On December 1, 2018, three Democrat and three Republican members of the House of Representatives introduced a joint resolution under the Congressional Review Act (H.J. Res. 122) to override the CFPB’s final payday/auto title/high-rate installment loan rule.  The CRA is the vehicle used by Congress to overturn the CFPB’s arbitration rule in a party-line vote.

In a new blog post entitled “7 Reasons to Oppose the Federal Payday Loan Rule,” a policy analyst at the Competitive Enterprise Institute supports use of the CRA to overturn the payday loan rule.  Among the seven reasons discussed in the blog are that the rule leaves low-to-middle income consumers without access to credit, payday loan users overwhelmingly approve of the product, and the rule is built on a flawed theory of consumer harm.

The CFPB’s final payday became “effective” this past Tuesday, January 16, 2018.  However, the compliance date for the rule’s substantive requirements and limits (Sections 1041.2 through 1041.10), compliance program/documentation requirements (Section 1041.12), and prohibition against evasion (Section 1041.13) is August 19, 2019.  While the CFPB announced yesterday that it intends to engage in a rulemaking process to reconsider the final rule, it normally cannot do so without following the time-consuming notice and comment procedures of the Administrative Procedure Act.  In addition, since any changes made by the CFPB are likely to be challenged in litigation, the CFPB will need to successfully defend a revised rule or its withdrawal of the existing rule.

Given the hurdles created by the rulemaking process, the CRA provides a “cleaner” and quicker vehicle for overturning the final rule.  Republican Congressman Dennis Ross, one of the CRA resolution’s sponsors, is reported to have said that despite the CFPB’s announcement, he intends to continue to seek passage of the resolution by Congress.

Both high-rate loans covered by the final rule and the final rule itself are highly controversial.  Accordingly, there can be no assurance that the majorities needed to override the rule under the CRA can be assembled in both the House and the Senate.  Nevertheless, whether through the CRA, new rulemaking, or litigation, we continue to expect that the final rule adopted under former CFPB Director Richard Cordray will not be implemented in anything approaching its current form.

Mick Mulvaney, President Trump’s appointee as CFPB Acting Director, has sent a letter to Fed Chair Janet Yellen “to inform [her] that for the Second Quarter of Fiscal Year 2018, the Bureau is requesting $0.” (emphasis included).

Pursuant to Section 1017(a)(1) of the Dodd-Frank Act, subject to the Act’s funding cap, the Fed is required to transfer to the CFPB on a quarterly basis “the amount determined by the [CFPB] Director to be reasonably necessary to carry out the authorities of the Bureau under Federal consumer financial law, taking into account such other sums made available to the Bureau from the preceding year (or quarter of such year.)”

In his letter, Mr. Mulvaney states that he has been assured that the current balance of the CFPB’s fund at the Federal Reserve Bank of New York is sufficient for the CFPB “to carry out its statutory mandates for the next fiscal quarter while striving to be efficient, effective, and accountable.”  Mr. Mulvaney indicates that the CFPB’s projected second quarter expenses are approximately $145 million and its current balance at the New York Fed is $177.1 million.

Mr. Mulvaney suggests that there is no statutory support for the CFPB’s practice under former Director Cordray of maintaining a “reserve fund” for possible financial contingencies.  He states further that he sees “no practical reason for such a large reserve, since I have been informed that the Board has never denied a Bureau request for funding and has always delivered requested funds in a timely fashion” and that he intends “to spend down the reserve until it is of a much smaller size.”

Mr. Mulvaney concludes his letter with the observation that while the approximately $145 million in CFPB expenses he plans to pay from the CFPB’s reserve rather than seek new funding for “may not make much of a dent in the deficit, the men and women at the Bureau are proud to do their part to be responsible stewards of taxpayer dollars.”

 

 

 

The U.S. District Court for the Southern District of New York recently held oral argument regarding the pending motions in the Lower East Side People’s Federal Credit Union v. Trump and Mulvaney.  Pending before the Court are the credit union’s motion for a preliminary injunction, and the government’s motion to dismiss.  As we’ve reported previously, this is the second lawsuit challenging the appointment of Mick Mulvaney as CFPB Acting Director.

