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Clients are always asking me and others in our Consumer Financial Services Group about how long Richard Cordray will remain as CFPB Director.  The short answer is nobody knows, perhaps not even Richard Cordray.  There are a number of factors, however, that lead me to believe that he will remain as Director until the end of his term on July 16, 2018 unless he voluntarily resigns before then to run for Governor of Ohio.

A Politico article yesterday reported that Gary Cohn, top White House economic aide, recently had a dinner meeting with Director Cordray at which he gave him an ultimatum:  resign or be removed by President Trump.  The article reported that Mr. Cohn had heard the rumors that Director Cordray wants to run for Ohio governor and, according to people familiar with the meeting, left the dinner thinking that the rumors were true.  According to the article, the White House decided to hold off on firing Director Cordray because President Trump “didn’t want to cause a sensation that could boost his candidacy and juice his fundraising.”

While it is very hazardous to predict what President Trump will do, I doubt whether he will try to remove Director Cordray either for cause or without cause.  As things now stand, the only event which could change my opinion would be if the Court of Appeals en banc in the PHH case were to reach the same conclusion as the 3-judge panel in the case – namely, that the CFPB was unconstitutionally structured and the appropriate remedy is to enable the President to remove the Director without cause – and the en banc judgment were to become final before Director Cordray’s term ends on July 16, 2018 (which is only 15 months away).  In my view, the likelihood of those events happening before July 16, 2018 is remote.

The recent filing of a brief  by the DOJ in the PHH case essentially urging  the en banc court to adopt the opinion of the 3-judge panel  suggests that President Trump will not jump the gun by attempting to remove Director Cordray before a final judgment in the PHH case authorizes him to do so.  An attempt by the President to remove Director Cordray for cause would likely trigger a legal challenge by Director Cordray that would outlast the expiration of his term unless his removal were to coincide with a decision by him to voluntarily resign to run for Ohio Governor.  Such a lawsuit would likely be stayed pending the outcome of the PHH case.  If President Trump intended to pursue a removal for cause, I believe he would have done so by now.  If he were to attempt now to remove Director Cordray for cause, that would also likely result in litigation that would outlast July 16, 2018 and, in the meantime, Director Cordray might remain in office.

Ultimately, I believe the length of Director Cordray’s remaining tenure at the CFPB will turn on whether he decides to run for Ohio Governor, and, if so, his view on when he needs to resign as Director to begin his campaign.

Even if Director Cordray remains at the CFPB for several months or longer, it does not necessarily mean that he will finalize any new regulations.  While he should have sufficient time to finalize at least the arbitration regulation, he may be deterred from doing so because of his concern that the rule will be overridden by Congress and President Trump under the Congressional Review Act.  Congress and President Trump have already overridden at least 13 final regulations issued by other federal agencies.

While Director Cordray may be deterred from finalizing any additional regulations, there is no reason to believe that there will be any let-up in his continuing pursuit of his enforcement and supervisory activities.  Indeed, the CFPB has initiated 9 enforcement actions since President Trump’s inauguration.

Recently, Richard Cordray was interviewed by CNBC while eating breakfast at a diner in his hometown in Ohio.  The interview was more noteworthy for what it failed to cover than for what it covered.  He was not asked the following questions:

  1. Do you still intend to issue a final arbitration rule and, if so, when will that happen? Are you worried about the possibility that if you do issue such a rule, it will be overridden by Congress under the Congressional Review Act?
  2. If President Trump tries to remove you for cause, will you fight the removal in court?
  3. Rumors are swirling that you intend to run for Governor in Ohio? Are the rumors true and, if so, when would you need to resign and begin your campaign?
  4. The PHH case may result in giving President Trump the right to remove you without cause. Do you regret taking the action that your agency took in light of the fact that it was contrary to the position that HUD took regarding the same RESPA issue?
  5. Does your agency still take the position that there is no statute of limitations when you prosecute an enforcement action before an Administrative Law Judge in the face of the DC Circuit panel’s decision holding that the same statute of limitations that applies in court applies in an administrative proceeding?
  6. Have you had discussions with anyone in the White House or part of the transition team and, if so, what message have they delivered to you?
  7. Have you met with Attorney General Sessions or any of his aides and, if so, do you expect that there will be any changes in the level of cooperation between your two agencies, particularly in fair lending cases?
  8. Why haven’t you selected a Deputy Director?

