Last week the CFPB announced an initiative to create a Global Financial Innovation Network (GFIN) with 11 other financial regulators and related organizations across the globe. The GFIN sprang from a previous proposition by the UK Financial Conduct Authority (FCA) to create a “global sandbox” for innovative financial services firms to be able to test new financial services and products such as artificial intelligence and blockchain based solutions in different financial markets. Feedback provided in response to that proposition indicated a need for more comprehensive collaboration among regulators to expand the innovation activities currently undertaken by financial services regulators around the world.

The GFIN, as described within the Consultation Document announcing its creation, is intended to serve three main functions:

  1. Facilitate information and knowledge sharing among financial services regulators on emerging innovation trends and best practices and to share appropriate regulatory contact information with financial services firms;
  2. Provide a forum for joint policy work and regulatory trials; and
  3. Develop a “global sandbox” for business to consumer (B2C) or business to business (B2B) firms to trial and scale new technologies in multiple jurisdictions.

In the press release announcing the initiative, CFPB Acting Director Mick Mulvaney stated that joining the GFIN “demonstrates the Bureau’s commitment to promoting innovation by coordinating with state, federal and international regulators. We look forward to working closely with other regulatory authorities—whether in the United States or abroad—to facilitate innovation and promote regulatory best practices in consumer financial services.”

The GFIN working group is encouraging responses and feedback from interested parties to 10 questions posed within the Consultation Document by October 14, 2018. Commenters can submit responses to the Bureau’s representative, Paul Watkins in the recently-established Bureau’s Office of Innovation. Responses and input are particularly sought from innovative financial services firms, technology companies and providers, accelerators, academia, consumer groups, financial services regulators, and other entities or individuals interested in helping to develop the GFIN. After October 14 the working group will review feedback and agree on next steps, including a timeline for when to launch the GFIN.

According to media reports, the Senate was scheduled to begin debate yesterday afternoon on H.R. 6167, the “Interior, Environment, Financial Services, and General Government Appropriations Act, 2019.”  The bill, which was passed by the House last week by a vote of 217–199 with no Democrats voting for the bill, would make several dramatic changes to the CFPB as described below.

Although the Congressional Record does reflect that the Senate began consideration of H.R. 6167, such “consideration” consisted of the introduction by Senator Shelby of an amendment substituting the Senate’s financial services and general government appropriations bill, S. 3017, for the corresponding portions of the House bill.

While the House bill would make the CFPB subject to the regular appropriations process, the Senate bill would not change Section 1017 of Dodd-Frank which provides that the CFPB is funded through transfers from the Federal Reserve.  However, it contains a provision (Section 747) that would require the CFPB, during fiscal year 2019, to notify the House and Senate Appropriations Committees, the House Financial Services Committee, and the Senate Banking Committee when it makes a request for a transfer of funds from the Federal Reserve pursuant to Section 1017 and to post the notification on the CFPB’s website.

In contrast, the House bill would make the following changes to the CFPB:

  • Appropriations.  The bill would make the CFPB subject to the regular appropriations process beginning in fiscal year 2020.  For fiscal year 2019, it would prohibit the CFPB Director from requesting more than $485 million in transfers from the Federal Reserve.
  • Removal of Director.  The bill would strike from Dodd-Frank the provision that sets a five-year term for the Director and places a “for-cause” limit on the President’s authority to remove the Director.  Thus, the Director would have an unlimited term but serve at the will of the President.
  • Congressional approval of CFPB rules.  Subject to a narrow exception for national security and other special  circumstances, the bill would provide that no major CFPB rule can take effect unless Congress has enacted a joint resolution of approval pursuant to the procedures set forth in the bill.  The bill would also allow Congress to block a nonmajor rule from taking effect by enacting a joint resolution of disapproval pursuant to the procedures in the bill.  A “major rule” means any rule that the Administrator of the Office of Information and Regulatory Affairs of the Office of Management and Budget (OIRA) finds has resulted in or is likely to result in: (1) an annual cost to the economy of $100 million or more, (2) a major increase in costs or prices for consumers, individual industries, federal, state, or local government agencies, or geographic regions, or (3) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprise to compete with foreign-based enterprises in domestic and export markets.  (This standard is similar to the “significant regulatory action” standard that applies under Executive Order 12866.  That Executive Order requires federal agencies, other than those defined as an “independent regulatory agency” by 44 U.S.C. Sec. 3502(5), to submit proposed and final regulations constituting a “significant regulatory action” to OIRA for review prior to publication in the Federal Register.  As an independent agency, the CFPB has been exempt from this OIRA review process.)
  • “Cut-go” requirement.  The bill would require the CFPB “in making any new rule” to “identify a rule or rules that may be amended or repealed to completely offset any annual costs of the new rule to the United States economy.”  The new rule could not take effect until the CFPB “make[s] each such repeal or amendment.”
  • Publication requirements.  In addition to satisfying the cut-go requirement before a new rule can take effect, the bill would require the CFPB to publish in the Federal Register “a list of information on which the rule is based, including data, scientific and economic studies, and cost-benefit analyses, and identify how the public can access such information on line” and to submit a report to Congress and the GAO containing the rule and other specified information that includes a classification of the rule as major or nonmajor.

