Financial Institution Regulation

In a long-awaited constitutional decision regarding the Consumer Financial Protection Bureau (“CFPB”), the full D.C. Circuit Court of Appeals today in PHH v. CFPB reversed a prior ruling by a three-judge panel that the CFPB is unconstitutionally structured.  As we previously reported, that prior panel’s prior decision — stayed since its issuance in October 2016 — had held that Congress had unconstitutionally impeded the President’s Article II authority to “faithfully execute[]” the laws by creating an independent agency headed by only a single Director (as opposed to a multi-member commission structure).  The prior panel’s remedy had been to strike language from the Dodd-Frank Act that makes the Director removable only “for cause,” a change that would have made the Director removable at the pleasure of the President and turned the CFPB from an independent agency into an executive agency, with other regulatory ramifications.

Today’s ruling holds that the removable-only-for-cause provision, even as applied to a single Director, is compatible with the Constitution.  Thus, there will be — for now — no changes to the CFPB’s structure.  While a different outcome would have had many impacts across time, the status quo should remain intact unless the U.S. Supreme Court disturbs the ruling.  Currently, the CFPB is led only by a temporary, “Acting Director,” OMB Director Mick Mulvaney, and the President has not yet submitted to the Senate a nominee to fill that position for a full, five-year term.  But once there is a new, Senate-confirmed Director, that person would be removable only “for cause” (technically, for “inefficiency, neglect of duty, or malfeasance in office”), with a term that will last for at least two years into the next four-year presidential term.  Separately, today’s ruling also reinstated the prior panel court’s decisions — all adverse to the CFPB — on important issues relating to the Real Estate Settlement Procedures Act (“RESPA”).

On the constitutional question, today’s court saw no legally important distinction between the Supreme Court-approved multi-member independent commission structures — such as those that lead the FTC and the SEC — and the independent single-Director structure of the CFPB.  The prior panel and PHH had relied heavily on that distinction, with PHH arguing that “multi-member commissions contain their own internal checks to avoid arbitrary decisionmaking.”  The prior panel also noted that whereas staggered, multi-member commissions allow a President in a four-year term to exert some influence by nominating at least some commissioners, a President during a four-year period would on some occasions have such no influence over the CFPB’s Director, who serves a five-year term.

Today’s court found the distinction between a single Director and a multi-member commission “untenable,” with “no footing in precedent, historical practice, constitutional principle, or the logic of presidential removal power.”  The “removal-power doctrine,” it said, does not rely on “the competing virtues of various internal agency design choices.”  Today’s court also noted that the Supreme Court approved for-cause protection for a single individual in its decision upholding the independent counsel statute.

PHH retains a separate challenge:  that the appointment of the ALJ who initially considered its case violated the Constitution’s Appointments Clause.  Today’s court did not reach that issue because it recently upheld a closely analogous ALJ-appointment structure at the SEC in Lucas v. SEC.  Even more recently, however, the Supreme Court agreed to review that decision regarding SEC ALJs, so PHH possibly could still get a day in court on that issue.

A.                RESPA

Today’s court also reinstated the earlier panel’s important decisions regarding RESPA’s prohibition on paying fees / kickbacks for referrals of real estate settlement business.  Those RESPA decisions had been stayed, until today, as part of the broader stay on the prior panel’s October 2016 opinion.  The reinstated RESPA decisions are that:

