The Office of Inspector General for the Fed and CFPB recently issued an audit report entitled “The CFPB Can Strengthen Contract Award Controls and Administrative Processes.”  The objective of the OIG’s audit was to assess the CFPB’s compliance with applicable laws, regulations and CFPB policies and procedures related to contract solicitation, selection and award processes, as well as the effectiveness of the CFPB’s associated internal controls.

While finding the CFPB to be generally compliant, the OIG found occasions on which reviews and approvals were overlooked or not documented as required by regulation or CFPB policy.  Among its other findings was that the CFPB could improve the documentation used to support price reasonableness determinations for sole-source contracts (i.e. contracts where there is other than a full and open competition).

The OIG’s work plan updated as of April 1, 2017 includes the following initiated projects in which the OIG will evaluate:

  • the CFPB Enforcement Office’s processes for protecting confidential information obtained through the use of the CFPB’s enforcement powers, such as information received in response to a CID (completion expected second quarter 2017)
  • the CFPB’s compliance with the requirements for issuing CIDs including those in the Dodd-Frank Act (completion expected third quarter 2017)  (Last week, the D.C. Circuit affirmed the district court’s denial of the CFPB’s petition to enforce a CID because the CFPB had not complied with the Dodd-Frank requirements.)
  • the effectiveness of the CFPB’s management of examiner commissioning and training (completion expected third quarter 2017)

Planned projects described in the work plan include (1) an evaluation of the effectiveness of the Division of Supervision, Enforcement, and Fair Lending in monitoring and ensuring that supervised entities take timely action to correct deficiencies identified in examinations, (2) an evaluation of the risk assessment framework used by the CFPB to prioritize examinations, and (3) a review of the extent to which the CFPB has assessed the risks associated with the collection, maintenance, storage, and disposal of privacy data and personally identifiable information and applied appropriate information security controls and protection over the data to mitigate those risks.

 

 

The House Financial Services Committee has released the witness list for the hearing it will hold this Wednesday, April 26, 2017, to discuss the Financial CHOICE Act.

The witnesses will be:

  • John Allison, Former President and Chief Executive Officer, Cato Institute
  • Dr. Norbert J. Michel, Senior Research Fellow, Financial Regulations and Monetary Policy Institute for Economic Freedom and Opportunity, The Heritage Foundation
  • Hester Peirce, Director of Financial Markets Working Group and Senior Research Fellow, Mercatus Center
  • Alex J. Pollock, Distinguished Senior Fellow, The R Street Institute
  • Peter J. Wallison, Senior Fellow and Arthur F. Burn, Fellow in Financial Policy Studies, American Enterprise Institute

The Committee also released a memorandum that includes a summary of the discussion draft of the bill previously released by the Committee.

The House Financial Services Committee announced that it will hold a hearing on April 26, 2017 to discuss the Financial CHOICE Act.  It also released a discussion draft of a revised version of the bill.

In February, Rep. Hensarling, who chairs the Committee, circulated a memorandum to the Committee’s Leadership Team describing key revisions to the bill introduced last year.  Last week, he issued an outline of changes to the bill in which he identified more revisions, including revisions that would further reduce the CFPB’s powers.  Presumably, these revisions are reflected in the discussion draft.

 

On February 6, House Financial Services Committee Chairman Hensarling circulated a memorandum to the House Financial Services Committee Leadership Team describing key revisions to the Financial Choice Act.  Last week, he issued in outline form a so-called “Summary of Bill Changes” which identified further revisions to the Choice Act, which he referred to as “Choice 2.0”, some of which address subjects not covered in his February 6 revisions, which he referred to as “Choice 1.0.”

Choice 2.0, which addresses a wide range of issues, includes the following provisions that affect consumer financial services:

