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.

The issue of the CFPB’s constitutionality is currently before the Fifth Circuit in the interlocutory appeal of All American Check Cashing from the district court’s ruling upholding the CFPB’s constitutionality.  As a result, the Fifth Circuit’s decision issued earlier this week which found that the Federal Housing Finance Agency (FHFA) is unconstitutionally structured because it is excessively insulated from Executive Branch oversight could be a preview of how another Fifth Circuit panel might approach the CFPB’s constitutionality.

In addition, the decision will likely influence the approach that the CFPB takes in its brief in All American Check Cashing’s appeal.  All American Check Cashing has already filed its principal brief and the CFPB is seeking a 40-day extension of the date by which it must file its brief (from August 1 to September 10).  In its motion to extend the briefing schedule, the CFPB states that the Fifth Circuit’s opinion “discussed features of the Bureau and compared them to aspects of FHFA’s structure” and thus “many of the arguments discussed by the Court are relevant to the issues in [the All American Check Cashing] case.”  The CFPB is requesting the extension “so that it may evaluate the [Fifth Circuit’s] opinion, and to decide how to address that opinion in the context of the [the All American Check Cashing] case.”  (The motion indicates that All American Check Cashing has no objection to the extension provided it receives a one-week extension for filing its reply brief.)

The FHFA was created by the Housing and Economic Recovery Act of 2008 (HERA) to oversee two of the housing government services enterprises (GSEs).  Like the CFPB, the FHFA was established as an “independent agency” led by a single Director appointed by the President subject to Senate confirmation for a five-year term and who can only be removed by the President “for cause.”  Also like the CFPB, the FHFA is not funded through the regular appropriations process.  Instead, the FHFA is funded through assessments collected from the GSEs.  The FHFA is overseen by the Federal Housing Finance Oversight Board (Board) which is required to testify annually before Congress about the FHFA’s performance and the safety and soundness of the GSEs but cannot exercise any executive authority, or as put succinctly by the Fifth Circuit, “cannot require the FHFA or Director to do much of anything.”

The parties challenging the FHFA’s constitutionality were shareholders of the GSEs who were seeking to invalidate an amendment (Third Amendment) to a preferred stock agreement between the Treasury Department and the FHFA as conservator for the GSEs that required the GSEs to pay quarterly dividends to the Treasury equal to the GSEs’ excess net worth after accounting for prescribed capital reserves.

The Fifth Circuit determined that while the “for cause” removal provision alone was not sufficient to trigger a separation of powers violation, it did trigger a violation when combined with other features of the FHFA, specifically its insulation from the normal appropriations process and the absence of any statutory provision providing for executive branch control over the FHFA’s activities.  The court observed that while two of the Board’s members are Cabinet officials, the Board exercises purely advisory functions.  It determined that the appropriate remedy for the constitutional violation was to sever the for-cause removal provision while “leav[ing] intact the remainder of HERA and the FHFA’s past actions—including the Third Amendment.”

In ruling that the FHFA is unconstitutionally structured, the Fifth Circuit stated that it was “mindful” of the D.C. Circuit’s en banc PHH decision finding the CFPB’s structure to be constitutional but “salient distinctions between the agencies compel a contrary conclusion.”  It observed that, unlike the Board, the Financial Stability Oversight Council (FSOC) can directly control the CFPB’s actions because it holds veto-power over the CFPB’s policies.  The court also commented that the shareholders were not only challenging the for cause removal provision but were challenging the “cumulative effect of Congress’s agency-design decisions.”  (emphasis included)

In its interlocutory appeal to the Fifth Circuit, All American Check Cashing has argued that not only does the CFPB’s single-director-removable-only-for-cause structure, standing alone, make the CFPB’s structure unconstitutional, but that its other features “render it even more clearly unconstitutional when combined with its single unaccountable Director.”  Such other features include the CFPB’s insulation from the regular appropriations process.  As a result, the Fifth Circuit could rely on All American Check Cashing’s “cumulative effect” argument as a basis for disagreeing with the D.C. Circuit’s en banc conclusion in PHH.  Indeed, perhaps with All American Check Cashing’s interlocutory appeal in mind, the Fifth Circuit specifically indicated that its decision was limited to the FHFA’s constitutionality.  The court stated in a footnote:

We do not question Congress’s authority to establish independent agencies, nor do we decide the validity of any agency other than the FHFA….
We leave for another day the question of whether other agencies suffer from similar constitutional infirmities.

