PHH filed its reply brief with the D.C. Circuit on April 10 in the en banc rehearing of the PHH case. We have blogged extensively about the case since its inception. Central to the case is whether the CFPB’s single-director-removable-only-for-cause structure is constitutional. Of course, the CFPB fiercely defends its structure, while PHH, the DOJ, and others argue that the CFPB’s structure epitomizes Congressional usurpation of executive power in violation of the constitution’s separation of powers principles.

If the CFPB’s structure is constitutional then there is no reason why Congress can’t divest the President of all executive power, PHH argues. “[I]f Congress can divest the President of power to execute the consumer financial laws, then it may do so for the environmental laws, the criminal laws, or any other law affecting millions of Americans.” “The absence of any discernible limiting principle is a telling indication that the CFPB’s view of the separation of powers is wrong.”

Even if existing Supreme Court precedent authorizes Congress to assign some executive power to independent agencies, PHH argued that the CFPB’s structure goes too far. “No Supreme Court case condones the CFPB’s historically anomalous combination of power and lack of democratic accountability, and the Constitution forbids it.” The fact that the CFPB has the power of a cabinet-level agency while lacking any democratic accountability or structural safeguards is a sure sign that its structure is unconstitutional.

The only remedy to the CFPB’s unconstitutional structure, PHH argues, is to dismantle the agency entirely. “The CFPB’s primary constitutional defect, the Director’s unaccountability [], is not a wart to be surgically removed. Congress placed it right at the agency’s heart, and it cannot be removed without changing the nature of what Congress adopted.”

* * *

PHH’s reply completes the briefing in this appeal. Oral arguments are scheduled to take place on May 24, with each side being given 30 minutes to argue. On April 11, the D.C. Circuit granted the DOJ’s request for 10 minutes to present its views during oral argument.

Several individuals and organizations filed amicus briefs in support of the CFPB in the en banc rehearing in the PHH case. Among the amici is a brief filed by current and former members of Congress, including Chris Dodd and Barney Frank, the principal architects and namesakes of the Dodd-Frank Act, which created the CFPB. Senator Sherrod Brown and Representative Maxine Waters, both of whom previously sought to intervene, joined the brief as well.

The current and former members of Congress assert that the structure of the CFPB is constitutional and critical to the congressional design of Dodd-Frank. They stress the importance of the CFPB’s “independence” and the ability of a single director “to avoid the delay and gridlock to which multi-member agencies are susceptible.” These themes are repeated throughout the brief.

Of course, the flipside of independence is unaccountability. The CFPB’s structure heavily shields it from the consequences of an election. The ability of voters to voice their approval or disapproval with the CFPB’s enforcement and rulemaking is far lower than that of other important agencies such as the EPA. And although a single director may be able to move more swiftly than a multi-member commission, faster is not always better. Before a multi-member commission reaches a decision, it must debate the matter internally among a group of commissioners with diverse perspectives and experiences. That internal debate arguably has the ability to produce a better, more efficient outcome than any individual commissioner would be able to reach on their own. Indeed, input from multiple commissioners is particularly valuable to an agency like the CFPB that relies more heavily on enforcement actions than notice-and-comment rulemaking to effect industry-wide change.

A group of financial regulation scholars likewise submitted a brief in support of the CFPB’s position, focused entirely on the constitutionality of the CFPB’s structure. The scholars’ brief is, not surprisingly, more esoteric than many of the other briefs submitted in the case. Unlike the CFPB, the scholars concede that its structure is “novel,” but argue that the novel structure is evidence of a creative legislative approach to an issue, not evidence that it is unconstitutional. The brief then attempts to argue two seemingly inconsistent positions: 1) that the CFPB’s independence is necessary to prevent regulatory capture, but 2) the CFPB is subject to significant oversight.

The scholars’ regulatory capture argument is particularly weak. They claim that three features of the CFPB’s structure are key to preventing business interests from capturing the CFPB: “non-appropriated funding; a for-cause removal standard; and a single director.” The scholars correctly note that industry funding can create regulatory capture in the classical sense in that the regulated industry has direct control over the agency’s funding. That argument has no relevance to the actual issue in this case, however, since the real controversy is whether the CFPB should be subject to Congressional appropriations, not whether it should be industry funded.

