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District Court approves payday settlement
On November 10, the U.S. District Court for the Southern District of Mississippi issued a final settlement order resolving allegations that a Mississippi-based payday lender violated the CFPA in connection with check cashing services and small dollar loans. As previously covered by InfoBytes, the CFPB filed a complaint against two Mississippi-based payday loan and check cashing companies for allegedly violating the CFPA’s prohibition on unfair, deceptive, or abusive acts or practices.
In March 2018, a district court denied the payday lenders’ motion for judgment on the pleadings, rejecting the argument that the Bureau's structure unconstitutional and that the agency’s claims violate due process. The U.S. Court of Appeals for the Fifth Circuit agreed to hear an interlocutory appeal on the constitutionality question, and, prior to the U.S. Supreme Court’s ruling in Seila Law LLC v. CFPB, a divided panel held that the CFPB’s single-director structure is constitutional, finding no constitutional defect with allowing the director of the Bureau to only be fired for cause (covered by InfoBytes here). The order noted that the 5th Circuit voted sua sponte to rehear the case en banc and issued an opinion in which the majority vacated the district court’s opinion as contrary to Seila Law. The majority did not, however, direct the district court to enter judgment against the Bureau because, though the Supreme Court had found that the director’s for-cause removal provision was unconstitutional, it was severable from the statute establishing the Bureau (covered by a Buckley Special Alert). The majority determined that the “time has arrived for the district court to proceed” and stated it “place[s] no limitation on the matters that that court may consider, including, without limitation, any other constitutional challenges.”
According to the settlement, the owner and president of the company must pay a civil money penalty of $899,350 to the Bureau “by reason of the [UDAAP violations] alleged in the Complaint.” However, the order further noted that the amount is remitted by $889,350 because he paid “that amount in fines to the Mississippi Department of Banking and Consumer Finance.” The district court also entered a separate order dismissing the lawsuit with prejudice.
5th Circuit: CFPB enforcement may proceed but funding questions remain
On May 2, the U.S. Court of Appeals for the Fifth Circuit issued an en banc decision vacating a district court’s interlocutory decision denying the plaintiff payday lenders’ motion for judgment on the pleadings, and holding that the CFPB can continue its enforcement action against a Mississippi-based payday lending company subject to further order of the district court. As previously covered by InfoBytes, the CFPB filed a complaint against two Mississippi-based payday loan and check cashing companies for allegedly violating the CFPA’s prohibition on unfair, deceptive, or abusive acts or practices. In March 2018, a district court denied the payday lenders’ motion for judgment on the pleadings, rejecting the argument that the structure of the Bureau is unconstitutional and that the agency’s claims violate due process. The 5th Circuit agreed to hear an interlocutory appeal on the constitutionality question. And, prior to the U.S. Supreme Court’s ruling in Seila Law LLC v. CFPB, a divided panel held that the CFPB’s single-director structure is constitutional, finding no constitutional defect with allowing the director of the Bureau to only be fired for cause (covered by InfoBytes here).
The 5th Circuit voted sua sponte to rehear the case en banc and issued an opinion in which the majority vacated the district court’s opinion as contrary to Seila Law. The majority did not, however, direct the district court to enter judgment against the Bureau because, though the Supreme Court had found that the director’s for-cause removal provision was unconstitutional, it was severable from the statute establishing the Bureau (covered by a Buckley Special Alert). The majority determined that the “time has arrived for the district court to proceed” and stated it “place[s] no limitation on the matters that that court may consider, including, without limitation, any other constitutional challenges.”
