The CFPB has obtained a default judgment in the lawsuit it filed in October 2017 in Maryland federal district court against two commonly-owned debt relief companies, their affiliated payment processor, and three individual principals for alleged violations of the Telemarketing Sales Rule and the Consumer Financial Protection Act.  (The debt relief company defendants were Federal Debt Assistance Association, LLC and Financial Document Assistance Administration, Inc.  The payment processor defendant was Clear Solutions, Inc.)

Since the lawsuit was filed under the leadership of former Director Cordray, the Bureau’s decision to pursue a default judgment suggests that the debt relief industry will remain a target of CFPB enforcement actions.  The industry has also faced a barrage of enforcement actions by the FTC and state AGs and is likely to remain a target of such actions.

The Default Judgment and Order (Order), in its findings of fact, finds that the defendants did not answer or otherwise defend the CFPB’s action.  It further finds that the two debt relief companies, who targeted credit card debt, violated the TSR and CFPA by engaging in conduct that included the following:

  • Requesting and receiving fees before they had renegotiated the terms of at least one debt pursuant to a bona fide plan with the creditor or debt collector, before the customer had made one payment pursuant to that plan and in which the fee was not proportional to the amount saved.
  • Misrepresenting that they would reduce consumers’ principal balances by at least 60%, leave consumers’ creditors without recourse on the debts, and increase consumers’ credit scores
  • Instructing consumers to stop making payments on the debts enrolled in the program without disclosing that doing so might lead to the consumer being sued or to an increase in the amount owed.
  • Misrepresenting their affiliation with, endorsement by, or sponsorship by the CFPB and FTC.

The Order also includes as a finding of fact that for each of the CFPA and TSR violations committed by the two debt relief companies, the payment processor and three individual defendants also violated the CFPA and TSR by providing substantial assistance or support to the debt-relief companies’ unlawful acts and practices.  It also finds that the individual defendants each violated the CFPA “by directly contributing to the development, review, and approval of materials containing the misrepresentations about the companies’ government affiliations.

The Order enters judgment in favor of the Bureau against all of the defendants, jointly and severally, in the amount of $4,972, 389.31 for the purpose of providing consumer redress.  It also enters judgment against all of the defendants, jointly and severally, for a civil penalty of $16 million and imposes an injunction that permanently bans the defendants from engaging in the telemarketing of debt relief and credit repair products and services.

Ballard Spahr has successfully brought actions against fraudulent debt relief companies on behalf of bank clients seeking to protect their customers.  Litigation is only one prong of our multi-pronged strategy, which includes coordination with government regulatory entities and, where applicable, state bar associations.

 

 

This afternoon, President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act) into law.  The Act was passed by the House on Tuesday by a vote of 258 to 159 and by the Senate on March 14 by a vote of 67 to 31.

Although the Act does not make the sweeping changes to the Dodd-Frank Act contemplated by other proposals, it nevertheless provides welcome regulatory relief to both smaller and larger financial institutions.  After President Trump signed the Act, CFPB Acting Director Mick Mulvaney issued a statement applauding Congress for passing the Act and indicating that he is “pleased to see the long-overdue reforms to the regulations governing mortgage lending.”  Mr. Mulvaney also stated that he “stand[s] ready to work with Congress and the rest of the Administration to implement these new reforms that will promote a brighter, more prosperous future.”

On June 19, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar—Economic Growth, Regulatory Relief, and Consumer Protection Act: Anatomy of the New Banking Statute.  The webinar registration form is available here.

In addition to the changes regarding mortgage lending, the Act makes a number of changes to provisions of federal laws regarding credit reporting, and loans to veterans and students.  It also reduces the regulatory burdens on financial institutions—particularly financial institutions with total assets of less than $10 billion.  Bank holding companies with up to $3 billion in total assets would be permitted to comply with less-restrictive debt-to-equity limitations instead of consolidated capital requirements.  This change should promote growth by smaller bank holding companies, organically or by acquisition.  Larger institutions should benefit from the higher asset thresholds that would apply to systemically important banks subject to enhanced prudential standards.  The higher thresholds may lead to increased merger activity between and among regional and super regional banks.

For a summary of some of the Act’s key provisions applicable to financial institutions, click here for our full alert.

 

 

The OCC has issued a bulletin (2018-14) setting forth core lending principles and policies and practices for short-term, small-dollar installment lending by national banks, federal savings banks, and federal branches and agencies of foreign banks.

In issuing the bulletin, the OCC stated that it “encourages banks to offer responsible short-term, small-dollar installment loans, typically two to 12 months in duration with equal amortizing payments, to help meet the credit needs of consumers.”  The bulletin is intended “to remind banks of the core lending principles for prudently managing the risks associated with offering short-term, small-dollar installment lending programs.”

