Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
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 13, the CFPB filed a complaint against a pension advance company, its owner, and related entities (defendants) based upon alleged violations of the Consumer Financial Protection Act (CFPA) and the Truth in Lending Act (TILA). In a complaint filed with the U.S. District Court for the Central District of California, the Bureau charged that the defendants engaged in deceptive practices in violation of the CFPA when they allegedly misrepresented to customers that “lump-sum” pension advances were not loans and carried no applicable interest rate, even though customers were required to pay back advances at amounts equivalent to a 183 percent interest rate and often incurred fees such as one-time $300 set up fees, monthly management fees, and 1.5 percent late fees. According to the Bureau, the defendants allowed customers to take out advance payments ranging from $100 to $60,000. The defendants then allegedly provided the income streams as 60- or 120-month cash flow payments to third-party investors, promising between 6 and 12 percent interest rates. Moreover, the defendants allegedly failed to provide customers with TILA closed-end-credit disclosures. The complaint seeks civil penalties, monetary and injunctive relief.
As previously covered in InfoBytes, the pension advance company initiated a suit against the CFPB in January 2017 after the Bureau declined to set aside or keep confidential a civil investigative demand served against the company. The suit challenged the Bureau’s constitutionality and argued that the company was likely to suffer irreparable harm from being identified as being under investigation. However, in a split decision, the D.C. Circuit Court ultimately denied the company’s bid for an emergency injunction, citing the now-vacated majority opinion in PHH v. CFPB.
On August 13, two Mississippi-based payday loan and check cashing companies (appellants) filed an unopposed petition for initial hearing en banc with the U.S. Court of Appeals for the 5th Circuit regarding a challenge to the constitutionality of the CFPB’s single director structure. In April, the 5th Circuit agreed to hear the appellant’s interlocutory appeal, and now the appellants request the appeals court move straight to an en banc panel, stating “if [the] appeal is heard under the normal panel process, [the] Court will likely be asked to rehear that panel’s decision en banc, as occurred in the D.C. Circuit’s PHH case.” (covered by a Buckley Sandler Special Alert here.) The appellants cite to the July decision by the 5th Circuit ruling the FHFA’s single director structure violates Article II of the Constitution (previously covered by InfoBytes here) and note that a petition for rehearing en banc has already been filed in that case. The appellants suggest coordination in scheduling the potential en banc arguments should the court accept both petitions, arguing that the decision would “guarantee that the Fifth Circuit speaks with one voice regarding the constitutionality of these agencies’ structures.”
On August 10, the CFPB submitted a request to the U.S. District Court for the Southern District of New York for a pre-motion conference to discuss approval to file a motion requesting entry of final judgment with respect to the court’s June decision, which would allow the Bureau to appeal that decision. As previously covered by InfoBytes, the court had terminated the CFPB as a party to an action with the New York Attorney General’s office (NYAG) against a New Jersey-based finance company and its affiliates (defendants), concluding that the CFPB’s organizational structure is unconstitutional and therefore, the agency lacks authority to bring claims under the Consumer Financial Protection Act (CFPA). The court determined that the NYAG, however, had plausibly alleged claims under the CFPA and New York law and had the independent authority to pursue those claims.
In its letter, the CFPB argues that the conditions of Rule 54(b) are met because (i) there are multiple parties still involved in the litigation; (ii) the court’s decision as to the Bureau’s claims is final; and (iii) there is no just reason for delay. Moreover, the CFPB argues that allowing the NYAG to proceed with claims under the CFPA without the Bureau’s “statutorily-assigned right to participate in CFPA claims brought by state regulators” would result in hardship or injustice that could be alleviated by an immediate appeal. Additionally, the CFPB asserts that the issues to be appealed—the constitutionality of the Bureau’s structure and whether the for-cause removal provision is severable from the rest of the CFPA—are separable from the issues that remain to be decided between the NYAG and the defendants.