  1. De novo review of agency regulations would be required two years after a regulation’s enactment. This would call on more agency resources.  (Last week, we blogged about a former CFPB attorney’s comment that the CFPB’s Regulations Division is severely understaffed.)  Under Dodd-Frank, the CFPB is required to conduct a review of a regulation it adopts five years after the regulation’s effective date.  Indeed, the CFPB recently announced that it will initiate a five-year review of its regulation dealing with international money remittances.
  2. The President could remove the FHFA Director at will. The governance of the OCC and the NCUA would be unchanged.  The FDIC would be reorganized as a bipartisan commission with all five commissioners appointed by the President.  The Comptroller of the Currency and the CFPB Director, who currently serve on the FDIC Board, would not be members of the FDIC commission.
  3. Financial agencies would be required to “(1) when promulgating a rule with $100 million or more a year in impacts of state/local governments or the private sector to prepare and file a written statement on their process and evaluation and to select the least costly, most cost-effective, or least burdensome alternative, unless otherwise explained; and (2) provide state and local government and private sector with an effective process to provide input on proposals with significant mandates.”
  4. Financial agencies would be required to “implement policies to (1) minimize duplication between federal and state authorities in bringing enforcement actions; (2) determine when joint investigations and enforcement actions are appropriate; (3) and establish a lead agency for joint investigations and enforcement actions.”
  5. A financial agency, DOJ, and HUD would be prohibited “from entering into a settlement that provides payments to any person who is not a victim of the alleged wrongdoing.” The prohibition seems to be directed at certain ECOA settlements in the auto finance industry involving disparate impact.
  6. The Second Circuit’s controversial opinion in Madden v. Midland Funding would be overridden. Madden held that a non-bank transferee of a loan from a national bank loses the ability to charge the same interest rate that the national bank charged on the loan under Section 85 of the National Bank Act.  Under Choice 2.0, “a loan that is valid when made as to its maximum rate of interest should remain valid regardless of whether the loan is subsequently sold, assigned or transferred.”  While such a statutory amendment would be welcome, I believe that the OCC could more simply and quickly accomplish the same objective by issuing a regulation, as I pointed out in my recent article for American Banker’s BankThink.
  7. The CFPB, renamed the “Consumer Financial Opportunity Agency” would be governed by a sole Director (Choice 1.0 provided for a bipartisan independent commission with staggered terms) removable at will by the President. Also, the Deputy Director would be appointed by the President instead of by the Director as provided under Dodd-Frank.  The Deputy Director would also be removable at will by the President.  Under Dodd-Frank, the CFPB Director is only removable by the President for cause.
  8. The CFPB would be an enforcement agency only. It would be stripped of its supervisory authority.
  9. The CFPB would only be authorized to enforce the enumerated consumer protection laws. It would have “no UDAAP authority of any kind.”  Under Choice 1.0, the CFPB would have retained the authority to enforce the “unfairness,” and “deception” prongs of UDAAP, but not the “abusive” prong.
  10. The consumer complaint database could not be published. Under Choice 1.0, the database could be published to the extent that complaints were verified.
  11. The CFPB would be stripped of its authority to monitor markets. Under Choice 1.0, it could continue to engage in market monitoring as long as such monitoring is “separate from enforcement.”

It has been reported that the changes outlined above will be reflected in a new Choice Act bill to be introduced before the end of this month.

While there is a reasonable likelihood that the Choice Act will pass the House, its fate in the Senate is very uncertain.  In light of the proposed changes to the CFPB’s structure and powers, one might ask why lawmakers have not proposed to combine the FTC and the CFPB. The proposed cutbacks on the CFPB’s powers would result in the two agencies having largely overlapping enforcement powers for non-banks.

Rep. Hensarling’s proposal for the CFPB to continue to be managed by a sole Director is contrary to the CFPB governance desired by many in the banking industry.  In a letter dated April 13, 2017 from Richard Hunt, President and CEO of the Consumer Bankers Association (CBA) to Senator Mike Crapo, Chairman of the Senate Committee on Banking, Housing and Urban Affairs and Senator Sherrod Brown, Ranking Member of that Committee, the CBA strongly advocated in favor of a bipartisan five-member commission.

On April 25 2017, the CFPB will hold a meeting of its Community Bank Advisory Council in Washington, D.C. at which Acting Deputy Director David Silberman will give remarks.

The meeting topics are the CFPB’s requests for information on the use of alternative data in the credit process and consumer access to financial information issued in, respectively, February 2017 and November 2016.

 

PHH filed its reply brief with the D.C. Circuit on April 10 in the en banc rehearing of the PHH case. We have blogged extensively about the case since its inception. Central to the case is whether the CFPB’s single-director-removable-only-for-cause structure is constitutional. Of course, the CFPB fiercely defends its structure, while PHH, the DOJ, and others argue that the CFPB’s structure epitomizes Congressional usurpation of executive power in violation of the constitution’s separation of powers principles.

If the CFPB’s structure is constitutional then there is no reason why Congress can’t divest the President of all executive power, PHH argues. “[I]f Congress can divest the President of power to execute the consumer financial laws, then it may do so for the environmental laws, the criminal laws, or any other law affecting millions of Americans.” “The absence of any discernible limiting principle is a telling indication that the CFPB’s view of the separation of powers is wrong.”

