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Competing House and Senate bills aim to eliminate or reform the CFPB

Posted in CFPB General

Although the Trump Administration has largely been silent with respect to Dodd-Frank and the future of the CFPB, some members of Congress have been very active in proposing significant legislative changes. Several measures to reform the agency are pending in the House and Senate. These bills can generally be broken down into two categories. The first category includes measures that would eliminate the CFPB entirely, either through outright repeal or defunding. The second category includes more modest reforms that would leave the CFPB in place, but dramatically restrict its scope and influence.

Senator Ted Cruz recently introduced S. 370, the entire substance of which states: “The Consumer Financial Protection Act of 2010 (12 U.S.C. 5481 et seq.) is repealed, and the provisions of law amended or repealed by that Act are restored or revived as if the Act had not been enacted.” Representative John Ratcliffe of Texas introduced an identical bill in the House of Representatives.

Although the text of these bills appears straightforward, actual implementation would be an administrative nightmare. All of the rules and regulations passed by the CFPB would have to be unwound, which would require courts, compliance attorneys, and industry to determine what the current state of the law would be had the CFPB never existed. Additionally, the CFPB has entered into dozens of consent orders, almost all of which contain prescriptive injunctive relief. Some of these consent orders were entered into directly with the CFPB, but others were entered by federal courts. Presumably, parties who entered into administrative consent orders with the CFPB would be relieved of their future obligations under them. But the impact on consent orders entered by a federal court is less certain. Those orders are final judgments of an Article III court, and violations thereof are subject to the court’s authority to enforce its orders and judgments. The injunctive provisions of such orders would arguably remain in place, although there might not be another agency or individual with standing to bring a motion to enforce them.

Other recent proposals are aimed at diminishing the CFPB’s role by starving the Bureau of funding. The CFPB receives its primary funding through the Federal Reserve, and is thus outside the appropriations process to which most other federal agencies are subject. Senator Mike Rounds of South Dakota introduced a bill that relates to the mechanics of this funding process.

First, the bill would amend Title X of Dodd-Frank to remove the CFPB’s primary funding mechanism, which is the transfer of funds from the Federal Reserve Board. Currently, under Section 1017 of Title X, the Director of the CFPB must determine an amount “reasonably necessary to carry out the authorities of the Bureau,” and the Federal Reserve then transfers this amount, subject to a funding cap. The proposed bill would remove this mechanism for funding the Bureau.

Second, the bill would establish a “Civil Penalty” fund to be maintained by the Federal Reserve. The bill would require that all civil penalties obtained by the CFPB in judicial or administrative actions be deposited in that fund, and any amounts in that fund would in turn be transferred to the general fund of the U.S. Treasury.

Senator Fischer of Nebraska introduced a bill that would replace the CFPB’s single director structure with a five-member, bipartisan commission. A five-member commission was a key feature of the original version of the CHOICE Act, introduced in the House. In a significant departure, however, Chairman Hensarling proposed retaining the single director structure in a memorandum addressing several modifications to the CHOICE Act.

Finally, Senator Perdue of Georgia introduced the Consumer Protection Bureau Accountability Act of 2017, which also aims to reform the manner in which the CFPB receives its funding. This bill would make the CFPB subject to Congressional appropriations. The goal of the bill is to allow greater Congressional oversight of the CFPB by allowing Congress to control the CFPB’s funding. This bill appears to be the most shovel-ready of all of the CFPB reform measures, as it proposes a single, discreet change that: 1) only impacts the CFPB’s future operations; and 2) replaces the CFPB’s unconventional funding mechanism with the regular Congressional appropriations that fund most federal agencies.

NAFCU urges regulatory relief for credit unions in letter to Secretary of the Treasury Mnuchin

Posted in Federal Agencies

On February 28, 2017, B. Dan Berger, President and Chief Executive Officer of the National Association of Federally-Insured Credit Unions (the “NAFCU“), urged regulatory relief for credit unions in a letter submitted to the Secretary of the Treasury, Steven Mnuchin, in his capacity as Chairman of the Financial Stability Oversight Council (the “FSOC”), the voting members of which also include the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Director of the Consumer Financial Protection Bureau (the “CFPB“), the Chairman of the Securities and Exchange Commission, the Chairperson of the Federal Deposit Insurance Corporation, the Chairperson of the Commodity Futures Trading Commission, the Director of the Federal Housing Finance Agency, the Chairman of the National Credit Union Administration (the “NCUA“) and an independent member with insurance expertise.

