This past Thursday, by a  vote of 31-21, the House Appropriations Committee approved the fiscal year 2018 Financial Services and General Government Appropriations bill.  In addition to multiple provisions to reform the CFPB, the bill contains a provision intended to override the Second Circuit’s opinion in Madden v. Midland Funding.  In Madden, the court held that a non-bank transferee of a loan from a national bank loses the ability to charge the same interest rate that the national bank charged on the loan under Section 85 of the National Bank Act.

The CFPB reforms are:

  • Bringing the CFPB into the regular appropriations process (Section 926)
  • Eliminating the CFPB’s supervisory authority (Section 927)
  • Removing the CFPB’s “rulemaking, enforcement, or other authority with respect to payday loans, vehicle title loans or other similar loans” (Section 928)
  • Removing the CFPB’s UDAAP authority (Section 929)
  • Repealing the CFPB’s authority to restrict arbitration (Section 930)

Section 925 of the Appropriations bill, which would override the Second Circuit’s Madden opinion, is identical to a provision in the CHOICE Act passed by the House.  The bill would add the following language to Section 85: “A loan that is valid when made as to its maximum rate of interest in accordance with this section shall remain valid with respect to such rate regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party, and may be enforced by such third party notwithstanding any State law to the contrary.”  Like the CHOICE Act, the Appropriations Bill would also add the same language (with the word “section” changed to “subsection” when appropriate) to the provisions in the Home Owners Loan Act, the Federal Credit Union Act, and the Federal Deposit Insurance Act that provide rate exportation authority to, respectively, federal savings associations, federal credit unions, and state-chartered banks.  (While these statutory amendments would be welcome, Alan Kaplinsky pointed out in an article for American Banker’s BankThink that the OCC could more simply and quickly accomplish the same objective for national banks by issuing a regulation.)

 

 

 

Today, the House Appropriations Committee’s Subcommittee on Financial Services and General Government will mark up its draft fiscal year 2018 appropriations bill.  The draft bill contains multiple provisions to reform the CFPB, which include:

  • Bringing the CFPB into the regular appropriations process;
  • Eliminating the CFPB’s supervisory authority;
  • Removing the CFPB’s UDAAP authority;
  • Repealing the CFPB’s authority to place restrictions on arbitration; and
  • Creating an exemption from risk retention requirements for nonresidential mortgages.

Notably, the bill does not challenge the CFPB’S leadership structure.  As reported in a blog post earlier this week, a group of financial trade associations had expressed support for including provisions in this appropriations bill that would reform the CFPB’s organizational structure, so that the CFPB would be controlled by a five person commission rather than a single director.

The legislative strategy of including CFPB reforms as a “policy rider” to appropriations bills has frequently been pursued by the House in prior years.  For example:

  • The FY2017 draft appropriations bill contained provisions requiring a commission structure; and
  • The FY2016 draft appropriations bill contained provisions requiring the CFPB to be funded through the congressional appropriations process, rather than through transfers from the Federal Reserve as provided in the Dodd-Frank Act.

These CFPB reforms were never incorporated into any of the final appropriations bills enacted by the Congress.  This may have been due to the fact that Senate Republicans do not have a strong enough majority to defeat a Democratic filibuster of CFPB reforms, although the Republicans have been the majority party since the 2014 elections.  As the House appropriations bill moves forward, the CFPB provisions could be impacted by Republican efforts to reform the CFPB through the budget reconciliation process.  For example, Republicans might attempt to use that process to defund the CFPB entirely by eliminating its funding from the Federal Reserve, while also avoiding a filibuster in the Senate.

Policy riders in appropriations bills typically influence agencies by directing how appropriated funds may be spent, such as a provision prohibiting the use of appropriated funds for a particular agency program.  Because the CFPB is not dependent on appropriations to fund its programs, it is questionable to what extent congressional directives  in an appropriations bill could result in the changes to the CFPB sought by Republicans.  Even if the CFPB were dependent on the appropriations process, any CFPB reforms implemented through an appropriations bill could face legal challenges.  Even the Supreme Court has concluded that the congressional “power of the purse” is not without limits.  See e.g., South Dakota v. Dole, 483 U.S. 203 (1987).

