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House subcommittee discusses CFPB reform proposals
On March 9, the House Financial Services Committee’s Subcommittee on Financial Institutions and Monetary Policy held a hearing to discuss proposals that would alter the structure and authority of the CFPB. The subcommittee heard from several witnesses, including the CEO of the American Financial Services Association (AFSA), the Bureau’s former deputy director, and the Minnesota attorney general.
During the hearing, members discussed legislation that would reform the Bureau, including: (i) the Consumer Financial Protection Commission Act, which would make the Bureau an independent commission; (ii) the Transparency in CFPB Cost-Benefit Analysis Act, which would require the Bureau to include a statement justifying any proposed rulemaking (including “why the private market, State, local, or tribal authorities cannot adequately address the problem”), as well as provide qualitative and quantitative cost assessments and data or studies used in preparing a proposal; (iii) the CFPB-IG Reform Act, which would create a separate inspector general for the Bureau; and (iv) the Taking Account of Bureaucrats’ Spending (TABS) Act, which would make the Bureau an independent agency from the Federal Reserve System called the “Consumer Financial Empowerment Agency” that would be funded through congressional appropriations rather than the Fed.
In his prepared testimony, the AFSA CEO alleged several examples of regulatory overreach taken by the Bureau, including: (i) imposing limits on arbitration, despite the Bureau’s own finding that arbitration benefits consumers; (ii) releasing guidance, instead of legislative rulemaking, which creates ambiguity for companies and consumers; (iii) using “regulation by enforcement” to change TILA and creating an ability to repay standard that does not exist in any consumer financial law or regulation; (iv) issuing press releases that serve as regulations and provide recommendations inconsistent with the plain language of laws such as the SCRA; and (v) creating potential harm to servicemembers through misinterpretations of the Military Lending Act. He further explained that a press release issued by the Bureau last year on junk fees (covered by InfoBytes here) “goes beyond its authority” and creates confusion for both depository institutions and finance companies who are unsure what the rules are. He emphasized that “the best way to protect consumer is to protect access to credit,” and the best method for achieving this “is to have clearly defined terms and conditions that both industry and the regulatory community can understand and follow.”
The former CFPB deputy director also asserted in his prepared testimony that the agency is prone to exceeding statutory limits or requirements. He commented that “[w]hile one or two of these actions could perhaps be dismissed as over-exuberance, the frequency with which these issues arise suggests that the agency lacks adequate internal or external controls to ensure it operates within the law,” and that in “the absence of these controls . . . [it] compels the conclusion that the CFPB is ripe for reform.” He also maintained that having the Bureau go through the annual appropriations process would help the agency “focus its priorities” and “improve its effectiveness and efficiency.” He further noted that expanding the Bureau’s UDAAP authority to cover conduct it observes in the marketplace (such as applying UDAAP credit discrimination laws to any decision making by a financial institution) is “a decision fundamentally for Congress.”
The Minnesota attorney general, however, highlighted joint enforcement actions taken with the Bureau in his prepared testimony, stating that by serving “as a critical enforcement partner,” the agency is operating as Congress intended when it created the Bureau in response to the 2008 financial crisis. “The CFPB’s destruction would topple the whole system like dominos,” he stressed, adding that the funding arguments fall short as several federal agencies are not funded by Congress.
Senators Sherrod Brown (D-OH), Chair of the Senate Banking Committee, and Representative Maxine Waters (D-CA), Ranking Member of the House Financial Services Committee, issued a statement strongly disagreeing with the introduced legislation. “We will continue to work with our colleagues to stop any anti-consumer bill and protect the CFPB so that consumers can continue to have an agency solely dedicated to protecting their hard-earned money,” the lawmakers said.
Online lender asks Supreme Court to review ALJ ruling
A Delaware-based online payday lender and its founder and CEO (collectively, “petitioners”) recently submitted a petition for a writ of certiorari challenging the U.S. Court of Appeals for the Tenth Circuit’s affirmation of a CFPB administrative ruling related to alleged violations of the Consumer Financial Protection Act (CFPA), TILA, and EFTA. The petitioners asked the Court to first review whether the high court’s ruling in Lucia v. SEC, which “instructed that an agency must hold a ‘new hearing’ before a new and properly appointed official in order to cure an Appointments Clause violation” (covered by InfoBytes here), meant that a CFPB administrative law judge (ALJ) could “conduct a cold review of the paper record of the first, tainted hearing, without any additional discovery or new testimony.” Or, the petitioners asked, did the Court intend for the agency to actually conduct a new hearing. The petitioners also asked the Court to consider whether an agency funding structure that circumvents the Constitution’s Appropriations Clause violates the separation of powers so as to invalidate prior agency actions promulgated at a time when the Bureau was receiving such funding.
