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On June 21, 2018, Judge Preska of the Southern District of New York (“SDNY”) issued a decision finding that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional.  In doing so, the SDNY held that Title X of Dodd-Frank—the title that created the CFPB and established its regulatory, supervisory, and enforcement authority—should be stricken in its entirety.

The SDNY went further in finding that Mulvaney’s ratification of the CFPB’s decision to bring the lawsuit was inadequate to cure the constitutional deficiencies.  The decision was issued in response to the motion to dismiss filed by the defendants in the CFPB’s and New York Attorney General’s case against RD Legal Funding, LLC.

This decision is in direct conflict with the D.C. Circuit’s en banc decision in the PHH case, which held that the CFPB’s structure is constitutional.  Adopting portions of two dissenting opinions in the en banc decision, the SDNY found that, not only is the CFPB’s structure unconstitutional, but the proper remedy is to strike all of Title X rather than just its for-cause removal provision.

While the SDNY dismissed the CFPB from the RD Legal Funding case, it allowed the New York Attorney General’s claims to proceed.  Because part of the case remains active, the CFPB cannot appeal the decision unless the SDNY certifies that there is no reason to delay that appeal under Rule 54(b) of the Federal Rules of Civil Procedure.  Assuming such a certification by the SDNY, the CFPB could appeal to the Second Circuit.

We will soon be blogging in further detail about the implications of the SDNY decision.

The federal banking agencies (the Federal Reserve Board, OCC, and FDIC (FBAs)), recently issued a “Policy Statement on Interagency Notification of Formal Enforcement Actions” that is intended “to promote notification of, and coordination on, formal enforcement actions among the FBAs at the earliest practicable date.”  The issuance of the policy statement follows the DOJ’s announcement last month of a new policy to encourage coordination among the DOJ and other enforcement agencies when imposing multiple penalties for the same conduct to discourage “piling on.”

The new policy statement recites that it is not intended as a substitute for routine informal communications among FBAs in advance of an enforcement action, including verbal notification of pending enforcement actions “to officials and staff with supervisory  and enforcement responsibility for the affected institution.”

The policy statement’s key instructions are:

  • When an FBA determines that it will take formal enforcement action against a federally-insured depository institution, depository institution holding company, non-bank affiliate, or institution-affiliated party, it should evaluate whether the action involves the interests of another FBA.  By way of example, the policy statement notes that an entity targeted by an FBA for unlawful practices might have significant connections with an institution regulated by another FBA.
  • If it is determined that one or more other FBAs have an interest in an enforcement action, the FBA proposing the action should notify the other FBA(s) at the earlier of the FBA’s written notification to the targeted entity or when the responsible agency official or group of officials determines that enforcement action is expected to be taken.
  • The information shared should be appropriate to allow the other FBA(s) to take necessary action in examining or investigating the entity over which they have jurisdiction
  • If two or more FBAs is considering bringing a complementary action, such as an action involving a bank and its parent holding company, those FBAs should coordinate the preparation, processing, presentation, potential penalties, service, and follow-up of the enforcement action.

We view the new policy statement as a very positive development.

The CFPB has issued a request for information that seeks comment on how the CFPB can improve its administrative adjudication processes, including its “Rules of Practice for Adjudication Proceedings” codified at 12 CFR part 1081, Subpart E (Rules).  The Rules address the general conduct of administrative enforcement proceedings, the initiation of such proceedings and prehearing rules, decisions and appeals, and temporary cease-and-desist proceedings.  Comments on the RFI must be received by April 6, 2018.

In the background discussion, the CFPB states that, to date, there have been eight administrative adjudication proceedings under the Rules that were not immediately resolved through a consent order.  Six of those proceedings were settled during the course of adjudication, one is pending, and one has resulted in a final decision.  In explaining its rationale for issuing the RFI, the CFPB states that it understands “that the administrative adjudication process can result in undue burdens, impacts, or costs on the parties subject to these proceedings.”

The RFI seeks feedback on all aspects of the CFPB’s administrative adjudication process but lists 13 general areas, which according to the CFPB “represents a preliminary attempt by the Bureau to identify elements of Bureau processes related to administrative adjudication that may be deserving of more immediate focus.”  In addition to the requirements and other aspects of specific provisions of the Rules, the 13 general areas include “[w]hether, as a matter of policy, the Bureau should pursue contested matters only in Federal court rather than through the administrative adjudication process.”  Given that the administrative adjudication process puts the CFPB simultaneously in the role of prosecutor, judge and jury, we believe the CFPB should give careful consideration to discontinuing the use of the administrative adjudication processes.