The scholars then switch from capture theory to public-choice theory to argue that Congressional appropriation is unwise because concentrated industry groups have greater influence over Congress and the Executive Branch than individual consumers. In making this argument, the scholars focus not on industry capture of the CFPB but of the entire Legislative and Executive Branches. And the activities with which the scholars take issue – lobbying and campaign contributions – are key First Amendment activities. The scholars therefore argue that the CFPB’s structure is necessary because members of the public might exercise their First Amendment rights successfully to oppose the actions of the CFPB.

The scholars then undercut their legislative-and-executive-capture argument completely in the next session of their brief, in which they argue that the CFPB is, in fact, subject to extensive legislative oversight and control. This argument is wholly inconsistent with the prior argument that the CFPB is completely independent and thus immune from capture. Namely, if the CFPB is subject to extensive oversight and control, then it is also subject to Legislative-and-Executive capture.

A group of separation of powers scholars likewise filed an amicus brief heavy on theory. As their name suggests, the separation of powers scholars focus on whether the single director, removable-for-cause feature of the CFPB violates constitutional separation of powers principals. The brief firsts undertakes an originalist-style historical analysis of early federal-and-state executive agencies. Next, the scholars argue that the number of commissioners is irrelevant to the constitutional analysis. Then, they argue that the for-cause removability feature leaves enough Presidential discretion over the CFPB Director to preserve its constitutionality.

Finally, in a preview of arguments likely designed to drive a wedge between Justice Kennedy and other members of the Supreme Court, Chief Justice Roberts in particular, the scholars argue that abstract concerns over the protection of “individual liberty” and separation of powers do not supply independent constitutional bases to invalidate the CFPB structure. Instead, they argue that the structure must violate a specific constitutional provision, not an abstract ideal. This particular line of argument will likely receive greater attention if the constitutional issues reach the Supreme Court, as there are different views regarding it among the conservative majority.

A host of “consumer and civil rights organizations who advocated for the CFPB’s creation,” many of which unsuccessfully sought to intervene, filed a brief that mainly covers public policy arguments in favor of the CFPB’s structure. They essentially argue that the CFPB has succeeded where other agencies failed in terms of protecting consumers.

The AARP also filed an amicus brief in support of the CFPB’s position. Unlike other amici, however, the AARP brief focused more on the RESPA issues in the case than the more esoteric constitutional issues. The AARP claimed that kickbacks and “junk fees” have a disproportionate impact on older individuals.  It argued that older individuals are often the target of “unscrupulous mortgage lending practices,” which increases the cost of homeownership to older individuals by several thousand dollars. After the policy-heavy introduction, the brief tackles the history and purpose of the RESPA provisions at issue, which we blogged about in detail.

Although the constitutional issues received the most attention in the press, the RESPA issues discussed in the AARP brief could very well be more important to the outcome of the appeal. The court could reverse the district court on the RESPA issues and invoke the doctrine of constitutional avoidance to decline to reach the overall constitutionality of the CFPB’s structure.

On March 31, the CFPB and supporting amici submitted their briefs in the en banc rehearing of the PHH case. We have blogged extensively about the PHH case in which the D.C. Circuit is grappling with four critical issues: (i) whether the CFPB’s structure is constitutional (the CFPB says, yes), (ii) whether administrative actions brought by the CFPB are subject to a statute of limitations (the CFPB says, no), (iii) whether the CFPB’s interpretation of RESPA is correct (the CFPB says, yes), and (iv) whether the CFPB’s interpretation of RESPA, which differs from HUD’s historical interpretation, can be applied retroactively (the CFPB says, yes). We’ll focus here on the CFPB’s constitutional arguments.