Had the Senate given actual consideration to the House bill, there would have been little likelihood of its passage by the Senate.  Because an appropriations bill requires at least 60 votes in the Senate to pass, it could have been blocked by Democrats who are likely to remain opposed to the CFPB changes contained in the House bill.

 

 

 

 

This morning, the Senate Banking Committee held a hearing on President Trump’s nomination of Kathy Kraninger to serve as CFPB Director.  Although the hearing also included the President’s nomination of Kimberly Reed to serve as President of the Export-Import Bank, most of the questioning was directed to Ms. Kraninger.

Ms. Kraninger currently serves as Program Associate Director for General Government Programs at OMB.  A significant amount of the questioning of Ms. Kraninger by Democratic Senators was focused on obtaining information about her role at OMB in the development and implementation of the Trump Administration’s “zero-tolerance” policy for individuals attempting illegal entry into the United States.  (Republican Committee Chairman Crapo opened the hearing by rejecting the request of Democratic Senators to postpone the hearing pending Ms. Kraninger’s provision of the documents and other information about her role at OMB that they had requested in a letter sent to Ms. Kraninger.)

Ms. Kraninger was unwilling to provide any information about her involvement beyond stating that she had participated in meetings about the implementation of the zero-tolerance policy but had no role in setting the policy.  She declined requests from Democratic Senators to characterize any advice she gave at OMB concerning the policy because, according to Ms. Kraninger, doing so would require her to reveal information about the “deliberative process.”  Democratic Senators also attempted to highlight Ms. Kraninger’s lack of previous experience in the financial services industry, either as an employee of a financial institution or a regulator.

The following noteworthy information discussed during the hearing:

  • In her prepared testimony and opening remarks, Ms. Kraninger outlined the following initial priorities for the CFPB, which closely track those of Acting Director Mulvaney:
    • The Bureau should be “fair and transparent, ensuring its actions empower consumers to make good choices and provide certainty for market participants,” with the Bureau making “robust use of cost benefit analysis.”  Ms. Kraninger observed that “notice and comment rulemaking is essential for ensuring the proper balancing of all interests” and “also enables consideration of tailoring to reduce the burden of compliance, particularly on consumers and smaller marketplace participants.”
    • The Bureau should work closely with other financial regulators and the states on supervision and enforcement. Ms. Kraninger stated that she would take “aggressive action against bad actors who break the rules by engaging in fraud and other illegal activity.”
    • The Bureau must recognize its duty “to protect sensitive information in its possession.”  She would limit the Bureau’s data collection “to what is needed and required under law.”
    • The Bureau must be “accountable to the American people for its actions, including its expenditure of resources.”
  • Ms. Kraninger indicated that she was willing to revisit Acting Director Mulvaney’s decisions to reorganize the CFPB’s Office of Fair Lending and its Office of Students and Young Consumers and would approach such review with “an open mind.”
  • While stating that she would be committed to enforcing fair lending laws as CFPB Director, Ms. Kraninger declined to answer Democratic Senator Jones’ question asking her whether she would support the CFPB’s continued use of the disparate impact theory.  She responded that she planned to have “detailed conversations” with CFPB staff to understand the CFPB’s position on the use of disparate impact.
  • In response to a question from Democratic Senator Warner suggesting that her support for the use of cost benefit analysis was inconsistent with her desire to limit the Bureau’s data collection, Ms. Kraninger indicated that she was committed to “data-driven decision making” but that it should be based on data that comes in response to Bureau requests for information and other sources rather than from supervised entities.
  • Republican Senator Toomey’s efforts in obtaining a determination from the GAO that the CFPB’s indirect auto finance guidance was a “rule” within the scope of the Congressional Review Act (CRA) resulted in Congress’ use of the CRA to override the guidance.  In his questioning of Ms. Kraninger, Senator Toomey used the guidance as an example of a situation in which the CFPB had failed to properly use the Administrative Procedure Act’s notice-and-comment procedures and obtained a commitment from Ms. Kraninger to use such procedures when imposing new CFPB rules.  Ms. Kraninger was not willing to state that she agreed with Senator Toomey’s statement that Dodd-Frank Section 1071 (which deals with the collection of data on credit applications made by women- or minority-owned businesses and small businesses) was the “only respect” in which Dodd-Frank requires the CFPB to deal with small businesses.  Instead, she indicated that she had not reviewed all federal consumer financial laws but that it was her belief that Congress intended to limit the CFPB’s role in dealing with small businesses.
  • In responding to questions from Democratic Senators critical of the CFPB’s plans to revisit its payday lending rule, Ms. Kraninger indicated that it was “important” to allow the CFPB’s reopening of its rulemaking process to proceed as planned.

