CFPB News: Kraninger Steers an Independent Path

Financial Services Law

CFPB Director Kathy Kraninger continues to chart her own course. CFPB developments include its settlement with a student loan management company, a public hearing on “abusive acts or practices, ” and updated guidance on payday lending. Meanwhile, court developments (on constitutionality, with a new CFPB amicus filing) continued to make news. 

What happened

Student Lending Enforcement Action -- According to the Bureau’s complaint filed in Indiana federal court, a student loan management company – created in 2008 to fund, purchase, manage and hold private loans for students at a private, for-profit school – engaged in unfair acts and practices in violation of the Consumer Financial Protection Act (CFPA).

The CFPB filed suit against the school in 2014 for violations of the CFPA as well as the Truth in Lending Act; two years later, the school ceased operations and filed for bankruptcy.

But the Bureau continued to pursue the student loan management company, alleging that it was “actively involved” in the creation and implementation of the school’s loan program. The defendant raised money for the loan program, ratified the loan criteria and oversaw the origination and servicing of the loans, the CFPB said.

The student loan management company knew – or was reckless in not knowing – the risks and problems associated with the loan program, the Bureau added.

“In particular, the [student loan management company] knew, at least as of August 2010, that the majority of borrowers were likely to default on their loans and knew or was reckless in not knowing that, because of [the school’s] financial aid practices, many students were pushed into the [loans], did not understand the terms of their [loans] or did not realize they had taken out loans at all,” according to the CFPB’s complaint. “Despite these red flags, the [student loan management company] participated in the [loan program], ensuring that [the school’s] students faced the harmful consequences of the high cost debt.”

To settle the charges, the student loan management company must stop collecting on and discharge all outstanding loans, ask all consumer reporting agencies to delete tradelines relating to its loans and provide notice to all consumers with outstanding loans that their debt has been discharged and is no longer owed.

The Bureau estimated the total amount of loan forgiveness in the neighborhood of $168 million. A similar deal was reached between the student loan management company and 44 states, plus the District of Columbia.

To read the CFPB’s complaint, click here.

To read the CFPB’s proposed final stipulated judgment, click here.

Amicus Filing – More rare since the departure of former director Richard Cordray, pro-consumer amicus filings were once a staple of an activist Bureau.  While that materially changed under Mick Mulvaney’s tenure, as we’ve discussed previously, Director Kraninger has continued her independent streak.  Late last month, the CFPB came out on the side of consumers, arguing in an amicus curiae filing that a district court wrongly dismissed a complaint under the Fair Debt Collection Practices Act (FDCPA).   The filing, in Bender v. Elmore & Throop, P.C.¸ rejects the trial court’s conclusion that the trigger for limitations purpose, is not when the “first similar violation” occurs, but rather after each discrete “violation.”  In other words, if there are subsequent violations, suit must be commenced within a year of the last such violation, not the first.  And that is indeed what the statute says, in that suits must be filed “within one year from the date on which the violation occurs.” 15 U.S.C. § 1692k(d). While this may seem like a common sense argument, such an interpretation does lead to some abuse by plaintiffs, so the amicus position is somewhat of a surprise, given current Bureau leadership, although perhaps reflective of a continued focus on debt collection.

Symposium on “Abusive” Acts or Practices – Jumping in to its symposia series with a hotly debated topic, the CFPB hosted a discussion on the meaning of “abusive acts or practices” under Section 1031 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In addition to remarks by Bureau Director Kathy L. Kraninger and Deputy Director Brian Johnson, two panels of experts discussed  the term. In the first panel, moderated by Tom Pahl, CFPB Policy Associate Director, Research, Markets and Regulation, academics debated various policy issues related to the abusive standard.

The second panel featured an examination of how the abusive standard has been used in practice, with commentary from practicing attorneys and state regulators, led by David Bleicken, CFPB Deputy Associate Director, Supervision, Enforcement and Fair Lending.

“This topic is one of many important and challenging issues facing the Bureau,” Kraninger said in her remarks. While the legal concepts of unfairness and deception have been substantially developed over more than 80 years of case law, statutory language, regulations and agency policy statements, “[a]busiveness is somewhat different.”

“We have heard from some stakeholders that there is uncertainty about abusiveness’s parameters, which makes it harder for businesses that want to comply with the law to do so,” Kraninger told attendees. “And this uncertainty creates impediments to innovation and other salutary developments in the marketplace.”