The CFPB’s main argument is that under Humphry’s Executory and its progeny, there is only one relevant question to determining whether its structure is constitutional: Is its structure “of such a nature that [it] impede[s] the President’s ability to perform his constitutional duty” to take care that the laws are faithfully executed? It insists that the  D.C. Circuit panel erred in undertaking “’an additional inquiry’ into whether an agency’s structure somehow threatens individual liberty.”

This is, of course, a strained argument. On the one hand the CFPB grants that its structure is a “departure from tradition” in that “most independent agencies[, like the FTC,] have been headed by multi-member commissions.” Yet, at the same time, the CFPB argues that the D.C. Circuit must slavishly apply precedents such as Humphry’s Executor which address (and, indeed, create) the “traditional” structure of independent agencies. It seems obvious that a different structure demands a different analysis.

In making this argument, the CFPB ignores the underlying separation of powers issue by insisting that the protections for individual liberty in the structure of other independent agencies are irrelevant to the constitutional analysis.  Counsel for PHH put it succinctly in recent testimony before a Senate sub-committee. Quoting James Madison, he pointed out that the consolidation of executive, judicial, and legislative power in one person is the “very definition of tyranny.”  By constituting other independent agencies as commissions, Congress prevented that consolidation and avoided the very problem the U.S. structure of government was designed to prevent. Yet, the CFPB argues that the commission and single-director structures are “indistinguishable” from a constitutional perspective.

The CFPB also ignores other features of agencies with a  commission structure that  make them more likely to operate as “independent” agencies, a precondition to the courts’ acceptance of their constitutionality. For example, no more than three of the FTC’s five commissioners can be of the same political party. As a result, the decision-making body at the FTC is required to receive input from those with differing views.  Not so with the CFPB director. He can set an agenda driven by the politics of his party without any check on his authority, even if that agenda is completely contrary to that of the President. This too is irrelevant from the CFPB’s perspective.

As we had indicated, on March 16, the subcommittee on Oversight and Investigations of the House Financial Services Committee conducted a hearing entitled “The Bureau of Consumer Financial Protection’s Unconstitutional Design.” Unsurprisingly, Republicans and Democrats on the subcommittee talked past each other in making remarks and questioning the four witnesses: Ted Olson, Saikrishna Prakash, Adam White, and Brianne Gorod.

The Democrats on the subcommittee, by and large, ignored the constitutional issues. One Democratic subcommittee member, Keith Ellison of Minnesota, stated that the constitutional arguments are a “subterfuge” for business interests’ desire to go back to having the un-checked ability to abuse consumers. Instead of the constitutional issues, subcommittee Democrats focused principally on the “good” outcomes that the CFPB has achieved for consumers. They cited the billions and billions in fines and redress that the CFPB has extracted from the financial services industry, among other things. Various Democratic subcommittee members vowed to protect the CFPB from being dismantled by what they saw as the forces of evil.

Oddly, the ranking member of the subcommittee, Al Green, a Democrat from Texas, spent almost all of his time criticizing the subcommittee for holding the hearing while the PHH case was pending before the D.C. Circuit. He found it particularly troublesome that Ted Olson would be testifying before Congress instead of advocating in the courts. His zeal for the issue was especially peculiar, given that Gorod, another witness testifying on the panel, was an attorney who represented Mr. Green and other Congressional Democrats in filing amicus briefs in the PHH case in an attempt to intervene on behalf of the CFPB.

Republicans, in contrast, focused on the constitutional issues, namely, the CFPB’s lack of accountability either to Congress or the President and the unprecedented consolidation of legislative, judicial, and executive power in the CFPB director. In response to questioning on these issues, Ted Olson, quoting James Madison, said that such consolidation of power is “the very definition of tyranny.”

Of course, while the Republicans focused on the constitutional issues, they did not miss the opportunity to shoot a few barbs back at Democrats on the “results” achieved by the CFPB. They pointed out that the CFPB’s various accomplishments have increased the size of the unbanked population in America, diminished access to credit, and hurt smaller financial institutions who cannot afford “armies” of lawyers and compliance professionals.