In response to the Bureau’s letter, the NYAG argued that, regardless of the court’s decision under Rule 54(b), the court should not stay the case and should resolve all of its claims. The defendants responded that they do not oppose the Bureau’s Rule 54(b) request but believe NYAG’s claims should be stayed during the pendency of the Bureau’s appeal, arguing that the Bureau implied this in their request. The Bureau subsequently denied any implication that the NYAG’s claims should be stayed.
On June 21, the U.S. District Court for the Southern District of New York terminated the CFPB as a party to an action against a New Jersey-based finance company and its affiliates (defendants), concluding that the CFPB’s organizational structure is unconstitutional and therefore, the agency lacks authority to bring claims under the Consumer Financial Protection Act (CFPA). As previously covered by InfoBytes, the Bureau and the New York Attorney General’s office (NYAG) filed a lawsuit in in February 2017, claiming the defendants engaged in deceptive and abusive acts by misleading first responders to the World Trade Center attack and NFL retirees with high-cost loans by mischaracterizing loans as assignments of future payment rights, thereby causing the consumers to repay far more than they received. The defendants sought dismissal of the case, arguing that, among other things, “the CFPB’s unprecedented structure violates fundamental constitutional principles of separation of powers, and the CFPB should be struck down as an unconstitutional administrative agency.”
The court denied the defendants’ motion as to the NYAG, finding that it had plausibly alleged claims under the CFPA and New York law and had the independent authority to pursue those claims. But the court concluded that the CFPB lacked such authority, noting that it was not bound by the recent decision of the D.C. Circuit upholding the Bureau’s constitutionality in PHH v. CFPB (covered by a Buckley Sandler Special Alert). The court instead adopted portions of two separate dissents from that decision to conclude that the Bureau’s single director structure is unconstitutional and that the defect cannot be remedied by striking the limitations on the president’s authority to remove the Bureau director because the “removal for cause” provision is “at the heart of Title X” of Dodd-Frank. Quoting one of the PHH dissents, the court stated, “I would strike Title X in its entirety.”
The court also rejected an attempt by acting Director Mulvaney to salvage the Bureau’s claims. Although the action was initiated by Director Cordray, the Bureau filed a notice in May ratifying that decision and arguing that, because the Bureau is currently led by an acting director who can be removed by the president at will, defendants’ motion to dismiss the Bureau’s claims should be denied. The court disagreed, concluding that the constitutional issues presented in the case “are not cured by the appointment of Mr. Mulvaney” because “the relevant provisions of the Dodd-Frank Act that render the CFPB’s structure unconstitutional remain intact.”
On June 21, the U.S. Supreme Court held, in Lucia v. SEC, that SEC administrative law judges (ALJs) are “inferior officers” subject to the Appointments Clause (Clause) of the Constitution. The case began when the SEC instituted an administrative proceeding against the petitioner resulting in a decision by the ALJ imposing sanctions against the petitioner, including civil penalties of $300,000 and a lifetime bar from the investment industry. On appeal, the D.C. Circuit Court of Appeals upheld the ALJ’s sanctions and rejected the petitioner’s argument that ALJs are officers of the United States and therefore subject to provisions of the Clause, including the requirement that officers be appointed by the president, the head of a department, or a court of law. The D.C. Circuit decision conflicts with subsequent decisions by the U.S. Court of Appeals for the 10th and 5th Circuits (available here and here).
In a 6-3 decision, the Supreme Court reversed the D.C. Circuit decision, holding that ALJs are “Officers of the United States” subject to the Clause under the framework the Court used in Freytag v. Commissioner (concluding that U.S. Tax Court “special trial judges” are officers subject to the Clause). In support of this holding, the majority noted that ALJs receive a career appointment, exercise “significant discretion,” and if the SEC decides against reviewing a decision, their decisions become final and are “deemed the action of the Commission.”
