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 Humphry’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 Humphry’s Executor was not present in agencies endowed with the CFPB’s structural features. The DOJ’s counsel pointed to language in Humphry’s Executor approving the for-cause removal provisions only as to “officers of the kind here under consideration,” namely FTC commissioners. The Humphry’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 Humphry’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 Humphry’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 Humphry’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 Humphry’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 Humphry’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.

 

One of the hallmarks of the CFPB’s enforcement actions has been its use of those actions to announce new legal standards. Navient attacks this enforcement strategy in its motion to dismiss a recent case brought against it by the CFPB. On January 18, 2017, the CFPB sued Navient, alleging a number of violations. The chief allegation is that Navient unlawfully “steered” consumers into resolving student loans defaults using forbearance instead of income-driven repayment plans (“IDB”), even in situations where IDB would have been allegedly better for consumers. The motion to dismiss briefing closed on May 15, 2017.

Navient’s main argument is that the CFPB cannot seek penalties against it for the alleged steering because no one had fair notice that steering, if it occurred, violated UDAAP before the enforcement action began.  This is especially so when, as Navient points out, it was governed by the comprehensive rules, regulations, and contractual obligations that never even mention the conduct that the CFPB is suing over.

In addition, Navient argues that the CFPB is required to engage in rulemaking before imposing penalties on industry actors for alleged UDAAP violations. The CFPB is authorized under 12 U.S.C. § 5531(a) to seek fines and penalties against any entity that that engages in “an unfair, deceptive, or abusive act or practice under Federal Law.” Navient argues that “under Federal Law” means the CFPB must declare that conduct violates UDAAP through rulemaking before seeking fines and penalties for alleged violations. This, Navient argues, is supported by § 5531(a)’s placement in the statute immediately before § 5531(b), which allows the CFPB to “prescribe rules . . . identifying as unlawful unfair, deceptive, or abusive acts or practices.” The CFPB disagrees, arguing that “under Federal Law” is a reference to the general prohibition on UDAAPs in § 5536, and that no rulemaking is required prior to a UDAAP enforcement action. No court that we know of has yet addressed this specific issue under Dodd-Frank. How the court resolves this argument could have a substantial impact on how the CFPB does business going forward.

Navient also attacked the premise of the CFPB’s steering claims. For steering to be a violation, Navient argues, the CFPB has to first establish that Navient had some legal duty to counsel consumers on whether IDB or forbearance is better for their individualized situations. In an attempt to manufacture that duty, the CFPB points to general statements on Navient’s website inviting consumers to let Navient help them resolve their student loan defaults. In response, Navient emphasizes that such generalized statements do not create a fiduciary relationship as a matter of law and rightly reminds the court that lenders are not fiduciaries of borrowers.

We will continue to follow this case and keep you posted. Oral argument on the motion has been scheduled for June 27.

At the Auto Finance Risk and Compliance Summit held this week, Calvin Hagins, CFPB Deputy Assistant Director for Originations, stated that the CFPB is increasingly asking lenders about ancillary product programs during examinations, particularly about the percentage of consumers buying these products.

In June 2015, when the CFPB released its larger participant rule for nonbank auto finance companies, it also issued auto finance examination procedures in which ancillary products, like GAP insurance and extended service contracts, received heavy attention.  We commented that by giving so much attention to these products, the CFPB was signaling its intention to give lots of scrutiny to these products in the auto finance market.  Mr. Hagins’s comments confirm that the CFPB is in fact looking closely at these products in exams.

Speaking at the Summit as a member of a regulatory panel, Mr. Hagins indicated that companies should expect to get questions from CFPB examiners about ancillary products.  He indicated that the CFPB specifically looks at how the product is offered to the consumer, when in the contracting process is it offered, how disclosures are being provided to the consumer, and the acceptance rate.  As an example, he indicated that a 95% acceptance rate would cause CFPB examiners to raise questions about how the rate was achieved.

At the Summit, Colin Hector, an FTC attorney, indicated that the FTC is also interested in ancillary products, particularly whether there is a potential for consumer deception in how they are sold.  He commented that, in its enforcement work, the FTC has focused on ancillary product sales that occur at the end of the sales process when consumers may be led to believe they must purchase the products to obtain financing and the seller has increased leverage because the consumer is more invested in completing the transaction.

 

In a recent Bloomberg interview, Senate Majority Leader Mitch McConnell expressed skepticism about the Senate’s ability to pass meaningful Dodd-Frank reform.  After months of inactivity, the House Financial CHOICE Act finally moved out of committee to the House floor where a vote by the full House is expected in June.

