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On February 7, 2018, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) released the third installment of its call for comments on the Bureau’s functions. The latest request for information (“RFI”) on the CFPB’s enforcement processes should spark the interest of previously investigated and yet-to-be investigated entities alike. Comment letters should include specific suggestions on how the Bureau can change the enforcement process and identify specific aspects of the CFPB’s existing enforcement process that should be modified. In addition to considering the regulations governing CFPB investigations, 12 C.F.R. part 1080, commentators should consider reviewing the CFPB Office of Enforcement’s Policies and Procedures Manual, which governs the enforcement process. According to the RFI, commentators should include supporting data or information on impacts and costs, where available.

The RFI requests comments on the following topics:

Continue Reading Change is Coming: The CFPB Requests Comments on Its Enforcement Process

Since the Consumer Financial Protection Bureau’s inception in 2011, the Office of Fair Lending and Equal Opportunity (Office of Fair Lending) has been a powerful force within the agency. This week, Acting Director Mick Mulvaney announced that the Office of Fair Lending will be transferred from where it currently resides – in the Division of Supervision, Enforcement, and Fair Lending (SEFL) – to the Office of the Director, where it will become part of the Office of Equal Opportunity and Fairness. Despite the similar nomenclature, the priorities of the Office of Fair Lending and the Office of Equal Opportunity and Fairness are vastly different, with the latter having oversight over equal employment opportunity and diversity and inclusion initiatives within the CFPB. The move likely signals a substantial curtailment of CFPB fair lending enforcement activities.

Section 1013 of the Dodd-Frank Act mandated the establishment of an Office of Fair Lending and the statutory language provides that the Office of Fair Lending “shall have such powers and duties as the Director may delegate to the Office, including”:

  • Providing oversight and enforcement of federal fair lending laws (including ECOA and HMDA);
  • Coordinating fair lending efforts with other federal agencies and state regulators;
  • Working with the private industry and consumer advocates on the promotion of fair lending compliance and education; and
  • Providing annual reports to Congress on the Bureau’s efforts to fulfill its fair lending mandate.

The CFPB to date had in fact given the Office of Fair Lending the powers and duties listed in the statute, and Office of Fair Lending attorneys played a substantial role in overseeing fair lending examinations and bringing fair lending enforcement actions. Indeed, the Office of Fair Lending has come under fire for “regulation through enforcement” and for “pushing the envelope” through its aggressive enforcement of federal anti-discrimination statutes against lenders on the basis of statistical analyses (i.e., dealer markup and redlining). It is clear that, as a result of the restructuring, the Office of Fair Lending will no longer have supervisory or enforcement responsibilities. According to an email sent by Mulvaney to CFPB staff that was leaked to several news outlets, the Office of Fair Lending’s new focus will be on advocacy, coordination, and education. Although SEFL as a whole still maintains responsibility for fair lending supervisory and enforcement matters, this restructuring signals a de-emphasis on fair lending and likely will lead to a significant decrease in the number of fair lending examinations, investigations and enforcement actions brought by the Bureau. Indeed, Congress presumably required the establishment of a separate fair lending office out of recognition that having such an office would ensure a persistent attention to fair lending issues. Stripping the office of supervisory and enforcement responsibilities will similarly result in less of a focus on those issues. While SEFL leadership and staff are likely to continue to pursue fair lending matters, those matters will now compete for attention and resources with the myriad other issues over which the CFPB has jurisdiction.

In its Fair Lending Report released last year, the Bureau’s then-Director Cordray touted its “historic resolution of the largest redlining, auto finance, and credit card fair lending cases.” Cordray also identified redlining, mortgage loan servicing, student loan servicing, and small business lending as the Bureau’s fair lending priorities going forward. Under the Bureau’s new leadership, fair lending issues evidently will no longer be a top priority. With the rollback in the CFPB’s fair lending enforcement activities, there may be an uptick in consumer advocacy groups seeking other avenues for fair lending relief, such as class action litigation and complaints filed with HUD and state agencies tasked with enforcing state anti-discrimination laws.

The U.S. Court of Appeals for the D.C. Circuit (the “court”) has issued its long-awaited en banc decision in PHH v. CFPB. In a January 31, 2018 opinion, the court rejected the three-judge panel’s conclusion that the structure of the Consumer Financial Protection Bureau (“CFPB”) is unconstitutional.  But the en banc court reinstated the panel’s decisions that the CFPB’s interpretation of the Real Estate Settlement Procedures Act (“RESPA”) is unlawful and may not stand and that the CFPB is subject to a three-year statute of limitations even when bringing RESPA claims administratively.

