When President Trump took office earlier this year, many predicted the end of the Consumer Finance Protection Bureau (CFPB or the Bureau) as we know it. Nine months later, despite ongoing litigation challenging the structure of the CFPB as unconstitutional, the CFPB has maintained its aggressive enforcement agenda, filing over 30 enforcement actions. The Bureau has also flexed its regulatory muscles this year by issuing new regulations for the payday lending industry and a controversial rule that would have prohibited financial institutions and credit card companies from employing mandatory arbitration clauses to prevent consumers from joining class actions suits against them. Although Congress and President Trump have successfully repealed the arbitration rule, the CFPB largely held its course under the direction of Richard Cordray, an Obama administration appointee.
CFPB Director Cordray recently announced that he will step down by November 30, 2017. This announcement follows widespread speculation that the former Ohio attorney general would leave before his term was to expire in July 2018 to run for governor of Ohio. President Trump’s pick to permanently lead the Bureau will require Senate confirmation but change could come quickly under an acting director. The prospects for quick changes at the Bureau are complicated, however, by the fact that there is some question about both whether the current deputy director can now assume the role of acting director and whether President Trump has authority to appoint an acting director of his choice.
Meanwhile, the D.C. Circuit Court of Appeals is poised to issue a decision in PHH v. CFPB, which may rule that the Bureau’s current structure is unconstitutional and should be changed. Finally, House and Senate Republicans continue to pursue legislative measures that would curb the CFPB’s independence and authority. With so many unknowns circling around the CFPB, we take stock of the state of consumer finance enforcement for the coming year and conclude that although change is clearly on the horizon, financial institutions should not expect enforcement of consumer finance laws to grind to a halt in 2018.
Change in CFPB Leadership
The statute establishing the CFPB directs that the CFPB deputy director “shall serve as acting Director in the absence or unavailability of the Director.” (12 U.S. Code § 5491(b)(5). It is unclear whether this Dodd-Frank Act clause means that the deputy director can assume the role of acting director upon the voluntary resignation of Cordray.
There is also debate whether President Trump will use the Federal Vacancies Reform Act of 1998 (Vacancies Act) to fill the position, and has authority to do so. The Vacancies Act provides that when an “executive agency” position requiring Senate confirmation is vacated due to resignation, the duties of that position could be filled by the “first assistant” to the vacant position. (5 U.S. Code § 3345). However, the Vacancies Act also permits President Trump to fill such a vacancy with (1) another officer or employee of the Bureau that meets certain salary and longevity of service requirements; or (2) an officer in any executive agency who is already occupying a position requiring Senate confirmation. (Id. (emphasis added)). The Vacancies Act itself acknowledges that a statutory provision may designate a specific officer or employee to fill the vacancies in an acting capacity. (5 U.S. Code § 3347). One could argue that the statutory provision that designates the CFPB deputy director to serve as acting director in the “absence or unavailability” of the director does this. The Trump administration may, however, take the position that this provision does not apply to a vacancy created by the CFPB director’s resignation.
If Trump’s legal team determines that he is authorized to make his own pick of acting director, a Trump-appointed acting director could quickly redirect the activities of the Bureau by rolling back controversial CFPB regulations and halting aggressive enforcement activity that critics claim amounts to “regulation through enforcement.” However, the lack of clarity about Trump’s authority to appoint an acting director other than the current deputy director of the CFPB, David Silberman, could lead to legal challenges attacking the legitimacy of any actions a future acting director could take.
Even if a Trump-appointed acting director does not quickly change the course of the Bureau, such change will likely come under Trump’s permanent pick for the position. The timeline for Senate confirmation is unpredictable. Thus, the degree to which new leadership will shape the CFPB’s regulatory, supervisory and enforcement activity and the timeline for such changes remain to be seen.
Legislators Take Aim at the CFPB
In June 2017, the House of Representatives passed a major piece of legislation, the Financial Choice Act (H.R. 10), which would roll back many banking reforms enacted in the Dodd-Frank Act following the 2008 financial crisis. The Financial Choice Act would also dramatically reshape the CFPB if enacted by the Senate and signed into law. Although the Financial Choice Act appears to be stalled in the Senate, some of its provisions may nonetheless make their way into law.
The House bill would rename the CFPB the Consumer Law Enforcement Agency. It would establish a single director removable at will by the president, subject the agency to the congressional appropriations process, eliminate the agency’s authority to police unfair, deceptive, or abusive acts or practices (UDAAPs) and restrict enforcement to enumerated consumer protection laws. Other provisions, if enacted, would impact how financial regulatory agencies (including the CLEA) could promulgate regulations and would prevent new rules estimated to have an annual economic impact of $100 million or more from taking effect unless Congress passes a joint resolution of approval.
Senate Majority Leader Mitch McConnell (R-Ky.) has indicated that prospects are grim for Senate approval of a major Dodd-Frank reform bill akin to the Financial Choice Act. A more limited, bipartisan bill recently unveiled by Senate Banking Committee would ease regulations on community banks and increase the asset threshold that subjects larger regional lenders to stricter regulatory oversight and higher compliance costs. The bill, which is scheduled for a committee vote on Dec. 5, would not change the structure or authority of the CFPB.
Nonetheless, some of the CFPB-related provisions of the Financial Choice Act could be bundled into appropriations bills or other legislation. The Financial Services and General Appropriations Bill (H.R. 3280) passed by the House in July included provisions that would submit the CFPB to the congressional appropriations process, eliminate the Bureau’s supervisory authority, and remove UDAAP authority—a frequently used CFPB enforcement tool. It remains to be seen if any of the these provisions will be ultimately enacted through the appropriations process, now that Republicans control Congress and the White House. Previous attempts to alter the CFPB through the appropriations process failed due to steadfast opposition from congressional Democrats and President Obama.