By way of background, the bulletin notes that in October 2017, the OCC rescinded its guidance on deposit advance products because continued compliance with such guidance “would have subjected banks to potentially inconsistent regulatory direction and undue burden as they prepared to comply with the [CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule).”]  The guidance had effectively precluded banks subject to OCC supervision from offering deposit advance products.  The OCC references the CFPB’s plans to reconsider the Payday Rule and states that it intends to work with the CFPB and other stakeholders “to ensure that OCC-supervised banks can responsibly engage in consumer lending, including lending products covered by the Payday Rule.”  (The statement issued by CFPB Acting Director Mulvaney applauding the OCC bulletin further reinforces our expectation that the CFPB will work with the OCC to change the Payday Rule.)

When the OCC withdrew its prior restrictive deposit advance product guidance, we commented that the OCC appeared to be inviting banks to consider offering the product.  The bulletin appears to confirm that the OCC intended to invite the financial institutions it supervises to offer similar products to credit-starved consumers, although it suggests that the products should be even-payment amortizing loans with terms of at least two months.  It may or may not be a coincidence that the products the OCC describes would not be subject to the ability-to-repay requirements of the CFPB’s Payday Rule (or potentially to any requirements of the Payday Rule).

The new guidance lists the policies and practices the OCC expects its supervised institutions to follow, including:

  • “Loan amounts and repayment terms that align with eligibility and underwriting criteria and that promote fair treatment and access of applicants.  Product structures should support borrower affordability and successful repayment of principal and interest in a reasonable time frame.”
  • “Analysis that uses internal and external data sources, including deposit activity, to assess a consumer’s creditworthiness and to effectively manage credit risk.  Such analysis could facilitate sound underwriting for credit offered to consumer who have the ability to repay but who do not meet traditional standards.”

While the OCC’s encouragement of bank small-dollar lending is a welcome development, the bulletin contains potentially troubling language.  The OCC’s “reasonable policies and practices specific to short-term, small-dollar installment lending” also include “[l]oan pricing that complies with applicable state laws and reflects overall returns reasonably related to product risks and costs.  The OCC views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entities licensing state(s).”  (emphasis added).  This statement raises at least two concerns:

  • The OCC’s reference to “[l]oan pricing that complies with applicable state laws” is confused (or likely to cause confusion).  Federal law (12 U.S.C. Section 85) governs the interest national banks may charge.  It authorizes banks to charge the interest allowed by the law of the state where they are located, without regard to the law of any other state.  The OCC should clarify that it did not mean to suggest otherwise.
  • The OCC’s unfavorable view of bank-nonbank partnerships, where the “sole goal [is] evading” state-law rate limits, could be read to call into question a valuable distribution channel for bank loans.  While the context is “specific to short-term, small-dollar installment lending,” this apparent hostility to bank-model relationships should be of concern to all banks that partner with third parties, including fintech companies, to make loans under Section 85.  The statement in question seems at odds with the broad view of federal preemption enunciated by the OCC with respect to the Madden decision. 

 

Yesterday afternoon, President Trump signed into law S.J. Res. 57, the joint resolution under the Congressional Review Act (CRA) that disapproves the CFPB’s Bulletin 2013-2 regarding “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act.”  The Government Accountability Office had determined that the Bulletin, which set forth the CFPB’s disparate impact theory of assignee liability for so-called auto dealer “markup” disparities, was a “rule” subject to override under the CRA.

The joint resolution was passed by the Senate in April 2018 by a vote of 51 to 27 and by the House earlier this month by a vote of 234 to 175.  We recently shared our thoughts on the implications of Congressional disapproval.

The CFPB issued a statement about the signing that included a statement from Acting Director Mulvaney that referred to the Bulletin as an “initiative that the previous leadership at the Bureau pursued [that] seemed like a solution in search of a problem.”  Mr. Mulvaney said that “those actions were misguided, and the Congress has corrected them.”

The CFPB stated that the resolution’s enactment “does more than just undo the Bureau’s guidance on indirect auto lending.  It also prohibits the Bureau from ever reissuing a substantially similar rule unless specifically authorized to do so by law.”  Most significantly, the CFPB indicated that it “will be reexamining the requirements of the ECOA” in light of “a recent Supreme Court decision distinguishing between antidiscrimination statutes that refer to the consequences of actions and those that refer only to the intent of the actor” and “the fact that the Bureau is required by statute to enforce federal consumer financial laws consistently.”

This is presumably a reference to the Supreme Court decision in Inclusive Communities and the fact that the ECOA discrimination proscription does not proscribe discriminatory effects but, rather, speaks solely in terms of discrimination “against any applicant on the basis of” race, national origin and other prohibited bases.  As we have observed previously, the basis for the Inclusive Communities holding with respect to the FHA, which is summarized at the end of Section II of the majority opinion, highlights material differences between the FHA and the ECOA.  The distinctions between discrimination statutes that refer to the consequences of actions and those that do not is illustrated vividly by a textual juxtaposition chart that appeared in the House Financial Services Committee Majority Staff Report titled “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending.”  The Business Lawyer article cited in that report, “The ECOA Discrimination Proscription and Disparate Impact – Interpreting the Meaning of the Words that Actually Are There,” discusses this issue in further detail.  The CFPB’s plans to reexamine ECOA requirements could represent an overture to reviewing references to the effects test in Regulation B (which implements the ECOA) and the Regulation B Commentary.

