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CFPB previews 5-year review of mortgage rules

Posted in Mortgages

Dovetailing with President Trump’s recent Executive Order requiring a reduction in regulatory burden, on March 21, 2017, a CFPB official remarked at the American Bankers Association Government Relations Summit that the CFPB was planning to start its review of significant mortgage regulations, including the ability to repay/qualified mortgage rule.

The Dodd-Frank Act requires the CFPB to use available evidence and data to assess all of its rules five years after they go into effect to ensure they are meeting the purposes and objectives of Dodd-Frank, and the specific goals of the subject rule.  January 2018 will mark five years since the ability to repay/ qualified mortgage rule was finalized, as well as other key mortgage regulations, in January 2013.

Citing this requirement and “common sense,” Chris D’Angelo, Associate Director of the CFPB’s Division of Supervision, Enforcement and Fair Lending, said that the CFPB is “embarking upon now the beginning of an assessment process for our major mortgage rules.” D’Angelo said that the CFPB would assess these rules’ “real-world effects” on the market, as well as “whether it had the effect which was intended, what the costs were, whether there’s some tailoring that would make that more effective.”

D’Angelo noted that the CFPB was still receiving complaints related to the mortgage servicing industry despite the existence of these rules, and that most of the problems were due to “the third-party service providers and the folks who develop your technology solutions.”  He also stated that incentive compensation practices would be considered but noted that “We know that you need those in order to manage larger organizations and how you drive your employees.”

Given Presidential pressure to reduce regulatory burdens and the fact that the CFPB’s mortgage rules have been criticized by financial industry participants and consumer advocates alike, the CFPB review of the key mortgage rules warrants close attention.

Process vs. Outcomes Debated at Hearing on Constitutionality of CFPB Structure

Posted in CFPB General, Hot Issues

As we had indicated, on March 16, the subcommittee on Oversight and Investigations of the House Financial Services Committee conducted a hearing entitled “The Bureau of Consumer Financial Protection’s Unconstitutional Design.” Unsurprisingly, Republicans and Democrats on the subcommittee talked past each other in making remarks and questioning the four witnesses: Ted Olson, Saikrishna Prakash, Adam White, and Brianne Gorod.

The Democrats on the subcommittee, by and large, ignored the constitutional issues. One Democratic subcommittee member, Keith Ellison of Minnesota, stated that the constitutional arguments are a “subterfuge” for business interests’ desire to go back to having the un-checked ability to abuse consumers. Instead of the constitutional issues, subcommittee Democrats focused principally on the “good” outcomes that the CFPB has achieved for consumers. They cited the billions and billions in fines and redress that the CFPB has extracted from the financial services industry, among other things. Various Democratic subcommittee members vowed to protect the CFPB from being dismantled by what they saw as the forces of evil.

Oddly, the ranking member of the subcommittee, Al Green, a Democrat from Texas, spent almost all of his time criticizing the subcommittee for holding the hearing while the PHH case was pending before the D.C. Circuit. He found it particularly troublesome that Ted Olson would be testifying before Congress instead of advocating in the courts. His zeal for the issue was especially peculiar, given that Gorod, another witness testifying on the panel, was an attorney who represented Mr. Green and other Congressional Democrats in filing amicus briefs in the PHH case in an attempt to intervene on behalf of the CFPB.

Republicans, in contrast, focused on the constitutional issues, namely, the CFPB’s lack of accountability either to Congress or the President and the unprecedented consolidation of legislative, judicial, and executive power in the CFPB director. In response to questioning on these issues, Ted Olson, quoting James Madison, said that such consolidation of power is “the very definition of tyranny.”

Of course, while the Republicans focused on the constitutional issues, they did not miss the opportunity to shoot a few barbs back at Democrats on the “results” achieved by the CFPB. They pointed out that the CFPB’s various accomplishments have increased the size of the unbanked population in America, diminished access to credit, and hurt smaller financial institutions who cannot afford “armies” of lawyers and compliance professionals.

Republicans on the subcommittee and three of the witnesses, Olson, White, and Prakash, seemed to agree that three steps are needed to fix the CFPB’s structure: (i) eliminate the removal only for cause provision, (ii) make the CFPB’s budget part of the appropriations process, and (iii) limit the Chevron deference afforded to the CFPB’s interpretations of consumer financial services laws.

Republicans, Olson, White, and Prakash also agreed that the President has the right and responsibility to refuse to enforce unconstitutional laws. Republicans on the subcommittee took this to mean that the President has the power, even now that the PHH panel decision has been vacated, to remove Director Cordray from office at will.

