Earlier this week, by a party-line 34-26 vote, the House Financial Services Committee passed H.R. 4861, a bill seemingly intended to ease restrictions on short-term, small-dollar loans made by depository institutions.  The bill is part of the efforts of House Republicans to provide greater regulatory relief to banks than would be provided by S. 2155, the banking bill passed by the Senate last week.  We expect that Jeb Hensarling, who chairs the House Committee, will attempt to make the bill part of a final banking bill.

H.R. 4861 would nullify the FDIC’s November 2013 guidance on deposit advance products, which effectively precludes FDIC-supervised depository institutions from offering deposit advance products.  (The FDIC supervises state-chartered banks and savings institutions that are not Federal Reserve members.)  We had been sharply critical of that guidance, as well as the OCC’s substantially identical guidance as to national banks.  However, in October 2017,  just hours after the CFPB released its final rule on payday, vehicle title, and certain high-cost installment  loans (CFPB Rule), the OCC rescinded its guidance on deposit advance products.  Because the FDIC has not yet followed suit, H.R. 4861 would remove a regulatory impediment to state-chartered banks and savings institutions offering one form of small-dollar lending to their customers.

H.R. 4861 would require the federal banking agencies to promulgate regulations within two years “to establish standards for short-term, small-dollar loans or lines of credit made available by insured depository institutions.”  The standards must “encourage products that are consistent with safe and sound banking, provide fair access to financial services, and treat customers fairly.”  The regulations would preempt any state laws “that set standards for [such loans or lines of credit]” and would override the CFPB Rule for insured depository institutions that become subject to H.B. 4861 regulations.  (Insured and uninsured credit unions would gain relief from the CFPB Rule even before regulations are adopted.)

Presumably, the “standards” under H.B. 4861 regulations could include interest rate standards.  Thus, federal banking agencies supportive of short-term, small-dollar loans could authorize interest rates higher than the insured depository institutions could otherwise charge under applicable federal law.  Unfortunately, as it is currently drafted, H.R. 4861 could be interpreted to allow the banking agencies to establish rate limits that are more restrictive than the limits that currently apply under federal law.  Accordingly, we would hope that the final bill will clarify that it does allow the federal banking agencies to impair existing rate authority under applicable federal law, including Section 85 of the National Bank Act, Section 27 of the Federal Deposit Insurance Act, and Section 4(g) of the Home Owners’ Loan Act.

 

 

In a press release issued by the House Financial Services Committee, Committee Chairman Jeb Hensarling announced that Kirsten Mork, the Committee’s Staff Director, has been named CFPB Chief of Staff.  Mr. Hensarling was a very vocal CFPB critic throughout former Director Cordray’s tenure.

Ms. Mork will join Brian Johnson, another former House Financial Services Committee staff member who is also reported to now be working for the CFPB.

The CFPB’s former Chief of Staff was Leandra English, who was appointed Deputy Director by former Director Cordray only hours before his resignation became effective at midnight on November 24.  Ms. English is currently awaiting a ruling from the D.C. federal district court on her motion for a preliminary injunction in her action challenging President Trump’s appointment of Mick Mulvaney as CFPB Acting Director.

 

The National Association of Federally-Insured Credit Unions (NAFCU) is hosting its annual conference in Washington, D.C. today through September 13.  Speakers will include opinion-leaders from Congress, NCUA, additional government agencies and the media, and will include HUD Secretary Ben Carson, SBA Administrator Linda McMahon, Vice President Pence’s Chief Economist, Mark Calabria (long-time housing reform advocate and former director of financial regulation studies at the Cato Institute) and House Committee on Financial Services Chair, Jeb Hensarling.  The conference will focus on data security, housing finance reform, repeal of the Durbin Amendment and, as expected, regulatory relief.

Director Cordray, responding today to a letter from Rep. Jeb Hensarling who chairs the House Financial Services Committee, stated that “I have no further insights to provide” on whether he intends to serve his full term as CFPB Director.