The case involves a challenge to a 2015 administrative action that alleged the petitioners engaged in unfair or deceptive acts or practices when making short-term loans (covered by InfoBytes here). The Bureau’s order required the petitioners to pay $38.4 million as both legal and equitable restitution, along with $8.1 million in penalties for the company and $5.4 million in penalties for the CEO. As previously covered by InfoBytes, between 2018 and 2021, the Court issued four decisions, including Lucia, which “bore on the Bureau’s enforcement activity in this case” by “deciding fundamental issues related to the Bureau’s constitutional authority to act” and appoint ALJs. During this time, two different ALJs decided the present case years apart, with their recommendations separately appealed to the Bureau’s director. The director upheld the decision by the second ALJ and ordered the lender and its owner to pay the restitution. A district court issued a final order upholding the award, which the petitioners appealed, arguing, among other things, that the enforcement action violated their due-process rights by denying the CEO additional discovery concerning the statute of limitations. The petitioners claimed that they were entitled to a “new hearing” under Lucia, and that the second administrative hearing did not rise to the level of due process prescribed in that case.
However, the 10th Circuit affirmed the district court’s $38.4 million restitution award, rejecting the petitioners’ various challenges and affirming the director’s order. The 10th Circuit determined that there was “no support for a bright-line rule against de novo review of a previous administrative hearing,” nor did it see a reason for a more extensive hearing. Moreover, the petitioners “had a full opportunity to present their case in the first proceeding,” the 10th Circuit wrote.
The petitioners maintained that “[d]espite the Court’s clear instruction to hold a ‘new hearing,’ ALJs and courts have reached divergent conclusions as to what Lucia requires, expressing confusion and frustration regarding the lack of guidance.” What it means to hold a “new hearing” runs “the gamut,” the petitioners wrote, pointing out that while some ALJs perform a full redo of the proceedings, others merely accept a prior decision based on a cold review of the paper record. The petitioners argued that they should have been provided a true de novo hearing with an opportunity for new testimony, evidence, discovery, and legal arguments. The rehearing from the new ALJ was little more than a perfunctory “paper review,” the petitioners wrote.
Petitioners asked the Court to grant the petition for three reasons: (i) “the scope of Lucia’s ‘new hearing’ remedy is an important and apparently unsettled question of federal law”; (ii) “the notion Lucia does not require a genuinely ‘new’ de novo proceeding is necessarily wrong because a sham ‘remedy’ provides parties no incentive to litigate Appointments Clause challenges”; and (iii) the case “is an ideal vehicle to provide guidance on Lucia’s ‘new hearing’ remedy.” The petitioners further argued that “Lucia’s remedy should provide parties an incentive to raise separation of powers arguments by providing them actual and meaningful relief.”
The petitioners’ second question involves whether Appropriations Clause violations that render an agency’s funding structure unconstitutional, if upheld, invalidate agency actions taken under such a structure. The petitioners called this “an important, unsettled question of federal law meriting the Court’s review,” citing splits between the Circuits over the constitutionality of the Bureau’s funding structure which has resulted in uncertainty for both regulators and regulated parties. Recently, the Court granted the Bureau’s request to review the 5th Circuit’s decision in CFSAA v. CFPB, which held that Congress violated the Appropriations Clause when it created what the 5th Circuit described as a “perpetual self-directed, double-insulated funding structure” for the agency (covered by InfoBytes here).
Supreme Court agrees to review constitutionality of CFPB’s funding, but not on an expedited basis
The Supreme Court granted the CFPB's request to review the U.S. Court of Appeals for the Fifth Circuit’s decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau but so far has not expedited consideration of the case. Without quick action to expediate consideration by the Court, all CFPB actions will be open to challenge until the Supreme Court issues a decision. At the current pace, the CFPB could remain in this limbo until June of 2024.
