On December 12, the Credit Union National Association (“CUNA”) filed an amicus brief in D.C. Federal District Court opposing Leandra English’s motion for a preliminary injunction to block President Trump’s appointee for Acting CFPB Director, Mick Mulvaney, from exercising the powers of that office. The Court has already denied English’s motion for a temporary restraining order.

CUNA is the largest organization representing the nation’s 6,000 credit unions, which are heavily regulated by the CFPB. As such, it has a significant interest in the outcome of preliminary injunction hearing.

In its brief, CUNA argues that Mulvaney’s appointment was entirely proper under the Vacancies Reform Act of 1998 (“VRA”). CUNA further argues that the language in Dodd-Frank stating that the Deputy Director shall become the Acting Director in the “absence or on availability” of the Director covers temporary situations, like an accident requiring long term hospitalization of the Director. It does not cover a vacancy in the office of the Director, including one resulting from a resignation.

Under the VRA, when an office is vacant, the President has the power to appoint an acting officer to fill the post, subject to certain limitations. Indeed, when the VRA was passed, the Senate committee that considered the VRA explicitly stated that, “statutes enacted in the future purporting to or argued to be construed to govern the temporary filling of offices covered by this statute are not to be effective unless they expressly provide that they are superseding the Vacancies Reform Act.” So, because Dodd-Frank did not explicitly override the VRA, the VRA governs.

In addition, CUNA points out the serious constitutional problems that would result if the court adopted English’s position. If she is right, then a departing CFPB Director would have the power to appoint anyone as his or her successor, including non-citizens, through the simple expedient of naming him or her as the Deputy Director, while the President would have more limited powers of appointment under the VRA. That would give the CFPB Director more power than the President over an agency in the executive branch of government.

What’s more, English’s argument also implies that the President would be as unable to remove an Acting CFPB Director as he is the CFPB Director. That only exacerbates the constitutional defects that are at the heart of the PHH case, which we have blogged about extensively.

CUNA’s brief, which Ballard Spahr authored, highlights the industry perspective on why Leandra English is wrong and why the court should not try to unwind the President’s appointment of an Acting CFPB Director. We will continue to follow this unfolding saga closely.

As one of his final actions before resigning last Friday from the Consumer Financial Protection Bureau, Director Richard Cordray sent letters to the chief executives of 29 banks, credit unions, and other financial companies urging them to help their customers attain greater control over their financial lives.

“There is enormous value in new technology that makes it feasible, right now, to enable consumers to exert much greater control over their credit cards, debit cards, and other payment methods,” Director Cordray wrote. He asserted that consumers should have the ability to easily and conveniently control how, when, and to what extent their accounts may be accessed.

Director Cordray’s letter suggested digital media platforms as the most convenient method of enabling consumers to exercise this detailed control over their accounts. He provided several examples of enhanced capabilities digital media servicing may be able to offer, such as the ability to set spending limits on each payment card for particular merchants, categories of spending, or channels of transactions (for example, online, phone, in-person, and recurring transactions). Digital media servicing could also provide consumers the ability to receive alerts or warnings if a transaction is attempted that falls outside the consumer’s personal preset parameters (or parameters for a separate authorized user). These money management tools could be offered through financial institutions’ online and mobile platforms.

Director Cordray pointed out that, as in past advisory letters, his suggestions are not regulatory requirements, but rather issues that financial institutions “would do well to consider as [they] seek to better serve [their] customers.” He posited that allowing consumers to control their own spending would lessen consumer worries about data breaches and help financial institutions minimize the incidence of fraudulent payment card usage. By helping consumers to help themselves, financial institutions will materially improve the lives of their customers, while reducing their own costs at the same time.

Consumer Financial Protection Bureau (CFPB) Director Richard Cordray has responded to the letter from the Department of Education (ED) terminating the Memoranda of Understanding (MOUs) between the agencies. ED’s August 31st letter—signed only by Kathleen Smith of the Office of Postsecondary Education and Dr. A. Wayne Johnson of Federal Student Aid—provided 30 days’ notice of the termination of two MOUs: a 2011 agreement providing collaboration to resolve student loan complaints and a 2014 agreement encouraging coordination of supervisory activities.

