Skip to main content
Menu Icon Menu Icon
Close

InfoBytes Blog

Financial Services Law Insights and Observations
Section Content

Upcoming Events

Filter

Subscribe to our InfoBytes Blog weekly newsletter for news affecting the financial services industry.

  • PHH v. CFPB Update: D.C. Circuit Hears Oral Arguments Before En Banc Court

    Courts

    On May 24, the en banc U.S. Court of Appeals for the D.C. Circuit heard oral arguments in the matter of PHH Corp. v. CFPB. The parties and the Department of Justice generally presented their arguments as expected based on their briefs. However, questions from some members of the court indicated doubts about the conclusion by a panel of the court in October 2016 that the CFPB’s structure was unconstitutional. In particular, multiple members of the court repeatedly pressed PHH’s counsel on whether prior Supreme Court decisions upholding the constitutionality of the Federal Trade Commission and other independent agencies led by presidential appointees who could only be removed “for cause” prevented the D.C. Circuit from concluding that the president lacked sufficient authority over the CFPB’s Director.

    Notably, however, in response to statements by PHH that current CFPB Director Richard Cordray could remain in his position after the expiration of his term in July 2018 until a successor was confirmed by the Senate, the CFPB’s counsel stated that, in the Bureau’s view, the “for cause” removal limitation no longer applied once the Director’s term expired, and the president could then remove the Director “at will.”

    In contrast to the constitutional issue, the questioning on other aspects of the case was minimal and did not indicate that the en banc court was inclined to revisit the panel’s determination that the CFPB misinterpreted the Real Estate Settlement Procedures Act (RESPA) when applying it to PHH’s practices, violated due process by failing to give PHH proper notice of its interpretation, and improperly failed to apply RESPA’s statute of limitations in its administrative proceedings.

    At the direction of the en banc court, the oral arguments in PHH followed those in Lucia v. SEC, a case addressing whether the SEC’s administrative law judges (ALJs) violate the appointments clause of the U.S. Constitution. Although this issue was not discussed during the PHH oral arguments, the CFPB originally brought its claims against PHH before an ALJ borrowed from the SEC and the court had previously suggested that a finding that the SEC ALJs were improperly appointed could also justify reversal of the CFPB’s decision against PHH. (See previous Special Alert here.)

    A decision from the en banc court is not expected for months. Importantly, while questioning during oral argument is often used as a barometer of the potential outcome of a case, the questions asked by a judge do not necessarily indicate how that judge will vote on a particular issue. Judges often use oral argument to see how the parties and their colleagues will respond to hypotheticals, rather than to share their views of the case.

    Courts Consumer Finance CFPB RESPA PHH v CFPB Mortgages Litigation

    Share page with AddThis
  • Company Accused of Bilking 9/11 First Responders Out of Millions of Dollars Says CFPB Action Unlawful

    Courts

    On May 15, a New Jersey-based finance company and its affiliated parties filed a motion to dismiss allegations that it scammed first responders to the World Trade Center attack and NFL retirees with high-cost loans. As previously covered in InfoBytes, the CFPB and the New York Attorney General’s office (NYAG) claimed the defendants engaged in deceptive and abusive acts by misleading consumers into selling expensive advances on benefits to which they were entitled by mischaracterizing extensions of credit as assignments of future payment rights, thereby causing the consumers to repay far more than they received. The defendants’ motion to dismiss was prompted, in part, by the recent PHH v. CFPB decision in which the court held that the CFPB’s single director leadership structure is unconstitutional and, thus, that the agency must operate as an executive agency supervised by the President. Here, the defendants argue, the complaint issued against them is a “prime example of how the unchecked authority granted to the CFPB leads to administrative overreach that has a profound effect on the businesses and individuals the agency targets.”

    In response to the claims that they mischaracterized credit, the defendants assert that the complaint is “based on the erroneous theory that—despite clear contractual terms and the weight of legal authority to the contrary—these transactions are not true sales, but instead are ‘extensions of credit’ under the Consumer Financial Protection Act [(CFPA)], and therefore the [defendants] deceived consumers by labeling the agreements as sales.” The CFPA defines an extension of “credit” as “the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment.” In this instance, the defendants contend, there is no debt, no repayment obligation, and no “right granted to defer payment of a debt” because the consumers are the sellers of the asset.