  1. Courts and the CFPB must give effect to an important RESPA exception, which allows settlement service providers who receive referrals to pay the referrer, nonetheless, for other “goods or facilities actually furnished or for services actually performed” (but not, of course, for the referral). The novel interpretation advocated by the CFPB in this case would virtually have read this exception out of the books, exposing settlement service providers to increased RESPA risk.  The panel court, in the now-reinstated portion of its opinion, held that the exception must apply so long as the payment is for no more than the reasonable market value of the goods or services actually provided.
  2. Even if the Director’s novel interpretation of that RESPA exception in this case had been permissible, the Director violated the Due Process Clause by imposing it on PHH retroactively.
  3. A three-year statute of limitations applies to both administrative proceedings and civil actions (lawsuits in court) enforcing RESPA. Before the panel, the CFPB had taken the position that no statute of limitations applied to its administrative proceedings enforcing RESPA — or, by extension, to administrative proceedings enforcing any of the 18 other consumer protection laws it has authority to enforce.  The reinstated portion of the panel’s decision, moreover, held that the CFPB — in administrative proceedings and in court — must abide by applicable statutes of limitations found in those 19 consumer protection laws.

B.                 Next Steps

PHH may well seek review of this ruling by the U.S. Supreme Court.  Although the likelihood of that Court accepting the case cannot be predicted, the Court has previously showed an interest in cases like this one that present issues at the intersection of constitutional and administrative law; the Court’s very recent decision to review the related Lucas v. SEC decision on the appointment of ALJ’s is an example of that interest.  Regarding the reinstated RESPA rulings, it is extremely unlikely that the CFPB, now under Republican control, will appeal.

At the CFPB now, as noted, only an Acting Director is in charge.  But any new, Senate-confirmed Director would be entitled to serve a five-year term with for-cause removal protection, unless the Supreme Court disturbs today’s ruling.  Thus, that new Director, if he or she chooses, could serve at least two years into the next four-year Presidential term.

On December 21, 2017, the Consumer Financial Protection Bureau (CFPB) issued a public statement regarding implementation of the Home Mortgage Disclosure Act (HMDA), noting that it plans to reconsider aspects of the mortgage data rule.

The HMDA, enacted in 1975, requires many lenders to report information concerning applications they receive for particular mortgage loans and other loans they purchase. The Dodd-Frank Act directed the CFPB to expand the collection of this data, prompting the Bureau to issue a rule in 2015 that required financial institutions to collect and report additional mortgage information beginning in 2018. The CFPB then issued a final rule in August of 2017 regarding this collection of information.

Despite this relatively recent final rulemaking, the CFPB has announced that it “intends to engage in a rulemaking to reconsider various aspects of the 2015 HMDA Rule such as the institutional and transactional coverage tests and the rule’s discretionary data points.” According to the CFPB, this rulemaking will likely re-examine, among other things, lending-activity criteria that determines whether data and transactions must be reported.

At this point, it is unclear how the regulations will change, but it appears likely that the modifications will reduce the amount of information about borrowers that banks and other lenders are required to submit to regulators. Further, the number and types of institutions required to report certain information could be reduced. For now, lenders will have to comply with the rule coming into effect, though the CFPB has said that it “does not intend to require data resubmission unless data errors are material.” Moreover, the Bureau doesn’t intend to assess penalties with respect to data collected in 2018 and reported in 2019, and will only use examinations of 2018 data as diagnostic, to aid in identifying compliance weaknesses.

This announcement may signal a new approach by the CFPB, which traditionally has taken an expansive view toward regulation of financial institutions, particularly as this news comes less than a month after Mick Mulvaney, the Director of the Office of Management and Budget, took the reins at the CFPB. This new rulemaking should be closely tracked so financial institutions may appropriately adjust their compliance programs to this shifting landscape.

This post originally appeared in our sister publication, Password Protected.

On October 18, 2017, the Consumer Financial Protection Bureau (CFPB) issued a set of Consumer Protection Principles regarding the sharing and aggregation of consumers’ financial data. The timing of the announcement in light of last month’s disclosure of the Equifax breach of approximately 140 million consumers’ financial data seems noteworthy, as all companies whose businesses rely on the consumer-authorized financial data market are scrambling to regain consumer trust.

Noting the “growing market” for consumer-authorized financial data aggregation services, the CFPB has promulgated nine principles which, in the words of CFPB Director Richard Cordray “express [the Bureau’s] vision for realizing an innovative market that gives consumers protection and value.” (See CFPB press release).

