Since the election of Donald Trump, the legitimacy and very survival of the Consumer Financial Protection Bureau is now front and center. The agency is in peril after an Oct. 11 decision by the U.S. Court of Appeals for the District of Columbia Circuit that ruled, for the first time, that an independent agency established by the legislative branch of government is unconstitutional.
Established as an independent federal agency pursuant to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB is a direct result of the 2008 financial crisis. The agency, founded on July 21, 2011, was spearheaded by Sen. Elizabeth Warren, D-Mass, and was established with the goal of protecting consumers by having one authority serve as the main point for accountability and enforcement of consumer financial laws.
In theory, the establishment of such an agency protects consumers by ensuring large financial institutions do not take advantage of individuals, and by holding such institutions accountable for their wrongdoings.
BROAD AUTHORITY
Since its inception, the broad authority given to the CFPB has been under consistent scrutiny and discussion. Critics of the agency argue that the power held by the agency creates more strain on the lending market with an increase in rules, regulations, fines and audits. With an increased burden placed upon lenders, such institutions are not able to open up options to consumers, which is necessary to allow more access within the lending market. Those who suggest that CFPB has too much power further are of the opinion that such broad authority creates a counter-intuitive goal, which ends up hurting consumers, rather than aiding them by helping them have access to loans.
The CFPB’s broad power and single director structure is unusual for its classification as an independent agency, as particularly noted by the federal appeals court in the Oct. 11 ruling of PHH v. CFPB. (PHH Corp. v. Consumer Fin. Prot. Bureau, No. 15-1177 (D.C. Cir. Oct. 11, 2016).) The court noted that historically there have been two types of agencies that have broad rulemaking power: executive agencies and independent agencies. As detailed in the PHH holding, an agency that has a single individual accountable to and appointed by the president, along with the advice and consent of the Senate, is considered an executive agency.
However, an independent agency, led by multiple board or commission members of independent agencies, is not accountable directly to the president, but rather is accountable to fellow directors or board members who act as a check upon one another. Thus, many in the mortgage industry — and the judges in the PHH case — questioned how the CFPB’s structure could vest so much power in a single director, Richard Cordray.
Named director of the CFPB during a recess appointment by President Obama in January 2012, Director Cordray, prior to this ruling, was not accountable to the president or any member of the U.S. government. U.S. Circuit Judge Brett Kavanaugh wrote in the PHH holding that having a single director of an independent agency simply provides too much power to one individual within one regulatory body and violates the Constitution’s separation of powers issue.
HISTORY OF THE PHH CASE
The ruling in the PHH case validated what critics had argued since the agency’s inception, that the CFPB has too much authority. While there have been many examples in which the CFPB was criticized for attempting to exert immense, mostly unchecked, authority, this was the first time that a judiciary body has reaffirmed this opinion.
The United States Department of Housing and Urban Development (HUD) began investigations on PHH Corporation, PHH Mortgage Corp., PHH Home Loans, LLC, Atrium Insurance Corp., and Atrium Reinsurance Corp. in 2008. The basis for the investigations was the Real Estate Settlement Procedure Act’s Section 8(a) kickback prohibitions, specifically that when mortgages were originated, PHH would refer borrowers to mortgage insurers with whom it partnered. The insurers would purchase “reinsurance” from PHH subsidiaries, and the reinsurance premiums paid to PHH subsidiaries were taken as kickbacks.
During this ongoing investigation by HUD, the CFPB was created and the regulatory authority overseeing RESPA was transferred to the CFPB. As the successor oversight body, the CFPB completed the investigation and on Jan. 29, 2014, the CFPB issued a notice of charges against PHH and filed an administrative adjudication claim.
In doing so, the CFPB took the position that the three-year statute of limitations that would apply to bringing an enforcement action in federal court under RESPA was not applicable because this action was an administrative proceeding.