 

The issue of the CFPB’s constitutionality is currently before the Fifth Circuit in the interlocutory appeal of All American Check Cashing from the district court’s ruling upholding the CFPB’s constitutionality.  As a result, the Fifth Circuit’s decision issued earlier this week which found that the Federal Housing Finance Agency (FHFA) is unconstitutionally structured because it is excessively insulated from Executive Branch oversight could be a preview of how another Fifth Circuit panel might approach the CFPB’s constitutionality.

In addition, the decision will likely influence the approach that the CFPB takes in its brief in All American Check Cashing’s appeal.  All American Check Cashing has already filed its principal brief and the CFPB is seeking a 40-day extension of the date by which it must file its brief (from August 1 to September 10).  In its motion to extend the briefing schedule, the CFPB states that the Fifth Circuit’s opinion “discussed features of the Bureau and compared them to aspects of FHFA’s structure” and thus “many of the arguments discussed by the Court are relevant to the issues in [the All American Check Cashing] case.”  The CFPB is requesting the extension “so that it may evaluate the [Fifth Circuit’s] opinion, and to decide how to address that opinion in the context of the [the All American Check Cashing] case.”  (The motion indicates that All American Check Cashing has no objection to the extension provided it receives a one-week extension for filing its reply brief.)

The FHFA was created by the Housing and Economic Recovery Act of 2008 (HERA) to oversee two of the housing government services enterprises (GSEs).  Like the CFPB, the FHFA was established as an “independent agency” led by a single Director appointed by the President subject to Senate confirmation for a five-year term and who can only be removed by the President “for cause.”  Also like the CFPB, the FHFA is not funded through the regular appropriations process.  Instead, the FHFA is funded through assessments collected from the GSEs.  The FHFA is overseen by the Federal Housing Finance Oversight Board (Board) which is required to testify annually before Congress about the FHFA’s performance and the safety and soundness of the GSEs but cannot exercise any executive authority, or as put succinctly by the Fifth Circuit, “cannot require the FHFA or Director to do much of anything.”

The parties challenging the FHFA’s constitutionality were shareholders of the GSEs who were seeking to invalidate an amendment (Third Amendment) to a preferred stock agreement between the Treasury Department and the FHFA as conservator for the GSEs that required the GSEs to pay quarterly dividends to the Treasury equal to the GSEs’ excess net worth after accounting for prescribed capital reserves.

The Fifth Circuit determined that while the “for cause” removal provision alone was not sufficient to trigger a separation of powers violation, it did trigger a violation when combined with other features of the FHFA, specifically its insulation from the normal appropriations process and the absence of any statutory provision providing for executive branch control over the FHFA’s activities.  The court observed that while two of the Board’s members are Cabinet officials, the Board exercises purely advisory functions.  It determined that the appropriate remedy for the constitutional violation was to sever the for-cause removal provision while “leav[ing] intact the remainder of HERA and the FHFA’s past actions—including the Third Amendment.”