The recently announced symposia series aims to explore “consumer protections in today’s dynamic financial services marketplace,” helping the Bureau with its policy development process, including future rulemakings.

Future topics include behavioral law and economics, small business loan data collection, cost-benefit analysis as well as disparate impact and the Equal Credit Opportunity Act.

To read the Director’s prepared remarks for the symposium, click here.

Challenge to Constitutionality of Bureau Structure – As the business of the CFPB carries on, so does the battle over its constitutionality. In May, a unanimous panel of the Ninth Circuit declared that the structure of the Bureau passes constitutional muster, relying heavily on the D.C. Circuit’s 2018 decision in PHH Corp. v. CFPB.

The Ninth Circuit case involved a law firm being investigated by the CFPB for potential violations of the Telemarketing Sales Rule. As part of its review, the Bureau issued a civil investigative demand (CID) to the law firm, requiring it to respond to seven interrogatories and four requests for documents. After the firm refused to comply with the CID, the CFPB filed a petition in California federal court to enforce compliance.

In response, the law firm challenged the structure of the Bureau, arguing that it violates the Constitution’s separation of powers because the agency is headed by a single director who exercises substantial executive power but can be removed by the president only for cause.

The Ninth Circuit disagreed. “[T]he for-cause removal restriction protecting the CFPB’s director does not ‘impede the President’s ability to perform his constitutional duty’ to ensure that the laws are faithfully executed,” the panel wrote.

Declining to seek rehearing en banc, the law firm elected to request a stay of the case pending the filing of a petition for a writ of certiorari in the Supreme Court. There is “a reasonable chance” the justices will grant further review in the case, the law firm told the Ninth Circuit, given the importance of the issue and the existence of contrary authority from a New York federal court.   Its petition for writ of certiorari was filed Friday, June 28, 2019, and is available here.

“The question whether the CFPB’s structure violates the constitutional separation of powers is ‘substantial’ under any sense of the term,” the law firm argued, and “has engendered serious debate among federal judges.”  Given the current administration’s view of the CFPB as a near autonomous entity, it is not altogether clear whether the Department of Justice will oppose the petition.  It did so in the State National Bank of Big Spring litigation, but took the position that the Supreme Court should address the issue “in an appropriate case.”

To read the motion for a stay in the constitutional challenge, click here.

Payday Lending Compliance – Finally, as the CFPB continues to sort through its delayed issuance of payday lending rules, it issued updated guidance for “small entities” engaged in short-term lending.  The guidance was updated to address the delay of the mandatory underwriting provisions (a huge deal, of course, for short-term lenders) and the technical corrections set forth in the final rule released on June 6, 2019, including revisions to account for the delayed compliance date for the mandatory underwriting provisions, and provisions dealing with unsuccessful attempts to debit accounts in order to reduce account closures and nonsufficient funds fees for consumers, among other, mostly modest. revisions.

Why it matters

At some point, a politicized U.S. Supreme Court may chime in on the constitutionality of the CFPB, but we do not believe the Ninth Circuit case is the right vehicle.  There is no split in the  Circuits on the issue, and the law firm challenge seems like a less than sympathetic case to attack CFPB excesses.   On the more practical side, the CFPB’s symposia series may be quite educational.  Its focus on “abusive acts or practices,” says Kraninger, “will help inform the Bureau’s thinking as to whether the Bureau should use its rulemaking or other tools to provide clarity about the general meaning of abusiveness – and, if so, which principles should be applied to determine the scope of abusiveness.” We expect that it will.

On the enforcement front, student loan servicing remains a front burner topic at both the federal and state levels.  Maine just passed a “Student Loan Bill of Rights,” for example.   Although the Bureau’s deal with the student loan management company requires loan forgiveness of roughly $168 million, it does not include a civil money penalty nor mandate that the company refund prior loan payments, continuing a trend by the current CFPB to avoid or substantially limit such penalties. As for the ongoing fight over the constitutionality of the CFPB’s structure, it remains to be seen whether the Supreme Court will take up the question, having already rejected an appeal in the D.C. Circuit case. While a circuit split has yet to occur, the Fifth Circuit recently heard oral argument on the issue and briefing has begun on a similar case in the Second Circuit, reviewing the New York federal court decision finding the structure unconstitutional.