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Court reported to reject request of plaintiffs in another case challenging CFPB’s constitutionality for consolidation with PHH

Posted in CFPB Enforcement

According to a Law360 report, the D.C. federal district court has denied the request of the plaintiffs in State National Bank of Big Spring, Texas, et al. v. Lew, et al. to consolidate their case with PHH on appeal to the D.C. Circuit.

In July 2016, the D.C. federal district court rejected the plaintiffs’ attempt in State National Bank of Big Spring to invalidate the actions taken by Director Cordray while he was a recess appointee.  The district court deferred ruling on the plaintiffs’ separation of powers constitutional challenge pending a decision by the D.C. Circuit in PHH.  The D.C. Circuit subsequently ruled in PHH that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional.

The plaintiffs had filed a motion with the district court seeking a status conference to determine how their case “can be most efficiently adjudicated” in light of the CFPB’s petition to the D.C. Circuit for rehearing en banc in PHH.  In their motion, the plaintiffs argued that judicial economy would be served by having the district court enter partial summary judgment in their favor on their claim that the Dodd-Frank Act’s for-cause removal provision is unconstitutional and then certify the partial summary judgment order for interlocutory appeal to the D.C. Circuit.

Although it did not oppose the plaintiffs’ motion for a status conference, the CFPB filed a response opposing certification and urging the court to “continue to hold this case in abeyance until the D.C. Circuit mandate issues in PHH.”  While Law360 reported that the court denied the plaintiffs’ consolidation request on January 17, the district court docket currently indicates only that a status conference was held on that day.

Democratic leadership plans to oppose change in CFPB structure

Posted in CFPB General

As Inauguration Day approaches, the rhetoric about the CFPB’s future continues to heat up.  American Banker reported that, on a conference call with reporters earlier this week, Senate Minority Leader Charles Schumer stated that that he would not support legislation to replace the CFPB’s single-director leadership with a five-person commission.

Such a change in the CFPB’s leadership structure is among the changes to the CFPB proposed by the CHOICE Act, the bill released in July 2016 by House Financial Services Committee Chairman Jeb Hensarling to replace the Dodd-Frank Act and passed by the Committee in September 2016.  The bill is expected to be reintroduced early this year.  In addition, it has been reported that another bill (S. 105) has been introduced by three Republican Senators that would also change the CFPB’s leadership structure to a five-person commission.

Senator Schumer was joined on the call by Senator Elizabeth Warren and Senator Sherrod Brown.  American Banker also reported that the three Senators suggested that Director Cordray would file a lawsuit to challenge an attempt by President-elect to remove him.  Former Republican Congressman Randy Neugebauer has been identified as a possible replacement for Director Cordray.



CFPB previews company portal update

Posted in CFPB General

The CFPB has released an overview of an updated online company portal for viewing and responding to consumer complaints that it plans to launch in early 2017.

The overview is intended to serve “only as a first glance at the updated system and is designed to highlight key Portal updates and changes.”  The CFPB states that, before the updated system goes live, it will provide “informative materials and training opportunities, including a revised company portal manual, training webinars, and detailed log-in instructions.”  The CFPB also plans to offer support sessions after the updated system goes live.

The changes described in the overview fall into two categories.  First, the CFPB describes a series of changes designed to make “it easier and faster for companies to receive and respond to complaints.”  These changes include a company dashboard, simplified company response data entry, and an expanded character count for text boxes.

The second series of changes described by the CFPB are designed to make “it easier for companies to analyze and interpret the data associated with those complaints.”  These changes include a “better” search and data export tool, the addition of timestamps on all company responses, and a new PDF export option.



Federal district court certifies interlocutory appeal in CFPB lawsuit against CashCall

Posted in CFPB Enforcement

The California federal district court judge who is presiding over the CFPB’s lawsuit against CashCall and several related companies that funded, purchased, serviced, and collected online installment loans has granted the defendants’ motion to certify an interlocutory appeal of the district court’s August 31, 2016 order to the Ninth Circuit.  That order granted the CFPB’s motion for partial summary judgment and denied the defendants’ motion for summary judgment.  The district court judge also stayed the case pending the appeal.  