Despite the Fifth Circuit’s reliance on the FSOC’s oversight of the CFPB to distinguish the D.C. Circuit’s en banc PHH decision, we are not convinced that the FSOC’s oversight of the CFPB is significantly different from the Board’s oversight of the FHFA.  While the FSOC can veto a CFPB regulation, it can only do so within a short time period by a two-thirds vote and only for reasons of safety and soundness (a very high standard) and not because FSOC members believe the regulation is bad policy.  Indeed, to date the FSOC has not vetoed any CFPB regulation nor has any FSOC member filed a petition to initiate a potential veto vote.  Furthermore, except for its ability to veto a CFPB regulation for safety and soundness reasons, the FSOC has no oversight over CFPB supervisory and enforcement activities.  The FSOC did not consider a veto of the CFPB’s arbitration rule even though the then Acting Comptroller of the Currency took the position that the rule threatened the safety and soundness of the banking system because of the avalanche of class action litigation that the CFPB predicted would result from the rule.  The only check on the CFPB proved to be Congress’ use of the Congressional Review Act to override the arbitration rule.

Should the Fifth Circuit conclude that the CFPB’s structure is unconstitutional, its FHFA decision also suggests that it would rule that the proper remedy is to sever the Consumer Financial Protection Act’s (CFPA) for-cause removal provision.  All American Check Cashing is arguing that the correct remedy is to strike down the CFPA as a whole.

Both the FHFA and the Treasury Department, in their briefs to the Fifth Circuit, sought to avoid the constitutionality issue by arguing that the Third Amendment was entered into by the FHFA’s Acting Director who was removable by the President at will and therefore the shareholders’ harm was not traceable to the for-cause removal restriction.  The FHFA and Treasury Department argued that because HERA, by its plain terms, only restricted the President’s authority to remove the Director but did not restrict the President’s authority to remove an Acting Director, the Acting Director was not subject to the for-cause removal restriction.  The Fifth Circuit rejected this argument stating:

But if the acting Director could be removed at will, the FHFA would be an executive agency—not an independent agency.  There is no indication that Congress sought to revoke the FHFA’s status as an independent agency when it is led by an acting, rather than appointed, Director.  So an acting Director, like an appointed one, is covered by the removal restriction. (footnotes omitted).

The FHFA also argued in the alternative that the FHFA’s structure was constitutional.  In its brief, the FHFA observed that the shareholders were relying on the D.C. Circuit’s vacated panel decision in PHH in arguing that the FHFA’s structure is unconstitutional.  The FHFA stated that “the District Court did not err by agreeing with every other court that has considered the issue that “the reasoning of the panel decision in PHH Corp. [is] unpersuasive even if it had not been vacated.'”

In a supplemental filing, the FHFA notified the Fifth Circuit of the D.C. Circuit’s issuance of its en banc PHH decision rejecting the constitutional challenge to the CFPB’s structure and indicated that the D.C. Circuit’s reasoning closely tracked the FHFA’s arguments in support of its constitutionality.  In addition to defending its constitutionality, the FHFA took the position that if its structure were found to be unconstitutional, the proper remedy would be to strike the for-cause removal provision.

The Fifth Circuit’s rejection of the argument made by the FHFA and the Treasury Department that the shareholders’ constitutionality challenge failed because the Acting Director was removable at will can be expected to influence whether the CFPB will make a similar argument in the All American Check Cashing case.  In opposing All American Check Cashing’s petition to the Fifth Circuit asking it to grant interlocutory review, the CFPB did not directly address the merits of the appellants’ constitutional challenge.  Instead, it claimed that because Acting Director Mulvaney is removable at will by the President and had ratified the CFPB’s decision to bring the lawsuit, any constitutional defect that may have existed with the CFPB’s initiation of the lawsuit was cured and the constitutionality of the for-cause removal provision was no longer relevant to the case.

According to the CFPB, Acting Director Mulvaney is removable at will by the President because the CFPA’s removal provision by its plain terms applies only to “the Director.”  Another Fifth Circuit panel could easily apply the rationale used by the Fifth Circuit in rejecting the FHA’s and Treasury Department’s “plain terms” argument and conclude that the CFPB’s Acting Director also is not removable at will because “there is no indication that Congress sought to revoke the [CFPB’s] status as an independent agency when it is led by an acting, rather than appointed, Director.”

It remains unclear what position the CFPB will take on its constitutionality in the All American Check Cashing case.  However, given that another Fifth Circuit panel now has the Fifth Circuit’s FHFA decision on which it can readily rely to reject an argument by the CFPB that the Acting Director’s ratification makes a ruling on the CFPB’s constitutionality unnecessary, there is now a greater likelihood that the Fifth Circuit will issue a decision that does rule on the CFPB’s  constitutionality.  (In the CFPB’s lawsuit against RD Legal Funding, Judge Preska of the Southern District of New York recently ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional and struck the CFPA (Title X of Dodd-Frank) in its entirety.  The CFPB has not yet indicated whether it plans to appeal Judge Preska’s decision.)