In dissent, several judges issued an opinion arguing that the case should be dismissed because the agency’s funding structure violates the Constitution’s separation of powers and “is doubly removed from congressional review.” The dissenting judges explained that the Bureau is not subject to the Congressional appropriations process for its budget, unlike most federal agencies, but rather receives its funding directly from the Federal Reserve Board. This budgetary process was intended to ensure full independence from Congress and prevent future congresses from using budget cuts to influence the Bureau’s agenda and priorities. The dissenting judges argued, however, that such a structure violates the Appropriations Clause of the Constitution. “The CFPB’s double insulation from Article I appropriations oversight mocks the Constitution’s separation of powers by enabling an executive agency to live on its own in a kingly fashion,” the dissent stated. “The Framers warned that such an accumulation of powers in a single branch of government would inevitably lead to tyranny. Accordingly, I would reject the CFPB’s novel funding mechanism as contravening the Constitution’s separation of powers. And because the CFPB funds the instant prosecution using unconstitutional self-funding, I would dismiss the lawsuit.”
District Court rules ratification unnecessary for CFPB to proceed with 2017 enforcement action
On March 16, the U.S. District Court for the Southern District of New York ruled that the CFPB can proceed with its 2017 enforcement action against a New Jersey-based finance company alleging, among other things, that it misled first responders to the World Trade Center attack and NFL retirees about high-cost loans mischaracterized as assignments of future payment rights. In 2020, the U.S. Court of Appeals for the Second Circuit vacated a 2018 district court order dismissing the case on the grounds that the Bureau’s single-director structure was unconstitutional, and that, as such, the agency lacked authority to bring claims alleging deceptive and abusive conduct by the company (covered by InfoBytes here). The 2nd Circuit remanded the case to the district court, determining that the U.S. Supreme Court’s ruling in Seila Law LLC v. CPFB (holding that the director’s for-cause removal provision was unconstitutional but severable from the statute establishing the Bureau, as covered by a Buckley Special Alert) superseded the 2018 ruling. The appellate court further noted that following Seila, former Director Kathy Kraninger ratified several prior regulatory actions (covered by InfoBytes here), including the enforcement action brought against the defendants, and as such, remanded the case to the district court to consider the validity of the ratification of the enforcement action. The defendants later filed a petition for writ of certiorari, arguing that the Bureau could not use ratification to avoid dismissal of the lawsuit, but the Supreme Court declined the petition. (Covered by InfoBytes here.)
In 2021, the defendants filed a motion to dismiss the Bureau’s enforcement action on the grounds that “it was brought by an unconstitutionally constituted agency” and that the Bureau’s “untimely attempt to subsequently ratify this action cannot cure the agency’s constitutional infirmity.” After narrowly reviewing whether the Bureau had the authority to bring claims under the Consumer Financial Protection Act, the district court turned to the Supreme Court’s June 2021 majority decision in Collins v. Yellen, which held that “‘an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed[.]’” Accordingly, the agency’s actions are not void and do not need to be ratified, unless a plaintiff can show that “the agency action would not have been taken but for the President’s inability to remove the agency head.” (Covered by InfoBytes here.) The district court’s March 16 opinion applied Collins and ruled that “the CFPB possessed the authority to bring this action in February 2017 and, hence, that ratification by Director Kraninger was unnecessary.”
5th Circuit remands shareholders’ net worth sweep claims to lower court
On March 4, a split U.S. Court of Appeals for the Fifth Circuit, on remand from the U.S. Supreme Court, sent a shareholders’ suit back to the district court for further proceedings consistent with the Supreme Court’s decision in Collins v. Yellen, in which the Supreme Court, relying on its decision in Seila Law LLC v. CFPB, held that FHFA’s leadership structure was unconstitutional because it only allowed the president to fire the FHFA director for cause. (Covered by InfoBytes here.) In Collins, the Supreme Court reviewed the 5th Circuit’s en banc decision stemming from a 2016 lawsuit brought by a group of Fannie Mae and Freddie Mac (GSEs) shareholders against the U.S. Treasury Department and FHFA, in which shareholders claimed that the Housing and Economic Recovery Act of 2008 (Recovery Act), which created the agency, violated the separation of powers principal because it only allowed the president to fire the FHFA director “for cause.” The shareholders also alleged that FHFA acted outside its statutory authority when it adopted a third amendment to the Senior Preferred Stock Purchase Agreements, which replaced a fixed-rate dividend formula with a variable one requiring the GSEs to pay quarterly dividends equal to their entire net worth minus a specified capital reserve amount to the Treasury Department (known as the “net worth sweep”). (Covered by InfoBytes here.) At the time, while the en banc appellate court reaffirmed its earlier decision that FHFA’s structure violated the Constitution’s separation of powers requirements, nine of the judges concluded that the appropriate 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.”
