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  • CFPB denies student loan relief company’s petition to postpone CID pending decision in Seila Law

    Federal Issues

    On December 26, the CFPB denied a petition by a student loan relief company to modify or set aside a civil investigative demand (CID) issued by the Bureau last October. According to the company’s petition, the CID requested information as part of an investigation into the company’s promotion of student loan debt relief programs. As previously covered by InfoBytes, stipulated orders were entered against the company by the FTC and the Minnesota attorney general for violations of TILA and the assisting and facilitating provision of the Telemarketing Sales Rule, which resulted in the company being permanently banned from engaging in transactions involving debt relief products and services or making misrepresentations regarding financial products and services. In its petition, the company argued that the CFPB’s requests were duplicative of the FTC’s earlier investigation. The company also argued that the documents and materials sought in the CID were overly burdensome and the time frame to respond was too short. Furthermore, the company stated that until the U.S. Supreme Court issues a decision in Seila Law v. CFPB on whether the Bureau’s structure violates the Constitution’s separation of powers under Article II, the CID should either be withdrawn or stayed because of the uncertainty surrounding the Bureau’s ability to proceed with enforcement actions.

    The Bureau denied the petition, arguing that “the administrative CID petition process is not the proper forum for raising and deciding constitutional challenges to provisions of the Bureau’s statute.” The Bureau also noted that the company failed to show that it engaged with Bureau staff on ways to alleviate undue burden, such as proposing modifications to the substance of the requests, and that even though the Bureau proposed an extension to the CID deadline, the company did not seek such an extension.

    Federal Issues CFPB CIDs Single-Director Structure Enforcement Seila Law FTC State Attorney General TILA Telemarketing Sales Rule Debt Relief

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  • District Court stays proceedings in structured settlement case pending outcome of Seila Law

    Courts

    On December 23, the U.S. District Court for the District of Maryland granted a motion to stay in an action between the CFPB and parties of a structured-settlement company, pending the U.S. Supreme Court’s decision in CFPB v. Seila Law. According to the court, a decision in Seila Law that the CFPB’s structure violates the Constitution’s separation of powers under Article II may render the CFPB unable prosecute the case. A determination by the Court is expected later this year (previous InfoBytes coverage here).

    As previously covered by InfoBytes, the court allowed to move forward the Bureau’s UDAAP claim, which alleged the defendants employed abusive practices when purchasing structured settlements from consumers in exchange for lump-sum payments. The defendants asked the court to stay the proceedings pending the outcome of two cases: Seila Law and a case pending in the Maryland Court of Appeals involving a different structured settlement company (covered by InfoBytes here). The court determined that a stay is not appropriate based on the Maryland case since it is not known when the case may be decided. The court also disagreed with the defendants’ argument that if the Maryland Court of Appeals upholds the settlement, the Bureau would be precluded from obtaining relief from the defendants. According to the court, “the extent to which the settlement is preclusive is unclear” and the provision that would preclude action by the Bureau is being disputed on appeal. However, the court concluded that a stay pending the outcome in Seila Law is warranted because “one of the Supreme Court’s paths in Seila Law may render the CFPB unable to prosecute this action; the stay would not be lengthy; and the interests of judicial efficiency and potential harm to the movants justify the stay.”

    Courts CFPB Enforcement UDAAP Structured Settlement U.S. Supreme Court Single-Director Structure Seila Law

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  • Briefs filed in Supreme Court CFPB constitutionality challenge

    Courts

    On December 9, parties filed briefs in Seila Law LLC v. CFPB. As previously covered by InfoBytes, the U.S. Supreme Court granted cert in Seila to answer the question of whether an independent agency led by a single director violates the Constitution’s separation of powers under Article II, while also directing the parties to brief and argue whether 12 U.S.C. §5491(c)(3), which sets up the CFPB’s single director structure and imposes removal for cause, is severable from the rest of the Dodd-Frank Act, should it be found to be unconstitutional. While both parties are in agreement on the CFPB’s single-director leadership structure, they differ on how the matter should be resolved.

