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DOJ says CFPB structure is unconstitutional, but urges Supreme Court to deny writ since case is a “poor vehicle”
On December 10, the DOJ filed a brief in response to a Texas bank and two associations’ (petitioners) petition for writ of certiorari with the U.S. Supreme Court, challenging the constitutionality of the CFPB’s structure, with the DOJ arguing that the Bureau’s structure infringes on the president’s responsibility to ensure that federal laws are faithfully executed, but urging the court to deny the writ as the case is a “poor vehicle” for the constitutionality consideration. Specifically, the DOJ argues that the decision would warrant review by the full court, which would be unlikely due to newly appointed Judge Kavanaugh’s involvement in the January 2018 D.C. Circuit en banc decision in PHH v. CFPB (covered by a Buckley Sandler Special Alert). Additionally, the DOJ acknowledges that the petitioners’ standing to sue “is sufficiently questionable to present a significant vehicle problem,” as the Texas bank is supervised by the OCC and the two associations are not regulated by the Bureau. On the merits, however, the DOJ agrees with the petitioners that statutory restriction on the president’s authority to remove the Bureau’s director violates the constitution. Citing to Judge Kavanaugh’s dissent opinion in the PHH en banc decision, the DOJ asserts that not only does the for-cause removal restrict the president’s powers to ensure the laws are faithfully executed, a single-director lacks the attributes of a multi-member commission that would warrant a for-cause removal provision. The DOJ concludes that the proper remedy would be to sever the for-cause provision while leaving the remaining applicable portions of the Dodd-Frank Act intact. Lastly, the DOJ notes that since it would not argue in favor of constitutionality, it recommends that if the Court were to grant certiorari, it should wait until the Bureau’s new director, Kathy Kraninger, has an opportunity to decide if the Bureau would defend the judgment before appointing an amicus curiae.
As previously covered by InfoBytes, the petitioners asked the Court (i) whether the CFPB as an independent agency headed by a single director that can only be removed from office for cause violates the Constitution’s separation of powers; (ii) whether a 1935 Supreme Court case upholding removal restrictions on members of the FTC should be overturned; and (iii) whether the CFPB’s “perpetual, on-demand funding streams” are permitted under the Appropriations Clause. The petition for writ resulted from a June decision by the D.C. Circuit upholding summary judgment against the petitioners, based on the D.C. Circuit en banc decision in PHH v. CFPB, which concluded the Bureau’s single-director structure is constitutional.
On September 19, the U.S. Court of Appeals for the D.C. Circuit remanded an SEC case against an investment adviser and his company for a new hearing before another Administrative Law Judge (ALJ) or before the Commission in accordance with the U.S. Supreme Court decision in Lucia v. SEC. As previously covered by InfoBytes, in June, the Supreme Court held that SEC ALJs are “inferior officers” subject to the Appointments Clause of the Constitution. After the decision in Lucia, the SEC moved to remand the case for a new hearing. In response, the investment adviser moved to have the SEC’s previous orders, including those imposing penalties, set aside in whole, arguing that remand is not authorized in this circumstance; citing to Lucia, the investment adviser argued the penalties resulted from an unconstitutional hearing and the language concerning remand for a new hearing in Lucia was dicta and carried no weight. The D.C. Circuit rejected this argument and denied the motion to set aside in part, citing D.C. Circuit precedent in stating “carefully considered language of the Supreme Court, even if technically dictum, generally must be treated as authoritative.”
On September 10, the CFPB rejected the arguments made by two Mississippi-based payday loan and check cashing companies (appellants) challenging the constitutionality of the CFPB’s single director structure. The challenge results from a May 2016 complaint filed by the CFPB against the appellants alleging violations of the Consumer Financial Protection Act (CFPA) for practices related to the companies’ check cashing and payday lending services, previously covered by InfoBytes here. The district court denied the companies’ motion for judgment on the pleadings in March 2018, declining the argument that the structure of the CFPB is unconstitutional and that the CFPB’s claims violate due process. The following April, the 5th Circuit agreed to hear an interlocutory appeal on the constitutionality question and subsequently, the appellants filed an unopposed petition requesting for initial hearing en banc, citing to a July decision by the 5th Circuit ruling the FHFA’s single director structure violates Article II of the Constitution (previously covered by InfoBytes here).
