The CFPB’s Ombudsman’s Office has issued its sixth annual report covering the Office’s activities during fiscal year 2017 (October 1, 2016 through September 30, 2017).  The role of the Ombudsman’s Office is to assist in the resolution of individual and systemic issues that a depository entity, non-depository entity, or consumer has with the CFPB.

The report’s “Demonstrating the Ombudsman in Practice” section provides examples of the Ombudsman’s role in assisting in the resolution of CFPB “process issues.”  Noteworthy examples included:

  • Engaging in “shuttle diplomacy” to resolve inquiries from industry that sought clarification of information communicated by the CFPB. The Ombudsman engaged in “shuttle diplomacy” between industry and the relevant CFPB officers to try to assist in resolving the issue.
  • Suggesting updates to the letters used by the CFPB’s Office of Consumer Response when inviting companies to join the CFPB’s Company Portal for responding to consumer complaints. The updates were intended to address feedback that the Ombudsman received from companies indicating that more clarity was needed about the process for joining the Portal and what companies should consider in deciding whether to participate in the consumer complaint process.

The report includes a summary of feedback and recommendations the Ombudsman received from compliance officers who participated in a June 2017 forum and from representatives and members of associations of state regulators who participated in a September 2017 forum.  It also discusses the first “Ombudsman Interactive,” a new initiative involving facilitated discussion sessions held onsite for attendees at consumer, trade and other groups’ conferences.  These sessions are available by request on a first-come first-served basis, subject to the Ombudsman’s budget and availability.

In the section of the report dealing with the Ombudsman’s review of systemic issues, the Ombudsman discusses the two systemic issues it reviewed in FY 2017 and updates two issues raised in previous reviews. The systemic issues reviewed in FY 2017 were the following:

  • In response to comments from consumer groups that they were experiencing long waits in obtaining CFPB educational materials in Braille and large print, the Ombudsman conducted research and reviewed existing CFPB processes for providing such materials.  Stemming from meetings facilitated by the Ombudsman, the CFPB added language to the accessibility page of its website to inform the public how to obtain such materials and designated a central location to standardize the receipt and processing of accessibility requests.
  • In response to concerns that changes made by the CFPB to its telephone system had resulted in some non-consumers not knowing how to obtain by phone CFPB information unrelated to individual consumer finance questions or matters, the Ombudsman conducted a study that included a review of the CFPB’s telephone entry points for non-consumers and the information available to non-consumers by phone, such as recorded information provided to callers.  In the report, the Ombudsman’s Office discusses its findings and recommendations to the CFPB for addressing this issue.

The issues reviewed in prior reports for which the Ombudsman provided updates were the following:

  • In its 2016 report, the Ombudsman recommended that the CFPB standardize its process for memorializing ex parte communications regarding proposed rules.  In April 2017, the CFPB adopted changes to its “Policy on Ex Parte Presentations in Rulemaking Proceedings,” which are discussed in the Ombudsman’s 2017 report.  As the Ombudsman notes, under the new policy persons submitting ex parte presentation materials are only required to submit the materials electronically to the CFPB, which will post them on the public rulemaking docket at www.regulations.gov. The policy had previously required persons submitting such materials to also file them directly with the public rulemaking docket.
  • In its 2016 report, in response to comments about the specificity of options available to consumers to identify the issue with a company when submitting complaints, the Ombudsman provided feedback to Consumer Response regarding the need for additional sub-issues for some products and shared concerns about the varying number and specificity of issue/sub-issue options provided to consumers depending on the product involved in the complaint.  In April 2017, the CFPB updated its consumer complaint form to add issues and sub-issues, as relevant, for all products other than mortgages. In response to the Ombudsman’s recommendation that the CFPB explain why further options should not be provided for mortgages, the CFPB indicated that consumers were not asked to select a sub-issue because of “the complexity and interrelated nature of mortgages and mortgage issues.”  According to the CFPB, “this ensures the reliability of mortgage complaint data that we collect from consumers and share in reports through the Consumer Complaint Database.”

The U.S. Court of Appeals for the Federal Circuit has partially lifted a preliminary injunction that prevented the U.S. Department of Education (Department) from placing defaulted student loans with private collection agencies (PCAs).  Following this ruling, the U.S. Court of Federal Claims has ordered the Department to complete its efforts to reevaluate bids associated with a disputed contract procurement process by January 11, 2018.

The appeal to the Federal Circuit challenged a ruling of Judge Susan Braden of the U.S. Court of Federal Claims in consolidated lawsuits brought by several PCAs.  The PCAs challenged the Department’s 2016 award of several large business contracts to collect defaulted student loans.  The Department had stayed the 2016 large business contracts in response to the Government Accountability Office’s recommendation to reopen the contract competition, request and consider amended bids, and make a new award decision.

Despite the government’s self-imposed stay, in May 2017, the Court of Federal Claims issued a preliminary injunction that broadly enjoined the Department from (1) authorizing performance of the 2016 large business contracts, and (2) “transferring work to be performed under the contract at issue in this case to other contracting vehicle to circumvent or moot this bid protest.”  The injunction thus prevented the Department from placing defaulted student loans with PCAs under any other preexisting contracts, including 2014 small business contracts and award term extension (ATE) contracts that rewarded top performers under 2009 contracts.  The Court of Federal Claims asserted the broad injunction was necessary to maintain the status quo.  The court based its injunction ruling on, among other things, an article that stated the CFPB found the value of PCAs to be “highly questionable . . . but unquestionably expensive.”  The Department appealed the injunction ruling.