UPDATE: The Subcommittee reported out the bill by voice vote for consideration by the full House Appropriations Committee.

The CFPB has issued its fourth report entitled “Report of the Consumer Financial Protection Bureau Pursuant to Section 1017(e)(4) of the Dodd-Frank Act.”  That Dodd-Frank section requires the CFPB’s Director to submit an annual report to the House and Senate Committees on Appropriations “regarding the financial operating plans and forecasts of the Director, the financial condition and results of operations of the Bureau, and the sources and application of funds of the Bureau, including any funds appropriated in accordance with [Section 1017(e)].”  (The CFPB’s previous report covered the period October 1, 2014 through September 30, 2015.)

The new report covers the period October 1, 2015 through September 30, 2016.  It repackages (often verbatim) the information contained in three previous CFPB reports: the ninth Semi-Annual Report to the President and Congress covering the period from October 1, 2015 to March 31, 2016, the tenth Semi-Annual Report to the President and Congress covering the period from April 1, 2016 through September 30, 2016, and the FY 2016 financial report.

By a vote of 236-181, the House of Representatives rejected an amendment offered by two Democratic Congressman to H.R. 5485, the Financial Services and General Government Appropriations Act, which covers appropriations for the fiscal year ending September 30, 2017.  (The bill was approved by the full House last month by a vote of 239-185.)  The amendment would have removed a provision in the bill establishing new requirements the CFPB would have to follow before it could finalize an arbitration rule.  The American Bankers Association had urged House members to reject the amendment.

In addition to various provisions intended to curb the CFPB’s authority, the bill includes a provision that states none of the CFPB’s funding “may be used to regulate pre-dispute arbitration agreements…and any regulation finalized by the Bureau to regulate pre-dispute arbitration agreements shall have no legal force or effect until the requirements regarding pre-dispute arbitration specified in the report accompanying [the bill] under the heading “Bureau of Consumer Financial Protection” are fulfilled.”  On May 5, 2016, the CFPB issued a proposed rule that would prohibit covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action with respect to the covered consumer financial product or service.  The proposed rule would also require a covered provider that is involved in an individual arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB.

The “requirements regarding pre-dispute arbitration specified in the report accompanying [the bill]” include requirements related to a further study that must be conducted by the CFPB.  They also include a requirement for the CFPB to consider the costs and benefits to consumers in determining whether any final rule regulating pre-dispute arbitration rule is in the public interest and for the protection of consumers.

Such costs and benefits must include: (1) the practical effect on consumers’ access to low cost, fair, and efficient means of resolving claims for the types of injuries that consumers most often incur and that are less likely to be the subject of government enforcement actions; (2) the extent to which private class action proceedings on behalf of consumers regarding consumer financial products and services provide net benefits to consumers in light of the CFPB’s and other regulators’ enforcement and examination authority; (3) the practical effect of any regulation on the availability of pre-dispute arbitration; and (4) the impact of any regulation on the cost and availability of credit to consumers and small business.  The CFPB must find that the demonstrable benefits of any rule to consumers outweigh the costs to consumers, taking into account the foregoing factors and other relevant factors, and that the rule subjects pre-dispute arbitration to no more regulation than is necessary to serve the public interest and protect consumers.

 

By a vote of 239-185, the House of Representatives has approved a fiscal year 2017 appropriations bill that contains various provisions intended to curb the CFPB’s authority.  Those provisions would fund the CFPB through the annual congressional appropriations process rather than through transfers from the Federal Reserve as currently provided by Dodd-Frank and change the CFPB’s leadership structure from a single Director to a five-member Board of Directors appointed by the President.

