On July 20, we reported that Director Cordray is scheduled to give a speech at the September 4 Cincinnati AFL-CIO Labor Day picnic.  Assuming the speculation that Director Cordray plans to run for Ohio governor is accurate, that event seemed to be an ideal venue for him to announce his candidacy.

Yesterday, the Ohio Democratic Party announced that the first in a series of six gubernatorial debates will be held on September 12 at Martins Ferry High School in Belmont County.  All of the announced candidates (former U.S. Rep. Betty Sutton, Dayton Mayor Dan Whaley, former state Senate Minority Leader Joe Schiavoni and former State Senator Connie Pillich) have agreed to participate.

As of now, Director Cordray is not slated to participate in the debate.  Party Chairman David Pepper was quoted by Cleveland.com: “I think anyone looking to run for statewide office, there aren’t that many months left before you really have to get going…As you can see, we’re moving forward.”

So far, Director Cordray has not indicated whether he is planning to enter the Ohio gubernatorial race and, if so, when that will happen.  If he decides to run, he must first resign as CFPB Director.  That could happen in early September so that he can launch his campaign on Labor Day at the Cincinnati AFL-CIO picnic, and/or participate in the first Democratic Party gubernatorial debate on September 12.

As we reported previously, on July 7, 2017 the Consumer Financial Protection Bureau (CFPB) posted on its website long awaited amendments to the TILA/RESPA Integrated Disclosure (TRID) rule, and a proposal to address the so-called “black hole” issue (regarding limits on the ability of a credit to reset tolerances with a Closing Disclosure).

Both the amendments and the proposal were published in Federal Register on August 11, 2017.  As a result, the amendments become effective on October 10, 2017, with a mandatory compliance date of October 1, 2018, and the comment deadline for the proposal is also October 10, 2017.

As we’ve discussed before, the CFPB sued Navient over its student loan servicing practices in the Middle District of Pennsylvania. In doing so, the CFPB followed its strategy of announcing new legal standards by enforcement action and then applying them retroactively. The chief allegation in the complaint is that Navient wrongly “steered” consumers into using loan forbearance rather than income-based repayment plans to cure or avoid defaults on their student loans. On March 24, 2017, Navient moved to dismiss the complaint on a number of grounds. While, on Friday, August 4, 2017, the district court declined to dismiss the case, the motion raised several arguments that a court of appeals should not be so quick to gloss over. We’ll focus here on two of them: fair notice, and the constitutionality of the CFPB’s structure.

Fair Notice

Navient argued in its briefs that the CFPB was pursuing them for alleged conduct when Navient was not given fair notice that the conduct, if it occurred, violated the law. The court used a technicality to decline to consider Navient’s fair notice argument at all. The court stated that: “[Under the relevant authorities,] Navient’s fair notice argument fails if it was reasonably foreseeable to Navient that a court could construe their alleged conduct as unfair, deceptive, or abusive under the CFP Act. Navient, however, has only advanced arguments as to why it did not have fair notice of the Bureau’s interpretation of the CFP Act (emphasis added).” Thus, the court found that it need not consider the fair notice argument.

In doing so, the court ignored authorities Navient cited that held that, as Navient paraphrased, “[a]n agency cannot base an enforcement action on law created or changed after the conduct occurred.” The court also ignored the obvious and clearly-implied corollary to Navient’s argument: The only way for Navient to be liable for the claims alleged in the complaint would be for a court, namely, the Middle District of Pennsylvania, to adopt the Bureau’s position. Thus, with all due respect for the court, Navient’s fair notice argument was fairly before it and should not have been so lightly cast aside.

This is especially so given how well-founded the argument seems to have been. How could Navient have known that the CFP Act required it to provide over-the-phone individualized financial counseling to borrowers as a result of a statement on its website indicating that “Our representatives can help you by identifying options and solutions, so you can make the right decision for your situation (emphasis added).” The statement was both conditional, and placed the duty for making the right decision squarely on consumers. The court completely ignored the fact that the CFP Act’s prohibition on unfair, deceptive, or abusive conduct would not have alerted anyone that the CFPB or a court would make the inferential leap between that statement and the duty that the CFPB says Navient undertook by making it.

