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  • Company Accused of Bilking 9/11 First Responders Out of Millions of Dollars Says CFPB Action Unlawful

    Courts

    On May 15, a New Jersey-based finance company and its affiliated parties filed a motion to dismiss allegations that it scammed first responders to the World Trade Center attack and NFL retirees with high-cost loans. As previously covered in InfoBytes, the CFPB and the New York Attorney General’s office (NYAG) claimed the defendants engaged in deceptive and abusive acts by misleading consumers into selling expensive advances on benefits to which they were entitled by mischaracterizing extensions of credit as assignments of future payment rights, thereby causing the consumers to repay far more than they received. The defendants’ motion to dismiss was prompted, in part, by the recent PHH v. CFPB decision in which the court held that the CFPB’s single director leadership structure is unconstitutional and, thus, that the agency must operate as an executive agency supervised by the President. Here, the defendants argue, the complaint issued against them is a “prime example of how the unchecked authority granted to the CFPB leads to administrative overreach that has a profound effect on the businesses and individuals the agency targets.”

    In response to the claims that they mischaracterized credit, the defendants assert that the complaint is “based on the erroneous theory that—despite clear contractual terms and the weight of legal authority to the contrary—these transactions are not true sales, but instead are ‘extensions of credit’ under the Consumer Financial Protection Act [(CFPA)], and therefore the [defendants] deceived consumers by labeling the agreements as sales.” The CFPA defines an extension of “credit” as “the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment.” In this instance, the defendants contend, there is no debt, no repayment obligation, and no “right granted to defer payment of a debt” because the consumers are the sellers of the asset.

    The defendants argue that (i)“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”; (ii) because these transactions do not fall into the CFPA’s definition of credit, the case lacks a federal cause of action; and (iii) “each cause of action in the [c]omplaint individually fails to state a claim for relief, including because the Government is flat out wrong in its contention that the underlying settlement proceeds are not assignable.”

    Courts Consumer Finance CFPB Enforcement State Attorney General PHH v. CFPB UDAAP Litigation Single-Director Structure

  • CFPB Orders Law Firm to Comply with CID

    Agency Rule-Making & Guidance

    On April 10, the CFPB issued a Decision and Order denying a law firm’s petition to set aside a civil investigative demand (CID) asking for information about the firm’s business practices to determine whether debt relief providers or lead generators engaged in “unlawful acts or practices in the advertising, marketing, or sale of debt relief services or products, including but not limited to debt negotiation, debit elimination, debt settlement, and credit counseling.” Specifically, the Bureau determined that none of the objections raised by the law firm warrant setting aside or modifying the CID.

    On March 19, the firm filed a petition to set aside the CID (issued on February 27, 2017), offering four key reasons why the CID should not be enforced:

    • the CFPB’s structure is unconstitutional and the CID should be stayed pending the PHH Corp. v. CFPB case;
    • the CFPB lacks supervisory and enforcement authority with respect to the law firm;
    • the CID’s requests are “excessively vague and overly broad”; and
    • the CID was issued after the Bureau failed to prevail on a contempt order before the district court.

    In responding to these arguments, the CFPB took the following positions. First, the Bureau contended that the law firm had waived its objection to the Bureau’s authority by failing to raise it during the meet-and-confer process with Bureau enforcement counsel. Second, the CFPB noted that under the Consumer Financial Protection Act, the Bureau has the authority to issue CIDs to “any person” who may have relevant information. Third, the Bureau disagreed that the requests in the CID were “excessively vague and overly broad,” and stated that the time to have raised this challenge was during the meet-and-confer process. However, the Bureau stated it is willing to engage in further discussions to determine if modifications may be appropriate. Fourth, the Bureau determined that the mere fact that the law firm in question was never held in contempt by a court of law does not preclude the CFPB “from issuing a CID or investigating whether it violated federal consumer financial law.”  Pursuant to the Decision and Order, the law firm is required to produce documents and provide answers to interrogatories within 10 calendar days.