With regard to the Bulletin’s status as the first guidance document to be disapproved pursuant to the CRA, the CFPB commented that the resolution’s enactment “clarifies that a number of Bureau guidance documents may be considered rules for purposes of the CRA, and therefore the Bureau must submit them for review by Congress.”  The CFPB indicated that it plans to “confer with Congressional staff and federal agency partners to identify appropriate documents for submission.”

 

 

 

 

 

A group of 35 Democratic Senators have sent a letter to Mick Mulvaney and Leandra English urging the CFPB to continue to publicly disclose consumer complaint information.

In remarks last month at an American Bankers Association conference, CFPB Acting Director Mick Mulvaney is reported to have strongly criticized the CFPB’s policy of publicly disclosing consumer complaint information and suggested that the policy is likely to be discontinued.  Mr. Mulvaney is reported to have said that while the CFPB will maintain the consumer complaint database as required by Dodd-Frank, he did not see any legal requirement for the CFPB “to run a Yelp for financial services sponsored by the federal government.”

In their letter, the Senators assert that consumers would be hurt by the elimination of public access to the database.  They ask the CFPB to provide, if a decision is made to end public access, “an explanation of any proposed changes, a detailed accounting of your justification, and a copy of any analysis you undertook in support of your decision.”

The CFPB has issued a request for information that seeks comment on potential changes to its practices for the public reporting of consumer complaint information.  Comments on the RFI are due by June 4.

 

The 60-day period during which the Senate could pass a resolution under the Congressional Review Act disapproving the CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule) with only a simple majority appears to have expired yesterday.  Although the Senate’s failure to pass a CRA resolution is disappointing because the CRA would have provided the “cleanest” vehicle for overturning the Payday Rule, we were always doubtful that there would be 51 votes in the Senate to pass a CRA resolution.

The focus of efforts to undo the Payday Rule will now be the CFPB’s reopened rulemaking and the Texas lawsuit filed by two trade groups challenging the Payday Rule.  In its Spring 2018 rulemaking agenda, the CFPB indicated that it expects to issue a Notice of Proposed Rulemaking to revisit the Payday Rule in February 2019.

In the meanwhile, all eyes will be on the Texas lawsuit to see how the CFPB responds and, in particular, whether it will agree with most, if not all, of the plaintiffs’ allegations.  The CFPB must file its answer by June 11.

 

The CFPB’s Spring 2018 rulemaking agenda has been published by the Office of Information and Regulatory Affairs (OIRA) as part of its Spring 2018 Unified Agenda of Federal Regulatory and Deregulatory Actions.  (OIRA is part of the Office of Management and Budget.)  It represents the CFPB’s first rulemaking agenda that reflects the CFPB’s rulemaking plans under the Trump Administration and Mick Mulvaney’s leadership.  The agenda’s preamble indicates that the information in the agenda is current as of March 15, 2018 and identifies the regulatory matters that the Bureau “reasonably anticipates…having under consideration during the period from May 1, 2018, to April 30, 2019.”

The preamble notes that the CFPB “is under interim leadership” and lists the matters that, “in light of this status, Bureau leadership is prioritizing during coming months.”  Those matters are:

  • Meeting specific statutory responsibilities
  • Continuing selected rulemakings that were already underway
  • Reconsidering two regulations issued under the prior leadership

The CFPB previously announced its plans to reconsider its payday lending rule and HMDA/Regulation C rule.  The Spring 2018 agenda estimates the issuance of notices of proposed rulemakings (NPRM) for these two rules in, respectively, February 2019 and January 2019.

Most significantly, the Bureau states in the preamble that Mr. Mulvaney “has decided to classify as ‘inactive’ certain other rulemakings that had been listed in previous editions of the Bureau’s Unified Agenda in the expectation that final decisions whether and when to proceed with such projects will be made by the Bureau’s next permanent director.”  It also states that several items listed as potential long-term projects in the CFPB’s Fall 2017 rulemaking agenda have been designated “inactive.”  The Bureau indicates that the change in designation “is not intended to signal a substantive decision on the merits of the projects.”

The noteworthy items designated “inactive” are:

  • Overdrafts  (This was a “prerule stage” item in the Fall 2017 agenda.)
  • “Larger Participants”  (This was both a “proposed rule stage” and “long-term actions” item in the Fall 2017 agenda which stated (as did prior agendas) that the Bureau was considering “larger participant” rules “in markets for consumer installment loans and vehicle title loans for purposes of supervision” as well as possible other “larger participant” regulations based on market trends and developments.  It also stated that the Bureau was “considering whether rules to require registration of these or other non-depository lenders would facilitate supervision.”)
  • Student Loan Servicing  (This was a “long-term actions” item in the Fall 2017 agenda.)