Constitutionality of CFPB Structure

The court also rejected the argument that the CFPB’s structure was unconstitutional. We’ve argued before why we believe that such a view is incorrect and even dangerous to our constitution. But a few of those arguments bear repeating in light of the Navient court’s ruling. The first problem with the Navient court’s holding is that it applies Humphrey’s Executor in a way that ignores the fundamental holding of the case. In Humphrey’s Executor, the Supreme Court held that for-cause removal, staggered terms, and a combination of enforcement and law-making powers was acceptable in a multi-member commission. Its rationale: because of the commission structure, the FTC would operate as a quasi-legislative and quasi-judicial body, not a quasi-executive one. Not to state the obvious, but the CFPB is not a multi-member commission; its unitary director is like the President, a unitary executive. Thus, the Supreme Court’s indulgence of these accountability-limiting features in Humphrey’s Executor does not apply to the CFPB.

Second, the retort to this argument, that the CFPB Director is somehow more accountable to the President, is a legal fiction at best. If the President has no power to remove the Director without cause, the Director is not accountable to him. Period. The President can approach the Director, ask him to implement a certain policy, and the Director can ignore the President with impunity. That is not accountability, however one may measure it. It is true that the five FTC Commissioners, the entire board of the Federal Reserve, or the SEC Commissioners could do the same. But, those interactions are more like the ones the President faces in dealing with Congress or the Judiciary, interactions that the Constitution contemplated and intended. With the CFPB Director, the President stands powerless before the unitary executive of a federal agency whose will can stand in direct contrast to his own. If that is not an affront to the Constitution’s notion of the President as a unitary executive, what is?

Third, the Supreme Court also indulged accountability-limiting features in Morrison v. Olsen, because, among other reasons, the inferior officer at issue in the case “lack[ed] policymaking or significant administrative authority.” Such is not the case with the CFPB Director. The Director is not an inferior officer. More importantly, he has substantial policymaking authority. The Director has the authority to approve and enforce regulations relating to any consumer financial product or service, companies and individuals involved in providing such services, and service-providers to those companies and individuals. The CFPB has interpreted its authority to extend not just to banks, lenders, and debt collectors, but to mobile phone companies, homebuilders, payment processors, and law firms. The court in this case ignored these substantial differences between the CFPB Director and the inferior officer approved in Morrison v. Olsen.

Finally, the court ignored the implications of its ruling. Before long, if the CFPB structure is replicated elsewhere in government, we’ll have a government where Congress, the President, and even the Courts are relegated to the sidelines while powerful bureaucrats make law, interpret the law, and enforce it with virtually no political oversight.

* * *

As the case progresses, Navient will continue to defend itself. We will keep a close eye on the case and, as always, keep you posted.

A new research paper released by the Federal Reserve Bank of Philadelphia found that fintech lending has expanded consumers’ ability to access credit.  The paper, “Fintech Lending: Financial Inclusion, Risk Pricing, and Alternative Information,” used account-level data provided by a large fintech lender to “explore the advantages/disadvantages” of loans made by such lender “and similar loans that were originated through traditional banking channels.”

The study’s key findings include:

  • The fintech lender’s consumer lending activities penetrated into areas that could benefit from additional credit supply, such as areas that have lost a disproportionate number of bank branches and highly concentrated banking markets.
  • Consumers presenting the same credit risk could obtain credit at lower rates through the fintech lender than through traditional credit cards offered by banks.
  • The lender’s use of alternative credit data allowed consumers with few or inaccurate credit records (based on FICO scores) to access credit at lower prices, thereby resulting in enhanced financial inclusion.

In February 2017, the CFPB issued a request for information that seeks information about the use of alternative data and modeling techniques in the credit process.

A report by the majority staff of the House Financial Services Committee concludes that there is a “valid and factual basis” for instituting contempt of Congress proceedings against Director Cordray.  The report states that it was issued in furtherance of “the Committee’s on-going investigation into the CFPB’s arbitration rulemaking.”

