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.

Last week, the Federal Trade Commission (FTC) Bureau of Consumer Protection’s Acting Director, Thomas Pahl, posted on the FTC’s Business Blog about the FTC’s role as the federal agency with the “broadest jurisdiction” to pursue privacy and data security issues. Pahl noted that for over twenty years the FTC has used its authority, “thoughtfully and forcefully to protect consumers even as new products and services emerge and evolve.”  Pahl emphasized that the FTC is “the enforcement leader in the privacy and security arena” and that the FTC will continue to “focus the national conversation on keeping consumer privacy and data security front and center as new technologies emerge.”

Pahl’s blog posting supports recent statements by FTC Acting Chairman Maureen Ohlhausen, who recently testified before Congress that, “the FTC is committed to protecting consumer privacy and promoting data security in the private sector.”

Companies should not expect the FTC to reduce its enforcement activities relating to privacy and data security issues, but companies can expect the FTC to shift away from bringing cases based on novel legal theories.  Ohlhausen is committed to re-focusing the FTC’s efforts on “bread-and-butter” enforcement.  Ohlhausen has spoken openly in opposition to recent enforcement actions brought under the Obama Administration that were based on speculative injury or subjective types of harm rather than concrete consumer injury.

Furthermore, companies should expect further guidance from the FTC relating to privacy and data security expectations to help reduce unnecessary regulatory burdens and provide additional transparency to businesses on how they can remain compliant and avoid engaging in unfair or deceptive acts of practices.  Under Ohlhausen’s leadership, companies should be watching closely for FTC guidance laying out what they should do to protect consumer privacy and ensure proper data security, rather than just waiting to find out what they should not do from FTC enforcement actions.

Last Friday in New Orleans, the ABA Business Law Section Consumer Financial Services Committee hosted a fascinating program about CFPB enforcement at the Section’s 2017 Spring Meeting.  The program was entitled:  “Too Much or Too Little?  Is the CFPB Exercising its Enforcement Power with Appropriate Restraint?”  As might  be expected, the two industry representatives on the panel criticized certain of the CFPB’s enforcement initiatives, including, among others, the PHH case and the use of disparate impact analysis in connection with  discretionary dealer pricing to assess Equal Credit Opportunity Act (“ECOA”) compliance by auto finance companies.  The industry representatives’ principal complaint was that the CFPB routinely eschews rulemaking in favor of using consent orders, a practice which has been pejoratively referred to as “regulation by enforcement.”

Professor Chris Peterson of the University of Utah School of Law defended the CFPB’s enforcement initiatives by updating certain statistics contained in his law review article “Consumer Financial Protection Bureau Law Enforcement: An Empirical Review,” 90 Tulane Law Review 1057 (2016).  According to Professor Peterson:

  • The CFPB wins the vast majority of the cases that it initiates, 146 out of 150 cases.
  • Over 95% of all consumer relief was awarded in cases in which the CFPB uncovered evidence of deceptive conduct.
  • Over 95% of all consumer relief was awarded in cases in which the CFPB collaborated with other state or federal law enforcement agencies.
  • No bank has contested a public CFPB enforcement action.

Professor Peterson opined that the greatest risk today is that a change in the CFPB’s governance, such as replacing the current single director with a multi-member commission as has been proposed, will bring the CFPB “to heel” and result in industry capture.  Jeffrey Langer, formerly Assistant Director of Installment and Liquidity Lending Markets in the CFPB’s Research, Markets, and Regulations Division, observed that the CFPB has been (and still is) “significantly understaffed” in its Research, Markets and Regulations Division.  (It was suggested that the CFPB’s emphasis on enforcement has contributed to the understaffing by reducing interest among CFPB staff in working in the Regulations Division.)

Professor Peterson agreed with Jeff’s observation, adding that “rulemaking is very labor intensive” and that the Regulations Division does not have the “bandwidth” needed to engage in more robust rulemaking.  He further noted that CFPB regulations run the risk of being “thrown out” by Congress under the Congressional Review Act.  Professor Peterson made the obvious point that regulations only operate prospectively and “don’t return money” to consumers.