    Agency Rule-Making & Guidance Consumer Finance CFPB Single-Director Structure Seila Law

  • PHH Submits Reply Brief in Case Against CFPB; DOJ Allocated 10 Minutes at May 24 Oral Argument

    Courts

    As recently covered by InfoBytes, on March 31 the CFPB and seven amicus curiae respondents each filed briefing in PHH Corp. v CFPB urging the D.C. Circuit to uphold the constitutionality of the Bureau’s single-director, independent-agency structure. On April 10, PHH filed a reply brief responding to the arguments raised by the CFPB and other respondents, and reiterating its position that, among other things, the en banc court should declare that the Dodd-Frank Act’s creation of the CFPB violated constitutional separation of powers requirements and that the only satisfactory remedy is the complete invalidation of the Bureau.

    Citing Myers v. United States, 272 U.S. 52 (1926), PHH contends that, “the Constitution does not permit Congress to assign any portion of the executive power to an ’independent’ officer who is not accountable to, and removable by, the President.” Id. at 113. Moreover, in addressing comparisons between the CFPB and the FTC, the mortgage lender’s reply argues that “[t]he CFPB’s broad executive, legislative, and adjudicative authority further refutes its claim that it is functionally ‘indistinguishable’ from the FTC in 1935” because, among other reasons, “[i]n 1935, the FTC had no substantive rulemaking powers—the FTC disclaimed that authority until 1962.” In support of this claim, PHH highlights the fact that “the CFPB has all the authority—and more—of a cabinet department such as Treasury or Justice” but “unlike most cabinet positions, the Director may unilaterally appoint every subordinate official in the agency, as well as hire and compensate all CFPB employees outside the normal competitive-service requirements” (emphasis added). In addition to addressing the constitutional issue, PHH’s reply brief also notes that the CFPB has offered no support for its effort to enforce a reinterpretation of the Real Estate Settlement Procedures Act against the companies.

    Oral argument is scheduled for May 24. As provided in a Per Curiam Order issued on April 11, the Court has allocated 30 minutes per side for the argument and an additional ten minutes of argument for the United States as amicus curiae. For additional background, please see our recent PHH Corp. v CFPB Case Update.

    Courts PHH v. CFPB Consumer Finance CFPB Dodd-Frank FTC RESPA Mortgages Litigation Single-Director Structure

  • CFPB Director Withdraws Notification for Final Decision in Payday Lender Charges; Parties File Differing Opinions

    Courts

    On March 31, CFPB Director Richard Cordray issued an order directing the Bureau’s Office of Administrative Adjudication to withdraw a February 13 notification informing the parties that the administrative proceeding against an online payday lender and its CEO (Respondents) had been submitted for a final decision by the CFPB.  The order noted that while the withdrawal “delay[s] [the] resolution of this appeal,” Director Cordray believed it to be appropriate in that it “help[s] minimize unnecessary or duplicative proceedings and . . . facilitate[s] a more efficient resolution of this matter.”

    The March 31 order follows a March 9 order in which parties were directed to file statements indicating whether they objected to the withdrawal of the notification. The parties offered differing opinions in their responses. In their March 24 filing, Respondents agreed generally with the Bureau’s reasons for withdrawal but sought clarification on the timing of the “proposed re-notification in this matter” and, furthermore, stressed that that re-notification should only be made once the cases of PHH Corp v. CFPB, Lucia v. SEC, and Bandimere v. SEC have been resolved by their respective courts. A three-judge panel had previously ruled in PHH that the structure of the CFPB was unconstitutional and that the Bureau’s interpretations of the kickback prohibitions of the Real Estate Settlement Procedures Act (RESPA) and RESPA’s statute of limitations provisions were erroneous. The full court granted the CFPB’s petition in February 2017 and explicitly vacated the panel’s decision (see previously posted Special Alert). Conversely, the Enforcement Counsel’s filing “respectfully” objected to the withdrawal of the notice “because resolution of the PHH matter will not determine the resolution of this proceeding and . . . any delay would be inefficient and would exacerbate the harm to affected consumers.”

    Last September, administrative law judge, the Hon. Parlen L. McKenna, recommended civil money penalties against Respondents totaling over $13 million as well as restitution of over $38 million to be paid to affected consumers. It further affirmed the CFPB’s allegations that the Respondents deceived consumers about the cost of short-term loans, thereby violating the Truth in Lending Act, the Electronic Fund Transfer Act, and the Consumer Financial Protection Act’s prohibition against deceptive acts or practices. Following the recommended decision, the Respondents filed a notice of appeal.