Should any of the parties to the FHFA decision wish to seek a rehearing en banc, they must do so within 45 days after entry of judgment.  The 45-day period applies when one of the parties is a United States agency (here, the FHFA and the Treasury Department) or a current United States officer or employee sued in an official capacity (here, FHFA Director Watt and Treasury Secretary Mnuchin).

 

 

The CFPB will be one of the members of the new Task Force on Market Integrity and Consumer Fraud (Task Force) to be established by the U.S. Department of Justice (DOJ).  Last week, the DOJ announced that it was disbanding the Financial Fraud Enforcement Task Force, established under the Obama Administration, and pursuant to an Executive Order issued by President Trump, plans to establish the Task Force in its place.

The purpose of the Task Force, according to the DOJ press release, is to deter fraud on consumers, especially veterans and the elderly, and the government, specifically as it relates to health care.  The Task Force will provide guidance both for the investigation and prosecution of specific fraud cases and provide recommendations “on fraud enforcement initiatives.”

Although the DOJ will lead the Task Force, the Executive Order directs him to include several other federal agencies, including the CFPB.  Acting Director Mulvaney, who joined Deputy AG Rod Rosenstein in the formal announcement of the Task Force, stated that  “[i]nteragency cooperation is incredibly important to these complex issues” and favorably cited the “growing cooperation” among the DOJ and other federal and state agencies.

The Task Force’s focus on consumer fraud is consistent with Acting Director Mulvaney’s statements that the CFPB will no longer use its enforcement authority to “push the envelope” and instead will use it to target violations that present “quantifiable and unavoidable harm to the consumer.”  It is also consistent with his previous statements identifying the prevention of elder financial abuse as a priority issue for the CFPB.  In his remarks at the formal announcement of the Task Force, Acting Director Mulvaney highlighted the CFPB’s initiatives to address elder financial exploitation.

CFPB Acting Director Mick Mulvaney announced yesterday that he has selected Brian Johnson, who currently serves as CFPB Principal Policy Director, to serve as Acting Deputy Director.  Before joining the CFPB, Mr. Johnson served as a House Financial Services Committee staff member.

Mr. Johnson’s selection as Acting Deputy Director follows the announcement by Leandra English this past Friday that, in light of President Trump’s nomination of Kathy Kraninger to serve as CFPB Director, she would resign as Deputy Director this week and drop her lawsuit challenging Mr. Mulvaney’s appointment as Acting Director.

Leandra English, who was appointed CFPB Deputy Director by former Director Cordray before his November 2017 resignation, announced today that she will resign as Deputy Director early next week.  Ms. English indicated that her resignation was prompted by President Trump’s recent nomination of Kathy Kraninger to serve as CFPB Director.

Ms. English’s announcement was accompanied by a statement from her attorney indicating that he will be filing papers on Monday to terminate her lawsuit against President Trump and Acting Director Mulvaney which is now pending before the D.C. Circuit Court of Appeals.  The District Court had previously held that Mr. Mulvaney is the lawful Acting Director.

According to numerous media sources, the White House announced on Friday, June 16, that President Trump plans to nominate Kathy Kraninger as CFPB Director later this week.

The nomination means that pursuant to the Federal Vacancies Reform Act, Mick Mulvaney can continue to serve as Acting Director while Ms. Kraninger’s nomination is pending confirmation by the Senate and, as we explain below, potentially until mid-2020 if she is not confirmed.  In the absence of a nomination by President Trump, the FVRA would not have allowed Mr. Mulvaney to continue to serve as Acting Director beyond June 22 and created the potential for his post-June 22 actions to be challenged as invalid.  (The otherwise applicable FVRA time limit on service–210 days after the date the vacancy occurs—began to run on November 25, 2017, the date former Director Cordray’s resignation became effective.)

Ms. Kraninger is currently the Program Associate Director for General Government at the Office of Management and Budget.  (In addition to serving as CFPB Acting Director, Mr. Mulvaney currently serves as OMB Director.)  At OMB, Ms. Kraninger oversees budget development for several agencies, including DOJ, HUD, and Treasury. She has been at OMB since March 2017.  She has also held positions with two Congressional committees, the House Committee on Homeland Security and the Senate Homeland Security and Governmental Affairs Committee, and has worked in two agencies, Treasury and Homeland Security.  At Homeland Security, she served as Deputy Assistant Secretary for Policy Secretary Tom Ridge during the Bush Administration. Ms. Kraninger is a 2007 graduate of Georgetown University Law Center.

