The pendency of three cases in circuit courts challenging the CFPB’s constitutionality has given rise to speculation as to whether the CFPB will continue to defend its constitutionality under Director Kraninger’s leadership.  The CFPB continued to defend its constitutionality in these cases while under former Acting Director Mulvaney’s leadership.  It did so, however, as a fallback to its primary argument that because Mr. Mulvaney was removable at will by the President and had ratified the CFPB’s decision to bring the lawsuit in question, any constitutional defect that may have existed with the CFPB’s initiation of the lawsuit was cured.

On January 9, a Ninth Circuit panel heard oral argument in CFPB v. Seila Law LLC, one of three pending circuit court cases involving a challenge to the CFPB’s constitutionality.  The appellant in Seila Law is asking the Ninth Circuit to overturn the district court’s refusal to set aside a Bureau civil investigative demand, arguing that the CID is invalid because the CFPB’s structure is unconstitutional.  In its answering brief filed with the Ninth Circuit, the CFPB relied on the ratification argument and its fallback constitutionality argument. (Mr. Mulvaney was Acting Director at the time of briefing.)

At the oral argument, the CFPB maintained the positions taken in its brief, namely that Mr. Mulvaney’s ratification cured any constitutional defect and, in any event, the Bureau’s structure is constitutional under U.S. Supreme Court precedent and the D.C. Circuit’s en banc PHH decision.  This would suggest that Director Kraninger, like former Acting Director Mulvaney, will continue to defend the CFPB’s constitutionality in the other pending cases.

Should she do so, however, Ms. Kraninger will be at odds with the position of the Department of Justice.  In opposing the petition for certiorari filed by State National Bank of Big Spring (which the Supreme Court denied this week), DOJ argued that while it agreed with the bank that the CFPB’s structure is unconstitutional and the proper remedy would be to sever the Dodd-Frank Act’s for-cause removal provision, the case was a poor vehicle for deciding the constitutionality issue.  It also noted that its position “is that of the United States, not the position of the Bureau to date.”  The DOJ had asked the Supreme Court to allow the CFPB to weigh in should it grant the petition for certiorari.  (The DOJ’s position could have added significance because of the Dodd-Frank provision that requires the Bureau to seek the Attorney General’s consent before it can represent itself in the Supreme Court.)

If Director Kraninger has a change of heart, she will be following in the shoes of Joseph Otting, who was appointed Acting FHFA Director by President Trump (and also serves as Comptroller of the Currency).  Next week, the Fifth Circuit is scheduled to hold oral argument in the en banc rehearing of Collins v. Mnuchin, in which a Fifth Circuit panel found that the FHFA is unconstitutionally structured because it is excessively insulated from Executive Branch oversight.  The plaintiffs, shareholders of two of the housing government services enterprises (GSEs), are seeking to invalidate an amendment to a preferred stock agreement between the Treasury Department and the FHFA as conservator for the GSEs.

The Fifth Circuit panel had determined that the appropriate remedy for the constitutional violation was to sever the provision of the Housing and Economic Recovery Act of 2008 (HERA) that only allows the President to remove the FHFA Director “for cause” while “leav[ing] intact the remainder of HERA and the FHFA’s past actions.”  The plaintiffs sought a rehearing en banc to overturn the panel’s rulings that the FHFA acted within its statutory authority in entering into the agreement and that the FHFA’s unconstitutional structure did not impact the agreement’s validity.  The FHFA also sought a rehearing en banc but with the goal of overturning the panel’s determination that the plaintiffs had Article III standing to bring a constitutional challenge.

Despite having argued in its petition for rehearing that the panel’s constitutionality ruling was incorrect, the FHFA has now announced that it will not defend the FHFA’s constitutionality to the en banc court.  In the En Banc Supplement Brief of the FHFA and Mr. Otting, the FHFA states that Mr. Otting “has reconsidered the issues presented in this case.”  It further states that while it remains the FHFA’s position that the plaintiffs’ lack of standing makes it unnecessary for the en banc court to reach the constitutionality issue, to the extent the court concludes it is necessary to do so “FHFA will not defend the constitutionality of HERA’s for cause removal provision and agrees with the analysis in Section II.A of the Treasury’s Supplemental Brief that the provision infringes on the President’s control of executive authority.”