On August 21, 2017, the CFBP filed an amicus brief in the appeal.  Disagreeing with the Court of Federal Claims—and siding with the Trump Administration—the CFPB asserted that enjoining the Department from placing defaulted loans with PCAs harmed the public.  According to the CFPB, PCAs were a point of contact for borrowers to set up plans to rehabilitate default and, without such rehabilitation, borrowers were not eligible for other federal programs and interest would continue to accrue on loans during the collection delays caused by the injunction.  According to the CFPB “borrowers in default will be better off if they have access to [the Department’s] debt-collection contractors during the pendency of this litigation than if they do not.”

On December 8, 2017, the appellate court lifted the part of the preliminary injunction that barred the Department from “transferring work to be performed under the contract at issue in this case to other contracting vehicles to circumvent or moot this bid protest.”  Thus, the Department can continue to place defaulted loans with PCAs under its preexisting small business and ATE contracts. The appellate court’s ruling still prohibits the Department from authorizing performance of the disputed 2016 contracts.

The case continues to proceed in the district court before Judge Thomas C. Wheeler.  (Judge Braden transferred the case to Judge Wheeler on November 20, 2017 for “the efficient administration of justice.”)  On December 12, 2017, Judge Wheeler held a status conference to discuss allocation of the Department’s backlog of accounts in light of the ongoing injunction, as well as the status of the Department’s corrective action to reevaluate amended bids for the 2016 large business contracts.  The Department had previously advised that it intended to complete its corrective action by August 24, 2017—a deadline that expired more than three months ago.  At the status conference, the government’s counsel declined to provide the court with a new date certain for completion.  Instead, he reported that the Education Department was in the “final stages,” with the Source Selection Authority “in the process of determining which offerors will and will not receive final awards.”

Following the conference, Judge Wheeler noted his displeasure with the pace of the Department’s corrective action.  He ordered the Source Selection Authority to make its final award decisions and complete the corrective action by January 11, 2018.

The Democratic attorneys general of 15 states and the District of Columbia have sent a letter to President Trump in which they express their support for the CFPB’s consumer protection mission and criticize the President’s appointment of Mick Mulvaney as CFPB Acting Director.  The 15 states are California, Connecticut, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Mexico, North Carolina, Oregon, Vermont, Virginia, and Washington.  In particular, the AGs contend that various statements made by Mr. Mulvaney about the CFPB “are categorically false, and should disqualify Mr. Mulvaney from leading the agency, even on an acting basis.”

Since the AGs’ presumably realize that their criticism is unlikely to cause President Trump to reconsider his appointment of Mr. Mulvaney, it would appear that the letter’s primary purpose is “saber rattling” by the AGs.  While providing examples of various enforcement matters on which state AGs have worked jointly with the CFPB, the AGs highlight their own “express statutory authority to enforce federal consumer protection laws, as well as the consumer protection laws of our respective states.”  The AGs state that they “will continue to enforce those laws vigorously regardless of changes to the CFPB’s leadership or agenda.  As attorneys general, we retain broad authority to investigate and prosecute those individuals or companies that deceive, scam, or otherwise harm consumers.”

In addition to various federal consumer protection statutes that give direct enforcement authority to state AGs or regulators, Section 1042 of the Consumer Financial Protection Act authorizes state AGs and regulators to bring civil actions to enforce the provisions of the CFPA, most notably its prohibition of unfair, deceptive or abusive acts or practices.  A state AG or regulator, before filing a lawsuit using his or her Section 1042 authority, must notify the CFPB and Section 1042 allows the CFPB to intervene as a party and remove an action filed in state court to federal court.  (AGs and regulators in several of the states joining in the letter to President Trump have already filed lawsuits using their Section 1042 authority.)

On January 11, 2018, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar: Who Will Fill the Void Left Behind by the CFPB?  Click here to register.

The AGs warn that “if incoming CFPB leadership prevents the agency’s professional staff from aggressively pursuing consumer abuse and financial misconduct, we will redouble our efforts at the state level to root out such misconduct and hold those responsible to account.”  They further state that “regardless of the future direction or leadership of the CFPB, we as state attorneys general will vigorously enforce state and federal laws to ensure fairness and deter fraud.”  It is also important to note that CFPB staff, who may feel handcuffed by Mr. Mulvaney, can share information with sympathetic state AGs.

 

As we reported recently, the Government Accountability Office has determined that CFPB Bulletin 2013-02 on dealer pricing in indirect auto finance (“Dealer Pricing Bulletin” or “Bulletin”) is a “rule” subject to review under the Congressional Review Act (“CRA”).  We noted that, if Congress chose to disapprove the guidance, it would severely undermine the basis for any future enforcement or supervisory action based on the legal and factual theories set forth in the Bulletin.