I, for one, learned more about what he likes eating for breakfast than the answers to the important questions that I posed and that our clients are asking me every day.

Here are the highlights from Richard Cordray’s interview earlier today with the Wall Street Journal.

He refused to respond to the question of whether or not the memo issued on January 20 on behalf of President Trump by his Chief of Staff, Reince Priebus, directing a moratorium with respect to regulations issued by executive agencies applies to the CFPB. He stated that he would “leave it to the lawyers at this point” to figure that out.

He also refused to express an opinion about whether the governance and the funding of the CFPB should be changed legislatively. He stated that it is “above my pay grade” and up to Congress.

He also stated that he would accept the opinion of the DC Circuit with respect to whether the Dodd -Frank Act is or is not constitutional. He stated that it was completely up to the courts to figure out whether President Trump has the right to remove him as director and he did not indicate, one way or another, whether he would resign voluntarily. In answer to a question posed at a press conference briefing yesterday, President Trump’s Press Secretary Spicer, stated that “no decision” has been made about Director Cordray’s future at the CFPB.

He expressed the opinion that the “vast majority “ of all of the CFPB enforcement activity deals with deceptive conduct, implying that people on both sides of the political aisle would be hard-pressed to quarrel with that.

He stated that the pace of law enforcement will remain “steady and vigorous” during the remainder of his term.

Finally, he indicated that a rulemaking dealing with the collection of information regarding loans to small businesses is a “work in process.” It did not sound like anything is imminent.

Republican members of the House Financial Services Committee recently released a report, prepared by the Republican Staff of the Committee, titled “Unsafe at Any Bureaucracy, Part III: The CFPB’s Vitiated Legal Case Against Auto Lenders.”  This is the third Republican Staff report examining the automotive ECOA enforcement actions of the CFPB with respect to what its characterizes as a “dealer markup” of the wholesale buy rate established by the assignee of a retail installment sale contract (“RISC”).  We previously wrote about the first investigative report in this series, which was titled “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending.”  The latest report discusses two subjects.

The “Vitiated Legal Case”

The third report is devoted principally to “demonstrat[ing] that under” the Supreme Court decision in Inclusive Communities, “if the CFPB were to rely upon the legal theory it deployed in previous enforcement actions against auto financiers, its claims would not survive judicial scrutiny.”  As a threshold matter, the report asserts that disparate impact claims are not cognizable under the ECOA because the ECOA does not contain “results-oriented language” like that which the Supreme Court relied upon in holding that disparate impact claims are cognizable under the Fair Housing Act (“FHA”).   The ECOA speaks instead in terms of discriminating against an applicant on a prohibited basis.  The report further asserts that Inclusive Communities interpreted the adoption of the FHA Amendments of 1988, which it said contemplated the existence of disparate impact liability, as Congressional ratification of prior appellate decisions holding that disparate impact claims are cognizable under the FHA.  By way of contrast, however, the report notes that “Congress has made no such amendments to ECOA.”

The staff report also asserts, and contains a robust discussion of, additional reasons why the Bureau could not establish a prima facie case of disparate impact liability against an assignee of RISCs.  Specifically, for reasons discussed therein, the report concludes that: (i) the asserted “discretion” to “mark up” the wholesale buy rate is not a specific “policy” upon which a disparate impact claim may be based; and (ii) the CFPB could not meet the robust causality standard that Inclusive Communities reiterated and expounded upon in its discussion of the safeguards against abusive disparate impact claims.  Finally, the report suggests that, “[b]y asking only whether a minority [buyer] paid more than the non-Hispanic white average, the CFPB does not accurately assess whether he or she was actually harmed by the disparate impact.”

