FDIC Chairman notes ‘substantial progress’ on planning resolution of SIFIs

By Thomas G. Wolfe, J.D.

 

Speaking at the University of Pennsylvania’s Wharton School on Feb. 16, 2018, Federal Deposit Insurance Corporation Chairman Martin Gruenberg discussed the progress that has been made in planning for the resolution of systemically important financial institutions (SIFIs). Commenting that the progress “has been substantial and, I believe, not well appreciated,” the FDIC Chairman underscored not only that “the living wills process has proven enormously helpful to firms and regulators,” but also that “options and tools now exist that provide a path far better than existed in 2008 to help ensure that a systemic firm can fail, that shareholders, creditors, and management of the firm bear the consequences of their decisions, and that financial stability can be preserved during times of stress without taxpayer bailouts.”

 

In his prepared remarks, titled “Resolving a Systemically Important Financial Institution: A Progress Report,” Gruenberg observed that “orderly resolution of systemic firms had never been an explicit goal of financial regulation in the United States” prior to the 2008 financial crisis. “In fact, it was never really contemplated. The experience of the crisis and the enactment of Dodd-Frank changed that,” he noted.

 

Gruenberg said that developing the capability for the orderly failure of a SIFI, “without taxpayer support, and with accountability for the shareholders, creditors, and management of the failed firm” has been a top priority for the FDIC. After sketching the orderly liquidation authority under the Dodd-Frank Act, Gruenberg focused on the progress that has been made through “the living will resolution plan process in bringing about tangible changes to the structure and operations of the eight U.S. Global Systemically Important Banks (GSIBs) … to enhance the resolvability of these firms and avoid the bailouts of the last crisis.”

 

Highlights of progress made. After a series of resolution-plan filings by the U.S. GSIBs beginning in 2012, and joint guidance by the FDIC and the Federal Reserve Board beginning in 2013, the firms filed their most recent resolution plans in July 2017. Based on the FDIC’s and Fed’s joint feedback letters in December 2017 about those plans, Gruenberg asserted that although “there is still a great deal of work to do,” the U.S. GSIBs have made substantial progress—particularly by:

 

• establishing clean holding companies with pre-funded loss absorbing capacity;
• rationalizing their legal entity structures to align those structures and support their preferred resolution strategy;
• identifying and positioning capital and liquidity across material entities to support an orderly failure;
• implementing internal escalation triggers, playbooks, and other governance mechanisms to facilitate the timely execution of important recovery and resolution actions by the board of directors and senior management;
• adhering to the International Swaps and Derivatives Association’s “Universal Resolution Stay Protocol;”
• developing strategies and playbooks to maintain access to payment, clearing, and settlement services, including the description of operational and liquidity arrangements;
• taking steps to ensure that inter-company services shared by multiple affiliates will continue to be available in resolution to reduce the potential that the failure of one subsidiary within a firm will disrupt the operations of its affiliates and improve the firm’s ability to separate affiliates during resolution;
• modifying service contracts with key vendors to ensure the continuation of services as long as the firm continues to meet its obligations under the terms of the contract; and
• developing options for the sale of discrete businesses and assets under different market conditions to increase the flexibility of the firm's execution of its preferred resolution strategy, and taking steps to make those options actionable. 

 

Concluding remarks. In his concluding remarks, Gruenberg emphasized that “the resolvability of firms will change as markets change and as firms’ activities, structures, and risk profiles change.” Accordingly, the FDIC and Fed expect the U.S. GSIBs to “remain vigilant in considering the resolution consequences of their management decisions.”

 

Indicating that there are inherent challenges and uncertainties associated with the resolution of a SIFI, Gruenberg pointed out that “we have not yet executed an orderly resolution of a financial institution of systemic consequence either under bankruptcy or the Orderly Liquidation Authority.” Despite the cautionary remark, the FDIC Chairman added, “But it is also true that we are in a different place today than we were in 2008.”

 

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Treasury report calls for restricting, not abolishing, orderly liquidation authority

By Richard A. Roth

A report by the Treasury Department says that the federal government’s power to take over and resolve insolvent large nonbank financial companies should be subject to stricter limits but not entirely revoked. The orderly liquidation authority, which was created by the Dodd-Frank Act, should be available only if extraordinary circumstance would render a new bankruptcy code chapter inadequate, Treasury says. Changes to the OLA itself also are called for.

The report’s recommendations rely heavily on benefits from Dodd-Frank Act and other post-financial crisis reforms, including required higher capital and liquidity levels and resolution plans.

Using the OLA. The Dodd-Frank Act created the OLA to address a problem revealed by the financial crisis—the inability of the government to prevent the disorderly failure of large, complex financial companies other than insured banks and securities broker-dealers. The OLA gives the Federal Deposit Insurance Corporation the power to take over and resolve such companies outside of the ordinary bankruptcy process. The Treasury report notes that bankruptcy is the preferred resolution method and that the OLA can be implemented only if four distinct hurdles first are cleared:

1. Two thirds of the serving Federal Reserve Board governors must concur that the OLA should be invoked.
2. The FDIC or Securities and Exchange Commission, as appropriate, then must make the same recommendation, again by a two-thirds vote.
3. The Treasury Secretary, in consultation with the President, must determine that the OLA should be invoked.
4. The Treasury Secretary must seek the consent of the company’s board of directors and, if they do not consent, petition a federal district court to approve the action.