As we reported earlier today, it now appears that Director Cordray will not resign before Labor Day and intends to remain as Director until at least a date in September.  However, because it is widely believed that Director Cordray still intends to resign to run for Ohio Governor and there is conjecture that the ultimate timing of his departure will turn on when a final payday loan rule issued, Mr. Hensarling sent a letter to Director Cordray asking him to confirm that he intends to serve his full term as Director or to provide the earlier date on which he intends to resign.  Mr. Hensarling also asked Director Cordray for his categorical denial that political considerations have informed any aspect of his actions relating to the payday loan rulemaking.

In addition to providing the categorical denial requested by Mr. Hensarling, Director Cordray indicated in his response that he had been asked before whether he intends to serve his full term and his “answer remains the same.”  The issue of Director Cordray’s departure plans was raised by Mr. Hensarling and several other members of the House Financial Services Committee during Director Cordray’s last appearance before the Committee on April 5, 2017.  Indeed, when asked by Rep. Zeldin whether he intended to serve the remainder of his term, Director Cordray also responded by saying that he had “no insights to provide.”

On May 26, the House of Representatives Committee on Rules announced that House members have until June 2 to propose amendments to the Financial Choice Act bill.  The Chairman of the House Financial Services Committee, Jeb Hensarling, is expected to introduce an amendment to strike from the bill the provision which purports to repeal the Durbin Amendment.  The Durbin Amendment enacted in 2010 as part of the Dodd-Frank Act, imposed limits on fees banks are allowed to charge retailers for debit card transactions.  It is anticipated that this amendment will pass.

The House Financial Services Committee approved the Financial Choice Act bill on May 4.  We blogged on the topic here and here.  It is anticipated that the full House will vote to approve the bill during the week of June 5.

At that point the bill will be sent to the Senate where its fate is very uncertain.

The House Financial Services Committee announced that it will hold a hearing on April 26, 2017 to discuss the Financial CHOICE Act.  It also released a discussion draft of a revised version of the bill.

In February, Rep. Hensarling, who chairs the Committee, circulated a memorandum to the Committee’s Leadership Team describing key revisions to the bill introduced last year.  Last week, he issued an outline of changes to the bill in which he identified more revisions, including revisions that would further reduce the CFPB’s powers.  Presumably, these revisions are reflected in the discussion draft.

 

On February 6, House Financial Services Committee Chairman Hensarling circulated a memorandum to the House Financial Services Committee Leadership Team describing key revisions to the Financial Choice Act.  Last week, he issued in outline form a so-called “Summary of Bill Changes” which identified further revisions to the Choice Act, which he referred to as “Choice 2.0”, some of which address subjects not covered in his February 6 revisions, which he referred to as “Choice 1.0.”

Choice 2.0, which addresses a wide range of issues, includes the following provisions that affect consumer financial services:

  1. De novo review of agency regulations would be required two years after a regulation’s enactment. This would call on more agency resources.  (Last week, we blogged about a former CFPB attorney’s comment that the CFPB’s Regulations Division is severely understaffed.)  Under Dodd-Frank, the CFPB is required to conduct a review of a regulation it adopts five years after the regulation’s effective date.  Indeed, the CFPB recently announced that it will initiate a five-year review of its regulation dealing with international money remittances.
  2. The President could remove the FHFA Director at will. The governance of the OCC and the NCUA would be unchanged.  The FDIC would be reorganized as a bipartisan commission with all five commissioners appointed by the President.  The Comptroller of the Currency and the CFPB Director, who currently serve on the FDIC Board, would not be members of the FDIC commission.
  3. Financial agencies would be required to “(1) when promulgating a rule with $100 million or more a year in impacts of state/local governments or the private sector to prepare and file a written statement on their process and evaluation and to select the least costly, most cost-effective, or least burdensome alternative, unless otherwise explained; and (2) provide state and local government and private sector with an effective process to provide input on proposals with significant mandates.”
  4. Financial agencies would be required to “implement policies to (1) minimize duplication between federal and state authorities in bringing enforcement actions; (2) determine when joint investigations and enforcement actions are appropriate; (3) and establish a lead agency for joint investigations and enforcement actions.”
  5. A financial agency, DOJ, and HUD would be prohibited “from entering into a settlement that provides payments to any person who is not a victim of the alleged wrongdoing.” The prohibition seems to be directed at certain ECOA settlements in the auto finance industry involving disparate impact.
  6. The Second Circuit’s controversial opinion in Madden v. Midland Funding would be overridden. Madden held that a non-bank transferee of a loan from a national bank loses the ability to charge the same interest rate that the national bank charged on the loan under Section 85 of the National Bank Act.  Under Choice 2.0, “a loan that is valid when made as to its maximum rate of interest should remain valid regardless of whether the loan is subsequently sold, assigned or transferred.”  While such a statutory amendment would be welcome, I believe that the OCC could more simply and quickly accomplish the same objective by issuing a regulation, as I pointed out in my recent article for American Banker’s BankThink.
  7. The CFPB, renamed the “Consumer Financial Opportunity Agency” would be governed by a sole Director (Choice 1.0 provided for a bipartisan independent commission with staggered terms) removable at will by the President. Also, the Deputy Director would be appointed by the President instead of by the Director as provided under Dodd-Frank.  The Deputy Director would also be removable at will by the President.  Under Dodd-Frank, the CFPB Director is only removable by the President for cause.
  8. The CFPB would be an enforcement agency only. It would be stripped of its supervisory authority.
  9. The CFPB would only be authorized to enforce the enumerated consumer protection laws. It would have “no UDAAP authority of any kind.”  Under Choice 1.0, the CFPB would have retained the authority to enforce the “unfairness,” and “deception” prongs of UDAAP, but not the “abusive” prong.
  10. The consumer complaint database could not be published. Under Choice 1.0, the database could be published to the extent that complaints were verified.
  11. The CFPB would be stripped of its authority to monitor markets. Under Choice 1.0, it could continue to engage in market monitoring as long as such monitoring is “separate from enforcement.”

It has been reported that the changes outlined above will be reflected in a new Choice Act bill to be introduced before the end of this month.

While there is a reasonable likelihood that the Choice Act will pass the House, its fate in the Senate is very uncertain.  In light of the proposed changes to the CFPB’s structure and powers, one might ask why lawmakers have not proposed to combine the FTC and the CFPB. The proposed cutbacks on the CFPB’s powers would result in the two agencies having largely overlapping enforcement powers for non-banks.

Rep. Hensarling’s proposal for the CFPB to continue to be managed by a sole Director is contrary to the CFPB governance desired by many in the banking industry.  In a letter dated April 13, 2017 from Richard Hunt, President and CEO of the Consumer Bankers Association (CBA) to Senator Mike Crapo, Chairman of the Senate Committee on Banking, Housing and Urban Affairs and Senator Sherrod Brown, Ranking Member of that Committee, the CBA strongly advocated in favor of a bipartisan five-member commission.

Despite its long duration (over five hours including a recess for a vote), the House Financial Services Committee’s hearing on April 5 at which Director Cordray was the sole witness provided a strong dose of political theater but little in the way of new information or substance.   Although there were many important questions that Committee members could have asked Director Cordray (we suggested several in a prior blog post), members mostly returned to familiar themes in their questions and remarks.  For Republican members, those themes included CFPB overreach and unaccountability to Congressional oversight, damage to credit availability and community banks resulting from CFPB guidance and regulations, excessive spending, and mistreatment of CFPB employees.  Familiar themes of Democratic members included how the financial crisis gave rise to the CFPB and how the CFPB serves consumers by protecting them from discrimination, fraud, and other unlawful practices.

The hearing’s battle lines were drawn during the opening remarks of Chairman Hensarling and Ranking Member Waters.  Chairman Hensarling began his remarks by referencing press reports that Director Cordray intends to run for Ohio governor, expressing surprise that he had not returned to Ohio to do so, and was still serving as CFPB director given that President Trump had the right to dismiss him at will.  He then called on the President to immediately dismiss Director Corday, claiming that the PHH decision allowed the President to do so without the need to show cause.   He also asserted that even if the President needs cause to dismiss Director Cordray, there are numerous grounds on which President Trump could rely.  According to Chairman Hensarling, such grounds include the harm inflicted on consumers by the CFPB’s auto lending guidance (as well as the illegality of the CFPB’s attempt to regulate auto dealers through such guidance) and Director Cordray’s unilateral reversal of well-settled RESPA guidance in the PHH case.