Our friend Professor Adam Levitin at Georgetown Law Center sent one of us the following message on Twitter a few days ago, questioning whether such an override would have any impact at all:

@AlanKaplinsky Trying to puzzle through this.  It’s pretty weird. GAO’s determined that the IAL [indirect auto lending] guidance is subject to CRA. But as far as I can tell, the GAO decision has no force of law, and I don’t see how it could, as the CRA says it’s not subject to judicial review.  If it isn’t actually a “rule,” then a CRA disapproval resolution would have no effect.  But there’s no judicial review allowed to determine this.  And even if it is a rule, what would it mean to void non-binding guidance?  It doesn’t void or change the CFPB’s position or undercut any ECOA or UDAAP suit the CFPB might bring.  All it does it void the guidance communicating the CFPB’s position.  IAC, does it really matter?  Perhaps the CFPB will stop enforcement actions for a while, but the IAL consent decrees presumably have forward looking provisions, and there’s also state AG enforcement risk.  I can’t imagine compliance at most IALs letting them revert to old form.  And given the 5-year SOL on ECOA, even if a Trump confirmed CFPB Director had no interest in bringing ECOA actions, any reversion to old behavior will quickly become chargeable by the AG in the next administration or the CFPB Director after a Trump-confirmed one.  It’s possible that that AG and CFPB Director won’t be interested in pursuing ECOA actions, but if they are, a[n] IAL that reverted to allowing unpoliced markups would be in a most uncomfortable position.  A lot of risk for a few years of allowing unpoliced markups. (emphasis added).

There is much that can (and ultimately may) be said in response to each of these assertions, but given the likelihood of a joint resolution of disapproval being introduced shortly, we wanted to focus today on the suggestion that the enactment of a disapproval measure would be inconsequential.  More specifically, we wanted to take the opportunity to explain why, as suggested in our blog post, we believe an override of the Dealer Pricing Bulletin should put a permanent end to this theory of assignee liability for so-called dealer “markup” disparities and make it impossible for the CFPB to pursue supervisory or enforcement actions based upon it.

Let’s begin by remembering that the legal and factual theories on which the CFPB’s indirect auto fair lending cases were based are very shaky, to say the least.  We wrote a blog post about this a couple of years ago, but just to refresh your recollection:

  • There is a significant question, especially after Inclusive Communities, about whether disparate impact claims are cognizable under the Equal Credit Opportunity Act in the first place (see “The ECOA Discrimination and Disparate Impact – Interpreting the Meaning of the Words that Actually Are There,” 61 Business Lawyer 829 (2006));
  • The Supreme Court decision in Dukes v. Wal-Mart stands for the proposition that a policy of “allowing discretion” is not a specific, identifiable policy subject to disparate impact analysis (seeAuto Finance and Disparate Impact: Substantive Lessons Learned from Class Certification Decisions);
  • The Regulation B multiple creditor liability rule (12 C.F.R. § 1002.2(l)) provides that an assignee (i.e., an “indirect auto finance company” in the parlance of the Bureau) is not liable for an ECOA violation by the original creditor unless the assignee knew or had reasonable notice of the act, policy or practice constituting the violation before becoming involved in the credit transaction – meaning in our view that the government should need to prove that the assignee knew or had reasonable notice of disparate treatment by a dealership prior to purchasing a retail installment sale contract (“RISC”);
  • The legal theory on which the discrimination claim ultimately is based – that discretionary pricing by dealerships has a discriminatory effect due to disparate treatment by dealerships – would require a dealer-level analysis rather than a portfolio-wide one;
  • The use of a portfolio-wide analysis manufactures statistical evidence of discrimination that does not exist by aggregating the RISCs of different dealerships to the assignee level, thereby comparing different auto dealers to one another; and
  • The use of a continuous-regression model over BISG proxy results creates the appearance of disparities when none exist, and inflates any that may exist.

In subsequent blogs posts, we discussed reports prepared by the House Financial Services Committee Majority Staff titled “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending” and “Unsafe at Any Bureaucracy, Part III: The CFPB’s Vitiated Legal Case Against Auto Lenders.”  We also reported previously on the AFSA study titled “Fair Lending: Implications for the Indirect Auto Finance Market,”an Executive Summary of which is available here.  In short, the subject of alleged assignee liability for asserted dealer “mark-up” disparities has been highly controversial and a lightning rod for Congressional, media and industry criticism of the Bureau.

Now let’s assume for the moment that Congress enacts a joint resolution disapproving the Dealer Pricing Bulletin articulating the Bureau’s theories of assignee liability for so-called dealer “markup” disparities, and the President of the United States signs it into law.  In that event, we believe that it should become impossible for a federal governmental agency to pursue the theory of liability in enforcement and, therefore, anywhere else.  We further believe that such a Congressional override would cause the federal judiciary to be even more hostile to the CFPB’s theory of liability than Supreme Court decisions like Wal-Mart and Inclusive Communities would require.  Here’s why.

The salient question is, “what would be the import of the enactment of a joint resolution of disapproval?”  A Congressional override of the guidance would not represent, as Professor Levitin suggests, merely a disapproval of the agency’s statement of its position.  It is, rather, a disapproval of the position itself pursuant to a law enacted by the democratically-elected representatives of the People of the United States declaring that “such rule shall have no force and effect.”  The “position” is embodied in the “statement” and cannot be disassociated from it; they are indivisible.