Several other bills aimed at reforming the CFPB have been introduced by various Republican lawmakers in the House and Senate.  This legislative action would seem to suggest that CFPB reform was a real possibility.  Senator McConnell, however, cast renewed doubt on the prospects of reform, to the disappointment of many in the banking and finance industry.

Many factors stand in the way of significant Dodd-Frank reform in the Senate.  As Senator McConnell acknowledged, Republicans would need the support of at least some Democrats on the Banking Committee and in the full Senate.  According to Bloomberg, Democrats and Republicans appear to agree on the need for community banking reform, but little else.  Of course, the two parties do not necessarily agree on what counts as a small, community bank, as both have pushed differing size thresholds in the past.

The slim Republican majority in the Senate is not the only thing standing in the way of meaningful reform.  Even if it passed the House, the revised CHOICE Act was likely to face stiff resistance in the Senate.  Unfortunately, the revised version dropped the proposal for a five-member commission in favor of a single director removable at will.  Industry has long viewed a commission as a more appropriate structure, to bring stability and predictability to the agency over the long run.

Although the more modest Senate proposals, such as reforming the CFPB’s funding mechanism, had a greater chance at passage, the recent turmoil in Washington, of course, will make passage of any legislation difficult, and make grand reforms much less likely.  At the end of the day, meaningful change to the CFPB is more likely to come from within the agency itself when a new director is appointed in July 2018.

 

The CFPB’s Student Loan Ombudsman has released an update setting forth the CFPB’s “preliminary observations” based on the data it received in response to a voluntary request for information sent to several of the largest student loan servicers in October 2016.  The request, which was sent contemporaneously with the release of the Ombudsman’s 2016 annual report (2016 report), asked servicers to provide information about their policies and procedures related to servicing loans of previously defaulted borrowers.  The update indicates that the CFPB received information from servicers collectively handling accounts for more than 20 million student loan borrowers.

On June 8, 2017, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “CFPB Criticism of Student Loan Servicers – What’s Coming Next?”  Click here to register.

In the update, the CFPB makes the following “preliminary observations” regarding the borrowers about whom servicers provided loan performance information:

  • More than 90 percent of borrowers who rehabilitated one or more defaulted loans were not enrolled and making payments under an income-driven repayment (IDR) plan within the first nine months after curing a default.  According to the CFPB, this data reinforces its observations in the 2016 report that “a series of administrative, policy, and procedural hurdles may limit access to or enrollment in IDR for borrowers with previously defaulted federal student loans.”
  • Borrowers who did not enroll in an IDR plan were five times more likely to default a second time.
  • Nearly one in three borrowers who completed rehabilitation and for whom a servicer provided information about two years of payment history redefaulted within 24 months.
  • Over 75 percent of borrowers who default for a second time after completing rehabilitation did not successfully satisfy a single bill, including those who used forbearance or deferment for a period of time before redefaulting.  The CFPB states that it estimates that “as many as four out of five borrowers who rehabilitate a student loan could be eligible for a zero dollar payment under an IDR plan, which suggests that many of these defaults were preventable.
  • Borrowers using consolidation to cure defaulted loans are more likely to have better outcomes.

The CFPB states that the data described in the update provides support for its policy recommendations in the 2106 report. Those recommendations included a reassessment by policymakers of the treatment of borrowers with severely delinquent or defaulted loans and consideration of steps to streamline, simplify or enhance the current consumer protections in place for such borrowers.  The CFPB also urged policymakers and industry to consider various actions, including enhancing servicer communications to borrowers transitioning out of default, such as using personalized communications related to IDR enrollment, and using incentive compensation for debt collectors and servicers that is linked to a borrower’s enrollment in an IDR plan and successful recertification of income after the first year of enrollment.

In the update, the CFPB asks policymakers to “examine whether an extended period of income-driven rehabilitation payments and a complicated collector-to-servicer transition are necessary and whether current financial incentives for [servicers] are in the best interests of taxpayers and consumers.”  It also suggests that policymakers and market participants should “in the near-term” implement the CFPB’s recommendations for improving borrower communication throughout the default-to-IDR transition and streamlining IDR application and enrollment.

Although not mentioned in the update, the CFPB’s press release suggests that the CFPB plans to use the information discussed in the update to support its efforts to establish industrywide servicing standards.  The press release states that such information “will help the Bureau assess how current practices intended to assist the highest-risk borrowers may differ among companies. The Bureau previously highlighted how inconsistent practices across servicers can cause significant problems for borrowers, calling for industrywide servicing standards in this market.”

 

The FDIC announced last week that it had entered into settlements with Bank of Lake Mills and two non-bank “institution-affiliated parties” through which the bank originated loans for allegedly engaging in unfair and deceptive practices in violation of Section 5 of the FTC Act.  The settlements should serve as a reminder to non-banks entering into arrangements with FDIC-supervised banks that they can become subject to FDIC enforcement authority.