In addition to reconsidering the payday lending and HMDA rules, the other key rulemaking initiatives listed on the Spring 2018 agenda are:

  • Debt Collection. The agenda states that the Bureau “is preparing a proposed rule focused on FDCPA collectors that may address such issues as communication practices and consumer disclosures.”  It estimates the issuance of a NPRM in March 2019.
  • Business Lending Data.  Dodd-Frank Section 1071 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 data includes the race, sex, and ethnicity of the principal owners of the business.  In May 2017, the CFPB issued a RFI and a white paper on small business lending in conjunction with a field hearing on small business lending.  The RFI was intended to inform the CFPB’s rulemaking to implement Dodd-Frank Act section 1071.  The Spring 2018 agenda states that the information received in response to the RFI “will help the Bureau determine how to implement [Section 1071] efficiently while minimizing burdens on lenders.”  It estimates a March 2019 date for prerule activities.
  • Privacy Notices.  In July 2106, the CFPB issued a proposal to amend Regulation P, which implements the Gramm-Leach-Bliley Act (GLBA), to implement a GLBA amendment that provided financial institutions that meet certain conditions with an exemption from the GLBA requirement to deliver annual privacy notices to customers.  The Spring 2018 agenda indicates that the CFPB expects to issue a final rule in June 2018.

The key long-term actions items listed in the Spring 2018 agenda are:

  • Inherited Regulations.  These are the existing regulations that the CFPB inherited from other agencies through the transfer of authorities under the Dodd-Frank Act.  Previously listed on the Fall 2017 agenda as a “prerule stage” item, the Spring 2018 lists the CFPB’s review of the inherited regulations as a “long-term actions” item.  In the preamble, the CFPB indicates that it expects to focus its initial review on the subparts of Regulation Z  that implement TILA with respect to open-end credit and credit cards in particular.  By way of example, the CFPB states that it expects to consider adjusting rules concerning the database of credit card agreements it is required to maintain by the CARD Act “to reduce burden on issuers that submit credit card agreements to the Bureau and make the database more useful for consumers and the general public.”
  • Consumer reporting.  This was previously listed in the Fall 2017 agenda as a “long-term actions” item. The Spring 2018 agenda indicates that the Bureau will evaluate potential additional rules or amendments to existing regulations governing consumer reporting, with possible topics for consideration to include the accuracy of credit reports, including the processes for resolving consumer disputes, identity theft, or other issues.
  • Consumer Access to Financial Records.  This was also previously listed in the Fall 2017 agenda as a “long-term actions” item.  In November 2016, the CFPB issued a RFI about market practices related to consumer access to financial information.  The Spring 2018 agenda states that the Bureau will continue to monitor market developments and evaluate possible policy responses to issues identified, including potential rulemaking. Possible topics the Bureau might consider include specific acts or practices and consumer disclosures. In addition, the Bureau plans to consider “whether clarifications or adjustments are necessary with respect to existing regulatory structures that may be implicated by current and potential developments in this area.”
  • Regulation E Modernization.  This is another item that was previously listed in the Fall 2017 agenda as a “long-term actions” item.   The Spring 2018 agenda states that the Bureau “will evaluate possible updates to the regulation, including but not limited to how providers of new and innovative products and services comply with regulatory requirements” and that “potential topics for consideration might include disclosure provisions, error resolution provisions, or other issues.”

 

 

According to media reports, CFPB Acting Director Mick Mulvaney has sent an email to Bureau staff indicating that he plans to fold the Office of Students and Young Consumers into the Office of Financial Education.  Both Offices are part of the Bureau’s Consumer Education and Engagement Division.  The Student Loan Ombudsman, a position created by the Dodd-Frank Act, will also be part of the Office of Financial Education.  The current staff of the Office of Students and Young Consumers is expected to be reassigned to other Offices.

While the reorganization means that the Office of Students and Young Consumers will no longer be involved in investigations that could result either in supervisory actions or in enforcement actions, it does not mean that the CFPB will no longer bring such actions against student loan lenders and servicers.

As might be expected, the reorganization has quickly attracted criticism from consumer advocates and others. New York State Department of Financial Services Superintendent Maria Vullo released a statement expressing her Department’s concern “with the CFPB’s troubling decision to minimize the role of the Office of Students and Young Consumers.” She indicated that “DFS’s Student Protection Unit will continue its nation leading efforts in safeguarding students from fraud and misrepresentation in the market, monitoring student-related financial practices in New York and educating student consumers and their families regarding available financial products and services to empower them to make informed choices.  And violators of the law will be met with swift DFS response.”

In February 2018, Mr. Mulvaney announced that he planned to transfer the CFPB’s Office of Fair Lending from the Supervision, Enforcement, and Fair Lending Division to the Director’s Office, where it will become part of the Office of Equal Opportunity and Fairness.