In this case, the 5th Circuit held that Congress violated the Constitution’s Appropriations Clause when it created what that Court described as a “perpetual self-directed, double-insulated funding structure” for the agency. As a result, the CFPB’s 2017 Payday Lending Rule is invalid because the CFPB would not have been able to issue it “without its unconstitutional funding.” The implication, as the CFPB itself pointed out in its petition for certiorari, is that all past and future actions that relied on the same funding mechanism—basically everything the agency has ever done or will ever do—are invalid as well.
Although the CFPB had ninety days to seek review of the 5th Circuit’s decision, it took the unusual step of filing the petition in less than 30 days, and specifically urged the Supreme Court to “set this case for argument this Term,” to guarantee a decision by June or early July of this year. The Court’s order issued Monday simply states that the CFPB’s petition is granted, without setting an expediated briefing schedule. As a result, without the Court taking some immediate steps to speed up consideration, the case will be decided under the Court’s standard briefing schedule. This means the matter will be briefed over the next several months with oral argument likely next fall, as part of the Supreme Court’s October 2023 Term. Although a decision could come out any time after oral argument, cases as significant as this case often come out towards the end of the term, i.e., by June 2024.
The Supreme Court’s unwillingness to expedite consideration of the case to date has serious practical implications for the CFPB’s ability to push forward its ambitious agenda. As the CFPB has itself acknowledged, the 5th Circuit’s decision binds lower courts in that circuit unless and until it is overturned. It will likely encourage challenges to CFPB rulemakings and potentially other actions in that circuit. Even outside of the 5th Circuit, lower courts adjudicating CFPB enforcement actions may be unwilling to move those cases forward until the Supreme Court provides direction on this fundamental funding issue. Thus, for the time being, we can expect more challenges and more delays in CFPB enforcement actions.
For financial institutions, our advice remains the same as when the 5th Circuit’s decision was issued. Generally, companies should maintain their day-to-day focus on compliance, as the CFPB may weather this latest constitutional challenge with its full authority, including its enforcement power, intact. In addition, other Federal agencies—for example, the Federal banking agencies, the National Credit Union Administration, the Federal Trade Commission—and state attorneys general and/or state regulators often have overlapping authority to enforce Federal consumer financial law. Finally, companies should continue to assume that rules issued by the Bureau are valid and that they will not be penalized for good-faith reliance on such rules.
Supreme Court “relist” of CFPB petition for certiorari threatens prolonged legal limbo
The Supreme Court recently had the opportunity to grant the CFPB’s pending petition for certiorari seeking review of the U.S. Court of Appeals for the Fifth Circuit’s holding in Community Financial Services Association of America v. Consumer Financial Protection Bureau. The 5th Circuit found that the agency’s funding structure is unconstitutional, potentially voiding everything the CFPB has done or could do. The Justices considered the petition at their conference this past Friday, but the Court neither granted nor denied the petition. Instead, it “relisted” the petition for consideration at its conference this Friday, February 24.
The Court’s decision functions as a delay and does not necessarily suggest an ultimate denial of the petition. In recent practice, petitions have been relisted before being granted. Practically, this action makes it less likely that the case will be decided this term, leaving the agency, and the rules it issues, in a state of legal limbo for as much as another year or more. The possibility that the case will not be decided during this Supreme Court term may leave the CFPB’s actions subject to successful challenges in federal district courts in states subject to the 5th Circuit decision (Texas, Mississippi and Louisiana).
The CFPB was no doubt hoping to avoid this possible outcome. It filed the petition less than 30 days after the 5th Circuit’s decision and urged the Court to act quickly to decide the case during the current term, which typically ends in late June. In the petition the CFPB explained that the 5th Circuit’s decision would negatively impact the “CFPB’s critical work administering and enforcing consumer financial protection laws … because the decision below vacates a past agency action based on the purported Appropriations Clause violation, the decision threatens the validity of all past CFPB actions as well.” The CFPB argued that refusal to decide the case this term “threatens the ability of the CFPB to function and risks severe market disruption. Delaying review until next term would likely postpone resolution of the critical issues at stake until sometime in late 2023 and more likely 2024.”
