The Consumer Financial Protection Bureau recently issued an updated version of the TILA-RESPA Integrated Disclosure Guide to the Loan Estimate and Closing Disclosure forms. The revised Guide incorporates the changes to the TRID rule that were issued in July 2017 and published in the August 11, 2017 Federal Register.
Congress may have now have the opportunity to disapprove by a simple majority vote the CFPB’s disparate impact theory of assignee liability for so-called dealer “markup” disparities as a result of a determination by the General Accountability Office (GAO) that the CFPB’s Bulletin describing its legal theory is a “rule” subject to override under the Congressional Review Act (CRA).
We previously blogged about press reports that the GAO had accepted a request from Senator Patrick Toomey to determine whether CFPB Bulletin 2013-02, titled “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” (the “Bulletin”), is a “rule” within the scope of the CRA. (“Indirect auto lenders” is the term used by the Bureau to refer to persons, such as banks and sales finance companies, that are engaged in the business of accepting assignments of automobile retail installment sale contracts from dealerships.) We subsequently suggested that a recent GAO determination that the interagency leveraged lending guidance is a “rule” subject to the CRA foreshadowed a similar determination for the CFPB indirect auto finance guidance reflected in the Bulletin.
As it turns out, we were right. The GAO issued its decision on December 5, 2017, concluding that the Bulletin is a “rule” subject to the CRA because “it is a general statement of policy designed to assist indirect auto lenders to ensure they are operating in compliance with [the] ECOA and Regulation B, as applied to dealer markup and compensation policies.”
The Bulletin is an official guidance document issued by the Bureau on March 21, 2013. It effectively previewed the Bureau’s subsequent ECOA enforcement actions against assignees of automobile retail installment sale contracts (RISCs), setting forth the views of the CFPB concerning what it characterized as a significant ECOA compliance risk associated with an asserted assignee “policy” of “allowing” dealerships to negotiate the annual percentage rate under a retail installment sale contract by “marking up” the wholesale buy rate established by a prospective assignee. The Bulletin’s intent to establish its enforcement and supervisory approach with respect to the subject practice was unmistakably clear not only from its text but also from the tag line in the accompanying press release – “Consumer Financial Protection Bureau to Hold Auto Lenders Accountable for Illegal Discriminatory Markup.”
Before responding to Senator’s Toomey’s request, in accordance with its standard procedure for responding to requests of this nature, the GAO solicited and obtained the CFPB’s views. The Bureau responded to the GAO by letter dated July 7, 2017.
The legal analysis reflected in the GAO opinion is straightforward. Subject to exceptions not relevant, the CRA adopts the Administrative Procedure Act definition of a “rule,” which states, in relevant part, that a rule is “”the whole or a part of an agency statement of general . . . applicability and future effect designed to implement, interpret, or prescribe law or policy . . ..” The GAO framed the question presented as “whether a nonbinding general statement of policy, which provides guidance on how [the] CFPB will exercise its discretionary enforcement powers, is a rule under [the] CRA.” It agreed with the CFPB’s assertion that the Bulletin “is a non-binding guidance document” that “identifies potential risk areas and provides general suggestions for compliance” with the ECOA.
The GAO rejected, however, the CFPB’s argument that the CRA does not apply to the Bulletin because the Bulletin has no legal effect on regulated entities. Specifically, the Bureau had argued “taken as a whole the CRA can logically apply only to agency documents that have [binding] legal effect.” The GAO concluded that “CRA requirements apply to general statements of policy, which, by definition, are not legally binding.”
The GAO letter explains that, “to strengthen congressional oversight of agency rulemaking,” the CRA requires all federal agencies, including independent regulatory agencies, to submit a report on each new rule to both Houses of Congress and to the Comptroller General before it can take effect.” (emphasis added) The CFPB acknowledged that it had not complied with this formal reporting requirement because it did not believe the Bulletin was a “rule” subject to the CRA reporting requirement. In response to the GAO decision, Senator Toomey issued a press release stating that “I intend to do everything in my power to repeal this ill-conceived rule using the Congressional Review Act.”