As is well known, on October 11, 2016, a three-judge panel of the court had overturned a $109 million disgorgement order that the CFPB had imposed on PHH Corporation (“PHH”) for its involvement in an allegedly unlawful mortgage reinsurance arrangement. Pursuant to that arrangement, PHH did business with mortgage insurance companies that purchased reinsurance from a wholly-owned subsidiary of PHH. The court held, by a 2-1 vote, that the CFPB’s single-director structure allowing the President to remove the Director during his/her five-year term only for cause violates the Constitution’s separation-of-powers principles.  The court severed the for-cause limitation, thereby effectively allowing the President to remove the Director at will at any time.

The three-judge panel also unanimously rejected the CFPB’s interpretation of Section 8 of RESPA, concluding that, contrary to the CFPB’s determination, Section 8(c)(2) of the statute provides an actual exemption to the anti-kickback provision in Section 8(a). On February 16, 2017, the court granted the CFPB’s petition for rehearing en banc, vacating the panel decision and setting up review by the full D.C. Circuit. Nearly a year later, the court ruled on these matters.

In a 7-3 majority ruling, the court held that the CFPB is not unconstitutionally structured and that the for-cause limitation on the President’s removal authority is a permissible exercise of congressional authority. This part of the decision, however, seems less momentous in the wake of former CFPB Director Richard Cordray’s resignation in November 2017 and President Trump’s appointment of Office of Management and Budget Director Mick Mulvaney as the CFPB’s Acting Director.

Of more immediate significance to the settlement service industry is the court’s decision to reinstate the three-judge panel decision respecting RESPA. The panel had found that Section 8(c)(2) was indeed an exemption to the Act’s Section 8(a) anti-kickback provisions, provided that reasonable payments are made in return for services actually performed or goods actually furnished.  As a result of the court’s reinstatement, real estate brokers, lenders and title companies that were waiting on the sidelines for this decision may take another look at advertising agreements, desk rentals, and other services agreements.

The panel opinion also had rejected the CFPB’s contention that no statute of limitations applies to administrative enforcement of RESPA. That aspect of the reinstated opinion is likely to be helpful to respondents facing administrative claims under other federal consumer financial laws as well.

Finally, despite the 7-3 ruling on the constitutional issues and differences of opinion regarding the proper interpretation of RESPA, one thing all of the judges seem to agree on is that an agency cannot seek penalties for past conduct that violates a novel legal interpretation first advanced in an enforcement case.  That is, “regulation by enforcement” is permissible as a way to announce new legal principles, but, for due process reasons, it cannot be a basis to penalize past conduct.

It remains to be seen if PHH will seek Supreme Court review of the constitutional holding or will instead try its luck on remand in front of the Mulvaney-led CFPB.

On January 24, 2018, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) announced that it is seeking public comment on all aspects of its civil investigative demand (“CID”) process. This Request for Information (“RFI”) is the first in a series of RFIs in which the Bureau plans to seek comment on its enforcement, supervision, rulemaking, market monitoring, and education activities.

The RFI comes on the heels of Acting Director Mick Mulvaney’s announcement that the CFPB will no longer “push the envelope” when it comes to enforcement.  Consistent with that sentiment, the RFI explains that the CFPB is “especially interested in better understanding how its processes related to CIDs may be updated, streamlined, or revised to better achieve the Bureau’s statutory and regulatory objectives, while minimizing burdens.” Because responding to the CFPB’s CIDs has often proved to be an arduous and costly endeavor, this RFI is likely to be a welcome opportunity for many regulated entities. Continue Reading CFPB Requests Comments on Civil Investigative Demand Process

In a decision expressly based on the novelty of the legal claims brought by the Consumer Financial Protection Bureau (CFPB), a federal district court has rejected the CFPB’s broad demand for consumer restitution and civil money penalties in a case that has already produced several important rulings. The case represents the second time that a federal district judge has rejected the CFPB’s expansive view of remedies following a bench trial. The CFPB’s loss suggests that parties willing to litigate against the CFPB may achieve success even if they lose on the merits, as courts appear reluctant to award the robust remedies the CFPB typically demands, particularly in cases where the CFPB’s claims do not sound in fraud or are based on novel legal theories. Continue Reading District Court Rejects CFPB Restitution and Penalty Demand

The federal district court in Washington heard oral argument this morning in the case of English v. Trump, the challenge brought by Consumer Financial Protection Bureau (CFPB) Deputy Director Leandra English to President Trump’s appointment of Mick Mulvaney as Acting Director of the CFPB. The case largely turns on whether the Federal Vacancies Reform Act (FVRA) authorized Mulvaney’s appointment, as the government claims, or whether the Dodd Frank Act instead directs that the Deputy Director of the agency – and only the Deputy Director – can serve as the Acting Director when the Director resigns.  The oral argument lasted nearly two hours and was lively and engaging.  Judge Timothy Kelly was extremely well-prepared and ran the argument along topical lines about which he had questions.  Judge Kelly did not rule from the bench, but most of his questions were for English’s counsel and based on the nature of the questions it seems quite likely that Judge Kelly will deny her request for a preliminary injunction.