    The defendants argue that (i)“the CFPB’s unprecedented structure violates fundamental constitutional principles of separation of powers, and the CFPB should be struck down as an unconstitutional administrative agency”; (ii) because these transactions do not fall into the CFPA’s definition of credit, the case lacks a federal cause of action; and (iii) “each cause of action in the [c]omplaint individually fails to state a claim for relief, including because the Government is flat out wrong in its contention that the underlying settlement proceeds are not assignable.”

    Courts Consumer Finance CFPB Enforcement State AG PHH v CFPB UDAAP Litigation

    Share page with AddThis
  • PHH v CFPB Update: D.C. Circuit Grants CFPB’s Request to Go Last at May 24 En Banc Oral Arguments

    Courts

    In an per curium order handed down on May 1, the U.S. Court of Appeals for the D.C. Circuit granted an uncontested motion brought by the CFPB seeking to revise the order of the oral arguments in the upcoming PHH Corp. v. CFPB hearing before the en banc court. With all briefing on the merits having been submitted, the case awaits oral arguments, which have been set for May 24. The Bureau sought to change the order of arguments such that the CFPB presented its argument last—after both PHH and the DOJ. In seeking a change in scheduling order, the CFPB argued that the original schedule—pursuant to which the DOJ would go last—did not afford the Bureau an opportunity to respond to the DOJ’s arguments. The Court’s May 1 Order, having granted the Bureau’s Motion, provides for the following argument order:

    • Petitioners (PHH Corp.) – 30 minutes
    • Amicus Curiae United States – 10 minutes
    • Respondent (CFPB) – 30 minutes

    Also, note that the CFPB’s motion agrees-in-advance to PHH to likewise respond to both the DOJ and CFPB, should it wish to do so.

    As previously discussed in InfoBytes, the once-cooperative relationship between the CFPB and the DOJ recently turned adverse after the Sessions-led DOJ presented arguments in its latest briefing that differed markedly from both the CFPB’s positions and from the arguments asserted in briefing submitted by the Obama Administration in December 2016. For additional background, please see our recent PHH Corp. v CFPB Case Update.

    Courts Consumer Finance PHH v CFPB RESPA Mortgages Litigation

    Share page with AddThis
  • PHH Submits Reply Brief in Case Against CFPB; DOJ Allocated 10 Minutes at May 24 Oral Argument

    Courts

    As recently covered by InfoBytes, on March 31 the CFPB and seven amicus curiae respondents each filed briefing in PHH Corp. v CFPB urging the D.C. Circuit to uphold the constitutionality of the Bureau’s single-director, independent-agency structure. On April 10, PHH filed a reply brief responding to the arguments raised by the CFPB and other respondents, and reiterating its position that, among other things, the en banc court should declare that the Dodd-Frank Act’s creation of the CFPB violated constitutional separation of powers requirements and that the only satisfactory remedy is the complete invalidation of the Bureau.

    Citing Myers v. United States, 272 U.S. 52 (1926), PHH contends that, “the Constitution does not permit Congress to assign any portion of the executive power to an ’independent’ officer who is not accountable to, and removable by, the President.” Id. at 113. Moreover, in addressing comparisons between the CFPB and the FTC, the mortgage lender’s reply argues that “[t]he CFPB’s broad executive, legislative, and adjudicative authority further refutes its claim that it is functionally ‘indistinguishable’ from the FTC in 1935” because, among other reasons, “[i]n 1935, the FTC had no substantive rulemaking powers—the FTC disclaimed that authority until 1962.” In support of this claim, PHH highlights the fact that “the CFPB has all the authority—and more—of a cabinet department such as Treasury or Justice” but “unlike most cabinet positions, the Director may unilaterally appoint every subordinate official in the agency, as well as hire and compensate all CFPB employees outside the normal competitive-service requirements” (emphasis added). In addition to addressing the constitutional issue, PHH’s reply brief also notes that the CFPB has offered no support for its effort to enforce a reinterpretation of the Real Estate Settlement Procedures Act against the companies.

    Oral argument is scheduled for May 24. As provided in a Per Curiam Order issued on April 11, the Court has allocated 30 minutes per side for the argument and an additional ten minutes of argument for the United States as amicus curiae. For additional background, please see our recent PHH Corp. v CFPB Case Update.

