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible under [28 U.S.C.] § 78u(d)(5).” 140

S. Ct. at 1940. The Court further ruled that “courts must deduct legitimate expenses

' Further, Petitioners repeatedly asserted attorney-client privilege in responding to discovery requests, which hindered the Bureau’s ability to contest any advice-of-counsel evidence. Petitioners don’t dispute this fact.

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before ordering disgorgement under § 78u(d)(5).” Jd. at 1950. But the present case differs from Liu.

Here, the Director ordered the full $38.4 million as both legal and equitable restitution. Petitioners haven’t challenged that designation and have thus waived any challenge. So we evaluate the case as one involving a legal, not equitable, remedy. Under § 5565, the Bureau has jurisdiction in “[a]dministrative proceedings or court actions” “to grant any appropriate legal or equitable relief with respect to a violation of Federal consumer financial law, including a violation of a rule or order prescribed under a Federal consumer financial law.” 12 U.S.C. § 5565(a)(1). Among the listed available remedies is “restitution.” Jd. at § 5565(a)(2)(C).

In contrast, Liu involved a disgorgement order under a statute allowing only equitable relief. Certainly, the Director in Petitioners’ case did describe as “disgorgement” any possible sums deposited in the U.S. Treasury for borrowers the Bureau couldn’t locate to reimburse. See Dkt. 309 at | (“If funds remain after this redress has been completed, the Bureau will deposit any remaining funds in the U.S. Treasury as disgorgement.’’). But Petitioners offer no authority that such deposits to the U.S. Treasury become equitable disgorgement. In fact, in Liu, the Court declared it an ““open question” whether such deposits are “consistent with the limitations of § 78u(d)(5).” Jd. at 1948. The Court noted that “‘[t]he parties have not identified authorities revealing what traditional equitable principles govern when, for instance, the wrongdoer’s profits cannot practically be disbursed to the victims.” Jd. at 1948—49. Left in this same circumstance,

we cannot conclude that Petitioners are entitled to an offset for legitimate business

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expenses against any future, hypothetical funds collected as legal restitution, but by the Director’s order deposited with the U.S. Treasury as disgorgement.*? Moreover, Liu concerned the SEC’s authority to order disgorgement under 15 U.S.C. § 78u(d)(5). That statute limits the SEC to granting ‘“‘any equitable relief that may be appropriate or necessary for the benefit of investors.” 15 U.S.C. § 78u(d)(5). But 12 U.S.C. § 5565(a) is broader, permitting the Bureau to pursue both equitable and legal relief.

Finally, Petitioners contest the Director’s imposition of joint and several liability for restitution or disgorgement “without consideration or evidence of what (if any) profits of the alleged misconduct went to Mr. Carnes individually.” Op. Br. at 39-40. The Bureau responds that Petitioners have waived this argument by failing to object to its request for joint and several liability in moving for summary disposition before ALJ Kirby or on appeal before the Director. Petitioners reply that the possibility of disgorgement never arose until the Director issued her order, so they couldn’t have objected to its joint and several nature. Even so, Petitioners could have objected to joint and several liability for the full restitution award of $38.4 million. In that circumstance,

we conclude that Petitioners have waived this issue too.7!

?° Tn their reply brief, Petitioners enlarge their argument to assert that the Director “ordered that the entire award be retained by the government as ‘disgorgement,’ in essence, turning the remedy into a disgorgement award.” Reply Br. at 18 (citing Dkt. 309 at 1). In addition to asserting a new argument in the reply brief, Petitioners mischaracterize the record as cited, which does not support their account of it.

1 We note that in Liu, the Court addressed an argument against imposing joint

and several liability. 140 S. Ct. at 1947, 1949. The Court pointed to “the commonlaw rule requiring individual liability for wrongful profits,” and commented that the

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CONCLUSION

The Director’s order is affirmed.

SEC’s joint and several liability “could transform any equitable profits-focused remedy into a penalty.” Jd. at 1949. But the Court further noted that “[t]he common law did, however, permit liability for partners engaged in concerted wrongdoing.” Jd. The Court didn’t reverse the joint and several liability. Instead, it noted that the petitioners, a married couple, had presented no evidence that they did not both “enjoy the fruits of the scheme.” Jd. Here, Integrity and Carnes obviously were closely related, and as in Liu, we see nothing making joint and several liability “unjust.” See id.

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21-9521, Integrity Advance v. Consumer Financial Protection Bureau PHILLIPS, Circuit Judge, concurring.