Notably, the ALJ that presided over the petitioner’s case is the same ALJ that presided over the CFPB’s claims against PHH, which ultimately lead to the D.C. Circuit’s en banc decision in PHH v. CFPB and the CFPB’s subsequent dismissal of the action (covered by Buckley Sandler here and here).
On June 7, acting Director of the CFPB, Mick Mulvaney, dismissed the Bureau’s action against PHH, which spawned years of litigation and a constitutional challenge to the CFPB’s structure. In January, the U.S. Court of Appeals for the D.C. Circuit issued its en banc decision concluding the CFPB’s structure is constitutional but affirmed the October 2016 panel opinion that the CFPB misinterpreted RESPA and its statute of limitations (covered by a Buckley Sandler Special Alert). The $109 million penalty imposed on PHH by the CFPB was vacated and the case was sent back to CFPB leadership for review. On June 6, in response to an order by Mulvaney, PHH and the Bureau’s enforcement counsel filed a joint statement addressing whether further proceedings were necessary and jointly recommended dismissal of the matter.
On June 6, Mulvaney reportedly removed all current members of the Consumer Advisory Board (CAB), the Community Bank Advisory Council (CBAC), and the Credit Union Advisory Council (CUAC). In a blog post, the Bureau’s policy associate director for external affairs noted that the changes to the advisory boards were in response to the comments received from the Bureau’s Request for Information (RFI) on external engagements (previously covered by InfoBytes here). The comment period for the RFI closed on May 29. According to the blog, the Bureau will still continue its statutory obligation under the Dodd-Frank Act to convene the CAB and provide forums for the CBAC and the CUAC. The councils will be re-staffed with a smaller membership from the 2018 application and selection process. The changes come only a few days after it was reported that Mulvaney canceled his meeting with the CAB for the second time since he took on the acting director role.
PHH will not seek to appeal the January 31 decision by the U.S. Court of Appeals for the D.C. Circuit, which upheld the CFPB’s constitutionality in a 7-3 decision. (Covered by a Buckley Sandler Special Alert.) The Supreme Court requires petitions for writ of certiorari to be filed within 90 days of the decision, which would have put PHH’s deadline around May 1. According to reports, a PHH spokesperson confirmed the company did not file the petition but declined to provide further comment.
As previously covered by InfoBytes, the U.S. Court of Appeals for the 5th Circuit recently agreed to hear a similar challenge to the constitutionality of the CFPB’s single-director structure by two Mississippi-based payday loan and check cashing companies.
On April 24, the U.S. Court of Appeals for the 5th Circuit agreed to hear a challenge by two Mississippi-based payday loan and check cashing companies to the constitutionality of the CFPB’s single-director structure. The CFPB filed a complaint against the two companies in May 2016 alleging violations of the Consumer Financial Protection Act 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, rejecting their arguments that the structure of the CFPB is unconstitutional and that the CFPB’s claims violate due process. However, the district court granted the companies’ motion to certify an interlocutory appeal as to the question of the constitutionality of the CFPB’s structure, referencing the D.C. Circuit’s decision in PHH Corp. v. CFPB, (covered by a Buckley Sandler Special Alert here), and noting the “substantial ground for difference of opinion as to this issue as exhibited by the differences of opinion amongst the jurists in the [D.C. Circuit] who have considered this issue.” The district court emphasized that the question is a “controlling question of law” that the 5th Circuit has yet to decide and, if the CFPB were determined to be an unconstitutional entity, this would materially advance the underlying action’s termination. A panel of the 5th Circuit has now granted the companies’ motion for leave to appeal from the interlocutory order on the issue of the constitutionality of the CFPB’s structure.