Mr. Mulvaney is also reported to have indicated in his email to Bureau staff that he plans to hire more political appointees and create an office of cost-benefit analysis staffed by economists that report directly to him.  Another reported change is Mr. Mulvaney’s creation of an Office of Innovation, known previously as Project Catalyst, an initiative launched by the CFPB in 2012 for facilitating innovation in consumer financial products and services.

We previously reported that Congress might have the opportunity to disapprove the CFPB’s disparate impact theory of assignee liability for so-called auto dealer “markup” disparities because the CFPB Bulletin describing its theory was determined by the General Accountability Office (GAO) to be a “rule” subject to override under the Congressional Review Act (CRA).  Our hope became a reality late this afternoon when the House of Representatives passed, by a bipartisan vote of 234 to 175, a joint resolution stating that Congress:

“[D]isapproves the rule submitted by the Bureau of Consumer Financial Protection relating to ‘Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act’ (CFPB Bulletin 2013-02 (March 21, 2013), and printed in the Congressional Record on December 6, 2017, . . . along with a letter of opinion from the [GAO] dated December 5, 2017, that the Bulletin is a rule under the Congressional Review Act), and such rule shall have no force or effect.”

The Senate previously passed this joint resolution on April 18, 2018 by a vote of 51 to 47.  It has been reported that President Trump will sign the joint resolution into law when it is presented to him for executive action.  Like every other legislative measure that is passed by Congress and signed by the President of the United States, the joint resolution of disapproval will be assigned a Public Law number and published in Statutes at Large.  See, e.g., Pub. L. No. 115-74, 131 Stat. 1243 (joint resolution disapproving of CFPB rule relating to arbitration agreements).

The Bulletin

The Bulletin is an official guidance document – a species of what one scholar has characterized as “regulatory dark matter” – that previewed the Bureau’s subsequent ECOA enforcement actions against assignees of automobile retail installment sale contracts (“RISCs”).  It set forth the CFPB’s views concerning what it characterized as a significant ECOA compliance risk associated with an asserted assignee “policy” of “allowing” dealerships to negotiate the retail annual percentage rate (APR) under their RISCs by “marking up” the wholesale buy rate established by a prospective assignee.  The Bulletin’s intent to establish and prioritize a supervisory and enforcement initiative with respect to the asserted practice was unmistakably clear not only from its text, but also from the tag line in the accompanying press release – “Consumer Financial Protection Bureau to Hold Auto Lenders Accountable for Illegal Discriminatory Markup.”  Indeed, the blog post that we published on the day the Bulletin was issued was titled “The CFPB previews its coming auto finance fair lending enforcement actions” and the associated webinar that we then hosted was titled, appropriately, “Auto Finance Industry in the CFPB’s Crosshairs.”

The CFPB initiative regarding so-called dealer “mark up” was premised upon what we believe may fairly be characterized, in the parlance of Inclusive Communities, as a disparate impact claim that is “abusive” of banks and sales finance companies that acquire RISCs from independent, unaffiliated dealerships, because it is based on a factual and legal theory that is highly suspect, and in particular seeks to establish causation through the use of statistics alone, which Inclusive Communities holds is improper.  The initiative proved to be highly controversial and became a lightning rod for media, industry, and Congressional criticism of the Bureau.  The industry criticism is probably best reflected and documented in the AFSA study titled “Fair Lending: Implications for the Indirect Auto Finance Market”, an Executive Summary of which is available here.  The congressional criticism included a trilogy of investigative reports prepared by the House Financial Services Committee Majority Staff titled  “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending,Unsafe at Any Bureaucracy, Part II: How the Bureau of Consumer Financial Protection Removed Anti-Fraud Safeguards to Achieve Political Goals and “Unsafe at Any Bureaucracy, Part III: The CFPB’s Vitiated Legal Case Against Auto Lenders.”

We also have written previously about some of the many legal and factual flaws inherent in the approach taken by the Bureau and reflected in the now congressionally-disapproved Bulletin.  See, e.g., “The CFPB Stretches ECOA Past the Breaking Point,” CFPB Monitor (Feb. 21, 2013); Auto Finance and Disparate Impact: Substantive Lessons Learned from Class Certification Decisions,” Consumer Fin. Servs. L. Rep., Vol. 18, Issue 21 (May 1, 2015).   Indeed, in our blog post dated February 21, 2013 – one month before the issuance of the Bulletin – we noted that “there are several things about potential enforcement actions in this area that make them profoundly unfair, and which should cause the CFPB to refrain from pursuing enforcement based on this flawed theory.”  Accordingly, it should surprise no one that the Bulletin has become the first guidance document to be disapproved by Congress pursuant to the CRA.