In ruling that the FHFA is unconstitutionally structured, the Fifth Circuit stated that it was “mindful” of the D.C. Circuit’s en banc PHH decision finding the CFPB’s structure to be constitutional but “salient distinctions between the agencies compel a contrary conclusion.”  It observed that, unlike the Board, the Financial Stability Oversight Council (FSOC) can directly control the CFPB’s actions because it holds veto-power over the CFPB’s policies.  The court also commented that the shareholders were not only challenging the for cause removal provision but were challenging the “cumulative effect of Congress’s agency-design decisions.”  (emphasis included)

In its interlocutory appeal to the Fifth Circuit, All American Check Cashing has argued that not only does the CFPB’s single-director-removable-only-for-cause structure, standing alone, make the CFPB’s structure unconstitutional, but that its other features “render it even more clearly unconstitutional when combined with its single unaccountable Director.”  Such other features include the CFPB’s insulation from the regular appropriations process.  As a result, the Fifth Circuit could rely on All American Check Cashing’s “cumulative effect” argument as a basis for disagreeing with the D.C. Circuit’s en banc conclusion in PHH.  Indeed, perhaps with All American Check Cashing’s interlocutory appeal in mind, the Fifth Circuit specifically indicated that its decision was limited to the FHFA’s constitutionality.  The court stated in a footnote:

We do not question Congress’s authority to establish independent agencies, nor do we decide the validity of any agency other than the FHFA….
We leave for another day the question of whether other agencies suffer from similar constitutional infirmities.

Despite the Fifth Circuit’s reliance on the FSOC’s oversight of the CFPB to distinguish the D.C. Circuit’s en banc PHH decision, we are not convinced that the FSOC’s oversight of the CFPB is significantly different from the Board’s oversight of the FHFA.  While the FSOC can veto a CFPB regulation, it can only do so within a short time period by a two-thirds vote and only for reasons of safety and soundness (a very high standard) and not because FSOC members believe the regulation is bad policy.  Indeed, to date the FSOC has not vetoed any CFPB regulation nor has any FSOC member filed a petition to initiate a potential veto vote.  Furthermore, except for its ability to veto a CFPB regulation for safety and soundness reasons, the FSOC has no oversight over CFPB supervisory and enforcement activities.  The FSOC did not consider a veto of the CFPB’s arbitration rule even though the then Acting Comptroller of the Currency took the position that the rule threatened the safety and soundness of the banking system because of the avalanche of class action litigation that the CFPB predicted would result from the rule.  The only check on the CFPB proved to be Congress’ use of the Congressional Review Act to override the arbitration rule.

Should the Fifth Circuit conclude that the CFPB’s structure is unconstitutional, its FHFA decision also suggests that it would rule that the proper remedy is to sever the Consumer Financial Protection Act’s (CFPA) for-cause removal provision.  All American Check Cashing is arguing that the correct remedy is to strike down the CFPA as a whole.

Both the FHFA and the Treasury Department, in their briefs to the Fifth Circuit, sought to avoid the constitutionality issue by arguing that the Third Amendment was entered into by the FHFA’s Acting Director who was removable by the President at will and therefore the shareholders’ harm was not traceable to the for-cause removal restriction.  The FHFA and Treasury Department argued that because HERA, by its plain terms, only restricted the President’s authority to remove the Director but did not restrict the President’s authority to remove an Acting Director, the Acting Director was not subject to the for-cause removal restriction.  The Fifth Circuit rejected this argument stating:

But if the acting Director could be removed at will, the FHFA would be an executive agency—not an independent agency.  There is no indication that Congress sought to revoke the FHFA’s status as an independent agency when it is led by an acting, rather than appointed, Director.  So an acting Director, like an appointed one, is covered by the removal restriction. (footnotes omitted).

The FHFA also argued in the alternative that the FHFA’s structure was constitutional.  In its brief, the FHFA observed that the shareholders were relying on the D.C. Circuit’s vacated panel decision in PHH in arguing that the FHFA’s structure is unconstitutional.  The FHFA stated that “the District Court did not err by agreeing with every other court that has considered the issue that “the reasoning of the panel decision in PHH Corp. [is] unpersuasive even if it had not been vacated.'”

In a supplemental filing, the FHFA notified the Fifth Circuit of the D.C. Circuit’s issuance of its en banc PHH decision rejecting the constitutional challenge to the CFPB’s structure and indicated that the D.C. Circuit’s reasoning closely tracked the FHFA’s arguments in support of its constitutionality.  In addition to defending its constitutionality, the FHFA took the position that if its structure were found to be unconstitutional, the proper remedy would be to strike the for-cause removal provision.