Judge Kelly moved methodically through the questions on the merits as well as the standards for a preliminary injunction. He asked questions about: the nature of the relief requested (is this a mandatory injunction and if so does that change the applicable standard); the nature of the claims in plaintiff’s complaint (does she really have a separate constitutional claim or does that claim collapse into her statutory claim); how to apply certain cannons of statutory interpretation when comparing the FVRA’s use of the word “may” and the Dodd Frank Act’s use of the word “shall”; how other provisions of Dodd Frank impact the analysis; whether the Dodd Frank Act provision the plaintiff relies on applies to a Director’s resignation; possible constitutional concerns with plaintiff’s argument; what constitutes irreparable injury; and what the balance of the equities supports.  In the back-and-forth, plaintiff’s counsel got most of the questions and did most of the talking.  Plaintiff’s counsel pressed the point that the President’s appointment of OMB Director Mulvaney undermines the CFPB’s independence and closed by arguing that the case posed a threat to the tradition of independent financial regulators more generally.  The government’s lawyer (Chad Readler, the Acting Assistant Attorney General in charge of the Civil Division) – clearly sensing that the Judge was on the government’s side and facing fewer questions – tended to make more targeted arguments that raised two or three points in rebuttal to the plaintiff.  A more comprehensive summary of the argument follows. Continue Reading English v Trump: Round 2

The Consumer Financial Protection Bureau (CFPB) recently posted its Enforcement Policy and Procedures Manual (Manual) on its FOIA reading room website.  This is a welcome step in transparency, which was driven by the agency’s receipt of multiple FOIA requests for the Manual.  Other documents available in the FOIA reading room relating to the agency’s enforcement process now include the instructions and template for the memo sent to the Action Review Committee (ARC), which determines whether issues identified in the course of a CFPB examination warrant public enforcement action, and a template of the memo that staff send to the Director seeking authority to settle or sue at the conclusion of an enforcement investigation.  Hopefully, the CFPB will not wait for multiple FOIA requests to post other helpful documents on its website, such as a staff directory, which is available via FOIA request but is not currently posted on the CFPB website.

In an email to staff, Consumer Financial Protection Bureau (CFPB) Director Richard Cordray announced on Wednesday, November 15, that he will be stepping down this month.  His departure was widely anticipated.  Because the CFPB is headed by a single director – as opposed to a 5-member commission – the agency’s director wields enormous power. Below we address some of the most frequently asked questions regarding Director Cordray’s resignation.

Continue Reading CFPB Director Richard Cordray to Step Down

The Consumer Financial Protection Bureau (“CFPB”) has issued its first No-Action Letter (“No-Action Letter” or “Letter”) in response to a request from Upstart Network, Inc. (“Upstart”). The No-Action Letter means that CFPB staff currently has no intention of recommending enforcement or supervisory action against Upstart. This decision is limited to the application of the Equal Credit Opportunity Act (“ECOA”) and its implementing regulation, Regulation B, to Upstart’s automated model for underwriting applicants for unsecured, non-revolving credit (“automated model”).

Upstart is an online lending platform that, working with a bank partner, uses alternative data to facilitate credit and pricing decisions for consumers with limited credit or work history. In addition to relying on traditional credit information, Upstart uses non-traditional sources of information to evaluate a consumer’s creditworthiness. For instance, Upstart might look at an applicant’s educational information, such as school attended and degree obtained, and the applicant’s employment to determine financial capacity and ability to repay. Upstart submitted a Request for No-Action Letter (“Request”) in relation to its automated model to the CFPB pursuant to the agency’s no-action letter policy.

According to the CFPB, the no-action letter policy is intended to facilitate consumer-friendly innovations where regulatory uncertainty may exist for certain emerging products or services. In practice, however, the process has presented significant challenges for companies that might seek to benefit from it. Continue Reading CFPB Issues No-Action Letter to Alternative Credit Lending Platform

On June 22, 2017, the CFPB’s Student Loan Ombudsman put out its annual report on student loans, as required by the Dodd-Frank Act. The report analyzes complaints submitted by consumers about student loan servicers between March 2016 and February 2017. Many of the complaints relate to practices, such as payment processing, customer service and borrower communication, and income-based repayment plan enrollment, that the CFPB has frequently scrutinized in the past through supervision and enforcement activities.

However, the majority of the report focuses on complaints from consumers related to the Public Service Loan Forgiveness (PSLF) program, which allows those who enter careers in public service to have their student loans forgiven after a decade. The CFPB’s report criticizes servicers’ alleged failures to actively advise borrowers on how to qualify for PSLF, track their progress toward PSLF completion, and inform them about the requirements of the PSLF program. In conjunction with the report, the CFPB updated its education loan examination procedures to include additional questions about the PSLF program. Continue Reading CFPB Issues Report on Student Loan Servicing and Updated Examination Procedures