As explained in prior blog posts, the CRA establishes a streamlined procedure pursuant to which Congress may enact, by simple majority vote, a joint resolution disapproving a “rule.” A joint resolution of disapproval passed by Congress is presented to the President for executive action. If approved by the President, the joint resolution is enacted into law and assigned a Public Law number. If a joint resolution of disapproval is enacted into law, the disapproved rule “may not be reissued in substantially the same form, and a new rule that is substantially the same as such a rule may not be issued, unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.” Thus, the enactment of a joint resolution of disapproval has a preclusive effect on future regulatory action.
According to a Congressional Research Service report, in prior instances where the GAO determined that the agency action satisfied the CRA definition of a “rule” and joint resolutions of disapproval were subsequently introduced, “the Senate has considered the publication in the Congressional Record of the official GAO opinions . . . as the trigger date for the initiation period to submit a disapproval resolution and for the action period during which such a resolution qualifies for expedited consideration in the Senate.” If a joint resolution of disapproval is introduced, it therefore would appear that the CRA clock may start to run for expedited consideration by the Senate once the GAO opinion is published in the Congressional Record.
So, what does all of this mean for the automobile sales finance industry? We think there are several important implications. First, the GAO’s decision strengthens the argument that the CFPB’s effort to regulate dealer pricing of RISCs should have been pursued through a rulemaking proceeding, rather than through “guidance” and enforcement actions.
Second, the GAO determination means that Congress could override the Bulletin by means of a joint resolution of disapproval, with a majority vote that could not be avoided by a Senate filibuster. Given the Republican opposition to the CFPB’s pursuit of this issue, and the Democratic support for auto dealers as well (expressed in letters from members of Congress to the CFPB), there seems to be a fair chance of a CRA disapproval resolution passing. Indeed, as Senator Toomey noted in his press release, the House of Representatives passed the Reforming CFPB Indirect Auto Financing Guidance Act in November 2015 by a bipartisan vote of 332-96.
What would the enactment of a joint resolution of disapproval mean? Obviously, it would mean the Bulletin would be null and void. But since the Bulletin was non-binding anyway and the CFPB did not comply with the CRA reporting requirement, what difference would it make?
Opponents of the CFPB’s disparate impact theory of liability would argue that the override of the guidance is, by definition, a Congressional repudiation of its content – the legal and factual theories of liability contained in the Bulletin. The corollary of this compelling argument is that the override would preclude not only another similar “rule,” but also that which is inherent in the existence of such a “rule” – its application to regulated entities in supervisory activities or enforcement actions. This repudiation would be permanent (unless altered by a subsequent Congressional enactment), and might therefore offer a lasting end to the CFPB’s efforts to regulate dealer pricing through banks and sales finance companies, rather than the potentially temporary hiatus that could be brought about by new leadership at the CFPB.
We hope that Congress will override the Bulletin under the CRA, and possibly put a final end to this highly questionable legal and factual ECOA theory.
As required by Judge Kelly’s scheduling order, yesterday afternoon Leandra English filed a motion for a preliminary injunction in her action seeking a declaration that she, rather than Mick Mulvaney, has the legal right to serve as CFPB Acting Director. The motion was accompanied by a supporting memorandum. Ms. English also filed a First Amended Complaint yesterday.
Like her unsuccessful motion for a temporary restraining order (TRO), Ms. English’s preliminary injunction motion relies primarily on the argument that the provision of the Federal Vacancies Reform Act (FVRA) that authorizes the President to temporarily fill a vacancy in an executive agency position requiring confirmation is superseded by the provision in the Consumer Financial Protection Act (CFPA) that provides the CFPB Deputy Director “shall…serve as acting Director in the absence or unavailability of the Director.” Ms. English’s argument continues to be based on the premise that the phrase “absence or unavailability” in the CFPA provision covers a vacancy created by the CFPB Director’s resignation. However, for the compelling reasons set forth in our blog post, we believe the phrase should not be construed to cover such a vacancy. (We note that the succession provisions in other federal statutes cited by Ms. English on pg. 11 of her memorandum in support of her argument that the CFPA provision should prevail over the FVRA expressly address succession “in the event of a vacancy” in a leadership position. None of these statutes use the phrase “absence or unavailability” found in the CFPA provision. Indeed, the other statutes cited by Ms. English provide further support for the argument that the CFPA provision is inapplicable.)