The split Supreme Court had affirmed the 5th Circuit’s en banc decision regarding the FHFA’s structure, but left intact the net worth sweep and remanded the case to the appellate court to determine “what remedy, if any, the shareholders are entitled to receive on their constitutional claim.” Justice Samuel Alito, who wrote for the majority, stated that “[a]lthough the statute unconstitutionally limited the President’s authority to remove the confirmed Directors, there was no constitutional defect in the statutorily prescribed method of appointment to that office. As a result, there is no reason to regard any of the actions taken by the FHFA in relation to the third amendment as void.”
On remand, the en banc 5th Circuit majority ordered the district court to decide whether the shareholders suffered compensable harm from the unconstitutional removal provision, observing that the Supreme Court left open the possibility that the unconstitutional restriction on the President’s power to remove the FHFA director could have inflicted compensable harm. Noting that the Supreme Court had sketched “possible causes and consequences of such harm along with the Federal Defendants’ denial of any such harm,” the majority stressed that “it became clear” during oral argument that “the prudent course is to remand to the district court to fulfill the Supreme Court’s remand order.”
However, five of the appellate judges dissented from the majority decision on the grounds that nothing in the Supreme Court’s decision precluded the 5th Circuit from deciding the harm issue, pointing out that the appellate court could “easily do so in light of [its] previous conclusion that ‘the President, acting through the Secretary of the Treasury, could have stopped [the Net Worth Sweep] but did not.’” The dissenting judges noted that because the shareholders failed to point to sufficient facts to cast doubt on the 5th Circuit’s previous decision, the appellate court “should modify the district court’s judgment by granting declaratory relief in the Plaintiff’s favor, stating that the ‘for cause’ removal provision as to the Director of the FHFA is unconstitutional. In all other respects, we should affirm.”
Seila Law will not petition Supreme Court a second time
On October 8, counsel for the appellant in CFPB v. Seila Law LLC sent a letter to the U.S. Court of Appeals for the Ninth Circuit stating that, after further consideration, the law firm has decided not to seek further review from the U.S. Supreme Court in its long-running challenge with the Bureau. Seila Law’s last trip to the Court resulted in a decision that declared the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau (covered by a Buckley Special Alert). October 11 was the deadline for Seila Law to file a certiorari petition with the Court after the 9th Circuit granted the law firm’s request to stay a mandate ordering compliance with a 2017 civil investigative demand (CID) issued by the Bureau. As previously covered by InfoBytes, the order stayed the appellate court’s mandate (covered by InfoBytes here) for 150 days, or until final disposition by the Court if the law firm had filed its petition of certiorari. The letter did not explain Seila Law’s reasoning.
This announcement follows the Court’s recent decision not to hear a petition filed by a New Jersey-based finance company accused by the CFPB and the New York attorney general of misleading consumers about high-cost loans allegedly mischaracterized as assignments of future payment rights (covered by InfoBytes here), and may mark the beginning of the end of litigation over former Director Kraninger’s July 2020 ratifications of the Bureau’s private actions (covered by InfoBytes here). Since the Court’s decision in Seila, several courts have heard challenges from companies claiming the Bureau could not use ratification to avoid dismissal of their lawsuits.