Patrice Ficklin, the Assistant Director of Fair Lending and Equal Opportunity of the CFPB’s Office of Supervision, Enforcement and Fair Lending, viewed the program as an audience member.  Speaking from the audience, she made several comments in defense of the CFPB’s use of disparate impact analysis to determine whether banks and non-banks that purchase motor vehicle installment sales contracts from auto dealers are violating the ECOA by enabling the dealers to use discretionary pricing.  Ms. Ficklin made the following points:

  • The CFPB was not the first federal law enforcement agency to deploy disparate impact analysis. She described the CFPB as having received a “hand-off” of disparate impact analysis from “sister agencies,” including DOJ, that were already using that analysis.
  • In using disparate impact analysis, the CFPB is not “clarifying the law” because the “law is clear.” Ms. Ficklin was, of course, basing her claim on language in Regulation B that purports to legitimize the use of disparate impact analysis.

Unfortunately for the CFPB, however, the law is anything but clear, particularly in the aftermath of the U.S. Supreme Court’s Inclusive Communities decision.  While language in Regulation B does purport to authorize the use of disparate impact analysis, there are powerful arguments supporting the proposition that such language is contrary to the ECOA’s express language.

Peggy Twohig, Assistant Director of Supervision Policy of the Office of Supervision, Enforcement and Fair Lending, was also an audience member.  Ms. Twohig had previously spent 17 years with the Federal Trade Commission where she was the Associate Director of the FTC’s Division of Financial Practices.  Speaking from the audience, she observed that many years ago the FTC was “put down” for what Congress considered to be overly aggressive rulemaking.  Ms. Twohig was, of course, referring to the Magnusson-Moss standards enacted in 1980 which made it virtually impossible for the FTC to engage in rulemaking for more than 30 years.  Ms. Twohig seemed to imply that, if history is any guide, the CFPB should be cautious in using its rulemaking authority.

PHH filed its reply brief with the D.C. Circuit on April 10 in the en banc rehearing of the PHH case. We have blogged extensively about the case since its inception. Central to the case is whether the CFPB’s single-director-removable-only-for-cause structure is constitutional. Of course, the CFPB fiercely defends its structure, while PHH, the DOJ, and others argue that the CFPB’s structure epitomizes Congressional usurpation of executive power in violation of the constitution’s separation of powers principles.

If the CFPB’s structure is constitutional then there is no reason why Congress can’t divest the President of all executive power, PHH argues. “[I]f Congress can divest the President of power to execute the consumer financial laws, then it may do so for the environmental laws, the criminal laws, or any other law affecting millions of Americans.” “The absence of any discernible limiting principle is a telling indication that the CFPB’s view of the separation of powers is wrong.”

Even if existing Supreme Court precedent authorizes Congress to assign some executive power to independent agencies, PHH argued that the CFPB’s structure goes too far. “No Supreme Court case condones the CFPB’s historically anomalous combination of power and lack of democratic accountability, and the Constitution forbids it.” The fact that the CFPB has the power of a cabinet-level agency while lacking any democratic accountability or structural safeguards is a sure sign that its structure is unconstitutional.

The only remedy to the CFPB’s unconstitutional structure, PHH argues, is to dismantle the agency entirely. “The CFPB’s primary constitutional defect, the Director’s unaccountability [], is not a wart to be surgically removed. Congress placed it right at the agency’s heart, and it cannot be removed without changing the nature of what Congress adopted.”

* * *

PHH’s reply completes the briefing in this appeal. Oral arguments are scheduled to take place on May 24, with each side being given 30 minutes to argue. On April 11, the D.C. Circuit granted the DOJ’s request for 10 minutes to present its views during oral argument.

Earlier today, at the Practicing Law Institute’s (“PLI”) 22nd Annual Consumer Financial Services Institute in New York City, Alan Kaplinsky (who is co-chairing the event) moderated a panel entitled “The CFPB Speaks,” that featured three senior CFPB lawyers: Anthony (“Tony”) Alexis (Assistant Director for Enforcement), Diane Thompson (Deputy Assistant Director, Office of Regulations), and Peggy Twohig (Assistant Director for Supervision Policy).  Ballard Spahr attorney James Kim, a former senior CFPB enforcement lawyer who now represents industry, was also a panel member.