The Fifth Circuit’s rejection of the argument made by the FHFA and the Treasury Department that the shareholders’ constitutionality challenge failed because the Acting Director was removable at will can be expected to influence whether the CFPB will make a similar argument in the All American Check Cashing case.  In opposing All American Check Cashing’s petition to the Fifth Circuit asking it to grant interlocutory review, the CFPB did not directly address the merits of the appellants’ constitutional challenge.  Instead, it claimed that because Acting Director Mulvaney is removable at will by the President and had ratified the CFPB’s decision to bring the lawsuit, any constitutional defect that may have existed with the CFPB’s initiation of the lawsuit was cured and the constitutionality of the for-cause removal provision was no longer relevant to the case.

According to the CFPB, Acting Director Mulvaney is removable at will by the President because the CFPA’s removal provision by its plain terms applies only to “the Director.”  Another Fifth Circuit panel could easily apply the rationale used by the Fifth Circuit in rejecting the FHA’s and Treasury Department’s “plain terms” argument and conclude that the CFPB’s Acting Director also is not removable at will because “there is no indication that Congress sought to revoke the [CFPB’s] status as an independent agency when it is led by an acting, rather than appointed, Director.”

It remains unclear what position the CFPB will take on its constitutionality in the All American Check Cashing case.  However, given that another Fifth Circuit panel now has the Fifth Circuit’s FHFA decision on which it can readily rely to reject an argument by the CFPB that the Acting Director’s ratification makes a ruling on the CFPB’s constitutionality unnecessary, there is now a greater likelihood that the Fifth Circuit will issue a decision that does rule on the CFPB’s  constitutionality.  (In the CFPB’s lawsuit against RD Legal Funding, Judge Preska of the Southern District of New York recently ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional and struck the CFPA (Title X of Dodd-Frank) in its entirety.  The CFPB has not yet indicated whether it plans to appeal Judge Preska’s decision.)

Should any of the parties to the FHFA decision wish to seek a rehearing en banc, they must do so within 45 days after entry of judgment.  The 45-day period applies when one of the parties is a United States agency (here, the FHFA and the Treasury Department) or a current United States officer or employee sued in an official capacity (here, FHFA Director Watt and Treasury Secretary Mnuchin).

 

 

A fifth amicus brief has been filed in support of All American Check Cashing and the other appellants in their interlocutory appeal to the U.S. Court of Appeals for the Fifth Circuit of the district court’s ruling upholding the CFPB’s constitutionality.

The brief was filed by the Cato Institute which describes itself as “a nonpartisan public policy research foundation dedicated to advancing the principles of individual liberty, free markets, and limited government.”

The CFPB’s brief is due to be filed by August 1.  We expect the brief to reveal the CFPB’s position on its constitutionality.

For our prior blog posts on All American Check Cashing’s principal brief and the four other amicus briefs, click here and here.

 

 

In response to the U.S. Supreme Court’s decision in Lucia v. SEC, President Trump has issued an executive order that changes the process used by federal agencies for administrative law judges (ALJs).

In Lucia, the Supreme Court ruled that administrative law judges (ALJs) used by the SEC are “Officers of the United States” under the Appointments Clause in Article II of the U.S. Constitution because they exercise “significant authority pursuant to the laws of the United States.”  Under the Appointments Clause, the power to appoint “Officers” is vested exclusively in the President, a court of law, or the head of a “Department.”

Currently, federal agencies hire ALJs through a competitive merit-selection process administered by the Office of Personnel Management (OPM).  The Executive Order removes ALJs from the “competitive service,” a federal worker classification that follows the OPM’s hiring rules, and places them into the “excepted service,” a category of federal workers who are subject to a different hiring process, by creating a new excepted service category specifically for ALJs.

Federal regulations provide that appointments of workers who are in the excepted service are to be made “in accordance with such regulations and practices as the head of the agency concerned finds necessary.”  The executive order amends such regulations to provide that for ALJs, such regulations and practices must include the requirement that an ALJ who is other than an incumbent ALJ must be licensed to practice law by a state, the District of Columbia, the Commonwealth of Puerto Rico, or any territorial court established under the U.S. Constitution.

Presumably, to address Lucia’s conclusion that ALJs must be appointed by an agency official who qualifies as the “head of a Department” for purposes of the Appointments Clause, the agency regulations for hiring ALJs issued pursuant to the executive order will provide that a final hiring decision must be made by the agency head rather than a subordinate official.  However, even if ALJs are only hired by agency heads, it is not certain that the heads of all agencies would qualify as the “head of a Department.”