Many of the principles themselves will be familiar to anyone who has paid attention to consumer privacy discourse over the last 30+ years. They are in many ways a restatement of the OECD Guidelines, published in 1980 by the Organisation for Economic Co-operation and Development, but with a few useful additions. The “new” CFPB principles include time-tested privacy principles of:

  1. informed consent & control over data sharing
  2. notice and transparency regarding the third parties’ access to and use of consumer data
  3. data quality & accuracy and the right of consumers to dispute inaccuracies
  4. an expectation of security and safeguards to protect consumer data
  5. a right of access by consumers to their own data; and
  6. accountability to the consumer for complying with the foregoing principles.

In addition, however, the CFPB principles contain some fairly specific guidance that is particularly useful in the context of financial data and may have a significant impact on the way financial data is gathered, marketed and retained. For example, the CFPB Principles contain a specific principle (#4) regarding payment authorization:

  • Authorizing Payments. Authorized data access, in and of itself, is not payment authorization. Product or service providers that access information and initiate payments obtain separate and distinct consumer authorizations for these separate activities. Providers that access information and initiate payments may reasonably require consumers to supply both forms of authorization to obtain services.

The above principle is one of several that illustrate the CFPB’s disapproval of broad, open-ended consents from consumers, favoring instead tailored, purpose-specific access. Principle #2 (Data Scope and Usability) is another example of this theme. It reads in part, “Third parties with authorized access only access the data necessary to provide the product(s) or service(s) selected by the consumer and only maintain such data as long as necessary.”

It remains to be seen how these principles might be applied to data collectors like credit bureaus, who typically hold consumer data for as long as a consumer’s lifetime in many cases. The CFPB’s press release emphasized that the principles are not intended to supercede or interpret any existing consumer protection statutes or regulations and that they are not binding. Still, they do provide a window into the CFPB’s mindset and the likely trend for future regulation.

On Monday, July 10, 2017, the Consumer Financial Protection Bureau (CFPB) issued a game-changing final rule regarding the use of arbitration clauses in consumer contracts.  The Rule is effective 60 days following its publication in the Federal Register and applies only to contracts entered into more than 180 days after that date.  The final rule comes as no surprise—as we reported here, here, and here, the Bureau has forecast for more than a year its intentions to engage in this rulemaking.

Most significantly, the Rule accomplishes the following:

  • Bans the use of arbitration clauses to bar class actions. The Rule bans covered providers of certain consumer financial products and services from using arbitration clauses to bar consumers from filing or participating in class action lawsuits.
  • Requires covered providers to provide the CFPB with records related to their arbitration proceedings. Covered providers that engage in arbitration must provide the CFPB with records relating to initial claims and counterclaims, answers thereto, and awards issued. The CFPB will also collect correspondence covered providers receive from arbitrators regarding (1) determination that an arbitration agreement does not comply with the arbitrator’s “due process or fairness standards”; and (2) dismissal of an action due to a covered provider’s failure to pay required fees.

The CFPB intends to begin publishing this information starting in July 2019 and stated that it will publish additional details of how covered providers should comply. The Bureau stated that gathering and publishing these records will make “the individual arbitration process more transparent” and “enable the CFPB to better understand and monitor arbitration, including whether the process itself is fair.”

Notably, the Rule does not ban the use of clauses to require arbitration of individual actions, but covered providers must include in their agreements specific language to inform consumers that the agreement may not be used to block class action litigation.

The CFPB’s latest regulatory move takes aim at banks and credit card and other covered companies and sets the stage for legal challenges and political battles with Congress and the Trump Administration.

The primary legal question surrounding the Rule’s validity is whether it comports with the Federal Arbitration Act (FAA) and recent Supreme Court rulings that arguably implicitly approve of pre-dispute class-action waivers. For example, in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 347-48 (2011), the Supreme Court held that the FAA preempted California state law, which deemed such class-action waivers unconscionable in consumer cases.  Then, in American Express Company v. Italian Colors Restaurant, 133 S. Ct. 2304, 2309 (2013), the Court rejected the argument that class action litigation is necessary to preserve the opportunity to assert low-value, statutory claims.