Even if existing Supreme Court precedent authorizes Congress to assign some executive power to independent agencies, PHH argued that the CFPB’s structure goes too far. “No Supreme Court case condones the CFPB’s historically anomalous combination of power and lack of democratic accountability, and the Constitution forbids it.” The fact that the CFPB has the power of a cabinet-level agency while lacking any democratic accountability or structural safeguards is a sure sign that its structure is unconstitutional.

The only remedy to the CFPB’s unconstitutional structure, PHH argues, is to dismantle the agency entirely. “The CFPB’s primary constitutional defect, the Director’s unaccountability [], is not a wart to be surgically removed. Congress placed it right at the agency’s heart, and it cannot be removed without changing the nature of what Congress adopted.”

* * *

PHH’s reply completes the briefing in this appeal. Oral arguments are scheduled to take place on May 24, with each side being given 30 minutes to argue. On April 11, the D.C. Circuit granted the DOJ’s request for 10 minutes to present its views during oral argument.

Despite its long duration (over five hours including a recess for a vote), the House Financial Services Committee’s hearing on April 5 at which Director Cordray was the sole witness provided a strong dose of political theater but little in the way of new information or substance.   Although there were many important questions that Committee members could have asked Director Cordray (we suggested several in a prior blog post), members mostly returned to familiar themes in their questions and remarks.  For Republican members, those themes included CFPB overreach and unaccountability to Congressional oversight, damage to credit availability and community banks resulting from CFPB guidance and regulations, excessive spending, and mistreatment of CFPB employees.  Familiar themes of Democratic members included how the financial crisis gave rise to the CFPB and how the CFPB serves consumers by protecting them from discrimination, fraud, and other unlawful practices.

The hearing’s battle lines were drawn during the opening remarks of Chairman Hensarling and Ranking Member Waters.  Chairman Hensarling began his remarks by referencing press reports that Director Cordray intends to run for Ohio governor, expressing surprise that he had not returned to Ohio to do so, and was still serving as CFPB director given that President Trump had the right to dismiss him at will.  He then called on the President to immediately dismiss Director Corday, claiming that the PHH decision allowed the President to do so without the need to show cause.   He also asserted that even if the President needs cause to dismiss Director Cordray, there are numerous grounds on which President Trump could rely.  According to Chairman Hensarling, such grounds include the harm inflicted on consumers by the CFPB’s auto lending guidance (as well as the illegality of the CFPB’s attempt to regulate auto dealers through such guidance) and Director Cordray’s unilateral reversal of well-settled RESPA guidance in the PHH case.

In her opening remarks, Ranking Member Waters praised Director Corday for fighting for “hard working Americans” and thanked him for his continued leadership of the CFPB.  She referenced how much money the CFPB has recovered for consumers and assessed in civil money penalties and mentioned her efforts and those of other Democrats to defend the CFPB’s constitutionality in the PHH litigation.

In addition to Chairman Hensarling’s comments, several other committee members, in their questioning of Director Cordray, raised the issue of his resignation.  Rep. Duffy asserted that because Director Cordray had served as a recess appointee from January 2012 until his Senate confirmation in July 2013, he has already effectively served a five-year term as director and  “consistent with the spirit” of Dodd-Frank, should step down voluntarily now.  In response to Rep. Zeldin’s question whether Director Cordray intended to serve the remainder of his term, Director Cordray stated that he had “no insights to provide.”  When asked by Rep. Hollingworth if he would resign if requested to do so by President Trump, Director Cordray responded that he would follow the law.

While its substantive content was slim, the hearing did produce the following noteworthy information:

  • Somewhat surprisingly, Chairman Hensarling criticized the CFPB for not proceeding more quickly to issue a regulation to implement Section 1071 of Dodd-Frank (which amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses such as the race, sex, and ethnicity of the principal owners of the business).  He commented that the CFPB had engaged in discretionary rulemaking but had not completed the Section 1071 rulemaking mandated by Dodd-Frank.
  • Rep. Lukemeyer criticized the provision in the CFPB’s proposed rule concerning the disclosure of confidential supervisory information (CSI) that would restrict a company’s disclosure of either the receipt or the content of a CID or NORA letter.  Director Cordray indicated that, after considering comments received on the proposal, the CFPB is “going back to the drawing board,” and that Rep. Lukemeyer would  be “happy” with the outcome.   (The proposal would also expand the CFPB’s discretion to share CSI with state attorneys general and other agencies that do not have supervisory authority over an entity.)
  • In response to Rep. Maloney’s question whether the CFPB plans to propose an overdraft rule, Director Cordray noted the CFPB’s long-standing interest in overdrafts, stated that overdrafts continued to be  “on our minds very much,” and said he could not speak to the timing of any rulemaking.  With regard to the timing of other pending rulemakings, when asked about the timing of a final payday/small dollar loan rule and clarifications to the TILA/RESPA integrated disclosure rule, Director Cordray was unwilling to give an estimated date for either item, noting the unprecedented number of comments received on the payday/small dollar loan proposed rule.  Although the CFPB’s arbitration rule is the furthest along in the rulemaking process, Director Cordray was not asked about the timing of a final rule and was only asked about the rule’s application to insurance premium financing agreements.
  • Director Cordray was unwilling to respond directly to Rep. Posey’s question as to how many no-action letters the CFPB has issued.  (None have been published on the CFPB’s website.)  However, he stated that the CFPB’s no-action policy has “not yet generated a lot of demand” which could indicate the policy is not working properly.
  • Several Republican committee members criticized CFPB press releases about consent orders for containing conclusory statements that a company had violated the law despite language in the consent order stating that the company neither admits nor denies the order’s findings of fact and conclusions of law.  In an exchange with Rep. Huizenga, Director Cordray defended the press releases, stating that “the facts are the facts.”   He commented that a consent order’s “neither admit nor deny” language does not matter for the truth of the facts recited in the consent order but matters for whether the facts have been established for follow-on lawsuits by private attorneys.  He was also unwilling to concede that a company might enter into a consent order because it is intimidated by the CFPB’s authority and instead insisted that the main reason a company enters into a consent order is because the CFPB has completed a thorough investigation, “we know the facts,” “they know the facts,” and “they don’t have a leg to stand on.”
  • Director Cordray indicated that the CFPB is looking at possible changes to the prepaid card final rule dealing with the linking of credit cards to digital wallets and error resolution procedures for unregistered cards.

The CFPB has issued its annual Consumer Response Report that provides an analysis of the approximately 291,400 complaints handled by the CFPB between January 1 and December 31, 2016.  According to the report, complaint volume rose 7% from 271,600 complaints in 2015 to 291,400 in 2016. The report provides data on the most common types of complaints for each product, the handling of complaints, and median monetary relief.   

Of the 291,400 complaints received in 2016, approximately 73% were received through the CFPB’s website, 7% via telephone calls, 12% via referrals from other agencies and regulators, and the balance via mail, e-mail and fax.  Based on the CFPB’s breakdown of the number of complaints received in each category, debt collection (88,000), credit reporting (54,000), and mortgages (51,200) accounted for 67% of all 2016 complaints.  97% of complaints sent to companies received timely responses.  

41% of debt collection complaints involved continued attempts to collect debts not owed, 20% involved debt validation (such as not receiving enough information to verify the debt), 15% involved communication tactics, 9% involved false statements or representations, 9% involved taking or threatening illegal action, and 6% involved improper contact or sharing of information.  For credit reporting complaints, 74 % involved incorrect information on credit reports and 11% involved the credit reporting company’s investigation.  For mortgage complaints, 40% involved making payments (such as issues involving servicing, posting of payments, and escrow accounts), 38% involved problems relating to inability to pay (such as issues involving loan modifications, collections, or foreclosures), and 10% involved applying for a loan. 

The report contains monetary relief information for companies that reported relief amounts.  The median amount of relief reported included $316 for 360 debt collection complaints, $29 for 150 credit reporting complaints, $500 for 1,190 mortgage complaints, $108 for 4,060 bank account and services complaints, $105 for 4,250 credit card complaints, $200 for 530 consumer loan complaints, $245 for 250 student loan complaints, $375 for 60 payday loan complaint, and $200 for 270 prepaid complaints.  (Companies have the option to report an amount of monetary relief.  As a result, the total number of complaints receiving monetary relief is greater than the number of complaints on which the median relief amounts are based.)

Several individuals and organizations filed amicus briefs in support of the CFPB in the en banc rehearing in the PHH case. Among the amici is a brief filed by current and former members of Congress, including Chris Dodd and Barney Frank, the principal architects and namesakes of the Dodd-Frank Act, which created the CFPB. Senator Sherrod Brown and Representative Maxine Waters, both of whom previously sought to intervene, joined the brief as well.

The current and former members of Congress assert that the structure of the CFPB is constitutional and critical to the congressional design of Dodd-Frank. They stress the importance of the CFPB’s “independence” and the ability of a single director “to avoid the delay and gridlock to which multi-member agencies are susceptible.” These themes are repeated throughout the brief.