The report’s discussion of the “vitiated legal case” against assignees of RISCs concludes with the observations that “[f]uzzy logic and false comparisons are unfortunately prevalent in the” Bureau’s ECOA auto enforcement actions, as is a “lack of rigor that leads to unsupported and unreliable conclusions.”  We have written previously about some of the issues discussed in the report, including in our articles on the Supreme Court decision in Inclusive Communities, “Auto Finance and Disparate Impact: Substantive Lessons Learned from Class Certification Decisions,” and a February 2006 Business Lawyer article titled “The ECOA Discrimination Proscription and Disparate Impact – Interpreting the Meaning of the Words That Actually Are There.”

The Auto Finance Larger Participant Rule

The press release issued by the Republican members of the Committee highlights the final subject covered by the report.   Titled “CFPB Director Failed to Heed Attorney Advice on Auto Lending Rule, Likely Violated Federal Law,” the press release asserts that the Bureau may have violated the Administrative Procedures Act in adopting the larger participant rule for the automobile financing market (the “LPR”).  Quoting from the Supplementary Information accompanying the proposed LPR, the report states that the definition of a “larger participant” is “based upon ‘quantitative information on the number of market participants and their number and dollar volume of annual originations’ taken from Experian’s AutoCount database.”

According to the report, during the comment period for the proposed LPR, the Bureau received requests for a list of the companies that it believed would qualify as “larger participants” under the proposed rule, and “‘a number of comments pertaining directly or indirectly to the Experian list.’” Believing the Experian AutoCount data, and any information derived from it, to be proprietary information that it was not at liberty to disclose, the Bureau did not respond with the requested information.

The report indicates, however, that after the comment period ended, Experian informed the Bureau that it had no objection to: (i) releasing the list of the names of the entities that the Bureau estimated would be “larger participants” under the proposed volume threshold for larger participant status; and (ii) the relative market share for each listed entity.  Relying upon internal CFPB documents obtained by the Committee, the report asserts that the Bureau did not follow an internal legal recommendation to reopen the comment period, publish this information and request comments with respect to it before proceeding to adopt a final LPR for the automobile financing market.

The CFPB announced that the following individuals are joining its senior leadership team:

  • Leandra English is returning to the CFPB to serve as the Chief of Staff.  Ms. English previously served in several senior CFPB leadership roles, including deputy chief operating officer, acting chief of staff, deputy chief of staff, and deputy associate director of external affairs.  Most recently, Ms. English served as the principal deputy chief of staff at the Office of Personnel Management.
  • Jerry Horton will serve as the CFPB’s Chief Information Officer.  Before joining the CFPB, Mr. Horton worked at the Department of State where he started and led the Office of the Chief Architect for State’s global information presence.  He also previously served as the chief information officer at the U.S. Agency for International Development and at the U.S. Mint in the Department of the Treasury.
  • Paul Kantwill will serve as the CFPB’s Assistant Director for Servicemember Affairs.  Prior to joining the CFPB, Mr. Kantwill served as the director of the Pentagon’s Office of Legal Policy, Office of the Under Secretary of Defense, Personnel & Readiness.  In that position, Mr. Kantwill was the Department of Defense’s legal policy expert on the financial industry and the effects of financial products and services on military members and their families.
  • John McNamara will serve as the CFPB’s Assistant Director of Consumer Lending, Reporting, and Collections Markets.  Mr. McNamara previously served in the same capacity in an acting role, and before that was the CFPB’s debt collection program manager.
  • Elizabeth Reilly will serve as the CFPB’s Chief Financial Officer.  Ms. Reilly previously served as the CFPB’s deputy chief financial officer.

As a result of Donald J. Trump’s election as President, coupled with the Democrats’ failure to wrest control of the House or Senate from the Republicans, the CFPB can be expected to undergo significant changes that are likely to have the effect of reducing the agency’s impact.

On November 30, 2016, from 2 p.m. to 3 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Election Post-Mortem: What It Means for the CFPB, Other Federal and State Regulators, and the Industry.”  The webinar registration form is available here.