Olson, White, and Prakash also pointed out the dangerous precedent the CFPB structure would set for future agencies. All agreed at various points during the hearing that, if the CFPB’s current structure is constitutional, that would mean no limit exists on Congress’s ability to vest executive, judicial, and legislative authority in anyone of its choosing. They argued that, if the CFPB’s structure stands, there is nothing left of the separation of powers doctrine or the unitary executive.

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More on Comptroller Curry’s remarks at LendIt USA conference

Posted in Marketplace Lending, Technology

In a recent blog post, Alan Kaplinsky and Scott Pearson wrote about the remarks made by CFPB Director Richard Cordray and Comptroller of the Currency Thomas Curry at the LendIt USA conference in New York City earlier this month.  In the blog post, we expressed our strong disagreement with Comptroller Curry’s refusal to author an interpretive opinion to address the disruption in the lending markets caused by the Second Circuit’s Madden decision and promised to share our reasons at a later date for why we think that the OCC should go even further and propose a rule to address Madden 

Alan has now written an article published in BankThink, American Banker’s “platform for informed opinion about the ideas, trends and events reshaping financial services,” that urges the OCC to issue a rule to address Madden.  In Madden, the Second Circuit ruled that a company that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge.  As Alan demonstrates in his article, there is clear OCC and U.S. Supreme Court precedent for the OCC to issue an interpretive opinion or regulation interpreting Section 85 to address an issue that is being litigated and the Supreme Court has indicated that it can properly do so.  As he also demonstrates, the need for an OCC rule is not eliminated by the OCC’s proposal to create a national bank charter for financial technology companies.

 

 

 

 

CFPB launches assessment of remittance rule

Posted in Remittance Transfers

The CFPB has issued a notice regarding its plans to conduct an assessment of its remittance transfer rule which became effective on October 28, 2013.

The assessment is being conducted under Section 1022(d) of the Dodd-Frank Act which requires the CFPB to conduct an assessment “of each significant rule or order adopted by the Bureau under Federal consumer financial law.”  The assessment must include a review of “the effectiveness of the rule or order in meeting the purposes and objectives of [Title X] and the specific goals stated by the Bureau.”  The CFPB must publish a report of its assessment “not later than 5 years after the effective date of the subject rule or order.”  The notice lists six issues on which the CFPB seeks information and other comments.  Comments must be received on or before 60 days after date the notice is published in the Federal Register.

According to the notice, the CFPB’s reasons for designating the remittance rule “significant” for purposes of Section 1022(d) include the estimated aggregate annual compliance costs and the CFPB’s expectations for the rule “to have important effects on remittance transfer service features, provider operations, and the overall market,” such as those resulting from the rule’s new error resolution procedures.  The CFPB plans to focus its assessment on two areas: (1) whether the remittances market has evolved after the rule in ways that promote access, efficiency, and limited market disruption by considering how remittance volumes, prices, and competition in the remittance market may have changed, and (2) whether the rule’s consumer protections have brought more information, transparency, and greater price predictability to the market.

In conducting the assessment, the CFPB seeks to compare consumer outcomes to a baseline that would exist if the rule’s requirements were not in effect (something the CFPB acknowledges is “challenging” to do).  The CFPB may also seek to compare outcomes observed with the rule “to counterfactual outcomes” if specific elements of the rule were not in effect, such as “the effects of specific amendments, provisions, or exceptions, which only makes sense when compared to a baseline in which the balance of the Remittance Rule is in effect.”  The data that the CFPB plans to use includes its consumer complaint database, information obtained from CFPB supervisory and enforcement activities, and information provided by banks and credit unions in call reports.  The CFPB also intends to interview market participants.

 

 

House subcommittee to hold hearing tomorrow on CFPB’s constitutionality

Posted in CFPB General

The Subcommittee on Oversight and Investigations of the House Committee on Financial Services has scheduled a hearing for tomorrow entitled “The Bureau of Consumer Financial Protection’s Unconstitutional Design.”  The memo from the Committee’s Majority Staff to Committee Members states that “the [h]earing will examine whether the structure of the Bureau violates the Constitution as well as structural changes to the Bureau to resolve any constitutional infirmities.”

The hearing will undoubtedly cover the same constitutional issues that are being briefed and will be argued on May 24, 2017 by the parties and their amici before the en banc D.C. Circuit in PHH Corporation v. Consumer Financial Protection Bureau, September Term, 2016, No. 7151177.

The following witnesses will testify:

  • Ted Olson, Partner, Gibson, Dunn & Crutcher, LLP
  • Professor Saikrishna Prakash, James Monroe Distinguished Professor, University of Virginia School of Law
  • Adam White, Research Fellow, Hoover Institution
  • Brianne Gorod, Chief Counsel, Constitutional Accountability Center

Mr. Olson is lead counsel to PHH.