Ms. Kraninger’s nomination “resets the clock” on Mr. Mulvaney’s tenure as Acting Director under the FVRA.  He can continue to serve as Acting Director until Ms. Kraninger’s nomination is withdrawn, rejected, or returned by the Senate.  Senate rules provide that a nomination that has not been acted on by the end of the session in which it was submitted is returned to the President.  (The current target date for the Senate’s adjournment is December 14.)  Under the FVRA, the withdrawal, rejection, or return of Ms. Kraninger’s nomination would allow Mr. Mulvaney to continue to serve as Acting Director for an additional 210-day period.  If a second nomination is made (which we assume would not happen before 2019), Mr. Mulvaney could continue to serve as Acting Director until the second nomination is confirmed, withdrawn, or rejected or returned by the Senate.  If the second nomination is withdrawn or rejected or returned by the Senate at the end of the 2019 session, a further 210-day period would be triggered during which Mr. Mulvaney could continue to serve as Acting Director until approximately July 2020.  (It appears that Mr. Mulvaney’s tenure as Acting Director could not be further extended by subsequent nominations.)

If confirmed as CFPB Director, Ms. Kraninger is expected to follow Mr. Mulvaney’s philosophy of not using the CFPB’s enforcement authority to “push the envelope” or to engage in “rulemaking by enforcement.”  In addition, her nomination and potential confirmation is not expected to have any impact on the CFPB’s regulatory priorities outlined in its Spring 2018 rulemaking agenda of reopening rulemaking on the CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule) and proposing a debt collection rule dealing with third-party collectors.  Most significantly, by eliminating a possible challenge to the validity of actions taken by Mr. Mulvaney as Acting Director after June 22, Ms. Kraninger’s nomination allows Mr. Mulvaney to move forward (hopefully expeditiously) on staying the Payday Rule’s compliance date pursuant to the Administrative Procedure Act’s notice-and-comment procedures.  (Last week, a Texas federal court granted the stay of the lawsuit filed by two trade groups challenging the Payday Rule requested in a joint motion filed by the trade groups and the CFPB but denied the stay of the Payday Rule’s August 19, 2019 compliance date also requested in the joint motion.)

The continuing “wildcard” for Ms. Kraninger’s nomination and Mr. Mulvaney’s tenure as Acting Director is the possibility of a decision from the D.C. Circuit adverse to Mr. Mulvaney in Leandra English’s appeal challenging Mr. Mulvaney’s appointment as Acting Director.  One possible outcome is that the D.C. Circuit could find that Ms. English is entitled to serve as Acting Director pursuant to the Dodd-Frank Act (DFA) provision that provides the Deputy Director shall serve as Acting Director in the Director’s “absence or unavailability” and that the DFA provision supersedes the President’s FVRA authority.  It is unclear whether the DFA provision that only allows the President to remove the CFPB Director “for cause” would similarly limit the President’s removal of an Acting Director.  (Mr. Mulvaney has asserted on various occasions that President Trump can remove him without cause.)

A second possible outcome is that the D.C. Circuit could find that Ms. English is not entitled to serve as Acting Director pursuant to the DFA because “absence or unavailability” does not include a vacancy created by a resignation and, although the President can use his FVRA authority to appoint an Acting Director, his appointment of Mr. Mulvaney is invalid because Mr. Mulvaney cannot simultaneously serve as OMB Director and CFPB Acting Director.  The 210-day time limitation established by Section 3346(a)(1) of the FVRA on an acting officer’s tenure runs from “the date the vacancy occurs.”  While a permanent officer’s nomination can extend the tenure of an existing acting officer beyond 210 days, it appears that the President cannot use the FVRA to appoint another person as acting officer after the 210-day period expires.  Thus, assuming that after June 22 President Trump could not use the FVRA to appoint someone else to serve as Acting Director, the CFPB would remain without an Acting Director until a nominee is confirmed by the Senate.  (Ms. English, unless removed by President Trump, would continue to serve as Deputy Director but could not exercise the authority of the Director.  As noted above, while the DFA only allows the President to remove the CFPB Director “for cause,” it does not speak directly to the Deputy Director’s removal.)

It is important to also note that once a new Director appointed by President Trump is confirmed, he or she will be entitled to serve for a full five-year term regardless of how long Mr. Mulvaney has served as Acting Director.  As a result, if Mr. Mulvaney were to serve as Acting Director for as long as possible (i.e. until mid-2020), even if a Democrat is elected President in 2020, a new Director appointed by President Trump and sworn-in in mid-2020 could potentially serve until mid-2025.

Such a possible scenario underscores the need for Congress to enact legislation to change the CFPB’s leadership structure to a five-member commission, something industry has previously urged lawmakers to do.  While we are pleased with the direction in which Mr. Mulvaney has moved the CFPB, regardless of whether the President is a Republican or a Democratic, in our opinion, it is better policy and will provide more stability for the Bureau to be led by a group of people with diverse viewpoints rather than a single individual tied to the President’s political agenda.