The end result of the legislative process thus would be a Public Law effectively branding this theory of liability as, in the parlance of Inclusive Communities, a disparate impact claim that is “abusive” of sales finance companies and banks engaged in the automobile sales finance business.  (Inclusive Communities emphasized the importance of safeguards against disparate impact claims that are abusive of defendants, such as the requirement to identify a specific policy or practice of the defendant causing asserted statistical disparities, and directed district courts to enforce this “robust causality requirement” promptly by “examin[ing] with care whether a plaintiff has made out a prima facie case of disparate impact” by “alleg[ing] facts at the pleading stage or produc[ing] evidencing demonstrat[ing] a causal connection” between the alleged policy and the disparity.)

Pursuant to the CRA, the enactment of a disapproval measure would preclude the CFPB from subsequently reissuing the rule or adopting a new rule that is substantially the same as the disapproved rule unless “the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.”

If the CFPB’s “rule,” as expressed in its Dealer Pricing Bulletin, is invalid, and the CFPB cannot issue a similar rule in the future, how can it possibly turn around and apply the disapproved “rule” in supervision and enforcement?  We don’t believe it can because doing so would disregard the clear import of an act of Congress.  Rather, we are confident that a Court would conclude that the Congressional override is an expression of disapproval of the legal and factual theories of liability expressed in the Bulletin.

By Professor Levitin’s logic, even though Congress nullified the CFPB arbitration agreements rule, the CFPB would be free to commence UDAAP enforcement actions or administrative proceedings against companies simply for using arbitration agreements with class action waivers, even though the rule prohibiting them was invalidated.  We think this result not only would defy the Canon of Common Sense, but it also would fail to give effect to the will of the People as reflected in an act of Congress that was approved by the President of the United States.

In Professor’s Levitin’s formulation, an administrative agency can continue to apply, in the enforcement (and apparently in the supervisory) contexts, the substance of a “rule” that has been disapproved by an act of Congress.  We respectfully disagree.  This being a representative Democracy in which the government is subordinated to the will of the People as expressed in laws enacted by their elected representatives, we think it makes common sense to answer the salient question in the manner we suggest, rather than in a manner that leaves an agency free to do as it pleases, insulated from the clear import of what Congress (and derivatively the People) have instructed by enacting a disapproval measure into law.  We thus urge Congress to disapprove CFPB Bulletin 2013-02, because we believe that congressional disapproval should have a permanent preclusive effect on the ability of federal regulators to pursue this deeply flawed theory of liability.

We do not appear to be alone in this view.  Professor Levitin himself, in testimony submitted to the House Financial Services Committee in 2015, noted that a provision of the Financial CHOICE Act that would repeal the Dealer Pricing Bulletin would “shield discriminatory lenders from legal repercussions.”  Although we would eliminate the word “discriminatory” from that sentence, we believe that a CRA override of the Dealer Pricing Bulletin would have that effect.  Suggesting that the CFPB could pursue these cases against “indirect auto lenders” after a Congressional override of the Bulletin strikes us as wishful thinking.

On December 12, the Credit Union National Association (“CUNA”) filed an amicus brief in D.C. Federal District Court opposing Leandra English’s motion for a preliminary injunction to block President Trump’s appointee for Acting CFPB Director, Mick Mulvaney, from exercising the powers of that office. The Court has already denied English’s motion for a temporary restraining order.

CUNA is the largest organization representing the nation’s 6,000 credit unions, which are heavily regulated by the CFPB. As such, it has a significant interest in the outcome of preliminary injunction hearing.

In its brief, CUNA argues that Mulvaney’s appointment was entirely proper under the Vacancies Reform Act of 1998 (“VRA”). CUNA further argues that the language in Dodd-Frank stating that the Deputy Director shall become the Acting Director in the “absence or on availability” of the Director covers temporary situations, like an accident requiring long term hospitalization of the Director. It does not cover a vacancy in the office of the Director, including one resulting from a resignation.

Under the VRA, when an office is vacant, the President has the power to appoint an acting officer to fill the post, subject to certain limitations. Indeed, when the VRA was passed, the Senate committee that considered the VRA explicitly stated that, “statutes enacted in the future purporting to or argued to be construed to govern the temporary filling of offices covered by this statute are not to be effective unless they expressly provide that they are superseding the Vacancies Reform Act.” So, because Dodd-Frank did not explicitly override the VRA, the VRA governs.

In addition, CUNA points out the serious constitutional problems that would result if the court adopted English’s position. If she is right, then a departing CFPB Director would have the power to appoint anyone as his or her successor, including non-citizens, through the simple expedient of naming him or her as the Deputy Director, while the President would have more limited powers of appointment under the VRA. That would give the CFPB Director more power than the President over an agency in the executive branch of government.

What’s more, English’s argument also implies that the President would be as unable to remove an Acting CFPB Director as he is the CFPB Director. That only exacerbates the constitutional defects that are at the heart of the PHH case, which we have blogged about extensively.

CUNA’s brief, which Ballard Spahr authored, highlights the industry perspective on why Leandra English is wrong and why the court should not try to unwind the President’s appointment of an Acting CFPB Director. We will continue to follow this unfolding saga closely.

The Supreme Court is considering a cert petition requesting that it hear the Lucia case, which we have blogged about extensively due to its potential impact on the outcome of the PHH case. Significantly, the DOJ recently filed a brief in the case siding against the SEC and with Lucia, who is challenging the constitutionality of how the SEC’s Administrative Law Judges (“ALJs”) are appointed.