Director Cordray’s September 7th letter—addressed directly to Secretary Betsy DeVos—states that ED “appears to misunderstand” the scope of the CFPB’s authority.  In particular, Director Cordray asserts that the Higher Education Act does not supersede the federal consumer financial laws that the CFPB enforces under Title X of the Dodd-Frank Act (Dodd-Frank). In addition, Director Cordray emphasizes that Dodd-Frank required the Bureau to establish a consumer complaint unit and gave the Bureau authority with respect to institutions responsible for “servicing loans” and “collecting debt related to any consumer financial product or service.”

However, in advancing these arguments, Director Cordray seems to have conceded that even under his analysis some collecting and servicing of federal student loans could occur outside of the purview of the CFPB.  The discussion of servicing and collecting is circumscribed by the CFPB’s apparent admission that institutions collecting and servicing federal student loans are subject to its authority only insofar as they are covered by the “larger participant rules” for debt collectors and student loan servicers.  Moreover, Title IV of the Higher Education Act does supersede at least one federal consumer financial law, the Truth in Lending Act, which has no application to loans made, insured, or guaranteed under Title IV.

Cordray’s letter goes on to address other points made by ED.  As justification for the split, ED accused the CFPB of “violating the intent” of the agreements by failing to forward Title IV federal student loan complaints within ten days of receipt and handling complaints itself.  Director Cordray dismisses this concern by noting that ED had never expressed any concerns about the MOU or the handling of federal student loan complaints prior to its letter and that the CFPB shares its complaint information in “near real-time” by providing ED access through its Government Portal. Director Cordray also cites to Section 1035 of Dodd Frank, which provides that the CFPB student loan ombudsman is to establish an MOU with the ED student loan ombudsman to “ensure coordination in providing assistance to and serving borrowers seeking to resolve complaints related to their private education or Federal student loans.”

It’s unlikely that ED will find these arguments persuasive.  Director Cordray does not articulate how the CFPB can require ED to constantly monitor the Government Portal as a substitute for the direct forwarding of complaints contemplated by the MOU. He also overlooks the fact that Section 1035 of Dodd Frank can be interpreted to require the CFPB to forward complaints about federal student loans to ED but to coordinate in the limited instance when a complaint addresses conduct affecting both private student loans handled by the CFPB ombudsman and federal student loans handled by the ED ombudsman.

With respect to enforcement coordination, Director Cordray rejects the accusation that the CFPB had overstepped its bounds. He states that “the Bureau has never knowingly taken any actions in conflict with the Department’s regulations or instructions to servicers” and that all of its actions were consistent with ED’s directives.  Director Cordray also defends the CFPB’s use of information requests before conducting on-site examinations and maintains that the CFPB took the necessary steps to preserve confidentiality with respect to actions involving student loan servicers.

Again, ED is unlikely to be convinced.  The letter makes no mention of any outreach efforts on the part of the CFPB to determine ED’s intentions.  More tellingly, the letter does not explain how the CFPB is able to serve as the arbiter of what ED’s regulations, instructions, and directives require.  The perfunctory statements about preserving confidentiality are no more compelling.

Director Cordray lauds the Bureau’s complaint handling as providing an “efficient means” to obtain consumer relief, but stops short of saying that ED is incapable of independently handling all federal student loan complaints. He also notes that the CFPB began accepting complaints “without any objections” in February 2016. However, he says nothing that would indicate that the CFPB discussed the expansion of the complaint portal with ED ahead of time.  He also fails to provide any insight as to why the Bureau started accepting federal student loan complaints more than four years after signing the MOU.

Ultimately, Director Cordray’s letter serves as an olive branch. The letter requests a “constructive conversation” about future cooperation and notes that the CFPB “stand[s] ready to meet with you or your colleagues, hear your concerns, and explore constructive solutions to help us all better serve students and borrowers.”  Director Cordray does not include any explicit incentives for ED’s cooperation and, perhaps as a concession, suggests that the CFPB is willing to negotiate cooperation on a smaller scale or under more restrictive terms. As he states in the letter, the CFPB “stand[s] ready to work toward new MOUs between the Bureau and the Department.”