The two other pending circuit court cases challenging the CFPB’s constitutionality are the All American Check Cashing case pending in the Fifth Circuit and the RD Legal Funding case pending in the Second Circuit.  Oral argument is tentatively calendared for the week of March 11, 2019 in the All American Check Cashing case and briefing is scheduled to begin next month in the RD Legal Funding case.

 

 

According to an American Banker report, CFPB Director Kathy Kraninger recently sent an email to CFPB staff that provides a window into what her approach to running the CFPB will be.

The report quotes Ms. Kraninger as having said in the email that the CFPB must do its work “with an open mind and without presumptions of guilt, and to always carefully weigh the costs and benefits to consumers of our enforcement activities and regulatory rulemakings.”  She is also reported to have said that on her watch as Director, “the CFPB will vigorously enforce the law,” and that she wants the Bureau “to respect the rights of all we serve and interact with, to safeguard their personal information, and to be transparent in its operations.”  In addition, Ms. Kraninger is reported to have stressed the need for the CFPB to make sure that “the marketplace is innovating in ways that enhance both choice and the needs of the consumers.’

In our view, the email is a welcome signal that Ms. Kraninger does not intend to cast industry as the villain but instead intends to be fair-minded in her leadership of the CFPB and continue former Acting Director Mulvaney’s efforts to promote innovation.

 

 

Seventy-four organizations that describe themselves as “consumer, community, civil rights, faith, labor and legal services groups” have sent a letter to CFPB Director Kathy Kraninger to “reiterate our concerns about widespread debt collection abuses that we have raised in the past and the ongoing need for better protection against these abuses.”

In the letter, the groups make recommendations regarding the following:

  • Preventing telephone harassment and increasing consumer privacy.  The groups seek to limit collectors to one live call per week and up to three attempted calls, require collectors to honor a consumer’s verbal request to stop calls, allow text and email communications from collectors only if the consumer has agreed to electronic communications, prohibit collection calls and emails to the consumer’s work phone number and email unless in response to the consumer’s request, and make all collector contacts, including “limited content” calls or messages requesting a call back, subject to the FDCPA.
  • Prohibiting collection of time-barred debt.  The groups seek to entirely prohibit collectors from attempting to collect time-barred debt.  Alternatively, if the Bureau allows collectors to communicate regarding time-barred debts, the groups urge the Bureau to require that such communications be in writing and that a disclosure be provided to inform the consumer he or she cannot be sued on the debt.
  • Improving accuracy and clarity of debt collection notices.  The groups want the CFPB to create a model validation notice and statement of rights.

The issues raised by the groups are likely to be addressed by the Bureau in its anticipated debt collection rulemaking for debt collectors subject to the FDCPA.  In its Fall 2018 rulemaking agenda, the Bureau stated that it “expects to issue [a NPRM] addressing such issues as communication practices and consumer disclosures by spring 2019” and estimated the issuance of a NPRM in March 2019.

 

 

 

CFPB Director Kathy Kraninger has sent an email to CFPB employees informing them of her decision to halt “all ongoing efforts to make changes to existing products and materials related to the name correction initiative.”  That initiative was initiated by former Acting Director Mulvaney.  Under his leadership, the Bureau began using “Bureau of Consumer Financial Protection” as its name, together with the acronym “BCFP,”  instead of, respectively, “Consumer Financial Protection Bureau” and “CFPB.”

Ms. Kraninger identified the name change as an “early priority” because of implementation decisions that must be made.  In initiating the name change and commissioning a seal reflecting the change, Mr. Mulvaney had pointed to the Dodd-Frank Act’s use of “Bureau of Consumer Financial Protection” to refer to the agency.  Ms. Kraninger stated that the new seal and “the statutory name we were given in Dodd-Frank” would be used for “statutorily required reports, legal filings, and other items specific to the Office of the Director.”  However, for all other materials, the Bureau will continue to use the name “Consumer Financial Protection Bureau”  and “the existing CFPB logo.”

Ms. Kraninger indicated that she made her decision “after being fully briefed on the costs, operational challenges and the effect on stakeholders.”  Her decision closely follows Senator Elizabeth Warren’s sending of a letter to the Inspector General for the Fed and CFPB asking for an investigation into Mr. Mulvaney’s decision to change the Bureau’s name.  In her letter, Senator Warren cited reports and an internal Bureau analysis indicating that the name change would cost the CFPB between $9 million and $19 million and would cost entities subject to CFPB supervision approximately $300 million to update internal databases, regulatory filings, and disclosure forms with the new name.