In contesting the Director’s restitution award, Petitioners don’t challenge the Director’s approval of restitution as a legal (as well as an equitable) remedy. Though I agree that Petitioners have waived any such challenge on this point, I express some reservations about legal restitution under § 5565(a) for a case in which the issue is preserved.

Under 12 U.S.C. § 5565, the Bureau may sue either in federal district court or in its own administrative tribunal to seek “appropriate legal or equitable relief”:

(a) Administrative proceedings or court actions

(1) Jurisdiction[—]The court (or the Bureau, as the case may be) in an action or adjudication proceeding brought under Federal consumer financial law, shall have jurisdiction to grant any appropriate legal or equitable relief with respect to a violation of Federal consumer financial law, including a violation of a rule or order prescribed under a Federal consumer financial law. 12 U.S.C. § 5565(a)(1) (emphasis added). In my view, whether this statute allows a given remedy depends on the forum and the nature of the remedy sought. I have three reasons for questioning whether “legal restitution” is an appropriate form of relief, especially when the Bureau chooses to litigate in its own administrative tribunal.

First, restitution is generally considered to be an equitable remedy. See Adams v. Cyprus Amax Minerals Co., 149 F.3d 1156, 1162 (10th Cir. 1998); see also CFPB v. Consumer First Legal Grp., LLC, 6 F.4th 694, 711 (7th Cir. 2021) (rejecting the

Bureau’s attempt to recharacterize an award of equitable restitution under 12 U.S.C.

§ 5565 as legal restitution). When Congress refers to a remedy that is traditionally

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equitable, courts presume that the remedy maintains its equitable character. See Liu, 140 S. Ct. at 1947 (“Statutory references to a remedy grounded in equity must, absent other indication, be deemed to contain the limitations upon its availability that equity typically imposes. Accordingly, Congress’ own use of the term ‘disgorgement’ in assorted statutes did not expand the contours of that term beyond a defendant’s net profits—a limit established by longstanding principles of equity.” (cleaned up)). Nothing in § 5565 empowers the Bureau to treat the listed remedies under

§ 5565(a)(2) as legal or equitable for its convenience.

Second, the Bureau’s claim to “legal restitution” might render superfluous another remedy listed in § 5565(a)(2). See Lockheed Martin Corp. v. Admin. Rev. Bd., 717 F.3d 1121, 1130 (10th Cir. 2013) (“It is a rudimentary canon of statutory construction that such superfluities are to be avoided.”). I am uncertain how the Bureau’s “legal restitution” differs from “payment of damages or other monetary relief,” which is separately listed in § 5565(a)(2)(E).

Third, allowing the Bureau to obtain “legal restitution” in an administrative forum raises Seventh Amendment concerns, which implicates the constitutionalavoidance canon. The Seventh Amendment guarantees jury-trial rights to parties sued for legal remedies. See Liberty Mut. Fire Ins. Co. v. Woolman, 913 F.3d 977, 992 n.14 (10th Cir. 2019) (“Though the Seventh Amendment guarantees the right to a jury trial in any suit involving legal rights, this guarantee doesn’t extend to equitable rights.” (cleaned up)); see also Lorillard v. Pons, 434 U.S. 575, 583 (1978) (“In cases

in which legal relief is available and legal rights are determined, the Seventh

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Amendment provides a right to jury trial.” (citation omitted)); Jarkesy v. SEC, 34 F.4th 446, 454 (Sth Cir. 2022) (the Seventh Amendment applies to actions seeking legal relief (citing Tu// v. United States, 481 U.S. 412 (1987)). Under the constitutional-avoidance canon, courts interpret federal statutes to avoid risking constitutional concerns. See United States v. Ciapponi, 77 F.3d 1247, 1250 (10th Cir. 1996); Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 247-48 (2012) (explaining that the “constitutional-doubt canon “militates against not only those interpretations that would render the statute unconstitutional but also those that would even raise serious questions of constitutionality.”). Interpreting § 5565(a)(2) to encompass “legal restitution” would enable the Bureau to file actions for legal relief in its own administrative tribunals potentially in violation of the Seventh Amendment.

Had Petitioners not waived their challenge to legal restitution, I would reach the issue of whether § 5565 permits legal restitution in an administrative enforcement action. If it doesn’t, and only equitable restitution is permitted, I would require an explanation why, under Liu, the Bureau’s administrative restitution order wouldn’t

need to be reduced by Integrity’s legitimate business expenses.