OLA powers. The report also describes restrictions on the FDIC’s powers. The FDIC must create an orderly liquidation plan, which must be approved by the Treasury. If resolving the company requires funding to preserve the value of parts of the company that remain viable, the FDIC can borrow from the Treasury and lend to the bridge company; however, the funding advances require Treasury approval, including approval of the financial terms—the amount, maturity, and interest to be paid on the loans.

The failed company’s managers must be replaced, and they are subject to compensation clawbacks. A new bridge company, managed by individuals hired from the private sector, is to be created. The losses that result from the failure are to be passed to the company’s shareholders and creditors and are not to be imposed on taxpayers, according to the report.

The FDIC has settled on a “single point of entry” resolution strategy, the report says. This strategy calls for the assets of the failed company, including the ownership of its solvent subsidiaries, to be transferred to the bridge company. The claims of most unsecured creditors, and of the company’s shareholders, would be liabilities of the receivership and satisfied, to the extent possible, by securities issued by the bridge company. The agency assumes that this process will wipe out any shareholders’ value.

Criticism of OLA. Critics of the OLA claim that the ability of the FDIC to borrow from the Treasury constitutes a bailout. They also claim the Dodd-Frank Act allows the FDIC to treat similarly situated creditors differently, and they want stronger judicial protection for companies. The Treasury’s recommendations are intended to address these concerns.

Bankruptcy code. The centerpiece of the Treasury’s recommendations is that Congress should pass a new Chapter 14 of the bankruptcy code that would be used specifically for large, complex financial institutions. Under the law, the failing company would file for bankruptcy court approval of the creation of a bridge company and the transfer of most of the failing company’s assets, and some of its liabilities, to the bridge company within the next 48 hours. This would allow the entire process to occur over a single weekend, the report says, so that the bridge company could open for business on Monday morning.

The new law would include “a clear, predictable allocation of losses,” according to the report. The claims of shareholders and of “capital structure debt” creditors would remain in the failed company. The securities initially issued by the bridge company would be held by a special trustee for the benefit of these persons and eventually would be distributed as directed by the bankruptcy court.

The report asserts that Dodd-Frank Act changes have increased the amount of liquidity that financial companies must have, so the bridge company would not need as much financing as might be expected. Also, the bankruptcy version of the SPOE strategy would create a financially sound bridge company with access to private capital. Treasury also notes that the living wills that the Dodd-Frank Act requires these companies to create calls on them to calculate and hold enough liquidity to sustain their subsidiaries in the event of a company’s failure.

In order to take advantage of all available expertise, the new bankruptcy code chapter would require that the case be assigned to one of a small number of previously-designated judges. Also, the federal financial industry regulators would have the right to participate in the bankruptcy proceeding.

OLA reforms. As noted, the Treasury does not want the OLA to be abolished. It should remain available as “an emergency tool,” but with changes. Recommended changes include:

• ensuring that creditors could determine, in advance, where their claims would stand in the payment hierarchy and that similarly-situated creditors be treated the same;
• empowering the bankruptcy court to adjudicate claims against the receivership;
• specifying more clearly when a company is deemed to be “in default or in danger of default,” which is the standard for invoking the OLA authority;
• repealing the bridge company tax-exempt status, a status Treasury says would give that company an “enormous advantage” over its competitors;
• permitting advances to the bridge company only for a short term of fixed duration;
• using guarantees and premium interest rates to induce bridge companies to begin relying on private capital as quickly as possible;
• requiring that advances to bridge companies be secured;
• if an advance could not be repaid by a bridge company, requiring that the industry be assessed for an orderly liquidation fund to cover the advance as quickly as possible; and
• strengthening the judicial review of a decision to invoke the OLA.

The FDIC needs to adopt a final SPOE strategy, the report adds.

Disappointed House leader. House Financial Services Committee Chairman Jeb Hensarling (R-Texas) was quick to express his dissatisfaction with the Treasury report. According to Hensarling, the report’s failure to call for the complete abandonment of the OLA is inconsistent with President Trump’s previously announced principle of avoiding all possible taxpayer bailouts.

Hensarling asserted that the FDIC’s ability to borrow from the Treasury to support a bridge company amounts to a bailout that puts taxpayers at risk, even though the Dodd-Frank Act requires that any draw always will be repaid by either the bridge company or the orderly liquidation fund. Trump asked the Treasury for a report on how to achieve the no-taxpayer-bailout goal, and the failure to call for the repeal of OLA means the report fell short, Hensarling said.

For more information about the FDIC's orderly liquidation authority, subscribe to the Banking and Finance Law Daily.

Debt collection cases remain center stage

By Andrew A. Turner, J.D.