We applaud Director Kraninger for quickly addressing this issue and addressing it in a practical manner.

 

Despite agreeing on the merits with State National Bank of Big Spring (SNB) and the other petitioners for certiorari that the CFPB’s structure is unconstitutional, the Department of Justice has filed a brief in which it argues that the U.S. Supreme Court should deny the petition.  (The other petitioners are two D.C. area non-profit organizations that in 2012, together with SNB, brought one of the first lawsuits challenging the CFPB’s constitutionality.)

The D.C. District Court initially dismissed the petitioners’ complaint for lack of standing but on appeal, in an opinion authored by Judge (now Justice) Kavanaugh, the D.C. Circuit held that the plaintiffs did have standing and remanded the case to the district court.  Further proceedings in the case were held in abeyance by the district court pending the outcome of the PHH case in the D.C. Circuit.

Following the D.C. Circuit’s en banc PHH decision that held the CFPB’s structure is constitutional, the district court lifted its abeyance order and, with the parties having agreed that PHH foreclosed the district court from ruling in favor of the plaintiffs on their constitutional challenge, entered judgment against the plaintiffs.  On June 8, 2018, the D.C Circuit entered an order summarily affirming the district court’s judgment.  Citing its en banc PHH decision, the D.C. Circuit order stated that “the merits of the parties’ positions are so clear as to warrant summary action.”

In its brief, the DOJ calls the principal question presented by the case—whether the Bureau’s single-director-removable-only-for-cause structure violates the separation of powers—is an “important one that warrants [the Supreme] Court’s review in an appropriate case” and that “absent legislative action eliminating the restrictions on removal…will ultimately need to be settled by [the Supreme] Court.”  Nevertheless, the DOJ asserts that the SNB case “would be a poor vehicle to consider the question for multiple reasons.”

Such reasons consist of the following:

  • If the Supreme Court were to grant the petition, it is unlikely the case would be considered by the full Court because of Justice Kavanaugh’s previous participation in the case while a D.C. Circuit judge, and his authoring of the D.C. Circuit’s standing decision.  The DOJ asserts that “[p]articularly for a question of this magnitude, the Court may wish to wait for a vehicle in which all nine Justices are likely to participate.”  (It is not surprising that the DOJ would want Justice Kavanaugh to participate given that he authored the D.C. Circuit panel decision in PHH that held the CFPB’s structure is unconstitutional and a dissent in the D.C. Circuit’s en banc PHH decision that reversed the panel’s decision and held the structure is constitutional.)
  • Before it could reach the merits of the constitutionality issue, the Supreme Court would have to resolve in the petitioners’ favor the jurisdictional issue of whether the petitioners have standing.  According to the DOJ, “petitioners’ standing is sufficiently questionable to present a significant vehicle problem.”
  • There are other cases pending in the courts of appeal that raise a similar constitutional challenge and “one or more of those cases may not present the same obstacles that could impede the full Court from considering the merits of this important issue.”  The pending cases cited by the DOJ are the All American Check Cashing case pending in the Fifth Circuit, the RD Legal Funding case pending in the Second Circuit, and the Seila Law case pending in the Ninth Circuit.  (Seila Law involves an appeal from the district court’s refusal to set aside a Bureau civil investigative demand.  Oral argument in the Ninth Circuit is scheduled for January 8, 2019.)

On the merits, the DOJ argues that the Bureau’s structure is unconstitutional and the proper remedy is to sever the Dodd-Frank Act’s for-cause removal provision.  The DOJ notes, however, that its position “is that of the United States, not the position of the Bureau to date.”  Citing the Dodd-Frank provision that gives the Bureau independent litigation authority in the lower courts, the DOJ observes that while the Bureau continued to defend the constitutionality of its structure in the lower courts under Acting Director Mulvaney, a new Director, Kathy Kraninger, will assume (and now has assumed) leadership of the Bureau.

