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House passes appropriations bill that includes several financial services provisions, brings CFPB into the appropriations process
On July 19, the House passed H.R. 6147, the “Interior, Environment, Financial Services, and General Government Appropriations Act, 2019” by a vote of 217 to 199. Under the appropriations bill, the CFPB would be brought into the appropriations process, and a change to Dodd-Frank would strike the “for-cause” provision on the president’s authority to remove the director, which has been the subject of significant litigation. (See here for continuing InfoBytes coverage on legal challenges to the CFPB’s constitutionality.) Several other financial services provisions would, among other things, (i) amend the Federal Financial Institutions Examination Council Act of 1978 to create an independent examination review director to evaluate bank examination procedures to ensure consistency; (ii) authorize the Federal Reserve to make Volcker Rule exemption determinations and issue and amend rules under Section 13 of the Banking Holding Company Act; (iii) allow the appropriate federal banking agencies to make process improvements for living will submissions; (iv) amend the Fair Credit Reporting Act (FCRA) to allow the furnishing of positive credit reporting related to a consumer’s performance when making payments under a lease agreement with respect to a dwelling or pursuant to a contract for utility or telecommunications services; and (v) require the Comptroller General of the United States to submit a report on the impact of furnishing consumer information, pursuant to the amendments of the FCRA, to Congress no later than two years after the date of the enactment of this Act. As previously covered in InfoBytes, a similar measure concerning the furnishing of consumer data was also introduced as part of S. 488, which passed the House on July 17 as part of a larger package of securities and banking bills. H.R. 6147 now heads to the Senate.
CFPB Succession: Kraninger testifies before Senate Banking Committee; Bureau nominates Paul Watkins to lead Office of Innovation
On July 19, the Senate Banking Committee held a confirmation hearing for Kathy Kraninger on her nomination as permanent director of the CFPB. Prior to the hearing, the White House issued a fact sheet asserting that “Kraninger has the management skills and policy background necessary to reform and refocus the Bureau.” In her written testimony Kraninger shared four initial priorities: (i) the Bureau should be fair and transparent, utilize a cost benefit analysis to facilitate competition, and effectively use notice and comment rulemaking to ensure the proper balance of interests; (ii) the Bureau should work closely with other regulators and states to “take aggressive action against bad actors who break the rules by engaging in fraud and other illegal activities”; (iii) data collection will be limited to what is needed and required under the law and measures will be taken to ensure the protection of the data; and (iv) the Bureau will be held accountable to the public for its actions, including its expenditure of resources.
Chairman of the Committee Senator Mike Crapo, R-Idaho, remarked in his opening statement that he hoped Kraninger “will be more accountable to senators on this Committee than Director Cordray was” but that he had “the utmost confidence that she is well-prepared to lead the Bureau in enforcing federal consumer financial laws and protecting consumers in the financial marketplace.” Conversely, Senator Elizabeth Warren, D-Mass., released a staff report prior to the hearing detailing Kraninger’s tenure at OMB and identifying her participation in several alleged management failures in the current administration.
During the hearing, Kraninger received questions covering a range of topics, including whether she would appeal last month’s ruling by a federal judge in New York that the CFPB’s structure was unconstitutional. (See previous InfoBytes coverage on the ruling here.) Kraninger responded that constitutionality questions are “not for me in this position to answer.” However, Kraninger did comment that “Congress, through [the] Dodd-Frank Act, gave the Bureau incredible powers and incredible independence from both the president and the Congress in its structure. . . . My focus is on running the agency as Congress established it, but certainly working with members of Congress. I’m very open to changes in that structure that will make the agency more accountable and more transparent.” Kraninger also commended recent efforts by the OCC to encourage banks to make small-dollar loans, discussed plans to consult Bureau staff on the use of the disparate impact theory in enforcement, and stated she will seek to promote the agency’s regulatory views through formal rulemaking instead of through enforcement.
On July 18, acting Director of the CFPB Mick Mulvaney announced the selection of Paul Watkins to lead the Bureau’s new Office of Innovation. The Office of Innovation—a recent addition to the Bureau—will focus on policies for facilitating innovation, engage with entrepreneurs and regulators, and review outdated or unnecessary regulations. Specifically, the Office of Innovation will replace what was previously known as Project Catalyst, which was—as previously discussed in InfoBytes—responsible for facilitating innovation in consumer financial services. Prior to joining the Bureau, Watkins worked for the Arizona Attorney General and helped launch the first state regulatory sandbox for fintech innovation. (See previous InfoBytes coverage on Arizona’s regulatory sandbox here.) Earlier in May, Mulvaney announced at a luncheon hosted by the Women in Housing & Finance that the Bureau is working to build its own regulatory sandbox program, and last year the agency took steps to make it easier for emerging technology companies to comply with federal rules by issuing its first “no action letter.”