In September, Congress passed and President Trump signed a continuing resolution (H.R. 601) that funds the federal government at fiscal year 2017 spending levels through December 8, 2017. Congress will likely act again this December to avoid a controversial government shut down. Although Congress could enact another continuing resolution to give itself more time to pass appropriations bills, the appropriations process is expected to be completed before the new year or in early 2018. We will be monitoring what, if any, CFPB-related provisions move forward in that process.
Despite Republican hostility to what House Financial Services Committee Chairman Jeb Hensarling (R-Texas) has called “arguably the most powerful and least accountable Washington bureaucracy in American history,” recent polls indicate that the CFPB enjoys broad public support. Republican attempts to roll back the CFPB’s powers may be somewhat constrained by public opinion. The CFPB touts that it has recovered nearly $12 billion for 29 million consumers and one recent poll found that 77 percent of independents and 66 percent of Republicans reported that they “favor somewhat” or “favor strongly” the CFPB. (See AFR/CRL Polling Memo: Fifth Consecutive Year of Broad Backing of CFPB and Wall Street Reform (July 18, 2017), Americans for Financial Reform). The CFPB’s future is also slightly brightened by the recent announcement that Hensarling, its sharpest critic, will retire from Congress.
The Courts and the CFPB
Meanwhile, the U.S. Court of Appeals for the District of Columbia Circuit is weighing a case involving PHH Corp. that tests whether the CFPB’s single-director leadership structure violates the U.S. Constitution. (See PHH Corp. v. CFPB, D.C. Cir. App. en banc, 15-cv-01177, argued 5/24/17). A three-judge panel of the court ruled in October 2016 that the CFPB’s current structure was unconstitutional. It also remedied this violation by severing a single provision in the law that established the independent agency, which provided that the director could be removed by the president only for cause. The D.C. Circuit explained that after severing this provision, “[t]he CFPB will now operate as an executive agency. The President of the United States now has the power to supervise and direct the Director of the CFPB, and may remove the Director at will at any time.” This decision was vacated and en banc review of it was granted in January 2017. Oral arguments were held on May 24, 2017 and a decision is forthcoming. If PHH does not prevail, it is expected to seek review by the U.S. Supreme Court. Although a ruling that the CFPB director is removable at will by the president would not have immediate significant consequences after President Trump has installed a director of his choice, it would have implications for the future. Moreover, the court could conclude that a more significant structural change (such as imposing a multi-member commission to direct the CFPB) is necessary to remedy any constitutional deficiency.
Cold Shoulder From White House
Even if the CFPB’s structure is left completely unchanged by Congress and the D.C. Circuit, the Bureau will nonetheless enjoy less support from other executive branch agencies in 2018. The Department of Justice recently argued against the CFPB in the PHH case, asserting that the Bureau’s current structure is unconstitutional. The Department of Education (DOE) recently announced that it was ending an information-sharing agreement with the CFPB because the CFPB was “confusing” borrowers by responding to student loan complaints. In a letter to the CFPB, the DOE also accused the Bureau of using student loan data to expand its jurisdiction into areas that Congress had not envisioned. In addition, if efforts to subject the CFPB to the regular appropriations process succeed, its budget will likely be cut dramatically.
Enforcement of Consumer Finance Laws Won’t Stop
Even if the CFPB was stripped of its UDAAP authority by legislation, the Bureau would still have the power to enforce numerous other laws. In enforcement actions invoking UDAAP, the CFPB has typically also asserted violations of consumer finance laws including the Truth in Lending Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures Act.
Moreover, even if the CFPB was somehow dismantled entirely, the enforcement authority of these enumerated laws, which was consolidated at the CFPB upon its creation, would presumably revert to the “transferor agencies” that had responsibility prior to Dodd-Frank—the Federal Reserve, the Federal Deposit Insurance Corporation, the Federal Trade Commission, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Department of Housing and Urban Development.
Federal enforcement agencies are not the only sheriffs in town. Under Title X, Section 1042 of Dodd-Frank (12 U.S.C. 5552) state attorney generals (or equivalent state officials) are empowered “to enforce provisions of this title or regulations issued under this title.” A number of states have enthusiastically embraced this role and have developed substantial expertise in consumer finance enforcement. The New York Attorney General, for instance, has established a Bureau of Consumer Frauds and Protection and has coordinated with the CFPB in several joint enforcement actions in the last few years. Florida, Illinois, California, Ohio, and Massachusetts are also already active in enforcing consumer finance laws.
State enforcement powers under Section 1042 do not authorize actions against a “national bank” or “federal savings association” to enforce provision of Title X (including UDAAP provisions). However, state actions to enforce CFPB regulations against such entities are permitted. State enforcers can bring both UDAAP claims and claims under CPFB regulations against financial institutions that are not “national banks” or “federal savings associations.”
If Congress succeeds in striking UDAAP authority from Title X entirely, state officials, along with the CFPB, would lose the ability to rely on these provisions in enforcement actions. Nonetheless, the expertise gained by states since the enactment of Dodd-Frank has put them in a strong position to fill any void created by a less powerful CFPB, or non-existent CFPB. A state attorney general or state regulator would continue to rely on state consumer protection laws as well as federal laws. States are motivated not only by recovering funds for consumers, but also by redirecting penalties to their state treasuries to the extent possible.
Although the CFPB will remain in the cross hairs of a hostile Republican Congress and executive branch, its work for the “little guy” may appeal to Republican voters more than it does to its sharpest critics. While it remains unclear whether legislation, executive actions or litigation will curtail the CFPB’s powers, banks and other financial institutions should not plan on an enforcement holiday from consumer protection laws and regulations.