    Courts CFPB Payday Lending PHH v. CFPB Litigation Single-Director Structure

  • Case Update: PHH Corp. v CFPB

    Courts

    March 31 marked the deadline for the CFPB to file its brief in response to PHH Corporation in the U.S. Court of Appeals for the District of Columbia Circuit’s en banc review of the CFPB’s enforcement action against PHH for alleged violations of the Real Estate Settlement Procedures Act (RESPA). As previously covered by InfoBytes, the PHH case began as a challenge to a 2015 penalty the CFPB levied against PHH, which was collected as part of what the CFPB deemed – a “captive reinsurance arrangement.” In fighting the penalty, PHH called into question the Bureau’s constitutionality and in October 2016, a panel of the D.C. Circuit concluded both that the CFPB misinterpreted RESPA, and also that its single-Director structure violated the constitutional separation of powers. On February 16 of this year, however, the D.C. Circuit granted the CFPB’s petition for rehearing en banc of the October 2015 panel decision. In granting en banc review, the court sought guidance from the parties on three specific questions: 

    • Is the Bureau’s structure unconstitutional because its Director may be removed only for cause, and if so, is the appropriate remedy to sever the for-cause removal provision from the Consumer Financial Protection Act?; 
    • May the Court avoid addressing the constitutionality of the Bureau’s structure if it adopts the panel’s holdings as to PHH’s liability under RESPA (and should it adopt those holdings)?; and
    • What is the appropriate disposition of this case if this Court concludes that the SEC’s administrative law judges are “inferior officers” under Lucia v. SEC? 

    Oral argument is scheduled for May 24. This Court has allocated 30 minutes per side for the argument and, as discussed further below, the Department of Justice (DOJ) has filed an unopposed motion seeking ten minutes of argument time for the United States at the May 24 en banc hearing.

    CFPB’s Brief. On March 31, the CFPB filed its brief for the en banc rehearing in PHH Corp. v CFPB urging the D.C. Circuit  to uphold the constitutionality of the Bureau’s single-director, independent-agency structure. According to the CFPB, neither the Bureau’s current single-director arrangement, nor the “for-cause” restriction on the President’s removal powers prevents the Executive branch from ensuring that the nation’s laws are implemented. Specifically, the brief explains that “[t]he President has no less control over a single-director agency than he does over a multi-member commission.” The brief also sets forth the Bureau’s position that, even “[i]f this Court determines that the Bureau’s structure is unconstitutional,” the appropriate remedy is not to invalidate the agency in its entirety, but rather to “sever the for-cause removal provision” of the Dodd-Frank Act (the Act), thereby allowing the President to remove the Bureau’s director for any reason. In addition to addressing the constitutional question, the CFPB also reiterated its argument that its RESPA interpretation is correct, that PHH and its affiliates violated RESPA, and that the Act’s statute of limitations does not apply to the Bureau’s administrative enforcement authority. And, at the direction of the court, the brief also addressed the potential effect of a decision in Lucia v. SEC that a SEC administrative law judge (ALJ) was an inferior officer under the Constitution. The ALJ used by the CFPB in the PHH enforcement proceeding was, in fact, borrowed from the SEC. Notably, Lucia v. SEC is scheduled to be argued immediately before PHH Corp. v. CFPB, on May 24, 2017.

    Amicus Curiae in Support of the CFPB. Also filed on March 31 were seven amicus curiae briefs, each of which offered arguments, both legal and non-legal, in favor of the CFPB’s continued existence as an independent regulator:

    PHH’s Brief. Briefing for PHH and amicus curiae briefs in support of the mortgage lender were due on March 17. In its opening brief and addendum, PHH focused on the separation-of-powers and remedy issues, raising the RESPA interpretation issue principally in support of the claim that the CFPB’s unconstitutional structure rendered the Bureau dangerously unaccountable. The New Jersey mortgage lender noted, among other things, that Congress has no ability to cut the agency’s budget and the President cannot remove its director without cause. As a general matter, the mortgage lender has argued that the Bureau’s creation “placed massive, unchecked federal power in the hands of a single, unaccountable director” and that “[t]he director alone rules over large swaths of the field of consumer finance, subject to virtually no restraints from the representative branches.”