In response to questions posed by Alan and audience members, the CFPB lawyers discussed regulatory, supervisory and enforcement developments and upcoming initiatives.  Particularly noteworthy comments were:

  • Ms. Twohig stressed the importance of an entity’s response to a PARR letter – a notice of Potential Action and Request for Response – in the supervisory process.  She commented that there have been instances where the CFPB has decided not to cite a company for a violation based on its response to a PARR letter.
  • Mr. Alexis and Ms. Twohig discussed the CFPB’s process for deciding whether the CFPB will use a supervisory or an enforcement action to address violations found in an examination.  Ms. Twohig indicated that the decision whether to refer a matter to enforcement is made by an Action Review Committee (ARC), which considers various factors such as the severity of the violation, the entity’s cooperation with the CFPB, and policy factors that include the need for the CFPB to send a public message of deterrence.  Mr. Alexis indicated that if a matter is referred to enforcement, the Enforcement Division will consider similar factors as well as input from witnesses obtained through CIDs.  Enforcement will then decide whether to proceed with an enforcement action, return the matter for supervisory resolution (which Mr. Alexis called a “reverse ARC” process), or drop the case.  Mr. Alexis acknowledged that a supervisory resolution through an MOU or similar agreement is the only vehicle available to the CFPB to enter into a non-public settlement.  Accordingly, if a company is not subject to CFPB supervision, a settlement can only be entered into through a public consent order.
  • Mr. Alexis indicated that the constitutional challenge to the CFPB’s use of an administrative judge in the PHH case has not caused the CFPB to direct more enforcement matters to lawsuits filed in federal district court rather than administrative proceedings.  He noted that the CFPB’s decision of which forum to use is frequently driven by the facts involved in a matter, with a district court lawsuit more likely to be filed when the CFPB is in need of more discovery to support its case.  He also indicated that the panel’s rejection in PHH of the CFPB’s position that it is not bound by statutes of limitation in administrative enforcement actions has not changed the CFPB’s approach to enforcement matters.
  • Mr. Alexis indicated that he saw no need to advocate for the CFPB’s adoption of a matrix for assessing civil money penalties similar to those used by the prudential regulators because the factors are laid out in Dodd-Frank.
  • Ms. Thompson declined to estimate when the CFPB is likely to issue a final arbitration rule or a final payday/small dollar loan rule, stating that it was “too speculative” for her to do so and that the CFPB was continuing to consider the unprecedented number of comments received on both rules.  She also indicated that the CFPB was in the early stages of developing a proposed rule to implement Dodd-Frank Section 1071.  (Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data include the race, sex, and ethnicity of the principal owners of the business.)  According to Ms. Thompson, the CFPB is attempting to address the absence of good sources of data on small business lending.
  • Ms. Twohig indicated that the CFPB’s next larger participant rule will deal with consumer installment lending and auto title loans and that the CFPB is continuing to consider creating a registration system for non-bank lenders to assist the CFPB in identifying market participants.  She also indicated that to address the widespread use of compliance technology solutions by entities it supervises, the CFPB has stood up the National Information Systems Supervision Program (NISSP).  Through the NISSP, the CFPB uses specialized managers to inform and focus supervisory reviews of entities’ compliance-related information systems, some of which are designed in-house but many of which rely upon third parties to develop and maintain.
  • Ms. Twohig defended the CFPB’s proposed rule that would amend the CFPB’s information disclosure rules to allow it to share confidential supervisory information with any federal or state agency (including state attorneys general) regardless of whether the agency has jurisdiction over the company whose CSI is shared as long as the CSI is “relevant” to the agency’s authority.
  • Mr. Alexis stated that the CFPB’s decision to assert that the non-bank, and not the tribal-affiliated lender, was the “true lender” in the pending CashCall case was fact specific and dependent on how that case unfolded.  Mr. Alexis said that the CFPB would consider using the “true lender” theory and the predominant economic interest test in other cases if it is appropriate.  Mr. Kim remarked that the CFPB’s application of the “true lender” theory requires states to cooperate by alleging that the non-banks, who service or collect on the loans, are violating state usury and licensing laws.

 

 

The announcement by the Office of the Comptroller of Currency that it will allow financial technology (fintech) companies to apply for national bank charters as way of fostering “responsible innovation” has already drawn fire from the New York Department of Financial Services (DFS) and the Conference of State Bank Supervisors (CSBS).  

In their statements responding to the OCC’s announcement, both the DFS and CSBS view the charter as threatening to weaken the states’ role in consumer protection.  In making consumer protection rather than the fostering of innovation their paramount concern, the state regulators appear to be aligned with the CFPB.  Despite the CFPB’s 2012 launch of Project Catalyst, its initiative for facilitating innovation in consumer financial products and services, and repeated claims that it is not attempting to stifle innovation, the CFPB has continued to signal additional regulation and enforcement activity in the fintech space.

