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.

 

Dovetailing with President Trump’s recent Executive Order requiring a reduction in regulatory burden, on March 21, 2017, a CFPB official remarked at the American Bankers Association Government Relations Summit that the CFPB was planning to start its review of significant mortgage regulations, including the ability to repay/qualified mortgage rule.

The Dodd-Frank Act requires the CFPB to use available evidence and data to assess all of its rules five years after they go into effect to ensure they are meeting the purposes and objectives of Dodd-Frank, and the specific goals of the subject rule.  January 2018 will mark five years since the ability to repay/ qualified mortgage rule was finalized, as well as other key mortgage regulations, in January 2013.

Citing this requirement and “common sense,” Chris D’Angelo, Associate Director of the CFPB’s Division of Supervision, Enforcement and Fair Lending, said that the CFPB is “embarking upon now the beginning of an assessment process for our major mortgage rules.” D’Angelo said that the CFPB would assess these rules’ “real-world effects” on the market, as well as “whether it had the effect which was intended, what the costs were, whether there’s some tailoring that would make that more effective.”

D’Angelo noted that the CFPB was still receiving complaints related to the mortgage servicing industry despite the existence of these rules, and that most of the problems were due to “the third-party service providers and the folks who develop your technology solutions.”  He also stated that incentive compensation practices would be considered but noted that “We know that you need those in order to manage larger organizations and how you drive your employees.”

Given Presidential pressure to reduce regulatory burdens and the fact that the CFPB’s mortgage rules have been criticized by financial industry participants and consumer advocates alike, the CFPB review of the key mortgage rules warrants close attention.

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

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

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

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

In his more than one hour nationwide address last night to a joint session of Congress, President Trump discussed a broad range of topics:  repeal of Obamacare, tax relief, immigration, rebuilding the Country’s infrastructure, strengthening the military, foreign trade.  All of these topics, and others mentioned by him, were important campaign issues for Trump.  Noticeably absent from his speech was any mention of Dodd-Frank (let alone any suggestion of a repeal) or the CFPB (let alone any suggestion that he intended to remove Director Cordray).  Indeed, he barely referenced the need for regulatory relief:

“We have undertaken a historic effort to eliminate job-crushing regulations, creating a deregulation task force inside of every government agency; imposing a new rule which mandates that for every one new regulation, two old regulations must be eliminated.”

While Trump implied that these deregulation initiatives apply to all Federal agencies, they likely apply only to executive agencies and not to independent agencies like the CFPB.

While it is hazardous to read too much into topics that he omitted from his speech, it is tempting to observe that the discharge and replacement of Richard Cordray as Director of the CFPB and the legislative initiatives to repeal or amend Dodd-Frank are not near the top of the President’s agenda.

On Monday, Chairman Hensarling circulated a memorandum to the House Financial Service Committee Leadership Team suggesting key revisions to the CHOICE Act. It only addresses proposed changes to the CHOICE Act; several key features of the original version, including subjecting the CFPB to congressional appropriations, remain in place but are not addressed in the memorandum. The proposed changes would, however, affect key features of the Dodd-Frank Act, including capital requirements, stress tests, and the Consumer Financial Protection Bureau (“CFPB”). Several proposed changes to the CFPB differ significantly from the original version of the CHOICE Act.  https://tinyurl.com/zcf52ob

The most striking difference between the memorandum and original CHOICE Act is the proposed structure of the CFPB. A key feature of the original CHOICE Act was replacing the single director with a bipartisan, five-member commission, similar to the FCC and FTC. https://tinyurl.com/hq4lkfg. The current proposal abandons that approach in favor of a “[s]ole director, removable by the President at-will,” effectively codifying the panel opinion in the PHH appeal. https://tinyurl.com/hyw3tw5.

The creation of a commission had wide industry support but was controversial among congressional Democrats. https://tinyurl.com/jdtwuaz. It is somewhat surprising that Chairman Hensarling would abandon a key provision of the original CHOICE Act, but the decision may reflect a political calculus. The CHOICE Act was first introduced in July 2016, when we had a Democratic President and Hilary Clinton was reported to be the clear frontrunner. It was widely believed that, given the opportunity, Mrs. Clinton would appoint a Director with views similar to those of Director Cordray. Now, however, Republicans control both houses of congress and the presidency. Making Director Cordray removable at will would allow President Trump to appoint a sole director who would have far greater ability to roll back Cordray-era measures than would a bipartisan, five-member commission.