At the beginning of the proceeding, Judge Paul G. Gardephe indicated that he would like the parties to focus on the standing issue.  Standing is, of course, a threshold issue because the judicial power under Article III of the U.S. Constitution extends only to a “case or controversy” involving an alleged “injury-in-fact” that is “fairly traceable to the challenged action” and redressable by a favorable decision.  According to the brief filed by the DOJ, “[a]ll Plaintiff’s [opening] brief offers on standing is six words in a footnote: ‘Plaintiff is regulated by the CFPB.’”  The DOJ’s brief and the credit union’s reply brief devoted significant attention to the standing issue.

Ilann M. Maazell, arguing on behalf of the credit union, asserted that the primary source of standing was the credit union’s status as an entity regulated by the CFPB.  He relied, in part, on State National Bank of Big Spring v. Lew, a 2015 decision of the D.C. Circuit involving, inter alia, a constitutional challenge by State National Bank to the CFPB’s structure and Richard Cordray’s recess appointment as CFPB Director.  In State National Bank, the D.C. Circuit observed that “[t]he Supreme Court has stated that ‘there is ordinarily little question’ that a regulated individual or entity has standing to challenge an allegedly illegal statute or rule under which it is regulated.”  The Court inquired, however, whether the D.C. Circuit had subsequently “walked that back” in John Doe Co. v. CFPB, 849 F.3d 1129 (D.C. Cir. 2017).

In John Doe, the recipient of a CFPB non-self-executing civil investigative demand sought to challenge the constitutionality of the Bureau’s structure without objecting to any regulatory measure taken by the Bureau or identifying other regulatory burdens to which it objected.  The district court denied John Doe’s request for a preliminary injunction, holding that the plaintiff had not met its burden of demonstrating a likelihood of success on the merits or irreparable harm.  John Doe then filed with the D.C. Circuit an emergency motion for an injunction pending appeal.  In John Doe, the D.C. Circuit quoted Supreme Court precedent for the proposition that standing is not dispensed “in gross” but, rather, a plaintiff “must demonstrate standing for each claim he seeks to press and for each form of relief that is sought.”  It stated that the plaintiff had failed “to demonstrate that the action of merely requesting information from private entities subject to regulation is . . . exclusively confined to the Executive Branch, and thus that issuance of this CID by the Bureau violates separation of powers.”

Plaintiff’s counsel asserted that it was not clear that the plaintiff in John Doe, a company engaged in the business of purchasing and selling income streams, was a regulated entity.  He further argued that John Doe involved a pre-enforcement challenge in which the question presented was whether the district court had abused its discretion in determining that the plaintiff had not demonstrated a likelihood of success on the merits and irreparable harm.  With respect to the notion that “standing is not dispensed in gross,” Plaintiff’s counsel asserted that this is not the case with respect to a regulated entity, and suggested that the holding in John Doe was not based upon a lack of standing.  He further argued that the credit union was not required to violate the law in order to create standing.

The other decisions cited by Plaintiff’s counsel were Olympic Fed. Savs. & Loan Ass’n v. Dir., Office of Thrift Supervision, 732 F. Supp. 1183 (D.D.C.), appeal dismissed and remanded, 903 F.3d 837 (D.C. Cir. 1990), and Free Enter. Fund v. Pub. Co. Accounting Oversight Board, 561 U.S. 447 (2010).  In its reply brief, the credit union had cited Olympic Fed. Savs. & Loan Ass’n for the proposition that a regulated entity was directly harmed by the assertedly unconstitutional appointment of an Acting Director of the Office of Thrift Supervision (OTS).  According to the credit union’s reply brief, the district court awarded injunctive relief that “was rendered moot by the subsequent constitutional appointment of the OTS Director.”

Free Enterprise Fund involved a challenge to the constitutionality of the Sarbanes-Oxley Act provision that created the Public Company Accounting Oversight Board and, in particular, the issue of whether the district court had jurisdiction over the proceeding notwithstanding a Securities Exchange Act provision that only allowed aggrieved parties to challenge a final SEC order or rule in a court of appeals.  In its reply brief, the credit union cited Free Enterprise Fund for the proposition that it need not select and challenge a rule at random while simultaneously noting that Free Enterprise Fund involved a general challenge that was collateral to any agency rules from which review might be sought.  Its reply brief also argued that John Doe had distinguished Free Enterprise Funding as a case where “denying standing would ‘foreclose all meaningful judicial review,’ as it would here, where plaintiff has no other forum.”