Republicans on the subcommittee and three of the witnesses, Olson, White, and Prakash, seemed to agree that three steps are needed to fix the CFPB’s structure: (i) eliminate the removal only for cause provision, (ii) make the CFPB’s budget part of the appropriations process, and (iii) limit the Chevron deference afforded to the CFPB’s interpretations of consumer financial services laws.

Republicans, Olson, White, and Prakash also agreed that the President has the right and responsibility to refuse to enforce unconstitutional laws. Republicans on the subcommittee took this to mean that the President has the power, even now that the PHH panel decision has been vacated, to remove Director Cordray from office at will.

Olson, White, and Prakash also pointed out the dangerous precedent the CFPB structure would set for future agencies. All agreed at various points during the hearing that, if the CFPB’s current structure is constitutional, that would mean no limit exists on Congress’s ability to vest executive, judicial, and legislative authority in anyone of its choosing. They argued that, if the CFPB’s structure stands, there is nothing left of the separation of powers doctrine or the unitary executive.

The DOJ submitted its amicus brief in the PHH case on Friday, March 17.  We have blogged extensively about this case since its inception. Unsurprisingly, the Trump DOJ supports striking from Dodd-Frank the removal-only-for-cause protection currently applicable to the director of the CFPB.  In its “view, the panel correctly applied severability principles and therefore properly struck down only the for-cause removal restrictions.”  If the DOJ gets its way, the CFPB would remain intact with a director that President Trump can replace at any time.

While PHH likely appreciates the DOJ’s support, the DOJ is advocating a more limited remedial measure than PHH is seeking.  As we’ve noted before, PHH is arguing in the case that the CFPB should be dismantled in its entirety because its “unprecedented independence from the elected branches of government violates the separation of powers” and because the CFPB’s “constitutional infirmities extend far beyond limiting the President’s removal power…the proper remedy is to strike down the agency in its entirety.”  In sharp contrast, the Trump DOJ supports keeping the CFPB intact with a director removable at the will of the President.

Though the brief does not highlight the fact, the Trump DOJ has departed substantially from the position that the DOJ took under President Obama.  The departure is most obvious in brief’s first footnote, where the DOJ notes that “[i]n one case filed against several federal agencies and departments . . ., [t]he [DOJ’s] district court briefs . . . argued that, based on the Supreme Court’s decision in Humphrey’s Executor, the CFPB’s for-cause removal provision is consistent with the Constitution.”  However, the footnote goes on, “[a]fter reviewing the panel’s opinion here and further considering the issue, the [DOJ] has concluded that the better view is that the provision is unconstitutional.”  The obviously political nature of the change makes it difficult to predict how the judges on the court will react to the DOJ’s brief.

Of course, the change at the DOJ is not reflected in the CFPB’s view, which is diametrically opposed to the DOJ’s.  It’s rare that two executive agencies disagree so starkly and so publicly on an issue of such importance.  This contrast only highlights the problems created by a federal agency headed by a single person that is not accountable to the president.

The D.C. Circuit issued its long-awaited decision in PHH Corporation v. CFPB. In reversing the decision of Consumer Financial Protection Bureau (CFPB) Director Cordray to impose an enhanced penalty of $109 million on PHH for its use of a captive (wholly-owned) mortgage reinsurer, the court made several landmark rulings.

First, it held that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional. The court held that it was a violation of Article II for the CFPB to lack the “critical check” of presidential control or the “substitute check” of a multi-member governance structure necessary to protect individual liberty against “arbitrary decisionmaking and abuse of power.” The court remedied this constitutional defect by severing the removal-only-for-cause provision from the Dodd-Frank Act. Under the ruling, Director Cordray now serves at the will of the President and is subject to supervision and management by the President. In a footnote, the court acknowledged that this may create some fallout in other cases, but left it for other courts to address.

It also rejected the CFPB’s argument that statutes of limitations do not apply to its administrative enforcement actions. The court’s holding was straightforward: If Congress had intended to alter the standard statute of limitations scheme, it would have said so. “[W]e would expect Congress to actually say that there is no statute of limitations for CFPB administrative actions . . . But the text of Dodd-Frank says no such thing.”