In her opening remarks, Ranking Member Waters praised Director Corday for fighting for “hard working Americans” and thanked him for his continued leadership of the CFPB.  She referenced how much money the CFPB has recovered for consumers and assessed in civil money penalties and mentioned her efforts and those of other Democrats to defend the CFPB’s constitutionality in the PHH litigation.

In addition to Chairman Hensarling’s comments, several other committee members, in their questioning of Director Cordray, raised the issue of his resignation.  Rep. Duffy asserted that because Director Cordray had served as a recess appointee from January 2012 until his Senate confirmation in July 2013, he has already effectively served a five-year term as director and  “consistent with the spirit” of Dodd-Frank, should step down voluntarily now.  In response to Rep. Zeldin’s question whether Director Cordray intended to serve the remainder of his term, Director Cordray stated that he had “no insights to provide.”  When asked by Rep. Hollingworth if he would resign if requested to do so by President Trump, Director Cordray responded that he would follow the law.

While its substantive content was slim, the hearing did produce the following noteworthy information:

  • Somewhat surprisingly, Chairman Hensarling criticized the CFPB for not proceeding more quickly to issue a regulation to implement Section 1071 of Dodd-Frank (which 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 as the race, sex, and ethnicity of the principal owners of the business).  He commented that the CFPB had engaged in discretionary rulemaking but had not completed the Section 1071 rulemaking mandated by Dodd-Frank.
  • Rep. Lukemeyer criticized the provision in the CFPB’s proposed rule concerning the disclosure of confidential supervisory information (CSI) that would restrict a company’s disclosure of either the receipt or the content of a CID or NORA letter.  Director Cordray indicated that, after considering comments received on the proposal, the CFPB is “going back to the drawing board,” and that Rep. Lukemeyer would  be “happy” with the outcome.   (The proposal would also expand the CFPB’s discretion to share CSI with state attorneys general and other agencies that do not have supervisory authority over an entity.)
  • In response to Rep. Maloney’s question whether the CFPB plans to propose an overdraft rule, Director Cordray noted the CFPB’s long-standing interest in overdrafts, stated that overdrafts continued to be  “on our minds very much,” and said he could not speak to the timing of any rulemaking.  With regard to the timing of other pending rulemakings, when asked about the timing of a final payday/small dollar loan rule and clarifications to the TILA/RESPA integrated disclosure rule, Director Cordray was unwilling to give an estimated date for either item, noting the unprecedented number of comments received on the payday/small dollar loan proposed rule.  Although the CFPB’s arbitration rule is the furthest along in the rulemaking process, Director Cordray was not asked about the timing of a final rule and was only asked about the rule’s application to insurance premium financing agreements.
  • Director Cordray was unwilling to respond directly to Rep. Posey’s question as to how many no-action letters the CFPB has issued.  (None have been published on the CFPB’s website.)  However, he stated that the CFPB’s no-action policy has “not yet generated a lot of demand” which could indicate the policy is not working properly.
  • Several Republican committee members criticized CFPB press releases about consent orders for containing conclusory statements that a company had violated the law despite language in the consent order stating that the company neither admits nor denies the order’s findings of fact and conclusions of law.  In an exchange with Rep. Huizenga, Director Cordray defended the press releases, stating that “the facts are the facts.”   He commented that a consent order’s “neither admit nor deny” language does not matter for the truth of the facts recited in the consent order but matters for whether the facts have been established for follow-on lawsuits by private attorneys.  He was also unwilling to concede that a company might enter into a consent order because it is intimidated by the CFPB’s authority and instead insisted that the main reason a company enters into a consent order is because the CFPB has completed a thorough investigation, “we know the facts,” “they know the facts,” and “they don’t have a leg to stand on.”
  • Director Cordray indicated that the CFPB is looking at possible changes to the prepaid card final rule dealing with the linking of credit cards to digital wallets and error resolution procedures for unregistered cards.