The letter asserted that credit unions have been “improperly ensnared in a regulatory net that was not intended for them” and emphasized that Dodd-Frank and the CFPB were “designed to curb the bad practices of bad actors” as opposed to “credit unions [that] did not cause the financial crisis and have traditionally acted in good faith.”  It further emphasized that this unintended inclusion of credit unions has created an environment whereby “credit unions can no longer afford to review and comply with hundreds of regulations totaling thousands of pages.”  With this in mind, the NAFCU pressed Secretary Mnuchin to utilize consultations with the heads of the agencies of the FSOC—as required by President Trump’s “Executive Order on Core Principles for Regulating the United States Financial System” prior to the issuance of a 120-day report—to work closely with the NCUA to “uncover practical approaches to remedying Dodd-Franks’ regulatory misalignment.”

The NAFCU’s letter also urged scrutiny of the CFPB’s detrimental rulemaking impact on credit unions in light of the fact that credit unions are already subject to “strict field membership and capital restrictions” and “numerous consumer protection provisions in the Federal Credit Union Act.”  In particular, it asked Secretary Mnuchin to address CFPB actions that are especially burdensome on credit unions, such as those related to: (i) unfair, deceptive or abusive acts or practices, (ii) debt collection, (iii) qualified mortgages, (iv) mortgage servicing; (v) consumer complaints, (vi) Home Mortgage Disclosure Act requirements, (vii) overdraft programs, (viii) payday lending rules, (ix) arbitration and (x) small entity exemptions.

Finally, citing the recent changes in party affiliation with respect to the new administration and the composition of agency heads serving on the FSOC, the NAFCU urged the FSOC to review CFPB rules “that it believes pose a safety and soundness risk to the banking system or the stability of the financial system.”  Particularly, the NAFCU entreated the FSOC to use its authority under section 1023 of Dodd-Frank to stay and set aside CFPB regulations to “spur renewed dialogue between the Bureau and the federal banking agencies regarding rules that may actually pose systemic risk to financial institutions and the customers they serve.”

Cordray’s CNBC interview answers few questions

Posted in CFPB People

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.

Trump ignores Dodd-Frank and CFPB in Congressional address

Posted in CFPB General

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.

President issues executive order to enforce compliance with regulatory reform agenda

Posted in CFPB General

As part of his 100-day action plan, the President promised to institute a regulatory moratorium by requiring that for every new federal regulation, two existing regulations must be eliminated.  On January 30, 2017, the President signed an executive order that purported to accomplish this goal by requiring agencies to “identify” two rules to be revoked for every new rule they propose, and to find ways to offset costs of new rules.  Commentators have argued that this executive order is difficult to implement and fails to consider the benefits of new regulations.  On February 24, 2017, the President signed another executive order aimed at pressuring regulatory agencies to be less aggressive in promulgating new rules.

Under the President’s new order, the head of each agency must (1) designate an agency official as its Regulatory Reform Officer within 60 days, (2) establish a Regulatory Reform Task Force, and (3) measure its progress related to regulatory reform objectives.  Each Task Force must evaluate existing regulations and make recommendations to the agency head regarding their repeal, replacement, or modification, consistent with applicable law, and in doing so, must seek input from State, local, and tribal governments, small businesses, consumers, non-governmental organizations, and trade associations.  Regulations that are identified as being outdated, unnecessary, or ineffective will be prioritized for regulatory offset pursuant to the January 30, 2017 Executive Order.

The executive order provides a deadline of 90 days for each Task Force to prepare a report detailing its progress toward implementing regulatory reform initiatives and identifying regulations for repeal, replacement, or modification.  Given this tight timeline, agency Task Forces will likely rely upon submitted comments.  Thus, industry participants should seek counsel regarding which regulations might be particularly susceptible to attack and hasten to prepare advocacy letters regarding such regulations.

Much like his previous order regarding regulatory reform, this order should not literally apply to independent agencies like the CFPB.  It is unclear whether the CFPB will voluntarily comply with the requirements of this order.

ABA comments on CFPB’s RFI on consumer access to financial information; Ballard Spahr to hold March 16 webinar on RFI

Posted in CFPB General

The American Bankers Association has submitted a comment letter in response to the CFPB’s request for information regarding consumer access to financial information.