The federal Fair Debt Collection Practices Act remains one of the hottest areas of litigation involving financial services as consumers and the debt collection industry grapple in the courts. Three recent cases illustrate how the courts continue to refine and define the law.

3rd Cir.: Stale debt settlement offer could be FDCPA misrepresentation. A debt collector's letter offering to settle a debt after the statute of limitations had passed could have constituted a misrepresentation in violation of the FDCPA. The least sophisticated consumer could be misled into thinking that settling the debt referred to the debt collector's legal ability to enforce the debt. The use of “settlement” and “settlement offer” could imply to the least sophisticated consumer the possibility of litigation to enforce the debt (Tatis v. Allied Interstate,LLC, Feb. 12, 2018, Vazquez, J.).

6th Cir.: Consumers had no standing under FDCPA for a mere procedural violation. Although a letter from the attorney for a mortgage servicing company to loan consumers was technically in violation of the FDCPA, it caused the consumers no injury and they therefore had no Article III standing to bring a FDCPA claim, held the Sixth Circuit Court of Appeals. The letter at issue actually benefitted the consumers, in that it explained that their debt was discharged and they were able to rely on the letter later, when the mortgage servicing company incorrectly tried to collect on the settled debt. Therefore, even though the letter lacked required disclosures under the FDCPA, the lack of disclosures caused no harm to the consumers and their claims under the FDCPA and comparable state law were dismissed for lack of standing (Hagy v. Demers & Adams, Feb. 16, 2018, Sutton, J.).

N.D. Ill.: FDCPA does not require safe harbor language in debt letter. Although the letter from a debt collector to a consumer did not contain the safe harbor language suggested by the Seventh Circuit, the debt collector was not in violation of the FDCPA, held a federal district court in Illinois. Debt letters are not required to contain the specific language suggested by the Seventh Circuit, said the court, as long as they contain the information required by the FDCPA, they will be in compliance with the statute. The court also determined that the debt letter met the unsophisticated consumer standard; such a consumer would have understood the letter to mean that the loan balance in the letter was the balance as of the date of the letter and that interest on the debt would continue to accrue (Chatman v. AlltranEducation, Inc., Feb. 7, 2018, St. Eve, A.).

More cases are sure to come in 2018 requiring courts to resolve claims that debt collectors used misrepresentations or deceptive practices to collect debts, while industry members defend language used in collection letters.

For more information about litigation under the Fair Debt Collection Practices Act, subscribe to the Banking and Finance Law Daily.

Death for GFE and HUD-1 docs highly exaggerated

By James T. Bork, J.D., LL.M., and Mark A. White, M.A., J.D.

* As published in BankingExchange.com.

Since the Oct. 3, 2015, effective date of the TILA/RESPA Integrated Disclosure (TRID) rule, we have detected a continuing, mistaken impression in some quarters that the standard RESPA documents (GFE, HUD-1, etc.) are obsolete because they have been fully displaced by the Loan Estimate and Closing Disclosure.

That impression was fueled in part by webinars and newsletter articles whose titles and headlines informed us "The HUD-1 is Dead: Long Live the Closing Disclosure!" and "HUD-1 Going Away: Understand New Closing Forms, Procedures."

Those titles and headlines told only part of the story.

But in conjunction with months of sustained and intense focus on TRID implementation in 2014 and 2015, they created conditions in which some experienced what we'll refer to here as “TRID tunnel vision.”

This syndrome is characterized by:

• A clear perception of TRID's impact on the application and origination process for one class of residential mortgage loans, and
• Failure to recognize that TRID's impact does not affect loans that fall outside that class.

A sample from recent inquiries that we receive shows that TRID tunnel vision persists, though at a lower level than a year ago.

The rule … and the exception

Since long before TRID was finalized, the rule regarding the use of GFE and HUD-1 has been fixed.

Consider this regarding the latter document: "Either the HUD-1 or the HUD-1A, as appropriate, shall be used for every RESPA-covered transaction, unless its use is specifically exempted." [12 CFR 1024.8(a)]

The Dodd-Frank Act and TRID final rule did nothing to alter that pronouncement.

But they did implement a new exception to the rule. In accordance with 12 CFR 1026.19(e) and (f), creditors now use the Loan Estimate and Closing Disclosure documents, in lieu of the RESPA documents, for closed-end consumer credit transactions (other than reverse mortgages) secured by real property or a cooperative unit.

We believe this “rule/exception approach” to be the most useful way to examine this issue.

• First, understand clearly and completely the general rule or rules that govern the process you're working with.
• Then—and only then—consider the nature and scope of any exceptions that may apply.

There is no doubt that most residential mortgage loans are within the scope of the TRID exception. But their prevalence in the marketplace does not transform their status: They remain exceptions to the general rule stated in Regulation X.

What loan types currently use GFE and HUD-1?

In light of the analytical framework described above, this is the wrong question.

Instead of making a list of loans for which standard RESPA documents are used, creditors should presume that the RESPA documents will be used for all federally related mortgage loans, unless such use is specifically exempted.