The CFPB’s timeline was complicated by the Court’s agreement to extend the briefing schedule on the petition, in part to accommodate briefing on the Community Financial Services Association of America’s conditional cross-petition, which seeks review on other aspects of the 5th Circuit’s decision. The Court’s delay in acting on the CFPB’s petition complicates matters further. It is still possible that the Court could agree to hear the case and set it for expedited briefing so that it can be decided this term, but every indication so far is that the Court is in no hurry to decide this matter, even if it complicates life for the CFPB. Stay tuned. We may get action on the petition by the Court either Friday or next Monday.
Find continuing InfoBytes coverage here.
CFPB urges Supreme Court review of 5th Circuit decision
The CFPB recently filed a reply brief in its petition for a writ of certiorari asking the U.S. Supreme Court to review whether the U.S. Court of Appeals for the Fifth Circuit erred in holding that the Bureau’s funding structure violates the Appropriations Clause of the Constitution, and to consider the appellate court’s decision to vacate the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (Payday Lending Rule or Rule) on the premise that it was promulgated at a time when the Bureau was receiving unconstitutional funding. (Covered by InfoBytes here.)
Last month, the respondents filed an opposition brief urging the Supreme Court to deny the Bureau’s petition on the premise that the 5th Circuit’s decision does not warrant review—“let alone in the expedited and limited manner that the Bureau proposes”—because the appellate court correctly vacated the Payday Lending Rule, which, according to the respondents, has “multiple legal defects, including but not limited to the Appropriations Clause issue.” (Covered by InfoBytes here.) The respondents also maintained that the case “is neither cleanly presented . . . nor ripe for definitive resolution at this time,” and argued that the Supreme Court could address the validity of the Payday Lending Rule without addressing the Bureau’s funding issue. Explaining that the 5th Circuit’s decision “simply vacated a single regulation that has never been in effect,” the respondents claimed that the appellate court should have addressed questions about the Rule’s validity before deciding on the Appropriations Clause question. The respondents filed a cross-petition for writ of certiorari arguing that if the Supreme Court decides to hear the case, it should vacate the rule based on the unconstitutional removal restriction, and because it exceeds the Bureau’s statutory authority since “the prohibited conduct falls outside the statutory definition of unfair or abusive conduct.”
In its reply brief, the Bureau challenged the respondents’ assertion that the agency’s funding was “unprecedented,” noting that the respondents “cannot meaningfully distinguish the CFPB’s funding from Congress’s longstanding and concededly valid practice of funding agencies from standing sources outside annual spending bills.” The Bureau also argued that the respondents failed to rehabilitate the appellate court’s disruptive remedy and could not justify the district court’s failure to conduct a severability analysis. Even if any unconstitutional features could be severed, that would not justify the “extraordinarily disruptive remedy of automatic vacatur” of the Payday Lending Rule, the Bureau said. Furthermore, the Bureau contended that the respondents offered no sound basis for declining to review the appellate court’s decision in the current Supreme Court term.
According to the Bureau, the decision “carries immense legal and practical consequences that override any interest in ‘further percolation’” and “has already affected more than half of the Bureau’s 22 active enforcement actions” where five have been stayed and motions for relief are pending in seven other courts. Emphasizing that the 5th Circuit’s decision “threatens the validity of virtually all past CFPB actions, including numerous regulations that are critical to consumers and the financial industry,” the Bureau stressed that the proper course would be to grant its petition, set the case for argument in April, and add the additional questions raised by respondent in their cross-petition.
Respondents urge Supreme Court to wait on CFPB funding review
On January 13, respondents filed a brief in opposition to a petition for a writ of certiorari filed by the CFPB last November, which asked the U.S. Supreme Court to review whether the U.S. Court of Appeals for the Fifth Circuit erred in holding that the Bureau’s funding structure violates the Appropriations Clause of the Constitution (covered by InfoBytes here). The Bureau also asked the Supreme Court to consider the 5th Circuit’s decision to vacate the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (Payday Lending Rule or Rule) on the premise that it was promulgated at a time when the Bureau was receiving unconstitutional funding. The Bureau requested that the Supreme Court review the case during its current term, which would ensure resolution of the issue by the summer of 2023. Last December, a coalition of state attorneys general from 22 states, including the District of Columbia, filed an amicus brief supporting the Bureau’s petition for a writ of certiorari, while 16 states filed an amicus brief opposing the petition (covered by InfoBytes here).