In support of her preliminary injunction motion, Ms. English also renews her TRO argument that Mr. Mulvaney’s appointment is inconsistent with the CFPB’s status as an “independent agency” because, as Director of the Office of Management and Budget, he is an “at-will employee” who can be dismissed by the President without cause. She also adds two new arguments not advanced in support of her TRO motion.
First, she argues that even if the CFPA provision does not supersede the FVRA, the FVRA does not apply to the appointment of a CFPB Acting Director. The FVRA provides that the President’s authority to use the FVRA to fill vacancies does not apply to positions held by “any member who is appointed by the President, by and with the advice and consent of the Senate to any board, commission, or similar entity that… (A) is composed of multiple members; and (B) governs an independent establishment or Government corporation.” 5 U.S.C. § 3349c(1). The Dodd-Frank Act amended the Federal Deposit Insurance Act (FDIA) to provide that the CFPB Director, or the Acting CFPB Director in the event of a vacancy in the Director’s position, shall serve as a member of the FDIC Board. According to Ms. English, because this provision would make the CFPB Acting Director a member of the FDIC Board, the President cannot use his FVRA authority to appoint a CFPB Acting Director.
The same argument was made in the lawsuit filed this week in U.S. District Court for the Southern District of New York by the Lower East Side People’s Federal Credit Union seeking a declaration that Ms. English has the legal right to serve as Acting Director. As we commented in our blog post about the credit union’s lawsuit [link], while clever, this argument is based on an incorrect reading of the FVRA. The FVRA provides that the President’s authority to use the FVRA to fill vacancies does not apply to positions held by “any member who is appointed by the President, by and with the advice and consent of the Senate to any board, commission, or similar entity that… (A) is composed of multiple members; and (B) governs an independent establishment or Government corporation.” 5 U.S.C. § 3349c(1). The Dodd-Frank Act amended the Federal Deposit Insurance Act (FDIA) to provide that the CFPB Director, or the Acting CFPB Director in the event of a vacancy in the Director’s position, shall serve as a member of the FDIC Board. According to Ms. English, because this provision would make the CFPB Acting Director a member of the FDIC Board, the President cannot use his FVRA authority to appoint a CFPB Acting Director.
Ms. English’s (and the credit union’s) argument ignores the fact that neither the CFPB Director nor the Acting Director “are appointed by the President, by and with the advice and consent of the Senate to any board….” Rather, the FDIA designates the CFPB Director or Acting Director members of the FDIC Board by virtue of their CFPB positions. (A person serving on a board by virtue of another position that he or she holds is often referred to as an “ex officio” member.) Indeed, the FDIA specifically recognizes this distinction by referring to the three FDIC Board members who are appointed by the President as the “appointed members.” Moreover, Ms. English implicitly acknowledges that Mr. Mulvaney would only serve on the FDIC Board by virtue of his appointment as CFPB Acting Director, arguing that the President exceeded his FVRA authority when he “attempted to designate Mr. Mulvaney as the Acting Director of the CFPB—and thus as a member of the FDIC Board.” (emphasis added). Accordingly, since the President did not appoint Mr. Mulvaney to the FDIC Board, and has only appointed him CFPB Acting Director (as well as OMB Director), the President can properly use his FVRA authority to appoint Mr. Mulvaney CFPB Acting Director.
The second argument added by Ms. English in support of her preliminary injunction motion is that the President’s appointment of Mr. Mulvaney violates the Appointments Clause of the U.S. Constitution. According to Ms. English, the Appointments Clause only gives the President two means of appointing officers: with the advice and consent of the Senate or pursuant to statute. She argues that the FVRA does not provide a valid statutory basis for Mr. Mulvaney’s appointment and his confirmation as OMB Director does not, in itself, allow the President to assign duties at another agency to Mr. Mulvaney.
Ms. English’s amended complaint generally tracks the introduction and factual allegations in her original complaint and seeks the same relief, namely a declaration that she, and not Mr. Mulvaney, is the CFPB Acting Director, an order directing President Trump to refrain from appointing, recognizing, or causing any person to recognize someone other than Ms. English as Acting Director, and an order directing Mr. Mulvaney to refrain from accepting an appointment as Acting Director or asserting or exercising in any way the authority of that office. Unlike her original complaint, however, the amended complaint breaks down her claims for relief into specific counts and references the new arguments made in her memorandum in support of her preliminary injunction.