In addition, the court held that the plain language of RESPA permits captive mortgage re-insurance arrangements like the one at issue in the PHH case, if the mortgage re-insurers are paid no more than the reasonable value of the services they provide. This is consistent with HUD’s prior interpretation. For the first time in 2015, in prosecuting the case against PHH, the CFPB announced a new interpretation of RESPA under which captive mortgage reinsurance arrangements were prohibited. The court rejected this on the ground that the statute unambiguously allows the kinds of payments that the CFPB’s 2015 interpretation prohibited. We have blogged about the CFPB’s erroneous interpretation of the RESPA provisions at issue in this case.

Finally, the court further admonished the CFPB by alternatively holding that—even assuming that the CFPB’s interpretation was permitted under any reading of RESPA—the CFPB’s attempt to retroactively apply its 2015 interpretation, which departed from HUD’s prior interpretation, violated due process. It held that “the CFPB violated due process by retroactively applying that new interpretation to PHH’s conduct that occurred before the date of the CFPB’s new interpretation.”

Notably, the court explicitly declined to address the CFPB’s claim that each mortgage insurance payment made in violation of RESPA triggers a new three-year statute of limitations for that payment. The CFPB’s view on this point was one basis that allowed it to dramatically increase the penalties it sought from PHH. The court’s decision not to address this point in its opinion makes it likely that this will not be the last circuit court opinion required to resolve the case.

The opinion of the court also did not address one aspect of the CFPB Director’s prior decision that disgorgement of the entire amount of the premiums was required, without an offset for the claims paid, which had also added considerably to the penalty amount. The court states in footnote 24 that if a mortgage insurer paid more than reasonable market value for reinsurance, the disgorgement remedy is the amount that was paid above reasonable market value. The court did not expressly address the Director’s approach of ignoring the claims paid. The concurring/dissenting opinion by Judge Henderson does address this point, however, indicating that disgorgement must be reduced by the claims paid.

Because the opinion did not dismantle the CFPB, the court remanded the case to the CFPB for consideration of whether PHH violated RESPA as interpreted by HUD.

Almost a year ago, on October 30, 2015, the FTC conducted a workshop on lead generation entitled to “Follow the Lead.” We published a three-part series on the workshop highlighting the key takeaways. On September 15, 2016, the FTC published its own staff paper discussing the workshop and providing its own analysis. The paper appears intended to serve as a warning to lead buyers and sellers about FTC expectations. Indeed, the staff states that the workshop and paper will “Inform our ongoing law enforcement work.” The paper is also likely to inform the CFPB’s ongoing supervisory and enforcement activities.

While the staff paper acknowledges some of the many positive aspects of lead generation, it focuses on what regulators are likely to view as the negatives:

  • Complexity and Lack of Transparency: The FTC staff recognized that the online lead generation process is complex and often not transparent to consumers. They suggest that consumers may not understand the process, specifically:
    • That their information may be going to a lead generator not a lender,
    • That their information can be sold multiple times leading to multiple offers from lenders and marketers,
    • That the offer they receive may be coming from the company that bid the most to get their information, and
    • That lenders who buy their information may supplement it with additional information about the consumer obtained from other sources.The staff stated that all of these issues should be prominently disclosed to consumers.

The staff stated that all of these issues should be prominently disclosed to consumers.

  • Aggressive or Potentially Deceptive Marketing: The staff also called attention to lead generators who engage in blatantly misleading advertising. One example cited was a lead generator that disguised loan applications to look like job applications.
  • Potential Abuse of Sensitive Consumer Information: The staff further highlighted that bad actors may purchase or obtain consumer information from lead generators and aggregators and use it to commit acts of fraud. In one recent FTC enforcement action the staff noted, a company was accused of purchasing consumer information and using it to debit funds from consumers’ accounts without authorization.

The staff issued stern warnings to lead buyers and sellers alike that neither will be permitted to benefit from this kind of misconduct and avoid liability.