In their opposition brief, the respondents urged the Supreme Court to deny the Bureau’s petition on the premise that the 5th Circuit’s decision does not warrant review—“let alone in the expedited and limited manner that the Bureau proposes”—because the appellate court correctly vacated the Payday Lending Rule, which, according to the respondents, has “multiple legal defects, including but not limited to the Appropriations Clause issue.” Among other things, the respondents argued that the Bureau erroneously contended that the Appropriations Clause does not limit the manner in which Congress may exercise its authority, claiming that: (i) the Appropriations Clause ensures Congressional oversight of the federal fiscal and executive power; (ii) the Bureau’s funding statute nullifies Congress’s appropriations power in an unprecedented manner; (iii) the Bureau’s merit defenses, including claims that text, history, and precedent support its funding scheme, all fail; and (iv) the Bureau’s remedial defenses of the Payday Lending Rule also fail.
The respondents also maintained that the case “is neither cleanly presented . . . nor ripe for definitive resolution at this time,” and argued that the Supreme Court could address the validity of the Payday Lending Rule without addressing the Bureau’s funding issue. Explaining that the 5th Circuit’s decision “simply vacated a single regulation that has never been in effect,” the respondents claimed that the appellate court should have addressed questions about the Rule’s validity before deciding on the Appropriations Clause question. The respondents claimed that the appellate court incorrectly rejected two antecedent grounds for vacating the Payday Lending Rule: (i) the Rule’s “promulgation was tainted by the removal restriction later held invalid in Seila Law” (covered by a Buckley Special Alert); and (ii) the Rule exceeds the Bureau’s authority “because the prohibited conduct falls outside the statutory definition of unfair or abusive conduct.” “Given the significant prospect that this Court will be unable to resolve the constitutional question in this case, it should await a better vehicle,” the respondents wrote, adding that “[i]f and when some judgment in some future case has ‘major practical effects,’  the Bureau should seek this Court’s review then—which may well present a better vehicle.”
Further, the respondents stated that if the Supreme Court grants review of the case, it “should proceed in a more deliberative fashion than the Bureau has urged.” The respondents asked the Supreme Court to expressly include the antecedent questions by either granting the respondents’ cross-petition or adding them to the Board’s petition in order to provide clarity about whether the Supreme Court intends to consider the alternative grounds. They further urged the Supreme Court to wait until next term to review the case, writing that the Bureau “cannot justify its demand for a case of this complexity and importance to be briefed, argued, and decided in a few months at the end of a busy Term.”
CFPB says ruling on funding structure doesn’t affect debt collector’s CID
In December, the CFPB denied a petition by a debt collection agency to set aside a civil investigative demand (CID) issued last October. The company challenged the Bureau’s authority to issue the CID on the grounds that the agency’s funding mechanism is unconstitutional. The company’s argument relied on a decision issued by the U.S. Court of Appeals for the Fifth Circuit on October 19 (covered by a Buckley Special Alert), which found that the Bureau is unconstitutionally funded and vacated the CFPB’s Payday Lending Rule. The Bureau submitted a petition for a writ of certiorari in November asking the U.S. Supreme Court to review the 5th Circuit decision (covered by InfoBytes here).
The debt collection agency and the CFPB held a “meet and confer” at the end of October, and the company argued that during the meet and confer the parties did not agree on two of the company’s objections: (i) the inadequate Notification of Purpose Pursuant to 12 C.F.R. §1080.5 contained in the CID; and (ii) the Bureau’s unconstitutional funding mechanism. The company filed a petition to set aside the CID, arguing that because the Bureau’s funding mechanism is unconstitutional, the Bureau lacks enforcement authority and the CID should be set aside in its entirety. The company claimed a similar nexus exists between the Bureau’s unconstitutional funding mechanism and the concrete harm suffered by the company. Just as the Payday Lending Rule was vacated by the 5th Circuit and set aside as unenforceable, “but for the Bureau’s unconstitutional spending, the CID would not have been issued,” the company said.
In rejecting the company’s arguments, the Bureau commented that it “has consistently taken the position that the administrative process … for petitioning to modify or set aside a CID is not the proper forum for raising and adjudicating challenges to the constitutionality of the Bureau’s statute.” In declining to set aside the CID on constitutional grounds, the Bureau wrote that should it later determine that it is necessary to obtain a court order compelling compliance with the CID, the company will have an opportunity to raise any constitutional arguments as a defense in district court.