The DOJ then notes that if the Supreme Court were to grant the petition for certiorari, it would be the Court’s “usual practice to appoint an amicus curiae to defend the judgment of the court of appeals” when no party is doing so.  The DOJ then cites the Dodd-Frank provision that requires the Bureau to seek the Attorney General’s consent before it can represent itself in the Supreme Court and asks the Court, before appointing an amicus curiae, to give the Bureau’s new Director “a reasonable opportunity…to determine whether the Bureau will seek to defend the court of appeals’ judgment in this Court and for the Acting Solicitor General to determine whether he will authorize the Bureau to do so.”  (The DOJ indicates in a footnote that the Solicitor General (Noel Francisco) is recused in the case.  Presumably, the reason for the recusal is that Mr. Francisco’s former law firm is representing one of the amici that has filed a brief with the Supreme Court in support of SNB.)

We note that although the Bureau did continue to defend its constitutionality under Acting Director Mulvaney, it did so as a fallback to its primary argument that because Acting Director Mulvaney is removable at will by the President and had ratified the CFPB’s decision to bring the lawsuit in question, any constitutional defect that may have existed with the CFPB’s initiation of the lawsuit was cured.  The continued viability of that argument is questionable given that Ms. Kraninger, who is now Director, can only be removed by the President for cause.  In its Fifth Circuit appeal, All American Check Cashing recently filed a letter in which it noted the Senate’s confirmation of Ms. Kraninger and stated that “[t]his refutes once and for all the CFPB’s contention that a purported ratification by the former Acting Director somehow cured the defects in the CFPB’s structure.”  It bears observing that a ruling by the Supreme Court that the CFPB’s structure is unconstitutional and the proper remedy is to sever the for-cause removal provision would mean that Ms. Kraninger’s five-year term could be cut short should a Democratic President be elected in 2020.

 

The CFPB has issued a new annual report covering its fair lending activities during 2017.  Since Mick Mulvaney did not become Acting Director until the end of November 2017, the fair lending activities described in the report largely took place under former Director Cordray’s leadership.

The Bureau’s last annual fair lending report under former Director Cordray (which covered its fair lending activities in 2016) identified the Bureau’s 2017 fair lending priorities.  Consistent with those priorities, the new report indicates that, in 2017, the Bureau focused on redlining, mortgage and student loan servicing, and small business lending.  The new report, however, provides no insights into the Bureau’s 2019 fair lending priorities.

Indeed, even if the report had identified 2019 priorities, it is unclear how meaningful that would have been given that the CFPB will be led by Kathy Kraninger, its new Director, in 2019.  Ms. Kraninger is likely to play a significant role in setting the Bureau’s fair lending agenda going forward.  During her initial press conference as Director earlier this week, Ms. Kraninger deflected questions she was asked about fair lending matters, including the Bureau’s use of the disparate impact theory to prove violations of ECOA, by saying that she has not reached any conclusions about the Bureau’s future fair lending policy and awaits staff briefings.

In the report’s section on supervisory activities, the Bureau reviews information previously provided in its Spring 2017 and Summer 2017 editions of Supervisory Highlights.  In the section on enforcement, the Bureau reviews its two public 2017 fair lending enforcement actions and its implementation of several consent orders.  It also reports that it referred two matters with ECOA violations to the Justice Department in 2017 and the DOJ declined to open its own investigation, deferring to the Bureau’s handling of both matters.  The Bureau states that at the end of 2017, it had a number of pending redlining investigations as well as a number of pending investigations in other areas.

In the section on rulemaking, the Bureau discusses various HMDA/Regulation C developments and its final rule amending Regulation B to facilitate Regulation C compliance.  In discussing its progress in developing rules on the collection of small business lending data to implement Section 1071 of Dodd-Frank, the Bureau references its May 2017 RFI seeking information on the small business lending market.  (Dodd-Frank 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 includes the race, sex, and ethnicity of the principal owners of the business.)  In the Bureau’s Spring 2018 rulemaking agenda, the Section 1071 rulemaking was included in the list of current rulemakings, with an estimated March 2019 date for prerule activities.  Its Fall 2018 agenda, however, reclassifies the Section 1071 rulemaking as a long-term action item.

The report also contains sections that discuss the Bureau’s coordination with other federal agencies on fair lending issues and outreach to industry and consumers (such as through speaking engagements and roundtables, blog posts, and supervisory highlights).  Another section is intended to satisfy certain ECOA and HMDA reporting requirements, including providing a summary of other agencies’ ECOA enforcement efforts and reporting on the utility of certain HMDA reporting requirements.