According to his bio on the website of the University of Virginia School of Law, Professor Prakash “focuses on separation of powers, particularly executive powers.”  As his 2013 law review article underscores, Professor Prakash strongly advocates in favor of robust Presidential powers. He is a colleague of Aditya Bamzai, an Associate Professor of Law at the same law school.  Professor Bamzai drew attention to himself when he posted a blog on November 22 of last year in the Yale Journal of Regulation and the ABA Section of Administrative Law & Regulatory Practice entitled “The President’s Removal Power and the PHH Litigation.”  We blogged about Professor Bamzai’s blog in which he argued that President Trump could lawfully remove Director Cordray without cause and need not await the outcome of the PHH case.

At the time of Professor Bamzai’s post, the D.C. Circuit had not yet granted the CFPB’s petition for rehearing en banc. The order granting the petition vacated the panel decision that held that the CFPB was unconstitutionally structured and severed the language from Title X of Dodd-Frank which enables the President to remove the Director only for cause, thus enabling the President to remove the Director without cause

It is unknown whether Professor Banzai still adheres to his opinion in light of the fact that the panel opinion has been vacated and, more importantly, whether Professor Prakash shares Professor Bamzai’s opinion.

Adam White’s bio describes Adam as a research fellow at Hoover Institution “writing on the courts and the administrative state for such publications as The Weekly Standard, The Wall Street Journal, Commentary, the Harvard Journal of Law & Public Policy…”  According to its website, “Hoover Institution seeks to improve the human condition by advancing ideas that promote economic opportunity and prosperity, while securing and safeguarding peace for America and all mankind.”  It is fair to characterize Hoover Institution as a conservative think tank.   Mr. White recently testified before the Senate Committee on Commerce, Science, and Transportation at a hearing entitled:  “A Growth Agenda:  Reducing Unnecessary Regulatory Burdens.”  In his testimony, he mentioned that he and his then law firm colleagues were co-counsel to a small community bank in State National Bank of Big Spring v. Lew which in a federal lawsuit challenged the CFPB’s structure as being unconstitutional.  We have blogged about that case on numerous occasions.

It seems clear that Brianne Gorod was chosen as a witness by the Democrats in order to balance the views of the other witnesses.  According to its website, the Constitutional Accountability Center “is a think tank, law firm and action center dedicated to fulfilling the progressive promise of our constitution’s text and history.  We work in our courts, through our government, and with legal scholars to preserve the rights and freedoms of all Americans and to protect our judiciary from politics and special interests.”

We will watch the hearing with interest and blog about it later this week.

Trump’s DOJ supports striking Cordray’s removable-only-for-cause protection from Dodd-Frank

Posted in CFPB General, Federal Agencies, Hot Issues, Richard Cordray

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.

CFPB covered by executive order on plan for reorganizing executive branch

Posted in CFPB General

President Trump has signed a new executive order entitled “Presidential Executive Order on a Comprehensive Plan for Reorganizing the Executive Branch.”

Unlike the regulatory freeze memo issued on Inauguration Day by Reince Priebus, the President’s Chief of Staff, the so-called “two for one” executive order on reducing regulation and controlling costs, and the executive order to enforce compliance with the regulatory reform agenda, the new order, on its face, does appear to apply to independent regulatory agencies including the CFPB.

The new order directs the OMB Director “to propose a plan to reorganize governmental functions and eliminate unnecessary agencies (as defined in section 551(1) of title 5, United States Code), components of agencies, and agency programs.”  Section 551(1) defines “agency” as “each authority of the Government of the United States, whether or not it is within or subject to review by another agency,” with certain exceptions that do not include independent regulatory agencies.

The order provides that within 180 days, “the head of each agency shall submit to the [OMB] Director a proposed plan to reorganize the agency, if appropriate, in order to improve the efficiency, effectiveness, and accountability of that agency.”  It also requires the OMB Director to publish a notice in the Federal Register inviting suggestions from the public for improving the organization and functioning of the executive branch.

Within 180 days after the deadline for the submission of suggestions by the public, the OMB Director must submit a proposed plan to the President “to reorganize the executive branch in order to improve the efficiency, effectiveness, and accountability of agencies.”  The proposed plan must include, “as appropriate, recommendations to eliminate unnecessary agencies, components of agencies, and agency programs, and to merge functions” and “recommendations for any legislation or administrative measures necessary to achieve the proposed reorganization.”