Of course, the flipside of independence is unaccountability. The CFPB’s structure heavily shields it from the consequences of an election. The ability of voters to voice their approval or disapproval with the CFPB’s enforcement and rulemaking is far lower than that of other important agencies such as the EPA. And although a single director may be able to move more swiftly than a multi-member commission, faster is not always better. Before a multi-member commission reaches a decision, it must debate the matter internally among a group of commissioners with diverse perspectives and experiences. That internal debate arguably has the ability to produce a better, more efficient outcome than any individual commissioner would be able to reach on their own. Indeed, input from multiple commissioners is particularly valuable to an agency like the CFPB that relies more heavily on enforcement actions than notice-and-comment rulemaking to effect industry-wide change.

A group of financial regulation scholars likewise submitted a brief in support of the CFPB’s position, focused entirely on the constitutionality of the CFPB’s structure. The scholars’ brief is, not surprisingly, more esoteric than many of the other briefs submitted in the case. Unlike the CFPB, the scholars concede that its structure is “novel,” but argue that the novel structure is evidence of a creative legislative approach to an issue, not evidence that it is unconstitutional. The brief then attempts to argue two seemingly inconsistent positions: 1) that the CFPB’s independence is necessary to prevent regulatory capture, but 2) the CFPB is subject to significant oversight.

The scholars’ regulatory capture argument is particularly weak. They claim that three features of the CFPB’s structure are key to preventing business interests from capturing the CFPB: “non-appropriated funding; a for-cause removal standard; and a single director.” The scholars correctly note that industry funding can create regulatory capture in the classical sense in that the regulated industry has direct control over the agency’s funding. That argument has no relevance to the actual issue in this case, however, since the real controversy is whether the CFPB should be subject to Congressional appropriations, not whether it should be industry funded.

The scholars then switch from capture theory to public-choice theory to argue that Congressional appropriation is unwise because concentrated industry groups have greater influence over Congress and the Executive Branch than individual consumers. In making this argument, the scholars focus not on industry capture of the CFPB but of the entire Legislative and Executive Branches. And the activities with which the scholars take issue – lobbying and campaign contributions – are key First Amendment activities. The scholars therefore argue that the CFPB’s structure is necessary because members of the public might exercise their First Amendment rights successfully to oppose the actions of the CFPB.

The scholars then undercut their legislative-and-executive-capture argument completely in the next session of their brief, in which they argue that the CFPB is, in fact, subject to extensive legislative oversight and control. This argument is wholly inconsistent with the prior argument that the CFPB is completely independent and thus immune from capture. Namely, if the CFPB is subject to extensive oversight and control, then it is also subject to Legislative-and-Executive capture.

A group of separation of powers scholars likewise filed an amicus brief heavy on theory. As their name suggests, the separation of powers scholars focus on whether the single director, removable-for-cause feature of the CFPB violates constitutional separation of powers principals. The brief firsts undertakes an originalist-style historical analysis of early federal-and-state executive agencies. Next, the scholars argue that the number of commissioners is irrelevant to the constitutional analysis. Then, they argue that the for-cause removability feature leaves enough Presidential discretion over the CFPB Director to preserve its constitutionality.

Finally, in a preview of arguments likely designed to drive a wedge between Justice Kennedy and other members of the Supreme Court, Chief Justice Roberts in particular, the scholars argue that abstract concerns over the protection of “individual liberty” and separation of powers do not supply independent constitutional bases to invalidate the CFPB structure. Instead, they argue that the structure must violate a specific constitutional provision, not an abstract ideal. This particular line of argument will likely receive greater attention if the constitutional issues reach the Supreme Court, as there are different views regarding it among the conservative majority.

A host of “consumer and civil rights organizations who advocated for the CFPB’s creation,” many of which unsuccessfully sought to intervene, filed a brief that mainly covers public policy arguments in favor of the CFPB’s structure. They essentially argue that the CFPB has succeeded where other agencies failed in terms of protecting consumers.

The AARP also filed an amicus brief in support of the CFPB’s position. Unlike other amici, however, the AARP brief focused more on the RESPA issues in the case than the more esoteric constitutional issues. The AARP claimed that kickbacks and “junk fees” have a disproportionate impact on older individuals.  It argued that older individuals are often the target of “unscrupulous mortgage lending practices,” which increases the cost of homeownership to older individuals by several thousand dollars. After the policy-heavy introduction, the brief tackles the history and purpose of the RESPA provisions at issue, which we blogged about in detail.

Although the constitutional issues received the most attention in the press, the RESPA issues discussed in the AARP brief could very well be more important to the outcome of the appeal. The court could reverse the district court on the RESPA issues and invoke the doctrine of constitutional avoidance to decline to reach the overall constitutionality of the CFPB’s structure.