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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 the three pending circuit court cases.  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 does have 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.

 

 

The CFPB has issued its Spring 2018 Semi-Annual Report to Congress covering the period October 1, 2017 through March 31, 2018.

At 41 pages, the new report is even shorter than the Bureau’s last semi-annual report (which was 55 pages) and continues what appears to be a goal under Acting Director Mulvaney’s leadership of issuing semi-annual reports that are substantially shorter than those issued under the leadership of former Director Cordray.  Like the prior semi-annual report under Mr. Mulvaney’s leadership, and also in contrast to the reports issued under former Director Cordray’s leadership, the new report does not contain any aggregate numbers for how much consumers obtained in consumer relief and how much was assessed in civil money penalties in supervisory and enforcement actions during the period covered by the report.

Pursuant to Section 1017(a)(1) of the Dodd-Frank Act, subject to the Act’s funding cap, the Fed is required to transfer to the CFPB on a quarterly basis “the amount determined by the [CFPB] Director to be reasonably necessary to carry out the authorities of the Bureau under Federal consumer financial law, taking into account such other sums made available to the Bureau from the preceding year (or quarter of such year.)”  The new report references the January 2018 letter sent by Mr. Mulvaney to former Fed Chair Yellen requesting no funds for the second quarter of Fiscal Year 2018.

Mr. Mulvaney has, however, sent letters to Fed Chair Powell requesting funds transfers for the third and fourth quarters of FY 2018 and for the first quarter of FY 2019.  The amounts requested are, respectively, $98.5 million, $65.7 million, and $172.9 million.  (In contrast, former Director Cordray’s final transfer request, which was for the first quarter of FY 2018, sought a transfer of $217.1 million.)  Two of Mr. Mulvaney’s letters included the following statement:

By design, this funding mechanism [created by Section 1017(a)(1)] denies the American people their rightful control over how the Bureau spends their money, which undermines the Bureau’s legitimacy.  The Bureau should be funded through Congressional appropriations.  However, I am bound to execute the law as written. 

The new report indicates that the Bureau had 1,671 employees as of March 31, 2018, representing a slight increase in the number of employees (1,627) as of March 31, 2017.  The new report does not discuss any ongoing or past developments of significance beyond those we have covered in previous blog posts.

 

 

 

 

Thirty state attorneys general, joined by the AGs of the District of Columbia, Puerto Rico, and the Virgin Islands, have sent a letter to CFPB Acting Director Mulvaney “to express our concern about recent reports that the [Bureau] will no longer ensure that lenders are complying with the Military Lending Act (MLA) as part of its regular, statutorily mandated supervisory examinations.” Such recent reports included one from the New York Times published in August 2018 indicating that Mr. Mulvaney was planning to eliminate routine supervisory examinations of creditors for MLA violations because the CFPB lacks statutory authority to conduct such examinations.

In addition to describing the benefits that the MLA provides to servicemembers, the AGs assert that the Bureau “would be failing to abide by its statutorily mandated duty to enforce the MLA by restrictively interpreting its examination authority to preclude lenders’ compliance with the MLA.” They cite to the MLA provision (10 U.S.C. Section 987(f)(6)) that states the MLA “shall be enforced by the agencies specified in section 108 of the Truth in Lending Act (15 U.S.C. 1607) in the manner set forth in that section or under any other applicable authorities available to such agencies by law.” Such agencies include the CFPB. The AGs argue that this language allows the CFPB to examine for MLA compliance because “Congress has explicitly provided [in the Consumer Financial Protection Act (CFPA)] that one ‘applicable authority’ available to the CFPB is examination of lenders in order to ‘detect[] and assess[] risks to consumers and to markets for consumer financial products and services.’”

The AGs appear to be arguing that the MLA allows the CFPB to use its supervisory authority to “enforce” the MLA. We believe this interpretation is incorrect for at least two reasons. First, TILA Section 108 specifies not only the agencies that can enforce TILA but also the laws they can use to exercise such enforcement authority. For the CFPB, Section 108 specifies that it can enforce TILA under subtitle E of the CFPA, the subtitle that sets forth the CFPB’s enforcement powers. Thus, it is apparent from a plain language reading that the phrase “any other applicable authorities” in the MLA refers to any laws that give the CFPB enforcement powers beyond those it can exercise under subtitle E. The CFPB’s supervisory authority (which is separately provided in subtitle B of the CFPA) is not a source of additional enforcement powers.