    Courts PHH v CFPB Consumer Finance CFPB Dodd-Frank FTC RESPA Mortgages Litigation

    Share page with AddThis
  • CFPB Director Withdraws Notification for Final Decision in Payday Lender Charges; Parties File Differing Opinions

    Courts

    On March 31, CFPB Director Richard Cordray issued an order directing the Bureau’s Office of Administrative Adjudication to withdraw a February 13 notification informing the parties that the administrative proceeding against an online payday lender and its CEO (Respondents) had been submitted for a final decision by the CFPB.  The order noted that while the withdrawal “delay[s] [the] resolution of this appeal,” Director Cordray believed it to be appropriate in that it “help[s] minimize unnecessary or duplicative proceedings and . . . facilitate[s] a more efficient resolution of this matter.”

    The March 31 order follows a March 9 order in which parties were directed to file statements indicating whether they objected to the withdrawal of the notification. The parties offered differing opinions in their responses. In their March 24 filing, Respondents agreed generally with the Bureau’s reasons for withdrawal but sought clarification on the timing of the “proposed re-notification in this matter” and, furthermore, stressed that that re-notification should only be made once the cases of PHH Corp v. CFPB, Lucia v. SEC, and Bandimere v. SEC have been resolved by their respective courts. A three-judge panel had previously ruled in PHH that the structure of the CFPB was unconstitutional and that the Bureau’s interpretations of the kickback prohibitions of the Real Estate Settlement Procedures Act (RESPA) and RESPA’s statute of limitations provisions were erroneous. The full court granted the CFPB’s petition in February 2017 and explicitly vacated the panel’s decision (see previously posted Special Alert). Conversely, the Enforcement Counsel’s filing “respectfully” objected to the withdrawal of the notice “because resolution of the PHH matter will not determine the resolution of this proceeding and . . . any delay would be inefficient and would exacerbate the harm to affected consumers.”

    Last September, administrative law judge, the Hon. Parlen L. McKenna, recommended civil money penalties against Respondents totaling over $13 million as well as restitution of over $38 million to be paid to affected consumers. It further affirmed the CFPB’s allegations that the Respondents deceived consumers about the cost of short-term loans, thereby violating the Truth in Lending Act, the Electronic Fund Transfer Act, and the Consumer Financial Protection Act’s prohibition against deceptive acts or practices. Following the recommended decision, the Respondents filed a notice of appeal.

    Courts CFPB Payday Lending PHH v CFPB Litigation

    Share page with AddThis
  • Case Update: PHH Corp. v CFPB

    Courts

    March 31 marked the deadline for the CFPB to file its brief in response to PHH Corporation in the U.S. Court of Appeals for the District of Columbia Circuit’s en banc review of the CFPB’s enforcement action against PHH for alleged violations of the Real Estate Settlement Procedures Act (RESPA). As previously covered by InfoBytes, the PHH case began as a challenge to a 2015 penalty the CFPB levied against PHH, which was collected as part of what the CFPB deemed – a “captive reinsurance arrangement.” In fighting the penalty, PHH called into question the Bureau’s constitutionality and in October 2016, a panel of the D.C. Circuit concluded both that the CFPB misinterpreted RESPA, and also that its single-Director structure violated the constitutional separation of powers. On February 16 of this year, however, the D.C. Circuit granted the CFPB’s petition for rehearing en banc of the October 2015 panel decision. In granting en banc review, the court sought guidance from the parties on three specific questions: 

    • Is the Bureau’s structure unconstitutional because its Director may be removed only for cause, and if so, is the appropriate remedy to sever the for-cause removal provision from the Consumer Financial Protection Act?; 
    • May the Court avoid addressing the constitutionality of the Bureau’s structure if it adopts the panel’s holdings as to PHH’s liability under RESPA (and should it adopt those holdings)?; and
    • What is the appropriate disposition of this case if this Court concludes that the SEC’s administrative law judges are “inferior officers” under Lucia v. SEC? 

    Oral argument is scheduled for May 24. This Court has allocated 30 minutes per side for the argument and, as discussed further below, the Department of Justice (DOJ) has filed an unopposed motion seeking ten minutes of argument time for the United States at the May 24 en banc hearing.