Originally filed in December 2013 in federal district court in Massachusetts, the lawsuit broke new ground by asserting CFPA  violations based on the defendants’ efforts to collect loans that were purportedly void in whole or in part under state law.  The CFPB’s complaint alleged that the loans in question, which were made by a tribally-affiliated lender the CFPB did not sue, were void in whole or in part as a matter of state law because the lender charged excessive interest and/or failed to obtain a required license.  The CFPB claimed that the defendants’ effort to collect amounts in excess of the amounts lawfully due under state law was “unfair,” “deceptive” and “abusive” under the CFPA as a matter of federal law.  Also named as a defendant in the CFPB’s lawsuit was J. Paul Reddam, the president and sole owner of CashCall and the president or director and sole owner of the other two defendant companies.  The case was subsequently transferred to a California federal district court.

In its August 31 decision, the California federal district court ruled that: CashCall, rather than the tribally-affiliated lender, was the “true lender”;  the laws of the borrowers’ home states should apply rather than the tribal choice-of-law provision in the loan agreements; the loans were void or uncollectible under the laws of most of the relevant states; a CFPA violation could be predicated on a violation of state law; and the individual defendant could be held liable for the companies’ alleged CFPA violations.  The district court also rejected the defendants’ challenge to the constitutionality of the CFPB’s structure.

In his Statement of Decision, Judge John F. Walter concluded that his August 31 order met the standard for interlocutory appeal in 28 U.S.C. Section 1292(b) because it presented “a controlling question of law” as to which there is “a substantial ground for difference of opinion” and an immediate appeal would “materially advance the ultimate termination of the litigation.”  Judge Walter identified the following four controlling questions of law:

  • Whether, under the CFPA, an individual can be held liable for a “knowing misrepresentation” based on a corporation’s attempts to collect unenforceable loans where the individual obtained legal advice that the loans were enforceable
  • Whether the CFPB’s structure is unconstitutional because it violates separation of powers
  • Whether CFPA violations can be predicated on state law
  • Whether the proper test for determining the “true lender” under a loan agreement allows the court to look past the contract and its parties and investigate related transactions

Judge Walter noted in his Statement of Decision that “a substantial ground for difference of opinion” under Section 1292(b) does not require another court to have reached a different conclusion but can exist where there is a novel and difficult question of first impression.  Under Section 1292(b), the decision to permit an interlocutory appeal is within a circuit court’s discretion.  As a result, the questions identified by Judge Walter will only be reviewed by the Ninth Circuit if it decides to permit the defendants’ interlocutory appeal.



Another view on Presidential authority to remove Director Cordray

Posted in CFPB General

As rumors swirl that President-elect Trump is planning to remove Director Cordray immediately after January 20th, conflicting views have emerged about his authority to do so before the appeal in PHH is resolved.  We previously blogged about an article written by Aditya Bamzai, an Associate Professor of Law at the University of Virginia School of Law, that asserted the new President could remove Director Cordray while the PHH appeal is pending if the Executive Branch determines that the Dodd-Frank Act’s “for cause” restriction on removal is unconstitutional.  Professor Bamzai also asserted that Director Cordray could not insist that he be allowed to remain in office following a presidential order to vacate it.

Professor Bamzai’s assertions have been challenged in a blog post written by Brianne Gorod, Chief Counsel at the Constitutional Accountability Center.  Ms. Gorod argues that even assuming there are circumstances in which the President can decline to enforce a statute he believes is unconstitutional, existing opinions of the Department of Justice’s Office of Legal Counsel (OCL) make clear that ignoring the law “would be wholly inappropriate” in the context of the CFPB Director.

According to Ms. Gorod, a major reason why the President can sometimes decline to enforce a law is to avoid taking action that is itself unconstitutional.  She argues that compliance with the Dodd-Frank Act’s for-cause removal provision would not require the President to take an action that he believes is unconstitutional (i.e., removal of the CFPB Director is not required to comply with the Constitution).  She also argues that because “there is every reason to think the courts will ultimately conclude that the CFPB’s for-cause removal provision is constitutional,” it would be inconsistent with OLC opinions for a President to choose not to enforce a statute when there is considerable law supporting its constitutionality.