In a possible preview of argument in support of the Rule, the CFPB, in its Executive Summary of the Rule, cited its authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) to issue regulations that are in the public interest, for the protection of consumers, and based on findings consistent with the Bureau’s study of arbitration.  The CFPB also mentioned Congress’s prohibition of arbitration agreements in the residential mortgage market and the Military Lending Act’s prohibition of such agreements in certain forms of credit extended to servicemembers and their families.  Yet these examples are acts of Congress.

Critics of the Rule point out that the Rule may contradict the CFPB’s research into arbitration.  Dodd-Frank required the CFPB to study the use of mandatory arbitration clauses in consumer financial markets.  The CFPB’s study, released in March 2015 and reported on here, arguably indicates that arbitration is often faster, less expensive, and a more effective way for consumers to resolve disputes with companies compared to class action litigation.  Of the 562 class actions the CFPB studied, the average cash settlement per consumer was $32.35, and the litigation generally took two or more years.  By comparison, the average amount received by a consumer in arbitration was $5,389, and the timeframe for the proceedings averaged two to seven months.

In addition to legal challenges, the Rule may face opposition in Congress. In a July 7 letter, Congressman Jeb Hensarling (R-Tex.), chair of the House Financial Services Committee and longtime CFPB critic, threatened CFPB Director Richard Cordray with possible contempt if the CFPB issued the Rule before supplying the Committee with certain information about the agency’s deliberations and conversations with consumer groups.  Moreover, Congress has the power to overturn the Rule within 60 days of finalization under the Congressional Review Act.

President Trump has already taken some action to begin to dismantle parts of Dodd-Frank through Executive Order and Presidential Memoranda signed on April 21.  And questions remain about whether President Trump may remove Cordray as the constitutionality of the CFPB’s leadership structure awaits decision in the U.S. Court of Appeals for the District of Columbia.  As we reported, the D.C. Circuit granted the CFPB’s petition for rehearing en banc in PHH Corporation v. Consumer Financial Protection Bureau.  The court held oral argument on May 24 and has yet to issue an opinion.

Even if President Trump is able to replace Cordray, questions remain about whether his successor could unilaterally stay the compliance date of the Rule. In another recent D.C. Circuit case, Clean Air Council v. Pruitt, the court held that the Environmental Protection Agency (EPA) lacked authority to stay the compliance date of an EPA rule concerning greenhouse gas emissions and vacated the stay.  Thus, any new CFPB head may be able to issue a notice of proposed rulemaking to reconsider the Rule, but may not be able to unilaterally stay the Rule’s compliance date.

We will continue to monitor developments surrounding the Rule as it progresses towards implementation.

The Department of the Treasury recently cited the CFPB’s “unaccountable structure and unduly broad regulatory powers,” in suggesting reforms to address the CFPB’s “regulatory abuses and excesses.” The Department’s recommendations were made as a part of its report, A Financial System that Creates Economic Opportunities: Bank and Credit Unions, issued in response to President Trump’s Executive Order 13772 on Core Principles for Regulating the United States Financial System. The report covers a number of topics, but includes a significant section addressing the perceived concerns with and proposed changes to the CFPB’s structure and practices.

In the report, the Department pointed to a number of core issues with the CFPB it believes necessitate sweeping reforms, including a lack of accountability, the CFPB’s failure to provide adequate notice to regulated parties, the CFPB’s heavy reliance on enforcement actions, the limited availability of no-action letters providing guidance; the use of administrative actions to circumvent federal court procedures and applicable statute of limitations; the CFPB’s failure to adequately review outdated and unnecessary regulation requirements; and the CFPB’s failure to verify consumer complaints before including the information in its public database.

