On September 5, the Consumer Financial Protection Bureau (CFPB) published a blog post regarding what to do in the event of a natural disaster like Hurricane Harvey.  The CFPB recommends that affected consumers consolidate their financial information by using a checklist and take the following steps after their most urgent needs (like food and safety) have been met:

  1. start the claims process by calling the insurance company;
  2. register for FEMA assistance;
  3. contact their mortgage servicer and tell them about the situation, including damage to the home;
  4. contact their credit card company and any other creditors to explain the situation before the next payment is due; and
  5. contact utility companies to suspend service if the home is too damaged to live in.

The CFPB also provides a number of resources to assist consumers:

Finally, the CFPB warns consumer of the increased risk of fraud and provides tips on how to avoid common scams, such as fake charities and contractors selling repairs door-to-door.

Previously, we wrote about guidance from HUD, the Department of Veterans Affairs, Freddie Mac, and Fannie Mae, as well information from the banking agencies regarding Hurricane Harvey.bacon

Several federal agencies have issued reminders and requirements related to banking and credit services for borrowers affected by Hurricane Harvey.  We previously reported on mortgage-related guidance issued by Fannie Mae, Freddie Mac, HUD, and VA regarding mortgage loans.

On August 26, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), and Conference of State Bank Supervisors (CSBS) issued a joint press release  urging financial institutions in disaster areas to “work constructively with borrowers in communities affected by Hurricane Harvey.”  The joint press release reminds financial institutions that they may receive Community Reinvestment Act (CRA) consideration for community development loans, investments, or services that revitalize or stabilize federally designated disaster areas. It also reminds banks to monitor municipal securities and loans affected by the hurricane, as government projects may be negatively affected.  The joint press release also assures banks that regulators will grant flexibility in regulatory reporting and publishing requirements, and that regulators will expedite any request to operate temporary banking facilities.

Additionally, the agencies have adopted the following disaster relief policies:

FRB

The FRB published letter SR 13-6 on March 29, 2013 to highlight the supervisory practices it employs during a disaster.  In general, the letter seeks to encourage covered banking organizations to adopt measures that help borrowers and other customers in communities under stress and that contribute to the health and recovery of these communities.  Per the letter, the FRB will aim to assist in disaster relief efforts by easing the regulatory burden on banks.  For example, the FRB may exercise its authority to waive real estate-related appraisal regulations, and may extend CRA consideration to activities that revitalize or stabilize a disaster area, even if the loans, investments, or services provided are to middle- or upper-income individuals.  The FRB also published a webpage of resources following Hurricanes Katrina and Rita that may be applicable here.

FDIC

On August 29, the FDIC published Financial Institution Letter FIL-38-2017 (the “Letter”), which applies to all FDIC-supervised institutions, including community banks.  The Letter encourages banks to “consider all reasonable and prudent steps to assist customers in communities affected by recent storms.”  Specifically, the FDIC suggests waiving fees, increasing ATM cash limits, easing credit card limits, allowing loan customers to defer or skip payments, and delaying the submission of delinquency notices to credit bureaus.  The Letter also suggests that banks use the non-documentary verification methods permitted by the Customer Identification Program requirement of the Bank Secrecy Act for affected customers who cannot provide standard identification documents.

The FDIC has also set up a webpage dedicated to Hurricane Harvey information for consumers and bankers.  That webpage links to a document created for institutions supervised by FFIEC member agencies and the Conference of State Bank Supervisors that discusses the lessons they learned from the effects of Hurricane Katrina.

The webpage includes resources for consumers including Hurricane Harvey FAQs, disaster planning assistance, and a disaster recovery to-do list.

OCC

On August 24, the OCC issued a Proclamation that permits national banking associations, federal savings associations, and federal branches and agencies of foreign banks to close offices in the areas affected by the emergency conditions for as long as deemed necessary for bank operation or public safety.  The Proclamation also referred to OCC Bulletin 2012-28, which sets forth previous bank guidance applicable to natural disasters (the “Bulletin”).  For the purposes of disaster relief, the Bulletin persuades banks to consider assisting affected borrowers by, among other things, waiving or reducing ATM fees, and restructuring borrowers’ debt obligations.