The bill also includes a provision that states none of the CFPB’s funding “may be used to regulate pre-dispute arbitration agreements…and any regulation finalized by the Bureau to regulate pre-dispute arbitration agreements shall have no legal force or effect until the requirements regarding pre-dispute arbitration specified in the report accompanying [the bill] under the heading “Bureau of Consumer Financial Protection” are fulfilled.”  On May 5, 2016, the CFPB issued a proposed rule that would prohibit covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action with respect to the covered consumer financial product or service.  The proposed rule would also require a covered provider that is involved in an individual arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB.

The “requirements regarding pre-dispute arbitration specified in the report accompanying [the bill]” include requirements related to  a further study that must be conducted by the CFPB.  The report lists various topics the CFPB must address in the study and mandates use of a research process “that includes peer review of the CFPB’s methodology and findings by a diverse group of individuals with relevant expertise in quantitative and qualitative research methods from the private and public sectors” but whose “expertise in research methods is unrelated to dispute resolution.”  The composition of the peer review panel is subject to rulemaking procedures, including notice and comment.  The CFPB must publish its tentative conclusions together with sufficient supporting and explanatory information, and solicit public comment.  In its report to Congress, the CFPB must explain its reason for disagreeing with significant comments. Concurrently with submitting its report to Congress, the CFPB must make a description of the peer review process publicly available.

The report also requires the CFPB to consider the costs and benefits to consumers in determining whether any final rule regulating pre-dispute arbitration rule is in the public interest and for the protection of consumers.  Such costs and benefits must include: (1) the practical effect on consumers’ access to low cost, fair, and efficient means of resolving claims for the types of injuries that consumers most often incur and that are less likely to be the subject of government enforcement actions; (2) the extent to which private class action proceedings on behalf of consumers regarding consumer financial products and services provide net benefits to consumers in light of the CFPB’s and other regulators’ enforcement and examination authority; (3) the practical effect of any regulation on the availability of pre-dispute arbitration; and (4) the impact of any regulation on the cost and availability of credit to consumers and small business.  The CFPB must find that the demonstrable benefits of any rule to consumers outweigh the costs to consumers, taking into account the foregoing factors and other relevant factors, and that the rule subjects pre-dispute arbitration to no more regulation than is necessary to serve the public interest and protect consumers.  The CFPB’s findings, together with its analysis and underlying data, must be published in the Federal Register.

The House Appropriations Committee had adopted an amendment to the appropriations bill that would block the CFPB from finalizing or enforcing a rule regulating payday lending until the CFPB submits a detailed report on the consumer impact to Congress and identifies existing credit products available to replace the current sources of short-term, small dollar credit.  However, because that amendment is not included in the version of the bill that is linked to the committee’s press release announcing the House’s approval of the bill, the status of the amendment is unclear.

 

The fiscal year 2017 appropriations bill approved last week by the House Financial Services and General Government Appropriations Subcommittee of the House Appropriations Committee includes the following provisions intended to curb the CFPB’s authority:

  • A provision under which, effective October 1, 2017,  the CFPB would be funded pursuant to the annual congressional appropriations process rather than through transfers from the Federal Reserve as currently provided by Dodd-Frank.  During FY 2017 (October 1, 2016 through September 30, 2017), when the CFPB requests transfers from the Fed, it must notify various House committees and include in the notice the amount of the funds requested, an explanation of how the funds will be obligated, and a statement regarding why the funds are necessary to protect consumers.  In addition, no later than two weeks after the end of each quarter of every fiscal year, the CFPB must provide the same House committees with a report that includes certain information such as the obligations made during the previous quarter and the actions taken to achieve the goals, objectives, and performance measures of each office.
  • A provision under which the CFPB’s leadership structure would be changed from a single Director to a five-member Board of Directors appointed by the President.