    According to Seila Law’s brief, the CFPB’s single-director leadership structure is a blatant violation of the Constitution’s separation of powers clause. Seila Law proposes that the Court eliminate the CFPB entirely, leaving Congress to determine how to address the unconstitutionality of the Bureau, rather than save the law by making the director an at-will employee of the President. Removing the director at will, Seila Law argues, “would radically reshape the CFPB, creating a mutant version of the agency that Congress envisioned—one that would still be unaccountable to Congress, yet fully within presidential control.” Discussing the U.S. Court of Appeals for the Ninth Circuit’s reliance in part on a 1935 Supreme Court decision in Humphrey’s Executor v. United States (which dealt with removal protections for members of a nonpartisan, multimember commission) in its May ruling which held that the Bureau’s single-director structure is constitutional (InfoBytes coverage here), Seila Law states that the Court’s ruling in Humphrey’s Executor was “badly reasoned, wrongly decided, and should be overruled,” and, in any event, is distinguishable when addressing the CFPB’s single-director leadership structure. Whether the Court distinguishes or overturns Humphrey’s Executor’s precedent, Seila Law argues, it should hold that the Bureau’s structure violates the separation of powers clause and reverse the 9th Circuit’s judgment.

    “By insulating the director of the CFPB from removal at will by the President while empowering him to exercise substantial executive power, Congress breached the President’s core prerogatives under Article II of the Constitution,” Seila Law further asserts, claiming that the appropriate remedy for the constitutional violation would be to deny the CFPB’s petition to enforce the CID and ultimately let Congress determine how to address the “constitutional defect in the CFPB’s structure.” Seila Law also argues that should the Court decide to engage in severability analysis, it should invalidate all of Title X of Dodd-Frank, which does not allow the current leadership structure to be altered to a multi-member commission.

    In contrast, though the CFPB concedes that Dodd-Frank’s restriction on the President’s ability to remove the Bureau’s director violates the “separation of powers” principles of the Constitution, it contends in its brief that, should the removal provision be found unconstitutional, it should be severed from the rest of the law in accordance with Dodd-Frank’s express severability clause. “Even considering only the Bureau-specific provisions contained in Title X . . . , there is no basis to conclude that Congress would have preferred to have no Bureau at all rather than a Bureau headed by a Director who would be removable like almost all other single-headed agencies,” the CFPB wrote. “Nothing in the statutory text or history of the Bureau’s creation suggests, much less clearly demonstrates, that Congress would have preferred, for example, that the regulatory authority vested in the Bureau revert back to the seven federal agencies that previously administered those responsibilities if a court were to invalidate the Director’s removal restriction.”

    Oral arguments are scheduled for March 3, 2020.

    Courts Federal Issues CFPB Single-Director Structure Constitution Seila Law Separation of Powers Dodd-Frank

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  • Government says CFPB should have authority to continue enforcement actions even if declared unconstitutional

    Courts

    On November 6, the CFPB and the DOJ filed a brief with the U.S. Supreme Court arguing that the Bureau should still “have the authority to commence or continue enforcement proceedings” in the event that the Court declares the Bureau’s structure unconstitutional. The brief was filed in response to a petition for writ of certiorari by two Mississippi-based payday loan and check cashing companies (collectively, “petitioners”) urging the Court to grant certiorari before the U.S. Court of Appeals for the Fifth Circuit renders a decision on a challenge to the Bureau’s single-director structure. The petitioners are not only challenging the Bureau’s structure but also arguing that the asserted constitutional violation requires the dismissal of the underlying lawsuit brought by the Bureau.

    The government argues that dismissal of the underlying enforcement action is not the way to remedy a constitutional structure violation, at least in a situation where “an official fully accountable to the President determines that it should go forward.” The brief notes that, in this case, then-Acting Director Mulvaney, to whom the Bureau has argued the limitation to for-cause removal did not apply, had ratified the enforcement action against petitioners at issue. While the Bureau and the DOJ acknowledge that lower courts “have not yet addressed the particular issue here,” they make the case that “the few reasoned decisions that address related issues are in accord: A separation-of-powers problem with an agency does not compel invalidation of the agency’s actions if those actions are subsequently approved in compliance with separation-of-powers requirements.”