Ms. English’s claims for relief in the amended complaint consist of the following:
- Count I. Mr. Mulvaney’s appointment as Acting Director is unlawful under the CFPA and is unauthorized under the FVRA.
- Count II. Mr. Mulvaney’s appointment violates the CFPA’s “independence requirement” for the CFPB.
- Count III. Mr. Mulvaney appointment violates the Appointments Clause.
- Count IV. Actions taken by Mr. Mulvaney as Acting Director violate the Administrative Procedure Act because they are not “in accordance with law.”
- Count V. Ms. English is entitled to declaratory relief under the Declaratory Judgment Act.
- Count VI. Ms. English is entitled to equitable relief.
We have previously blogged about reports that Mick Mulvaney, President Trump’s designee as CFPB Acting Director, has put a 30-day freeze on all regulatory action, CFPB hiring, and new enforcement cases. We also blogged about the CFPB’s withdrawal of its opposition to a motion filed by the defendants in an enforcement action to stay execution of a $7.9 million judgment obtained by the CFPB without posting a bond.
Mr. Mulvaney is reported to have also taken the following recent actions:
- Placing a freeze on the CFPB’s collection of any personally identifiable information, such as individual loan level data, until the CFPB improves its data security systems. The Office of Inspector General for the CFPB issued two reports earlier this year (which we blogged about here and here) in which it found deficiencies in the CFPB’s data security practices.
- Approving payments out of the civil penalty fund. (Since Mr. Mulvaney is reported to have placed a 30-day freeze on such payments, presumably the approved payments represent an exception.)
- Directing CFPB staff to examine all investigations and litigation. It has been reported that Mr. Mulvaney has suspended the CFPB’s investigation of a company that has challenged the CFPB’s constitutionality and authority to issue a civil investigative demand to the company pending a ruling by the federal district court hearing the company’s challenge.
It has also been reported that Mr. Mulvaney has voiced support for Congressional efforts to override the CFPB’s final payday loan rule. We recently blogged about the introduction of a joint resolution under the Congressional Review Act to override the rule by a bipartisan group of lawmakers.
With regard to Leandra English, who was appointed CFPB Deputy Director by Richard Cordray before his resignation as CFPB Director and is challenging Mr. Mulvaney’s right to serve as Acting Director, Mr. Mulvaney is reported to have indicated that he has no plans to dismiss Ms. English but has sent her several emails either instructing her to stop holding herself out as Acting Director or asking her to perform duties that fall within her purview as Deputy Director.
On November 28, 2017, the Federal Reserve Board announced a Consent Order with Peoples Bank (Peoples) in Lawrence, Kansas. The Order charges Peoples with violating Section 5 of the Federal Trade Commission Act (FTCA) by engaging in deceptive mortgage origination practices between January 2011 and March 2015. According to the Order, Peoples “often” gave prospective borrowers the option of paying discount points (an amount calculated as a percentage of the loan amount) at the time of closing, in order to obtain a lower interest rate. According to the Fed, this “regularly” led borrowers to pay thousands of dollars for discount points, but did not always result in a lower interest rate. Peoples denies the charges, but has agreed to pay $2.8 million to a settlement fund for the purpose of making restitution to the affected borrowers. Also, while not a part of the Order, Peoples has ceased taking new mortgage applications, and is in the process of winding down its mortgage lending operation.
Section 5 of the FTCA proscribes “unfair or deceptive acts or practices in or affecting commerce.” Here, the Federal Reserve found that Peoples’ misrepresentations were deceptive because they were likely to mislead borrowers to reasonably conclude that they obtained a lower interest rate through the payment of discount points, when in fact, many did not receive a reduced interest rate, or received a rate that was not reduced commensurate with the price they paid for the discount points. This was found to be material because it “relate[s] to the cost of the loan paid by the borrowers.