Other proposals set forth in the memorandum would have a greater impact than making the director removable at will. The memorandum proposes restructuring the CFPB as a “civil law enforcement agency similar to the Federal Trade Commission.” It is not clear what, exactly, is meant by “civil law enforcement agency.” But other reforms proposed in the memorandum indicate that the intent is to eliminate the CFPB’s authority to supervise banks and non-banks and to curtail greatly the CFPB’s rulemaking power and largely limit it to enforcing existing statutes and regulations:

  • Rule-making authority limited to enumerated [federal consumer financial services] statutes
  • UDAP [sic] authority repealed in full
  • Supervision repealed
  • Enforcement powers limited to cease and desist and CID/Subpoena powers
  • Mandatory advisory boards repealed
  • Elimination of consumer education functions
  • Market monitoring authority repealed
  • Research function eliminated
  • Strengthen the existing Dodd-Frank language that the CFPB’s jurisdiction does not include entities regulated by the SEC or CFTC.

These proposals would drastically alter the CFPB and make it a less powerful and robust agency. The direct, consumer-facing aspects of education and complaint handling would largely be eliminated. The CFPB would also have a much smaller role in monitoring and researching financial markets; presumably, those functions would lie primarily with the Federal Reserve. The CFPB’s rulemaking authority would be reduced greatly, and its supervisory authority would be eliminated entirely. It would retain some enforcement authority, but its preferred enforcement mechanism – UDAAP – would be unavailable and it appears that the CFPB would be unable to obtain any monetary relief for consumers or civil money penalties.

Eliminating the CFPB’s UDAAP authority would have a significant impact on one of the most controversial aspects of the CFPB, which its critics have termed regulation by consent order. UDAAP allows the CFPB significant discretion to determine what is and is not an unfair, deceptive, or abusive act or practice. This broad authority allows it to find conduct illegal that is not prohibited by a more narrowly tailored statute, such as the Fair Debt Collection Practices Act or Fair Credit Reporting Act. Eliminating UDAAP would require the CFPB to rely on more specific statutes and regulations in enforcement actions, thereby reducing its ability to create new regulatory expectations through enforcement actions. Indeed, the impact of eliminating UDAAP authority may explain why the memorandum includes a proposal to “[r]e-draft Section 415 to prohibit any SEC rulemaking by enforcement” but does not include a similar restriction with respect to the CFPB.

Restricting the CFPB’s rulemaking authority may have a significant impact on rules that are in the pipeline. The Small Dollar Rule and Arbitration Rule both rely exclusively on the Dodd-Frank Act, and would therefore not be permissible. The Outline of Proposals related to debt collection could partially be grounded in the Fair Debt Collection Practices Act, but the CFPB would not be able to rely on UDAAP or other Dodd-Frank authority. This also means that the CFPB would not be able to issue a rule regarding first-party (i.e., creditor) debt collection, as it would have to rely on UDAAP. We have blogged extensively on this proposed and contemplated rulemaking activity. https://tinyurl.com/zrho39l; https://tinyurl.com/gvoq7mp; https://tinyurl.com/jcjm672

At the end of the day, neither the original CHOICE Act nor the proposed amendments to it are likely to pass in the Senate. Republicans currently hold a narrow, 51-49 majority, and would need to pick-up several Democratic votes to overcome a likely filibuster unless the Republicans “go nuclear” – that is, change the Senate rules to eliminate the ability of the Democrats to filibuster the bill. Less ambitious reforms may be feasible, but fundamentally re-shaping the CFPB will likely prove difficult with the current makeup of the Senate. We also do not know what changes President Trump would like to make to the CFPB.

The Ninth Circuit recently issued its opinion in CFPB v. Great Plains Lending, LLC, et al., in which three tribal-affiliated, for-profit lending companies (“Tribal Lenders”) challenged the authority of the CFPB to issue civil investigative demands (CIDs) against Native American tribes.

In 2012, the CFPB issued CIDs against the Tribal Lenders regarding their advertising, marketing, origination, and collection of small-dollar loan products. In response, the Tribal Lenders claimed that the CFPB lacked jurisdiction to investigate them and, after their offer of cooperation was rejected by the Bureau, challenged the CIDs in a California federal court. The district court granted the CFPB’s petition to enforce the CIDs and the Tribal Lenders appealed.