8th Circuit lets GSE shareholders seek retrospective relief
On October 6, the U.S. Court of Appeals for the Eighth Circuit held that Fannie Mae and Freddie Mac shareholders have standing to seek retrospective, but not prospective, relief related to their claims that they suffered damages as a result of the FHFA’s leadership structure. The shareholders alleged FHFA’s leadership structure and appointments violated the appointments clause, the separation of powers, and the non-delegation doctrine. Among other things, the shareholders claimed that (i) the Housing and Economic Recovery Act (Recovery Act), which created the agency, violated separation of powers principles because it only allowed the president to fire the FHFA director “for cause,” and (ii) FHFA acted outside its statutory authority when it adopted a third amendment to the Senior Preferred Stock Purchase Agreements, which replaced a fixed-rate dividend formula with a variable one requiring the GSEs to pay quarterly dividends equal to their entire net worth minus a specified capital reserve amount to the Treasury Department (known as the “net worth sweep”). The district court dismissed the claims for lack of standing, and in the alternative, rejected them on the merits.
The 8th Circuit began by rejecting the district court’s holding that the shareholders lacked standing. Relying on the U.S. Supreme Court’s recent ruling in Collins v. Yellen (covered by InfoBytes here), the appellate court held that the shareholders’ alleged injury flowed from the adoption of the agreement containing the net worth sweep by FHFA’s acting director, who did not properly hold office. However, the shareholders were limited to seeking retrospective relief, because prospective relief was mooted by the adoption of subsequent amendments to the agreement by validly-appointed directors.
However, the appellate court went on to hold that the shareholders were not entitled to relief based on their argument that the acting director had been in office too long in an “acting” role when he adopted the agreement. Even if the shareholders were correct, the acting director’s decisions were valid under the de facto officer doctrine, which confers validity on the acts of persons operating “under the color of official title even though it is later discovered that the legality of that person’s appointment or election to office is deficient.” Moreover, even if the de facto officer doctrine did not control, “[a]ny defect was resolved when the subsequent FHFA directors—none of whose appointments were challenged—ratified the third amendment.”
The 8th Circuit also rejected the argument that Congress unlawfully delegated authority to FHFA in the Recovery Act, finding that the statute directs FHFA “to act as a ‘conservator,’ with clear and recognizable instructions.”
Finally, the 8th Circuit did agree with the shareholders that FHFA’s leadership structure was unconstitutional because, as the Court held in Collins, it limited the president’s ability to remove the director. But the appellate court rejected the shareholders’ request that it vacate the adoption of the agreement containing the net worth sweep as a result, noting that the acting director was always “removable at will,” and that there was no allegation that subsequent agency directors (who took actions to implement the agreement) were appointed improperly. Still, the appellate court noted that, in Collins, the Court had remanded the case for a determination whether the constitutional violation “caused compensable harm” to the plaintiffs, and it did the same here.
Supreme Court won’t hear challenge to CFPB ratification
On October 4, the U.S. Supreme Court declined to hear a petition filed by a New Jersey-based finance company accused by the CFPB and the New York attorney general of misleading first responders to the World Trade Center attack and NFL retirees about high-cost loans mischaracterized as assignments of future payment rights (see entry #20-1758). In 2020, the U.S. Court of Appeals for the Second Circuit vacated a 2018 district court order, which had previously dismissed the case on the grounds that the Bureau’s single-director structure was unconstitutional, and that, as such, the agency lacked authority to bring claims alleging deceptive and abusive conduct by the company (covered by InfoBytes here). At the time, the district court also rejected an attempt by then-acting Director Mulvaney to salvage the Bureau’s claims, concluding that the “ratification of the CFPB’s enforcement action against defendants failed to cure the constitutional deficiencies in the CFPB’s structure or otherwise render defendants’ arguments moot.” The 2nd Circuit remanded the case to the district court, determining that the Court’s ruling in Seila Law LLC v. CPFB (which held that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau, as covered by a Buckley Special Alert) superseded the 2018 ruling. The appellate court further noted that following Seila, former Director Kathy Kraninger ratified several prior regulatory actions (covered by InfoBytes here), including the enforcement action brought against the defendants, and as such, remanded the case to the district court to consider the validity of the ratification of the enforcement action.