The Consent Order notes that Peoples’ loan disclosures “gave an accurate quantitative picture of the loans’ costs.” But according to the Fed, Peoples (which had no written policy regarding discount points) misrepresented and/or omitted the nature of the discount points, which led many reasonable consumers to incorrectly assume they were receiving a rate based on the discount points they paid, when they actually received no benefit (or not the full benefit) from their payment. This illustrates the need for mortgage lenders to ensure they are painting an accurate picture of their mortgage products at all stages of the origination process – including advertising, loan disclosures, and communications with prospective borrowers.
Yesterday, the Lower East Side People’s Federal Credit Union filed a complaint in U.S. District Court for the Southern District of New York seeking a declaration that Mick Mulvaney’s appointment as CFPB Acting Director is unconstitutional and in violation of the Consumer Financial Protection Act (CFPA). The complaint also seeks a declaration that Leandra English has the legal right to serve as Acting Director.
As an initial matter, it is likely the lawsuit will be transferred to Judge Timothy Kelly, the D.C. federal district court judge before whom Ms. English’s lawsuit challenging Mr. Mulvaney’s appointment is pending. Pursuant to 28 U.S.C. § 1404, a federal judge can transfer a related action to another district where the action might have been brought “for the convenience of parties and witnesses, in the interest of justice.” While the credit union and its attorney are located in New York City, the defendants are located in the District of Columbia, the new lawsuit involves no disputed factual issues, and practically all of the legal issues have already been briefed and argued in front of Judge Kelly. It would seem to be a waste of judicial resources for the new lawsuit to be heard by a new judge in a different district court and circuit.
With one exception, the credit union’s arguments generally track those made by Ms. English. Like Ms. English, the credit union argues that the President’s authority under the Federal Vacancies Reform Act (FVRA) to temporarily fill executive agency leadership vacancies is superseded by the CFPA provision that states the CFPB Deputy Director “shall…serve as Acting Director in the absence or unavailability of the Director.” The credit union also adopts Ms. English’s argument that Mr. Mulvaney’s appointment is inconsistent with the CFPB’s status as an “independent agency” because he can be dismissed by the President as OMB Director without cause.
The new argument advanced by the credit union, while clever, is based on an incorrect reading of the FVRA. The FVRA provides that the President’s authority to use the FVRA to fill vacancies does not apply to positions held by “any member who is appointed by the President, by and with the advice and consent of the Senate to any board, commission, or similar entity that… (A) is composed of multiple members; and (B) governs an independent establishment or Government corporation.” 5 U.S.C. § 3349c(1). The Dodd-Frank Act amended the Federal Deposit Insurance Act (FDIA) to provide that the CFPB Director, or the Acting CFPB Director in the event of a vacancy in the Director’s position, shall serve as a member of the FDIC Board. According to the credit union, because this provision would make the CFPB Acting Director a member of the FDIC Board, the President cannot use his FVRA authority to appoint a CFPB Acting Director.
The credit union’s argument ignores that neither the CFPB Director nor the Acting Director “are appointed by the President, by and with the advice and consent of the Senate to any board….” Rather, the FDIA designates the CFPB Director and Acting Director members of the FDIC Board by virtue of their CFPB positions. (A person serving on a board by virtue of another position that he or she holds is often referred to as an “ex officio” member.) In fact, the FDIA recognizes this distinction by referring to the three FDIC Board members who are appointed by the President as the “appointed members.” Thus, since the President did not appoint Mr. Mulvaney to the FDIC Board, and has only appointed him CFPB Acting Director (as well as Director of the Office of Management and Budget), the President can properly use his FVRA authority to appoint Mr. Mulvaney Acting CFPB Director.
Ending many months of speculation, former CFPB Director Richard Cordray announced yesterday that he is running for Ohio governor.
Mr. Cordray’s announcement makes him the fifth Democrat to enter the race. The primary will be held on May 8, 2018.
Following a scheduling conference held earlier today, Judge Timothy Kelly entered an order setting a briefing schedule and hearing date for Laurena English’s motion for a preliminary injunction in her action seeking a declaration that she, rather than Mick Mulvaney, has the legal right to serve as CFPB Acting Director.
The order sets the following filing deadlines:
- December 6, 2017. Plaintiff’s motion for preliminary injunction.