    In its brief, the Bureau and the DOJ also argue that questions presented to the Court do not warrant review of the case before the 5th Circuit has an opportunity to rule. The government emphasizes that the Court has already agreed to hear a different case, Seila Law LLC v. CFPB, to answer the question of whether an independent agency led by a single director violates the Constitution’s separation of powers under Article II (covered by InfoBytes here). In doing so the Court also directed the parties to that action to brief and argue whether 12 U.S.C. §5491(c)(3), which established removal of the Bureau’s single director only for cause, is severable from the rest of the Dodd-Frank Act, should it be found to be unconstitutional.

    Courts CFPB Single-Director Structure U.S. Supreme Court Fifth Circuit Appellate Seila Law

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  • Kraninger discusses semi-annual report at House and Senate hearings

    Federal Issues

    On October 17, CFPB Director Kathy Kraninger testified at a hearing held by the Senate Banking Committee on the CFPB’s Semi-Annual Report to Congress. (Previous InfoBytes coverage here.) Pursuant to the Dodd-Frank Act, the hearing covered the semi-annual report to Congress on the Bureau’s work from October 1, 2018 to March 31, 2019. While Committee Chairman Mike Crapo (R-Idaho) praised recent key initiatives undertaken by Kraninger pertaining to areas such as innovation, small dollar lending underwriting provisions, and proposed amendments to the Ability to Repay/Qualified Mortgage Rule, he stressed the importance of reconsidering the fundamental structure of the Bureau. Conversely, Senator Sherrod Brown (D-Ohio) argued that Kraninger’s leadership has led to zero enforcement actions taken against companies for discriminatory lending practices, and that her initiatives have, among other things, failed to protect consumers. In her opening testimony, Kraninger reiterated her commitment to (i) providing clear guidance; (ii) fostering a “‘culture of compliance’” through the use of supervision to prevent violations; (iii) executing “vigorous enforcement”; and (iv) empowering consumers. Notable highlights include:

    • Constitutionality challenges. The Bureau recently filed letters in pending litigation arguing that the for-cause restriction on the president’s authority to remove the Bureau’s single Director violates the Constitution’s separation of powers, and on October 18, the U.S. Supreme Court granted cert in Seila Law LLC v. CFPB, to answer the question of whether an independent agency led by a single director violates Article II of the Constitution. (InfoBytes coverage here.) Senator Brown challenged, however, Kraninger’s “credibility as a public official,” arguing that she changed her original position about not speaking on constitutionality issues.
    • Supervision of student loan servicers. Kraninger addressed several Senators’ concerns about the Department of Education reportedly blocking the Bureau from obtaining information about the Public Service Loan Forgiveness Program for supervisory examinations, as well as and the need for a stronger response from the Bureau to obtain the requested information. Kraninger stressed that the CFPB will move forward with a statutorily required Memorandum of Understanding between the two agencies, and emphasized that the Bureau continues to examine private education loans and is collaborating with the Department of Education to ensure consumer protection laws are followed.
    • Proposed revisions to Payday Rule. Several Democratic Senators questioned the Bureau’s notice of proposed rulemaking to rescind the Payday Rule’s ability-to-repay provisions. (Previously covered by InfoBytes here.) Specifically, one Senator argued that the Bureau has failed to “present any new research in defense of the change.” Kraninger replied that while she defends the Bureau’s proposal, “a final decision has not been made in this issue.” Kraninger also addressed questions as to why—if the Bureau does not believe there is a reason to delay the effective date of the Payday Rule’s payment provisions—the Bureau has not yet filed a motion to lift a stay and allow payment provision to be implemented. Kraninger indicated that the CFPB had not done so because the payday loan trade groups were also challenging the Bureau’s constitutionality (InfoBytes here).
    • Clarity on abusive practices under UDAAP. Kraninger noted the Bureau intends to, “in the not too distant future,” provide an update as to whether more guidance is necessary in order to define what constitutes an abusive act or practice.