In its September response to the appellants’ arguments, which are similar to previous challenges to the Bureau’s structure—specifically that the Bureau is unconstitutional because the president can only remove the director for cause—the Bureau argues that the agency’s structure is consistent with precedent set by the U.S. Supreme Court, which has held that for-cause removal is not an unconstitutional restriction on the president’s authority. The brief also cited to the recent 5th Circuit decision holding the FHFA structure unconstitutional and noted that the court acknowledged the Bureau’s structure as different from FHFA in that it “allows the President more ‘direct control.’” The Bureau also argues that the appellants are not entitled to judgment on the pleadings because the Bureau’s complaint— which was filed under the previous Director, Richard Cordray— has been ratified by acting Director, Mick Mulvaney, who is currently removable at will under his Federal Vacancies Reform Act appointment and therefore, any potential constitutional defect in the filing is cured. Additionally, the Bureau argues that even if the single-director structure were deemed unconstitutional, the provision is severable from the rest of the CFPA based on an express severability clause in the Dodd-Frank Act.
On September 6, a Texas bank and two associations (petitioners) filed a petition for writ of certiorari with the U.S. Supreme Court challenging the constitutionality of the CFPB’s structure. Specifically, the petition asks the Court (i) whether the CFPB as an independent agency headed by a single director that can only be removed from office for cause violates the Constitution’s separation of powers; (ii) whether a 1935 Supreme Court case upholding removal restrictions on members of the FTC should be overturned; and (iii) weather the CFPB’s “perpetual, on-demand funding streams” are permitted under the Appropriations Clause. The petition results from a 2012 lawsuit challenging the constitutionality of several provisions of the Dodd-Frank Act, which resulted in the June decision by the D.C. Circuit to uphold summary judgment against the petitioners. That decision was based on the January 2018 D.C. Circuit en banc decision concluding the CFPB’s single-director structure is constitutional (covered by a Buckley Sandler Special Alert.
On August 14, a national bank filed a petition for writ of certiorari with the U.S. Supreme Court requesting review of the U.S. Court of Appeals for the 9th Circuit’s March decision, which held that a California law that requires the bank to pay interest on mortgage escrow funds is not preempted by federal law. As previously covered by InfoBytes, the 9th Circuit held that the Dodd-Frank Act of 2011 essentially codified the existing National Bank Act preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson. In May, a panel of three judges on the U.S. Court of Appeals for the 9th Circuit denied the petition for an en banc rehearing. In its petition, the bank argues that the appeals court decision warrants further review “because it creates significant uncertainty about whether national banks must comply with similar laws in other states” and whether other state banking laws also apply to national banks. The petition argues the uncertainty is exacerbated by the fact that the appellate court “disregarded and refused to enforce longstanding OCC regulations.” The bank contends that the 9th circuit interpreted the decision in Barnett incorrectly, and when a state law limits “a national bank’s federal authority to set the terms for their products and services, it is preempted by the National Bank Act.”
On August 7, the U.S. Court of Appeals for the 3rd Circuit held that unpaid highway tolls are not “debts” under the FDCPA because they are not transactions primarily for a “personal, family, or household” purpose. According to the amended class action complaint at issue in the case, after a consumer’s electronic toll payment system account became delinquent, a debt collection agency sent notices containing the consumer’s account information in the viewable display of the notice envelope. The consumer filed suit alleging the collection agency violated the FDCPA. While the lower court held that the consumer had standing to bring the claim, it dismissed the action on the ground that the unpaid highway tolls fell outside the FDCPA’s definition of a debt. The 3rd Circuit affirmed the lower court’s decision. On the issue of standing, citing the Supreme Court’s 2016 ruling in Spokeo, Inc. v. Robins (covered by a Buckley Sandler Special Alert), the panel reasoned that the exposed account number “implicates a core concern animating the FDCPA—the invasion of privacy” and is a legally cognizable injury that confers standing. The panel agreed with the consumer that the obligation to pay the highway tolls arose out of a “transaction” for purposes of the FDCPA because he voluntarily chose to drive on the toll roads, but found the purpose of the transaction was “public benefit of highway maintenance and repair”—not the private benefit of a “personal, family, or household” service or good as required by the FDCPA. Moreover, the court concluded that while the consumer chose to drive on the roads for personal purposes, the money being rendered was primarily for public services, as required by the statute to collect tolls “to acquire, construct, maintain, improve, manage, repair and operate transportation projects.”