    DOJ Brief. As previously covered by InfoBytes, the DOJ filed its own brief in the case on March 17, arguing in support of the D.C. Circuit panel’s initial ruling and proposed remedy. The DOJ brief stated, among other things, that, “[w]hile we do not agree with all of the reasoning in the panel’s opinion,” the DOJ agrees with the panel’s conclusion that “a removal restriction for the Director of the CFPB is an unwarranted limitation on the President’s executive power” and that “the panel correctly concluded … that the proposed remedy for the constitutional violation is to sever the provision limiting the President’s authority to remove the CFPB’s Director, not to declare the entire agency and its operations unconstitutional.”  As  covered recently on InfoBytes, the DOJ presented arguments that differed both from the CFPB and from the positions previously presented by the Obama Administration in briefing submitted on behalf of the United States back in December. 

    Also, as mentioned above, on April 3, the DOJ filed an unopposed motion seeking ten minutes of argument time for the United States at the May 24 en banc hearing.

    Amicus Curiae in Support of PHH. The March 10 deadline in the en banc proceeding also brought about the filing of seven amicus curiae briefs in support of PHH’s claims and/or defenses. Six of these filings took the position that the Bureau’s current structure violates separation-of-powers principles:

    A seventh—filed by a combined group of 13 banking and residential real estate-related organizations—argued in support of the company’s interpretation of the RESPA. According to this brief, the CFPB incorrectly changed a long-standing RESPA interpretation that permitted the use of captive reinsurance companies under appropriate circumstances. The changed interpretation was contrary to the Act and to the CFPB’s own regulation. The brief also argued that the Bureau improperly changed the interpretation and applied the new interpretation in an enforcement action without proper notice.

    Courts PHH v. CFPB Consumer Finance Federal Issues RESPA DOJ Mortgages Litigation Single-Director Structure

  • CFPB Director Cordray Faces Tough Questioning During House Financial Services Committee Hearing

    Consumer Finance

    On April 5, CFPB Director Richard Cordray appeared before the House Financial Services Committee in order to “report on the Bureau’s activities and face questions from lawmakers about the harm those activities cause consumers.” As explained in a memorandum issued by the Committee in advance of the hearing, Section 1016 of the Dodd-Frank Act requires the Bureau Director to publish a semi-annual report on the Bureau’s activities and to testify on the report before the House Financial Services and Senate Banking Committees. The April 5 hearing explored the Bureau’s most recent two reports—Spring 2016 and Fall 2016.

    Committee Chairman Jeb Hensarling (R-Texas) used Wednesday’s hearing to, among other things, make a case for the firing of the Director for cause. Describing the Bureau as an “unelected, unaccountable and unconstitutional” agency, the Chairman argued that “[f]or all the harm inflicted upon consumers, [Director Cordray] should be dismissed by the President.” The Chairman thereafter “call[ed] upon the president—yet again—to do just that, and to do it immediately.” In addition to debating the constitutionality of the agency, the Committee also spent time discussing the timing (and true extent) of the Bureau’s involvement in certain recent investigations and enforcement actions the CFPB has taken credit for.

    Meanwhile, the Democrats on the Committee urged Cordray to stand firm amid efforts to oust him. In her opening statement, the Panel’s Ranking Member, Rep. Maxine Waters (D-Calif.) thanked the Director for his “sustained strong leadership” and for “doing exactly the job [he is] supposed to do,” and “doing it well.” Rep. Waters also characterized the Bureau as “an invaluable ally to consumers” whose “work must continue.”

    As previously covered on InfoBytes, GOP committee members have been calling for the abolition of the CFPB, suggesting both that “President Trump should immediately fire CFPB Director Richard Cordray” and that “the agency must be functionally terminated,” so that “[c]onsumer protection can instead come through an accountable and constitutional process.” By contrast, Democrats on the committee have consistently urged the President to reject calls by GOP members to fire the CFPB Director noting, among other things, that an attempt by the President to fire Director Cordray “for cause” would be hard-pressed to withstand a legal challenge.