Under the Appointments Clause of Article II of the U.S. Constitution, an “inferior officer” must be appointed by the President, a court, or the head of a “department.” Lucia argues that  because the SEC’s ALJs are hired by the SEC’s Office of Administrative Law Judges and not appointed by an SEC commissioner, their appointments would be unconstitutional if they are “inferior officers. ”

In its brief, the DOJ acknowledged the course change on this issue, stating that, “In prior stages of this case, the government argued that the Commission’s ALJs are mere employees rather than ‘Officers’ within the meaning of the Appointments Clause. Upon further consideration, and in light of the implications for the exercise of executive power under Article II, the government is now of the view that such ALJs are officers because they exercise ‘significant authority pursuant to the laws of the United States.'”

Needless to say, it is extremely unusual for the DOJ to take up arms against another government agency like this. How it impacts the outcome of the Lucia case is yet to be seen. As we’ve explained in prior posts, the CFPB uses SEC ALJs to hear its administrative cases. So, if the Supreme Court hears the Lucia case and determines that ALJs are inferior officers, it will call into question every SEC and CFPB case that an ALJ decided. It may also impact how the en banc D.C. Circuit decides the PHH case.

We will continue to follow the issues and keep you posted.

Five amicus briefs were filed last Friday in support of the motion for a preliminary injunction filed by Leandra English in her action seeking a declaration that she, rather than Mick Mulvaney, has the legal right to serve as CFPB Acting Director.

Like her unsuccessful motion for a temporary restraining order (TRO), Ms. English’s preliminary injunction motion relies primarily on the argument that the provision of the Federal Vacancies Reform Act (FVRA) that authorizes the President to temporarily fill a vacancy in an executive agency position requiring confirmation is superseded by the provision in the Consumer Financial Protection Act (CFPA) that provides the CFPB Deputy Director “shall…serve as acting Director in the absence or unavailability of the Director.”

The five amicus briefs were filed by the following amici:

  • Consumer Finance Regulation Scholars.  Amici consist of a group of 10 academics described as “leading scholars of financial regulation and consumer finance.”
  • Current and former Democratic members of Congress.  Amici consist of a group of 37 current and former Representatives and Senators described as “sponsors of Dodd-Frank [who] participated in drafting it, serve or served on committees with jurisdiction over the federal financial regulatory agencies and the banking industry, currently serve in the leadership, or served in the leadership when Dodd-Frank was passed.”  (The same amici filed substantially the same amicus brief in support of Ms. English’s TRO motion.)
  • Democratic State Attorneys General.  Amici consist of the attorneys general of 17 states and the District of Columbia.
  • Consumer advocacy groups.  Amici consist of 10 nonprofit organizations who are described as engaged in “work to defend the rights of consumers through education, advocacy, policy, research, and litigation.”
  • Peter Conti-Brown.  Professor Conti-Brown is an Assistant Professor at the Wharton School of the University of Pennsylvania who is described as “a scholar of the structure, history, and evolution of financial regulatory institutions, including especially the U.S. Federal Reserve System.”

Like Ms. English, the primary argument made by the Consumer Finance Regulation Scholars, the current and former members of Congress, and the Democratic state AGs in their amicus briefs is that the CFPA succession provision supplants the FVRA and provides the sole means for temporarily filling a vacancy in the position of CFPB Director until Senate confirmation of a new Director.  They assert that such a reading of the CFPA provision is consistent with the CFPA’s legislative history and structure and necessary to preserving the CFPB’s status as an independent agency.  (All three of these amicus briefs argue expressly or assume that the phrase “absence or unavailability” in the CFPA provision covers a vacancy created by the CFPB Director’s resignation.  However, for the compelling reasons set forth in our blog post, we believe the phrase should not be construed to cover such a vacancy.)

The amicus brief filed by the consumer advocacy groups does not directly discuss the FVRA and CFPA provisions.  Instead, the consumer advocacy groups describe regulatory, enforcement, and other actions taken by the CFPB that have “meaningfully improved consumer financial markets and concretely benefited consumers.”  They argue that the public interest weighs in favor of a preliminary injunction because, without an injunction, the CFPB “will be stymied from pursuing its [consumer protection] mission and “the public will lose the CFPB’s independence.”  According to the consumer groups, Mr. Mulvaney’s position as Director of the Office of Management and Budget, actions he has taken such as the imposition of a regulatory and hiring freeze, and his stated support for White House priorities demonstrate that he “is inherently conflicted from supporting [the CFPB’s congressionally-mandated independence and] already, he is taking active steps to eviscerate it.”

Professor Conti-Brown also does not directly address the FVRA and CFPA provisions in his amicus brief.  Instead, he argues that even if the FVRA applies, the President’s “decision to appoint a White House official to act as the Bureau’s director eliminates the independence that Congress has required for the Bureau.”  According to Professor Conti-Brown, under the FVRA, “President Trump does not have the legal authority to appoint a White House official to lead the CFPB.”