In addition, a serious constitutional question exists as to whether the CFPB Director has the authority to appoint administrative law judges.  The U.S. Supreme Court recently agreed to decide whether SEC ALJs  are “inferior officers” who must be appointed by the President, the courts, or a department head in accordance with the U.S. Constitution’s appointments clause.  A similar question exists as to ALJs used by the CFPB in its administrative adjudication proceedings.  If they are “inferior officers,” it would raise the further questions of whether the CFPB is a “department” and thus whether the CFPB Director is department head who can appoint an ALJ.

The new RFI represents the second in a series of RFIs announced by Mick Mulvaney, President Trump’s designee as Acting Director.  Mr. Mulvaney described the CFPB’s plans to issue the RFIs as “a call for evidence to ensure the Bureau is fulfilling its proper and appropriate functions to best protect consumers.”  In its press release announcing the second RFI, the CFPB stated that the next RFI in the series “will address the Bureau’s enforcement processes, and will be issued next week.”

The first RFI, which was published last week in the Federal Register and has a March 27, 2018 comment deadline, was entitled a “Request for Information Regarding Bureau Civil Investigative Demands and Associated Processes.”  In that RFI, the CFPB asks for comments on its processes surrounding Civil Investigative Demands and investigational hearings.  As we indicated in connection with the first RFI, with the recent change of leadership and philosophy, we anticipate a CFPB that will be more receptive to the concerns of industry.  We therefore view the RFIs as an important opportunity for the industry to argue for permanent changes in the areas addressed by the RFIs.

On January 26, 2018, the CFPB published a “Request for Information Regarding Bureau Civil Investigative Demands and Associated Processes” (“Request”) in the Federal Register. In the Request, the CFPB asks industry and attorneys who regularly practice before the Bureau to comment on its processes surrounding Civil Investigative Demands (“CID”) and investigational hearings. Comments are due by March 27, 2018 and can be submitted electronically, by email, by regular mail, or by hand-delivery. The Request indicates that all comments will be posted online without change.

The CFPB requested comments on several specific topics, but did not limit comments to them. The topics include:

  1. The process for issuing CIDs; the authority of CFPB personnel to issue them; how CIDs  can be made less burdensome; and the timeframes and processes for complying with or challenging them.
  2. The requirements for responding to CIDs, including certification requirements, and the CFPB’s document submission standards.
  3. Transparency with CID recipients as to the focus of the investigation and what information the CFPB needs to conduct its investigation.
  4. The process for dealing with the inadvertent production of privileged information and whether that process should more closely mirror the Federal Rules of Evidence.
  5. The process for conducting investigational hearings of business entities, including whether it should more closely mirror the Federal Rules of Civil Procedure and whether counsel should be able to offer objections at investigational hearings.

This Request is one of the CFPB’s first opportunities to receive official comments from industry on its enforcement process. While the CFPB has requested comments on its rules and processes before, some people in the industry felt their comments were ignored. With the recent change of leadership, we anticipate a CFPB that will be more receptive to the concerns of industry. We therefore view the Request as an important opportunity for the industry to argue for permanent changes to the CID process, and to make the CID process more efficient, less expensive, and fairer to the targets of investigations.

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.

Yesterday, U.S. District Court Judge Timothy J. Kelly denied Leandra English’s motion for a preliminary injunction in a 46-page opinion. English had sought to block President Trump’s appointment of Mick Mulvaney to serve as the CFPB’s Acting Director. The Court denied that request and held that English failed to satisfy  any of the four elements of her preliminary injunction claim.

The Court found that English was unlikely to ultimately succeed on the merits of her claim. It held that the Vacancies Reform Act (“VRA”) gave President Trump the right to appoint a CFPB Acting Director and that the Dodd-Frank Act did not displace the President’s VRA authority. In reaching that conclusion, the Court relied on language in Dodd-Frank providing that all federal laws relating to federal employees or officers – such as the VRA – apply to the CFPB “except as otherwise provided expressly by law.” It found that Dodd-Frank’s reference to the Deputy Director’s service as the Acting Director in the Director’s “absence or unavailability” did not constitute an “express” provision of law overriding the VRA.

English had argued, under the canon of statutory construction that specific statutes trump general ones, that the Dodd-Frank provision was more specific than the VRA, and thus controlled. The Court soundly rejected this argument, finding that the VRA’s reference to “vacancies” was more specific to this situation than Dodd-Frank’s reference to the Director’s “absence or unavailability.”