On July 10, President Trump issued an Executive Order (EO) excepting Administrative Law Judges (ALJs) from the federal government’s competitive hiring service. The EO is in response to the recent Supreme Court decision in Lucia v. SEC, which held that ALJs are “inferior officers” subject to the Appointments Clause of the Constitution. (Previously covered by InfoBytes here.) The EO allows federal agencies to hire ALJs without going through the Office of Personnel Management (OPM) competitive selection process, which will give agencies the ability to select candidates who meet the agency’s specific needs— providing greater “flexibility and responsibility for ALJ appointments,” according to the White House announcement. The announcement emphasizes that the EO “reduces the legal uncertainty” over new ALJ appointments under the Appointments Clause in order to safeguard agencies’ enforcement of federal laws.
On July 5, the U.S. District Court for the Southern District of New York issued a memorandum opinion and order stating that an international bank must maintain the $500 million bond it had filed in 2015 to secure $806 million in damages owed to the Federal Housing Finance Agency for selling allegedly faulty residential mortgage-backed securities to Fannie Mae and Freddie Mac. The court had stayed execution of the judgment pending appeal, and the stay expired on July 5, following the Supreme Court’s denial without comment of the bank’s petition for writ of certiorari. (See previous InfoBytes coverage here.) According to the district court opinion and order, the bank maintained that the stay order required the bond to remain in effect only through July 5, even though the bank was not required to pay the final judgment until July 20. The court disagreed, explaining that a “more natural reading of the [s]tay [o]rder and the [b]ond together is that the [b]ond must remain in place until two conditions are met: (1) the stay of execution ends and (2) the [f]inal [j]udgment is satisfied. Condition 1 has now been met, but not condition 2.” The court added that the bank is free to satisfy the final judgment prior to its July 20 due date, at which point the bond could be dissolved prematurely.
On June 25, the U.S. Supreme Court in a 5-4 vote held that a credit card company did not unreasonably restrain trade in violation of the Sherman Act by preventing merchants from steering customers to other credit cards. As previously covered by InfoBytes, in September 2016, the U.S. Court of Appeals for the 2nd Circuit considered the non-steering protections included in the credit card company’s agreements with merchants and concluded that such provisions protect the card company’s rewards program and prestige and preserve the company’s market share based on cardholder satisfaction. Accordingly, the 2nd Circuit concluded that “there is no reason to intervene and disturb the present functioning of the payment‐card industry.” In June 2017, a coalition of states, led by Ohio, petitioned the Supreme Court to review the 2nd Circuit decision, arguing the credit card industry’s services to merchants and cardholders are not interchangeable and therefore, the credit card market should be viewed as a two-sided market, not a single market. The Supreme Court disagreed with the petitioners’ arguments, finding that the credit card industry is best viewed as one market. The court reasoned that while there are two sides to the credit card transaction, credit card platforms “cannot make a sale unless both sides of the platform simultaneously agree to use their services,” resulting in “more pronounced indirect network effects and interconnected pricing and demand.” Accordingly, the two-sided transaction should be viewed as a whole for purposes of assessing competition. The court further concluded that the higher merchant fees the credit card company charges result in a “robust rewards program” for cardholders, causing the company’s anti-steering provisions to not be inherently anticompetitive, but in fact to have “spurred robust interbrand competition and has increased the quality and quantity of credit-card transactions.”
On June 25, the Supreme Court denied without comment an international bank’s petition for writ of certiorari to challenge the $806 million in damages awarded by the Federal Housing Finance Agency (FHFA) for selling allegedly faulty mortgage-backed securities to Fannie Mae and Freddie Mac. As previously covered by InfoBytes, in September 2017, the U.S. Court of Appeals for the 2nd Circuit affirmed the New York District Court’s ruling requiring the $806 million payment. Both lower courts concluded that the marketing prospectus used to sell the mortgage securities to Fannie and Freddie between 2005 and 2007 contained “untrue statements of material fact,” including false statements regarding the underlying loans’ compliance with underwriting standards related to the creditworthiness of borrowers and appraisal value of the properties.
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