On September 12, 2017, Director Cordray appeared as the keynote speaker at the Seventh Annual Ohio Land Bank Conference.  Director Cordray’s appearance came on the heels of his speech at the Cincinnati AFL-CIO Labor Day Picnic where many speculated he would announce his campaign for Ohio governor.  The Ohio Land Conference brings together governmental and corporate partners striving to re-purpose vacant and abandoned properties and revitalize struggling neighborhoods—a perfect landscape for the launch of a gubernatorial run.  The Conference coincidentally fell on the same day as the first gubernatorial debate for Ohio Democrats.  Despite this perfect setting and date, Director Cordray remained silent on the rumors of his political aspirations.

At the Ohio Land Bank Conference, Director Cordray’s remarks were retrospective.  He reflected on the creation of the CFPB and touted certain milestones of the agency.  Out of all of the industries touched by the CFPB, Cordray’s remarks focused on the mortgage industry and the foreclosure crisis.  He did not break any news during his speech.  Many have commented that Director Cordray’s remarks could have easily been used in a campaign speech.  Indeed, he ended his speech with a quote from Theodore Roosevelt: “This country will not be a good place for any of us to live in unless we make it a good place for all of us to live in.”

Director Cordray’s term expires in July 2018.  He is expected to announce his bid for governor of Ohio after the CFPB issues a final payday loan rule.  In the interim, we will continue to monitor Director Cordray’s public appearances and remarks.

Ever since it was announced that Richard Cordray would be delivering a speech at the annual Cincinnati AFL-CIO Labor Day picnic, there was wide speculation that he would use that occasion to launch his campaign to run for governor of Ohio. Indeed, I thought that his plan would be to issue the final small-dollar lending rule last week, resign as CFPB Director this past Friday and launch his political campaign at the AFL-CIO picnic yesterday. I was wrong!

The small-dollar lending rule has not yet been issued, Richard Cordray has not yet resigned and last week he responded to Rep. Jeb Hensarling’s letter asking him when he plans to resign by saying he has “no insight” about that.  Yesterday, he gave his highly anticipated AFL-CIO Labor Day speech as Director of the CFPB. Although his speech chronicled what he perceived to be his major accomplishments as Director of the CFPB and as Ohio State Treasurer and Attorney General, he said nothing about his future plans.  He didn’t make any news by announcing any new CFPB initiatives or even refer to the imminent issuance of the small-dollar lending rule. If he had used the occasion to launch his campaign, he could have used essentially the same speech.  Isaac Boltansky observes “[T]he speech venue, the political cadence of the remarks and even the reference to Dr. Martin Luther King, Jr. at the end of the speech reinforce our belief that Director Cordray will depart the Bureau in the coming weeks.”

Labor Day has come and gone and Richard Cordray remains Director of the CFPB. Will he issue the small-dollar lending rule and resign this week so that he can participate in the Ohio Democratic Gubernatorial Debate on September 12?  During that same day he is scheduled to be in Cleveland to deliver a keynote address to the 7th Annual Ohio Land Bank Conference.

We have previously blogged about two upcoming events that have led to speculation that Richard Cordray is about to resign as CFPB Director.  The first event is a speech he is giving in Cincinnati, Ohio at a Labor Day picnic sponsored by the AFL-CIO.  That seems like an ideal venue to launch his campaign for Governor of Ohio.  The second is an Ohio gubernatorial debate on September 12.

There is now a third sign that his resignation may be imminent.  The CFPB this week posted on its website a notice of a meeting on September 7, 2017 at 3:30pm of the Fall 2017 Credit Union Advisory Council Meeting in Washington, D.C.  The notice states that Acting Deputy Director David Silberman will be present and will make some remarks.  This represents a departure from Director Cordray’s usual practice of giving remarks at advisory group meetings.   Acting Deputy Director Silberman has given remarks in Director Corday’s stead very rarely.

While Director Cordray has stated nothing publicly about his intent to resign, this latest CFPB announcement supports the notion that he will resign at the end of next week, perhaps after issuing the final small dollar lending rule.