Plaintiff’s counsel also referred to another source of standing, namely amendments to Regulation C, the implementing regulation for the Home Mortgage Disclosure Act, that became effective on January 1, 2018.  Although the  Regulation C amendments were not adopted under Acting Director Mulvaney, Plaintiff’s counsel stated that they are being implemented by the Acting Director and would cause the credit union to incur additional compliance costs.  In response to a question from the Court, Plaintiff’s counsel indicated that the credit union did not object to the regulation.  He asserted, however, that a regulated entity does not need to object to a regulation in order to have standing.  The credit union was granted permission to submit a declaration regarding its standing allegations relating to Regulation C.

Finally, in its reply brief, the credit union had argued that it was unable to engage in long-range planning concerning its HMDA reporting obligations due to uncertainty stemming from the Bureau’s recent announcement that it intends to reconsider various aspects of  Regulation C.  Plaintiff’s counsel asserted that none of the cases cited by the DOJ for the proposition that uncertainty does not confer standing involved a regulated entity.

Matthew J. Berns, arguing for the DOJ, asserted that no case cited by the credit union supports the proposition that uncertainty confers standing and, in response to the Plaintiff’s contrary assertion, noted that one of the cases cited by the defendant, New England Power Generators Ass’n, Inc. v. FERC, 707 F.3d 364 (D.C. Cir. 2013), did, in fact, involve a regulated entity.  He also disputed the assertion that State National Bank was predicated solely on the status of the bank as a regulated entity.  Defense counsel asserted, rather, that the decision acknowledged that the bank incurred compliance costs as a result of the CFPB Remittance Rule.  (State National Bank noted that “[t]he Bank indeed alleged that it must now monitor its remittances to stay within the safe harbor [under the CFPB Remittance Rule], and the monitoring program causes it to incur costs.”)

Defense counsel also noted that the plaintiff in John Doe had not objected to any CFPB regulation.  (In John Doe, the D.C. Circuit appears to distinguished State Bank on the basis that John Doe did not object to any regulatory action or identify any regulatory burdens other than “the harm occasioned by having to respond to a non-self-executing CID.”)   Finally, he emphasized that Supreme Court standing jurisprudence requires that an injury-in-fact that is concrete and particularized, and actual or imminent.  Whereas plaintiff’s counsel had characterized this as a quintessential standing case in which the injury consisted of being regulated by a person without the authority to regulate the credit union, defense counsel argued that this type of asserted injury was too generalized to constitute an “injury-in-fact.”

The Court asked defense counsel who would have standing to challenge the appointment of Mulvaney as Acting Director if the credit union did not have standing.  Defense counsel responded by noting that the defendants had not asserted a lack of standing in the counterpart challenge filed by Leandra English in the District of Columbia.  He further noted that a proper party could litigate the issue in a pre-enforcement challenge to a regulation or regulatory action.

Although the Court did not hear argument on the merits issues, the credit union was granted permission to submit a short letter addressing the decision by Judge Timothy J. Kelly denying the motion for a preliminary injunction by Leandra English in the D.C. lawsuit.  This submission, and the credit union’s supplemental standing declaration relating to the HMDA regulation, are due to be filed by January 19, 2018; the Defendants’ reply is due to be filed on January 24, 2018.  The Court indicated that it would rule as expeditiously as possible once the record closes.

 

 

The CFPB announced that, in coming weeks, it plans to publish in the Federal Register a series of Requests for Information (RFIs) seeking comment on its enforcement, supervisory, rulemaking, market monitoring, and educational activities.

Describing its plans as “a call for evidence to ensure the Bureau is fulfilling its proper and appropriate functions to best protect consumers,” the CFPB stated that the RFIs are intended to provide “an opportunity for the public to submit feedback and suggest ways to improve outcomes for both consumers and covered entities.”

The CFPB also announced that its first RFI will seek comment on Civil Investigative Demands (CIDs), and the comments received will be used to evaluate current CID processes and procedures and determine whether any changes are needed.

According to Mick Mulvaney, President Trump’s appointee as Acting Director, the RFIs are part of the CFPB’s efforts “under new leadership…to critically examine its policies and practices to ensure they align with the Bureau’s statutory mandate.”  Mr. Mulvaney also stated that “[m]uch can be done to facilitate greater consumer choice and efficient markets, while vigorously enforcing consumer financial law in a way that guarantees due process.”

 

Leandra English has filed an emergency motion with the U.S. Court of Appeals for the D. C. Circuit requesting expedited briefing and oral argument in her appeal from the district court’s denial of her preliminary injunction motion in her action seeking a declaration that she, and not Mick Mulvaney, is the lawful CFPB Acting Director.