The ABA observes that while larger institutions have the resources to develop secure portals and the ability to impose privacy and data security requirements through contractual provisions negotiated with aggregators, community banks typically lack the resources to negotiate directly with aggregators.  Accordingly, the ABA makes a series of recommendations for how the CFPB can use existing regulatory authorities to close regulatory gaps and ensure that consumer financial data is accorded baseline privacy and security protections regardless of where the data resides.  Such recommendations include:

  • The CFPB should clarify that data aggregators are “financial institutions” subject to the requirements of the Gramm-Leach-Bliley Act that apply to financial institutions under the FTC’s Safeguards Rule and the CFPB’s Regulation P.  Clarification that aggregators fall within Regulation P would mean that aggregators would be required to provide disclosures to consumers about how they collect, store, and share consumer data and how it is safeguarded.  With regard to the safeguards rule, in addition to urging the CFPB to work with the FTC to clarify the rule’s coverage of data aggregators, the ABA also urges the CFPB to encourage the FTC to revise the rule to require notice to consumers when a breach occurs and to require notice to the financial institutions that created the data involved.
  • The CFPB should clarify that data aggregators providing electronic fund transfer services are “service providers” under the EFTA  and are liable for unauthorized electronic fund transfers.
  • The CFPB should subject data aggregators to CFPB supervision by adopting a rule to define  “larger participants in the market for consumer financial data.”
  • The CFPB should prescribe rules to ensure that the features of data aggregation products and services are adequately disclosed by using its authority under Dodd-Frank Act Section 1032 to “prescribe rules to ensure that the features of any consumer financial product or service…are fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks associated with the product or service, in light of the facts and circumstances.”

In addition to the above regulatory actions, the ABA urges the CFPB to launch a consumer education campaign to inform consumers about the risk, responsibilities, and choices associated with the use of data aggregation products and services.

The ABA’s letter was among 71 comment letters submitted on the RFI.  Commenters included a variety of financial institutions, other trade associations, data aggregation companies, and consumer groups.

On March 16, 2016 from 12:00 p.m. to 1:00 p.m., Ballard Spahr attorneys will hold a webinar, “CFPB Launches Inquiry Into Challenges Consumers Face in Using and Securely Sharing Access to Their Digital Financial Records.”  Click here to register.

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PHH opposes intervention by plaintiffs in another case challenging CFPB’s constitutionality

Posted in CFPB Enforcement

PHH has filed a response opposing the motion of the plaintiffs in State National Bank of Big Spring, Texas, et al. v. Lew to intervene in the en banc rehearing.  The D.C. Circuit granted the CFPB’s petition for en banc rehearing on February 16.

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.  Following the D.C. federal district court denial of the plaintiffs’ attempt to consolidate their case with PHH on appeal to the D.C. Circuit, the plaintiff filed a motion to intervene with the D.C. Circuit.

In their motion to intervene, the plaintiffs argued that if the D.C. Circuit grants the CFPB’s petition for rehearing en banc but decides the case on RESPA grounds, their “constitutional claims will be left unresolved, and the district court will be left without binding guidance from this Court as to how the constitutional question should be answered.”  According to the plaintiffs, a decision on RESPA grounds would delay the resolution of their case, “prolonging the harm they suffer from being subject to unconstitutionally promulgated regulations and ensuring that they will wait even longer for an eventual, inevitable merits determination from this Court.”  The plaintiffs also asserted that because they could not rely on PHH to defend the panel’s constitutionality holding as vigorously as they would, they met the requirement for intervention of right that no party to the action could adequately protect their interests.

In its response in opposition to the motion to intervene, PHH argues that like other intervention motions that have been filed in the case, the motion filed by the plaintiffs in State National Bank of Big Spring “appears to be little more than a naked attempt to seize control of this litigation from the actual litigants for the purpose of someday petitioning the Supreme Court for a writ of certiorari in the event the defeated litigant determines that it is not in its interest to do so.  That goal is equally illegitimate when pursued by those who agree with PHH on the separation-of-powers question as it is for those who disagree.”  PHH characterizes the plaintiffs’ motion as an improper attempt to use intervention as a means of circumventing the district court’s abeyance order.