5th Circuit rules FHFA structure violates Constitution’s separation of powers
On July 16, in a divided opinion, the U.S. Court of Appeals for the 5th Circuit affirmed in part and reversed in part a lower court’s decision that addressed two claims brought by a group of Fannie Mae and Freddie Mac (government-sponsored entities or GSEs) shareholders: (i) whether the Federal Housing Finance Agency (FHFA) acted within its statutory authority when it adopted a dividend agreement, which requires the GSEs to turn over every quarter “dividends equal to their entire net worth” to the Treasury Department; and (ii) whether the structure of the FHFA is unconstitutional and in violation of the separation of powers. The lower court previously dismissed the shareholder’s statutory claims and granted summary judgment in favor of the Treasury Department and the FHFA on the constitutional claim. In addressing the first claim, the appellate court agreed with the lower court and found the government-sponsored entities’ payments acceptable under the agency’s statutory authority and that the FHFA was lawfully established by Congress through the Housing and Economic Recovery Act of 2008, which places restrains on judicial review. However, the appellate court reversed the lower court’s decision as to the second claim and agreed with shareholders 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. “We hold that Congress insulated the FHFA to the point where the Executive Branch cannot control the FHFA or hold it accountable,” the opinion stated. The divided appellate panel remanded to the lower court for further proceedings.
Earlier this year, in response to a challenge to the CFPB's single-director structure, the U.S. Court of Appeals for the D.C. Circuit en banc upheld the CFPB’s constitutionality in a 7-3 decision (see Buckley Sandler Special Alert). The 5th Circuit is also scheduled to hear a challenge by two Mississippi-based payday loan and check cashing companies to the constitutionality of the CFPB’s single-director structure, in which 14 state Attorney General filed an amici curiae brief encouraging the appellate court to disagree with the en banc decision of the D.C. Circuit. (See previous InfoBytes coverage here and here.)
Texas Attorney General leads 14-state brief to 5th Circuit challenging CFPB structure
On July 10, the Attorney General of Texas and 13 other state Attorneys General filed an amici curiae brief with the U.S. Court of Appeals for the 5th Circuit, challenging the constitutionality of the CFPB. As previously covered by InfoBytes, in April, 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 in response to a CFPB action filed against the companies. The brief encourages the appellate court to disagree with the en banc decision of the D.C. Circuit, which upheld the Bureau’s structure (covered by a Buckley Sandler Special Alert). Instead, the Attorneys General argue, the court should find the structure unconstitutional rendering “all its actions unlawful.” The brief poses similar arguments to past challenges, including (i) the director should be removable at will by the president and (ii) the president’s removal power should only be restricted for multi-member commissions.
Notably, the U.S. District Court for the Southern District of New York recently disagreed with the D.C. Circuit decision, concluding the CFPB’s organizational structure is unconstitutional and terminated the Bureau as a party to an action because the agency lacked the authority to bring claims under the Consumer Financial Protection Act (CFPA). (Previously covered by InfoBytes here.)
New York Attorney General: Don’t delay action if CFPB appeals constitutionality determination
On July 9, the New York Attorney General and a New Jersey-based litigation funding company and its affiliates filed a joint letter in the U.S. District Court for the Southern District of New York addressing how the parties would like to proceed in the legal matter after the court terminated the CFPB as a party to the action. As previously covered by InfoBytes, in June, the district court held the agency’s structure is unconstitutional and therefore not allowed to bring claims under the Consumer Financial Protection Act (CFPA), but allowed the Attorney General to continue the action. The letter discusses the parties’ desired path for the litigation should the Bureau choose to appeal the court’s constitutionality determination. If the Bureau should appeal, the defendants request the court allow the immediate appeal and stay the current litigation, while the Attorney General disagrees with allowing the immediate appeal and “would like the case to proceed as expeditiously as possible.”
As for whether the court continues to have jurisdiction over the remaining claims, the Attorney General argues that the federal district court continues to have subject matter jurisdiction over the Consumer Financial Protection Act (CFPA) claims and supplemental jurisdiction over the state law claims. The defendants disagree and interpret the June decision to strike all substantive provisions of the CFPA that would form the basis for federal jurisdiction.
The letter states the Bureau has not yet decided if it will pursue an appeal of the court’s determination.
