A group of 22 trade associations sent a letter last week to the Chairmen and Ranking Members of the Senate and House Appropriations Committees expressing their “strong support” for the creation of a five-member bipartisan commission to lead the CFPB.  The trade associations include the American Bankers Association, American Financial Services Association, Consumer Bankers Association, Financial Services Roundtable, Mortgage Bankers Association, and the Real Estate Services Providers Council, Inc.

In their letter, the associations assert that “[a] Senate confirmed, bipartisan commission will provide a balanced and deliberative approach to supervision, regulation, and enforcement for consumers and the financial institutions the CFPB oversees by encouraging input from all stakeholders.”  They claim that “[t]he current single director structure leads to regulatory uncertainty and instability…leaving vital consumer protection subject to dramatic political shifts with each changing presidential administration.”

The Financial CHOICE Act passed by the House this month would amend the Dodd-Frank Act to continue the CFPB’s single director structure but allow the President to remove the director without cause.  The Treasury report issued this month recommends an amendment to Dodd-Frank that either makes the director removable at-will by the President or restructures the CFPB’s leadership as an multi-member commission or board.

Instead of an amendment to Dodd-Frank, the trade associations express support for changing the CFPB’s leadership structure through the appropriations process, in particular by including language making the change in the FY 2018 Senate and House Appropriations Bills.

 

At the Comply2017 conference held earlier this week in New York City, Scott Steckel, a member of the CFPB’s Office of Consumer Response, gave a presentation in which he detailed the CFPB’s complaint process and how the CFPB shares complaint data through its complaint database.

Also at the conference, Ballard Spahr attorney James Kim moderated a panel discussion focused on innovation in which the panelists were Paul Reymann, Director for Consumer Compliance Policy at the OCC, and Duane Pozza, Assistant Director, Division of Financial Practices, at the FTC.  Mr. Reymann is a member of the OCC’s Office of Innovation which is handling the OCC proposal to allow fintech companies to apply for special purpose national bank charters.  The panelists discussed the agencies’ work in various areas such as fintech, privacy and data security, marketplace lending and BSA/AML, as well as the Trump Administration’s potential impact on OCC and FTC priorities and plans.

 

 

The report issued earlier this week by the U.S. Treasury Department to President Trump in response to his February 2017 Executive Order 13772, “A Financial System That Creates Economic Opportunities-Banks and Credit Unions,” recommends numerous CFPB changes.

Entitled “Core Principles for Regulating the United States Financial System,” the Executive Order was a high-level policy statement consisting of a series of Core Principles designed to inform the manner in which the Trump Administration regulates the financial system.  The Order directed the Treasury Secretary to identify, in a report to the President, any laws, regulations, guidance and other Government policies “that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.”

Treasury’s report, the first in a series of four reports to be issued in response to the Executive Order, covers the depository system, i.e. “banks, savings associations, and credit unions of all sizes, types and regulatory charters.”  In addition to the recommendations directed at the CFPB, the report makes recommendations for addressing a wide range of issues such as market liquidity, capital requirements, and the supervisory and regulatory roles of the federal banking agencies.

Treasury’s CFPB recommendations are discussed in the section of the report entitled “Providing Credit to Fund Consumer and Commercial Needs to Drive Economic Growth,” with the CFPB viewed as the source of many of the “numerous regulatory factors [identified by Treasury] that are unnecessarily limiting the flow of credit to consumers and businesses and thereby constraining economic growth and vitality.”  The CFPB recommendations are intended to address the CFPB’s “unaccountable structure and unduly broad regulatory powers [which] have led to predictable regulatory abuses and excesses” and its “approach to rulemaking and enforcement [which] has hindered consumer access to credit, limited innovation, and imposed unduly high compliance burdens, particularly on small institutions.”

Several of Treasury’s recommended CFPB changes are similar to the changes to the CFPB contained in the Financial CHOICE Act passed by the House last week.  It is unclear how Treasury’s recommendations will impact the CHOICE Act’s prospects in the Senate or the Senate’s approach to Dodd-Frank reform.

In addition to recommendations for changes to the CFPB’s residential mortgage regulations that we will discuss in a separate blog post, the Treasury’s CFPB recommendations include the following:

  • Structure and Funding.  Amend Dodd-Frank to:
    • Make the Director removable at-will by the President or restructure the CFPB as an independent multi-member commission or board; fund the CFPB through the annual Congressional appropriations process
    • Allow the CFPB to only retain and use funds in the Consumer Financial Civil Penalty Fund for payments to victims of the activities for which civil money penalties were imposed and require the CFPB to remit any excess fund to the Treasury
  • Regulatory Authority.  Issue UDAAP regulations “that more clearly delineate [the CFPB’s] interpretation of the UDAAP standard” and change CFPB policy to only seek monetary damages “in cases in which a regulated party had reasonable notice—by virtue of a CFPB regulation, judicial precedent, or FTC precedent—that its conduct was unlawful.”
  • Supervisory Authority. Repeal the CFPB’s supervisory authority, with bank supervisory authority limited to the prudential regulators and supervision of nonbanks limited to state regulators.
  • Enforcement Authority.
    • Issue a CFPB rule barring enforcement actions “in areas in which clear guidance is lacking or the CFPB’s position departs from the historical interpretation of the law” unless the CFPB has issued “rules or clear guidance subject to public notice and comment procedures” before bringing the action
    • Change the requirements for no-action letters to make them less onerous by aligning CFPB policy with “the more effective policies of the SEC, CFTC, and FTC,” with specific changes to CFPB requirements to include expanding the scope of the CFPB’s policy beyond new products
    • Adopt a CFPB policy to bring enforcement actions in federal district court rather than use administrative proceedings but to the extent administrative proceedings continue to be used, issue a rule specifying the criteria the CFPB will use when deciding which forum to use
    • Reform the CID process, including by adopting procedures for allowing a confidential appeal of a CFPB decision on modifying or setting aside a CID appeal if requested and enacting a Dodd-Frank amendment to allow motions to modify or set aside CID to be directly filed in federal district court.
  • Other.  Make data in the Consumer Complaint Database available only to federal and state agencies and not to the general public.

 

On June 7, the CFPB submitted a Rule 28(j) letter to the D.C. Circuit in the PHH case.  In the letter, the CFPB embraced the fact that the Supreme Court’s recent Kokesh v. SEC decision makes the five-year statute of limitations in 28 USC § 2462 applicable to disgorgement remedies in CFPB administrative proceedings.  The CFPB asserted (incorrectly in our view) that Kokesh somehow obviated the applicability of RESPA’s three-year statute of limitations in the PHH case.

PHH forcefully responded to that argument in its reply letter.  It started with the point that § 2462’s limitation period applies “except as otherwise provided” by Congress. Because RESPA “otherwise provides” a three-year statute of limitations, § 2462 is inapplicable.  Next, it pointed out how unreasonable it is for the CFPB to assume that Congress would set one statute of limitations for judicial actions and another for administrative proceedings.  That “would destroy the certainty that Section 2614 was intended to provide,” it argued.  PHH also reminded the court of the CFPB Director’s holding in an earlier proceeding that no statute of limitations applies to administrative actions.  It chided the CFPB for trying to back away from that position at the “eleventh-hour.”

PHH also pointed out that “at the same time the CFPB argued in this Court that Section 2462 governs disgorgement, the Acting Solicitor General argued in Kokesh that it does not.  The CFPB’s freelancing merely underscores that the Director answers to no one but himself.”

By a vote of 233-188, the House of Representatives passed H.R. 10, the Financial CHOICE Act yesterday.  The bill, often referred to as the Dodd-Frank Act replacement bill, includes an overhaul of the CFPB’s structure and authority and makes significant changes to the rulemaking process followed by the CFPB and federal banking agencies.

As passed by the full House, the bill includes several amendments to the version of the bill passed by the House Financial Services Committee on May 4.  One such amendment is the amendment introduced by House Financial Services Committee Chairman, Jeb Hensarling, to strike the provision which purported to repeal the Durbin Amendment.  Based on reports we have seen, it does not appear any of the amendments impact the bill’s provisions dealing with the CFPB.

The bill’s fate in the Senate is very uncertain, with most pundits predicting it will not pass the Senate in its current form.

On June 7, 2017, Attorney General Jeff Sessions issued a memorandum directing that “Department attorneys may not enter into any agreement on behalf of the United States in settlement of federal claims or charges . . . that directs or provides for a payment or loan to any non-governmental person or entity that is not a party to the dispute.” In a press release, he explained that “settlement funds should go first to the victims and then to the American people—not to bankroll third party special interest groups or the political friends of whoever is in power.”

The DOJ and CFPB frequently include such provisions in consent orders settling fair lending claims. For example, in BancorpSouth Bank’s consent order with the CFPB and DOJ, the bank agreed to spend $500,000 on “partnerships” with “one or more community-based organizations or governmental organizations that provide credit, financial education, homeownership counseling, credit repair, and/or foreclosure prevention services to the residents of majority–minority neighborhoods . . . .” Other banks in other fair lending cases have been required to contribute $750,000 to similar organizations.

Each of the fair lending settlements involved substantially more money than the funds directed at community organizations. Nevertheless, the sums that the defendants were required to spend on these organizations were not insubstantial. Under the DOJ’s new policy, these components of the settlements would be prohibited. Given that the DOJ and CFPB do not always see eye to eye under the new administration, it is unclear how the Attorney General’s new policy will impact future fair lending settlements involving both federal agencies. We will, of course, continue to monitor these cases and keep you posted.

While our blog tends to focus primarily on regulatory, supervisory and enforcement developments at the CFPB, the CFPB also performs an important function in educating consumers about scams.

I frequently receive voicemail messages at home from people who are tell me that they are calling on behalf of the IRS to warn me that I will be arrested because of problems with my tax returns unless I promptly call a telephone number that they provide.  This has been going on for years.  Although I remain puzzled as to why law enforcement agencies have been unable to identify and prosecute these scamsters, I give immense credit to the CFPB for a blog it published earlier this week in which it described the IRS scams and how the IRS collects debts.