Banks should also consider previously issued OCC guidance that may be applicable in the event of a disaster.  For example, OCC Bulletin 2014-37 provides that a bank must halt all debt sales on accounts of customers in disaster areas.  According to FEMA declarations, this debt sales moratorium should have started on August 23 for affected counties in Texas, and on August 27 for Louisiana.

Farm Credit Administration (FCA)

On August 29, the FCA issued a press release  encouraging Farm Credit System institutions to extend the terms of loan repayments, restructure borrowers’ debt obligations, ease some loan documentation or credit-extension terms for new loans to certain borrowers, and seek FCA relief from specific regulatory requirements.

National Credit Union Administration (NCUA)

On August 25, in a press release, the NCUA reminded credit unions that its Office of Small Credit Union Initiatives can provide urgent needs grants of up to $7,500 to low-income credit unions that experience sudden costs to restore operations interrupted by the storm.

On August 28, the NCUA announced that there were 150 federally insured credit unions in the areas of Texas affected by Hurricane Harvey and approximately 28 credit unions in the areas of Louisiana affected by the storm.  To help these credit unions, the NCUA stated that its disaster assistance policy was to:

  • Encourage credit unions to make loans with special terms and reduced documentation to affected members;
  • Guarantee lines of credit for credit unions through the National Credit Union Share Insurance Fund;
  • Make loans to meet the liquidity needs of member credit unions through the Central Liquidity Facility; and
  • Reschedule routine examinations of affected credit unions.

Under certain conditions, the NCUA permits federal credit unions to assist other credit unions and non-members by using their correspondent services authority to provide emergency financial services, including check cashing, access to ATM networks, or other services to meet short-term emergency needs of individuals in the areas affected by the floods.  The NCUA notes that if a credit union provides such emergency services, it may not impose charges for such services that exceed its direct costs.

In addition to following the guidance above, in the absence of applicable exemptions or waivers granted by regulators, financial institutions wherever located must continue to comply with consumer protection and other banking laws.  In particular, financial institutions serving communities impacted by Hurricane Harvey should remain mindful of anti-money laundering, suspicious activity reporting, data security, and privacy requirements.

U.S. Department of Housing and Urban Development (HUD)

On Monday, August 28, HUD announced that it was committed to “speed federal disaster assistance to the State of Texas and provide support to homeowners and low-income renters forced from their homes due to Hurricane Harvey.”

The following forms of relief are available to people in impacted counties (currently, Aransas, Atascosa, Austin, Bee, Bexar, Brazoria, Brazos, Caidwell, Calhoun, Cameron, Chambers, Colorado, Comal, DeWitt, Fayette, Fort Bend, Galveston, Goliad, Gonzales, Grimes, Guadalupe, Hardin, Harris, Jackson, Jasper, Jefferson, Jim Wells, Karnes, Kerr, Kleberg, Lavaca, Lee, Leon, Liberty, Live Oak, Madison, Matagorda, Montgomery, Newton, Nueces, Refugio, San Patricio, Tyler, Victoria, Walker, Waller, Washington, Wharton, Willacy and Wilson counties) (the “disaster area”):

Expedited Funds.  State and local governments may request that the awarding of annual Community Development Block Grant (CDBG) and HOME Investment Partnerships (HOME) funds be expedited or that program year start dates be moved up. HUD is currently contacting state and local officials to explore streamlining its CDBG and HOME programs in order to expedite the repair and replacement of damaged housing.

Foreclosure Relief.  HUD is granting a 90-day moratorium on foreclosures and foreclosure forbearance on Federal Housing Administration (FHA)-insured home mortgages located within the geographic boundaries of the disaster area.  A borrower can also qualify for foreclosure relief if he or she is a household member of someone who is deceased, missing or injured directly due to the disaster, or if his or her financial ability to pay mortgage debt was directly or substantially affected by  the disaster.

Mortgage Insurance.   HUD’s Section 203(h) program provides FHA insurance to disaster victims who have lost their homes, enabling them to finance the purchase or rehabilitation of a home. Borrowers working with participating FHA-approved lenders may be eligible for 100% financing.  Additionally, HUD’s Section 203(k) loan program enables the purchase, refinance, and rehabilitation of a home that has been lost or damaged.

Section 108 Loan Guarantee Program.  HUD will offer state and local governments federally- guaranteed loans for housing rehabilitation, economic development, and repair of public infrastructure.  Loans typically range from $500,000 to $140 million, depending on the scale of the project or program. Under this program, project costs can be spread over time with flexible repayment terms and low interest rates.