In an op-ed published in today’s New York Times, CFPB Director Richard Cordray argues against congressional repeal of the agency’s final arbitration rule by “correcting the record.”  He contends that the CFPB’s March 2015 study of consumer arbitration shows that consumers fare much better in class action litigation than in individual arbitration.   We have read that study many times and have drawn the opposite conclusion.

For example, the CFPB’s study contains the following statistics regarding class actions:

  • Only 12.3% of the 562 class actions studied produced any settlement benefits to the putative class members.   Since none of those class actions went to trial, that means about 87% of the putative class members received no benefits at all.
  • 60 % of the class actions either settled individually or were dropped by the named plaintiffs, leaving the putative class members to fend for themselves.
  • The benefits received by putative class members in the 12.3% of the class actions that settled were minuscule — an average of $32 — and for that paltry sum the settlement class members had to wait for two or more years.
  • In class settlements that required the putative class members to submit a claim form, the weighted average claims rate was only 4%, meaning that 96% of the potentially eligible putative class members failed to obtain any benefits because they did not submit claims.
  • Director Cordray argues that the lawyers for the class “collect a small portion compared with consumers.”  But the CFPB’s study determined that the plaintiffs’ lawyers received a staggering $424,495,451 in attorneys’ fees in the class actions studied.  Hardly a “small portion.”

Now, compare those numbers with the CFPB’s data regarding individual arbitration:

  • The average award to a prevailing consumer in arbitration was $5,389 —166 times what putative class members recover on average in class settlements.  And, they received that award within five months, instead of two or more years.  (Even Director Cordray acknowledged in his op-ed that “[i]t is true that the average payouts are higher in individual suits”).  While, as Director Cordray notes, fewer people go through arbitration, that is attributable in large part to the fact that the CFPB refused to spend any of its virtually unlimited resources educating consumers on the many benefits that arbitration has to offer them.
  • The consumer’s share of the arbitration costs were minimal, typically $200 at most compared to the $400 fee for filing a federal court complaint.   The companies pay the remaining costs (typically $3,000 or more), and many companies have agreed in their arbitration clauses to pay or advance the consumer’s share.
  • While none of the 562 class actions the CFPB studied went to trial, of 341 cases resolved by an arbitrator, in-person hearings were held in 34% of the cases, and an arbitrator issued an award on the merits in about one-third of the cases.

Director Cordray’s op-ed overstates the importance of class actions to consumers.  In submitting comments on the CFPB’s May 2016 proposed arbitration rule, the U.S. Chamber of Commerce analyzed 10 days’ worth of consumer complaints submitted to the CFPB through its complaint portal in 2016 to determine whether the complaints revealed individualized disputes or disputes that would be amenable to class treatment.  It concluded that “over 90 percent of the narratives that consumers submitted to the Database described disputes that were likely individualized.”  The CFPB’s final arbitration rule imposes draconian measures on the financial services industry to benefit (supposedly) only a small percentage of the disputes that consumers have.

The  op-ed  attempts to minimize the financial harm the rule will inflict on affected companies.  The CFPB estimates that the proposed rule will cause 53,000 providers who currently utilize arbitration agreements to incur between $2.62 billion and $5.23 billion over a five-year period to deal with 6,042 additional federal and state court class actions that will be filed due to the proposed rule’s elimination of class waivers.  Those numbers presumably will be repeated every five years.  He repeats his position that this will not pose a risk for the safety and soundness of banks because it is only about “$1 billion per year,” but we have shown in a previous blog that in fact there is a very real safety and soundness concern depending upon future circumstances.  In any event, the op-ed neglects to mention that most if not all of these increased costs will be passed through to consumers, who as taxpayers will also bear the additional costs to the court systems of administering thousands of additional class actions.

Director Cordray’s op-ed argues that class actions benefit consumers “by halting and deterring harmful behavior.”  It gives an example of a class action in which a class action recovered $1 billion.  But the CFPB itself is far more effective and efficient than class action litigation in addressing alleged consumer harm.  On the front page of its website, the CFPB announces that through July 20, 2017, it has ordered companies to pay more than $11.9 billion to more than 29 million consumers in enforcement actions.  That is an average payment of $410 to each consumer, about 13 times the $32 cash payment received by the average putative class member.  Moreover, none of that consumer relief went to pay private attorneys’ fees.