The Court also rejected English’s argument that a different result was required because Dodd-Frank used the word “shall” in reference to the Deputy Director’s service as Acting Director. It relied on the commonsense notion that, while the word “shall” is generally mandatory, it is not necessarily unqualified. The court recognized that this very notion is embedded in Dodd-Frank itself. Dodd-Frank says that the Director “shall serve as the head of the [CFPB].” If “shall” were unqualified in that context, then the provision stating that the President “may” remove the Director for cause would be meaningless (and the statute nonsensical).

Further, relying on the doctrine of constitutional avoidance, the Court rejected English’s position because it would create serious constitutional problems. “Under English’s reading, the CFPB Director has unchecked authority to decide who will inherit the potent regulatory and enforcement powers of that office, as well as the privilege of insulation from direct presidential control, in the event he resigns. Such authority appears to lack any precedent, even among other independent agencies.”

If the CFPB Director had that much control over his successor, it would severely diminish the President’s control over Executive officers and thus his constitutional duty to “take care that the laws be faithfully executed,” the Court held. It also acknowledged that a panel of the D.C. Circuit has already found that the CFPB’s structure is unconstitutional. It held that English’s reading of the statutes would only exacerbate those problems.

English had equal difficulty convincing the Court that she would suffer irreparable harm if an injunction were not issued. The only harm she proffered was the intangible harm she would suffer from being unable to perform the duties of the Acting Director. The Court declined to adopt the reasoning of the only authority supporting the proposition that such harm was irreparable harm — an unpublished district court decision from 1983 involving the termination of officers of an agency that would automatically cease to exist under its implementing statute thus precluding their later reinstatement. The Court found that English “utterly failed to describe any [irreparable] harm.”

On the third and final elements of English’s claim – balance of the equities and public interest – the Court found her claim equally wanting. English said that the need for clarity meant that an injunction should issue. The Court held that, “There is little question that there is a public interest in clarity here, but it is hard to see how granting English an injunction would bring any more of it. . . . The President has designated Mulvaney the CFPB’s acting Director, the CFPB has recognized him as the acting Director, and it is operating with him as the acting Director. Granting English an injunction . . . would only serve to muddy the waters.”

Finding that English failed to meet her burden on even one element of her preliminary injunction claim, the Court denied her motion. The Court’s decision does not ultimately resolve the merits of the case and English will doubtless file an appeal with the D.C. Circuit. Because of the cloud that the ongoing litigation casts on the legality of any of Mulvaney’s actions, President Trump should appoint a permanent Director without delay.

The Democratic attorneys general of 16 states and the District of Columbia have sent a letter to President Trump in which they express their support for the CFPB’s consumer protection mission and criticize the President’s appointment of Mick Mulvaney as CFPB Acting Director.  The 16 states are New York, California, Connecticut, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Mexico, North Carolina, Oregon, Vermont, Virginia, and Washington.  In particular, the AGs contend that various statements made by Mr. Mulvaney about the CFPB “are categorically false, and should disqualify Mr. Mulvaney from leading the agency, even on an acting basis.”

Since the AGs’ presumably realize that their criticism is unlikely to cause President Trump to reconsider his appointment of Mr. Mulvaney, it would appear that the letter’s primary purpose is “saber rattling” by the AGs.  While providing examples of various enforcement matters on which state AGs have worked jointly with the CFPB, the AGs highlight their own “express statutory authority to enforce federal consumer protection laws, as well as the consumer protection laws of our respective states.”  The AGs state that they “will continue to enforce those laws vigorously regardless of changes to the CFPB’s leadership or agenda.  As attorneys general, we retain broad authority to investigate and prosecute those individuals or companies that deceive, scam, or otherwise harm consumers.”

In addition to various federal consumer protection statutes that give direct enforcement authority to state AGs or regulators, Section 1042 of the Consumer Financial Protection Act authorizes state AGs and regulators to bring civil actions to enforce the provisions of the CFPA, most notably its prohibition of unfair, deceptive or abusive acts or practices.  A state AG or regulator, before filing a lawsuit using his or her Section 1042 authority, must notify the CFPB and Section 1042 allows the CFPB to intervene as a party and remove an action filed in state court to federal court.  (AGs and regulators in several of the states joining in the letter to President Trump have already filed lawsuits using their Section 1042 authority.)

On January 11, 2018, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar: Who Will Fill the Void Left Behind by the CFPB?  Click here to register.