    CFPB’s Brief. On March 31, the CFPB filed its brief for the en banc rehearing in PHH Corp. v CFPB urging the D.C. Circuit  to uphold the constitutionality of the Bureau’s single-director, independent-agency structure. According to the CFPB, neither the Bureau’s current single-director arrangement, nor the “for-cause” restriction on the President’s removal powers prevents the Executive branch from ensuring that the nation’s laws are implemented. Specifically, the brief explains that “[t]he President has no less control over a single-director agency than he does over a multi-member commission.” The brief also sets forth the Bureau’s position that, even “[i]f this Court determines that the Bureau’s structure is unconstitutional,” the appropriate remedy is not to invalidate the agency in its entirety, but rather to “sever the for-cause removal provision” of the Dodd-Frank Act (the Act), thereby allowing the President to remove the Bureau’s director for any reason. In addition to addressing the constitutional question, the CFPB also reiterated its argument that its RESPA interpretation is correct, that PHH and its affiliates violated RESPA, and that the Act’s statute of limitations does not apply to the Bureau’s administrative enforcement authority. And, at the direction of the court, the brief also addressed the potential effect of a decision in Lucia v. SEC that a SEC administrative law judge (ALJ) was an inferior officer under the Constitution. The ALJ used by the CFPB in the PHH enforcement proceeding was, in fact, borrowed from the SEC. Notably, Lucia v. SEC is scheduled to be argued immediately before PHH Corp. v. CFPB, on May 24, 2017.

    Amicus Curiae in Support of the CFPB. Also filed on March 31 were seven amicus curiae briefs, each of which offered arguments, both legal and non-legal, in favor of the CFPB’s continued existence as an independent regulator:

    PHH’s Brief. Briefing for PHH and amicus curiae briefs in support of the mortgage lender were due on March 17. In its opening brief and addendum, PHH focused on the separation-of-powers and remedy issues, raising the RESPA interpretation issue principally in support of the claim that the CFPB’s unconstitutional structure rendered the Bureau dangerously unaccountable. The New Jersey mortgage lender noted, among other things, that Congress has no ability to cut the agency’s budget and the President cannot remove its director without cause. As a general matter, the mortgage lender has argued that the Bureau’s creation “placed massive, unchecked federal power in the hands of a single, unaccountable director” and that “[t]he director alone rules over large swaths of the field of consumer finance, subject to virtually no restraints from the representative branches.”

    DOJ BriefAs previously covered by InfoBytes, the DOJ filed its own brief in the case on March 17, arguing in support of the D.C. Circuit panel’s initial ruling and proposed remedy. The DOJ brief stated, among other things, that, “[w]hile we do not agree with all of the reasoning in the panel’s opinion,” the DOJ agrees with the panel’s conclusion that “a removal restriction for the Director of the CFPB is an unwarranted limitation on the President’s executive power” and that “the panel correctly concluded … that the proposed remedy for the constitutional violation is to sever the provision limiting the President’s authority to remove the CFPB’s Director, not to declare the entire agency and its operations unconstitutional.”  As  covered recently on InfoBytes, the DOJ presented arguments that differed both from the CFPB and from the positions previously presented by the Obama Administration in briefing submitted on behalf of the United States back in December. 

    Also, as mentioned above, on April 3, the DOJ filed an unopposed motion seeking ten minutes of argument time for the United States at the May 24 en banc hearing.

    Amicus Curiae in Support of PHH. The March 10 deadline in the en banc proceeding also brought about the filing of seven amicus curiae briefs in support of PHH’s claims and/or defenses. Six of these filings took the position that the Bureau’s current structure violates separation-of-powers principles:

    A seventh—filed by a combined group of 13 banking and residential real estate-related organizations—argued in support of the company’s interpretation of the RESPA. According to this brief, the CFPB incorrectly changed a long-standing RESPA interpretation that permitted the use of captive reinsurance companies under appropriate circumstances. The changed interpretation was contrary to the Act and to the CFPB’s own regulation. The brief also argued that the Bureau improperly changed the interpretation and applied the new interpretation in an enforcement action without proper notice.