PHH’s defense to the claim of violating RESPA Section 8 was based upon a letter received from HUD in 1997 that stated, “so long as payments for reinsurance under captive reinsurance arrangements are solely for payment for goods or facilities actually furnished or for services performed, these arrangements are permissible under RESPA Section 8 (c)(2).” (In the Matter of PHH Corporation, et al., CFPB Administrative Proceeding, 2014-CFPB-0002, Pg. 18.) Despite the PHH defense, on Nov. 25, 2014, the CFPB’s administrative law judge (ALJ) ruled that PHH accepted reinsurance premiums in violation of RESPA Section 8 and ordered PHH to pay a $6.4 million disgorgement penalty.
The Dodd-Frank Act, 12 U.S.C.S. § 5563, requires that a decision by the CFPB ALJ must first be “submitted to the bureau for final decision,” and thus the case was brought before Cordray for review. In his final order issued on June 4, 2015, Cordray was clear that his decision was made on an altered basis from the decision made by the CFPB’s ALJ.
First, he noted that there is no restriction by a statute of limitations when the agency brings actions initiated in administrative proceedings. When addressing the letter from HUD upon which PHH relied upon as a defense, Cordray found that because the letter was never published in the Federal Register, where agencies often (but are not required to) publish proposed rules, it was non-binding and pursuant to applicable provisions of RESPA.
Therefore, he found that the letter provided no protection to PHH. Cordray further held that PHH violated RESPA each time it accepted a kickback on or after July 21, 2008, and directed the company to disgorge $109 million, instead of the $6.5 million ordered by the ALJ.
PHH appealed Cordray’s decision to the appeals court on June 19, 2015. In its appeal, PHH argued that Cordray’s final decision and order was arbitrary, capricious and an abuse of discretion within the meaning of the Administrative Procedures Act, and also that it violated federal law, including the U.S. Constitution, RESPA, and the Consumer Financial Protection Act of 2010. The CFPB countered that its structure is constitutional and that the RESPA statute of limitations only applies when an action is brought in court and not heard in an administrative law proceeding, unlike in this situation where the proceeding was heard by an ALJ. The CFPB further argued that Cordray’s interpretation of RESPA was appropriate, and that the injunctive relief ordered against PHH was proper.
A LANDMARK DECISION
On Oct. 11, 2016, the Court of Appeals issued its holding in the PHH case marking the first time a judiciary body formally limited the authority given to the director of the CFPB. The three-judge panel unanimously decided that, as an independent agency, the CFPB’s structure is unconstitutional and allows the director far too much power, finding that other than the president of the United States, the CFPB director is the single most powerful official in the entire U.S. government.
The court’s opinion distinguished between executive agencies and independent agencies, as stated earlier, thus allowing for checks and balances. The circuit court stated that there is too great a risk of unchecked power by having a single director, and therefore the agency’s structure is unconstitutional. It sought to remedy this by providing that the CFPB’s director could be removed by the president, at will (and not just “for cause”), aligning the agency with the structure of executive agencies.
The court further found that the CFPB violated basic due process in a retroactive interpretation of the statute of limitations of RESPA when it ordered PHH to pay a $109 million penalty, pursuant to violations stemming from before the CFPB was created.
On. Nov. 18 the CFPB filed a petition for rehearing with the circuit court and it is likely that the court will hear the case en banc, where all the judges in the U.S. Court of Appeals in Washington, D.C. will hear the case rather than a three-judge panel. The petition for rehearing is not required to petition the Supreme Court, therefore the ultimate question is whether the CFPB will petition the U.S. Supreme Court to hear this case and whether the Supreme Court would entertain the request.
OTHER CFPB EXERTIONS OF POWER
This is not the first time the CFPB has been accused of overreaching authority. For instance, on July 7, 2016, the CFPB posted a Request for Information (RFI) requesting vendors to develop an automated technology solution for nonbank financial institutions, and requiring them to register with the CFPB. The agency stated that it planned to use the potential registration system to collect financial and operational data, as well as organizational structure data of nonbank financial service providers.
The Dodd-Frank Act permits the CFPB the authority to prescribe rules regarding registration requirements, but does not mandate creation of a registration system, and it is questionable as to whether the CFPB is authorized to use the system to collect such data.