The most visible expected change is Mr. Trump’s replacement of Director Richard Cordray.  How soon that occurs post-inauguration may depend on whether the CFPB seeks further judicial review of the D.C. Circuit’s decision in CFPB v. PHH Corporation and, if so, the outcome of such review.  In its decision, the D.C. Circuit ruled that the CFPB’s single-director-removable-only-for-cause structure was unconstitutional.  To remedy the constitutional defect, the court severed the removal-only-for-cause provision from the Dodd-Frank Act so that the President can now “remove the Director at will at any time.”  Unless and until the PHH decision takes effect (or Congress amends the Dodd-Frank Act), Mr. Trump could only remove Director Cordray “for cause” before the Director’s term ends in 2018.

Once appointed by Mr. Trump, a new Director can be expected to take aim at the CFPB’s “rulemaking by enforcement” approach that has been the target of Republican criticism by decreasing CFPB enforcement activity while using CFPB rulemaking as a way to limit the CFPB’s exercise of its enforcement authority.  For example, a new Director might seek the CFPB’s adoption of a rule to define the practices that are considered “abusive” for purposes of the CFPB’s authority to prohibit unfair, deceptive, or abusive acts or practices.  A new Director’s efforts to promote rulemaking over enforcement might also include seeking the repeal of the CFPB’s auto finance fair lending guidance.  (One of the criticisms leveled at the guidance is that it should not have been adopted outside the rulemaking process.)

In addition, if the CFPB’s proposed payday lending and arbitration rules have not been finalized when a new Director is appointed, a new Director might seek to withdraw or amend the proposals.  Also, since the CFPB has not yet issued a proposed debt collection rule but has issued only an advance notice of proposed rulemaking, it is possible a proposed rule, if any, will not be issued until a new Director is in place and therefore might be more industry-friendly.  (These potential scenarios could also motivate Director Cordray to accelerate the three rulemakings.)

The election results also substantially increase the likelihood that Congress will enact some of the reforms to the CFPB’s structure, funding, and operation that have been the subject of numerous bills introduced by Republicans over the approximately five years the CFPB has been operational.  Such bills include “The Financial CHOICE Act of 2016,” the Dodd-Frank Act replacement bill that was approved this past September by the House Financial Services Committee.  Most notably, the CHOICE Act, like previous Republican bills, would replace the CFPB’s current single director with a bipartisan, five-member commission and fund the agency through the appropriations process rather than through transfers from the Federal Reserve.  The effects of these changes are likely to include a longer timeline for CFPB rulemaking, a less partisan-driven CFPB agenda, and greater Congressional influence on CFPB decision-making.

The CFPB has announced the following senior leadership changes:

  • Stacy Canan will serve as the CFPB’s Assistant Director for the Office for Older Americans.  Ms. Canan had been serving as the deputy assistant director for the Office for Older Americans since joining the Bureau in November 2012.  Before joining the CFPB, Ms. Canan was the managing attorney at the AARP Foundation Litigation group where she handled consumer protection and healthcare cases nationwide.
  • John Coleman will serve as the CFPB’s Deputy General Counsel for Litigation and Oversight in the Legal Division. Since joining the Bureau in November 2010, Mr. Coleman has served as the assistant general counsel for litigation, and as senior litigation counsel.  Before joining the Bureau, Mr. Coleman worked as a trial attorney in the Department of Justice’s Federal Programs Branch.
  • Sonya White will serve as the CFPB’s Deputy General Counsel for General Law and Ethics in the Legal Division.  Ms. White previously served as the Bureau’s assistant general counsel for general law and ethics.  Before joining the CFPB in February 2013, Ms. White worked as the deputy chief counsel at the U.S. Treasury Department, Bureau of Engraving and Printing.