We recently blogged about expectations that changes to the CFPB under a Trump Administration will reduce the CFPB’s impact, particularly in the enforcement area.  Faced with a less aggressive CFPB, state attorneys general and financial regulators may be emboldened to ramp up their enforcement activity, with Democratic-controlled states such as New York, Illinois, and California already known for an activist approach likely take the lead.  The DFS and CSBS statements suggest that should the CFPB’s enforcement role diminish in the fintech space, state AGs and regulators will assume the mantle of enforcing the Consumer Financial Protection Act’s UDAAP prohibition using their Section 1042 authority.  In addition, state AGs have direct enforcement authority under several federal consumer protection laws (such as TILA, FCRA and RESPA), and are expressly allowed by the CFPA to bring civil actions against national banks and federal savings associations to enforce state laws that are not preempted.

To help providers of consumer financial services be prepared to defend against the likely surge in state investigations and enforcement activity, we will hold a webinar, “Beyond the CFPB: Preparing for State Enforcement Post-Election,” on December 15, 2016 from 12 p.m. to 1 p.m.  More information about the webinar and a link to register is available here.

 

 

The CFPB’s Ombudsman’s Office has issued its fifth annual report covering the Office’s activities during fiscal year 2016 (October 1, 2015 through September 30, 2016).  The role of the Ombudsman’s Office is to assist in the resolution of individual and systemic issues that a depository entity, non-depository entity, or consumer has with the CFPB.

The report’s “Demonstrating the Ombudsman in Practice” section provides examples of the Ombudsman’s role in assisting in the resolution of CFPB “process issues.”  Noteworthy examples included:

  • Engaging in “shuttle diplomacy” to resolve an inquiry received from a company in the midst of an ongoing CFPB examination concerning the company’s ability to share the examination’s existence with its state regulator.  (The report notes that CFPB regulations require a company to obtain the CFPB’s permission to share confidential supervisory information.)  The Ombudsman also reviewed the process for such requests, specifically how a company would initiate a request to share information and the CFPB’s process for approval of such requests.
    In August 2016, the CFPB proposed amendments to its rule on the disclosure of records and information. The proposal included a provision that would prohibit the recipient of a civil investigative demand (CID) or letter from the CFPB providing notice and opportunity to respond and advise (NORA) from disclosing the CID or NORA to third parties without prior consent of a high ranking CFPB official.  In a blog post for the Washington Legal Foundation, Ballard Spahr attorneys Burt M. Rublin and Daniel L. Delnero explain why the proposal is not only ill-advised as a matter of public policy but is also unconstitutional both as a prior restraint on speech and a content-based restriction.  Although there is clearly a distinction between disclosing an enforcement investigation and disclosing a supervisory examination (with the CFPB having a stronger case for secrecy as to the latter), the matter described by the Ombudsman appeared to deal with a state agency that had clear jurisdiction over the entity the CFPB was examining.  At the same time it is attempting to keep its examinees on a tight leash with respect to disclosures of this sort, the CFPB, in the proposed amendents to its rule on the disclosure of records and information, is also seeking to expand its discretion to share confidential supervisory information with state attorneys general and other agencies that do not have supervisory authority over companies.
  • Sharing with the CFPB a company’s comment that the CFPB Daily Digest (a digital publication that companies can elect to receive that contains notifications on consumer complaints) did not show that the company had complaints requiring a response.  Consumer Response advised the Ombudsman that the Daily Digest is provided as a service and companies should log into the Company Portal to monitor complaints rather than rely only on the Daily Digest.
  • Sharing with the Office of Enforcement feedback and suggestions regarding a pilot enforcement warning letter project being developed by the CFPB.

The report includes a summary of feedback and recommendations the Ombudsman received from consumer-focused organizations that participated in a June 2016 forum on various topics that included the consumer complaint process and database.  Among the comments received was that the database is not “mobile friendly” and that the CFPB should add the actual company name provided by consumers rather than the parent company name.

In the section of the report dealing with the Ombudsman’s review of systemic issues, the Ombudsman discusses the two systemic issues it reviewed in FY 2016 and updates two issues raised in previous reviews.  The systemic issues reviewed in FY 2016 were the following:

  • In response to comments about the CFPB’s documentation of ex parte communications, the Ombudsman reviewed ex parte communications regarding rulemakings posted by the CFPB on regulations.gov.  (The Ombudsman notes that the CFPB’s ex parte policy is set forth in Bulletin 11-3.)  In reviewing such documentation, the Ombudsman found that no consistent format was used even though a template is available to CFPB staff.  The Ombudsman also found that there was no consistency in the timing of when documents were posted after a communication and found examples of communications posted as ex parte communications although not required by CFPB policy.  The Ombudsman has recommended that the CFPB standardize its process for memorializing ex parte communications regarding proposed rules and understands that the CFPB plans to issue a revised ex parte policy.
  • In response to comments about the specificity of options available to consumers to identify the issue with a company when submitting complaints, the Ombudsman provided feedback to Consumer Response regarding the need for additional sub-issues for some products and shared concerns about the varying number and specificity of issue/sub-issue categorization options provided to consumers depending on the product involved in the complaint.  The Ombudsman understands that, in the next iteration of the consumer complaint form, Consumer Response plans to add issues and sub-issues, as relevant, for all products other than mortgages.  Consumer Response plans to further consider the impact of additional options for mortgages.