As we have previously observed with regard to the CFPB, the Dodd-Frank Act provided that “[t]here is established in the Federal Reserve System, an independent bureau to be known as the “[BCFP].”  Under U.S. Supreme Court decisions that have addressed the meaning of the term “Department,” it is unclear whether an establishment’s status as an independent agency with a principal officer who is not subordinate to any other executive officer is sufficient to render it a “Department” or whether it must also be self-contained.  While compelling arguments can be made that that the CFPB’s status as an independent agency should be sufficient to render it a “Department,” Congress’ decision to house the CFPB in the Federal Reserve means that the CFPB’s status as a “Department” is not free from doubt.  Similarly, because the OCC is housed in the Treasury Department, there is a question whether the Comptroller would qualify as the “head of a Department.”

 

As we discuss below, President Trump’s nomination of D.C. Circuit Judge Brett Kavanaugh to serve as a Justice of the U.S. Supreme Court could have significant implications for all federal agencies should Judge Kavanaugh be confirmed.  However, in light of Judge Kavanaugh’s rulings in the PHH case, the implications for the CFPB could be even more consequential.

Judge Kavanaugh was a member of the 3-judge D.C. Circuit panel and the author of the panel’s decision in PHH which held that the CFPB’s single-director-removable-only-for-cause structure violates Article II of the U.S. Constitution.  He also took the same position in his dissent from the en banc majority decision in PHH which held that the structure is constitutional.  In both the panel decision and his dissent from the en banc decision, Judge Kavanaugh concluded that the proper remedy was to sever the for-cause removal provision from the Dodd-Frank Act and thereby allow the CFPB to continue to operate with a Director removable by the President at will (rather than strike Title X of Dodd-Frank in its entirety).

While there is no possibility of PHH reaching the Supreme Court (none of the parties sought certiorari and the CFPB dismissed its administrative proceeding against PHH), there are several other pending cases involving a challenge to the CFPB’s constitutionality that could reach the Supreme Court in the coming years.  Those cases include All American Check Cashing’s interlocutory appeal to the U.S. Court of Appeals for the Fifth Circuit of the district court’s ruling upholding the CFPB’s constitutionality which is currently being briefed and a possible appeal to the Second Circuit in the RD Legal Funding case of the district court’s ruling holding that the CFPB’s structure is unconstitutional.

Should Judge Kavanaugh have an opportunity to rule on the question of the CFPB’s constitutionality as a member of the Supreme Court, we would expect him to be a definite vote in favor of a decision that holds that the CFPB’s structure is unconstitutional and severs the for-cause removal provision instead of striking all of Title X.  (Of course, there is also the possibility that this question could become moot if Congress were to change the for-cause removal provision or change the CFPB’s leadership structure to a multi-member commission.)  For that reason, we would also expect Judge Kavanaugh to face a request for him to recuse himself from the litigants who are defending the CFPB’s constitutionality.

In making such a request, the litigants are likely to rely on 28 U.S.C. Section 455 which provides:

(a) Any justice, judge, or magistrate judge of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.

(b)  He shall also disqualify himself in the following circumstances:

[(1)-(2) omitted]

(3)   Where he has served in governmental employment and in such capacity participated as counsel, adviser or material witness concerning the proceeding or expressed an opinion concerning the merits of the particular case in controversy;

[(4)-(5) omitted].

The litigants seeking Judge Kavanaugh’s recusal might argue that based on his PHH opinions, he is a “justice” who “has served in governmental employment and in such capacity…expressed an opinion concerning the merits of the particular case in controversy.”

While the phrase “particular case in controversy” arguably is limited to the specific case in which the Justice previously issued an opinion (i.e. PHH), a broader reading is suggested by a memorandum written by Justice Scalia regarding his decision not to recuse himself from a case in which Vice President Cheney was a named party.  That case involved a claim that a government committee had not complied with the Federal Advisory Committee Act (FACA).  According to Justice Scalia, Vice President Cheney’s name appeared in the lawsuit “only because he was the head of [that] Government committee.”

In explaining his decision not to recuse himself, Justice Scalia indicated that his personal friendship with Vice President Cheney did not call his impartiality into question under Section 455(a).  He stated that “while friendship is a ground for recusal of a Justice where the personal fortune or the personal freedom of the friend is at issue, it has traditionally not been a ground for recusal where official action is at issue, no matter how important the official action was to the ambitions or the reputation of the Government officer.”