States have their say on CFPB funding
Recently, a coalition of state attorneys general from 22 states, including the District of Columbia, filed an amicus brief supporting the CFPB’s petition for a writ of certiorari, which asked the U.S. Supreme Court to review whether the U.S. Court of Appeals for the Fifth Circuit erred in holding that the Bureau’s funding structure violates the Appropriations Clause of the Constitution. A separate coalition of 16 state attorneys general filed an amicus brief opposing the Bureau’s position and supporting the 5th Circuit’s decision, however these states also urged the Supreme Court to grant the Bureau’s petition to address whether the 5th Circuit’s conclusion was correct.
As previously covered by a Buckley Special Alert, the 5th Circuit’s October 19 holding found that although the Bureau spends money pursuant to a validly enacted statute, the structure violates the Appropriations Clause because (i) the Bureau obtains its funds from the Federal Reserve (not the Treasury); (ii) the agency maintains funds in a separate account; (iii) the Appropriations Committees do not have authority to review the agency’s expenditures; and (iv) the Bureau exercises broad authority over the economy. The case involves a challenge to the Bureau’s Payday Lending Rule, which prohibits lenders from attempting to withdraw payments for covered loans from consumers’ accounts after two consecutive withdrawal attempts have failed due to insufficient funds. As a result of the 5th Circuit’s decision, lenders’ obligation to comply with the rule (originally set for August 19, 2019, but repeatedly delayed) will be further delayed while the constitutional issue winds its way through the courts. The Bureau’s petition also asked the court to consider the 5th Circuit’s decision to vacate the Payday Lending Rule on the premise that it was promulgated at a time when the Bureau was receiving unconstitutional funding. (Covered by InfoBytes here.)
- Amicus brief supporting CFPB’s position. The 22 states urged the Supreme Court to review the 5th Circuit’s decision, arguing that the Bureau’s funding is lawful and that even if the Supreme Court were to find a constitutional defect in the funding scheme, vacating otherwise lawfully-promulgated regulations is neither justified nor compelled by law. “Left undisturbed, the court of appeals’ reasoning could jeopardize many of the CFPB’s actions from across its decade-long existence, to the detriment of both consumers protected by those actions and financial-services providers that rely on them to guide their conduct,” the states said. In their brief, the states argued, among other things, that the Supreme Court should grant the petition “to review at least the question of whether the court of appeals erred in vacating a regulation promulgated during a time when the CFPB received allegedly unconstitutional funding.” The states asserted that the decision “threatens substantial harm” to the states because the states and their residents “could stand to lose the benefits of the CFPB’s critical enforcement, regulatory, and informational functions if the decision  stands and is interpreted to impair the CFPB’s ongoing operations.” With respect to questions related to the Bureau’s funding structure, the states claimed that it is altogether speculative as to whether the Bureau would have behaved differently if its funding had come from the Treasury rather than the Federal Reserve. Former Director Kraninger’s ratification and reissuance of the Payday Lending Rule “is strong evidence that the CFPB would have issued the same regulation once again, after any constitutional defect was corrected,” the states said.
- Amicus brief opposing CFPB’s position. The 16 opposing states argued, however, that the Supreme Court should grant the Bureau’s petition to provide states with “certainty over their role” in regulating the financial system, and should affirm the 5th Circuit’s decision to “restore the CFPB’s accountability to the states.” In their brief, the states asked the Supreme Court “to resolve this issue quickly” and to “reinvigorate the protections of the Appropriations Clause, not weaken them.” The states maintained that if the Supreme Court does not quickly resolve the dispute, states “will have to litigate the same issue in other districts and circuits over and over,” and “[a]ny continuing confusion could seriously impede the growth of the consumer-financial services market at a time when the economy is already strained.” According to the brief, congressional oversight “ensures a level of state participation that ordinary administrative processes don’t allow.” In summary, the states’ position is that the 5th Circuit’s decision on the funding question is correct and that the court “was right to vacate a rule enacted without constitutional funding.”