    A day earlier, Kraninger also presented testimony at the House Financial Services Committee’s hearing to discuss the semi-annual report, in which committee members focused on, among other things, constitutionality questions and concerns regarding recent Bureau settlements. Similar to the Senate hearing, Democratic committee members questioned Kraninger’s change in position concerning the Bureau’s constitutionality, and argued that for her “to second-guess Congress’ judgment on [the] constitutionality of the CFPB and to argue against the CFPB structure in court is disrespectful to Congress.” With regard to recent Bureau enforcement actions, many of the committee members’ questions revolved around consumer restitution, as well as a recently released majority staff report, which detailed the results of the majority’s investigation into the CFPB’s handling of consumer monetary relief in enforcement actions since Richard Cordray stepped down as director in November 2017. (See previous InfoBytes coverage here.)

    Federal Issues CFPB Senate Banking Committee House Financial Services Committee Student Lending Payday Rule UDAAP Single-Director Structure Seila Law

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  • Supreme Court to decide CFPB constitutionality

    Courts

    On October 18, the U.S. Supreme Court granted cert in Seila Law LLC v. CFPB, to answer the question of whether an independent agency led by a single director violates the Constitution’s separation of powers under Article II. The Court also directed the parties to brief and argue whether 12 U.S.C. §5491(c)(3), which sets up the Bureau’s single director structure and imposes removal for cause, is severable from the rest of the Dodd-Frank Act, should it be found to be unconstitutional. As previously covered by InfoBytes, the law firm filed a petition for a writ of certiorari with the Court, appealing the May decision by the U.S. Court of Appeals for the Ninth Circuit, which held that (i) the Bureau’s single-director structure is constitutional, and (ii) the district court did not err when it granted the Bureau’s petition to enforce the law firm’s compliance with a 2017 Civil Investigative Demand (previously covered by InfoBytes here). In response to the petition, the Bureau and the DOJ filed a brief arguing that the for-cause restriction on the president’s authority to remove the Bureau’s single director violates the Constitution’s separation of powers. While the Bureau previously defended the single-director structure to the 9th Circuit, the brief notes that since the May decision was issued, “the Director has reconsidered that position and now agrees that the removal restriction is unconstitutional.”

    In response to the Court’s decision to grant cert, an online loan servicer that operated on tribal lands has withdrawn its appeal from the 9th Circuit challenging the Bureau’s structure pending the Court’s decision in Seila Law. In the original action, the district court found that an online loan servicer that operated on tribal lands engaged in deceptive practices by collecting on loans that exceeded the usury limits in various states, and ordered it and its affiliates to pay a $10 million penalty, far short of the Bureau’s request. (Previously covered by InfoBtyes here and here.)

    Courts CFPB Single-Director Structure Constitution Separation of Powers Federal Issues Dodd-Frank Seila Law

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  • House tells Supreme Court CFPB structure is constitutional

    Courts

    On October 4, the U.S. House of Representatives filed an amicus brief with the U.S. Supreme Court arguing that the CFPB’s structure is constitutional. The brief was filed in response to a petition for writ of certiorari by a law firm, contesting a May decision by the U.S. Court of Appeals for the Ninth Circuit, which held that, among other things, the Bureau’s single-director structure is constitutional (previously covered by InfoBytes here). The House filed its brief after the amicus deadline, but requested its motion to file be granted because it only received notice that the Bureau changed its position on the constitutionality of the CFPB’s structure the day before the filing deadline. As previously covered by InfoBytes, on September 17, the DOJ and the CFPB filed a brief with the Court arguing that the for-cause restriction on the president’s authority to remove the Bureau’s single Director violates the Constitution’s separation of powers; and on the same day, Director Kraninger sent letters (see here and here) to House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Mitch McConnell (R-Ky.) supporting the same argument.