NY District Court holds CFPB structure is unconstitutional
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.”
Supreme Court holds SEC ALJs are subject to the Appointments Clause of the Constitution
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).
District Court denies joint request to stay payday rule but agrees to stay lawsuit
On June 12, the U.S. District Court for the Western District of Texas denied a joint request by the CFPB and two payday loan trade groups to stay the compliance date (August 19, 2019) of the Bureau’s final rule on payday loans, vehicle title loans, and certain other high-cost installment loans (Rule) until 445 days after final judgment in the pending litigation. The court declined to provide an explanation for the denial, but did grant the parties’ joint request to stay the lawsuit pending further court order. As previously covered by InfoBytes, the payday loan trade groups filed a lawsuit in April asking the court to set aside the Rule on the grounds that, among other reasons, the CFPB is unconstitutional and the Bureau’s rulemaking failed to comply with the Administrative Procedure Act. On May 31, the parties filed a joint request to stay the lawsuit and the compliance date for the Rule because of the Bureau’s plans to reconsider the Rule, which may repeal or revise certain provisions rendering the case moot or otherwise resolved.
CFPB dismisses PHH suit and removes all members of three advisory councils
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.
CFPB Succession: Bureau asks court to stay payday rule litigation; Mulvaney: Bureau may resume PII collection; working on a fintech regulatory “sandbox”; will consider scale and frequency of violations in future actions
On May 31, the CFPB filed a joint motion with two payday loan trade groups, requesting a stay of litigation pending the Bureau’s reconsideration of its final rule on payday loans, vehicle title loans, and certain other high-cost installment loans (Rule) and requesting a stay of the compliance date—currently set for August 19, 2019 for most substantive sections—of the Rule until 445 days after final judgment in the litigation. The motion argues that the stay is necessary for the duration of the rulemaking process because “the rulemaking process may result in repeal or revisions of the [Rule] and thereby moot or otherwise resolve this litigation.” As previously covered by InfoBytes, on April 9, the payday loan trade groups filed the lawsuit in the U.S. District Court for the Western District of Texas asking the court to set aside the Rule because, among other reasons, the CFPB is unconstitutional and the Bureau’s rulemaking failed to comply with the Administrative Procedure Act. The Bureau announced its intention to reconsider the Rule in January, and reiterated that intent in its Spring 2018 rulemaking agenda.
Additionally, acting Director of the CFPB, Mick Mulvaney, reportedly lifted the ban on the Bureau’s collection of personally identifiable information after an independent review concluded that “externally facing Bureau systems appear to be well-secured.” The ban was initially announced in December 2017, soon after Mulvaney began his acting role.
On May 29, Mulvaney stated in response to a question at a luncheon hosted by the Women in Housing & Finance that the CFPB is working closely with the U.S. Commodities Futures Trading Commission (CFTC) on developing a regulatory “sandbox” for fintech companies—which would provide targeted regulatory relief for companies to test new consumer financial products. While he did not provide many details on the project, he did note the Bureau was reviewing similar state actions for guidance (as previously covered by InfoBytes, Arizona was the first state to create a regulatory sandbox for fintech innovation). Additionally, in response to another question, Mulvaney noted that the Bureau may begin to take into account the scale and frequency of violations when determining whether to take action against a company; a practice, according to Mulvaney, that was not done under previous leadership. When referring to his authority to decide when to pursue an action, he stated, “I think if [a company is] doing something less than one-tenth of 1 percent of the time, maybe…it's evidence of a lack of criminal intent, and maybe there's a good place ... for me to execute some prosecutorial discretion."
Overall, Mulvaney’s remarks were consistent with previous comments about the direction of the Bureau, including his intention to end the practice of “regulation by enforcement” and his desire to move the CFPB under the Congressional appropriations process. He noted that he is still in the process of reviewing the public disclosure of consumer complaints and whether or not the Consumer Complaint Database will continue to be publicly available. Additionally, he was unable to provide a status update on the Bureau’s future debt collection rule (the Spring 2018 rulemaking agenda lists the rule in a “Proposed Rule Stage” and has the deadline for a notice of proposed rulemaking set for February 2019, see InfoBytes coverage here). Lastly, he reiterated the Bureau’s recent announcement that it is reviewing applications of the disparate impact doctrine under ECOA, stating that he is “reviewing all of [the Bureau’s] rules regarding ECOA, not just in auto lending” because Dodd-Frank requires that the Bureau “enforce federal consumer financial law consistently without regard to the status of the person.”