But for readers who require a list, the rule/exception analysis described above shows that RESPA documents are still used for reverse mortgages, HELOCs; chattel-dwelling loans (i.e., loans secured by a mobile home or by a dwelling that is not attached to real property); and other transactions not covered by the TRID rule.

For further clarification, see Sections 4.1, 4.2, and 17.1 of the CFPB's current TRID small entity compliance guide.


James T. Bork, J.D., LL.M., is Senior Banking Compliance Analyst with Wolters Kluwer Financial Services. Prior to joining WKFS, he practiced law for several years with a focus on financial institutions, consumer banking issues, commercial lending, and business law. He was also Assistant General Counsel and Senior Compliance Attorney at a billion dollar institution. Jim has written articles and spoken on regulatory and compliance developments affecting financial institutions. He received his law degree in 1989 and earned a Master of Laws degree (LL.M.) in banking law in 1993 from the Morin Center for Banking and Financial Law at Boston University School of Law.

Mark A. White, M.A., J.D., is a Banking Compliance Analyst for Wolters Kluwer Financial Services Division. Prior to joining Wolters Kluwer in 2013, Mark co-founded the law firm Eldredge & White, PLLC and managed the firm in Salt Lake City, UT for more than eight years specializing in securities and banking law. Mr. White has also previously worked as a securities attorney for UBS and for the law firm Presbrey & Associates in Chicago, IL. Mark has advised banks, mortgage companies, auto lenders, commercial lenders, secondary market loan purchasers, and securities broker-dealers, regarding regulatory, licensing, compliance and transactional matters. He received his J.D. from Northern Illinois University, graduating cum laude and was law review lead articles editor. 

CFPB strategic plan: fulfill statutory duties ‘but go no further’

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has published its strategic plan for fiscal years 2018-2022, outlining its mission, goals, and objectives. Acting Director Mick Mulvaney made it clear that the CFPB’s strategic plan presents a revised mission for the Bureau under his leadership, focusing now on "equally protecting the legal rights of all, including those regulated by the Bureau."

"If there is one way to summarize the strategic changes occurring at the Bureau, it is this: we have committed to fulfill the Bureau’s statutory responsibilities, but go no further," Mulvaney said. "By hewing to the statute [Dodd-Frank Act], this Strategic Plan provides the Bureau ready roadmap, a touchstone with a fixed meaning that should serve as a bulwark against the misuse of our unparalleled powers."

According to the plan, the Bureau now will focus on "regulating consumer financial products or services under existing federal consumer financial laws, enforcing those laws judiciously, and educating and empowering consumers to make better informed financial decisions."

Vision. The plan describes the Bureau’s vision. "Free, innovative, competitive, and transparent consumer finance markets where the rights of all parties are protected by the rule of law and where consumers are free to choose the products and services that best fit their individual needs." To achieve this vision, the CFPB will:

• seek the counsel of others;
• equally protect the legal rights of all;
• confidently do what is right; and
• act with humility and moderation.

Strategic goals. The plan outlines three strategic goals for FY 2018-2022:

1. Ensure that all consumers have access to markets for consumer financial products and services.
2. Implement and enforce the law consistently to ensure that markets for consumer financial products and services are fair, transparent, and competitive.
3. Foster operational excellence through efficient and effective processes, governance, and security of resources and information.

The plan provides objectives and strategies intended to achieve each goal, which include:

• Regularly identify and address outdated, unnecessary, or unduly burdensome regulations in order to reduce unwarranted regulatory burdens.
• Obtain input and feedback with respect to existing regulations, alternative approaches to regulation, and alternatives to regulation.
• Pursue an efficient, transparent, and inclusive approach to developing or revising regulations.
• Carefully evaluate the potential benefits and costs of contemplated regulations.
• Provide financial institutions, service providers, and other entities with tools and resources to support implementation and compliance with consumer financial protection laws.
• Enforce federal consumer financial law consistently, without regard to the status of a person as a depository institution, in order to promote fair competition.
• Enhance compliance with federal laws intended to ensure the fair, equitable, and nondiscriminatory access to credit for both individuals and companies and promote fair lending compliance and education.
• Focus supervision and enforcement resources on institutions and their product lines that pose the greatest risk to consumers based on the nature of the product, field and market intelligence, and the size of the institution and product line.
• Enhance internal policies that facilitate the integration of the Bureau’s supervision and enforcement functions.

Brown response. Senator Sherrod Brown (D-Ohio) said the Bureau, "under orders from OMB [Office of Management and Budget] Director Mick Mulvaney, has decided to revise the mission and vision of the bureau by further deterring the agency from pursuing its mission of protecting consumers." He stated that financial institutions, like banks and payday lenders, "have enough lobbyists working on their behalf—the Consumer Financial Protection Bureau must continue to be fighting for working families." Brown urged the Trump Administration to "swiftly nominate someone who will have full bipartisan support in the Senate and will protect consumers instead of special interests."