Ms. Gorod also argues that Director Cordray would not have to leave his position to challenge an attempted removal in court and cites examples under President Ronald Reagan and President George H.W. Bush in which officers resisted a removal order until a court could decide whether removal was proper.



D.C. Circuit grants PHH’s motion for leave to file supplemental response

Posted in CFPB Enforcement

Last Friday, the D.C. Circuit entered an order granting PHH’s motion for leave to file a supplemental response to the CFPB’s petition for rehearing en banc.  On December 22, PHH and the United States filed responses to the CFPB’s petition with the D.C. Circuit.

In its motion for leave to file a supplemental response, PHH asserted that, in its response, the United States argued that the D.C. Circuit should grant the CFPB’s petition for en banc rehearing on several grounds that were not pressed in the CFPB’s petition and that PHH was therefore seeking an opportunity to be heard on the views expressed by the United States.  PHH’s motion was opposed by the CFPB.

The D.C. Circuit’s per curiam order gives PHH until January 27, 2017 to file its supplemental response, thereby effectively ending speculation that the court might rule on the petition for rehearing en banc before January 20.  The order limits PHH’s response to no more than 15 pages.   

The order also indicates that “Chief Judge Garland did not participate in this matter.”  We understand that Chief Judge Garland recused himself from deciding cases while his U.S. Supreme Court nomination was pending.  However, since his nomination formally expired on January 3, 2017, when the 114th Congress was adjourned, we find it puzzling that he did not participate in the decision to grant PHH’s motion.  As we previously reported, D.C. Circuit rules provide that a majority of the circuit judges who are in regular active service and who are not disqualified may order that an appeal be reheard by the court en banc.  There are currently 11 active judges, of whom 7, including Chief Judge Garland, were appointed by either President Obama or President Clinton.



CFPB possibly amenable to changing its prepaid account rule

Posted in CFPB Rulemaking

At a panel discussion today on the prepaid account rule, held as part of the meeting of the American Bar Association Committee on Consumer Financial Services in Carlsbad, CA, Kristine Andreassen, the team leader for the CFPB prepaid account rule, left the door open for changes to be made and said that the Bureau wants to hear about problems or issues with the rule. She stated that the rules “are never set in stone” and advised that clarifications could come in the form of informal guidance or a formal modification to the rule. Ms. Andreassen also indicated that a small entity compliance guide should be issued within the next two months. Ms. Andreassen did not assuage concerns raised by Nessa Feddis of the American Bankers Association and our own Jeremy Rosenblum concerning the rule’s failure to clearly define the difference between prepaid cards subject to the rule and debit cards associated with “checking accounts,” which are subject to an entirely different (and in important respects more liberal) regulatory regime.

CFPB issues final rule to adjust civil penalties for inflation

Posted in CFPB Enforcement

The CFPB has published a final rule to adjust for inflation the civil penalties within its jurisdiction.  The adjustments are required by the Federal Civil Penalties Inflation Adjustment Act of 1990 which, pursuant to a 2015 amendment, required federal agencies to adjust the civil penalties within their jurisdiction by July 1, 2016 and by January 15 every year thereafter.  (In June 2016, the CFPB published an interim final rule to make the adjustments required by July 1, 2016.)

The civil penalties adjusted by the CFPB are the Tier 1-3 penalties set forth in Section 1055 of Dodd-Frank, as well as the civil penalties in the Interstate Land Sales Full Disclosure Act, Real Estate Settlement Procedures Act, SAFE Act, and Truth in Lending Act.  (To obtain the new penalty amounts, the CFPB multiplied each penalty amount by the “cost-of-living adjustment” multiplier and rounded to the nearest dollar.  The multiplier used was 1.01636.)  The new penalty amounts apply to civil penalties assessed after January 15, 2017.