On June 5, 2017, the U.S. Supreme Court handed down a unanimous decision in Kokesh v. SEC. In Kokesh, the SEC took the position that disgorgement was not a penalty and therefore not subject to the statute of limitations in 28 U.S.C. § 2462. The Court held that disgorgement remedies are indeed “penalties” and therefore  subject to the five-year statute of limitations in § 2462. In its PHH briefing, the CFPB argued that “[its] administrative proceedings are subject only to the statute of limitations set forth in 28 U.S.C. § 2462.” Thus, the Supreme Court’s reasoning in Kokesh would also apply squarely to the disgorgement remedies available to the CFPB.

The opening paragraph of the Kokesh opinion says it all.

“A 5-year statute of limitations applies to any ‘action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise.’ 28 U.S.C. § 2462. This case presents the question of whether § 2462 applies to claims for disgorgement imposed as a sanction for violating a federal securities law. The Court holds that it does. Disgorgement in the securities-enforcement context is a ‘penalty’ within the meaning of § 2462, and so disgorgement actions must be commenced within the five years of the date the claim accrues.”

The Court rested its decision on the principle that “[s]uch limits are ‘vital to the welfare of society’ and rest on the principle that ‘even wrongdoers are entitled to assume that their sins may be forgotten.'” The CFPB has argued that, except for the statute of limitations in § 2462, no statute of limitations applies to claims it brings through administrative enforcement actions. This argument was brought to the fore by the PHH case, which we have blogged about extensively. The CFPB lost on that issue in the PHH case before a three-judge panel of the D.C. Circuit. The panel’s decision was vacated when the D.C. Circuit decided to re-hear the case en banc. We are still waiting to see what the en banc court will do.

At the American Law Institute (ALI) annual meeting in Washington, DC on May 22-24th, members had the opportunity to review a discussion draft of the Restatement of the Law Third, Consumer Contracts.  The draft is the result of the ALI’s 2012 initiative to supplement the Restatement Second of Contracts and Uniform Commercial Code (UCC) with a Restatement dedicated to transactions made solely by consumers for personal or household purposes.

The ALI generally undertakes four types of projects—Restatements, Legislative Recommendations (i.e., Model Codes), “Principles,” and Studies.  Its “Principles” projects have historically been used for emerging areas of the law where the ALI seeks to “unify a legal field without regard to whether the formulations conformed precisely to present law or whether they could readily be implemented by a court.”  For its Consumer Contracts project, reporters to the project chose to draft a more formal and ambitious Restatement.  The Consumer Contracts draft purports to look to both common law and statutory law, including the Uniform Commercial Code and consumer protection statutes (e.g., Dodd- Frank), to address transactions that were either not contemplated or insufficiently addressed by the Restatement Second of Contracts and the UCC.  However, the discussion draft does not faithfully and consistently reflect prevailing common law as Restatements are supposed to do.  As such, the reporters should consider converting the document into a Principles project.

The draft recognizes that the use of standard terms in consumer contracts has enabled businesses to offer a greater number of consumer goods and services at lower prices.  Moreover, the draft recognizes that courts have generally resisted creating special or restrictive consumer-specific rules because the increased efforts to obtain relatively more informed consent (including enhanced disclosures) would “increase transaction costs without producing substantial benefit” for consumers.  Nevertheless, the draft expresses a willingness to undermine these price and distribution efficiencies by advocating for changes to our current legal framework.

Specifically, the draft advocates for expanded judicial review of consumer contract terms to police whether consumers are receiving a fair bargain, including:

  • Unconscionability: Section five encourages courts to more broadly identify and more closely scrutinize terms related to consumer remedies (e.g., choice-of-forum, choice-of-law, and arbitration agreements), business remedies (e.g., termination fees), and price.  In particular, the draft Restatement largely ignores the Federal Arbitration Act, its preemption of contrary state law, and the long history of Supreme Court decisions establishing a strong federal policy in favor of arbitration.
  • Deception: Section six provides an expanded notion of deception by incorporating the language of consumer protection statutes. In particular, the draft permits consumers to void an agreed-to term if the term is the result of a “deceptive act or practice” that is “likely to mislead the reasonable consumer.”  Additionally, the draft bestows consumers with the option to void the entirety of an agreement if an alleged deception undermines the value of the contract.  A consumer may allege deception even where the business does not intend to deceive the consumer, and where the challenged contract term may have been the result of a negligent act or practice.  Deception may also extend to price, particularly where the transaction includes fees, add-ons, and other “multidimensional” pricing.
  • Enforcement: Section nine proposes enhanced consumer remedy provisions and enshrines liberal rules allowing judges to re-write contract provisions.  The draft emphasizes several mandatory rules—rules that cannot be deviated from by agreement of the parties—including assent, notice, and an opportunity to terminate.  The draft instructs courts to limit the enforcement of any deviating term, but in certain circumstances also allows a court to replace a deviating term with one that “operates against the business.”

The draft presented at the annual meeting was not voted upon.  The ALI Reporters managing the project are to incorporate feedback from the discussion into a subsequent draft, which will be presented to the Council and then to the general membership for approval.