Ms. English argues that even without the “special circumstances” presented by her case, her appeal is entitled to expedited consideration because she is appealing from the denial of a preliminary injunction.  In support, Ms. English cites to 28 U.S.C. section 1657(a) which requires a federal court to “expedite the consideration of any action…for temporary or preliminary injunctive relief,” and to D.C. Circuit Rule 47.2(a), which directs the clerk of the court, in an action seeking such relief, to ” prepare an expedited schedule for briefing and argument” after docketing the appeal.

Ms. English also points to language in 28 U.S.C. section 1657(a) requiring expedited review when “good cause is shown” and asserts that, pursuant to the D.C. Circuit’s Handbook of Practice and Internal Procedures, “good cause” exists where a delay in hearing an appeal will cause irreparable injury and the decision under review is subject to “substantial challenge,” or if the public has “an unusual interest in prompt disposition.”

According to Ms. English, there is an “urgent public need for clarity” as to who is the lawful Acting Director because “doubt over who is the legitimate Acting Director hurts the public by casting a pall over the validity of the agency’s actions, since actions taken by an illegally appointed Director may themselves be unlawful.”  She also claims that as a result of the freeze imposed by Mr. Mulvaney on significant CFPB actions, “the public is deprived of the protections and guidelines that Congress intended the CFPB to provide.”

Ms. English also argues that the district court’s ruling is subject to substantial challenge, as proven by the “bevy of amicus briefs filed below” in her support.  She claims that she has suffered irreparable injury by virtue of “the usurpation of her statutorily-conferred position at the fore of a major federal agency” and that such injury “will continue every day that Mr. Mulvaney claims to hold the office of Acting Director.”  She further claims that a finding that her injury does not qualify as irreparable harm “would also have the pernicious result of rewarding and encouraging illegal temporary appointments.”

Ms. English proposes the following briefing schedule:

  • Appellant’s opening brief: January 30, 2018
  • Amicus briefs supporting appellant: February 6, 2018
  • Appellees’ brief: February 13, 2018
  • Amicus briefs supporting appellees: February 20, 2018
  • Appellant’s reply brief: February 22, 2018

 

 

Despite the CFPB’s change in position after Mick Mulvaney’s appointment regarding the need for Nationwide Biweekly Administration to post a bond to stay execution of the $7.9 million judgment obtained by the CFPB, the CFPB has opposed Nationwide’s motion to alter, amend, or vacate the judgment.

In its action against Nationwide, another related company, and the companies’ individual owner, the CFPB alleged that the defendants engaged in abusive and deceptive acts or practices in violation of the CFPA UDAAP prohibition by making false representations regarding the costs of a biweekly mortgage payment program and the savings consumers could achieve through the program.  A California federal district court refused to award restitution sought by the CFPB but did award the CFPB approximately $7.9 in civil money penalties.

Although it had initially filed a response opposing the defendants’ motion to stay execution of the judgment without posting a bond, the CFPB filed a notice following Mr. Mulvaney’s appointment as Acting Director stating that it was withdrawing its response and took “no position on whether the court should require a bond pending the disposition of the defendants’ anticipated post-trial motions.”

In its opposition to the defendants’ post-trial motion to alter, amend, or vacate the judgment, the CFPB rejected the defendants’ argument that the CFPB was required to establish rules interpreting what constitutes deceptive acts or practices before bringing an enforcement action.  The CFPB stated that “nothing the CFPA mandates that the Bureau engage in rulemaking prior to commencing a lawsuit against entities engaged in violations of Federal consumer financial law.”  It also rejected the defendants’ argument that the deception standard in the CFPA is unconstitutionally vague, asserting that the defendants “cannot credibly argue that they were not on notice that the CFPA prohibited deceptive and abusive acts or practices in connection with the sale or offering of consumer financial  products or services like [the defendants’ biweekly payment program].”

Also rejected by the CFPB was the defendants’ argument that they were entitled to relief from the judgment based on their current inability to pay.  The CFPB  stated that the court “appropriately imposed a $7.93 million penalty commensurate with the size of the business as it was during the lawful conduct.”

It seems likely that, in deciding to defend its judgment, the CFPB deemed the case one that involved garden-variety deception claims rather than one in which the CFPB had taken aggressive positions regarding its jurisdiction or in its theory of liability.  The CFPB’s approach also appears to be consistent with statements made by Mr. Mulvaney that he planned to review pending CFPB litigation on a case-by-case basis.