We find no support in the FVRA for Professor Conti-Brown’s argument.  The FVRA (5 U.S.C.§ 3345) provides that when an “executive agency” position requiring confirmation becomes vacant because the person holding the position “dies, resigns, or is otherwise unable to perform the functions and duties of the office,” it may be filled temporarily by someone serving in an acting capacity in several ways.  The first way is for the “first assistant” to such a position to assume the functions and duties of the office.

However, the FVRA gives the President other options for filling the vacancy, one of which allows the President to “direct a person who serves in an office for which appointment is required to be made by the President, by and with the advice and consent of the Senate, to perform the functions and duties of the vacant office temporarily in an acting capacity subject to the [FVRA] time limitations.”  Nothing in the FVRA would disqualify someone who satisfies such criteria from serving as CFPB Acting Director because he or she is a “White House official.”  As OMB Director, Mr. Mulvaney serves in an office to which he was appointed by the President and confirmed by the Senate.  As such, he is qualified to serve as CFPB Acting Director and his appointment to that position by President Trump complies fully with the FVRA.

 

Congress may have now have the opportunity to disapprove by a simple majority vote the CFPB’s disparate impact theory of assignee liability for so-called dealer “markup” disparities as a result of a determination by the General Accountability Office (GAO) that the CFPB’s Bulletin describing its legal theory is a “rule” subject to override under the Congressional Review Act (CRA).

We previously blogged about press reports that the GAO had accepted a request from Senator Patrick Toomey to determine whether CFPB Bulletin 2013-02, titled “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act” (the “Bulletin”), is a “rule” within the scope of the CRA.  (“Indirect auto lenders” is the term used by the Bureau to refer to persons, such as banks and sales finance companies, that are engaged in the business of accepting assignments of automobile retail installment sale contracts from dealerships.)  We subsequently suggested that a recent GAO determination that the interagency leveraged lending guidance is a “rule” subject to the CRA foreshadowed a similar determination for the CFPB indirect auto finance guidance reflected in the Bulletin.

As it turns out, we were right.  The GAO issued its decision on December 5, 2017, concluding that the Bulletin is a “rule” subject to the CRA because “it is a general statement of policy designed to assist indirect auto lenders to ensure they are operating in compliance with [the] ECOA and Regulation B, as applied to dealer markup and compensation policies.”

The Bulletin is an official guidance document issued by the Bureau on March 21, 2013.  It effectively previewed the Bureau’s subsequent ECOA enforcement actions against assignees of automobile retail installment sale contracts (RISCs), setting forth the views of the CFPB concerning what it characterized as a significant ECOA compliance risk associated with an asserted assignee “policy” of “allowing” dealerships to negotiate the annual percentage rate under a retail installment sale contract by “marking up” the wholesale buy rate established by a prospective assignee.  The Bulletin’s intent to establish its enforcement and supervisory approach with respect to the subject 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.”

Before responding to Senator’s Toomey’s request, in accordance with its standard procedure for responding to requests of this nature, the GAO solicited and obtained the CFPB’s views.  The Bureau responded to the GAO by letter dated July 7, 2017.

The legal analysis reflected in the GAO opinion is straightforward.  Subject to exceptions not relevant, the CRA adopts the Administrative Procedure Act definition of a “rule,” which states, in relevant part, that a rule is “”the whole or a part of an agency statement of general . . . applicability and future effect designed to implement, interpret, or prescribe law or policy . . ..”  The GAO framed the question presented as “whether a nonbinding general statement of policy, which provides guidance on how [the] CFPB will exercise its discretionary enforcement powers, is a rule under [the] CRA.”  It agreed with the CFPB’s assertion that the Bulletin “is a non-binding guidance document” that “identifies potential risk areas and provides general suggestions for compliance” with the ECOA.

The GAO rejected, however, the CFPB’s argument that the CRA does not apply to the Bulletin because the Bulletin has no legal effect on regulated entities.  Specifically, the Bureau had argued “taken as a whole the CRA can logically apply only to agency documents that have [binding] legal effect.”  The GAO concluded that “CRA requirements apply to general statements of policy, which, by definition, are not legally binding.”

The GAO letter explains that, “to strengthen congressional oversight of agency rulemaking,” the CRA requires all federal agencies, including independent regulatory agencies, to submit a report on each new rule to both Houses of Congress and to the Comptroller General before it can take effect.” (emphasis added)  The CFPB acknowledged that it had not complied with this formal reporting requirement because it did not believe the Bulletin was a “rule” subject to the CRA reporting requirement.  In response to the GAO decision, Senator Toomey issued a press release stating that “I intend to do everything in my power to repeal this ill-conceived rule using the Congressional Review Act.”

As explained in prior blog posts, the CRA establishes a streamlined procedure pursuant to which Congress may enact, by simple majority vote, a joint resolution disapproving a “rule.”  A joint resolution of disapproval passed by Congress is presented to the President for executive action.  If approved by the President, the joint resolution is enacted into law and assigned a Public Law number.  If a joint resolution of disapproval is enacted into law, the disapproved rule “may not be reissued in substantially the same form, and a new rule that is substantially the same as such a rule may not be issued, unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.”  Thus, the enactment of a joint resolution of disapproval has a preclusive effect on future regulatory action.

