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.

The DOJ submitted its amicus brief in the PHH case on Friday, March 17.  We have blogged extensively about this case since its inception. Unsurprisingly, the Trump DOJ supports striking from Dodd-Frank the removal-only-for-cause protection currently applicable to the director of the CFPB.  In its “view, the panel correctly applied severability principles and therefore properly struck down only the for-cause removal restrictions.”  If the DOJ gets its way, the CFPB would remain intact with a director that President Trump can replace at any time.

While PHH likely appreciates the DOJ’s support, the DOJ is advocating a more limited remedial measure than PHH is seeking.  As we’ve noted before, PHH is arguing in the case that the CFPB should be dismantled in its entirety because its “unprecedented independence from the elected branches of government violates the separation of powers” and because the CFPB’s “constitutional infirmities extend far beyond limiting the President’s removal power…the proper remedy is to strike down the agency in its entirety.”  In sharp contrast, the Trump DOJ supports keeping the CFPB intact with a director removable at the will of the President.

Though the brief does not highlight the fact, the Trump DOJ has departed substantially from the position that the DOJ took under President Obama.  The departure is most obvious in brief’s first footnote, where the DOJ notes that “[i]n one case filed against several federal agencies and departments . . ., [t]he [DOJ’s] district court briefs . . . argued that, based on the Supreme Court’s decision in Humphrey’s Executor, the CFPB’s for-cause removal provision is consistent with the Constitution.”  However, the footnote goes on, “[a]fter reviewing the panel’s opinion here and further considering the issue, the [DOJ] has concluded that the better view is that the provision is unconstitutional.”  The obviously political nature of the change makes it difficult to predict how the judges on the court will react to the DOJ’s brief.

Of course, the change at the DOJ is not reflected in the CFPB’s view, which is diametrically opposed to the DOJ’s.  It’s rare that two executive agencies disagree so starkly and so publicly on an issue of such importance.  This contrast only highlights the problems created by a federal agency headed by a single person that is not accountable to the president.

Recently, Richard Cordray was interviewed by CNBC while eating breakfast at a diner in his hometown in Ohio.  The interview was more noteworthy for what it failed to cover than for what it covered.  He was not asked the following questions:

  1. Do you still intend to issue a final arbitration rule and, if so, when will that happen? Are you worried about the possibility that if you do issue such a rule, it will be overridden by Congress under the Congressional Review Act?
  2. If President Trump tries to remove you for cause, will you fight the removal in court?
  3. Rumors are swirling that you intend to run for Governor in Ohio? Are the rumors true and, if so, when would you need to resign and begin your campaign?
  4. The PHH case may result in giving President Trump the right to remove you without cause. Do you regret taking the action that your agency took in light of the fact that it was contrary to the position that HUD took regarding the same RESPA issue?
  5. Does your agency still take the position that there is no statute of limitations when you prosecute an enforcement action before an Administrative Law Judge in the face of the DC Circuit panel’s decision holding that the same statute of limitations that applies in court applies in an administrative proceeding?
  6. Have you had discussions with anyone in the White House or part of the transition team and, if so, what message have they delivered to you?
  7. Have you met with Attorney General Sessions or any of his aides and, if so, do you expect that there will be any changes in the level of cooperation between your two agencies, particularly in fair lending cases?
  8. Why haven’t you selected a Deputy Director?

I, for one, learned more about what he likes eating for breakfast than the answers to the important questions that I posed and that our clients are asking me every day.

In his more than one hour nationwide address last night to a joint session of Congress, President Trump discussed a broad range of topics:  repeal of Obamacare, tax relief, immigration, rebuilding the Country’s infrastructure, strengthening the military, foreign trade.  All of these topics, and others mentioned by him, were important campaign issues for Trump.  Noticeably absent from his speech was any mention of Dodd-Frank (let alone any suggestion of a repeal) or the CFPB (let alone any suggestion that he intended to remove Director Cordray).  Indeed, he barely referenced the need for regulatory relief:

“We have undertaken a historic effort to eliminate job-crushing regulations, creating a deregulation task force inside of every government agency; imposing a new rule which mandates that for every one new regulation, two old regulations must be eliminated.”