Application of the CRA to the Bulletin

Some have, and others undoubtedly will, criticize this use of the CRA and seek to downplay the significance of the adoption of a Public Law disapproving the Bulletin.  We take issue with these critiques, and have engaged in some spirited “back and forth” with Professor Adam Levitin at Georgetown Law Center regarding this subject.  We previously replied to a message that Prof. Levitin sent to one of us on Twitter after the GAO issued its determination that the Bulletin is a “rule” subject to congressional review.  More recently, Prof. Levitin posted a Credit Slips Blog post titled “Congressional Review Act Confusion:  Indirect Auto Lending Guidance Edition (a/k/a The Fast & the Pointless)” in which he made various assertions regarding the CRA’s applicability to the Bulletin, and the consequences of its disapproval by Congress (in his opinion, basically none).  Since the impact of CRA disapproval of this CFPB Bulletin appears to be the subject of some debate, we wanted to take this opportunity to explain our view about why Congress’ action is so significant.

CRA Definition of a “Rule”

In his blog post, Prof. Levitin asserts that the Bulletin in not a “rule” subject to congressional review for various reasons.  These reasons include suggestions that the CRA only applies to rules that have “effective dates” because the CRA states that a rule may not “take effect” until the rule and its proposed effective date have been reported to each House of Congress and the Comptroller General pursuant to the CRA.  According to Prof. Levitin, this “suggests that the term ‘rule’ in the CRA means what we normally think of as a ‘rule,’ and not some technical definition.”  This argument strikes us as grasping at straws.

While the Bulletin will become the first guidance document to be disapproved pursuant to the CRA, the notion that a guidance document can be a “rule” subject to congressional review is not novel.  The GAO previously determined that other guidance documents can be “rules” subject to congressional review.  For example, as we reported previously, the GAO determined that the Interagency Leverage Lending Guidance issued jointly by the federal bank regulatory agencies on March 22, 2013 “is a general statement of policy and is a rule under the CRA.”  In concluding that the Interagency Leveraged Lending Guidance was a rule subject to the CRA, the GAO relied upon prior GAO opinions (including one issued in 2001) holding that general statements of policy are “rules,” decisional law under the Administrative Procedure Act and floor statements made by the principal sponsor during final congressional consideration of the bill that became the CRA as well as analyses of legal commentators.  Among other things, the principal sponsor had stated that the types of documents covered by the CRA include “statements of general policy, interpretations of general applicability, and administrative staff manuals and instructions to staff that affect a member of the public.”  Agencies thus were on notice that the CRA definition of a “rule” can encompass guidance documents and that this was by design.

With respect to the allusion to a “technical definition” of a “rule,” it is the prerogative of Congress to define statutory terms in a manner that is consistent with the achievement of its legislative objectives.  The legislative intent was to ensure that elected representatives of the People be afforded an opportunity to disapprove “rules” issued by administrative agencies, including certain guidance documents such as the Bulletin that are an example of administrative overreach. In making its determination, the GAO applied the statutory definition in a straightforward, well-reasoned manner.  As for the statutory requirement to include the proposed effective date when reporting a rule to Congress, absent some statutory or regulatory limitation, a guidance document that does not provide for a deferred effective date presumably is effectively immediately.  If such a guidance document is a “rule” (other than a “major rule”) subject to the CRA, “immediately” presumably should mean the date on which it is reported to each House of Congress and the Comptroller General in compliance with the CRA.

Prof. Levitin further suggests that the Bulletin is not a “rule” because it was not “designed” by the Bureau to “interpret law” or “prescribe . . . policy” and it does not have “future effect” because it is non-binding guidance that has no effect.  More specifically, Prof. Levitin asserts that the Bulletin has no future effect because, inter alia, it does not affirmatively state that the Bureau will bring enforcement actions in these circumstances, and it does not specifically and affirmatively state a position of the Bureau.  According to Prof. Levin, while “[p]erhaps there’s an implicit enforcement threat, “it’s pretty oblique” and, in his view, the guidance is merely “a sort of ‘head’s up, there might be compliance issues here that you guys aren’t aware of, so here’s what you should be thinking.”  We respectfully submit, however, that it cannot seriously be contended that the Bulletin was not designed by the Bureau to interpret law or prescribe policy and to have future effect.  To the contrary, the Bulletin was labeled in the CFPB’s own press release as indicating an intent “to Hold Auto Lenders Accountable for Illegal Discriminatory Markup.”  That does not seem oblique to us; it is an explicit statement of future enforcement actions which, in fact, the Bureau was pursuing at the time the Bulletin was released and which became public later in 2013.

Administrative agencies periodically issue official guidance documents to communicate their position with respect to regulatory compliance issues.  While such documents may be literally non-binding, regulatory agencies do not issue official guidance documents in the hope that they will be disregarded by regulated entities.  The regulatory expectation is that entities subject to the regulatory, supervisory and enforcement authorities of the agency will take to heart the views reflected therein.  As regulated entities are well aware, the failure to take official guidance documents seriously can have significant adverse regulatory consequences.  This is true generally and it was certainly true with respect to the Bulletin.