Freddie Mac

On August 25, Freddie Mac confirmed that under its Single-Family Seller/Servicer Guide, it requires servicers to suspend foreclosure proceedings for up to 12 months for disaster-affected borrowers and waive penalties or late fees for borrowers with disaster-damaged homes, and  bars servicers from   reporting forbearance or delinquencies caused by the disaster to  credit bureaus.  Freddie Mac also reminded servicers to obtain quality contact information for borrowers as soon as possible, help borrowers with disaster assistance, and monitor and coordinate the insurance claim process.

Moreover, recognizing that property inspections may be required to assess property damage and the costs of such inspections are typically not reimbursable, Freddie Mac will create a process for servicers to seek reimbursement.

In addition to confirming its existing policies, on August 29, Freddie Mac issued Bulletin 2017-14 (the “Bulletin”), which provides temporary servicing requirements related to Hurricane Harvey that are effective immediately.  The Bulletin applies to borrowers with mortgaged properties or places of employment within the disaster area.  Under the Bulletin, servicers and foreclosure firms must suspend all foreclosure sales and eviction activities for 90 days from when the area was declared to be a disaster area.

Fannie Mae

On August 25, Fannie Mae reminded servicers and homeowners to take advantage of its disaster relief policies, which allow servicers to suspend or reduce a homeowner’s mortgage payment for up to 90 days if the servicer believes a natural disaster reduced the value or habitability of the property or  temporarily impacted the homeowner’s ability to make mortgage payments.  Under Fannie Mae’s Servicing Guide, servicers do not need to contact homeowners in order to suspend payments for 90 days, but after contacting the homeowner, they can offer forbearance for up to six months, which can be extended up to an additional six months as needed for homeowners that were current or less than 90-days delinquent at the time of the storm.

Under its Selling Guide, Fannie Mae allows borrowers to use lump-sum disaster-relief grants or loans to satisfy Fannie Mae’s minimum borrower contribution requirement.  The Selling Guide also provides that a lender must warrant, for each mortgage loan it delivers to Fannie Mae, that (1) the property is not damaged by fire, wind, or other cause of loss, (2) there are no proceedings pending for the partial or total condemnation of the property, (3) the mortgage is an acceptable investment, and (4) the mortgage’s value or marketability has not been adversely affected.

On August 29, Fannie Mae announced that it is implementing a 90-day foreclosure sale suspension and a 90-day eviction suspension for borrowers with properties located within the disaster area.  Fannie Mae also reiterated that homeowners impacted by Hurricane Harvey may qualify for forbearance.

Department of Veterans Affairs

On August 29, the Department of Veterans Affairs (VA) published Circular 26-17-23 (the “Circular”), which describes the various disaster relief options available to its mortgagees and points to various regulations that facilitate the implementation of these options.  Specifically, the Circular encourages holders of guaranteed loans secured by properties in the disaster area to grant forbearance requests, institute a 90-day moratorium on initiating new foreclosures, waive late charges, and refrain from credit bureau reporting on affected loans.  The VA promises not to penalize servicers who suspend credit reporting for any late default reporting.  The Circular, which is valid until July 1, 2018, asks servicers to extend special forbearance to members of the National Guard who are called to active duty to assist in recovery efforts.

Many mortgage lenders and servicers are also providing disaster relief for customers in the disaster area.  We are monitoring the situation and will provide further updates as needed.

As we’ve discussed before, the CFPB sued Navient over its student loan servicing practices in the Middle District of Pennsylvania.  In doing so, the CFPB followed its strategy of announcing new legal standards by enforcement action and then applying them retroactively. The chief allegation in the complaint is that Navient wrongly “steered” consumers into using loan forbearance rather than income-based repayment plans to cure or avoid defaults on their student loans.

On March 24, 2017, Navient moved to dismiss the complaint on a number of grounds.  Although the district court, in a decision issued on August 4, declined to dismiss the case, the motion raised several arguments that a court of appeals should not be so quick to gloss over.  We focus here on two of them: fair notice and the constitutionality of the CFPB’s structure.