While Trump implied that these deregulation initiatives apply to all Federal agencies, they likely apply only to executive agencies and not to independent agencies like the CFPB.

While it is hazardous to read too much into topics that he omitted from his speech, it is tempting to observe that the discharge and replacement of Richard Cordray as Director of the CFPB and the legislative initiatives to repeal or amend Dodd-Frank are not near the top of the President’s agenda.

Here are the highlights from Richard Cordray’s interview earlier today with the Wall Street Journal.

He refused to respond to the question of whether or not the memo issued on January 20 on behalf of President Trump by his Chief of Staff, Reince Priebus, directing a moratorium with respect to regulations issued by executive agencies applies to the CFPB. He stated that he would “leave it to the lawyers at this point” to figure that out.

He also refused to express an opinion about whether the governance and the funding of the CFPB should be changed legislatively. He stated that it is “above my pay grade” and up to Congress.

He also stated that he would accept the opinion of the DC Circuit with respect to whether the Dodd -Frank Act is or is not constitutional. He stated that it was completely up to the courts to figure out whether President Trump has the right to remove him as director and he did not indicate, one way or another, whether he would resign voluntarily. In answer to a question posed at a press conference briefing yesterday, President Trump’s Press Secretary Spicer, stated that “no decision” has been made about Director Cordray’s future at the CFPB.

He expressed the opinion that the “vast majority “ of all of the CFPB enforcement activity deals with deceptive conduct, implying that people on both sides of the political aisle would be hard-pressed to quarrel with that.

He stated that the pace of law enforcement will remain “steady and vigorous” during the remainder of his term.

Finally, he indicated that a rulemaking dealing with the collection of information regarding loans to small businesses is a “work in process.” It did not sound like anything is imminent.

The D.C. Circuit issued its long-awaited decision in PHH Corporation v. CFPB. In reversing the decision of Consumer Financial Protection Bureau (CFPB) Director Cordray to impose an enhanced penalty of $109 million on PHH for its use of a captive (wholly-owned) mortgage reinsurer, the court made several landmark rulings.

First, it held that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional. The court held that it was a violation of Article II for the CFPB to lack the “critical check” of presidential control or the “substitute check” of a multi-member governance structure necessary to protect individual liberty against “arbitrary decisionmaking and abuse of power.” The court remedied this constitutional defect by severing the removal-only-for-cause provision from the Dodd-Frank Act. Under the ruling, Director Cordray now serves at the will of the President and is subject to supervision and management by the President. In a footnote, the court acknowledged that this may create some fallout in other cases, but left it for other courts to address.

It also rejected the CFPB’s argument that statutes of limitations do not apply to its administrative enforcement actions. The court’s holding was straightforward: If Congress had intended to alter the standard statute of limitations scheme, it would have said so. “[W]e would expect Congress to actually say that there is no statute of limitations for CFPB administrative actions . . . But the text of Dodd-Frank says no such thing.”

In addition, the court held that the plain language of RESPA permits captive mortgage re-insurance arrangements like the one at issue in the PHH case, if the mortgage re-insurers are paid no more than the reasonable value of the services they provide. This is consistent with HUD’s prior interpretation. For the first time in 2015, in prosecuting the case against PHH, the CFPB announced a new interpretation of RESPA under which captive mortgage reinsurance arrangements were prohibited. The court rejected this on the ground that the statute unambiguously allows the kinds of payments that the CFPB’s 2015 interpretation prohibited. We have blogged about the CFPB’s erroneous interpretation of the RESPA provisions at issue in this case.

Finally, the court further admonished the CFPB by alternatively holding that—even assuming that the CFPB’s interpretation was permitted under any reading of RESPA—the CFPB’s attempt to retroactively apply its 2015 interpretation, which departed from HUD’s prior interpretation, violated due process. It held that “the CFPB violated due process by retroactively applying that new interpretation to PHH’s conduct that occurred before the date of the CFPB’s new interpretation.”