Finally, the op-ed accuses opponents of the rule as “falsely” claiming that the rule bans individual arbitration.  We certainly have not made that assertion.  But we have argued that many if not most companies, based on a cost-benefit analysis, will likely cease offering even individual arbitration programs if class-action waivers are prohibited.  That is because a cost-benefit analysis may not support a company’s subsidizing of individual arbitrations without the corresponding benefit of  reducing class action litigation costs incurred in defending mostly meritless class actions.  If companies abandon arbitration altogether, that effectively will eliminate even individual arbitration.

Section 1028 of the Dodd-Frank Act imposed three express limits on the CFPB’s rule-making authority.  Any arbitration rule must be (1) “in the public interest,” (2) “for the protection of consumers” and (3) “consistent” with the study.  The failure of the final arbitration rule to satisfy these statutory mandates, as shown by the CFPB’s own study, should compel the Senate to join the House in overturning the rule.

In recent remarks, CFPB Director Richard Cordray noted, albeit passingly, the significant role debt collection activities play in the healthy maintenance of consumer credit markets.  “Responsible debt collectors that do their work with care and treat consumers with respect are a natural and even an essential part of the financial marketplace.” (emphasis added.)  A Staff Report that was just released by The Federal Reserve Bank of New York (“FRBNY”) serves to highlight just how essential that role is.  In their Report, Access to Credit and Financial Health: Evaluating the Impact of Debt Collection, the FRBNY staff found that “restricting collection activities leads to a decrease in access to credit and a deterioration in indicators of financial health.”  The staff reached these conclusions after looking at the extent to which certain state statutes reduced collection activity and then looking at the impact that change in collection activity had on consumers.

At the outset, the Report examined two different state legislative schemes to determine their impact on debt collection activities.  Not surprisingly, both legislative schemes lead to an overall decrease in debt collection activities, having “a significant impact on the number of debt collection employees in the state.” (p. 10).  First, the Report found that state legislation increasing licensing and bonding requirements for debt collectors had a tendency to increase the number of small decentralized debt collection agencies, while overall decreasing the number of debt collectors in the state.  Second, the analysis showed that state legislation providing for stricter penalties and increased private remedies for non-compliance with debt collection legislation tended to wipe-out smaller collection agencies and concentrate the practice in establishments with 50 or more employees.

Next, the Report examined the impact of restricted debt collection practices on both access to credit and financial health.  On auto-loans, the report found that originations were “significantly reduced following a tightening in state-level collection legislation” particularly among younger borrowers with low credit scores.  (p. 13).  A similar sizable impact was found on the limits in non-traditional finance (a category of debt including retail cards, personal loans, and various other non-traditional loans).  As a result of these reductions to credit access, the Report found that financial health tended toward a “moral hazard channel.”  In other words, as collection activity and debt recovery decreased, consumer demand for credit increased and individuals who could do so took on more risk and/or over borrowed.  Restricting debt collection activities therefore resulted both in an increase in the number of people with delinquent balances and in the duration of their delinquencies.  While the report found the impact greater on individuals with poor credit, the results were consistent across the credit spectrum.

The Report provides strong empirical support for the position that debt collection, through allowing better enforcement of contracts and increasing the supply of credit at lower interest rates, is an essential part of a healthy consumer credit market.  We urge the CFPB and other federal and state regulators and legislators to be mindful of these conclusions.

Clients are always asking me and others in our Consumer Financial Services Group about how long Richard Cordray will remain as CFPB Director.  The short answer is nobody knows, perhaps not even Richard Cordray.  There are a number of factors, however, that lead me to believe that he will remain as Director until the end of his term on July 16, 2018 unless he voluntarily resigns before then to run for Governor of Ohio.