However, in a footnote, Justice Scalia noted that the public interest group that was seeking his recusal had cited to the Supreme Court’s decision in Public Citizen v. Department of Justice, 491 U. S. 440 (1989), as a prior case in which Justice Scalia had recused himself.  Justice Scalia commented that while that case also involved FACA, as Assistant Attorney General for the Office of Legal Counsel, he had provided an opinion “that addressed the precise question presented in Public Citizen: whether the American Bar Association’s Standing Committee on Federal Judiciary, which provided advice to the President concerning judicial nominees, could be regulated as an ‘advisory committee’ under FACA.”  Judge Scalia stated that he “concluded that [his] withdrawal from the case was required by 28 U. S. C. §455(b)(3), which mandates recusal where the judge ‘has served in governmental employment and in such capacity . . . expressed an opinion concerning the merits of the particular case in controversy.’”  He further stated that, in contrast, “I have never expressed an opinion concerning the merits of the present case.”

Even if the phrase “the merits of the particular case in controversy” is read broadly, it seems doubtful that Section 455 was intended to apply where the prior opinion in question is one that a Justice whose recusal is sought issued as an appellate judge.  A separate provision, 28 U.S.C. Section 47, bars a judge from hearing an appeal in a case only where he or she was the trial judge.  There is no similar express prohibition on a Supreme Court Justice hearing an appeal in a case where he or she was an appellate judge.  It also bears noting that the circumstances involved in Justice Scalia’s recusal from Public Citizen are distinguishable from those that would be presented by Judge Kavanaugh’s recusal in that Justice Scalia had previously expressed his views on FACA in his capacity as a government attorney and not as a judge.  In any event, there is no mechanism for enforcing a Supreme Court Justice’s compliance with 28 U. S. C. Section 455 and Supreme Court Justices do not feel bound by the restrictions that apply to other members of the federal judiciary.

Based on the panel decision in PHH, it appears that Judge Kavanaugh would likely take an unfavorable view of aggressive actions and positions of any federal agency that are not clearly consistent with the agency’s statutory authority.  In the panel decision, Judge Kavanaugh refused to give Chevron deference to the CFPB’s interpretation of RESPA, observing that the statutory language “specifically bars the aggressive interpretation of [RESPA’s referral fee prohibition] advanced by the CFPB in this case.”

The panel decision in PHH also found that the CFPB’s retroactive application of its RESPA interpretation violated the Due Process Clause.  This suggests that Judge Kavanaugh could be favorably disposed to other due process challenges to agency actions or positions.

Three more amicus briefs have been filed in support of All American Check Cashing and the other appellants in their interlocutory appeal to the U.S. Court of Appeals for the Fifth Circuit of the district court’s ruling upholding the CFPB’s constitutionality.

The amicus briefs were filed by the following amici:

  • Pacific Legal Foundation, which describes itself as “the most experienced public-interest legal organization defending the constitutional principle of separation of powers in the arena of administrative law.”
  • The Attorneys General of Texas, Arkansas, Georgia, Indiana, Kansas, Louisiana, Michigan, Nebraska, Oklahoma, South Carolina, Tennessee, Utah, and West Virginia, and the Governor of Maine.
  • U.S. Chamber of Commerce

An amicus brief in support of the appellants was previously filed by a group of six “separation of powers scholars.”

 

RD Legal Funding and the New York Attorney General have filed a joint submission with Judge Preska of the Southern District of New York regarding how they propose to proceed in the CFPB’s and NYAG’s lawsuit against RD Legal Funding.

On June 21, Judge Preska issued an order denying RD Legal Funding’s motion to dismiss the NYAG’s federal UDAAP claims under the CFPA and state law claims but terminating the CFPB’s participation in the case as a consequence of her determination that because the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, the CFPB lacked authority to bring claims under the CFPA.  In Judge Preska’s view, the proper remedy was to strike the CFPA (Title X of Dodd-Frank) in its entirety rather than just sever the for-cause removal provision.  Her June 21 order also set yesterday as the deadline for counsel to advise the court how they intended to proceed.

The joint submission states that the CFPB has indicated to the parties that it has not yet made a decision as to how it will proceed.  Because the case remains active, the CFPB cannot appeal Judge Preska’s decision to the Second Circuit unless she finds that there is no reason to delay that appeal under Rule 54(b) of the Federal Rules of Civil Procedure.