Fair Notice

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

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

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

Constitutionality of CFPB Structure

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

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

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

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

* * *

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

On June 5, 2017, the U.S. Supreme Court handed down a unanimous decision in Kokesh v. SEC. In Kokesh, the SEC took the position that disgorgement was not a penalty and therefore not subject to the statute of limitations in 28 U.S.C. § 2462. The Court held that disgorgement remedies are indeed “penalties” and therefore  subject to the five-year statute of limitations in § 2462. In its PHH briefing, the CFPB argued that “[its] administrative proceedings are subject only to the statute of limitations set forth in 28 U.S.C. § 2462.” Thus, the Supreme Court’s reasoning in Kokesh would also apply squarely to the disgorgement remedies available to the CFPB.

The opening paragraph of the Kokesh opinion says it all.

“A 5-year statute of limitations applies to any ‘action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise.’ 28 U.S.C. § 2462. This case presents the question of whether § 2462 applies to claims for disgorgement imposed as a sanction for violating a federal securities law. The Court holds that it does. Disgorgement in the securities-enforcement context is a ‘penalty’ within the meaning of § 2462, and so disgorgement actions must be commenced within the five years of the date the claim accrues.”

The Court rested its decision on the principle that “[s]uch limits are ‘vital to the welfare of society’ and rest on the principle that ‘even wrongdoers are entitled to assume that their sins may be forgotten.'” The CFPB has argued that, except for the statute of limitations in § 2462, no statute of limitations applies to claims it brings through administrative enforcement actions. This argument was brought to the fore by the PHH case, which we have blogged about extensively. The CFPB lost on that issue in the PHH case before a three-judge panel of the D.C. Circuit. The panel’s decision was vacated when the D.C. Circuit decided to re-hear the case en banc. We are still waiting to see what the en banc court will do.

On May 24, 2017, the US Court of Appeals for the D.C. Circuit (D.C. Circuit) held oral argument in the PHH case, which we have blogged about extensively. The constitutionality of the CFPB’s structure was the central issue at the oral argument, occupying the vast majority of the time and the judges’ questions. It appears that the court intends to decide whether the CFPB’s single-director-removable-only-for-cause structure violates the Constitution’s separation of powers doctrine, even if the court rules in PHH’s favor on the RESPA issues.

The judges’ questioning signaled that, in their minds, the resolution turns on three questions: First, how does the CFPB structure diminish Presidential power more than a multi-member commission structure, which the Supreme Court has approved? Second, doesn’t the CFPB’s structure make it more accountable and transparent than a multi-member commission? Third, what are the consequences of approving the CFPB structure? Judges that appeared not to be concerned with the CFPB’s structure generally focused on the first two questions. Judges that appeared to be concerned with the CFPB’s structure focused on the third question. Another key theme addressed at various points throughout the oral argument is whether the CFPB’s structure is sufficiently close to the structures validated in prior Supreme Court cases, such that the court must uphold the CFPB’s structure.

At the oral argument, PHH’s counsel urged the court to recognize the serious affront that the various features of the CFPB’s structure, taken together, present to Presidential power, including: (i) the single director, (ii) the for cause removal provision, (iii) the funding outside the Congressional appropriations process, (iii) the director’s ability to appoint all inferior officers with no outside input, (iv) the director’s five-year term, (v) the deferential standard of review given to the director’s decisions, (vi) the director’s ability to promulgate regulations unilaterally, and (vii) the director’s sole ability to interpret and enforce regulations.

Before PHH’s counsel could even fully articulate his argument, however, judges started questioning him on how these features diminished Presidential power more than the multi-member commissions running other agencies, which the Supreme Court approved in Humphrey’s Executor. The DOJ, which was given time at the oral argument, forcefully responded to the judges’ questions. The “quintessential” character of the executive is the ability to act “with energy and dispatch,” counsel argued. Multi-member panels, as deliberative bodies, lack that quality and are thus more legislative and judicial than executive. Thus, they encroach on Presidential power to a much lesser degree.

DOJ’s counsel also pointed out that the rationale justifying the for cause removal provision that that the Supreme Court approved in Humphrey’s Executor was not present in agencies endowed with the CFPB’s structural features. The DOJ’s counsel pointed to language in Humphrey’s Executor approving the for-cause removal provisions only as to “officers of the kind here under consideration,” namely FTC commissioners. The Humphrey’s Executor court extensively described the FTC and the officers “here under consideration” in a way that precluded any applicability of the case to the CFPB. In Humphrey’s Executor, the FTC was described as a “non-partisan,” non-political body of experts that exercised quasi-judicial and quasi-legislative powers. The CFPB does not fit that mold, the DOJ ‘s counsel argued.