Summarizing precedent, the Ninth Circuit concluded that Dodd-Frank—a “law of general applicability”—applies to tribes unless: 1) the law touches on exclusive rights of tribal self-governance; 2) the application of the law to tribes would violate treaties; or 3) Congress expressed its intent that the law should not apply to tribes. The Tribal Lenders did not argue that the CIDs violated a treaty and their lending involved non-tribal customers. Accordingly, the panel’s decision scrutinized whether Congress intended the Act’s investigative authority to include tribes.

Dodd-Frank provides that the Bureau may issue a CID whenever it has reason to believe that a “person” may have information relevant to a violation. The Act defines “person” as “an individual, partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative, organization, or other entity.” In contrast, the Act defines “States” to include, in part, “any federally recognized Indian tribe as defined by the Secretary of the Interior.” The Tribal Lenders argued that the definitions were mutually exclusive. In other words, Congress intended to exempt tribes from the CFPB’s investigative authority by way of excluding tribes from the definition of “person.”

The Ninth Circuit was not persuaded. The panel emphasized that Dodd-Frank created a list of exempt entities with “great specificity” and this list of exemptions did not included tribal entities.  In the court’s view, the Tribal Lenders’ “definitional” argument only established “attenuated references” that did not amount to an express or implied intent to exempt tribes. Notably, however, the Ninth Circuit’s inquiry was limited to whether the CFPB’s authority was “plainly lacking” because courts apply less scrutiny to jurisdictional challenges in pre-complaint investigations.

While this decision addresses the powers of the CFPB under Dodd-Frank, and not the powers of state authorities or private litigants, it nevertheless creates a significant gap in the protection that Tribes and their partners perceived they had in providing consumer financial services to the public.

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

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

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

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

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

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

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

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

By a vote of 30-26 earlier this week, the House Financial Services Committee approved the “The Financial CHOICE Act of 2016” (H.R. 5983), the bill released in July 2016 by Committee Chairman Jeb Hensarling to replace the Dodd-Frank Act.  All Democrats on the Committee voted against the bill as did one Republican member.  No amendments were offered by Democratic members.  

The sections of the bill dealing with the CFPB are found in Title III, entitled “Empowering Americans to Achieve Financial Independence.”  Subtitles A and B entitled, respectively, “Separation of Powers and Liberty Enhancements” and “Administrative Enhancements,” contain provisions that would change the CFPB’s structure, funding, and operation. For example, such provisions would change the CFPB’s name to the “Consumer Financial Opportunity Commission,” replace the current single director with a bipartisan, five-member commission, fund the commission through the appropriations process, require the commission to verify consumer complaint information before making it publicly available, and require the commission to establish a procedure for issuing written advisory opinions.

Subtitle C, entitled “Policy Enhancements,” contains provisions directed at the CFPB’s regulatory authority.  For example, such provisions would repeal the CFPB’s authority to prohibit consumer financial services or products it deems “abusive” and to prohibit the use of arbitration agreements, repeal the CFPB’s indirect auto lending guidance and require use of the notice and comment process for any new proposed guidance, and authorize the commission to grant a 5-year waiver from a payday lending rule to any state or federally-recognized Indian tribe that requests such a waiver.

While the bill is not expected to be passed by Congress this year, depending on the outcome of the Presidential election, it could serve as a roadmap for future legislative change.

 

 

The Senate Judiciary Committee held a hearing yesterday entitled “The Administrative State v. The Constitution: Dodd-Frank at Five Years.”  The hearing was focused on constitutional issues relating to the Dodd-Frank Act, including the constitutionality of the CFPB.

The witnesses were: The Honorable C. Boyden Gray of Boyden Gray & Associates, PLLC: Deepak Gupta of Gupta Wessler PLLC; Professor Neomi Rao of George Mason University School of Law; Professor Adam J. Levitin of Georgetown University Law Center; and Dr. Mark Calabria of the Cato Institute.  Their written testimony is available on the Committee website.

 

To mark the fifth anniversary of Dodd-Frank’s enactment, Americans for Financial Reform is sponsoring a program “Five Years Later, How Has the Financial System Changed (and Not)?” to be held in Washington, D.C. on July 14, 2015.

Senator Sherrod Brown will give the keynote address and Senator Elizabeth Warren will give the closing address.  There will be two panel discussions.  One panel will  feature regulators from federal agencies, including Zixta Martinez, CFPB Associate Director for External Affairs.  A second panel will feature academics and representatives of various interest groups.