Notably, the court explicitly declined to address the CFPB’s claim that each mortgage insurance payment made in violation of RESPA triggers a new three-year statute of limitations for that payment. The CFPB’s view on this point was one basis that allowed it to dramatically increase the penalties it sought from PHH. The court’s decision not to address this point in its opinion makes it likely that this will not be the last circuit court opinion required to resolve the case.

The opinion of the court also did not address one aspect of the CFPB Director’s prior decision that disgorgement of the entire amount of the premiums was required, without an offset for the claims paid, which had also added considerably to the penalty amount. The court states in footnote 24 that if a mortgage insurer paid more than reasonable market value for reinsurance, the disgorgement remedy is the amount that was paid above reasonable market value. The court did not expressly address the Director’s approach of ignoring the claims paid. The concurring/dissenting opinion by Judge Henderson does address this point, however, indicating that disgorgement must be reduced by the claims paid.

Because the opinion did not dismantle the CFPB, the court remanded the case to the CFPB for consideration of whether PHH violated RESPA as interpreted by HUD.

The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness has sent a letter to Director Cordray suggesting a series of issues for Mr. Cordray to address in his prepared remarks at the CFPB’s field hearing on arbitration scheduled for this Thursday, May 5.

As the Chamber’s letter notes, the CFPB  foreshadowed in the materials given to the SBREFA panel  that the CFPB was contemplating a ban on the use of class action waivers in arbitration agreements.  The Chamber observes that the CFPB’s final arbitration study did not analyze whether the practical effect of a rule prohibiting class action waivers would be to eliminate the use of consumer arbitration from the consumer financial services market altogether.  The Chamber suggests that Director Cordray provide the CFPB’s views on this issue in his prepared remarks.

Among the other issues the Chamber would like Director Cordray to address in his remarks is “how a consumer with a small claim based on unique circumstances would be able to vindicate those legal claims if companies, faced with the need to reserve millions of dollars for class action defense, were to cease subsidizing consumer arbitration programs.”  The Chamber notes that under current class action rules, many small claims that involve issues of concern to consumers, such as alleged overcharges or the failure to timely credit a deposit, are unlikely to be classable because they are individualized disputes.  The Chamber observes that for such claims, “consumers will therefore have virtually no economically rational options for seeking redress: arbitration (in which most companies pay for consumers to bring claims against them, making it free to the consumer) will be gone; class action litigation will not be available; and rational consumers are not going to pay a $400 filing fee to pursue a $25 claim in court. ”

We note that, in a blog post today, Professor Jeff Sovern commented on the Chamber’s letter, asking whether consumers would “really suffer if they couldn’t bring arbitration claims for $25?”  According to Professor Sovern, the CFPB’s arbitration study “found that consumers almost never bring arbitration claims when less than $1,000 is at issue, so the ability to assert small claims in arbitration isn’t worth much.”  He asserts that consumers who want to assert $25 claims could still do so in small claims courts.

Professor Sovern’s comments overlook the fact that because the AAA due process protocol requires a carve-out in arbitration agreements for small claims that can be pursued in small claims court.  The predicate of the Chamber’s hypothetical example is a one-off individual claim that is not classable because it is not part of a systemic problem involving many consumers.  As a result, small claims court is the only recourse for a $25 claim of this kind and not class actions as Professor Sovern suggests.

In addition, the Chamber is likely concerned about non-classable claims that, because they exceed the small claims court limit, are ideal cases to be resolved in arbitration.  Neither the CFPB nor Professor Sovern have determined how such cases will be resolved if the result of the CFPB’s rule is the abandonment of consumer arbitration by consumer financial services providers.  Without arbitration, consumers with such non-classable claims will lose their only practical recourse.