PHH also challenges the plaintiffs’ standing to intervene, asserting that “it is elementary that a third party’s purported interest in securing a particular precedent does not create standing to intervene.” (emphasis provided).  According to PHH, this principle applies with even more force in this case because the plaintiffs are not concerned merely with an adverse legal decision but with any decision that leaves the constitutional claims unresolved.  According to PHH, if the plaintiffs “were truly aggrieved by the CFPB’s order, as PHH is, than it is unclear why [plaintiffs] would have any interest in the rationale this Court employs in vacating that order.  It is well-established that a party’s interest in securing a decision with a particular legal rationale is insufficient to provide standing to appeal the decision if it produces no adverse consequences.” (emphasis provided).

With regard to the plaintiffs’ claim that they cannot rely on PHH to adequately protect their interest in challenging the CFPB’s constitutionality, PHH asserts that “PHH, represented by capable counsel, is fully capable of representing that interest and “there is utterly no reason to think that [plaintiffs] can do a better job in pressing [the constitutional argument] than PHH.” PHH also observes that “[t]o the extent [plaintiffs] are interested in the issues presented, their amicus curiae brief [filed with the D.C. Circuit in support of PHH prior to the panel’s ruling] allows them to be heard and to advise the Court as to the possible effects of its decision in this matter on [plaintiffs’] pending litigation, a traditional function of such briefs.”

 

Court declines to enjoin Dept. of Education termination of recognition status of college accrediting organization challenging CFPB CID

Posted in CFPB Enforcement

In December 2016, the Secretary of Education issued a decision adopting the decision of the Department of Education’s Senior Department Official terminating and withdrawing the Department’s recognition of the Accrediting Council for Independent Colleges and Schools (ACICS) as a nationally recognized accrediting agency.  Earlier this week, the D.C. federal district court denied ACICS’ motion for temporary restraining order and preliminary injunction.  The motion sought to stay the decision revoking ACICS’ recognition, restore the status quo and continue ACICS’ recognition status, and enjoin the Department from implementing and enforcing a requirement that, as condition of receiving Title IV assistance, ACICS-accredited schools must take immediate steps to obtain an alternate federally-recognized accreditor.   

The denial of the restraining order and preliminary injunction comes on the heels of the oral argument held in the D.C. Circuit earlier this month on the CFPB’s appeal from the D.C. federal district court’s April 2016 ruling that the CFPB exceeded its statutory authority when it issued a CID to ACICS in August 2015.  In its injunction motion, ACICS argues that its “operating revenue will be immediately and adversely affected as a result of the Secretary’s decision and the Department’s related directives to ACICS-accredited schools.”  ACICS claims that a number of ACICS-accredited schools are refusing to pay outstanding fees, are seeking refunds of fees paid for 2016 and 2017, and/or are planning to allow their ACICS membership to expire and pay no further fees.  It also claims that potential revenues from site visits and applications will be cut off and that its “day-to-day operations will be substantially curtailed.”

 

 

The Eastern District of Michigan affirms the CFPB’s broad authority to issue civil investigative demands

Posted in CFPB General

A recent decision from the Eastern District of Michigan in CFPB v. Harbour Portfolio Advisors, LLC; National Asset Advisors, LLC; and National Asset Mortgage, LLC serves as a reminder that the CFPB’s authority to issue a Civil Investigative Demand (“CID”) is very broad, particularly when compared to discovery in federal litigation. For example, federal courts will often limit discovery to conduct that occurred within the relevant statute of limitations. In Harbour Portfolio Advisors, however, the court allowed the CFPB to seek information dating back seven years, even though the pertinent statute of limitations was at most three years. In declining to limit the CID to the statute of limitations, the court reasoned that “information dating back to that period will help the Bureau develop a complete understanding of Respondents’ practices and operations.” Plaintiffs in civil litigation will often argue that they need pre-statute material to tell the full story of a defendant’s alleged misconduct, but federal courts rarely permit it in discovery disputes.

In addition to approving the seven year response period, other features of the opinion highlight the broad nature of the CFPB’s investigatory power compared to traditional discovery. The first relates to the subject matter of the CID and the CFPB’s authority over it. The CFPB sought information with respect to a product the respondents offered known as an agreement for deed. An agreement for deed is similar to a rent-to-own product, only for real property instead of personal property. In the transaction, a consumer agrees to make periodic payments to the owner of real property until a certain “purchase price” is reached. Once the consumer makes payments that total the purchase price, the owner of the property transfers the deed to the consumer.