Consumers Union comments. Consumers Union said the Bureau’s plan "signals that it will ease up on enforcement and investigations of shady financial practices and identifies deregulation as a top priority."

"The CFPB’s new strategic plan effectively muzzles the consumer watchdog," said Anna Laitin, Director of Financial Policy for Consumers Union. Laitin continued, "It is past time for the President to nominate, and the Senate to consider, a permanent nominee who will restore the CFPB’s critical consumer protection role."

For more information about the CFPB under new leadership, subscribe to the Banking and Finance Law Daily.

Trump budget for 2019 would overhaul CFPB

By Stephanie K. Mann, J.D.

The White House has released its proposed budget for the 2019 fiscal year. Among other things, the budget proposes to restructure the Consumer Financial Protection Bureau, limit the agency’s mandatory funding, and provide discretionary appropriations to fund the Bureau beginning in 2020.

According to the Major Savings and Reforms document published with the budget, the Trump Administration stated that the proposed reforms would impose financial discipline, reduce wasteful spending, and ensure appropriate congressional oversight by subjecting the agency to discretionary appropriations starting in 2020.

In addition, the proposed budget would cap transfers by the Federal Reserve Board to CFPB during 2019 to $485 million and limit the CFPB’s "broad" enforcement authority over federal consumer law. "These changes would allow CFPB to focus its efforts on enforcing enacted consumer protection laws and eliminate the functions that allowed the Agency to become an unaccountable bureaucracy with unchecked regulatory authority."

Proposed budget. Additional proposals that would have an effect on the financial sector include:

• The Trump Administration would limit the "regulatory excesses" mandated by the Dodd-Frank Act, namely the Financial Stability Oversight Council and the Office of Financial Research. The proposal would "impose appropriate" congressional oversight by subjecting all activities to the normal appropriations process.
• The proposed budget eliminates funding for the Community Development Financial Institutions Fund’s discretionary grant and direct loan programs. However, the budget would maintain funding for administrative expenses to support ongoing CDFI Fund program activities, including the New Markets Tax Credit program. The Budget also proposes to extend the CDFI Bond Guarantee Program, which offers CDFIs low-cost, long-term financing at no cost to taxpayers, as the program requires no credit subsidy.
• The budget would reduce funding for the Special Inspector General for the Troubled Asset Relief Program commensurate with the wind-down of TARP programs. According to the Administration, Congress aligned the sunset of SIGTARP with the length of time that TARP funds or commitments are outstanding. Treasury currently estimates that all programs will substantially close by 2023.
• The Budget prioritizes safeguarding markets and protecting financial data by requesting $159 million for Treasury’s Office of Terrorism and Financial Intelligence to continue its critical work safeguarding the financial system from abuse and combatting other national security threats using non-kinetic economic tools. These additional resources would be used to economically isolate North Korea, complete the Terrorist Financing Targeting Center in Saudi Arabia, and increase sanctions pressure on Iran, including through the implementation of the Countering America’s Adversaries Through Sanctions Act.

The White House also issued its Analytical Perspectives, which contains analyses that are designed to highlight specified subject areas or provide other significant presentations of budget data that place the budget in perspective.

 

For more information about the White House's proposed budget, subscribe to the Banking and Finance Law Daily.

CFPB seeks feedback, suggestions on enforcement action processes

By Andrew A. Turner, J.D.

The Consumer Financial Protection Bureau is seeking comments on its enforcement action processes to help assess the overall efficiency and effectiveness of these processes as they relate to the enforcement of federal consumer financial law. The Request for Information (RFI)—the third announced as part of Acting Director Mick Mulvaney’s call for evidence to ensure that the agency is fulfilling its duty to best protect consumers—will provide an opportunity for the public to submit feedback and suggest ways to improve outcomes for both consumers and covered entities, the Bureau stated. The Bureau will begin accepting comments once the RFI is printed in the Federal Register, which is expected on Feb. 12, 2018, which would leave the comment period open until April 13, 2018.

The Bureau is particularly interested in receiving specific suggestions regarding any potential updates or modifications to the Bureau’s enforcement processes, as well as aspects of the Bureau’s enforcement processes that should not be modified. In an attempt to identify elements of its enforcement processes that may be deserving of more immediate attention, the Bureau is specifically seeking information regarding, among other areas:

• communication between the Bureau and the subjects of investigations, including the timing and frequency of those communications, and information provided by the Bureau on the status of its investigation;

• the length of Bureau investigations;

• the Bureau’s Notice and Opportunity to Respond and Advise process;

• whether the Bureau should afford subjects of potential enforcement actions the right to make an in-person presentation to Bureau personnel before the Bureau decides to initiate legal proceedings;

• civil money penalty calculations;

• standard provisions in Bureau consent orders; and

• coordinating its enforcement activity with other federal or state agencies that may have concurrent jurisdiction.

Calls for information on CFPB performance. The CFPB is issuing a series of requests for information that are intended to provide evidence on how well the Bureau is doing its job. The RFIs are seeking comments on the CFPB’s “enforcement, supervision, rulemaking, market monitoring, and education activities.” The CFPB started with requests for information on the CFPB’s use of civil investigative demands and administrative adjudications.