The CFPB states in the supplementary information accompanying the final rule that it did not have to publish a notice of proposed rulemaking and provide an opportunity for comment because the adjustments are technical and non-discretionary and “merely apply the statutory method for adjusting civil penalty amounts.”  The CFPB also states that OMB Guidance reaffirms that agencies need not complete a notice-and-comment process before making the annual adjustments for inflation.



Lawmakers take sides on Director Cordray’s future; Senator Warren urges consumer advocates to defend CFPB

Posted in CFPB General

Battle lines over Director Cordray’s future at the CFPB are predictably forming along party lines.  Earlier this week, two Republican senators sent a letter to Vice President-elect Pence urging Director Cordray’s removal by President-elect Trump.  Also earlier this week, a group of 21 Democratic members of the House Financial Services Committee, including ranking member Maxine Waters, sent a letter to President-elect Trump “to caution [him] against entering into a protracted-and likely unsuccessful-legal battle to oust [Director Cordray] before his term expires in July 2018.”

In their letter, the Republican senators assert that the CFPB is unconstitutionally structured, pointing to the D.C. Circuit’s PHH decision as support.  The senators argue that despite the CFPB’s petition for en banc rehearing in PHH, “the president retains constitutional authority to remove the director until a valid court order says otherwise.”  (We previously blogged about an article written by a University of Virginia School of Law associate professor that asserted the new President could remove Director Cordray before the PHH appeal is resolved if the Executive Branch determines that the Dodd-Frank Act’s “for cause” restriction on removal is unconstitutional.)

The Democratic lawmakers do not mention the PHH decision in their letter and appear to assume that the new President could only remove Director Cordray “for cause.”  They defend Director Cordray’s efforts to respond to allegations of discrimination at the CFPB and promote diversity and inclusion.  The lawmakers claim that “no President has ever removed an independent agency head for cause,” urge the President-elect “not to bow to [the demands of many powerful special interests that would like to see Director Cordray leave] to initiate costly, meritless litigation,” and announce that they “stand ready to oppose any efforts [the new President] may make to do so.”

Since the CFPB is often described as Senator Elizabeth Warren’s “brainchild,” it is not surprising that she is reported to be rallying consumer advocates and others to launch a campaign to defend the CFPB.  According to American Banker, speaking on a conference call sponsored by Americans for Financial Reform, Senator Warren told the 3,000 consumer advocates participating in the call that a grassroots effort is necessary to protect the CFPB from Republican efforts to restructure the agency and to test whether the Trump administration and Republican lawmakers are prepared to battle with Democrats and consumer advocates over the agency’s future.  (Americans for Financial Reform describes itself as “a nonpartisan and nonprofit coalition of more than 200 civil rights, consumer, labor, business, investor, faith-based, and civic and community groups.”)

American Banker reports that “progressives plan to flood Congressional offices with demands to defend the CFPB and Dodd-Frank just as various constituencies targeted House Republicans last week when they sought to gut the little-known Office of Congressional Ethics.”

According to Politico, President-elect Trump met earlier this week with former Republican Congressman Randy Neugebauer, who previously chaired the House Financial Services Committee’s Financial Institutions and Consumer Credit Subcommittee.  While serving in Congress, Mr. Neugebauer was a strong proponent of CFPB reform.  American Banker has reported that Mr. Neugebauer is being considered as a possible replacement for Director Cordray.



Proposed reform measure passed by House would result in seismic change in congressional review procedure for “major rules”

Posted in CFPB Rulemaking

We have previously written about the Congressional Review Act (“CRA”), which was enacted as part of the Contract with America Advancement Act of 1996.  The CRA created a fast-track legislative process for Congress to nullify a covered federal rule by passing a joint resolution of disapproval that would then be presented to the President for approval or veto.  Today we write about a proposed CRA reform measure that would enact a change in the congressional review procedure for “major rules” which has been characterized as “seismic.”

In the more than 20 years since the CRA was enacted, it reportedly has been used only once to disapprove a covered rule adopted by a federal agency.  Specifically, the controversial ergonomics rule adopted by the Occupational Safety and Health Administration toward the end of the Clinton Administration was successfully nullified pursuant to the CRA when the subsequent inauguration of a Republican President resulted in the same political party controlling both Houses of Congress and the Presidency.  The anomalous nature of this event is not surprising given that the political scenario required to enact a resolution of disapproval rarely occurs.