The bill also includes a provision that states none of the CFPB’s funding “may be used to regulate pre-dispute arbitration agreements…and any regulation finalized by the Bureau to regulate pre-dispute arbitration agreements shall have no legal force or effect until the requirements regarding pre-dispute arbitration specified in the report accompanying  [the bill] under the heading “Bureau of Consumer Financial Protection” are fulfilled.”  Although the report is not yet available on the Appropriations Committee’s website, the Committee’s press release about the bill states that it “requires the CFPB to study the use of pre-dispute arbitration prior to issuing regulations.”  Since the CFPB has already issued its “final” arbitration study, the bill would apparently require the CFPB to conduct a further study before a final rule could become effective.  On May 5, 2016, the CFPB issued a proposed rule that  would prohibit covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action with respect to the covered consumer financial product or service.  The proposed rule would also require a covered provider that is involved in an individual arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB.

 

The CFPB has issued its third report entitled “Report of the Consumer Financial Protection Bureau Pursuant to Section 1017(e)(4) of the Dodd-Frank Act.”  That Dodd-Frank section requires the CFPB’s Director to submit an annual report to the House and Senate Committees on Appropriations “regarding the financial operating plans and forecasts of the Director, the financial condition and results of operations of the Bureau, and the sources and application of funds of the Bureau, including any funds appropriated in accordance with [Section 1017(e)].”  (The CFPB’s previous appropriations report covered the period October 1, 2013 through September 30, 2014.)

The new report covers the period October 1, 2014 through September 30, 2015.  It repackages (often verbatim) the information contained in three previous CFPB reports: the seventh Semi-Annual Report to the President and Congress covering the period from October 1, 2014 to March 31, 2015, the eighth Semi-Annual Report to the President and Congress covering the period from April 1, 2015 through September 30, 2015, and the FY 2015 financial report.

According to a Politico report, the House Appropriations Committee has approved an amendment to the FY 2016 Financial Services Appropriations bill that would impose new requirements on the CFPB before it can issue a rule governing arbitration agreements.  The amendment, which was introduced by Republican Representatives Steve Womack and Tom Graves, reportedly would require the CFPB to produce a peer-reviewed study on arbitration and determine that the benefits of a new rule outweigh the costs before issuing an arbitration regulation.

In March 2015, the CFPB delivered to Congress the final results of its empirical study of consumer arbitration as mandated by Section 1028 of the Dodd-Frank Act.  Among the study’s deficiencies we have noted is its failure to examine the actual experiences of consumers who have gone through arbitration or compare how class members fared individually in class actions resulting in monetary relief to how the consumer would have fared in an individual arbitration.  Last month, five leading financial services industry trade groups sent a letter to the CFPB urging it to solicit public comments on the final results of its arbitration study before deciding whether to initiate a rulemaking proceeding pursuant to Section 1028(b) of the Dodd-Frank Act.

Republican Senator David Perdue has introduced a bill, S.1383 entitled the ‘‘Consumer Financial Protection Bureau Accountability Act of 2015,” that would make the CFPB subject to the congressional appropriations process.  Currently, pursuant to Dodd-Frank, the CFPB is entitled to receive automatic annual funding through transfers from the Fed that are capped at a fixed percentage of the Fed’s total 2009 operating expenses.

The introduction of the bill follows Senator Perdue’s attempt in March 2015 to make the CFPB subject to the congressional appropriations process through an amendment to the Senate’s 2015 Budget Resolution.

Another Republican CFPB effort to subject the CFPB to the congressional appropriations policy took the form of an amendment to the Senate’s 2015 Budget Resolution introduced last week by Senator David Perdue.  Earlier in March, Republican Congressman Sean Duffy introduced the Bureau of Consumer Financial Protection Accountability Act of 2015 (H.R. 1261) which is also directed at making the CFPB subject to the congressional appropriations process.  (Dodd-Frank entitles the CFPB to receive annual funding through transfers from the Fed that are capped at a fixed percentage of the Fed’s total 2009 operating expenses.)