On March 21, 2013, the CFPB issued a controversial auto lending bulletin (CFPB Bulletin 2013-02) in an attempt to curb discriminatory auto loan pricing. It warned indirect auto lenders that they would be responsible for any statistical bias discovered in rates charged by partnering dealerships. Using the disparate impact analysis, defined as an analysis of policies, practices, rules, or other systems that appear neutral, but result in a disproportionate impact on protected groups, the CFPB determined if minority borrowers were being charged more for car loans.
Auto loan applications do not require the applicant to indicate race or gender of the borrower and thus this made it difficult for the CFPB when the agency was estimating borrower demographics to cite lenders for unintentional discrimination.
PROPOSED LEGISLATION TO DIMINISH CFPB AUTHORITY
In May 2016, the House Financial Services and General Government Appropriations Subcommittee approved an appropriations bill passed with three proposed changes pertaining to the CFPB structure: (1) the CFPB’s budget would be brought into the annual appropriations budget, (2) the bureau’s leadership structure would be revised from a single director to a five-member commission, and (3) there would be a mandate of the CFPB to re-examine pre-disputed arbitration regulations. Passed on a roll call vote in the House of Representatives on July 7, 2016, H.R. 5484 was received by the U.S. Senate on July 12, 2016, and was placed on the Senate’s legislative calendar awaiting a vote.
In September, the House Financial Services Committee approved the Financial Choice Act, which was introduced by Rep. Jeb Hensarling, R-Texas, Chairman of the House Financial Services Committee. This act is a comprehensive plan to overhaul the Dodd-Frank Act, including the CFPB, and replace it with the Financial “CHOICE” (Creating Hope and Opportunity for Investors, Consumers, and Entrepreneurs) Act. It passed by a vote of 30 to 26 with no Democrats voting in favor of the law and one Republican voting against it.
The CFPB would be changed to the Consumer Financial Opportunity Commission (CFOC) and an Office of Economic Analysis would be created. The CFOC would be tasked with the mission of both consumer protection and competitive markets, with a cost-benefit analysis of rules performed by the Office of Economic Analysis.
The CHOICE plan also calls for replacing the CFPB’s single director structure with a five person bipartisan commission, and appointing a Senate-confirmed independent inspector general for the bureau.
In November 2015 the CFPB faced a potential setback in their oversight of auto lending. The House of Representatives passed H.R. 1737, which proposed the reformation of the bureau’s Indirect Auto Financing Guidance Act. The act would revoke the 2013 auto lending guidance from the CFPB, which sought to provide direction about compliance with the Equal Credit Opportunity Act (Regulation B) and implement the regulation for indirect auto lenders that permit dealers to increase consumer interest rates in order to share in increased interest revenues.
Proponents of the Reforming CFPB Indirect Auto Financing Guidance argue that the guidance helps ensure customers are not disproportionately charged higher prices and/or interest rates for auto loans because of their color, race or religion. They also argue that the bill would increase transparency at the CFPB.
House Rep. Tom Emmer, R-Minn., has proposed another bill that would amend the CFPB’s mission to direct the bureau’s focus toward competition and consumer choice while at the same time continuing to focus on fairness and transparency. H.R. 5211 or the CFPB Dual Mandate and Economic Analysis Act would also establish the Office of Economic Analysis within the CFPB to assess the impact of proposed guidance, orders, rules and regulations with its findings published in the Federal Register. Introduced to the House of Representatives on May 12, 2016, H.R. 5211 has been referred to the House Committee on Financial Services and is currently awaiting a vote.
ALL EYES ON WASHINGTON
The president, now, more than ever, has power over the CFPB, since the director reports directly to the Commander in Chief. Depending on the outcome of the appeal of the PHH case, the CFPB could shift from being an independent agency to an executive agency, meaning the president could remove the director at will.
The courts, the bills and the election all have had and will have an impact on the CFPB. The CFPB’s loss in PHH has significantly strengthened efforts to shift the Bureau’s leadership from a single director to a commission or, at the very least, remove the immense power possessed by the CFPB director.
With Republicans in control of both the House and the Senate, and with Donald Trump in the White House, whether the CFPB will continue to exert an unprecedented amount of authority over those that it regulates remains to be seen.