Lead buyers are warned that “companies who choose to ignore warning signs [of the above misconduct] and look the other way may be at risk of violating the law themselves.”  The staff acknowledged that many lead buyers are taking increasingly sophisticated steps to identify and reject leads potentially obtained through misleading advertising. For example, at least one company has developed an online tool that assigns unique identifiers to leads allowing them to be tracked throughout the lead generation ecosystem. Lead buyers can also carefully monitor and audit the sites of companies that they buy leads from. The staff’s warning makes clear that these and other steps are not options for lead buyers who wish to avoid violating the law.

To lead sellers, the staff warns that “ignoring warning signs that third parties are violating the law and pleading ignorance will not shield companies from FTC liability.” The staff explained that self-regulatory bodies such as the Better Business Bureau and the Online Lenders Alliance can help sellers in preventing fraud, if the bodies publish clear guidance and follow-it up with robust monitoring and enforcement. The staff also stated that lead sellers have an obligation to vet and monitor the companies they sell leads to. The staff paper indicates that FTC enforcement in this area will not let up. Thus, following industry best practices and the careful vetting and monitoring of lead buyers are essential for lead sellers to avoid liability.

As we’ve noted previously, we’re seeing an uptick in CFPB enforcement in this area even though the FTC seems to have taken primary responsibility for enforcement actions against lead generators. The FTC staff paper will likely inform the CFPB’s own expectations in its increasingly common enforcement activity in the lead generation ecosystem.

On June 23, PHH filed a letter in the D.C. Circuit supplementing its appeal briefing in PHH Corp v. CFPB, No. 15-1177. For those of you who may have missed our prior posts on this, PHH is appealing a decision made by CFPB Director Richard Cordray while sitting as the CFPB’s administrative appellate judge. In that capacity, Cordray held that PHH violated RESPA in connection with a captive mortgage reinsurance arrangement. In the appeal before the D.C. Circuit, the CFPB argues that Director Cordray’s interpretation of RESPA section 8(c)(2), which is central to the Director’s decision, is entitled to Chevron deference.

In its original appeal briefing, PHH vigorously opposed the application of Chevron deference to Director Cordray’s interpretation of RESPA section 8(c)(2). The Director determined the RESPA section 8(c)(2) is not an exemption from the broad referral fee prohibition of RESPA section 8(a).  PHH argued that deference only applies if the “normal tools of statutory construction” fail to produce a clear outcome. It further argued that, because RESPA is also a criminal statute, any ambiguities must be resolved in PHH’s favor under the Rule of Lenity.

In its June 23 supplement, PHH argued that the Supreme Court’s June 20 decision in Encino Motorcars,LLC v. Navarro, No. 15-415 is yet another reason not to apply Chevron deference to Director Cordray’s decision. In Encino, the Court addressed a Department of Labor (DOL) final rule under which automobile dealer service advisors are not covered by an exemption from the requirement to pay overtime pursuant to the Fair Labor Standards Act.  The Court held that the DOL interpretation in the final rule, which is opposite of the DOL position on the issue for more than 20 years preceding the rule, is not entitled to deference because of the reliance of the automobile industry on the prior position and because the DOL “gave almost no reasons” for the change.

Like the DOL position in the final rule that was at issue in Encino, Director Cordray’s decision went counter to previously-published guidance interpreting RESPA section 8(c)(2) as an exemption to the RESPA section 8(a) referral fee prohibition. Before the CFPB came into existence, HUD enforced RESPA. HUD interpreted RESPA section 8(c)(2) as an exemption to RESPA section 8(a), and had provided informal guidance on how lenders could establish mortgage reinsurance arrangements in compliance with RESPA. When PHH’s case was before the CFPB, PHH argued that it relied on these HUD interpretations. Director Cordray, however, summarily dismissed the reliance arguments as unpersuasive. PHH argues that, under Encino, Cordray’s unreasoned dismissal is fatal to the application of Chevron deference to his decision.

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.