The FDIC did not release the underlying stipulations and consent order and only released the orders requiring payment of restitution and civil money penalties.  The orders require the bank and two non-banks, Freedom Stores, Inc. (FSI) and Military Credit Services, LLC (MCS), to pay approximately $3 million in restitution to eligible borrowers and civil money penalties of, respectively, $151,000, $54,000, and $37,000.

The orders describe eligible borrowers as having received loans from the bank through “FSI and MCS channels.”  It would appear that, because the non-banks originated loans on behalf of the bank, the FDIC deemed the non-banks to be “institution-affiliated parties” under 12 U.S.C. section 1813(u)(1) which defines an “institution-affiliated party” to include any ” agent for an insured depository institution.”

According to the FDIC’s press release, the bank, FSI, and MCS violated Section 5 by practices that included:

  • Charging interest to borrowers who paid off their loans within six months when the loans were promoted as interest free for six months;
  • Selling add-on products without clearly disclosing the terms of those products; and
  • Failing to provide borrowers the opportunity to exercise the monthly premium payment option in conjunction with the purchase of optional debt cancellation coverage

In December 2014, FSI and MCS entered into a consent order with the CFPB to settle allegations that the companies had engaged in unlawful debt collection practices in violation of the CFPA UDAAP prohibition.

The CFPB’s final prepaid card rule has survived Republican efforts to nullify the rule under the Congressional Review Act (CRA).  The CRA establishes a special set of procedures through which Congress can nullify final regulations issued by a federal agency.  While a CRA joint resolution of disapproval must be approved by both Houses of Congress, it cannot be filibustered in the Senate and can be passed with only a simple majority.  In February 2017, joint resolutions were introduced in both the Senate and the House to disapprove the final prepaid card rule under the CRA.

According to Politico, May 11th was the last day for the Senate to pass the Senate resolution with a simple majority.  It was also reported that the House is not expected to vote on the House CRA resolution.

Last month, the CFPB issued a final rule to delay the final prepaid card rule’s effective date by six months, from October 1, 2017 to April 1, 2018.  In the final rule delaying the effective date, the CFPB indicated that it intends to propose changes to the prepaid card rule’s provisions dealing with linking credit cards to digital wallets that are capable of storing funds and error resolution and limitations on liability for unregistered prepaid accounts.  It also indicated that it is continuing to evaluate other concerns raised by industry and other stakeholders, and might address other topics in its proposal.

 

 

 

We previously reported that the Connecticut Attorney General, on behalf of the Attorneys General of Indiana, Kansas and Vermont, (the “state AGs”) had filed a joint motion to intervene in a CFPB enforcement action against Sprint to request a Consent Order modification permitting unused settlement funds to be paid to the National Association of Attorneys General (“NAAG”).  Under the proposed modification, the undistributed settlement funds would be used by NAAG for the purpose of developing the National Attorneys General Training and Research Institute Center for Consumer Protection (“NAGTRI”).  We subsequently reported that the CFPB and the DOJ had been directed to state, in separate submissions, their positions with respect to the state AGs’ modified proposal to redirect $14 million of the unused settlement funds from the U.S. Treasury to NAAG and to redirect the remaining $1.14 million to a community organization that provides internet access to underprivileged high school students.

In its Memorandum on the Joint Motion to Intervene to Modify Stipulated Final Judgment and Order, the CFPB stated that the Consent Order should not be modified because Fed. R. Civ. P. 60(a) “does not, in the Bureau’s view, provide grounds for the proposed modification.”  Rule 60(a) permits a court to “correct a clerical mistake or a mistake arising from an oversight or omission” in a judgment, order or other part of the record.

The Bureau also noted in its submission that it had not proposed to apply the unused settlement funds to other equitable relief reasonably related to the allegations set forth in the complaint and therefore the Consent Order provision authorizing alternative uses of that nature was not at issue.  The Bureau concluded its submission by stating that it would direct the Defendant to pay the unused settlement funds to the U.S. Treasury if the Court declined to modify the Consent Order.

In a separate submission titled “Statement of Interest of the United States of America,” the DOJ initially asserted that the motion to intervene should be denied as untimely.  It then proceeded to argue that Rule 60(a) is limited to modifications that implement the result intended by the court when the order was entered, and does not allow changes that alter the original meaning of the judgment.  The DOJ further noted that the state AGs had not identified any clerical error or mistake arising from an omission or oversight.  Instead, the DOJ noted, the provision at issue requiring that unused settlement funds be deposited in the U.S. Treasury as disgorgement “is a standard term that appears in numerous CFPB consent orders.”  Finally, the DOJ asserted that “[n]othing in the Consent Order suggests that NAGTRI or NAAG is an intended beneficiary” and, as the Court itself had noted, the proposed modification “seeks to alter the Consent Order in a fundamental way by redirecting elsewhere” unused settlement funds of $15.14 million that would otherwise be deposited in the U.S. Treasury.