Second, the AGs’ argument ignores the CFPA provisions that set forth the scope of the Bureau’s supervisory authority. CFPA Sections 1024(b)(1)(A) and 1025(b)(1)(A) provide that the CFPB shall conduct examinations of covered persons to assess compliance with the requirements of “Federal consumer financial laws.” Section 1002(14) of the CFPA defines the term “Federal consumer financial law” to mean generally the provisions of the CFPA and the “enumerated consumer laws.” Section 1002(12) lists the “enumerated consumer laws.” There are 18 federal statutes listed in Section 1002(12). Noticeably absent is the MLA.

Another letter urging Mr. Mulvaney to reconsider his plans to eliminate MLA examinations was sent by all 49 Democratic Senators who also take the position that the CFPB has statutory authority to conduct such examinations. As discussed in our blog post, we think the Senators’ interpretation is based on a misreading of the Bureau’s supervisory authority under the CFPA.

In this week’s podcast, Ballard Spahr partners Alan Kaplinsky and Chris Willis examine how the CFPB has changed under the leadership of Acting Director Mick Mulvaney and their expectations for future developments.

Alan and Chris discuss the practical impact of Mr. Mulvaney’s leadership on the CFPB’s day-to-day operations in the areas of supervision and enforcement, particularly with regard to how the CFPB’s public statements line up with its actual practices.  With regard to supervision and examinations, they highlight the Bureau’s current approach to UDAAP violations and military lending.

In the area of enforcement, Alan and Chris discuss the volume and nature of the Bureau’s current enforcement activity.  They also report on the status of the Bureau’s rulemaking initiatives and share their expectations for rulemaking under new leadership, including with regard to the Bureau’s payday lending rule and a debt collection rule.  They conclude the podcast by sharing their observations on the current compliance environment and its impact on decision-making by consumer financial services providers.

To listen and subscribe to the podcast, click here.

In this week’s podcast, Ballard Spahr attorneys Alan Kaplinsky and James Kim discuss the implications of the CFPB’s first enforcement action under Acting Director Mulvaney and analyze the amendments proposed by the CFPB to its trial disclosure policy (TDP).  Alan chairs Ballard’s Consumer Financial Services Group and James, a partner in the CFS Group, was formerly a CFPB Senior Enforcement Attorney.

James provides background on the prior litigation between the CFPB and the target of the enforcement action and reviews the allegations in the CFPB’s complaint.  He also provides observations on the action’s significance for the industry it targets and for the CFPB’s approach to UDAAP enforcement actions under its new leadership and shares his expectations for how the action is likely to proceed.

With regard to the proposed TDP amendments, James discusses the procedural and substantive changes contained in the proposal and how such changes would address the current policy’s shortcomings.  He also analyzes the effect that a trial disclosure waiver obtained under the amended policy would have on a company’s potential liability in federal and state enforcement actions and private litigation and discusses the proposal’s state sandbox option, the availability of waivers to companies offering traditional consumer financial products or services, and the relationship between the TDP and the CFPB’s no-action letter policy.

To listen and subscribe to the podcast, click here.

CFPB Acting Director Mick Mulvaney recently responded to former CFPB Student Loan Ombudsman Seth Frotman’s vocal departure from the Bureau.  As previously reported, Frotman tendered his resignation in a letter—also delivered to members of Congress—which accused Mulvaney of being derelict in his oversight of the “student loan market.”  Among other things,  Frotman accused Mulvaney of undercutting enforcement, undermining the Bureau’s independence, and shielding “bad actors” from scrutiny—collectively, “us[ing] the Bureau to serve the wishes of the most powerful financial companies in America.”