In light of this strong criticism, the Department has suggested a number of changes, intended to curb the abuses it noted in its review:

  • Improved Accountability: The Department proposes making the CFPB Director removable at will by the President or restructuring the CFPB, so it is led by an independent multi-member commission or board to increase accountability. Similarly, the Department recommends substantially altering funding such that the CFPB is funded through the annual appropriations process and is not permitted to retain funds from the Consumer Financial Penalty Fund.
  • Improved Transparency on Agency Positions: Many of the Department’s concerns center around a failure of the CFPB to clearly delineate its positions on banking practices before proceeding with enforcement actions. To rectify this failure, the Department recommends issuing clear rules subject to public comment before bringing enforcement actions, clarifying the CFPB’s position on what actions it considers unfair and deceptive, and increasing the availability of no-action letters.
  • Ending Abuses in Enforcement Actions: The Department notes significant misuses of administrative actions in its review and proposes limiting or altogether cutting out the use of administrative proceedings in favor of more formal federal court proceedings to address this concern.
  • Reviewing Regulations: The Department suggests a regular (at least every ten year), review of CFPB regulations for any that are outdated, unduly burdensome, or unnecessary.
  • Locking Down the Consumer Database: Given the concerns with reputational risk associated with the CFPB’s failure to verify consumer complaints before adding them to the public database, the Department recommends limiting database access to federal and state agencies only, much like the FTC’s analogous database.

This Report is the first in a series of four in response to the Executive Order, so more recommendations are likely forthcoming.

 

On Thursday, June 22, 2017, the Consumer Financial Protection Bureau (CFPB) provided updated guidance for supervisory examinations of student loan servicers.  Richard Cordray, the Director of the CFPB, gave prepared remarks in Washington D.C.  He explained his concerns related to the Public Service Loan Forgiveness program and how certain practices may be delaying or denying borrowers’ access to this debt relief.

The Public Service Loan Forgiveness program allows those who accept certain public service jobs to have their debt forgiven after ten years.  Director Cordray discussed a new CFPB report that highlights complaints concerning practices of student loan servicers that may hamper the program’s intentions.  The report focused on analyzing a year of complaints from borrowers, which reflected a delay or denial of promised debt relief.  Primarily, the complaints included incorrect, untimely, or inadequate information from servicers about borrowers’ eligibility for loan forgiveness.  Other complaints from borrowers included slow payment processing and receiving inaccurate denial letters that can lead to qualified payments being miscounted or not properly credited.
Cash

The CFPB’s updated exam procedures attempt to guide “how examiners assess risks to consumers and review servicers’ compliance with the law when they administer this program,” seeking to guarantee stronger oversight of servicers’ administration of the program.  Further, the examiners will “scrutinize whether servicers are telling consumers what they need to do to qualify for loan forgiveness” and check “whether servicers accurately calculate the number of qualifying payments to make sure that borrowers get their full benefits.”  Cordray emphasized that “borrowers working in public service should not miss out on key consumer benefits because their student loan servicer failed to comply with the law.”  The updated guidelines counsel agency examiners to ensure that loan servicers are informing borrowers about their requirements and obligations for loan forgiveness.  Additionally, examiners ought to confirm that loan servicers accurately track the progress of borrowers and warn those that may be mistaken as to their pathway to loan forgiveness.

Alongside these updated exam procedures, the CFPB is conducting a campaign to make sure borrowers seeking to take advantage of the Public Service Loan Forgiveness program are fully aware of the tools available to ensure they can navigate the process and reap the benefits.  This campaign has a specific emphasis on awareness for first responders and teachers.

It will be important to continue watching the CFPB’s action and administration concerning this program, to gauge the effectiveness of these new guidelines and how it may impact the inner working of loan servicers.  Finally, how well the Public Service Loan Forgiveness program is perceived to be functioning could affect the survival of the program itself, given that the 2018 White House budget has suggested the elimination of the program altogether.