The CFPB has announced the following senior leadership changes:

  • Chris D’Angelo will serve as the CFPB’s Associate Director for Supervision, Enforcement and Fair Lending.  Mr. D’Angelo is currently the Bureau’s chief of staff.  He replaces David Bleicken, who has been serving as the Acting Associate Director since the departure of Steven Antonakes from the CFPB last July.  (Mr.  Antonakes held the title of CFPB Deputy Director as well as Associate Director for Supervision, Enforcement and Fair Lending.)
  • Richard Lepley will serve as the CFPB’s Principal Deputy General Counsel in the Office of the General Counsel in the Legal Division.  For the past five years, Mr. Lepley has worked as the CFPB’s deputy general counsel for general law, ethics and oversight.
  • Nellisha Ramdass will serve as the CFPB’s Deputy Chief Operating Officer.  Previously, Ms. Ramdass was in charge of team operations in the Office of Technology and Innovation including serving as the acting deputy chief information officer.

On May 11, 2016, the CFPB sued All American Check Cashing, Mid-State Finance and their President and owner Michael E. Gray. It alleged that the Defendants engaged in abusive, deceptive, and unfair conduct in making certain payday loans, failing to refund overpayments on those loans, and cashing consumers’ checks.

The CFPB’s claims are mundane. The most interesting thing about the Complaint is the claim that isn’t there. Defendants allegedly made two-week payday loans to consumers who were paid monthly. They also rolled-over the loans by allowing consumers to take out a new loan to pay off an old one. The Complaint discusses how this practice is prohibited under state law even though it is not germane to the CFPB’s claims (which we discuss below). In its war against tribal lenders, the CFPB has taken the position that certain violations of state law themselves constitute violations of Dodd-Frank’s UDAAP prohibition. Yet the CFPB did not raise a UDAAP claim here based on Defendants’ alleged violation of state law.

This is most likely because of a possible nuance to the CFPB’s position that has not been widely discussed until recently. Jeff Ehrlich, CFPB Deputy Enforcement Director recently discussed this nuance at the PLI Consumer Financial Services Institute in Chicago chaired by Alan Kaplinsky. There, he said that the CFPB only considers state-law violations that render the loans void to constitute violations of Dodd-Frank’s UDAAP prohibitions. The Complaint in the All American Check Cashing case is an example of the CFPB adhering to this policy. Given that the CFPB took a more expansive view of UDAAP in the Cash Call case, it has been unclear how far the CFPB would take its prosecution of state-law violations. This case is one example of the CFPB staying its own hand and adhering to the narrower enforcement of UDAAP that Mr. Ehrlich announced last week.

In the All American Complaint, the CFPB cites an email sent by one of Defendants’ managers. The email contained a cartoon depicting one man pointing a gun at another who was saying “I get paid once a month.” The man with the gun said, “Take the money or die.” This, the CFPB claims, shows how Defendants pressured consumers into taking payday loans they didn’t want. We don’t know whether the email was prepared by a rogue employee who was out of line with company policy. But it nevertheless highlights how important it is for every employee of every company in the CFPB’s jurisdiction to write emails as if CFPB enforcement staff were reading them.

The Complaint also shows how the CFPB uses the testimony of consumers and former employees in its investigations. Several times in the Complaint, the CFPB cites to statements made by consumers and former employees who highlighted alleged problems with Defendants’ business practices. We see this all the time in the many CFPB investigations we handle. That underscores why it is very important for companies within the CFPB’s jurisdiction to be mindful of how they treat consumers and employees. They may be the ones the CFPB relies on for evidence against the subjects of its investigations.

The claims are nothing special and unlikely to significantly impact the state of the law. Although we will keep an eye on how certain defenses that may be available to Defendants play out, as they may be of some interest:

  • The CFPB claims that Defendants abused consumers by actively working to prohibit them from learning how much its check cashing products cost. If that happened, it is certainly a problem. Although, the CFPB acknowledged that Defendants posted signs in its stores disclosing the fees. It will be interesting to see how this impacts the CFPB’s claims. It seems impossible to hide a fact that is posted in plain sight.
  • The CFPB also claims that Defendants deceived consumers, telling them that they could not take their checks elsewhere for cashing without difficulty after they started the process with Defendants. The CFPB claims this was deceptive while at the same time acknowledging that it was true in some cases.
  • Defendants also allegedly deceived consumers by telling them that Defendants’ payday and check cashing services were cheaper than competitors when this was not so according to the CFPB. Whether this is the CFPB making a mountain out of the mole hill of ordinary advertising puffery is yet to be seen.
  • The CFPB claims that Defendants engaged in unfair conduct when it kept consumers’ overpayments on their payday loans and even zeroed-out negative account balances so the overpayments were erased from the system. This last claim, if it is true, will be toughest for Defendants to defend.