According to a Congressional Research Service report, in prior instances where the GAO determined that the agency action satisfied the CRA definition of a “rule” and joint resolutions of disapproval were subsequently introduced, “the Senate has considered the publication in the Congressional Record of the official GAO opinions . . . as the trigger date for the initiation period to submit a disapproval resolution and for the action period during which such a resolution qualifies for expedited consideration in the Senate.”  If a joint resolution of disapproval is introduced, it therefore would appear that the CRA clock may start to run for expedited consideration by the Senate once the GAO opinion is published in the Congressional Record.

So, what does all of this mean for the automobile sales finance industry?  We think there are several important implications.  First, the GAO’s decision strengthens the argument that the CFPB’s effort to regulate dealer pricing of RISCs should have been pursued through a rulemaking proceeding, rather than through “guidance” and enforcement actions.

Second, the GAO determination means that Congress could override the Bulletin by means of a joint resolution of disapproval, with a majority vote that could not be avoided by a Senate filibuster.  Given the Republican opposition to the CFPB’s pursuit of this issue, and the Democratic support for auto dealers as well (expressed in letters from members of Congress to the CFPB), there seems to be a fair chance of a CRA disapproval resolution passing.  Indeed, as Senator Toomey noted in his press release, the House of Representatives passed the Reforming CFPB Indirect Auto Financing Guidance Act in November 2015 by a bipartisan vote of 332-96.

What would the enactment of a joint resolution of disapproval mean?  Obviously, it would mean the Bulletin would be null and void.  But since the Bulletin was non-binding anyway and the CFPB did not comply with the CRA reporting requirement, what difference would it make?

Opponents of the CFPB’s disparate impact theory of liability would argue that the override of the guidance is, by definition, a Congressional repudiation of its content – the legal and factual theories of liability contained in the Bulletin. The corollary of this compelling argument is that the override would preclude not only another similar “rule,” but also that which is inherent in the existence of such a “rule” – its application to regulated entities in supervisory activities or enforcement actions. This repudiation would be permanent (unless altered by a subsequent Congressional enactment), and might therefore offer a lasting end to the CFPB’s efforts to regulate dealer pricing through banks and sales finance companies, rather than the potentially temporary hiatus that could be brought about by new leadership at the CFPB.

We hope that Congress will override the Bulletin under the CRA, and possibly put a final end to this highly questionable legal and factual ECOA theory.

As required by Judge Kelly’s scheduling order, yesterday afternoon Leandra English filed a motion for a preliminary injunction in her action seeking a declaration that she, rather than Mick Mulvaney, has the legal right to serve as CFPB Acting Director.  The motion was accompanied by a supporting memorandum.  Ms. English also filed a First Amended Complaint yesterday.

Like her unsuccessful motion for a temporary restraining order (TRO), Ms. English’s preliminary injunction motion relies primarily on the argument that the provision of the Federal Vacancies Reform Act (FVRA) that authorizes the President to temporarily fill a vacancy in an executive agency position requiring confirmation is superseded by the provision in the Consumer Financial Protection Act (CFPA) that provides the CFPB Deputy Director “shall…serve as acting Director in the absence or unavailability of the Director.”  Ms. English’s argument continues to be based on the premise that the phrase “absence or unavailability” in the CFPA provision covers a vacancy created by the CFPB Director’s resignation.  However, for the compelling reasons set forth in our blog post, we believe the phrase should not be construed to cover such a vacancy.   (We note that the succession provisions in other federal statutes cited by Ms. English on pg. 11 of her memorandum in support of her argument that the CFPA provision should prevail over the FVRA expressly address succession “in the event of a vacancy” in a leadership position.  None of these statutes use the phrase “absence or unavailability” found in the CFPA provision.  Indeed, the other statutes cited by Ms. English provide further support for the argument that the CFPA provision is inapplicable.)

In support of her preliminary injunction motion, Ms. English also renews her TRO argument that Mr. Mulvaney’s appointment is inconsistent with the CFPB’s status as an “independent agency” because, as Director of the Office of Management and Budget, he is an “at-will employee” who can be dismissed by the President without cause.  She also adds two new arguments not advanced in support of her TRO motion.

First, she argues that even if the CFPA provision does not supersede the FVRA, the FVRA does not apply to the appointment of a CFPB Acting Director.  The FVRA provides that the President’s authority to use the FVRA to fill vacancies does not apply to positions held by “any member who is appointed by the President, by and with the advice and consent of the Senate to any board, commission, or similar entity that… (A) is composed of multiple members; and (B) governs an independent establishment or Government corporation.” 5 U.S.C. § 3349c(1).  The Dodd-Frank Act amended the Federal Deposit Insurance Act (FDIA) to provide that the CFPB Director, or the Acting CFPB Director in the event of a vacancy in the Director’s position, shall serve as a member of the FDIC Board.  According to Ms. English, because this provision would make the CFPB Acting Director a member of the FDIC Board, the President cannot use his FVRA authority to appoint a CFPB Acting Director.