    Consumer Finance House Financial Services Committee CFPB Cordray Single-Director Structure

  • House Financial Services Committee Holds Hearing to Consider the “Unconstitutional Structure of the CFPB”

    Agency Rule-Making & Guidance

    On March 21, the Oversight and Investigations Subcommittee of the House Financial Services Committee held a hearing entitled “The Bureau of Consumer Financial Protection's (CFPB's) Unconstitutional Design.” The majority staff memorandum issued prior to hearing stated that its purpose was to: (i) “examine whether the structure of the [CFPB] violates the Constitution,” and (ii) consider potential “structural changes to the Bureau to resolve any constitutional infirmities.”

    Chairwoman Rep. Ann Wagner (R-Mo.) introduced the proceeding by describing the CFPB as a “an unconstitutional behemoth” with a 'Washington knows best' mindset,” that “side-steps accountability to Congress and the President.” Three of the four witnesses called to testify before the panel shared the general position that the CFPB is unconstitutional as currently structured. 

    • The Honorable Theodore Olson , a partner at Gibson, Dunn & Crutcher LLP and lead counsel for PHH in its suit against the CFPB, shared his personal opinion that the Bureau, “[m]ore than any other administrative agency ever created by Congress,” is “far outside of our constitutional structure, holds the potential for tyrannical governance, and obscures the lines of governmental accountability. [T]he CFPB’s structure is the product of aggregating some of the most democratically unaccountable and power-centralizing features of the federal government’s administrative state.” Particularly with respect to the President, Mr. Olson noted that “by preventing the President from removing the head of the Bureau except for very limited circumstances,” the President is effectively “stripped of the power to faithfully execute the laws in these circumstances.” 
    • Professor Saikrishna Prakash, a Law Professor at the University of Virginia School of Law questioned the Bureau’s constitutionality, characterizing the Director of the CFPB as “the second most powerful officer in the government for he serves under no one’s supervision, enjoys a vast budget not subject to the appropriations process, and exerts enormous influence over several prominent aspects of the economy.” 
    • Adam White, a Research Fellow with the Hoover Institution similarly urged Congress to reform the CFPB while also cautioning against allowing the “CFPB’s original structure to . . . become the new benchmark for the next generation of ‘independent agencies.’” 

    Meanwhile, offering several arguments in support of the Bureau’s current structure was Brianne Gorod – a public interest attorney who has helped prepare briefing in the PHH v CFPB matter on behalf of “current and former members of Congress, who were sponsors of Dodd-Frank” and “participated in drafting it,” and “serve or served on committees with jurisdiction over the [CFPB].” (See, e.g., Motion for Leave to Intervene in Support of the CFPB). Ms. Gorod argued, among other things, that “the President’s ability to remove the Director [of the CFPB] only for cause does not ‘impede the President’s ability to perform his constitutional duty[,]’” but rather, to the contrary, “provides the Executive with substantial ability to ensure that the laws are ‘faithfully executed.’” For this reason and others, Ms. Gorod argued that “the CFPB’s leadership structure . . . is consistent with the text and history of the Constitution, as well as Supreme Court precedent.”

    Agency Rule-Making & Guidance Consumer Finance CFPB House Financial Services Committee PHH v. CFPB Mortgages Litigation Single-Director Structure

  • Trump Administration Files Brief in PHH Corp. v. CFPB

    Agency Rule-Making & Guidance

    On March 17, the Trump Administration’s Department of Justice (“DOJ”) filed its amicus brief in the D.C. Circuit’s en banc review of the CFPB’s enforcement action against PHH Corporation for alleged violations of the Real Estate Settlement Procedures Act (“RESPA”). In October 2016, a panel of the D.C. Circuit concluded that the CFPB misinterpreted RESPA and that its single-Director structure violated the constitutional separation of powers. The DOJ brief states that, “[w]hile we do not agree with all of the reasoning in the panel’s opinion,” the DOJ agrees with the panel’s conclusion that “a removal restriction for the Director of the CFPB is an unwarranted limitation on the President’s executive power” and that “the panel correctly concluded … that the proposed remedy for the constitutional violation is to sever the provision limiting the President’s authority to remove the CFPB’s Director, not to declare the entire agency and its operations unconstitutional.”