Investigative demands. The CFPB said that it is making “a preliminary attempt” to identify the parts of the CID process on which attention should immediately be focused. The notice emphasizes the Bureau’s desire to collect comments from companies that have received CIDs in the past, as well as from those companies’ attorneys. The focus appears to be on easing the burden for recipients, rather than on improving the Bureau’s access to information. The comment period expires on March 27, 2018.

Administrative adjudication process. The Bureau is especially interested in receiving suggestions for whether it should be availing itself of the administrative adjudication process, and if so, how its processes and rules could be updated, streamlined, or revised to better achieve the its statutory objectives. Comments may be submitted until April 6, 2018.

The next RFI in the series will address the Bureau's supervisory processes.

For more information about changes at the CFPB under Acting Director Mulvaney, subscribe to the Banking and Finance Law Daily.

Credit union’s attack on Mulvaney appointment rejected

By J. Preston Carter, J.D., LL.M.

A New York City federal credit union does not have standing to attempt to block Mick Mulvaney’s appointment as Acting Director of the Consumer Financial Protection Bureau, a U.S. district judge has determined. Lower East Side People’s Federal Credit Union advanced four separate arguments to show that it had suffered an injury in fact from the appointment, but the judge rejected all four and dismissed the suit (Lower East Side People’s Federal Credit Union v. Trump, Feb. 1, 2018, Gardephe, P.).

Lower East Side contended that President Donald Trump exceeded his authority when he relied on the Federal Vacancies Reform Act in appointing Mulvaney as acting director. The Dodd-Frank Act makes clear that the CFPB’s deputy director automatically becomes acting director when there is a vacancy in the director’s office, the credit union asserted, which meant that Leandra English, not Mulvaney, was the Bureau’s acting director.

Standing to sue. A federal court has jurisdiction over a suit only if the plaintiff can describe an injury in fact that resulted from the challenged action, the judge pointed out. Lower East Side had to be able to describe a concrete and particularized, actual or imminent, invasion of an interest protected by law that resulted from Mulvaney’s appointment. Otherwise, the credit union did not have standing to sue, and the federal court did not have jurisdiction.

The credit union claimed it had standing for four reasons:

1.	It was regulated by the CFPB.
2.	CFPB actions under Mulvaney had hindered the credit union’s ability to carry out its mission of improving the financial health of underserved communities.
3.	It would suffer economic harm due to the Bureau’s changes in Home Mortgage Disclosure Act regulation enforcement.
4.	It was experiencing uncertainty due to the Bureau’s announced plan to review and amend the HMDA regulation.

The judge considered, and then rejected, each claim.

Regulated institution. The credit union did not have standing simply because it was regulated by the CFPB, the judge said. Unless the Bureau, under Mulvaney, had taken some action that imposed a new obligation and new costs on Lower East Side, the credit union could not show that it had suffered an injury in fact.

Harm to mission. Standing to sue cannot be based on harm to an institution’s organizational goal unless the harm extends to an injury to the organization itself, the judge said. Lower East Side could not show standing based solely on a reduced ability to improve the financial health of the communities it serves; rather, it had to show harm to itself. A claimed interference with the credit union’s ability to achieve its goal would not confer standing to sue.

Changes in HMDA compliance policies. According to the judge, Lower East Side asserted that recent CFPB pronouncements about how the HMDA regulation would be enforced would "effectively gut the HMDA rules." The first problem with that claim was that standing generally is based on the situation at the time a case is filed, and the CFPB announcements about its HMDA plans came after the credit union filed its suit.

Even if post-complaint events were to be considered, the credit union had not described an injury in fact, the judge continued. The enforcement change announced by the CFPB was that banks that made HMDA reporting errors with their 2018 data ordinarily will not be penalized. The credit union believes this will lead banks to falsify HMDA data in order to improve their Community Reinvestment Act ratings. According the Lower East Side, this will harm it because the banks will be able to stop investing in community financial institutions to earn CRA credit.

"Plaintiff’s speculation regarding the future actions of third parties is not sufficient to establish an imminent injury," the judge said. Moreover, any injury would not have been "fairly traceable" to the CFPB’s actions.

Planned HMDA rulemaking. Last, the judge determined that the Bureau’s plan to open a rulemaking to reconsider the 2015 amendments to the HMDA regulation could not affect the standing determination because this announcement, too, had come after the credit union filed its suit.

Moreover, a claim that a reexamination of a regulation would cause injury was conjectural and hypothetical, the judge added. Contrary to the credit union’s allegation, the CFPB had not said that it was going to rewrite the rules, the judge pointed out. Rather, the Bureau had said that it may make changes. Such an indefinite statement could not induce the credit union to invest resources in compliance, meaning there was no concrete injury.

The case is No. 14 Civ. 9536 (PGG).

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CFPB single-director structure is not unconstitutional

By Richard A. Roth, J.D.