Counsel for both PHH and the DOJ also stressed that the CFPB did not fit the mold of the inferior officer at issue in Morrison v Olson, in which the Supreme Court approved a for-cause removal provision applicable to a special prosecutor. A few judges asked counsel questions apparently aimed at establishing that the existence of special prosecutors was as great an affront to Presidential power as is the CFPB’s structure.

During these lines of questioning, one judge suggested that the CFPB’s structure makes it more accountable to the President. She pointed out that, with a single director, there is one person to blame for problems and that, unlike multi-member commissions, the President has the power to appoint leadership with complete control over the agency. Counsel for PHH and the DOJ responded to this by reminding the court that the President can only appoint a director after the last director’s five-year term expires or the for-cause removal provision is triggered. Interestingly, no one raised the point that the for cause removal provision and five-year term also limit the ability of a President to remove a director that he or she appointed, even if the appointee did not act in a manner satisfactory to the President. Thus, the argument that the CFPB director is somehow more accountable than a multi-member commission does not hold water.

Some judges’ questions presented the issue that “if” the CFPB director is the same as a special prosecutor or FTC commissioner, then the D.C. Circuit is bound by Humphrey’s Executor and Morrison v. Olson. Without missing a beat, however, the DOJ picked up on that “if” and argued the point that the CFPB director is nothing like either position. DOJ’s counsel asserted that the director is not an inferior officer, as was the special prosecutor in Morrison v. Olson, nor is the director part of a non-partisan body of experts, as was the FTC commissioner in Humphrey’s Executor.

During the argument, Judge Brown and Judge Kavanaugh, who wrote the panel’s majority opinion, attempted to draw the rest of the court’s attention to the consequences of extending Humphrey’s Executor to a single-director agency and Morrison v. Olson to principal, as opposed to inferior, officers. Judge Brown suggested that, if the CFPB’s structure is constitutional, nothing would prevent Congress from slapping lengthy terms and for-cause removal restrictions on cabinet-level officials. That, she argued, would reduce the presidency to a “nominal” office with no real executive power. Judge Kavanaugh addressed the same issue making an apparent reference to the speculation that Elizabeth Warren may run for President after Trump leaves office. How would it be, he questioned, if she ran on a consumer protection platform, got elected, and was stuck with a Trump-appointed CFPB director, who would presumably take a much different position on issues central to her platform?

The CFPB’s counsel defended the Bureau’s structure at the hearing using the same technical arguments that the CFPB has been making all along. The CFPB’s counsel asserted that the CFPB’s structure was constitutional because each of the features taken individually has support in Supreme Court jurisprudence, principally Humphrey’s Executor and Morrison v. Olson.

In discussing the CFPB’s problematic structural features, CFPB counsel argued that, because each feature is a “zero” in terms of a problematic Congressional encroachment on Presidential power, that adding them together resulted in zero constitutional problems. “Zero plus zero plus zero, is zero,” he said. In rebuttal, PHH’s counsel pointed out that, as catchy as the argument may be rhetorically, it completely ignores the fact that even Supreme Court jurisprudence supportive of the individual features recognizes them as departures from the norm, acceptable only under certain circumstances. PHH’s counsel observed that the features at issue are not “zeros.”

The RESPA and statute of limitations issues did not occupy much time at the oral argument. Counsel for PHH urged the D.C. Circuit to reinstate the panel’s RESPA and statute of limitations rulings, all of which were in favor of PHH, and to rule on one issue not addressed by the panel.  While the panel decided, contrary to the CFPB’s views, that the CFPB is subject to statutes of limitations in administrative proceedings, the panel left for the CFPB on remand to decide if, as argued by the CFPB, each reinsurance premium payment triggered a new three-year statute of limitations, or whether, as argued by PHH, the three year statute of limitations is measured from the time of loan closing.  The judges did not raise any questions in response to counsel’s arguments on the RESPA and statutes of limitation issues.

Even though Lucia v. SEC was argued that same day, no questions surfaced during the PHH oral argument about the impact that Lucia may have on the PHH case.

* * *

It is likely that the earliest the D.C. Circuit’s decision will be issued is toward year-end. We will continue to monitor developments in this case.

 

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.