In their joint submission, the NYAG and RD Legal Funding ask the court to set a scheduling conference in September 2018 and describe their positions as follows:

NYAG.  The NYAG indicates that it wants the case to proceed as quickly as possible and would oppose any request by RD Legal Funding for delay, including a request for interlocutory appeal and a stay of the proceeding.  In anticipation of a filing by RD Legal Funding raising jurisdictional issues, the NYAG indicates its belief “that the Court is clear as to jurisdiction in its [June 21 order].”  The NYAG cites Judge Preska’s statements in her June 21 order that the NYAG has “independent authority to bring claims in federal district court under the CFPA, without regard to the constitutionality of the CFPB’s structure” and that “federal question subject matter jurisdiction over the CFPA claims exists regardless of the constitutionality of the CFPB’s structure.”  Also cited is her determination that the court had supplemental jurisdiction over the NYAG’s state law claims because they “arise out of the same common nucleus of operative fact” as the CFPA claims.

RD Legal Funding.   RD Legal Funding contends that the June 21 order “struck each substantive provision of the [CFPA] that forms the basis of federal jurisdiction, which RD Legal will address in a separate filing.”  It also asks the court “to resolve the immediate ambiguity in the CFPB’s position and to prevent potential duplicative proceedings” by first making an express finding that there is “no just reason for delay” and entering judgment against the CFPB only under Rule 54(b) of the Federal Rules of Civil Procedure and then, should the CFPB seek immediate review of the June 21 order, certifying the June 21 order for interlocutory appeal and staying the proceeding during the pendency of the appeal.  RD Legal Funding indicates that should the CFPB not seek immediate review “and the Court permits the NYAG to proceed with claims under the stricken Title X,” it is prepared to litigate in the district court although it “do[es] not believe that would serve the interests of judicial economy.”

We find Judge Preska’s opinion to be self-contradictory.  On the one hand, she denied a motion to dismiss the claims brought by the NYAG against RD Legal Funding.  One of those claims is a federal UDAAP claim brought under Section 1042 of Dodd-Frank.  Section 1042(a) states, in relevant part:

“[T]he attorney general … of any state may bring a civil action in the name of such state in any district court of the United States in that state … to enforce provisions of this title …”

In asserting a federal UDAAP claim under Section 1042, the NYAG relied on Dodd-Frank Section 1031(a) which authorizes the CFPB to “take any actions authorized under Subtitle E [which describes the enforcement powers of the CFPB] to prevent a covered person … from committing and engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.”

On the other hand, toward the end of the opinion, Judge Preska dismissed the CFPB’s claims against RD Legal Funding and held that the entirety of Title X of Dodd-Frank is unconstitutional and should be stricken.  Title X, of course, includes Sections 1042 and 1031 of Dodd-Frank which are the sections relied upon by the NYAG.

Because of these contradictory rulings, Judge Preska will need to decide whether the NYAG’s claims remain alive.  We would expect Judge Preska to dismiss the NYAG’s Section 1042 claim since Section 1042 provides that a state attorney general opting to use Section 1042 must first consult with the CFPB about his or her intent to file a 1042 claim and that, while the CFPB may not preclude a state attorney general from filing such a lawsuit, the CFPB has the right to intervene in that lawsuit as a party.  This seems to demonstrate Congressional intent not to give a state attorney general the power to use Section 1042 if the CFPB lacks such power.

Judge Preska has already ruled that the CFPB lacks any power under Title X of Dodd-Frank because it was unconstitutionally structured.  If she dismisses the NYAG’s Section 1042 claim as we expect, the NYAG will need to determine whether it wants to appeal such ruling.  Because the NYAG’s state law claims remain viable, the NYAG could only appeal if Judge Preska gives the NYAG permission to file an interlocutory appeal and the Second Circuit agrees to hear the appeal.  If the NYAG decides not to appeal such a ruling, Judge Preska probably should dismiss the case in its entirety for lack of federal subject matter jurisdiction (unless the CFPB asks Judge Preska to enter a final judgment as to its claims so that the CFPB can appeal the constitutionality issue to the Second Circuit.)

 

 

 

 

 

 

CFPB Acting Director Mick Mulvaney announced yesterday that he has selected Brian Johnson, who currently serves as CFPB Principal Policy Director, to serve as Acting Deputy Director.  Before joining the CFPB, Mr. Johnson served as a House Financial Services Committee staff member.

Mr. Johnson’s selection as Acting Deputy Director follows the announcement by Leandra English this past Friday that, in light of President Trump’s nomination of Kathy Kraninger to serve as CFPB Director, she would resign as Deputy Director this week and drop her lawsuit challenging Mr. Mulvaney’s appointment as Acting Director.