In its June petition for writ of certiorari, the company argued that the Bureau could not use ratification to avoid dismissal of the lawsuit. The company noted that while several courts, including the U.S. Court of Appeals for the Ninth Circuit (covered by InfoBytes here) have “appl[ied] ratification to cure the structural problem,” other courts have rejected the Bureau’s ratification efforts, finding them to be untimely (see a dismissal by the U.S. District Court for the District of Delaware, as covered by InfoBytes here). As such, the company had asked the Supreme Court to clarify this contradictory “hopeless muddle” by clarifying the appropriate remedy for structural constitutional violations and addressing whether ratification is still effective if it comes after the statute of limitations has expired.
As is customary when denying a petition for certiorari, the Supreme Court did not explain its reasoning.
Supreme Court says FHFA unconstitutionally structured, leaves net worth sweep intact
On June 23, the U.S. Supreme Court issued a split opinion in Collins v. Yellen (previously Collins v. Mnuchin), holding that FHFA’s leadership structure, which only allows the president to fire the FHFA director for cause, is unconstitutional. The Court’s determination follows its decision in Seila Law LLC v. CFPB (covered by a Buckley Special Alert), in which the Court held that a similar clause in the Dodd-Frank Act that requires cause to remove the director of the CFPB violates the constitutional separation of powers. In Collins, the Court stated, “[a] straightforward application of our reasoning in Seila Law dictates the result here. The FHFA (like the CFPB) is an agency led by a single Director, and the [Housing and Economic Recovery Act of 2008 (Recovery Act)] (like the Dodd-Frank Act) restricts the President’s removal power.”
Last July, the Court agreed to review the U.S. Court of Appeals for the 5th Circuit’s en banc decision (covered by InfoBytes here) issued in a 2016 lawsuit brought by a group of Fannie Mae and Freddie Mac (GSEs) shareholders against the U.S. Treasury Department and FHFA. The shareholders claimed that the Recovery Act, which created the agency, violated the separation of powers principal because it only allowed the president to fire the FHFA director “for cause,” and that FHFA acted outside its statutory authority when it adopted a third amendment to the Senior Preferred Stock Purchase Agreements, which replaced a fixed-rate dividend formula with a variable one requiring the GSEs to pay quarterly dividends equal to their entire net worth minus a specified capital reserve amount to the Treasury Department (known as the “net worth sweep”). Following the en banc rehearing, the appellate court reaffirmed its earlier decision that FHFA’s structure 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.”
While the split Court agreed with the 5th Circuit that the agency’s structure violates the Constitution’s separation of powers, the justices left intact the net worth sweep. “Although the statute unconstitutionally limited the President’s authority to remove the confirmed Directors, there was no constitutional defect in the statutorily prescribed method of appointment to that office. As a result, there is no reason to regard any of the actions taken by the FHFA in relation to the third amendment as void,” Justice Samuel Alito wrote for the majority. “It is not necessary for us to decide—and we do not decide—whether the FHFA made the best, or even a particularly good, business decision when it adopted the third amendment,” the Court added. “[W]e conclude only that under the terms of the Recovery Act, the FHFA did not exceed its authority as a conservator, and therefore the anti-injunction clause bars the shareholders’ statutory claim.” The Court remanded the case to determine “what remedy, if any, the shareholders are entitled to receive on their constitutional claim.”
Various concurring and dissenting opinions were issued as well. While concurring, Justice Elena Kagan noted that “[s]tare decisis compels the conclusion that the FHFA’s for-cause removal provision violates the Constitution. But the majority’s opinion rests on faulty theoretical premises and goes further than it needs to.” Justice Sonia Sotomayor dissented, writing: “[t]he Court has proved far too eager in recent years to insert itself into questions of agency structure best left to Congress. In striking down the independence of the FHFA Director, the Court reaches further than ever before, refusing tenure protections to an Agency head who neither wields significant executive power nor regulates private individuals.”