Since the CFPB was created by the Dodd-Frank Act and much of its internal structure is dictated by Dodd-Frank, any proposal to eliminate or substantially restructure the CFPB could not be implemented by the President unilaterally but would require Congress to amend Dodd-Frank.

 

 

Lawmaker seeks CFPB fair lending investigation of fintech small business lenders

Posted in CFPB Rulemaking, Fair Lending, Technology

A Democratic congressman has raised concerns about potentially discriminatory lending practices used by fintech companies that extend credit to small businesses, calling on the CFPB “to vigorously investigate whether [such fintech companies] are complying with all anti-discrimination laws, including the Equal Credit Opportunity Act.”

In a letter to Director Cordray dated March 15, 2017, Representative Emanuel Cleaver, II, stated that fintech companies “geared toward lending to small businesses by using certain biased algorithms for creditworthiness have the potential of charging disproportionately higher rates to minority-owned businesses.”  He asserted that, as a result, it is important “to determine if minority-owned small businesses are being charged higher rates, or if they have been subject to predatory fees” by fintech companies.

In addition to urging the CFPB to launch an investigation, Rep. Cleaver requested responses to a series of questions that included when the  CFPB anticipates “finalizing regulation and guidance to fully implement” Dodd-Frank Section 1071.  Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data include the race, sex, and ethnicity of the principal owners of the business.  The CFPB has not yet proposed a rule to implement Section 1071.  In its Fall 2016 rulemaking agenda, the CFPB estimated a March 2017 date for prerule activities.

For more on Rep. Cleaver’s letter, see our legal alert.

PHH files opening en banc brief; seven supporting amicus briefs filed

Posted in CFPB Enforcement

On Friday, PHH filed its opening en banc brief with the D.C. Circuit in the rehearing of its appeal of Director Cordray’s June 2015 decision that affirmed an administrative law judge’s (ALJ) recommended decision concluding PHH had violated RESPA and increased the ALJ’s disgorgement award from over $6.4 million to over $109 million.  The rehearing was sought by the CFPB after a divided D.C. Circuit panel ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional and severed the unconstitutional provision to make the CFPB Director removable without cause by the President; rejected Director Cordray’s new RESPA interpretation and held that even assuming that his interpretation was consistent with RESPA, the CFPB’s attempt to apply that new interpretation retroactively violated due process; held that statutes of limitations apply to CFPB administrative enforcement actions; and remanded to the CFPB for further proceedings consistent with the panel’s decision.

In its opening brief, PHH argues that the CFPB’s “unprecedented independence from the elected branches of government violates the separation of powers” and that 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.”  According to PHH, the Dodd-Frank “for-cause removal provision is not severable from the rest of the provisions establishing the CFPB because severance would create a new agency unrecognizable to the Congress that passed Dodd-Frank.”  PHH contends that the court cannot avoid the separation-of-powers issues “simply by adopting the panel’s statutory holdings and remanding to the CFPB, because this Court cannot remand a case to an unconstitutional agency.”  PHH asserts that such issues can only be avoided “by vacating the CFPB’s order without remand, so that the CFPB would not be free to resume proceedings against PHH.” (emphasis provided).

In its order granting the CFPB’s petition for rehearing en banc, one of the issues the court ordered the parties to address was what the appropriate disposition would be in PHH if the court were to hold that the ALJ in Lucia v. SEC was an inferior officer.  In Lucia, a panel of the D.C. Circuit held that because the SEC’s ALJ was an “employee” rather than “inferior officer” who must be appointed in accordance with the Appointments Clause of the U.S. Constitution, the ALJ’s appointment by the SEC’s Office of Administrative Law Judges rather than an SEC Commissioner was constitutional.  The D.C. Circuit granted a petition for rehearing en banc in Lucia and, as noted below, has scheduled oral argument in that case and in PHH for the same day.

Responding to the issue posed by the D.C. Circuit, PHH argues in its brief that if the court holds the ALJ in Lucia was improperly appointed, then the ALJ in its case was also an “inferior officer” who was not appointed in accordance with the Appointments Clause.  As a result, the entire hearing before the ALJ was invalid, Director Cordray’s order would need to be vacated, and “any future proceeding must begin afresh before a constitutionally structured agency but also before a valid adjudicator.”  PHH further argues that merely restarting the current proceeding still would not provide PHH with full relief because “the unconstitutional taint stemming from the initial authorization of the Notice of Charges would continue to infect this matter.”  PHH asserts that for this reason, the court “must decide PHH’s separation-of-powers challenge even if the ALJ was improperly appointed.”