Republican Congressman Jeb Hensarling, who chairs the House Financial Services Committee, has sent a letter to Director Cordray asking him to provide written assurance by October 26, 2016 that, as a result of the D.C. Circuit’s decision in PHH Corporation v. CFPB, the CFPB will comply with the limits on executive agencies set forth in various executive orders.

On November 1, 2016, from 12:00 pm to 1:00 pm ET, Ballard Spahr attorneys will conduct a webinar: The Landmark Opinion of the D.C. Circuit Court of Appeals in PHH v. CFPB.  Information about the webinar and a link to register is available here.

In its PHH decision, the D.C. Circuit ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional.  To remedy the constitutional defect, the court severed the removal-only-for-cause provision from the Dodd-Frank Act so that the President “now has the power to supervise and direct the Director of the CFPB, and may remove the Director at will at any time.”  As the court stated, the consequence of this structural change is that the CFPB is no longer an “independent agency” and instead “now will operate as an executive agency.”

As we have observed, pursuant to Executive Order 12866, executive agencies, unlike independent agencies, are subject to the regulatory review process of the Office of Information and Regulatory Affairs (OIRA) within the Office of Management and Budget.  Executive Order 12866 requires federal agencies, other than those defined as an “independent regulatory agency” by 44 U.S.C. Sec. 3502(5), to submit proposed and final regulations constituting a “significant regulatory action” to OIRA for review prior to publication in the Federal Register.  A key component of OIRA’s review is an evaluation of the agency’s analysis of a regulation’s anticipated costs and benefits and its determination that the regulation’s anticipated benefits justify its anticipated costs as well as the agency’s identification and assessment of feasible alternatives.

Congressman Hensarling’s letter cites to various executive orders that impose regulatory requirements on executive agencies.  In addition to Executive Order 12866, the letter cites to three other executive orders: (1) Executive Order 13563 which requires executive agencies, in connection with applying the requirements of Executive Order 12866, to “use the best available techniques to quantify anticipated present and future costs and benefits as accurately as possible,” (2) Executive Order 13132 which requires executive agencies to prepare a “federalism summary impact statement” for a rule that “has federalism implications, that imposes substantial direct compliance costs on State and local governments, and that is not required by statute,” and (3) Executive Order 13175 which requires executive agencies to consult with tribal officials before promulgating a rule with tribal implications.  (For purposes of Executive Order 13123, a rule with “federalism implications” is one that has “substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.”)

In his letter, Mr. Hensarling asks Director Cordray to provide written assurance by October 26, 2016 “that the CFPB will comply in full with the requirements of Executive Orders 12866, 13563, 13132, and 13175 prior to issuing any future final rule, including rules governing arbitration agreements; payday, vehicle title, and installment loans; and debt collection.”  Assuming he responds to Mr. Hensarling, Director Cordray is likely to observe that the PHH decision is not yet effective, with the D.C. Circuit having issued an order directing the Clerk of the Court not to issue the mandate in the case until seven days after disposition of a timely petition for a rehearing or petition or petition for rehearing en banc and that, under circuit rules, the CFPB has 45 days to file a petition for a rehearing. Perhaps Director Cordray’s response will reveal whether the CFPB intends to seek a rehearing by the November 25 deadline (which we believe is very likely).

In response to Mr. Hensarling’s letter, Americans for Financial Reform issued a statement taking issue with the immediate application of the executive orders to the CFPB.  However, rather than noting the court’s withholding of the mandate, AFR stated that the CFPB is not subject to the executive orders because they “specifically exclude any agency defined as an “independent regulatory agency” by 44 U.S.C. 3502(5), which lists the CFPB by name.  PHH v. CFPB did nothing to change that statutory definition.”  In our view, notwithstanding that the CFPB is currently defined as “independent regulatory agency,” if the D.C. Circuit’s decision takes effect, the CFPB should no longer be considered an “independent regulatory agency” for purposes of the executive orders.

 

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.