We fail to understand how the Bulletin could fairly be read as anything other than a statement of policy.  As noted previously, the associated CFPB press release included a statement that the Bureau was going “to Hold Auto Lenders Accountable for Illegal Discriminatory Markup.”  Additionally, the concluding sentence in the Bulletin warned industry participants that “[t]he CFPB will continue to closely review the operations of. . . indirect auto lenders, utilizing all appropriate regulatory tools to assess whether supervisory, enforcement, or other actions may be necessary to ensure that the market for auto lending [sic] provides fair, equitable, and nondiscriminatory access to credit for consumers.”  (emphasis added).

This enforcement threat was, in fact, explicit and there was nothing oblique about it.  This threat publicly came to fruition nine months later with what the Bureau press release characterized as “the largest-ever settlement in an auto loan discrimination case” that was “the result of a CFPB examination that began in September 2012.”  The CFPB press release stated that the associated Consent Order “demonstrates the type of fair lending risk identified in” the Bulletin “explaining that [the Bureau] would hold indirect auto lenders accountable for unlawful discriminatory pricing.”  (emphasis added).  Notwithstanding the suggestion to the contrary by Prof. Levitin, we believe that the irrefutable evidence of the prescriptive nature and future effect of the Bulletin may be found in the Bulletin itself, the associated CFPB press release, various internal CFPB documents posted on the website of the House Financial Services Committee, four public Consent Orders, and in CFPB publications such as Supervisory Highlights and Fair Lending Reports of the Bureau.  From a big picture perspective, it is abundantly clear that the Bulletin was part of an orchestrated CFPB initiative to effectuate a sea change with respect to the discretionary pricing of retail automotive credit by either eliminating dealer discretion or requiring RISC assignees to impose more restrictive “mark up” limits, perform portfolio-level analyses for “mark up” disparities and promptly remunerate alleged affected consumers if disparities were identified at the portfolio level.  The Bulletin says as much when it discusses the approaches RISC assignees should take to manage the asserted ECOA compliance risk.

Implications of Congressional Disapproval

Much undoubtedly will be written about the implications of Congressional disapproval of the Bulletin, and some will suggest, as Prof. Levitin has in the title of his blog post, that it is a “pointless” exercise.  We respectfully disagree with this point of view, and believe a federal court would disagree as well if the issue were ever to be litigated.

In our “back and forth” with Prof. Levitin, he suggested that a Congressional override of the Bulletin would represent merely a disapproval of the Bureau’s statement of its position.  We responded that, in our view, it would also represent a disapproval of the position reflected in the Bulletin pursuant to a Public Law adopted by the elected representatives of the People stating that “such rule shall have no force and effect.”  It seems to us self-evident that the import of a Public Law disapproving the Bulletin would be a disapproval of the position reflected therein because the “position” is embodied in the “statement” of the position and cannot be disassociated with it.  They are, simply stated, indivisible.

So, what exactly is the substantive centerpiece of the Bulletin that Congress today disapproved?  It is the notion that a RISC assignee has a “policy” of “allowing” dealerships to negotiate the APRs under their RISCs by “marking up” the wholesale buy rate established by a prospective assignee and that disparate impact liability may be predicated upon this “policy” if there are “mark-up” disparities in the portfolio of RISCs acquired by the assignee. One cannot get past the “Background” section of the Bulletin without encountering a reference to supervisory experience of the Bureau confirming that such policies exist and the statement that such discretionary pricing “policies” create a significant risk that they will result in unlawful pricing disparities on a prohibited basis.  The Bulletin proceeds to state that an “indirect auto lender that permits dealer markup and compensates dealers on that basis may be liable for these policies and practices if they result in disparities on a prohibit basis.”  This rule of liability – based on the factual and legal theory set forth in the Bulletin – is the “rule” that Congress has just disapproved.

Viewed from this perspective, if a court is called upon to discern the import of the joint resolution of disapproval in the context of a litigation premised upon this type of disparate impact claim, we are confident that the court will conclude that it represents a repudiation, by Congress, of the substantive centerpiece of the Bulletin.

We hope, however, that no industry participant ever itself in a situation in which it becomes necessary to assert this argument in the context of a CFPB enforcement action.  As we suggested previously, if the Bulletin is invalid, and the CFPB cannot reissue a disapproved rule in “substantially the same form” or issue “a new rule that is substantially the same,” turning around and applying the substantive centerpiece of the disapproved rule in supervision and enforcement would disregard the clear import of an act of Congress.  And it would lead to the most absurd of results – that the CFPB would be forbidden from adopting the “rule” set forth in the Bulletin, but would be free to enforce that “rule” in enforcement actions against industry participants.  We think any federal court would find it impossible to swallow this contradiction.  But, as noted above, our hope is that an administrative agency that respects its role in a representative democracy should not behave in a manner that reflects a desire to nullify the clear import of a Congressional resolution disapproving the disparate impact centerpiece of the Bulletin.