The issues reviewed in prior reports for which the Ombudsman provided updates were the following:

  • In response to feedback provided by the Ombudsman that the CFPB does not provide sufficient lead time when announcing public events such as field hearings, the CFPB indicated that it “generally follows the accepted federal agency best practice of a 14-day advance notice for field hearings and public events” and that “various logistical issues, including city selection and the time required to procure event space, present challenges to providing lead time greater than the 14 day window.”
  • In response to industry concerns about the consumer complaint process, the Ombudsman provided recommendations to the CFPB on various issues such as when a company should be able to treat multiple consumer complaints involving the same company, transaction, and issue as duplicate complaints and the need for clarification regarding the distinction between administrative and substantive complaint responses and how the selection of a response determines if a complaint is published.  The Ombudsman states that these recommendations were implemented in the updated Company Portal Manual issued by Consumer Response in March 2016.

In the report, the Ombudsman discusses plans to pilot a new initiative, “Ombudsman Interactives,” which will consist of facilitated discussion sessions held onsite for attendees at consumer, trade and other groups’ conferences.  These sessions would be available by request on a first-come first-served basis, subject to the Ombudsman’s budget and availability.

As observers ponder the CFPB’s future in a Trump Administration, the Federal Trade Commission’s continuing role as an enforcer of federal consumer financial protection laws should not be overlooked.  Over the approximately five years the CFPB has been operational, the FTC has demonstrated its intention to vigorously use its enforcement authority as to nonbanks even where it shares that authority with the CFPB.

On January 4, 2017, from 12 p.m. to 1 p.m., Ballard Spahr attorneys will conduct a webinar, “Beyond the CFPB: The Enforcement Role of the FTC and Other Federal Regulators Post-Election.”  A link to register is available here.

Under the Consumer Financial Protection Act, the FTC retained its authority to enforce Section 5 of the FTC Act against all nonbanks within its jurisdiction.  Section 5 prohibits unfair or deceptive acts or practices.  It also retained its enforcement authority for nonbanks under the “enumerated consumer financial laws.”  Such laws include the TILA, CLA, EFTA, ECOA, FDCPA, FCRA and Gramm-Leach-Bliley.

Other laws that can be enforced by the FTC as to nonbanks include the Military Loan Act, the Telemarketing and Consumer Fraud and Abuse Protection Act, and the Credit Repair Organizations Act.

Since last Tuesday’s election, there has been much discussion of how expected changes under a Trump Administration are likely to reduce the CFPB’s impact, particularly in the enforcement arena.  Little attention, however, has been paid to the election’s implications for the role of state attorneys general and state financial services regulators in enforcing federal and state consumer financial protection laws.

Faced with a less aggressive CFPB, state attorneys general and financial regulators may be emboldened to ramp up their enforcement activity, with Democratic-controlled states such as New York, California and Illinois already known for an activist approach likely to take the lead.  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.  Indeed, the New York AG, the New York Department of Financial Services, and the Illinois AG have already filed lawsuits using their Section 1042 authority.

Several federal consumer financial protection laws such as the TILA, FCRA, and RESPA directly give enforcement authority to state AGs.  In addition to relying on that authority, state AGs can be expected to take a more aggressive approach to enforcement of state law, including provisions in many states under which a federal law violation is deemed to be violation of state law.  When enforcing state law, state AGs can bring civil actions against national banks or federal savings associations to enforce state laws that are not preempted. (Such authority is expressly provided by the CFPA, which codified the U.S. Supreme Court’s 2009 decision in Cuomo v. Clearing House Association, LLC.)  The issue of which state laws are preempted could take on heightened significance in the face of increased state AG enforcement activity.

Providers of consumer financial services will need to be prepared to defend against this likely surge in state investigations and enforcement activity.  To help clients prepare, we will hold a webinar, “Beyond the CFPB: Preparing for State Enforcement Post-Election,” on December 15, 2016 from 12 p.m. to 1 p.m.  A link to register is available here.