The DOJ concluded its submission with observations relating to the Miscellaneous Receipts Act.  Specifically, the DOJ noted that, “while [its] Statement of Interest is submitted on behalf of the United States as a whole, the CFPB is submitting a separate response opposing modification of the Consent Order.”  As a result, and in view of the fact that it believed there is no ground under Rule 60(a) to permit the proposed modification, the DOJ suggested that the Court need not address the issue of whether the proposed modification would implicate the Miscellaneous Receipts Act.

The DOJ noted, however, that “because the funds at issue have been constructively received by the United States, the Miscellaneous Receipts Act in any case would preclude the CFPB from directing the funds anywhere but the U.S. Treasury, including to NAAG or NAGTRI.”  “If NAAG wishes to fund its program with federal dollars,” the DOJ remarked, “it may seek a Congressional appropriation, but no portion of the Redress Amount may be diverted for that purpose.”

The state AGs and the Defendant may file responsive memoranda by May 24, 2017.  We will continue to monitor developments in this case.

 

 

 

 

Two enforcement actions filed by the CFPB recently went to trial in federal district court.

One of the cases was filed by the CFPB in July 2014 in a Wisconsin federal district court against two law firms and four of the firms’ attorneys for alleged violations of Regulation O, formerly known as the Mortgage Assistance Relief Services Rule, and for engaging in alleged deceptive practices in violation of the CFPA UDAAP prohibition.  The CFPB’s complaint alleged that the defendants violated Regulation O by charging advance fees to consumers before obtaining a loan modification, making various misrepresentations, and failing to provide required disclosures.  It alleged that the defendants violated the CFPA UDAAP prohibition by various actions that included deceiving consumers into thinking that they would receive legal representation even though many consumers never spoke with an attorney or had their case reviewed by one.

The district court held a five-day bench trial that began on April 24, 2017.  In various pre-trial rulings, the district court found that the defendants had engaged in conduct that would constitute a violation of Regulation O unless they could establish at trial that they satisfied the Regulation O attorney exemption.  (For example, the court found that they had charged advance fees before obtaining a loan modification and failed to provide required disclosures.)  Other issues to be decided at trial included whether the defendants had made certain of the misrepresentations alleged by the CFPB.  Post-trial briefs are due later this month.

The second case was filed by the CFPB in May 2015 in a California federal district court against two related companies offering a biweekly mortgage payment program and their individual owner.  The CFPB’s complaint alleged that the defendants engaged in deceptive telemarketing acts or practices in violation of the Telemarketing Sales Rule and engaged in abusive and deceptive acts or practices in violation of the CFPA UDAAP prohibition by making false representations regarding the costs of the defendants’ program and the savings consumers could achieve through the program.

The district court held a six-day bench trial that also began on April 24, 2017 at which the CFPB sought to prove that the defendants engaged in the conduct alleged in its complaint.  Post-trial briefs are due to be filed next month and the court has scheduled closing arguments for June 26, 2017.

 

 

For years many industry participants wondered if allowing their real estate agents or loan officers to engage in co-marketing on Zillow Group applications and websites posed a risk to their companies under RESPA.  The industry may soon know the answer, as Zillow Group advised in recent prepared remarks on first quarter earnings that “Over the past two years, the Consumer Financial Protection Bureau, or CFPB, has been reviewing our program for compliance with the Real Estate Settlement Procedures Act, or RESPA, which is a regulation designed to protect consumers.”

To say that the CFPB is not a fan of marketing arrangements between settlement service providers is an understatement.  We previously reported on an October 2015 bulletin in which the CFPB addressed its experiences with such marketing arrangements.  The CFPB stated “In sum, the Bureau’s experience in this area gives rise to grave concerns about the use of [marketing services agreements] in ways that evade the requirements of RESPA.”  The recent announcement by Zillow may cause industry members to assess co-marketing arrangements.

While the Zillow announcement indicates that the CFPB investigation has occurred over the past two years, the apparent reason for the announcement is the disclosure that “Recently, the CFPB requested additional information and documents from us as part of their evaluation, which we are working with them on.”  Zillow also notes that it considers its co-marketing program to be compliant, and that it has continually encouraged consumers to shop around while looking for a mortgage.