On March 22, the U.S. District Court for the Western District of Kentucky denied the CFPB’s motion to reconsider an opinion issued in July 2017, which held that a safe harbor provision for affiliated business arrangements under Section 8(c)(4) of RESPA protects a Louisville law firm's relationship with a string of now-closed title insurance agencies (previously covered by InfoBytes here). In denying the request, the court clarified its previous reasoning and found that the transactions did not violate Section 8(a) because the law firm did not give the title insurance agencies a “thing of value,” and even assuming a violation, the safe harbor under Section 8(c)(2)—even though the court previously relied on Section 8(c)(4)—applied. The court relied on the D.C. Circuit’s 2016 interpretation of Section 8(c)(2) in PHH Corporation v. CFPB, which found that payments made in exchange for a service “actually received” is not the same as payments made for referrals and a payment is bona fide if it amounts to “reasonable market value” for the service. In applying the PHH holding to the present facts, the court concluded that the payments consumers made to the title agencies, which were subsequently distributed as profits to corresponding partners, were made in exchange for title insurance that was actually received by the consumer. Moreover, the court noted that there was no evidence that the payments were above market value, and therefore determined they were bona fide. Lastly, the opinion emphasized that the purpose of RESPA is to prevent unnecessary increases in costs of certain settlement services for consumers, and the payments resulting from the relationship between the law firm and the title agencies not only were for services actually received but were not found to increase the cost of those services at settlement.
- Amanda R. Lawrence to discuss "Navigating the challenges of the latest data protection regulations and proven protocols for breach prevention and response" at the ACI National Forum on Consumer Finance Class Actions and Government Enforcement
- Tim Lange to discuss "Ease your pain at the state level: Recommendations for navigating the licensing issues in the states" at the Online Lenders Alliance Compliance University
- Amanda R. Lawrence, Aaron C. Mahler, and Jonice Gray Tucker to discuss "Expanded role for the FTC ahead: Implications for bank and nonbank financial institutions" at an American Bar Association Banking Law Committee Webinar
- Buckley Webcast: Flirting with alternatives — Opportunities and challenges created by alternative data, modeling, and technology
- Daniel P. Stipano to discuss "Reporting requirements for credit unions: CTRs and SARs" at the National Association of Federally-Insured Credit Unions BSA Seminar
- Daniel P. Stipano and Moorari K. Shah to discuss "Vendor management: What is the NCUA looking for?" at the National Association of Federally-Insured Credit Unions BSA Seminar
- Sasha Leonhardt and John B. Williams to discuss "Privacy" at the National Association of Federally-Insured Credit Unions Summer Regulatory Compliance School
- Warren W. Traiger to discuss "CRA modernization" at the National Association of Industrial Bankers and the Utah Association of Financial Services Annual Convention
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program
- Hank Asbill to discuss "Ethical guidance in conducting internal investigations – The intersection of Yates and Upjohn" at the American Bar Association Southeastern White Collar Crime Institute
- Brandy A. Hood to discuss "RESPA Section 8/referrals: How do you stay compliant?" at the New England Mortgage Bankers Conference
- Daniel P. Stipano to discuss "Risk management in enforcement actions: Managing risk or micromanaging it" at the American Bar Association Business Law Section Annual Meeting
- Daniel P. Stipano to discuss "Navigating the conflicting federal and state laws for doing business with cannabis companies" at the American Bar Association Business Law Section Annual Meeting
- Tim Lange to discuss "Services and value" at the North American Collection Agency Regulatory Association Annual Conference
- Amanda R. Lawrence to discuss "Data privacy litigation" at the Mortgage Bankers Association Regulatory Compliance Conference
- Jonice Gray Tucker to discuss "HMDA data is out, now what?" at the Mortgage Bankers Association Regulatory Compliance Conference
- Daniel P. Stipano to discuss "Assessing the CDD final rule: A year of transitions" at the ACAMS AML & Financial Crime Conference
- Daniel P. Stipano to discuss "Lessons learned from recent enforcement actions and CMPs" at the ACAMS AML & Financial Crime Conference
- Amanda R. Lawrence to discuss "How to balance a successful (and stressful) career with greater personal well-being" at the American Bar Association Women in Litigation Joint CLE Conference