    Like the brief filed in this case by the Obama Administration DOJ before the change in administration, the current DOJ brief states that “[t]he United States takes no position on the statutory issues in this case, but in the event that the ultimate resolution of those issues results in vacatur of the CFPB’s order [against PHH], it is within this Court’s discretion to avoid ruling on the constitutional question.” However, the brief goes on to state that, because the issue is already before the en banc court and the “question is likely to recut in pending and future cases, it would be appropriate for the Court to provide needed clarity by exercising its discretion to resolve the separation-of-powers issue now.”

    Agency Rule-Making & Guidance Consumer Finance Federal Issues CFPB PHH v. CFPB DOJ Mortgages RESPA Litigation Trump Single-Director Structure

  • House Oversight Committee to Hold Hearing on March 21 Examining CFPB’s “Unconstitutional Design”

    Consumer Finance

    On March 16, the U.S. House of Representatives Subcommittee on Oversight and Investigations announced it will hold a hearing on Tuesday, March 21, at 10:00 a.m., entitled “The Bureau of Consumer Financial Protection’s Unconstitutional Design.” According to a March 16 Committee Memorandum, the hearing—which will be held in room 2128 of the Rayburn House Office Building—will examine, among other things, “whether the structure of the CFPB (Bureau) violates the Constitution as well as structural changes to the Bureau to resolve any constitutional infirmities.” The following witnesses are scheduled to testify:

    • The Honorable Theodore Olson, Partner, Gibson, Dunn & Crutcher LLP
    • Professor Saikrishna Prakash, James Monroe Distinguished Professor, University of Virginia School of Law
    • Mr. Adam White, Research Fellow, Hoover Institution
    • Ms. Brianne Gorod, Chief Counsel, Constitution Accountability Center

    Consumer Finance Federal Issues House Oversight Committee CFPB Single-Director Structure

  • In a Split Decision, D.C. Circuit Denies John Doe Company’s Request to Remain Anonymous Pending Appeal Challenging CFPB Subpoena; Judge Kavanaugh Dissents, Reiterates Critique of CFPB

    Courts

    On March 3, 2017, the U.S. Court of Appeals for the District of Columbia Circuit denied the request of an anonymous California-chartered, finance company based in the Philippines to remain anonymous pending the resolution of its challenge to a CFPB administrative subpoena. See John Doe Co. v. CFPB, March 3, [Order] No. 17-5026 (D.C. Cir. Mar. 3, 2017) (per curiam). In a 2-1 decision, the court found that the company had failed to show either that it was likely to succeed on the merits of its challenge to the CFPB’s constitutionality, or that it was likely to suffer irreparable harm from being identified as being under investigation. In denying the company’s motion, the panel majority emphasized, among other things, the fact that “[t]he Company’s sole argument regarding likelihood of success on the merits before this court and the district court has been to point to the now-vacated majority opinion in PHH.”   Judge Kavanaugh—who  back in October, assailed the “massive, unchecked” power of the single director-led CFPB—filed a dissenting opinion, in which he reiterated his call for how to fix the CFPB: namely, giving the president greater power to remove the agency’s director.

    As previously covered on InfoBytes, back in January, the John Doe finance company filed an action seeking to set aside or keep confidential a “civil investigative demand” served on the Company by the CFPB as part of an industry-wide investigation against companies that buy and sell income streams. The Company argued both that the CFPB had strayed outside the scope of its authority, and that in light of the pending challenge to the constitutionality of its structure in a separate case (PHH v CFPB), the Bureau should be barred from pursuing any investigation until the questions about its constitutionality are resolved. Fearing that the CFPB would post documents on its website revealing its identity, the company also sought a temporary restraining order to enjoin the CFPB from, among other things, disclosing the existence of its investigation and taking any action against the company unless and until the CFPB is constitutionally structured. John Doe Co. v. CFPB, D.D.C., No. 17-cv-00049 (D.D.C. Jan. 10, 2017). As covered in a recent BuckleySandler Special Alert, however, the D.C. Circuit on February 16, vacated the October 2015 panel decision in PHH v CFPB and will now rehear the case en banc.

    Courts Consumer Finance CIDs John Doe v CFPB PHH v. CFPB Litigation Single-Director Structure

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