    Courts PHH v CFPB Consumer Finance Federal Issues RESPA DOJ Mortgages Litigation

    Share page with AddThis
  • House Financial Services Committee Holds Hearing to Consider the “Unconstitutional Structure of the CFPB”

    Agency Rule-Making & Guidance

    On March 21, the Oversight and Investigations Subcommittee of the House Financial Services Committee held a hearing entitled “The Bureau of Consumer Financial Protection's (CFPB's) Unconstitutional Design.” The majority staff memorandum issued prior to hearing stated that its purpose was to: (i) “examine whether the structure of the [CFPB] violates the Constitution,” and (ii) consider potential “structural changes to the Bureau to resolve any constitutional infirmities.”

    Chairwoman Rep. Ann Wagner (R-Mo.) introduced the proceeding by describing the CFPB as a “an unconstitutional behemoth” with a 'Washington knows best' mindset,” that “side-steps accountability to Congress and the President.” Three of the four witnesses called to testify before the panel shared the general position that the CFPB is unconstitutional as currently structured. 

    • The Honorable Theodore Olson , a partner at Gibson, Dunn & Crutcher LLP and lead counsel for PHH in its suit against the CFPB, shared his personal opinion that the Bureau, “[m]ore than any other administrative agency ever created by Congress,” is “far outside of our constitutional structure, holds the potential for tyrannical governance, and obscures the lines of governmental accountability. [T]he CFPB’s structure is the product of aggregating some of the most democratically unaccountable and power-centralizing features of the federal government’s administrative state.” Particularly with respect to the President, Mr. Olson noted that “by preventing the President from removing the head of the Bureau except for very limited circumstances,” the President is effectively “stripped of the power to faithfully execute the laws in these circumstances.” 
    • Professor Saikrishna Prakash, a Law Professor at the University of Virginia School of Law questioned the Bureau’s constitutionality, characterizing the Director of the CFPB as “the second most powerful officer in the government for he serves under no one’s supervision, enjoys a vast budget not subject to the appropriations process, and exerts enormous influence over several prominent aspects of the economy.” 
    • Adam White, a Research Fellow with the Hoover Institution similarly urged Congress to reform the CFPB while also cautioning against allowing the “CFPB’s original structure to . . . become the new benchmark for the next generation of ‘independent agencies.’” 

    Meanwhile, offering several arguments in support of the Bureau’s current structure was Brianne Gorod – a public interest attorney who has helped prepare briefing in the PHH v CFPB matter on behalf of “current and former members of Congress, who were sponsors of Dodd-Frank” and “participated in drafting it,” and “serve or served on committees with jurisdiction over the [CFPB].” (See, e.g., Motion for Leave to Intervene in Support of the CFPB). Ms. Gorod argued, among other things, that “the President’s ability to remove the Director [of the CFPB] only for cause does not ‘impede the President’s ability to perform his constitutional duty[,]’” but rather, to the contrary, “provides the Executive with substantial ability to ensure that the laws are ‘faithfully executed.’” For this reason and others, Ms. Gorod argued that “the CFPB’s leadership structure . . . is consistent with the text and history of the Constitution, as well as Supreme Court precedent.”

    Agency Rule-Making & Guidance Consumer Finance CFPB House Financial Services Committee PHH v CFPB Mortgages Litigation

    Share page with AddThis
  • Trump Administration Files Brief in PHH Corp. v. CFPB

    Agency Rule-Making & Guidance

    On March 17, the Trump Administration’s Department of Justice (“DOJ”) filed its amicus brief in the D.C. Circuit’s en banc review of the CFPB’s enforcement action against PHH Corporation for alleged violations of the Real Estate Settlement Procedures Act (“RESPA”). In October 2016, a panel of the D.C. Circuit concluded that the CFPB misinterpreted RESPA and that its single-Director structure violated the constitutional separation of powers. The DOJ brief states that, “[w]hile we do not agree with all of the reasoning in the panel’s opinion,” the DOJ agrees with the panel’s conclusion that “a removal restriction for the Director of the CFPB is an unwarranted limitation on the President’s executive power” and that “the panel correctly concluded … that the proposed remedy for the constitutional violation is to sever the provision limiting the President’s authority to remove the CFPB’s Director, not to declare the entire agency and its operations unconstitutional.”