Finally, in his Credit Slips Blog post, Prof. Levitin asserted that our reference to “grandiose and vague ‘will of the People’ language . . . is a glaring sign that there’s not a good substantive argument” and that we were “falling back” on a legislative intent argument.  In this regard, he asserts that we incorrectly assume that a CRA resolution is an affirmative statement of policy and seeks to draw a distinction between an affirmative law requiring 60 votes in the Senate and negative law adopted pursuant to the CRA.

Simply stated, we think it illogical to suggest that a statement of policy can be disapproved without thereby disapproving the substance of the policy that is the subject of the statement.  The purported distinction, based upon Senate filibuster rules, between an affirmative law and a negative law strikes us as curious indeed.  At the end of the day, a Public Law is, in fact, a law and the only relevant question is, “what is its import?”  In written testimony submitted to the House Financial Services Committee on July 12, 2015, Prof. Levitin himself observed that a trio of provisions of a proposed Financial CHOICE Act, including one that “would nullify the CFPB’s indirect auto lending guidance and impose an onerous process for any future guidance,” would “shield discriminatory lenders from legal repercussions.”

Additionally, our perspective strikes us entirely consistent with the policy underlying the CRA, which was to give Congress a veto power over administrative rulemaking that can be, and often is, substantive in nature.  It seems to us that the perspective articulated by Prof. Levtin leads to a result that leaves an administrative agency whose rule has been disapproved to continue to cling to (and apply) the substance of its disapproved rule in supervision and enforcement.  We respectfully submit that the view articulated by Prof. Levitin would have the effect of defeating the central purpose of the CRA.

In sum, although we have enjoyed the engaging “back and forth” with our friend Adam Levitin, it appears that we will have to agree to respectfully disagree.  What remains to be seen is whether the academic discussion in which we have been partaking ever becomes something with more practical impact.  That will, of course, depend on the CFPB’s future action.

On May 7, 2018, at the Practicing Law Institute’s 23rd Annual Consumer Financial Services Institute in Chicago, panel members Kristen Donoghue, the CFPB’s top enforcement official, and Allison Brown, from the Bureau’s Office of Supervision Policy, discussed how the Bureau has changed under Acting Director Mulvaney’s leadership, and how it has not changed.  Alan Kaplinsky, who leads Ballard Spahr’s Consumer Financial Services Group, moderated the panel, which also included Chris Willis, the leader of the firm’s consumer financial services litigation and enforcement practice.

Alan opened the panel discussion by asking the CFPB officials what it is like at the Bureau under Acting Director Mulvaney’s leadership.  Ms. Donoghue responded by first noting that this is the Bureau’s first leadership transition and that much of the chatter-inducing activity is just run-of-the-mill movement that would be associated with a changeover at any other agency.  She indicated that the last six months have included a lot of “get-to-know-you” meetings during which career Bureau staff members have been explaining to the Acting Director “why things are the way they are,” which she indicated has been a valuable exercise.

Next, Alan asked the Bureau officials to describe how Mr. Mulvaney has gone about instituting changes at the Bureau.  Ms. Brown explained that Mr. Mulvaney has generally managed the Bureau by appointing both a policy director and a career civil servant to lead each division.  The policy directors are there to ensure that Mr. Mulvaney’s policy objectives are carried out while the career civil servants are there to implement the changes and provide needed context and expertise.

There has also been speculation as to what is happening with the Bureau’s Office of Fair Lending, which, is currently being reorganized.  Asked by Alan to comment on such changes, Ms. Donoghue indicated that the reorganization is not intended to diminish the Office’s work, but to align it with the rest of the Bureau. The Office is being split up so that the enforcement and supervisory aspects of the Bureau’s fair lending work will be managed through, respectively, the Office of Enforcement and the Office of Supervision, while the Office of Fair Lending’s policy, education, and other functions will be part of the Acting Director’s “front office.”  Ms. Donoghue was quick to point out that these changes have not been implemented yet and that, practically, they will not result in much change for industry participants.

In response to a question from Alan about the apparent slow-down in the Bureau’s enforcement work, Ms. Donoghue pointed out that the Bureau is actively litigating 24 cases in federal courts throughout the country, including a recent jury trial against a debt collection law firm.  She also, of course, pointed to the recent record-setting consent order against a major bank.  In addition, Ms. Donoghue indicated that the CFPB has issued Civil Investigative Demands recently and that it would be a mistake for industry lawyers to advise their clients that the Bureau is relaxing its enforcement activities.  She declined, however, to say what industries or legal issues are being targeted in the new investigations.

Perhaps the most visible change discussed by the panel is the Bureau’s decision to use its “given name” as set forth in the Dodd-Frank Act, the Bureau of Consumer Financial Protection.  While the reason for this change is anyone’s guess, it may be representative of Acting Director Mulvaney’s focus on enforcing the law as written rather than “pushing the envelope.”