Dissatisfied with the ineffectiveness of the CRA as a means of asserting Congressional oversight over agency rulemaking, the House of Representatives (the “House”) recently passed a CRA reform measure known as the Regulations from Executive in Need of Scrutiny Act of 2017 (the “REINS Act”).  Officially titled an act to amend the CRA “to provide that major rules of the executive branch shall have no force or effect unless a joint resolution of approval is enacted into law,” the stated purpose of the REINS Act is “to increase accountability for and transparency in the Federal regulatory process.”  As expressed in its stated purpose, this measure reflects the view that “[o]ver time, Congress has excessively delegated its constitutional charge [to legislate] while failing to conduct appropriate oversight and retain accountability for the content of the laws it passes.”  A House Committee Report issued during the last Congress indicates, for example, that “the Obama Administration issued on average 81 new major regulations per year” from 2009 through 2013.  H.R. Rep. No. 114-214, pt. 1, at 10 (2015).

While it also would amend the CRA in other respects, the proposed REINS Act bears watching as it moves to the Senate because it would change fundamentally the review procedure for “major rules” subject to the CRA.  Subject to limited exceptions, the REINS Act would effectively stand the CRA on its head with respect to covered major rules by establishing special Congressional procedures and timelines within which a joint resolution of approval must be enacted into law before such a rule may take effect.  This is the converse of the current “negative option” approach for major rules under which a rule takes effect unless a joint resolution of disapproval is enacted.  In short, an affirmative ratification requirement would be substituted for a disapproval option.  The REINS Act explains that, “[b]y requiring a vote in Congress, [it] will result in more carefully drafted and detailed legislation, an improved regulatory process, and a legislative branch that is truly accountable to the American people for the laws imposed upon them.”

Generally speaking, a covered major rule could not take effect under the REINS Act unless a joint resolution of approval is enacted into law within 70 legislative (or session) days of receiving the rule and the accompanying report from the adopting agency.  However, a major rule could take effect for a 90-calendar-day period if the President issues an executive order determining that the major rule was issued pursuant to a statute implementing an international trade agreement, was necessary because of an imminent threat to health, safety or other emergency, or was necessary for the enforcement of criminal laws or national security.  If a joint resolution approving a major rule is not enacted within the required time period, the REINS Act provides that a joint resolution of approval concerning the same rule may not be considered in the same Congress by either the House or the Senate.

A “major rule” would include any covered rule, including an interim final rule, that “has resulted or is likely to result in . . . (A) an annual cost on the economy of $100,000,000 or more, adjusted annually for inflation; (B) a major increase in costs or prices for consumers, individual industries, Federal, State, or local government agencies, or geographic regions; or (C) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprises to compete with foreign-based enterprises in domestic and export markets.”  The “major rule” status determination would be made by the Administrator of the Office of Information and Regulatory Affairs of the Office of Management and Budget.  Under the affirmative approval approach reflected in the REINS Act, rules of this nature also might be referred to more colloquially as rules in need of congressional scrutiny.

The House Committee Report issued during the last Congress observed that, “[a]though joint resolutions have in numerous cases been introduced to pressure agencies to modify or withdraw their rules, as time shows that Congress is unlikely to use the CRA effectively to disapprove of rules, the use of joint resolutions as a source of pressure [on administrative agencies] becomes less and less effective.”  H.R. Rep. No. 114-214, pt. 1, at 9 (2015).  However, if the REINS Act were to be passed by the Senate and signed by the President, there would be a dramatic shift in the balance of federal regulatory power between Congress and administrative agencies, and Congress would be compelled to take a position on major rules.  Consider, for example, the effect that the need to enact a joint resolution of approval might have on the highly controversial CFPB rulemaking proceedings relating to arbitration agreements and payday, vehicle title, and certain high-cost installment loans.

The REINS Act was received in the Senate on January 6, 2017, and referred to the Senate Committee on Homeland Security and Government Affairs.  We will continue to monitor this significant measure.