- December 8, 2017. Amicus curiae briefs in support of Plaintiff’s motion.
- December 18, 2017. Defendants’ opposition to Plaintiff’s motion.
- December 18, 2017. Amicus curiae briefs in support of Defendants’ opposition.
- December 20, 2017. Plaintiff’s reply in support of her motion.
The order sets December 22, 2017 as the date for a hearing on Ms. English’s preliminary injunction motion. Unlike the court’s order denying the temporary restraining order requested by Ms. English, its ruling on her preliminary injunction motion will be appealable to the U.S. Court of Appeals for the D.C. Circuit.
A new filing by the CFPB in its action against Nationwide Biweekly Administration Inc. may be an indicator of the enforcement philosophy of Mick Mulvaney, President Trump’s designee as CFPB Acting Director, and how that philosophy may impact future CFPB enforcement activity. In addition to a 30-day freeze on all regulatory action, CFPB hiring, and payments from the civil penalty fund, Mr. Mulvaney is reported to have put a 30-day hold on new enforcement cases. Mr. Mulvaney is also reported to have named Brian Johnson as a senior adviser to him at the CFPB. Mr. Johnson is Senior Counsel to the House Financial Services Committee and was a member of President Trump’s transition team.
In the CFPB’s action against Nationwide, another related company, and the companies’ individual owner, the CFPB alleged that the defendants engaged in abusive and deceptive acts or practices in violation of the CFPA UDAAP prohibition by making false representations regarding the costs of a biweekly mortgage payment program and the savings consumers could achieve through the program. A California federal district court refused to award restitution sought by the CFPB but did award the CFPB approximately $7.9 in civil money penalties. (However, the court rejected the CFPB’s request for an award against each defendant and imposed only a single penalty for which the defendants would be jointly and severally liable.)
On November 27, the CFPB had filed a response opposing a motion filed by the defendants to stay execution of the $7.9 million judgment without posting a bond. The defendants had offered alternate security in the form of an agreement not to sell Nationwide’s commercial real property or the individual owner’s residence pending the disposition of anticipated post-trial motions and appeal. Two days later, on November 29, the CFPB filed a notice withdrawing its response and stating that the CFPB “takes no position as to whether the Court should require Defendants in this matter to post a bond as a condition of staying the monetary judgment pending the disposition of Defendants’ anticipated post-trial motions.” An attorney for the defendants is reported to have stated that the change in the CFPB’s position was in response to a letter she had sent to Mr. Mulvaney informing him of the CFPB’s November 27 filing.
A bipartisan group of lawmakers has introduced a joint resolution under the Congressional Review Act to override the CFPB’s final payday/auto title/high-rate installment loan rule. House members sponsoring the bill consist of three Democrats and three Republicans. The CRA is the vehicle used by Congress to overturn the CFPB’s arbitration rule.
The CFPB’s final payday loan rule was published in the Federal Register on November 17. The regulation is effective January 16, 2018. The compliance date for the rule’s substantive requirements and limits (Sections 1041.2 through 1041.10), compliance program/documentation requirements (Section 1041.12), and prohibition against evasion (Section 1041.13) is August 19, 2019. The deadline to submit an application for preliminary approval to be a registered information system is April 16, 2018.
To be eligible for the special Senate procedure that allows a CRA disapproval resolution to be passed with only a simple majority, the Senate must act on the resolution during a period of 60 “session days” which begins on the later of the date when the rule is received by Congress and the date it is published in the Federal Register. For purposes of the CRA, a rule is considered to have been “received by Congress” on the later of the date it is received in the Office of the Speaker of the House and the date of its referral to the appropriate Senate committee. The payday loan rule was received by the Speaker of the House on November 13 and referred to the Senate Banking Committee on November 15. (Due to uncertainty as to which days going forward will count as “session days,” the deadline for voting on a CRA resolution cannot be definitively determined in advance.)
In addition to the CRA resolution, we expect an industry lawsuit challenging the rule to be filed within the next few weeks. According to media reports, the lawsuit is expected to be filed by the Community Financial Services Association of America. Also, Mick Mulvaney, President Trump’s designee as CFPB Acting Director, is reported to be reviewing the payday loan rule as well as other CFPB actions to determine what his next steps will be.