In an interview addressing the letter, Mulvaney has emphasized that he is focused on the explicit statutory authority provided in the Dodd-Frank Act, including the limitations on his oversight of student loans.  When asked about Frotman’s resignation, Mulvaney responded that he “never met the gentleman” and “doesn’t know who he is.”  Mulvaney has served as Acting Director since November 2017.  Frotman joined the Bureau during its creation in 2011 to focus on military lending issues as a senior advisor to Holly Petraeus (the Assistant Director for the Office of Servicemember Affairs) and transitioned to the Private Education Loan Ombudsman in April 2016.  Mulvaney added, “I talked to his supervisor who met with him on a regular basis during the nine months I’ve [been] there; [Frotman] never complained about anything that was happening at the Bureau, so I think he was more interested in getting his name in the paper.”

In his resignation letter, Frotman noted that the “Student Loan Ombudsman,” statutorily created by Section 1035 of the Dodd-Frank Act, was authorized to “provide timely assistance to borrowers,” “compile and analyze” borrower complaints, and “make appropriate recommendations” to the Director of the CFPB, the Secretary of Education, the Secretary of the Treasury, and Congressional committees regarding student loans.  Frotman, however, omits any mention of statutory limits to the Ombudsman’s authority.  Section 1035—titled “Private Education Loan Ombudsman”—directs the Ombudsman to “provide timely assistance to borrowers of private education loans,” “compile and analyze data on borrower complaints regarding private education loans” and to “receive, review, and attempt to resolve informally complaints from borrowers of [private education] loans.”

With respect to federal student loans, Section 1035 of the Dodd Frank Act only contemplates the Private Education Loan Ombudsman’s cooperation with the Department of Education’s student loan ombudsman through a memorandum of understanding (MOU).  Mulvaney noted the somewhat informal nature of the MOU created during the Obama administration, referring to it as a “handshake agreement.”  Arguably signaling an intent to defer to the Department of Education on federal student loan issues, Mulvaney stated that the issue he is most “worr[ied] about [is] the growth in …student loans” because federal involvement in the market has created a “disconnect between the making of a loan and the repaying of [a] loan.”

The CFPB and its Acting Director are facing a proposed class action lawsuit alleging discrimination against minority and female workers based on allegations of lesser pay and fewer promotions than their white male counterparts. The case is captioned at, Jones et al v. Mulvaney, U.S. District Court, District of Columbia, No. 18-2132.

The Complaint, filed on September 13, 2018, in the D.C. District Court, alleges violations of the 1866 Civil Rights Act, Title VII of the 1964 Civil Rights Act and the 1963 Equal Pay Act. The lawsuit is seeking punitive damages and compensation for lost pay and benefits for minorities and women who have worked as consumer response specialists at the CFPB.

The plaintiffs contend that while the CFPB and Acting Director Mulvaney are tasked with providing justice to American consumers, they have failed in their responsibility to their own employees. The plaintiffs, Ms. Carzanna Jones and Mr. Heynard Paz-Chow, are seeking certification to join in the case a class of racial minority and female employees, both past and present, working in the consumer response division, whom the plaintiffs allege were subjected to the same discrimination and retaliation while working for the CFPB. Ms. Jones is a current employee of the CFPB, and her allegations cover the length of her career at the bureau dating back to 2012. Mr. Paz-Chow is a former employee of the bureau from 2011-2014, and his allegations occurred under the leadership of former CFPB Director Richard Cordray. The consumer response division of the bureau is responsible for investigating consumer complaints and determining whether laws or regulations have been violated.

The pending lawsuit alleges that through an agency-wide pattern and practice of discrimination and retaliation, the CFPB has sought to disparately impact racial minority and female workers despite the continued objections of CFPB employees. Specifically, it is alleged that the CFPB instituted discriminatory policies and procedures in its training, assigning, evaluating, and compensation of minority and female employees. The Complaint also details specific instances of discrimination and retaliation alleged to have been suffered by the individual named plaintiffs including:

  • Denial of training and promotion opportunities
  • Unequal assignment of investigations leading to disproportionate case closings which impact employee evaluations
  • Denial of transfer requests
  • Pay disparities
  • Failure to abide by the requirements of the ADA and FMLA
  • Retaliatory actions after employees complained about inequalities

The allegations in the Complaint stretch back as far as 2011 and address statistical studies and congressional reports that have highlighted equality issues at the CFPB under multiple directors. According to the Complaint, those analyses and investigations have shown deficiencies in the pay and promotion of both racial minorities and female employees in line with the allegations of the Complaint. The Complaint cites to a Congressional Investigation by the U.S. House of Representatives initiated in 2014 and an Office of Inspector General (“OIG”) report from 2015. Both authorities found significant issues with widespread disparities negatively impacting racial minority and female employees with regard to performance ratings, pay, promotion and related areas. During a hearing of the U.S. House of Representatives Financial Services Committee, a CFPB attorney testified that the white males in authority at the bureau gave themselves the best performance evaluations to garner better raises and bonuses.