At a presentation on February 18, 2016 to the American Constitution Society, CFPB Director Richard Cordray devoted most of his remarks to the subject of consumer arbitration. Director Cordray revealed that the effect on consumers of mandatory predispute arbitration clauses “has been on our radar screen since the very beginning,” and he confirmed that the CFPB strongly favors class actions over arbitration and is “considering whether to prohibit companies from using arbitration clauses to block class actions” through rulemaking. It appears that the CFPB is still on track to implement the proposals it outlined last fall which would prohibit class action waivers in consumer arbitration agreements while permitting individual arbitrations to continue subject to certain disclosure requirements. While Director Cordray stated that the CFPB is analyzing “a broad range of feedback we received in response to the outline, with a particular focus on feedback from small businesses,” his discussion of the proposals that the CFPB is considering does not appear to differ from the earlier outline.

The CFPB unquestionably has aligned itself with consumer advocacy groups in a common effort to promote class actions. Looking beyond the CFPB’s own jurisdiction, Director Cordray openly encouraged other consumer advocates “both inside and outside of government” to continue “doing great work investigating the effects of arbitration clauses in contracts for insurance, employment, franchises, and other goods and services.”

Director Cordray spoke glowingly of the 728-page empirical study of consumer financial services arbitration that the CFPB published last March. The study, he stated, “showed that arbitration clauses restrict consumers’ relief in disputes with financial service providers because companies are using them to block class action proceedings in any forum – whether court or arbitration. This affects consumers’ access to justice because group proceedings are often the only practical way to seek relief for relatively small claims.”   What Director Cordray did not disclose is that the data in the study actually contradict his laudatory conclusions. In fact, the study confirmed that arbitration is a faster, less expensive and far more effective way for consumers to resolve disputes with companies than class action litigation.

According to the study, in 60% of the class actions studied by the CFPB consumers received nothing at all because the named plaintiff settled individually or voluntarily withdrew the suit. In the 15% of class actions that settled, consumers who received settlement cash payments got a paltry $32.35 on average after waiting for up to two years. As few as 4% of the class members who were eligible to receive benefits conditioned on submitting a claim form actually filed a claim. In sharp contrast, the study showed, consumers who prevailed in an individual arbitration recovered an average of $5,389.00, and the entire arbitration process was concluded through hearing or settlement in an average of 2-7 months. Moreover, the cost to the consumer for the entire arbitration was only one-half of the cost of simply filing a federal court complaint. While the average class member recovered only $32.35, counsel for the class were awarded a staggering $424,495,451.00 in attorneys’ fees.

Those are the numbers to bear in mind when Director Cordray gloats that the study showed that class action “settlements totaled $2.7 billion in cash, in-kind relief, fees, and expenses.” When you back out the half-billion dollars in attorneys’ fees and the non-cash items, and do the long division that the CFPB purposely did not do, the stark reality – according to the CFPB’s own study – is that consumers who prevailed in arbitration recovered 166 times as much as the average putative class member. The CFPB’s own data strongly suggest that the CFPB should be devoting substantial resources to educating the public on the benefits of arbitration, rather than propping up the plaintiffs’ class action bar.

Director Cordray’s presentation raises another interesting question: why does the CFPB need to bolster class actions when the CFPB itself is already doing a commendable job at protecting a vast number of consumers? According to Director Cordray, to date the CFPB’s enforcement activity has resulted in $11.2 billion in relief for over 25 million consumers. Its supervisory oversight has further resulted in financial institutions providing more than $300 million in redress to over two million consumers. In addition, the CFPB has handled over 800,000 complaints from consumers on its website portal, and has provided “unbiased, reliable answers” to consumer finance questions to more than 10 million people. And the CFPB did all that without racking up a half-billion dollars in attorneys’ fees.

In sum, we can still expect the CFPB to prohibit the use of class action waivers in consumer arbitration agreements when it issues its proposed rules (although Director Cordray provided no hint as to timing, we still expect the proposed rules to be issued in the next few months), but the CFPB’s own statistics demonstrate that it is consumers who will be harmed and plaintiffs’ class action attorneys who will reap the benefits.