The Consumer Financial Protection Bureau’s structure, which features a single director who can be removed by the President only for cause, does not violate the Constitution, according to the U.S. Court of Appeals for the District of Columbia Circuit. A majority of the full court rejected the concerns of an earlier three-judge panel that the Bureau’s organization infringed on the President’s power to ensure that federal law is faithfully executed and violated separation of powers principles. However, the underlying CFPB administrative enforcement proceeding is being remanded to the Bureau for reconsideration (PHH Corporation v. CFPB).

The decision came in the context of the CFPB’s effort to enforce the Real Estate Settlement Procedures Act’s anti-kickback provisions against PHH Corporation and its affiliates. According to PHH, the CFPB changed a long-standing Department of Housing and Urban Development RESPA interpretation that allowed captive reinsurance arrangements as long as the reinsurance was purchased at market prices. The CFPB then applied its reinterpretation of RESPA to past PHH conduct, determined that there was no time limit on its enforcement authority, and imposed a $109 million disgorgement order.

PHH appealed the result, asserting both that the CFPB was unconstitutional and that the retroactive application of RESPA had denied the company due process.

Original panel decision. A three-judge panel of the appellate court rendered somewhat of a split decision. According to the panel, it was not constitutionally permissible to treat the Bureau as an independent agency. However, rather than invalidate the Bureau as a whole, the panel relied on a severability clause in the Dodd-Frank Act to decide that the Bureau should be treated as an executive agency and that its director could be removed by the president at will (see PHH Corporation v. CFPB).

That decision was vacated when the appellate court granted en banc review.

Bureau independence. According to the opinion of the court, Congress responded to consumer abuses that led up to the 2008 financial crisis by creating the CFPB to be “a regulator attentive to individuals and families.” This was necessary because the existing regulatory agencies were too concerned about the industry they were supposed to supervise. The CFPB needed a degree of independence to do its job, and the Bureau’s organization was intended to confer that independence.

The opinion of the court said that analyzing the constitutionality of that organization required answering two questions:

1. Is the “means of independence”—a single director with discharge-for-cause protection—constitutionally permissible?
2. Does the nature of the job that Congress gave the Bureau require that means of independence?

Answering both questions in the affirmative, the court decided that the Bureau’s structure was constitutional. The Supreme Court has never invalidated a law that confers a single level of discharge-for-cause protection, the opinion noted, especially when a degree of independence is necessary to an agency’s ability to function properly.

The court rejected each of PHH’s challenges. The opinion said repeatedly that the CFPB’s organization was not meaningfully different from the structure of other federal agencies and that nothing about that organization conflicted with the Constitution in any way.

Past practices. To begin with, precedent and history both make the Bureau’s constitutionality clear, the court said. For-cause restrictions have repeatedly been upheld. Only when Congress tried to claim a voice in an executive officer’s removal or made that removal “abnormally difficult” did the Supreme Court reject the law.

Analyzing the Supreme Court’s decisions in Myers v. U.S., 272 U.S. 52 (1928), Morrison v. Olson, 487 U.S. 654 (1988), Wiener v. U.S., 357 U.S. 349 (1958), Free Enterprise Fund v. PCAOB, 561 U.S. 477 (2010), and most importantly Humphrey’s Executor v. U.S., 295 U.S. 602 (1935), the appellate court said that the Constitution permits a level of for-cause protection when independence is needed. Humphrey’s Executor allowed such protection in the case of the Federal Trade Commission, which is in every meaningful respect similar to the CFPB, according to the court.

Financial services regulation is a clear example of a situation in which independence is needed, the court then said. The Federal Reserve Board, Comptroller of the Currency, Federal Deposit Insurance Corporation chair, head of the National Credit Union Administration, and members of the Securities and Exchange Commission all have such protection.

CFPB director. “The for-cause protection shielding the CFPB’s sole Director is fully compatible with the President’s constitutional authority,” the opinion said. Independence is necessary to the Bureau’s task, and the language of the Dodd-Frank Act is identical to the Federal Trade Commission Act language approved in Humphrey’s Executor. PHH’s challenge inescapably challenged the organization of many independent federal agencies, the court added.

The Bureau’s budgetary independence was said to be comparable to that enjoyed by the other financial supervisory agencies, even when combined with for-cause protection.

For-cause protection. The Dodd-Frank Act does not infringe on the President’s power any more than the FTC Act does, the court said, and the FTC Act was upheld. The nature of the tasks of the CFPB and the FTC are very similar, as are their powers.

Budget powers. Freeing the CFPB from the appropriations process was another step Congress took to secure its independence, the court went on. There was no reason why Congress could not create agencies that funded themselves through fees and assessments, and the Fed, OCC, and FDIC all worked in precisely that way.

There was no reason the CFPB could not be funded in the same manner, and the independent funding had no meaningful effect on presidential powers, the court asserted.

Combining budgetary independence and for-cause removal protection was not novel, the court observed. Other agencies worked the same way. There would be no concern unless both raised the same constitutional concern and together had a relevant effect. That was not the case.