 

 

Today was Kathy Kraninger’s first day at the BCFP.  According to her remarks at a press conference this afternoon,  she spent most of her day meeting staff.

In answer to questions from the press, she made the following points:

  1. She has not yet decided which policies of Acting Director Mick Mulvaney she will change. She noted the important difference in leadership posture between her and Mulvaney in that her status as Director will be full-time. She emphasized that she will be making her own decisions for which she will be fully accountable.
  2. She will take a fresh look at Mulvaney’s decision to change the Bureau’s name from the Consumer Financial Protection Bureau (CFPB) to the Bureau of Consumer Financial Protection (BCFP). She acknowledged the internal BCFP report finding that the name change would cost the industry $300 million. She stated that she cares “more about what the agency does than what it is called.” She said that this will be a “near-term” decision.
  3. She indicated that the Bureau’s budget is near and dear to her heart and that she will be prioritizing the budget because she soon needs to advise the Fed of how much funding the Bureau will need for the next quarter.
  4. She underscored that the Bureau will remain very focused on enforcement and that she will take seriously the Bureau’s mission to take enforcement actions against “bad actors” to the full extent of the law.
  5. She mentioned that she does not presently have an opinion regarding the use of the “disparate impact” theory in enforcing the Equal Credit Opportunity Act. She alluded to a conversation she had today with a member of the Bureau’s staff who is studying the issue.
  6. She indicated that her regulatory priorities are reflected in the Bureau’s most recent semi-annual regulatory agenda.
  7. Finally, she expects that she will be speaking at some time with former Director Richard Cordray since it has always been her policy to speak to her predecessors in office at other government jobs she has held.

This afternoon, by a vote of 50-49, the Senate confirmed Kathy Kraninger as CFPB Director.

Pursuant to the Dodd-Frank Act, the CFPB Director has a five-year term.  The approximate 12 months during which Mick Mulvaney has served as Acting Director since former Director Cordray’s resignation last November does not count against Ms. Kraninger’s five-year term.  As a result, Ms. Kraninger could serve as Director for approximately three years of the next four-year Presidential term that begins in January 2021 even if a Democratic President is elected.

There is, however, a “wildcard” that could potentially shorten Ms. Kraninger’s tenure, namely the ongoing litigation challenging the CFPB’s constitutionality.  In September 2018, a petition for certiorari was filed in the U.S. Supreme Court by State National Bank of Big Spring which, together with two D.C. area non-profit organizations that also joined in the petition, had brought one of the first lawsuits challenging the CFPB’s constitutionality.  Following the D.C. Circuit’s en banc PHH decision that held the CFPB’s structure is constitutional, the D.C. Circuit, based on PHH, summarily affirmed the district court’s judgment entered against the plaintiffs.  The issue of the CFPB’s constitutionality is also currently pending in two circuit courts–the Second Circuit in the RD Legal Funding case and the Fifth Circuit in the All American Check Cashing case.  In all of these cases, the CFPB’s constitutionality has been challenged based on its single-director-removable-only-for-cause structure.

These cases create a strong likelihood of this issue coming before the Supreme Court in the next year or so.  If the CFPB’s structure is found to be unconstitutional and severing Dodd-Frank’s for-cause removal provision is determined to be the appropriate remedy (as the D.C. Circuit determined in its PHH panel decision), a Democratic President might have the ability to remove Ms. Kraninger without cause before the end of her five-year term.

 

 

This afternoon the Senate voted 50 – 49 to invoke cloture and proceed to debate and a final vote on the nomination of Kathy Kraninger to be the next Director of the Bureau of Consumer Financial Protection (“BCFP”).  The vote was along strict party lines, with Senator James Inhofe (R-OK) not voting.  The Senate could begin debate on Kraninger’s nomination as early as Monday.  If all 50 senators who voted affirmatively today do so again for the full Senate vote, Kraninger’s confirmation is assured.  Once confirmed by the Senate, Kraninger will serve a 5-year term as the Director of the BCFP.

Politico has reported that Senate Majority Leader Mitch McConnell filed cloture this afternoon on President Trump’s nomination of Kathy Kraninger to serve as CFPB Director.  The filing means that the full Senate will vote on the nomination once it returns after Thanksgiving, although the date of a vote remains uncertain.