The AGs warn that “if incoming CFPB leadership prevents the agency’s professional staff from aggressively pursuing consumer abuse and financial misconduct, we will redouble our efforts at the state level to root out such misconduct and hold those responsible to account.”  They further state that “regardless of the future direction or leadership of the CFPB, we as state attorneys general will vigorously enforce state and federal laws to ensure fairness and deter fraud.”  It is also important to note that CFPB staff, who may feel handcuffed by Mr. Mulvaney, can share information with sympathetic state AGs.

 

The Supreme Court is considering a cert petition requesting that it hear the Lucia case, which we have blogged about extensively due to its potential impact on the outcome of the PHH case. Significantly, the DOJ recently filed a brief in the case siding against the SEC and with Lucia, who is challenging the constitutionality of how the SEC’s Administrative Law Judges (“ALJs”) are appointed.

Under the Appointments Clause of Article II of the U.S. Constitution, an “inferior officer” must be appointed by the President, a court, or the head of a “department.” Lucia argues that  because the SEC’s ALJs are hired by the SEC’s Office of Administrative Law Judges and not appointed by an SEC commissioner, their appointments would be unconstitutional if they are “inferior officers. ”

In its brief, the DOJ acknowledged the course change on this issue, stating that, “In prior stages of this case, the government argued that the Commission’s ALJs are mere employees rather than ‘Officers’ within the meaning of the Appointments Clause. Upon further consideration, and in light of the implications for the exercise of executive power under Article II, the government is now of the view that such ALJs are officers because they exercise ‘significant authority pursuant to the laws of the United States.'”

Needless to say, it is extremely unusual for the DOJ to take up arms against another government agency like this. How it impacts the outcome of the Lucia case is yet to be seen. As we’ve explained in prior posts, the CFPB uses SEC ALJs to hear its administrative cases. So, if the Supreme Court hears the Lucia case and determines that ALJs are inferior officers, it will call into question every SEC and CFPB case that an ALJ decided. It may also impact how the en banc D.C. Circuit decides the PHH case.

We will continue to follow the issues and keep you posted.

A new filing by the CFPB in its action against Nationwide Biweekly Administration Inc. may be an indicator of the enforcement philosophy of Mick Mulvaney, President Trump’s designee as CFPB Acting Director, and how that philosophy may impact future CFPB enforcement activity.  In addition to a 30-day freeze on all regulatory action, CFPB hiring, and payments from the civil penalty fund, Mr. Mulvaney is reported to have put a 30-day hold on new enforcement cases.  Mr. Mulvaney is also reported to have named Brian Johnson as a senior adviser to him at the CFPB.   Mr. Johnson is Senior Counsel to the House Financial Services Committee and was a member of President Trump’s transition team.

In the CFPB’s 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.  (However, the court rejected the CFPB’s request for an award against each defendant and imposed only a single penalty for which the defendants would be jointly and severally liable.)

On November 27, the CFPB had filed a response opposing a motion filed by the defendants to stay execution of the $7.9 million judgment without posting a bond.  The defendants had offered alternate security in the form of an agreement not to sell Nationwide’s commercial real property or the individual owner’s residence pending the disposition of anticipated post-trial motions and appeal.  Two days later, on November 29, the CFPB filed a notice withdrawing its response and stating that the CFPB “takes no position as to whether the Court should require Defendants in this matter to post a bond as a condition of staying the monetary judgment pending the disposition of Defendants’ anticipated post-trial motions.”  An attorney for the defendants is reported to have stated that the change in the CFPB’s position was in response to a letter she had sent to Mr. Mulvaney informing him of the CFPB’s November 27 filing.

In an update to its Policies and Procedures Manual (PPM), the Office of the Comptroller of the Currency (OCC) has revised PPM 5310-3, “Enforcement Action Policy,” dated September 9, 2011. The PPM sets forth the OCC’s policies and procedures for taking enforcement actions against banks, federal savings associations, federal branches, and agencies (“banks”).  The OCC notes that the principles in the PPM may also be considered in taking an enforcement action against a third-party service provider.  The update is effective December 1, 2017.

The PPM covers the following topics and changes to the September 9, 2011 PPM (“old PPM”):