The report recites the history of what the majority staff calls “the CFPB’s longstanding failure to fully comply with the Committee’s on-going oversight regard pre-dispute arbitration. The report describes the Committee’s request for records relating to the CFPB’s arbitration rulemaking issued in April 2016, the CFPB’s failure to produce the requested records, the subpoena issued by the Committee to Director Cordray in April 2017 requiring production of the requested arbitration-related records as well as documents requested by the Committee on other topics, and Director Cordray’s default on the subpoena.

The report focuses on the two specifications in the subpoena related to the arbitration rulemaking.  One specification required production of “all documents relating to pre-dispute arbitration agreements between the CFPB and [specified consumer advocacy groups.]”  The other specification required production of “all communications from one CFPB employee to another CFPB employee relating to pre-dispute arbitration agreements.”  The majority staff provides a detailed explanation for their finding that Director Cordray has defaulted on the two specifications and that due to such default, there is “ample basis to proceed against [him] for contempt of Congress.”

Politico has reported that Jen Howard, a CFPB spokesperson, issued a written statement in which she indicated that the CFPB has “been working diligently to comply with the committee’s oversight on a number of fronts,” and “[o]n this particular matter, we have produced thousands of pages of documents thus far, and by next week we will have completely responded to one of the two specifications at issue.”

The Committee has not yet taken a contempt vote.  We hope the report may help persuade Republican Senators who are reportedly undecided on how they will vote on the resolution introduced in the Senate to disapprove the CFPB’s arbitration rule under the Congressional Review Act to vote in favor of the resolution.

The CFPB has issued another report on checking account overdraft services, “Data Point: Frequent Overdrafts.”  The new report represents the CFPB’s third report dealing with overdraft services.  It previously issued a white paper in June 2013 and another “Data Point” report in July 2014.

In addition to the new report, the CFPB released four one-page prototype model forms to replace the current Regulation E model form for banks to use to disclose overdraft fees and obtain a consumer’s consent to the bank’s overdraft service for ATM and one-time debit card transactions.  The CFPB stated in its press release that it developed the prototypes through interviews with consumers and is now testing them more widely.

The 2014 report used data taken from account-level and transaction-level data for about two million accounts at large banks covered by the CFPB’s supervisory authority (i.e., banks with more than $10 billion in total assets). The new report states that the CFPB relied on a portion of the data set used in the 2014 report and supplemented that data with “additional data for a randomly selected subset of the active accounts in our sample from a nationwide credit repository.”

According to the report, the data set used for the new report contains information on about 240,000 active accounts, including about 48,000 accounts belonging to “frequent overdrafters.”  The CFPB defines “frequent overdrafters” as “accounts with more than 10 overdrafts and NSFs combined in a 12-month period.”  (“Very frequent” overdrafters are defined as “accounts with more than 20 overdrafts and NSFs combined in a 12-month period,” “non-overdrafters” are defined as “those with no overdrafts or NSFs in a 12-month period, and “infrequent” overdrafters are defined as “those with three or fewer overdrafts and NSFs combined in a 12-month period.”)

The new report’s key findings include:

  • Frequent overdrafters account for nine percent of all accounts but paid 79 percent of all overdraft and NSF fees.  Very frequent overdrafters account for about five percent of all accounts but paid over 63 percent of all overdraft and NSF fees.
  • Frequent overdrafters generally have lower credit scores and are less likely to have a general purpose credit card than non-overdrafters or infrequent overdrafters.  Those that have a general purpose credit card have less available credit on such cards than non- or infrequent overdrafters.
  • The dollar amount of monthly deposits into a checking account and the variability in monthly deposits, even after excluding low-activity accounts, is not strongly correlated with the number of overdrafts or NSFs incurred.  Once low-activity accounts are excluded, the CFPB found that overdrafters have lower median deposits than non-overdrafters.
  • The account usage characteristics and circumstances of frequent overdrafters vary considerably.  Four groups constituting nearly 70 percent of frequent overdrafters have low end-of-day balances (with medians between $237 and $439), low or moderate credit scores (with medians between 532 and 661), and low or moderate monthly deposits (with medians between $1,516, and $2,724).  Another group constituting 20 percent of frequent overdrafters has low end-of-day balances (median of $140), low monthly deposits (median of $1,313) and no credit score.  The remaining group, constituting about 11 percent of frequent overdrafters, has higher end-of-day balances (median of $1,403), significantly higher monthly deposits (median of $7,828), but only moderate credit scores (median of 635).
  • Compared to the median frequent overdrafter that has opted-in to overdraft services on one-time debit card transactions, the median frequent overdrafter that has not opted-in experiences only four fewer overdrafts per year but, accounting for fee reversals, pays 13 fewer overdraft fees per year.  Thus, opted-in consumers pay significantly more overdraft fees but incur only slightly more overdrafts than consumers who are not opted-in.  The CFPB suggests that this is likely the result of “authorize positive/settle negative” transactions (i.e. transactions that result from a bank’s payment or authorization of another debit between the authorization and settlement of the one-time debit transaction where the intervening debit creates a negative balance).

The CFPB offers no conclusions based on its findings and while the CFPB does not discuss its rulemaking plans, rulemaking does not appear to be imminent.  In its Spring 2017 rulemaking agenda, as it did in its Fall 2015 agenda and Fall and Spring 2016 agendas, the CFPB stated that it “is continuing to engage in additional research and has begun consumer testing initiatives related to the opt-in process.”  We have previously suggested that the CFPB may feel it is less urgent for it to promulgate a rule prohibiting the use of a high-to-low dollar amount order to process electronic debits because most of the banks subject to its supervisory jurisdiction have already changed their processing order

A Florida federal district court has granted the motion filed by Ocwen Financial Corporation to invite the U.S. Attorney General to express the AG’s views on the CFPB’s constitutionality.

In April 2017, the CFPB filed a lawsuit against Ocwen in which it alleged Ocwen had engaged in unlawful conduct in connection with its servicing of residential mortgages.  In anticipation of filing a motion to dismiss challenging the CFPB’s constitutionality, Ocwen filed a motion in which it asked the court to invite the AG to participate in the briefing on the motion to dismiss.  In its motion, Ocwen referenced the amicus brief filed by the AG in the D.C. Circuit’s en banc rehearing in the PHH case in which the AG agreed with PHH’s position that the CFPB’s structure is unconstitutional.  Ocwen asserted that because the AG’s views on the CFPB’s constitutionality conflict with those of the CFPB, it was necessary for the court to hear “both sides from the government entities.”

In June 2017, Ocwen filed a motion to dismiss in which it argued that the CFPB’s structure violates the U.S. Constitution’s separation of powers.  In its order entered last week granting Ocwen’s motion to invite the AG to participate, the court stated that “[i]n light of [Ocwen’s] constitutional concerns, the Court finds it appropriate and prudent to ask the Attorney General of the United States to share with the Court its views on the issues raised in [Ocwen’s motion and the CFPB’s response].”

The order provides that “[p]ursuant to 28 U.S.C. section 2403 and Federal Rule of Civil Procedure 5.1, the court certifies to the [AG] that a statute has been questioned and permits the United States to intervene.”  (Section 2403 requires district courts to notify the AG of a constitutional challenge in which the United States is not a party.)  The order sets an October 2, 2017 deadline for the AG’s brief, an October 16, 2017 deadline for the CFPB to respond, and an October 23, 2017 deadline for the AG’s reply brief.

On August 3, 2017, the Consumer Financial Protection Bureau (CFPB) provided the mortgage industry with a first look at the portal to be used for the reporting of, and public access to, data under the Home Mortgage Disclosure Act (HMDA).  Reporting institutions will use the portal to submit data commencing with the submission of calendar year 2017 data by March 1, 2018.  Also, instead of making their HMDA report and modified Loan Application Register (LAR) available to the public, reporting institutions will direct members of the public to the HMDA portal for this information.  The presentation was conducted by Michael Byrne, a Project Director in the Technology Division with the CFPB.  The presentation addressed only the data submission aspects of the portal, and not the ability to access HMDA data that is publicly available.