A Politico article yesterday reported that Gary Cohn, top White House economic aide, recently had a dinner meeting with Director Cordray at which he gave him an ultimatum:  resign or be removed by President Trump.  The article reported that Mr. Cohn had heard the rumors that Director Cordray wants to run for Ohio governor and, according to people familiar with the meeting, left the dinner thinking that the rumors were true.  According to the article, the White House decided to hold off on firing Director Cordray because President Trump “didn’t want to cause a sensation that could boost his candidacy and juice his fundraising.”

While it is very hazardous to predict what President Trump will do, I doubt whether he will try to remove Director Cordray either for cause or without cause.  As things now stand, the only event which could change my opinion would be if the Court of Appeals en banc in the PHH case were to reach the same conclusion as the 3-judge panel in the case – namely, that the CFPB was unconstitutionally structured and the appropriate remedy is to enable the President to remove the Director without cause – and the en banc judgment were to become final before Director Cordray’s term ends on July 16, 2018 (which is only 15 months away).  In my view, the likelihood of those events happening before July 16, 2018 is remote.

The recent filing of a brief  by the DOJ in the PHH case essentially urging  the en banc court to adopt the opinion of the 3-judge panel  suggests that President Trump will not jump the gun by attempting to remove Director Cordray before a final judgment in the PHH case authorizes him to do so.  An attempt by the President to remove Director Cordray for cause would likely trigger a legal challenge by Director Cordray that would outlast the expiration of his term unless his removal were to coincide with a decision by him to voluntarily resign to run for Ohio Governor.  Such a lawsuit would likely be stayed pending the outcome of the PHH case.  If President Trump intended to pursue a removal for cause, I believe he would have done so by now.  If he were to attempt now to remove Director Cordray for cause, that would also likely result in litigation that would outlast July 16, 2018 and, in the meantime, Director Cordray might remain in office.

Ultimately, I believe the length of Director Cordray’s remaining tenure at the CFPB will turn on whether he decides to run for Ohio Governor, and, if so, his view on when he needs to resign as Director to begin his campaign.

Even if Director Cordray remains at the CFPB for several months or longer, it does not necessarily mean that he will finalize any new regulations.  While he should have sufficient time to finalize at least the arbitration regulation, he may be deterred from doing so because of his concern that the rule will be overridden by Congress and President Trump under the Congressional Review Act.  Congress and President Trump have already overridden at least 13 final regulations issued by other federal agencies.

While Director Cordray may be deterred from finalizing any additional regulations, there is no reason to believe that there will be any let-up in his continuing pursuit of his enforcement and supervisory activities.  Indeed, the CFPB has initiated 9 enforcement actions since President Trump’s inauguration.

On Monday, during “The CFPB Speaks” panel I moderated that was part of the Practicing Law Institute’s 22nd Annual Consumer Financial Services Institute in Manhattan, Diane Thompson, Deputy Assistant Director of the CFPB’s Office of Regulations, reported that the CFPB is still reviewing comment letters on its proposed arbitration rule (which would preclude the use of class action waivers) and gave no timetable as to when it will issue a final arbitration rule.

Yesterday, on another panel, “Hot-Button Consumer Financial Services Issues,” Deepak Gupta and Paul Bland debated whether Director Cordray should issue a final arbitration rule.  Currently in private practice, Deepak practiced law for several years at Public Citizen Litigation Group and the CFPB.  Paul is Executive Director of Public Justice.

Paul took the position that Director Cordray should issue a final rule because there is a reasonably good chance that there would be insufficient votes in the Senate to override it under the Congressional Review Act.  Paul indicated that polling and focus groups of consumers support the CFPB’s issuance of a rule.

Deepak observed that Director Cordray is in a tight spot since if he issues a final rule, there is a high risk that Congress will pass and President Trump will sign a resolution overriding the rule under the CRA.  He pointed out that Congress and President Trump have already utilized the CRA to override several regulations issued by other agencies.  Deepak noted that if the CRA were to be used to override a final arbitration rule, the CRA would prohibit the CFPB from promulgating a rule that is substantially the same at any time in the future.  Playing “devil’s advocate,” Deepak suggested that Director Cordray consider waiting to issue the rule at some time in the future when there is no risk of a CRA override.