District Court stays action against remittance provider while Supreme Court weighs CFPB’s funding structure
On December 9, the U.S. District Court for the Southern District of New York stayed an action brought by the CFPB and the New York attorney general against a defendant remittance provider until after the U.S. Supreme Court decides if it will review whether the U.S. Court of Appeals for the Fifth Circuit erred in holding that the Bureau’s funding structure violates the Appropriations Clause of the Constitution. Last month the DOJ, on behalf of the CFPB, submitted a petition for a writ of certiorari seeking Supreme Court review of the 5th Circuit’s decision during its current term. (Covered by InfoBytes here.) The New York AG and the Bureau sued the defendant in April for allegedly violating the EFTA and its implementing Regulation E, the Remittance Rule, and the Consumer Financial Protection Act (CFPA), among various consumer financial protection laws, in its handling of remittance transfers. (Covered by InfoBytes here.)
The defendant argued that the district court should hold off on deciding on its motion to dismiss per the aforementioned argument, but should nonetheless rule on its pending motion to transfer. The Bureau opposed the defendant’s request for a stay, countering “that a stay would not promote efficiency” since the issue of the Bureau’s standing would not affect the claims brought in the current action. The Bureau further asserted “that the public and the parties’ interest weighs against a stay, as it would hinder Plaintiffs’ enforcement of the consumer protection laws and make obtaining evidence down the line more difficult.”
The district court disagreed, stating that the Supreme Court may address the broader issue of the Bureau’s standing to bring enforcement actions in its decision, and that, regardless, the agency’s claims in the current action “are inextricably linked to CFPB rules and regulations, which themselves may be implicated by a Supreme Court decision should it grant the petition.” The district court stayed the case in its entirety and said that it will wait to decide on both motions until after the Supreme Court decides on the Bureau’s filed petition for a writ of certiorari.
District Court: Defendants cannot use CFPB funding argument to dismiss deceptive marketing lawsuit
On November 18, the U.S. District Court for the Northern District of Illinois ruled that the CFPB can proceed in its lawsuit against a credit reporting agency, two of its subsidiaries (collectively, “corporate defendants”), and a former senior executive accused of allegedly violating a 2017 enforcement order in connection with alleged deceptive practices related to their marketing and sale of credit scores, credit reports, and credit-monitoring products to consumers. According to the court, a recent decision issued by the U.S. Court of Appeals for the Fifth Circuit, which found that the Bureau’s funding structure violates the Appropriations Clause of the Constitution (covered by a Buckley Special Alert), is a persuasive basis to have the lawsuit dismissed.
As previously covered by InfoBytes, the Bureau sued the defendants in April claiming the corporate defendants, under the individual defendant’s direction, allegedly violated the 2017 consent order from the day it went into effect instead of implementing agreed-upon policy changes intended to stop consumers from unknowingly signing up for credit monitoring services that charge monthly payments. The Bureau further claimed that the corporate defendants’ practices continued even after examiners raised concerns several times, and that the individual defendant had both the “authority and obligation” to ensure compliance with the 2017 consent order but did not do so.
The defendants sought to have the lawsuit dismissed for several reasons, including on constitutional grounds. The court disagreed with defendants’ constitutional argument, stating that, other than the 5th Circuit, courts around the country have “uniformly” found that Congress’ choice to provide independent funding for the Bureau conformed with the Constitution. “Courts are ill-equipped to second guess exactly how Congress chooses to structure the funding of financial regulators like the Bureau, so long as the funding remains tethered to a law passed by Congress,” the court wrote. The court also overruled defendants’ other objections to the lawsuit. “[T]his case is only at the pleading stage, and all the Bureau must do is plausibly allege that [the individual defendant] was recklessly indifferent to the wrongfulness of [the corporate defendants’] actions over which he had authority,” the court said, adding that the Bureau “has done so because it alleges that because of financial implications, [the individual defendant] actively ‘created a plan to delay or avoid’ implementing the consent order.”
The Bureau is currently seeking Supreme Court review of the 5th Circuit’s decision during its current term. (Covered by InfoBytes here.)
- Keisha Whitehall Wolfe to discuss “Tips for successfully engaging your state regulator” at the MBA's State and Local Workshop
- Max Bonici to discuss “Enforcement risk and trends for crypto and digital assets (Part 2)” at ABA’s 2023 Business Law Section Hybrid Spring Meeting
- Jedd R. Bellman to present “An insider’s look at handling regulatory investigations” at the Maryland State Bar Association Legal Summit