Process vs. Outcomes Debated at Hearing on Constitutionality of CFPB Structure

As we had indicated on March 16, the Subcommittee on Oversight and Investigations of the House Financial Services Committee conducted a hearing on "The Bureau of Consumer Financial Protection’s Unconstitutional Design." Unsurprisingly, Republicans and Democrats on the subcommittee talked past each other in making remarks and questioning the four witnesses: Ted Olson, Saikrishna Prakash, Adam White, and Brianne Gorod.

The Democrats on the subcommittee, by and large, ignored the constitutional issues. One Democratic subcommittee member, Keith Ellison of Minnesota, stated that the constitutional arguments are a "subterfuge" for business interests’ desire to go back to having the unchecked ability to abuse consumers. Instead of the constitutional issues, subcommittee Democrats focused principally on the "good" outcomes that the CFPB has achieved for consumers. They cited the billions in fines and redress that the CFPB has extracted from the financial services industry, among other things. Various Democratic subcommittee members vowed to protect the CFPB from being dismantled by what they saw as the forces of evil.

Oddly, the ranking member of the subcommittee, Al Green, a Democrat from Texas, spent almost all of his time criticizing the subcommittee for holding the hearing while the PHH case was pending before the D.C. Circuit. He found it particularly troublesome that Ted Olson would be testifying before Congress instead of advocating in the courts. His zeal for the issue was especially peculiar, given that Ms. Gorod, another witness testifying on the panel, was an attorney who represented Mr. Green and other Congressional Democrats in filing amicus briefs in the PHH case in an attempt to intervene on behalf of the CFPB.

Republicans, in contrast, focused on the constitutional issues, namely, the CFPB’s lack of accountability either to Congress or the President, and the unprecedented consolidation of legislative, judicial, and executive power in the CFPB director. In response to questioning on these issues, Ted Olson, quoting James Madison, said that such consolidation of power is "the very definition of tyranny."

While Republicans focused on the constitutional issues, they did not miss the opportunity to shoot a few barbs back at Democrats on the "results" achieved by the CFPB. They pointed out that the CFPB’s various accomplishments have increased the size of the unbanked population in America, diminished access to credit, and hurt smaller financial institutions that cannot afford "armies" of lawyers and compliance professionals.

Republicans on the subcommittee and three of the witnesses, Messrs. Olson, White, and Prakash, seemed to agree that three steps are needed to fix the CFPB’s structure: (1) eliminate the removal only for cause provision; (2) make the CFPB’s budget part of the appropriations process; and (3) limit the Chevron deference afforded to the CFPB’s interpretations of consumer financial services laws.

Republicans and Messrs. Olson, White, and Prakash also agreed that the President has the right and responsibility to refuse to enforce unconstitutional laws. Republicans on the subcommittee took this to mean that the President has the power, even now that the PHH panel decision has been vacated, to remove Director Cordray from office at will.

Messrs. Olson, White, and Prakash also pointed out the dangerous precedent the CFPB structure would set for future agencies. All agreed at various points during the hearing that, if the CFPB’s current structure is constitutional, that would mean no limit exists on Congress’s ability to vest executive, judicial, and legislative authority in anyone of its choosing. They argued that, if the CFPB’s structure stands, there is nothing left of the separation of powers doctrine or the unitary executive.

-Theodore R. Flo


HUD Inspector General Issues Alert on Appraiser Identity Theft

The Office of the Inspector General (OIG) of the U.S. Department of Housing and Urban Development has issued an alert on appraiser identity theft. The alert details cases in three states where identity thieves illegally used the signatures and certification numbers of Federal Housing Administration (FHA) roster appraisers.

In Washington, an appraiser's former boss used the appraiser's software PIN to create fraudulent reverse mortgage appraisals. The offender was sentenced to five years' imprisonment, while a mortgage lender who conspired with the offender was sentenced to 90 days in jail. In Illinois, a licensed appraiser illegally used the names and licenses of two other appraisers. The perpetrator, who worked with the victims, pleaded guilty and was sentenced to three years. In California, an appraiser illegally used the name and credentials of an FHA roster appraiser 170 times. The fraudster pretended to be the roster appraiser and presented the roster appraiser's credentials to an appraisal company.

These types of schemes frequently occur when an appraiser gives his or her PIN to a colleague or supervisor to help expedite an appraisal. The colleague or supervisor is then able to fraudulently use the PIN to create appraisals bearing the appraiser's credentials. To avoid these situations, OIG recommends that appraisers never provide their PIN to another person, including a company that requests it as a condition of doing business. The report also recommends that appraisers regularly review their list of appraised properties to detect any appraisals they did not prepare.