The respondents, issuers and servicers of agreements for deeds, argued that the CFPB does not have jurisdiction over agreements for deeds because they are not credit products, much in the way that rent-to-own agreements are not credit products. The court held that it did not need to decide whether an agreement for deed is a credit product, however, because that argument is relevant to an enforcement action, not a CID. Instead, the court held that the inquiry was limited to whether the CFPB’s jurisdiction was “plainly lacking.” If the CFPB has a “plausible basis” for jurisdiction over the activity, the court reasoned, it must enforce the CID. The court then held that because there was at least a plausible basis for believing an agreement for deed is a credit product, the CFPB had jurisdiction to issue the CID. In reaching this decision, the court distinguished the CFPB’s attempt to enforce a CID against a college accrediting agency, in which case another federal district court ruled that the CFPB’s jurisdiction was plainly lacking.

The “plainly lacking” standard could end up being the most significant aspect of the case. The CFPB’s authority to enforce a CID against the supplier of a product that is arguably not a consumer financial product or service is currently at issue in the Eastern District of Pennsylvania, involving a CID directed to an issuer of settlement annuities. The target of the CID, and the Chamber of Commerce of the United States as amicus, argued that the settlement annuities are not a consumer financial product or service, and, therefore, the CFPB does not have jurisdiction to regulate them. On the same day the Harbour Portfolio decision was issued, the CFPB submitted it as supplemental authority. We will monitor that case closely to determine whether the Eastern District of Pennsylvania finds Harbour Portfolio persuasive.

The Harbour Portfolio court similarly drew a distinction between an enforcement action and a CID with respect to the respondents’ “fair notice” argument. The respondents argued that they did not have fair notice that an agreement for deed was a financial product subject to CFPB jurisdiction. The court held that fair notice only comes into play if the CFPB proceeds beyond the investigative stage and into the enforcement stage. Because a CID is part of the investigative stage, the court did not rule on the merits of the argument, and deferred consideration of it to a future enforcement action, should one occur.

Finally, the court rejected the respondents’ undue burden argument because, in the court’s view, the respondents did not put forth sufficient evidence of the burden of production. This holding is a useful reminder to entities facing CIDs from the CFPB and other agencies that, when making a burden argument, the better strategy is to come forward with very specific evidence of the cost, time, and resources necessary to comply with information requests. This evidence should be presented to the CFPB in the first instance, as enforcement attorneys will often work with targets of an investigation to reach modifications to the requests. In our experience, such requests are more likely to be granted when supported by specific evidence of the exact nature of the burden involved. If an agreement with the CFPB is not possible, evidence of the burden will almost certainly be required from a court. Thus, it is invariably worth the effort to establish the burden by specific evidence as early as possible.

Almost as interesting as the opinion itself is the fact that the New York Times covered it. It is rare for a major newspaper to run a lengthy article on what essentially amounts to a discovery dispute. But the article is best understood as not being about a single dispute over a CID, but the broader debate over the future of the CFPB itself. With bills being introduced in Congress that would eliminate or substantially reshape the CID, all of its actions will likely receive heightened attention in the press, as all sides of the debate seek to shape the public narrative around the future of the agency.

MLA Website malfunction

Posted in Military Issues

According to an announcement posted on the Military Lending Act (“MLA”) Website,
“[b]etween February 9, 2017 and February 15, 2017 there was a problem with MLA Multiple Record Requests that prevented 149 request files from processing.” The Defense Manpower Data Center advises any creditor who, during the time period in question, submitted a Multiple Record Request file that failed to process submit the file again for processing.

Under the Department of Defense (“DoD”) final rule, using information obtained directly or indirectly from the DoD’s MLA Website is one of the safe-harbor methods for conclusively determining whether a credit applicant is a covered borrower eligible for MLA protections. (A safe harbor is also available to a creditor that uses a consumer report from a nationwide consumer reporting agency.) Users of the MLA Website can retrieve information on one individual via a Single Record Request or on multiple individuals (or multiple dates for a single individual) via a Multiple Record Request, or “batch” request.

The MLA Website is an important compliance resource for creditors, who face serious penalties and remedies for MLA violations. As a practical matter, to protect against file generation failures, creditors might wish to consider establishing backup arrangements with a consumer reporting agency to determine covered-borrower status for MLA purposes.