CFPB News: Constitutionality, Military Lending, Enforcement and More

Financial Services Law

While the dispute over the constitutionality of the Bureau of Consumer Financial Protection’s (CFPB or Bureau) structure continues to rage, the Bureau continued to make other news, releasing a report on the Ability to Repay and Qualified Mortgage rule, while Director Kathy Kraninger asked Congress for additional authority regarding military lending, and major enforcement actions dating back to the Cordray era continued to be resolved.

What happened

Constitutionality challenges continue—the battle over the constitutionality of the structure of the CFPB grinds on. Most recently, the Supreme Court has decided to pass on the issue, and an end does not appear to be in sight.

The news for CFPB followers has been decidedly mixed. Last year, the en banc D.C. Circuit issued a divided ruling in PHH Corp. v. CFPB, holding that the structure of the Bureau is indeed constitutional because it reflects the legislative goal of creating a truly independent agency. The opinion reversed an earlier panel decision finding the CFPB unconstitutional.

Back in May 2018, neither PHH nor the CFPB sought Supreme Court review, and thus the case did not serve as a vehicle for attacking the Bureau’s structure on a constitutional basis. Thereafter, in June 2018, then-Acting Director Mick Mulvaney directed that the charges against PHH be dismissed.

But that did not end the issue, as another lawsuit, State National Bank of Big Spring v. Mnuchin, was also working its way through the same courts. Plaintiff Big Spring had filed suit in the District of Columbia back in 2012, challenging the CFPB’s constitutionality, but a federal judge dismissed the suit, and the decision was then summarily affirmed by the D.C. Circuit based on its ruling in PHH.

Big Spring then filed a petition for writ of certiorari to the Supreme Court, but the Department of Justice (DOJ) opposed, arguing that the matter “would be a poor vehicle for” determining the constitutionality issue for “multiple reasons,” including that Judge Kavanaugh would have to recuse himself because he participated in the D.C. Circuit ruling below, and that there were other pending cases where the issue would be better presented. The Supreme Court then denied certiorari.

So what are the other cases? The three appellate cases are CFPB v. Seila Law LLC, on which the Ninth Circuit heard oral argument earlier this month; the RD Legal Funding case pending before the Second Circuit (a New York federal judge found the Bureau unconstitutional in a June 2018 decision); and CFPB v. All American Check Cashing, slated for oral argument before the Fifth Circuit in March.

As the federal appellate courts weigh in on the constitutionality question, with the strong possibility of a circuit split, it appears to be just a matter of time before the justices take up one of the cases and decide the issue.

Other CFPB News: While the constitutionality of the CFPB presents an important and perhaps existential issue for the Bureau, operations continue, and at least the following are worth noting here:

  • Ability to Repay/QM Report. The Bureau released a report on the Ability to Repay and Qualified Mortgage rule. The rule, which took effect in January 2014, mandates that lenders make a reasonable and good faith determination that a borrower has the ability to repay his or her loan.

    Taking a look back at five years of the rule, the Bureau found it was “not generally associated” with an improvement in loan performance, as measured by the percentage of loans becoming 60 or more days delinquent within two years after the obligation was incurred.

    The rule has not impacted self-employed borrowers’ access to credit, the CFPB said, nor does it appear to have materially increased lenders’ costs or the prices the lenders charged to consumers at an aggregate market level. However, forgone profits from not originating certain types of non-QM loans cost lenders $20 million to $26 million per year, the Bureau estimated.
  • MLA Exams. In light of bipartisan protests about the CFPB’s move to drop Military Lending Act (MLA) exams, CFPB Director Kathy Kraninger responded with a legislative proposal asking Congress to grant the Bureau “clear authority” to supervise for compliance with the statute.

    “The Bureau is committed to the financial well-being of America’s service members,” Kraninger said in a statement. “That’s why I have asked Congress to explicitly grant the Bureau authority to conduct examinations specifically intended to review compliance with the MLA. The requested authority would complement the work the Bureau currently does to enforce the MLA.”

    Kraninger’s draft proposal would add language to the Consumer Financial Protection Act (CFPA) to the effect that “[n]otwithstanding any other provision of law, the Bureau shall have nonexclusive authority to require reports and conduct examinations on a periodic basis … for purposes of” assessing compliance with the MLA, obtaining information about the activities and compliance systems or procedures of the entity, and detecting and assessing risks to consumers and to markets for consumer financial products and services.

    In her statement, Kraninger added, “My hope is that bipartisan legislation advances as quickly as possible.” The request for authority to conduct MLA compliance exams implies that the Bureau has no plans to do so absent an act of Congress.
  • Enforcement Action. Together with New York Attorney General Letitia James, the Bureau settled with the holding company of various national jewelry chains over allegations the company, among other things, opened store credit card accounts and enrolled customers in payment protection insurance without their consent.

    The CFPB alleged that the Ohio-based corporation, which operates roughly 1,500 jewelry stores in mall and off-mall locations in all 50 states, pressured its employees to open accounts and enroll customers in its programs, and “rated, retained and compensated” workers based on their ability to meet performance standards that included obtaining credit card applications.

    Employees allegedly failed to inform customers that they were applying for credit and misstated the reasons for requesting consumers’ personal information, according to the complaint, purporting to sign them up for a store “rewards card” or telling consumers they were collecting the data for a survey. Store managers purportedly encouraged these deceptive tactics, the CFPB and AG alleged, and company training materials instructed employees to offer credit to every customer who visited a store.

    The CFPB alleges that, over a four-year period, more than 1 million credit card accounts were opened based on applications completed and submitted in stores—and then never used by the consumers who supposedly applied for them, the CFPB and AG said.

    To settle the alleged violations of the CFPA, the Truth in Lending Act, Regulation Z and New York state law, the jewelry company agreed to pay a $10 million civil money penalty to the Bureau and another $1 million to the New York attorney general’s office. Injunctive relief requires the company to halt the allegedly deceptive practices and violations of law.
  • Personnel change. In other CFPB/New York attorney general news, a high-ranking Bureau employee announced his jump to the AG’s office. Chris D’Angelo, the associate director of supervision, enforcement and fair lending, plans to become the chief deputy attorney general for financial justice in New York after eight years with the Bureau.

    “He’s not going far—as all of you know, the Office of the Attorney General in New York has been a strong partner over the years given this office’s purview and interests as well as its proximity to our New York regional office,” Kraninger wrote in an email about the move.

To read the Ability-to-Repay and Qualified Mortgage Rule Assessment Report, click here.

To read Kraninger’s legislative proposal, click here.

To read the CFPB’s complaint, click here.

To read the stipulated judgment and order, click here.

Why it matters

The importance of the legal battle over the constitutionality of the Bureau cannot be overstated: If the CFPB is unconstitutional, it has no regulatory, examination or enforcement authority, and prior acts of the Bureau might not be capable of being ratified. As the cases wend their way through the courts, we will continue to monitor their progress. In issuing the new report, the CFPB noted that it does not include a cost-benefit analysis, suggestions for amendments or other policy recommendations, but that it could be used to “inform the Bureau’s future policy decisions.” Kraninger’s request to Congress for authority signals not only that MLA exams will continue to be on hold, but also that she appears to be taking a strict reading of the law, with subtle changes to the approach taken by her predecessor. As for the latest enforcement action, it is worth noting that civil money penalties appear to be making a small comeback, although the numbers are still substantially below those assessed during the Cordray era.