- Constantinos G. Panagopoulos and Matthew D. Lamb


Divided D.C. Circuit Panel Denies Injunction Blocking CFPB CID

The U.S. Court of Appeals for the District of Columbia Circuit, in a divided decision, denied a motion for an emergency injunction pending appeal filed by a company seeking to halt all CFPB action adverse to the company, including enforcement of a Civil Investigative Demand (CID) and disclosure of the company’s identity. The company seeking the injunction in John Doe Company v. CFPB is a California limited liability company in the business of purchasing and selling income streams, with its principal place of business in the Philippines.

To satisfy the requirement of showing a likelihood of success on the merits, the company pointed to the D.C. Circuit’s PHH decision holding that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional. In denying the injunction, the D.C. Circuit observed that the company was required to show not only that there is potentially persuasive authority for its legal position but also that the district court abused its discretion by not giving sufficient credit to that showing when it balanced the equities for purposes of deciding whether to grant preliminary injunctive relief.

The D.C. Circuit concluded that pointing to PHH was not enough because:

  • The PHH decision has been vacated as a result of the order granting the CFPB’s petition for rehearing en banc. The D.C. Circuit stated that the district court "did not abuse its discretion in determining that simply pointing to the vacated majority opinion in PHH did not establish the likelihood of an identical constitutional ruling by the en banc court in PHH or the court in this case." (emphasis provided).
  • Even assuming the en banc court were to agree with the majority opinion in PHH, the company is not in the same constitutional position as PHH.  According to the court, PHH was "on the receiving end of a completed law enforcement action by the Bureau" and the majority opinion emphasized the Constitution’s assignment of law enforcement authority to the Executive Branch.  In contrast, the company is seeking to stop "a non-self-executing investigative demand for regulatory action" and had not objected to the scope or content of the CID or argued that it is outside the CFPB’s authority.  To obtain the injunction, the company "would have to show that only the Executive Branch can demand information from regulated businesses or take such investigative steps," something which the court deemed "far from constitutionally self-evident." (emphasis provided).
  • The company’s argument that the alleged separation of powers violation requires the CFPB to "be stopped in its tracks" ignores that severance of the unconstitutional provision is often the chosen remedy (as it was in PHH) and that vacatur of past actions is not routine.  The court observed that the PHH decision "did not undo the Bureau enforcement action and make it start over from scratch.  The court simply remanded for the Bureau to address specific matters."
  • An administrative proceeding rather than the D.C. Circuit is the proper forum for the company’s separation of powers claim.

The D.C. Circuit also found that the district court had not abused its discretion in finding that the company had failed to show irreparable harm, calling the company’s argument about reputational harm "nothing more than speculation about how third parties might respond to routine regulatory investigations," or in holding that the company’s name did not need to be kept confidential in public court proceedings. On March 7, the date of the D.C. Circuit decision, the CFPB revealed the company’s name by publishing on its website the company’s petition to modify or set aside the CID and the CFPB’s decision and order denying the petition.

Judge Brett Kavanaugh, who was on the PHH panel and joined the majority decision, issued a dissenting opinion in which he stated that he would grant the company’s injunction motion. According to Judge Kavanaugh, the company had shown a likelihood of success on the merits because "given the Supreme Court’s Article II precedents, I believe that the CFPB’s structure is likely to be ruled unconstitutional, whether by this Court sitting en banc or by the Supreme Court." He also found that the company had shown irreparable harm because "[i]rreparable harm occurs almost by definition when a person or entity demonstrates a likelihood that it is being regulated on an ongoing basis by an unconstitutionally structured agency that has issued binding rules governing the plaintiff’s conduct and that has authority to bring enforcement actions against the plaintiff."

The CFPB had argued that even if it is unconstitutionally structured, the remedy would be to sever the for-cause removal provision as was done in PHH. According to the CFPB, because it would continue to regulate the company as an executive agency rather than an independent agency in that scenario, the company is not entitled to a preliminary injunction to prevent the CFPB in its current form from regulating the company. Calling the CFPB’s analysis "badly mistaken," Judge Kavanaugh stated that "unless and until" the for-cause removal provision is actually severed, the company "will continue to be regulated on an ongoing basis by an unconstitutional agency." In his view, a preliminary injunction "would alleviate that ongoing harm."