The CFPB filed its first new lawsuit under acting Director Mulvaney yesterday, alleging that a pension advance company and its president made predatory loans to consumers that were falsely marketed as asset purchases.  While it’s noteworthy as the Bureau’s first new case under current leadership, the action continues the CFPB’s focus on companies that offer settlement and pension advances, which began under Director Cordray and has continued under acting Director Mulvaney.

The defendants, under a pseudonym, unsuccessfully challenged the Bureau’s CID in federal court several months ago.  The investigation presumably continued, resulting in yesterday’s complaint filed in California federal court.  Similar to the Bureau’s earlier lawsuits against two pension advance companies and RD Legal, the complaint against Future Income Payments, its president Scott Kohn, and affiliated companies alleges that they made loans disguised as asset purchases that violated state usury and licensing laws.  More specifically, Future Income Payments and the other defendants allegedly committed deceptive acts in violation of the Consumer Financial Protection Act and failed to make disclosures required by the Truth in Lending Act by:

  • Falsely marketing that the alleged loans (1) are asset purchases rather than loans, (2) do not have interest rates, and (3) are comparable or cheaper than credit-card debt; and
  • Failing to provide the disclosures required by TILA explaining the cost of the credit.

The complaint, however, is missing a critical element.  It does not explain why the transactions are in fact extensions of credit.  Instead, the complaint concludes, without supporting allegations, that the funds provided to consumers are loans subject to the CFPA and TILA.  This failure to grapple with the elements of a loan under state law also exists in the CFPB’s pending action against RD Legal, which we highlighted in a blog.  In both cases, the Bureau fails to address the well-established, state-law factors for distinguishing asset purchases from loans, such as an absolute obligation by consumers to repay the funding company.

These lawsuits against pension and settlement advance companies are striking exceptions to acting Director Mulvaney’s public statements that the Bureau will neither push the envelope nor regulate by litigation/consent order.  We will, therefore, continue to monitor the Future Income Payments case as we have with the RD Legal lawsuit.

On September 5, 2018 a group of 14 state Attorneys General and the AG for the District of Columbia sent a comment letter to CFPB Acting Director Mick Mulvaney, urging him to refrain from “reexamining the requirements” of the Equal Credit Opportunity Act (“ECOA”). The AGs seek to preserve the interpretation that the ECOA provides for disparate impact liability.

This letter was written in response to the statement issued by the CFPB on May 21, 2018, responding to the enactment of S.J. Res. 57, disapproving of the CFPB’s Bulletin 2013-2 regarding “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act.” Through this joint resolution, Congress rejected the disparate impact theory underlying enforcement actions brought by the CFPB under the ECOA, related to auto dealer finance charge participation.  Although this enactment would appear to mark the demise of such enforcement actions, recent announcements from the New York Department of Financial Services have called that conclusion into question.

In its May 21, 2018 statement, the CFPB indicated that it “will be reexamining the requirements of the ECOA” in light of “a recent Supreme Court decision distinguishing between antidiscrimination statutes that refer to the consequences of actions and those that refer only to the intent of the actor” and “the fact that the Bureau is required by statute to enforce federal consumer financial laws consistently.”  (The statement presumably refers to the Supreme Court’s Inclusive Communities decision.)

Referencing the language in Regulation B and Regulation B Commentary regarding the “effects test,” the AGs argue in their letter that the regulations implementing the ECOA have continuously interpreted the statute as providing for disparate impact liability.  They assert that action by the CFPB in derogation of those regulations would violate the Administrative Procedure Act.