The same argument was made in the lawsuit filed this week in U.S. District Court for the Southern District of New York by the Lower East Side People’s Federal Credit Union seeking a declaration that Ms. English has the legal right to serve as Acting Director.  As we commented in our blog post about the credit union’s lawsuit [link], while clever, this argument is based on an incorrect reading of the FVRA.  The FVRA provides that the President’s authority to use the FVRA to fill vacancies does not apply to positions held by “any member who is appointed by the President, by and with the advice and consent of the Senate to any board, commission, or similar entity that… (A) is composed of multiple members; and (B) governs an independent establishment or Government corporation.” 5 U.S.C. § 3349c(1).  The Dodd-Frank Act amended the Federal Deposit Insurance Act (FDIA) to provide that the CFPB Director, or the Acting CFPB Director in the event of a vacancy in the Director’s position, shall serve as a member of the FDIC Board.  According to Ms. English, because this provision would make the CFPB Acting Director a member of the FDIC Board, the President cannot use his FVRA authority to appoint a CFPB Acting Director.

Ms. English’s (and the credit union’s) argument ignores the fact that neither the CFPB Director nor the Acting Director “are appointed by the President, by and with the advice and consent of the Senate to any board….”  Rather, the FDIA designates the CFPB Director or Acting Director members of the FDIC Board by virtue of their CFPB positions.  (A person serving on a board by virtue of another position that he or she holds is often referred to as an “ex officio” member.)  Indeed, the FDIA specifically recognizes this distinction by referring to the three FDIC Board members who are appointed by the President as the “appointed members.”  Moreover, Ms. English implicitly acknowledges that Mr. Mulvaney would only serve on the FDIC Board by virtue of his appointment as CFPB Acting Director, arguing that the President exceeded his FVRA authority when he “attempted to designate Mr. Mulvaney as the Acting Director of the CFPB—and thus as a member of the FDIC Board.” (emphasis added).  Accordingly, since the President did not appoint Mr. Mulvaney to the FDIC Board, and has only appointed him CFPB Acting Director (as well as OMB Director), the President can properly use his FVRA authority to appoint Mr. Mulvaney CFPB Acting Director.

The second argument added by Ms. English in support of her preliminary injunction motion is that the President’s appointment of Mr. Mulvaney violates the Appointments Clause of the U.S. Constitution.  According to Ms. English, the Appointments Clause only gives the President two means of appointing officers: with the advice and consent of the Senate or pursuant to statute.  She argues that the FVRA does not provide a valid statutory basis for Mr. Mulvaney’s appointment and his confirmation as OMB Director does not, in itself, allow the President to assign duties at another agency to Mr. Mulvaney.

Ms. English’s amended complaint generally tracks the introduction and factual allegations in her original complaint and seeks the same relief, namely a declaration that she, and not Mr. Mulvaney, is the CFPB Acting Director, an order directing President Trump to refrain from appointing, recognizing, or causing any person to recognize someone other than Ms. English as Acting Director, and an order directing Mr. Mulvaney to refrain from accepting an appointment as Acting Director or asserting or exercising in any way the authority of that office.  Unlike her original complaint, however, the amended complaint breaks down her claims for relief into specific counts and references the new arguments made in her memorandum in support of her preliminary injunction.

Ms. English’s claims for relief in the amended complaint consist of the following:

  • Count I.  Mr. Mulvaney’s appointment as Acting Director is unlawful under the CFPA and is unauthorized under the FVRA.
  • Count II.  Mr. Mulvaney’s appointment violates the CFPA’s “independence requirement” for the CFPB.
  • Count III.  Mr. Mulvaney appointment violates the Appointments Clause.
  • Count IV.  Actions taken by Mr. Mulvaney as Acting Director violate the Administrative Procedure Act because they are not “in accordance with law.”
  • Count V.  Ms. English is entitled to declaratory relief under the Declaratory Judgment Act.
  • Count VI.  Ms. English is entitled to equitable relief.

 

We have previously blogged about reports that Mick Mulvaney, President Trump’s designee as CFPB Acting Director, has put a 30-day freeze on all regulatory action, CFPB hiring, and new enforcement cases.  We also blogged about the CFPB’s withdrawal of its opposition to a motion filed by the defendants in an enforcement action to stay execution of a $7.9 million judgment obtained by the CFPB without posting a bond.

Mr. Mulvaney is reported to have also taken the following recent actions:

  • Placing a freeze on the CFPB’s collection of any personally identifiable information, such as individual loan level data, until the CFPB improves its data security systems.  The Office of Inspector General for the CFPB issued two reports earlier this year (which we blogged about here and here) in which it found deficiencies in the CFPB’s data security practices.
  • Approving payments out of the civil penalty fund.  (Since Mr. Mulvaney is reported to have placed a 30-day freeze on such payments, presumably the approved payments represent an exception.)
  • Directing CFPB staff to examine all investigations and litigation.  It has been reported that Mr. Mulvaney has suspended the CFPB’s investigation of a company that has challenged the CFPB’s constitutionality and authority to issue a civil investigative demand to the company pending a ruling by the federal district court hearing the company’s challenge.

It has also been reported that Mr. Mulvaney has voiced support for Congressional efforts to override the CFPB’s final payday loan rule.  We recently blogged about the introduction of a joint resolution under the Congressional Review Act to override the rule by a bipartisan group of lawmakers.

With regard to Leandra English, who was appointed CFPB Deputy Director by Richard Cordray before his resignation as CFPB Director and is challenging Mr. Mulvaney’s right to serve as Acting Director, Mr. Mulvaney is reported to have indicated that he has no plans to dismiss Ms. English but has sent her several emails either instructing her to stop holding herself out as Acting Director or asking her to perform duties that fall within her purview as Deputy Director.