-Barbara S. Mishkin


PHH Files Opening En Banc Brief; Seven Supporting Amicus Briefs Filed

On March 10, PHH filed its opening en banc brief with the D.C. Circuit in the rehearing of its appeal of Director Cordray’s June 2015 decision that affirmed an administrative law judge’s (ALJ) recommended decision concluding PHH had violated RESPA and increased the ALJ’s disgorgement award from over $6.4 million to over $109 million. The rehearing was sought by the CFPB after a divided D.C. Circuit panel ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional and severed the unconstitutional provision to make the CFPB Director removable without cause by the President; rejected Director Cordray’s new RESPA interpretation and held that even assuming that his interpretation was consistent with RESPA, the CFPB’s attempt to apply that new interpretation retroactively violated due process; held that statutes of limitations apply to CFPB administrative enforcement actions; and remanded to the CFPB for further proceedings consistent with the panel’s decision.

In its opening brief, PHH argues that the CFPB’s "unprecedented independence from the elected branches of government violates the separation of powers" and that because the CFPB’s "constitutional infirmities extend far beyond limiting the President’s removal power…the proper remedy is to strike down the agency in its entirety." According to PHH, the Dodd-Frank "for-cause removal provision is not severable from the rest of the provisions establishing the CFPB because severance would create a new agency unrecognizable to the Congress that passed Dodd-Frank." PHH contends that the court cannot avoid the separation-of-powers issues "simply by adopting the panel’s statutory holdings and remanding to the CFPB, because this Court cannot remand a case to an unconstitutional agency." PHH asserts that such issues can only be avoided "by vacating the CFPB’s order without remand, so that the CFPB would not be free to resume proceedings against PHH."

In its order granting the CFPB’s petition for rehearing en banc, one of the issues the court ordered the parties to address was what the appropriate disposition would be in PHH if the court were to hold that the ALJ in Lucia v. SEC was an inferior officer. In Lucia, a panel of the D.C. Circuit held that because the SEC’s ALJ was an "employee" rather than "inferior officer" who must be appointed in accordance with the Appointments Clause of the U.S. Constitution, the ALJ’s appointment by the SEC’s Office of Administrative Law Judges rather than an SEC Commissioner was constitutional. The D.C. Circuit granted a petition for rehearing en banc in Lucia and, as noted below, has scheduled oral argument in that case and in PHH for the same day.

Responding to the issue posed by the D.C. Circuit, PHH argues in its brief that if the court holds the ALJ in Lucia was improperly appointed, then the ALJ in its case was also an "inferior officer" who was not appointed in accordance with the Appointments Clause. As a result, the entire hearing before the ALJ was invalid, Director Cordray’s order would need to be vacated, and "any future proceeding must begin afresh before a constitutionally structured agency but also before a valid adjudicator." PHH further argues that merely restarting the current proceeding still would not provide PHH with full relief because "the unconstitutional taint stemming from the initial authorization of the Notice of Charges would continue to infect this matter." PHH asserts that for this reason, the court "must decide PHH’s separation-of-powers challenge even if the ALJ was improperly appointed."

With regard to the RESPA issues, PHH contends they "should not properly be disputed" before the en banc court "and any en banc opinion should simply reinstate the panel’s statutory rulings." It also observes that the RESPA issues "plainly were not en banc-worthy" and Director Cordray’s RESPA interpretation, if adopted by the en banc court, "would create a circuit split with every other court to have considered RESPA’s proper scope." Nevertheless,  PHH states that "[i]n an abundance of caution and in light of the critical importance of the RESPA issues to PHH and to the entire settlement-services industry…PHH addresses those issues directly [in its brief] to demonstrate that there is no legitimate basis to revisit the panel’s statutory rulings."

Amicus briefs in support of PHH were filed on March 10 by:

The RD Legal amici are defendants in an enforcement action filed by the CFPB and the New York Attorney General last month alleging that a litigation settlement advance product offered by RD Legal is a disguised usurious loan that is deceptively marketed and abusive. (In their brief, the RD Legal amici claim that the action was filed in retaliation for a preemptive challenge to the CFPB’s jurisdiction filed by RD Legal.) State National Bank of Big Spring and the other amici on its brief are the plaintiffs in a separate lawsuit pending in D.C. federal district court challenging the CFPB’s constitutionality. The State National Bank of Big Spring plaintiffs previously filed an unsuccessful motion with the D.C. Circuit seeking to intervene in the PHH en banc rehearing.