The AGs further argue that because their states have enacted statutes modeled on the ECOA, responsibility for enforcing the statutory protections is shared among the states and the federal government, such that the CFPB cannot overturn the Supreme Court’s 2015 ruling in Inclusive Communities.  The AGs state that the holding of Inclusive Communities, “dictates” that the ECOA provides for disparate impact liability, because the FHA and the ECOA contain identical language stating that it “shall be unlawful for any person . . . to discriminate against any person . . . because of race, color, religion, sex, handicap, familial status, or national origin.”

As we have observed previously, however, the Supreme Court’s conclusion in Inclusive Communities, that disparate impact liability is cognizable under the FHA, was largely based upon, “its results-oriented language, [and] the Court’s interpretation of similar language in Title VII and the [Age Discrimination in Employment Act (ADEA)].”  We commented that the Court’s analysis highlights material differences between the FHA and the ECOA; namely the lack of comparable “results oriented language” in the ECOA.

The states whose AGs signed the comment letter are North Carolina, California, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Vermont, and Virginia.  The same group of state AGs, with the addition of the Attorneys General for Iowa and Pennsylvania, recently sent a letter to HUD urging it not to make changes to its 2013 Disparate Impact Rule in light of the holding in Inclusive Communities.

As the Supreme Court aptly recognized in Inclusive Communities, limitations on disparate impact liability are necessary to protect potential defendants from abusive disparate impact claims.  The requirement of a “robust” causality requirement helps to safeguard potential defendants from claims that, in effect, seek to hold them “liable for racial disparities they did not create.”  These considerations, along with the materially different language in the two statutes, raises substantial questions as to how persuasive the CFPB will find the arguments presented by the state AGs.

In response to reports that Acting CFPB Director Mick Mulvaney intends to dispense with routine supervisory examinations of creditors for violations of the Military Lending Act (MLA), Senate Democrats sent a joint letter addressed to Mulvaney in his capacity as Director of the Office of Management and Budget—urging him to reconsider.

The letter, signed by all 49 Democratic Senators, takes the position that the CFPB has statutory authority to conduct examinations for MLA compliance:

We write regarding reports that the Consumer Financial Protection Bureau (CFPB) will no longer protect servicemembers and their families by including the Military Lending Act (MLA) as part of the CFPB’s routine lender examinations due to a purported lack of authority.  These reports are puzzling because the CFPB already possesses the authority to enforce the MLA and examine many types of lenders for the purposes of “detecting and assessing risks to consumers and to markets for consumer financial products and services.”

The apparent statutory basis for this view is the quoted language above, which is from Section 1024(b)(C) of the Dodd-Frank Act (12 U.S.C. § 5514 – Supervision of nondepository covered persons). Reading Section 1024(b) in its entirely, we think the interpretation set forth in the senators’ letter misreads the scope of supervisory authority authorized by Dodd-Frank:

(b) SUPERVISION.—
(1) IN GENERAL.—The Bureau shall require reports and conduct examinations on a periodic basis of persons described in subsection (a)(1) for purposes of—
(A) assessing compliance with the requirements of Federal consumer financial law;
(B) obtaining information about the activities and compliance systems or procedures of such
person; and
(C) detecting and assessing risks to consumers and to markets for consumer financial
products and services. (emphasis added)

Rather, we believe subpart (C) must be read within the context of (A), which uses the defined term “Federal consumer financial law,” thereby limiting the scope of statutes under which the CFPB has supervisory authority. As we previously wrote, the MLA is not a “Federal consumer financial law” under Dodd-Frank. To read (C) as a standalone authorization for the CFPB to conduct MLA examinations is to infer that the CFPB has statutory authority for proactive oversight relating to any number of federal statutes that could plausibly affect “consumers and markets for consumer financial products and services.” Likewise, if (C) is indeed as broad as the senators are implying, (A) would be superfluous, since (C) would offer a sufficient grant of authority to cover supervision under any “Federal consumer financial law,” as well as under any other law deemed relevant to “detecting and assessing” the risks outlined in (C).

The CFPB’s ongoing approach to the Servicemembers Civil Relief Act (SCRA) is instructive here. Like the MLA, the SCRA is not a Federal consumer financial law, even though it has direct bearing on various “consumer financial products and services,” including personal loans, motor vehicle loans and mortgage loans. However, the CFPB has not published any general SCRA examination procedures, and we are likewise not aware of general SCRA-related supervisory activity on the part of the CFPB.