Most companies settle claims like this with the CFPB, resulting in a CFPB-drafted consent order and a one-sided view of the facts.  Even though this case involves fairly routine claims, it may nevertheless give the world a rare glimpse into both sides of the issues.

Earlier this week, the CFPB announced the addition of several new members to its senior leadership team.

The announcement included the news that the CFPB has filled the position of Assistant Director for the Office of Small Business Lending Markets.  The CFPB’s job posting indicated that the Assistant Director would head the CFPB’s team involved in developing rules to implement the small business lending data requirements of Dodd-Frank Section 1071.  Section 1071 amended the Equal Credit Opportunity Act 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.  Presumably, the hiring of the Assistant Director means that the CFPB will now move forward on rulemaking.

The leadership additions announced by the CFPB were the following:

  • Grady Hedgespeth will serve as the Assistant Director for the Office of Small Business Lending Markets.  Before joining the CFPB, Mr. Hedgespeth served as the Director of the Office of Economic Opportunity for the U.S. Small Business Administration.  He originally joined the Small Business Administration in 2007 as the Director of the Office of Financial Assistance where he oversaw the agency’s business lending programs.  Before working in government, Mr. Hedgespeth led two different national small business community development financial institution lenders and created several businesses focused on underserved markets at some of the nation’s largest banks.
  • Seth Frotman will serve as the CFPB’s Student Loan Ombudsman and Assistant Director for the Office for Students and Young Consumers.  Mr. Frotman had been serving in the same positions on an acting basis.  He originally joined the CFPB as part of the Treasury Implementation Team in early 2011 as senior advisor to Holly Petraeus, the Assistant Director for the Office of Servicemember Affairs.
  • Elizabeth Ellis will serve as the Deputy Associate Director for the External Affairs Division.  Ms. Ellis previously served as the CFPB’s Deputy Assistant Director for the Office of Financial Institutions and Business.  Before that, she served as the Senior Advisor to the CFPB’s Chief of Staff.
  • Katherine Gillespie will serve as the Deputy Associate Director for the Consumer Education and Engagement Division. Ms. Gillespie previously served in the same position on an acting basis. Before that, Ms. Gillespie served as Senior Counsel to the CFPB’s Bureau’s Deputy Director and the Associate Director of the Supervision, Enforcement, and Fair Lending Division.  Ms. Gillespie originally joined the CFPB in 2011 as a senior counsel in the Office of Fair Lending and Equal Opportunity.
  • Chris Johnson will serve as the Assistant Director for the Office of Consumer Response.  Mr. Johnson previously served in the same position on an acting basis.  He joined the Office of Consumer Response in January 2011 as a member of the Treasury Implementation Team.  Within the Office of Consumer Response, Mr. Johnson has worked as the Deputy Assistant Director, a section chief, and a quality assurance manager.
  • John Schroeder will serve as the Midwest Regional Director for the Office of Supervision Examinations.  Mr. Schroeder previously served in the same position on an acting basis.  He joined the CFPB in March 2013 and before becoming an acting regional director, he worked as the Assistant Regional Director and as a field manager in the Midwest region.

We note that the CFPB has still not filled the position of Deputy Director, which has been open since Steven Antonakes resigned in July 2015.  Following Mr. Antonakes’ departure, Meredith Fuchs served as Acting Deputy Director.  In January 2016, the CFPB announced that David Silberman would replace Ms. Fuchs as the CFPB’s Acting Deputy Director.