 

 

 

The CFPB announced today that it intends to engage in a rulemaking process to reconsider, pursuant to the Administrative Procedure Act, its final rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans (the “Payday Rule”).  The announcement fully accords with our expectation that the Payday Rule will never see the light of day in its current form.

If it were to go into effect, the Payday Rule would largely eliminate the availability of payday loans to the public.  In this regard, the Payday Rule reflected former CFPB Director Cordray’s hostility to payday lending and his failure to seriously consider how consumers who rely upon the product would be impacted by its elimination.  It was adopted on a crash basis shortly before Director Cordray’s resignation and largely disregarded over 1,000,000 comments from consumers articulating the critical benefits of payday loans.

To our mind, it was inevitable that Director Cordray’s successor would wish to re-evaluate the costs and benefits of the Payday Rule.  We think it highly likely that, at the end of the day, the new Director (whether Mick Mulvaney in an acting capacity or the as-yet-to-be-appointed permanent successor to former Director Cordray) will repeal the Payday Rule while he or she considers other options that can preserve the product and limit the potential for consumer injury.

Today’s announcement is good news for the millions of consumers who rely upon payday and title loans to meet their financial needs (and, of course, to the payday and title lending industries).

On January 12, 2018, the U.S. Supreme Court agreed to hear the Lucia case in which Raymond J. Lucia is challenging how the SEC appoints administrative law judges (“ALJs”). He argues that ALJs are “inferior officers” who must be appointed by the President, the courts, or a department head in accordance with the Constitution’s appointments clause. Lucia filed a petition for certiorari with the Supreme Court after the D.C. Circuit rejected his argument. A circuit split was created when the 10th Circuit reached the opposite conclusion in another case making a similar appointments clause challenge. The Supreme Court’s decision in Lucia may impact numerous past and pending ALJ decisions, including cases involving the CFPB, most notably the PHH case. We’ve discussed the potential impact of Lucia and the related 10th Circuit case before and will continue to follow them closely.

The CFPB has published a final rule in the Federal Register to adjust for inflation the civil penalties within its jurisdiction.  The adjustments are required by the Federal Civil Penalties Inflation Adjustment Act of 1990 which, pursuant to a 2015 amendment, required federal agencies to adjust the civil penalties within their jurisdiction by July 1, 2016 and by January 15 every year thereafter.

The civil penalties adjusted by the CFPB are the Tier 1-3 penalties set forth in Section 1055 of Dodd-Frank, as well as the civil penalties in the Interstate Land Sales Full Disclosure Act, Real Estate Settlement Procedures Act, SAFE Act, and Truth in Lending Act.  (To obtain the new penalty amounts, the CFPB multiplied each penalty amount by the “cost-of-living adjustment” multiplier and rounded to the nearest dollar.  The multiplier used, which is determined by OMB, was 1.02041.)  The new penalty amounts apply to civil penalties assessed after January 15, 2018.

 

A New York federal district court dismissed the counterclaims of the defendants in a CFPB enforcement action claiming that, pursuant to the Equal Access to Justice Act (EAJA), they were entitled to fees and expenses incurred.

The CFPB’s complaint alleged that the defendants created and operated an illegal debt collection scheme.  In their answers, the defendants asserted that the CFPB’s investigation and lawsuit were unjustified and in violation of the EAJA and counterclaimed for their “fees, costs, and other further relief.”

The EAJA provides, that subject to any statutory exceptions, a court shall award to “a prevailing party” other than the United States “fees and other expenses” other than non-attorney fees and expenses awarded under the EAJA that such party incurred in a civil action (other than a tort case) brought by the United States “unless the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust.”

The court dismissed the defendants’ counterclaims as procedurally improper because the defendants could not be considered “prevailing parties.”  According to the court, the counterclaims were “premature fee requests” and under the EAJA, “the proper vehicle for a fee request is an application showing eligibility after a party has prevailed—not as a counterclaim within an answer.” (emphasis included)

A party entitled to an award under this provision of the EAJA must be an individual with a net worth that did not exceed $2 million at the time the civil action was filed, or an owner of an unincorporated business, or any partnership, corporation, association, unit of local government, or organization, with a net worth that did not exceed $7 million at the time the civil action was filed, and which did not have more than 500 employees at the time the civil action was filed.  However, a 501(c)(3) tax-exempt organization or a cooperative association as defined in the Agricultural Marketing Act may be a party regardless of its net worth.