In their amicus brief, the Republican state AGs argue that separation of powers creates a structural check against the aggregation of power on the federal level and protects the role of the states in the federal system by limiting the range of permissible federal action and ensuring federal power can only be wielded by officials who are politically accountable. A group of Democratic AGs from 16 states and the District of Columbia filed an unsuccessful motion with the D.C. Circuit seeking to intervene in the PHH appeal. Among the arguments made by the Democratic AGs in support of their motion was that their intervention was necessary because the Trump administration might not defend the CFPB’s constitutionality.

Except for the brief filed by the ABA and 12 other trade groups, which addresses only the merits of PHH’s RESPA arguments, the amicus briefs only address the CFPB’s constitutionality and argue that the CFPB is unconstitutionally structured because of the CFPB Director’s expansive powers and insulation from Presidential and Congressional oversight. (ACA International’s brief includes the argument that, in addition to being insulated from accountability, the CFPB’s funding mechanism also raises a conflict of interest. According to ACA, the civil penalty fund "creates a perverse incentive for the Bureau to use its enforcement actions as a funding mechanism, where the Bureau is both prosecutor and beneficiary.")

The ABA’s brief states that even though amici "do not understand the Court to have granted en banc review to reconsider the panel’s straightforward resolution of the RESPA and fair notice questions," they are nonetheless "filing this brief out of an abundance of caution because [such] questions addressed by the panel are of critical importance to them and their members." The ABA amici argue that the CFPB "misread RESPA, overturned decades of settled interpretations without any notice, and disrupted a large sector of the economy." They assert that the panel’s decision "correctly restored the status quo" and urge the en banc court "to let that decision stand."

Also on March 10, the D.C. Circuit entered an order allowing each side 30 minutes at the en banc oral argument scheduled for May 24, 2017. The order also indicates that the oral argument in Lucia v. SEC, also scheduled for May 24, will be heard first to be followed by a "short recess" before the argument in PHH. Finally, the order confirms that the en banc panel will consist of 11 judges, including Senior Judge A. Raymond Randolph. In addition to Senior Judge Randolph, four of the other panel members were appointed by a Republican president.

-Barbara S. Mishkin


RESPRO Annual Conference

The 2017 RESPRO Annual Conference, to be held April 18-20 at the Bellagio in Las Vegas, features the quality best practices sessions, regulatory workshops, and idea-sharing roundtables that RESPRO conference attendees have come to expect. And the networking opportunities will be invaluable!

April 19, 2017

Implementing New York's New Cyber Security Regulation
1:30 PM – 2:30 PM
Speakers: Kevin D. Leitão, Kim Phan

The Evolving Anti-Money Laundering Regulatory Landscape
2:45 PM – 3:45 PM
Moderator: Richard J. Andreano Jr.
Speaker: Kevin D. Leitão

HMDA Update, Implementation and Implications
4:00 PM – 5:00 PM
Speaker: Richard J. Andreano Jr.

April 20, 2017

9:45 AM – 10:45 AM
Digital Legal Hot Topics
Moderator: Richard J. Andreano Jr.
Speakers: Kevin D. Leitão, Kim Phan


Did you know?

South Dakota Adds Licensing Exemption for Certain Nonresidential Mortgage Loans

South Dakota requires those acting as a mortgage lender, mortgage brokerage, mortgage broker, or mortgage loan originator in the state to be licensed accordingly. The state has enacted a provision providing an exemption from licensure to any person who originates, sells, or services five or fewer nonresidential mortgage loans in a 12-month period as long as the total amount of the loans outstanding does not exceed $4 million. Any persons exempted must make annual reports when nonresidential mortgage loans have been originated, sold, or serviced.

This provision is effective starting July 1, 2017.

Utah Adopts Uniform State Test

The Utah Division of Real Estate will adopt the Uniform State Test (UST) for mortgage loan originator licensing. While most state agencies have adopted the UST, as summarized in the UST Adoption Map and Table provided by NMLS, the following four state agencies have not: the Minnesota Department of Commerce, South Carolina's Board of Financial Institutions and Department of Consumer Affairs, and the West Virginia Division of Financial Institutions.

More information about the UST can be found here.

Implementation of the UST is expected to occur this summer.

Wyoming and Oregon Adopt Electronic Surety bonds

On March 20, the Wyoming Division of Banking Started using new Electronic Surety Bond (ESB) form versions. Any undelivered bonds must be updated to the new version before delivery.

On April 15, the Oregon Division of Financial Regulation will start receiving new and converted ESBs through NMLS. More information on ESB is available here.


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