Shortly after the ruling, President Biden appointed Sandra L. Thompson as acting FHFA Director, effective immediately. Thompson has served at FHFA since March 2013 as Deputy Director of the Division of Housing Mission and Goals where she oversaw FHFA’s housing and regulatory policy, capital policy, financial analysis, fair lending, as well as all mission activities for the GSEs and the Federal Home Loan Banks. Former Director Mark Calabria issued a statement noting his respect for the Court’s decision and the authority of the president to remove the FHFA director.
Court grants interlocutory appeal in CFPB student loan servicing action
On February 26, the U.S. District Court for the Middle District of Pennsylvania granted a student loan servicer’s request for interlocutory appeal as to whether questions concerning the CFPB’s constitutionality stopped the clock on claims that it allegedly misled borrowers. The court’s order pauses a 2017 lawsuit in which the Bureau claimed the servicer violated the CFPA, FCRA, and FDCPA by allegedly creating obstacles for borrower repayment options (covered by InfoBytes here), and grants the servicer’s request to certify a January 13 ruling. As previously covered by InfoBytes, the servicer argued that the Supreme Court’s finding in Seila Law LLC v. CFPB (covered by a Buckley Special Alert—which held that that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the CFPB)—meant that the Bureau “never had constitutional authority to bring this action and that the filing of [the] lawsuit was unauthorized and unlawful.” The servicer also claimed that the statute of limitations governing the CFPB’s claims prior to the decision in Seila had expired, arguing that Director Kathy Kraninger’s July 2020 ratification came too late. The court disagreed, ruling, among other things, that “[n]othing in Seila indicates that the Supreme Court intended that its holding should result in a finding that this lawsuit is void ab initio.”
The court’s order sends the ruling to the 3rd Circuit to review “[w]hether an act of ratification, performed after the statute of limitations has expired, is subject to equitable tolling, so as to permit the valid ratification of the original action which was filed within the statute of limitations but which was filed at a time when the structure of the federal agency was unconstitutional and where the legal determination of the presence of the structural defect came after the expiration of the statute of limitations.” Specifically, the court explained that this particular “question does not appear to have been addressed by any court in the United States. . . .Not only is there a lack of conflicting precedent, there is no supporting precedent; indeed, no party has identified any comparable precedent.” Further, “[i]f this court erred in applying the doctrine of equitable tolling, it would almost certainly lead to a reversal on appeal and dismissal of this action,” the court noted.
Court says CFPB unconstitutionality argument strays from Supreme Court ruling in Seila
On January 13, the U.S. District Court for the Middle District of Pennsylvania denied a student loan servicer’s motion for judgment on the pleadings, ruling that the servicer’s argument that the CFPB is unconstitutional “strays afar” from the U.S. Supreme Court’s finding in Seila Law LLC v. CFPB. The servicer previously argued that the Supreme Court’s finding in Seila (covered by a Buckley Special Alert)—which held that that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the CFPB—meant that the Bureau “never had constitutional authority to bring this action and that the filing of [the] lawsuit was unauthorized and unlawful.” The servicer also claimed that the statute of limitations governing the CFPB’s claims prior to the decision in Seila had expired, arguing that Director Kathy Kraninger’s July 2020 ratification came too late. However, the court determined, among other things, that “[n]othing in Seila indicates that the Supreme Court intended that its holding should result in a finding that this lawsuit is void ab initio.” The court further noted that the servicer’s assertion that the Bureau “‘never had constitutional authority to bring this action’ is belied by Seila’s implicit finding that the CFPB always had the authority to act, despite the Supreme Court’s finding that the removal protection was unconstitutional.”