The portal was created by the CFPB in conjunction with the significant revisions to the HMDA rule.  As we have reported previously, most of revisions are scheduled to be implemented on January 1, 2018.  Nevertheless, initially the portal will be available only for the submission of the current HMDA data fields, which must be collected for 2017 activity and reported in 2018.

The portal is not yet available for access.  Mr. Byrne advised that the CFPB plans to make a Beta version of the portal available around the end of the third quarter, and that the CFPB will use input from the Beta period to revise the portal during the fourth quarter prior to the final version being released.  The CFPB also plans to release a check digit tool for use in verifying the universal loan identifier, and a geocoder tool, during the fourth quarter.

Once the portal becomes live, persons responsible for HMDA reporting at their institution will need to create an account to be able to access the portal.  The portal includes a series of steps to validate the accuracy and correct formatting of the data in a LAR before it can actually be submitted.  The CFPB has a File Format Verification Tool that institutions can use to test whether their 2017 HMDA data is formatted correctly.   The CFPB plans to issue a File Format Verification Tool for the revised HMDA data categories.  Data for the revised categories will first be collected for the 2018 reporting year, and reported in 2019.

Mr. Byrne advised that for institutions with a smaller volume of loans who elect to use the Excel-based LAR Formatting Tool that is available on the CFPB website, the CFPB designed the tool to convert the data into the format necessary to submit the data through the HMDA  portal.  The CFPB plans to issue a version of the LAR Formatting Tool for the revised HMDA data categories later this year.

For institutions that collect HMDA data with multiple LARs, they will be able to use the multiple LARS to test the data on the portal before submission.  However, to submit the data institutions will need to combine the multiple LARS into a single LAR file.

The CFPB’s July 2017 complaint report, which the CFPB calls another “special edition complaint report,” departs from the format of the CFPB’s standard monthly reports.  (The CFPB’s June 2017 complaint report was also called a “special edition.”)  Instead of analyzing monthly complaint trends and highlighting complaints received about a particular product and from consumers in a particular state and city, the new report focuses on annual complaint volume by product for 2014-2016 and the channels used by consumers to submit such complaints.  (Total complaints by month and product through March 31, 2017 is shown in an appendix.)

The report includes the following data:

  •  As of July 1, 2017, the CFPB has handled over 1,242,800 consumer complaints.
  • Companies have provided timely responses to approximately 97% of complaints sent to them by the CFPB for response.

The new report also discusses (1) the meaning of the various response categories available to companies and provides aggregate data on a product-by-product basis showing the response categories used by companies through March 1, 2017, and (2) consumer feedback about companies’ responses and provides data on a product-by-product basis showing the percentage of company responses disputed by consumers through March 31, 2017.  For example, the report shows that consumers complaining about mortgages disputed 23% of company responses while customers complaining about prepaid cards disputed 14% of company responses.

We were pleased to see an acknowledgment by the CFPB that while information about consumer disputes of company responses “is an indicator of consumer satisfaction with companies’ responses to consumers’ issues, it has some limitations.”  As an example, the CFPB observes that “quantitative dispute data does not provide insight into the reasons why a consumer was dissatisfied with the company’s response to their complaint and dispute data does not reflect the positive feedback consumers have about how companies have addressed their concerns.”

On July 31, I published a blog post in which I suggested that, if Director Cordray resigns, Treasury Secretary Mnuchin would be the obvious and logical person to serve as CFPB Acting Director until President Trump nominates, and the Senate confirms, Director Cordray’s successor.  I stated that the President clearly has the authority to appoint an Acting Director under the Federal Vacancies Reform Act of 1998 (the “Vacancies Act”).