With regard to the RESPA issues, PHH contends they “should not properly be disputed” before the en banc court “and any en banc opinion should simply reinstate the panel’s statutory rulings.”  It also observes that the RESPA issues “plainly were not en banc-worthy” and Director Cordray’s RESPA interpretation, if adopted by the en banc court, “would create a circuit split with every other court to have considered RESPA’s proper scope.”  Nevertheless,  PHH states that “[i]n an abundance of caution and in light of the critical importance of the RESPA issues to PHH and to the entire settlement-services industry…PHH addresses those issues directly [in its brief] to demonstrate that there is no legitimate basis to revisit the panel’s statutory rulings.”

Amicus briefs in support of PHH were filed on Friday by:

The RD Legal amici are defendants in an enforcement action filed by the CFPB and the New York Attorney General last month alleging that a litigation settlement advance product offered by RD Legal is a disguised usurious loan that is deceptively marketed and abusive.  (In their brief, the RD Legal amici claim that the action was filed in retaliation for a preemptive challenge to the CFPB’s jurisdiction filed by RD Legal.)  State National Bank of Big Spring and the other amici on its brief are the plaintiffs in a separate lawsuit pending in D.C. federal district court challenging the CFPB’s constitutionality.  The State National Bank of Big Spring plaintiffs previously filed an unsuccessful motion with the D.C. Circuit seeking to intervene in the PHH en banc rehearing.

In their amicus brief, the Republican state AGs argue that separation of powers creates a structural check against the aggregation of power on the federal level and protects the role of the states in the federal system by limiting the range of permissible federal action and ensuring federal power can only be wielded by officials who are politically accountable.  A group of Democratic AGs from 16 states and the District of Columbia filed an unsuccessful motion with the D.C. Circuit seeking to intervene in the PHH appeal.  Among the arguments made by the Democratic AGs in support of their motion was that their intervention was necessary because the Trump Administration might not defend the CFPB’s constitutionality.

Except for the brief filed by the ABA and twelve other trade groups which addresses only the merits of PHH’s RESPA arguments, the amicus briefs only address the CFPB’s constitutionality and argue that the CFPB is unconstitutionally structured because of the CFPB Director’s expansive powers and insulation from Presidential and Congressional oversight.  (ACA International’s brief includes the argument that, in addition to being insulated from accountability, the CFPB’s funding mechanism also raises a conflict of interest.  According to ACA, the civil penalty fund “creates a perverse incentive for the Bureau to use its enforcement actions as a funding mechanism, where the Bureau is both prosecutor and beneficiary.”)

The ABA’s brief states that even though amici “do not understand the Court to have granted en banc review to reconsider the panel’s straightforward resolution of the RESPA and fair notice questions,” they are nonetheless “filing this brief out of an abundance of caution because [such] questions addressed by the panel are of critical importance to them and their members.”  The ABA amici argue that the CFPB “misread RESPA, overturned decades of settled interpretations without any notice, and disrupted a large sector of the economy.”  They assert that the panel’s decision “correctly restored the status quo” and urge the en banc court “to let that decision stand.”

Also on Friday, the D.C. Circuit entered an order allowing each side 30 minutes at the en banc oral argument scheduled for May 24, 2017.  The order also indicates that the oral argument in Lucia v. SEC, also scheduled for May 24, will be heard first to be followed by a “short recess” before the argument in PHH.  Finally, the order confirms that the en banc panel will consist of eleven judges, including Senior Judge Randolph.  In addition to Senior Judge Randolph, four of the other panel members were appointed by a Republican president.

 

CFPB Proposes Delay in Prepaid Rule Effective Date

Posted in CFPB Rulemaking

The CFPB has proposed to delay the effective date of the final rule governing Prepaid Accounts from October 1, 2017 to April 1, 2018. The CFPB’s action is a direct response to ongoing dialogue between companies in the prepaid industry and the CFPB staff. The CFPB proposal to delay the effective date has a twenty-one (21) day comment period from publication of the proposal in the Federal Register.

The Prepaid Account Rule covers a broad range of products – from reloadable cards offered through retail locations to digital-only accounts. One of the specific industy concerns cited by the CFPB in their proposal is challenges with the “pull and replace” of non-compliant packaging of card product in retail locations. The CFPB also noted that industry participants have “raised concerns about what they describe as unanticipated complexities arising from the interaction of certain aspects of the rule with certain business models and practices.”

The Prepaid Account Rule is also facing numerous challenges from Congress. We wrote last month that Senator David Perdue (R-Ga) had introducted a joint resolution that could lead to nullification of the rule. In addition, Representatives Tom Graves (R-Ga) and Roger Williams (R-Tx) have introduced House Joint Resolution 62 and House Joint Resolution 73, respectively, disapproving of the final rule.