    The brief, which was submitted by the Office of General Counsel for the House, argues that the case “presents an issue of significant important to the House” and, because the Solicitor General “has decided not to defend” Congress’ enactment of the for-cause removal protection through the Dodd-Frank Act, the “House should be allowed to do so.” The brief asserts that the 9th Circuit correctly held that the Bureau’s structure is constitutional based on the D.C. Circuit’s majority in the 2018 en banc decision in PHH v. CFPB (covered by a Buckley Special Alert). Moreover, the brief argues that when an agency is “headed by a single individual, the lines of Executive accountability—and Presidential control—are even more direct than in a multi-member agency,” as the President has the authority to remove the individual should they be failing in their duty. Such a removal will “‘transform the entire CFPB and the execution of the consumer protection laws it enforces.’”

    Courts CFPB Single-Director Structure Dodd-Frank U.S. House U.S. Supreme Court Ninth Circuit Appellate D.C. Circuit Amicus Brief

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  • CFPB informs two courts its director structure is unconstitutional

    Courts

    On September 18, the CFPB issued letters in pending litigation to inform the courts that it was changing its position regarding the constitutionality of the for-cause removal provision of the Consumer Financial Protection Act (CFPA). As previously covered by InfoBytes, the DOJ and the CFPB filed a brief with the U.S. Supreme Court arguing that the for-cause restriction on the president’s authority to remove the Bureau’s single Director violates the Constitution’s separation of powers. The brief was filed in response to a petition for a writ of certiorari by a law firm contesting the May decision by the U.S. Court of Appeals for the Ninth Circuit, which held that, among other things, the Bureau’s single-director structure is constitutional. The brief noted that, since the appellate opinion was issued, “the Director has reconsidered that position and now agrees that the removal restriction is unconstitutional.” The Bureau has now issued letters (available here and here) to the 9th Circuit in two cases noting that the Bureau will no longer defend the constitutionality of the for-cause removal restriction. The Bureau also submitted a similar letter with the U.S. District Court for the District of Utah. In each letter, the Bureau argues that, while it now believes the for-cause removal provision is unconstitutional, this does not change its position with regard to the judgments made in any of the cases, noting that the provision should be severed from the rest of the CFPA.

    Courts CFPB Single-Director Structure Dodd-Frank CFPA Ninth Circuit Appellate U.S. Supreme Court DOJ

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  • Kraninger tells Supreme Court CFPB structure is unconstitutional

    Courts

    On September 17, the DOJ and the CFPB filed a brief with the U.S. Supreme Court arguing that the for-cause restriction on the president’s authority to remove the Bureau’s single Director violates the Constitution’s separation of powers. The brief was filed in response to a petition for a writ of certiorari by a law firm, contesting the May decision by the U.S. Court of Appeals for the Ninth Circuit, which held that (i) the Bureau’s single-director structure is constitutional, and that (ii) the district court did not err when it granted the Bureau’s petition to enforce a law firm’s compliance with a 2017 civil investigative demand (CID) (previously covered by InfoBytes here). The brief cites to a DOJ filing in opposition to a 2018 cert petition, which also concluded that the Bureau’s structure is unconstitutional by infringing on the president’s responsibility to ensure that federal laws are faithfully executed, but urged the Court to deny that writ as the case was a “poor vehicle” for the constitutionality consideration (previously covered by InfoBytes here).

    In contrast to the December brief, the DOJ now asserts that the present case is a “suitable vehicle for resolving the important question,” noting that only the constitutional question was presented to the Court and the 9th Circuit has stayed its CID mandate until final disposition of the case with the Court. Moreover, the government argues that until the Court resolves the constitutionality question of the Bureau’s structure, “those subject to the agency’s regulation or enforcement can (and often will) raise the issue as a defense to the Bureau’s efforts to implement and enforce federal consumer financial law.” While the Bureau previously defended the single-director structure to the 9th Circuit, the brief notes that since the May decision was issued, “the Director has reconsidered that position and now agrees that the removal restriction is unconstitutional.”