One of our blog readers sent  me a message asking why David Silberman, the current Acting Deputy Director, would not automatically become Acting Director under Section 1011(b)(5)(B) of Dodd-Frank. That provision states that the Deputy Director shall “serve as acting Director in the absence or unavailability of the Director.”  It is my view that this language does not cover a situation where the existing Director resigns and permanently leaves the agency, thereby creating a vacancy in the office.  My opinion remains the same even if Director Cordray eliminated “Acting” before “Deputy Director” in Mr. Silberman’s title.

I reached my conclusion based on the absence of any express reference to a “vacancy” in Section 1011(b)(5)(B) of Dodd-Frank.  This stands in contrast to numerous federal statutes in which Congress has expressly provided for the temporary filling of a vacancy in a position requiring Senate confirmation.  For example, Congress has expressly provided that when the offices of OMB Director, FAA Administrator, or Administrator of the SBA are “vacant” or have a “vacancy,” the Deputy Director or Administrator acts as Director or Administrator.

These statutes indicate that when Congress has wanted to give an officer holding a Deputy position the authority to run an agency in an acting capacity when the position of agency head became vacant, it has done so expressly.  Thus, the absence of any express language giving the CFPB Deputy Director authority to serve as Acting Director when there is a “vacancy” in the office of CFPB Director or when such office is “vacant” indicates that Congress did not intend to give the CFPB’s Deputy Director authority to automatically serve as Acting Director in that circumstance.

Furthermore, the Vacancies Act expressly covers the precise situation here – namely, a vacancy at an Executive Agency created by a resignation.  Two established rules of statutory construction are instructive.  First, when two federal statutes are arguably in conflict with one another, the more specific statute trumps (no pun intended) the more general statute.  See, e.g., Coady v. Vaughn, 251 F.3d 480, 484 (3d Cir. 2001) (“It is a well-established canon of statutory construction that when two statutes cover the same situation, the more specific statute takes precedence over the more general one. See Edmond v. United States, 520 U.S. 651, 657, 117 S.Ct. 1573, 137 L.Ed.2d 917 (1997) (‘Ordinarily, where a specific provision conflicts with a general one, the specific governs.’); Preiser v. Rodriquez, 411 U.S. 475, 488–89, 93 S.Ct. 1827, 36 L.Ed.2d 439 (1973) (holding that prisoner challenging validity of his confinement on federal constitutional grounds must rely on federal habeas corpus statute, which Congress specifically designed for that purpose, rather than broad language of Section 1983); West v. Keve, 721 F.2d 91, 96 (3d Cir.1983).  The rationale for this canon is that a general provision should not be applied ‘when doing so would undermine limitations created by a more specific provision.’  Varity v. Howe, 516 U.S. 489, 511, 116 S.Ct. 1065, 134 L.Ed.2d 130 (1996).”).  Second, when two federal statutes are arguable in conflict with one another, they should be harmonized with one another to the extent possible.  See, e.g., Shanty Town Associates, Ltd. Partnership v. E.P.A., 843 F.2d 782, 793 (4th Cir. 1988) (“[O]ur first obligation, when presented with a possible conflict between two federal statutes, is always to attempt to harmonize them.  See Morton v. Mancari, 417 U.S. 535, 551, 94 S.Ct. 2474, 2483, 41 L.Ed.2d 290 (1974) (“The courts are not at liberty to pick and choose among congressional enactments, and when two statutes are capable of co-existence, it is the duty of the courts, absent a clearly expressed congressional intention to the contrary, to regard each as effective.”).

I believe that Section 1011(b)(5)(B) of Dodd-Frank is intended to cover a situation in which the Director is still in office but unable to function as CFPB leader.  An example would be where the current Director is temporarily disabled.  As stated above, the Vacancies Act is intended to cover a temporary vacancy in the position of Director of the CFPB resulting from the resignation of the Director.

A reporter asked me recently how Secretary Mnuchin could possibly have the time to manage the CFPB on top of his main job of being Treasury Secretary.  Fortunately, Section 1012(b) of Dodd-Frank states:  “The Director of the Bureau may delegate to any duly authorized employee, representative, or agent any power vested in the Bureau by law.”