    Like the brief filed in this case by the Obama Administration DOJ before the change in administration, the current DOJ brief states that “[t]he United States takes no position on the statutory issues in this case, but in the event that the ultimate resolution of those issues results in vacatur of the CFPB’s order [against PHH], it is within this Court’s discretion to avoid ruling on the constitutional question.” However, the brief goes on to state that, because the issue is already before the en banc court and the “question is likely to recut in pending and future cases, it would be appropriate for the Court to provide needed clarity by exercising its discretion to resolve the separation-of-powers issue now.”

    Agency Rule-Making & Guidance Consumer Finance Federal Issues CFPB PHH v CFPB DOJ Mortgages RESPA Litigation Trump

    Share page with AddThis
  • In a Split Decision, D.C. Circuit Denies John Doe Company’s Request to Remain Anonymous Pending Appeal Challenging CFPB Subpoena; Judge Kavanaugh Dissents, Reiterates Critique of CFPB

    Courts

    On March 3, 2017, the U.S. Court of Appeals for the District of Columbia Circuit denied the request of an anonymous California-chartered, finance company based in the Philippines to remain anonymous pending the resolution of its challenge to a CFPB administrative subpoena. See John Doe Co. v. CFPB, March 3, [Order] No. 17-5026 (D.C. Cir. Mar. 3, 2017) (per curiam). In a 2-1 decision, the court found that the company had failed to show either that it was likely to succeed on the merits of its challenge to the CFPB’s constitutionality, or that it was likely to suffer irreparable harm from being identified as being under investigation. In denying the company’s motion, the panel majority emphasized, among other things, the fact that “[t]he Company’s sole argument regarding likelihood of success on the merits before this court and the district court has been to point to the now-vacated majority opinion in PHH.”   Judge Kavanaugh—who  back in October, assailed the “massive, unchecked” power of the single director-led CFPB—filed a dissenting opinion, in which he reiterated his call for how to fix the CFPB: namely, giving the president greater power to remove the agency’s director.

    As previously covered on InfoBytes, back in January, the John Doe finance company filed an action seeking to set aside or keep confidential a “civil investigative demand” served on the Company by the CFPB as part of an industry-wide investigation against companies that buy and sell income streams. The Company argued both that the CFPB had strayed outside the scope of its authority, and that in light of the pending challenge to the constitutionality of its structure in a separate case (PHH v CFPB), the Bureau should be barred from pursuing any investigation until the questions about its constitutionality are resolved. Fearing that the CFPB would post documents on its website revealing its identity, the company also sought a temporary restraining order to enjoin the CFPB from, among other things, disclosing the existence of its investigation and taking any action against the company unless and until the CFPB is constitutionally structured. John Doe Co. v. CFPB, D.D.C., No. 17-cv-00049 (D.D.C. Jan. 10, 2017). As covered in a recent BuckleySandler Special Alert, however, the D.C. Circuit on February 16, vacated the October 2015 panel decision in PHH v CFPB and will now rehear the case en banc.

    Courts Consumer Finance CIDs John Doe v CFPB PHH v CFPB Litigation

    Share page with AddThis
  • Two Trade Associations File Notices of Intent to Submit Amicus Briefs in PHH v. CFPB

    Courts

    On March 8 and 9, two separate Notices of Intention to Participate as Amicus Curiae were filed in PHH Corp. v. CFPB. The first was filed by ACA International, a trade association for the credit and collections industry. The second was filed on behalf of the following parties: American Bankers Association; American Escrow Association; American Financial Services Association; Consumer Bankers Association; Credit Union National Association; Housing Policy Council of the Financial Services Roundtable; Independent Community Bankers of America; Leading Builders of America; Mortgage Bankers Association; National Association of Federally- Insured Credit Unions; National Association of Home Builders; National Association of REALTORS; and Real Estate Services Providers Council. Nearly all of the associations listed above filed either joint or separate amici briefs at the panel stage and believe that “the en banc Court will be aided by a brief addressing how the Bureau’s Order not only contravenes RESPA’s statutory text, governing regulations, and applicable policy statements, but also how the Order’s violation of fair-notice principles disrupts the critically important home-lending market.”

    Courts CFPB PHH v CFPB RESPA Mortgages Litigation

    Share page with AddThis

Pages