  • Types of enforcement actions. The PPM lists the types of informal and formal enforcement actions the OCC can take. (Such actions are described more fully in appendices A and B to the PPM.) The PPM clarifies that all nonpublic enforcement actions are considered “informal enforcement actions,” including commitment letters, MOUs, operating agreements, and certain conditions imposed in writing under 12 U.S.C. § 1818. It specifically identified Individual Minimum Capital Ratios (“IMCRs”) and Notices of Deficiency under 12 CFR § 30 as new categories of informal enforcement actions. Similarly, the PPM clarifies which actions constitute “formal enforcement actions.” The old PPM specified that formal enforcement actions include orders and formal written agreements under 12 U.S.C. 1818(b), capital directives under 12 U.S.C. § 3907, Prompt Corrective Action directives under 12 U.S.C. § 1831o, and safety and soundness orders under 12 U.S.C. § 1831p. The PPM’s definition of formal enforcement action includes all those things as well as “all enforcement actions enforceable by the OCC in federal court,” Graham Leach Bliley Act Agreements pursuant to 12 CFR § 5.39, and any action in which a civil money penalty is imposed. The PPA also reminds banks that entities subject to certain formal enforcement actions are also deemed to be in “troubled condition” under 12 C.F.R.§ 5.51.
  • Determination of appropriate supervisory or enforcement response. The PPM lists factors that examiners should consider when determining the appropriate response to a bank’s deficiencies and describes the general circumstances under which the OCC will have a presumption in favor of a formal enforcement action, the impact of a bank’s CAMEL or ROCA rating on the OCC’s response to deficiencies, and the OCC’s authority to place a bank into conservatorship or receivership. The changes that the PPM implements in this section do not appear to be substantive. The simply clarify the old PPM.
  • Decision authority. The PPM describes the OCC’s supervision review committees (SRC) that review or make enforcement decisions. While the old PPM specifically discussed the Examiner in Charge’s authority to recommend enforcement actions, the new PPM omits that discussion. In addition, the PPM adds a Major Matters Supervision Review Committee, which will have final authority to make enforcement decisions on major cases. These changes may indicate that enforcement decisions will be handled at a higher level within the OCC. Other changes to this section appear to be primarily organizational in nature.
  • Content of enforcement action documents. The PPM lists the information that must be contained in enforcement documentation once the OCC has determined which deficiencies must be addressed in an enforcement action. While the old PPM did not explicitly require that the underlying basis for the enforcement action be specified, that requirement was added by the PPM. The PPM also added a requirement that enforcement action documents explicitly guide the board or management’s corrective actions and facilitate OCC follow-up.
  • Timeliness of enforcement actions. The PPM states that, whenever possible, a proposed enforcement action should be presented to the bank within 180 days of the start of supervisory activity that results in a formal written communication containing any of five statements listed in the PPM.  In contrast, the old PPM required only that action be taken “as soon as practicable once the need for such action has been identified.” The PPM also states that enforcement action recommendations based on facts gathered through an order of investigation should be presented to the appropriate supervision review committee within 90 days of completion of the investigative work. (Appendix C to the PPM outlines the general process and timeline for each type of enforcement action.) Any extensions to that deadline must be approved by the appropriate deputy comptroller. Under the old PPM, enforcement decisions were to be made more quickly, generally within 15 days of certain key milestones. However, extensions and exceptions only had to be documented, not formally approved.
  • Follow-up activities. The PPM describes the enforcement action follow-up activities that examiners should undertake. The PPM implements certain changes to the timing of the OCC’s follow up. The changes appear designed to both give the OCC more flexibility in scheduling follow-up and to align the follow-up timing with the requirements of any enforcement action. The PPM also specifies that the follow-up should include both verification (assessing compliance) and validation (assessing effectiveness) of the bank’s remedial efforts.
  • Assessment of compliance with enforcement actions. The PPM states that upon the completion of follow-up activities, examiners must determine whether a bank has met the requirements of each article of the enforcement action and designate the article as “in compliance” or “not in compliance.” The PPM describes the circumstances under which each such designation should be used. The old PPM included a strong presumption in favor of escalated enforcement when the bank was not in compliance on certain types of issues. The PPM does not discuss this presumption.
  • Communication of enforcement action compliance. The PPM describes the contents of formal communications from examiners to a bank that discuss compliance with an enforcement action and the types of communications from a bank to the OCC that follow an enforcement action. This requirement was not contained in the old PPM.
  • Termination of enforcement actions. The PPM describes the circumstances that permit termination of an enforcement action and the considerations for determining when to escalate an enforcement action or replace an enforcement action with a less severe or comprehensive action. The old PPM did not include specific guidance on when and how an enforcement action would be escalated.
  • The PPM describes the supporting documentation related to an enforcement action that must be included in the OCC’s supervisory information systems. These documentation requirements were spread throughout the old PPM. Consolidating them into one section was likely done to improve consistency and accountability in documenting the enforcement process.
  • Public disclosure of enforcement actions. The PPM describes the public disclosures that the OCC can make in connection with an enforcement action. The PPM specifically reminds banks of the circumstances under which they can and must make such public disclosures. The old PPM did not include this additional guidance.