    On the same day, Director Kraninger sent letters (here and here) to House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Mitch McConnell (R-Ky.) supporting the argument that the for-cause restriction on the president’s authority to remove the Bureau’s single Director, violates the Constitution’s separation of powers. Kraninger notes that while she is urging the Court to grant the pending petition for certiorari to resolve the constitutionality question, her position on the matter “does not affect [her] commitment to fulfilling the Bureau’s statutory responsibilities” and that should the Court find the structure unconstitutional, “the [Consumer Financial Protection Act] should remain ‘fully operative,’ and the Bureau would ‘continue to function as before,’ just with a Director who “may be removed at will by the [President.]’”

    Courts DOJ CFPB Single-Director Structure Appellate Ninth Circuit CIDs U.S. Supreme Court Seila Law

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  • En banc 5th Circuit declares FHFA structure unconstitutional, allows net worth sweep claims to proceed

    Courts

    On September 6, the U.S. Court of Appeals for the 5th Circuit reaffirmed, in an en banc rehearing, that the Federal Housing Finance Agency (FHFA) structure violates constitutional separation of powers requirements and allowed “net worth sweep” claims brought by a group of Fannie Mae and Freddie Mac (government-sponsored entities or GSEs) shareholders to proceed. As previously covered by InfoBytes, GSE shareholders brought an action against the U.S. Department of Treasury and FHFA arguing that (i) the FHFA acted outside its statutory authority when it adopted a dividend agreement that requires the GSEs to pay quarterly dividends equal to their entire net worth to the Treasury Department (known as “net worth sweep”); and (ii) the structure of the FHFA is unconstitutional because it violates separation of powers principles. The district court dismissed the shareholder’s statutory claims and granted summary judgment in favor of the Treasury Department and the FHFA on the separation of powers claim. On appeal, the 5th Circuit agreed with the lower court on the first claim, concluding that the net worth sweep payments were acceptable under the FHFA’s statutory authority and that the FHFA was lawfully established by Congress through the Housing and Economic Recovery Act of 2008 (HERA), which places restraints on judicial review. However, the appellate court reversed the lower court’s decision on the separation of powers claim, concluding that Congress went too far in insulating the FHFA’s single director from removal by the president for anything other than cause, ruling that the agency’s structure violates Article II of the Constitution. 

    After an en banc rehearing, the appellate court issued two separate majority opinions. Both opinions concluded that (i) the GSE shareholders plausibly alleged that the net worth sweep exceed the powers of the FHFA when acting as a conservator under HERA; and (ii) the FHFA’s structure—which provides the director with “for cause” removal protection—violates the Constitution’s separation of powers requirements. However, the opinions differed on the appropriate remedy, with nine judges concluding that the remedy should be severance of the for-cause provision, not prospective relief invalidating the net worth sweep, stating that “the Shareholders’ ongoing injury, if indeed there is one, is remedied by a declaration that the “for cause” restriction is declared removed. We go no further.”

    Various dissenting opinions were issued, including one signed by seven judges concluding that the FHFA acted within its statutory powers under HERA when it adopted the net worth sweep, stating “the FHFA’s ‘powers are many and mostly discretionary.’” In another dissenting opinion, four judges argued that the majority opinions wrongly concluded that the FHFA’s structure is unconstitutional, arguing that there are “only reasons for caution and skepticism, and none for action” in the constitutional claim. “Neither the Constitution’s text, nor the Supreme Court’s constructions thereof, nor the adversary process in this litigation has given us much ground on which to declare the FHFA’s design unconstitutional,” the judges argued.

    Given the similarities of the FHFA’s single director structure with that of the CFPB, this case warrants close attention as it has the potential to create a vehicle for consideration by the Supreme Court of the constitutionality of single director agencies.

    Courts Appellate Fifth Circuit En Banc FHFA Fannie Mae Freddie Mac GSE Single-Director Structure HERA Congress

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