On April 4, at the Practicing Law Institute’s (“PLI”) 21st Annual Consumer Financial Services Institute in Manhattan, Alan Kaplinsky (a co-chair of the institute) moderated a panel entitled “The CFPB Speaks,” where CFPB officials shared their own insights on industry trends on their radar, priorities for the coming years, and views on certain hot-button issues. On the panel from the CFPB were Anthony (“Tony”) Alexis (Assistant Director for Enforcement), Jeffrey Langer (Assistant Director for Installment Lending and Collections Markets), Diane Thompson (Managing Counsel, Office of Regulations), and Peggy Twohig (Assistant Director for Supervision Policy).

During the discussion, the CFPB panelists gave us their hopes on the timetables for new rules that the CFPB is promulgating. They indicated that debt collection rules may be forthcoming in late spring, that the payday lending rules will “hopefully” come out before summer, that the arbitration rules may come out in late spring or early summer, that overdraft rules should be issued in late summer, and that prepaid card rules will be promulgated in “early summer.”

Peggy Twohig first shared the CFPB’s supervision priorities for the coming year, which include: (i) arbitration, (ii) consumer reporting by both CRAs and furnishers, (iii) debt collection both by first and third parties, (iv) demand-side consumer behavior, which she indicated was an initiative to create tools to allow consumers to make better financial decisions, (v)household balance sheets, (vi) mortgages, (vii) open use credit, which she defined as credit like payday, installment, credit card, and other lending not tied to a specific purchase, (viii) small business lending, and (ix) student lending. In addition, she pointed out that the CFPB would continue to pursue past priorities, such as auto finance ECOA cases based on dealer finance charge participation.

Tony Alexis commented on several areas of interest to industry in response to questions posed by Alan and others:

  • Civil Money Penalties: He defended the CFPB’s case-by-case approach to assessing civil money penalties in enforcement actions and declined an invitation by another panelist to establish set parameters for the size of a civil money penalty relative to restitution.
  • Precedential Value of Consent Orders: In response to Alan’s question on whether CFPB consent orders have precedential value, he confirmed that the CFPB’s consent orders, while not binding on other industry participants, are nevertheless indicative of the types of conduct that the CFPB believes to constitute violations of law.  Recently, Director Cordray gave a speech in which he said that consent orders are precedential and that the Bureau will expect industry to comply with orders issued to others who are engaged in practices similar to those engaged in by parties to consent orders. Chris Willis also opined that, in advising clients, he treats consent orders as precedential.

Chris Willis also asked Mr. Alexis about a trend he referred to as “reverse vendor oversight,” where the CFPB has lately been holding service providers liable for the conduct of financial institutions to which they provide services, citing as examples the recent CFPB actions against lead generators, payment processors, and debt collection law firms.  Mr. Alexis indicated that reverse vendor oversight is contemplated by Dodd-Frank and consistent with the CFPB’s enforcement modus operandi. This confirms that service providers to entities under the CFPB’s (ever expanding) jurisdiction  must themselves take steps to ensure they are not assisting in violations of law, or risk prosecution themselves.

Jeffrey Langer reiterated the strong priority that the CFPB places on student lending. His remarks also highlighted the divergence between the CFPB and the Department of Education. He stated that, while the two agencies cooperate, they each have their own statutory mandates and that they set priorities independently. He also touched upon the types of alleged abuses and violations that the CFPB is taking great pains to correct in the marketplace, including issues related to the availability of loss mitigation options, the transfer of servicing from one entity to another, misallocation of partial payments, failure to credit payments appropriately, the lack of transparency around student loan refinancing, and student loan debt relief fraud.

Diane Thompson responded to Alan’s question about whether it is a foregone conclusion that the CFPB will be banning consumer arbitration. She pushed back on the notion that the CFPB has already decided to ban arbitration or class action waivers. She said that the CFPB is taking great pains to carefully analyze the impact of arbitration and to reach a decision that is good for consumers and industry alike.

Overall, the CFPB’s remarks were not surprising, but they provide useful insight on the CFPB’s views on these and other important topics.