Director v. board. One director as opposed to a multi-member commission made no difference either, the court said. First, Morrison upheld for-cause protection for a single independent counsel who had been appointed to investigate possible executive branch misdeeds. The Comptroller of the Currency also was just one individual.

The court believed that a single director actually could be more accountable to the President than members of a commission. The President could more easily change the course of an agency by changing one director than by changing a majority of a board. Also, by giving the responsibility for consumer financial protection to a single director, Congress left no doubt about who was responsible.

Other theories. Passing on to what it termed PHH’s “broader theories of unconstitutionality,” the court remained unsympathetic.

The CFPB could not be said to be too powerful to be permissible under the Constitution. The extent of the Bureau’s power was not out of the ordinary. Even if the Bureau’s organization was novel—a claim the court rejected—novelty is not a constitutional defect. The Constitution does not ban Congress from innovating.

The court’s opinion reserved its most scathing criticism for what it referred to as PHH’s “unmoored liberty analysis.” In the opinion’s understanding, PHH argued that a multi-member commission was required because it would be less able to act. As the court characterized the position, “Because multiple heads might make the CFPB less likely to act against the financial services industry it regulates, group leadership is, according to PHH, constitutionally compelled.”

“It remains unexplained why we would assess the challenged removal restriction with reference to the liberty of financial services providers, and not more broadly to the liberty of the individuals and families who are their customers,” the court replied. “Congress understood that markets’ contribution to human liberty derives from freedom of contract, and that such freedom depends on market participants’ access to accurate information, and on clear and reliably enforced rules against fraud and coercion. Congress designed the CFPB with those realities in mind.”

Dealing a final blow to PHH’s case, the court rejected the “slippery slope” argument that allowing for-cause protection to the CFPB director could, down the road, allow Congress to grant the same protection to other government officials, even cabinet members. The focus on the nature of the official’s tasks would prevent that, the court said.

In fact, “the slipperiest slope lies on the other side of the mountain,” the court observed. In the court’s understanding, PHH essentially was arguing that only independent agencies that precisely copy the FTC, which was approved in Humphrey’s Executor, could be permitted. That would threaten many, perhaps even all, modern agencies.

“If PHH’s version of liberty were the test—elevating regulated entities’ liberty over those of the rest of the public, and requiring that such liberty be served by agencies designed for maximum deliberation, gradualism, or inaction—it is unclear how such a test could apply to invalidate only the CFPB. That test would seem equally to disapprove other features of many independent agencies” the opinion said.

Concurring opinions. Three members of the en banc court, including the judge who wrote the court’s opinion, used a concurring opinion to address the RESPA issues that the court had avoided. They would have allowed the CFPB to reinterpret the RESPA anti-kickback section and to enjoin future conduct by PHH that was contrary to the reinterpretation. They would not, however, have permitted the Bureau to impose disgorgement based on earlier activity.

A concurring opinion by two other judges advanced a different basis for upholding the constitutionality of the CFPB’s organization. According to this opinion, the fact that PHH was appealing from a final decision in a CFPB adjudication made clear that the director had significant quasi-judicial duties. As a result, the for-cause protection was permissible.

Yet another concurring judge would have said simply that the for-cause protection was constitutional because it provided only “a minimal restriction on the President’s removal power, even permitting him to remove the Director for ineffective policy choices.”

Dissents. The three judges who comprised the original panel all wrote separate opinions to dissent from the full court’s decision:

• Judge Henderson placed great emphasis on the assertion that the CFPB’s structure was novel and therefore was to be considered with great skepticism. In reaching that conclusion, she attempted to distinguish the CFPB from the independent agencies that had been approved in the Supreme Court precedents and argued that the combination of the various differences made the Bureau unconstitutional.
• Judge Kavanaugh, joined by Senior Judge Randolph, disagreed with the court’s opinion on the bases of “history, liberty, and Presidential authority.” As did Judge Henderson, he disputed the import of the Supreme Court precedents and the Bureau’s similarity to other independent agencies. He also repeated the liberty-based concerns on which he relied heavily in the opinion he wrote on behalf of the three-judge panel.
• Judge Randolph, in addition to agreeing with Judge Kavanaugh, believed that the ALJ who presided over the hearing was an inferior officer under the Constitution who had not been properly appointed. In his opinion, that made any proceedings against PHH unconstitutional.

What does it mean? Because the original three-judge panel decision on the RESPA issues was reinstated by the court opinion, the administrative proceeding has been remanded to the CFPB for further proceedings. In those proceedings, the CFPB can attempt to show that the reinsurance practices of PHH and its affiliates amounted to an illegal kickback under the prior interpretation of the law. The prior interpretation is what matters because the panel decided both that the reinterpretation was wrong and that, if it were right, it could not be applied retroactively.

If the Bureau can prove that there was a violation, and that the violation occurred within three years of the start of the proceeding, it can impose an appropriate remedy.

However, whether the CFPB under Acting Director Mick Mulvaney will have an appetite for continuing an administrative enforcement proceeding against a company that arguably was acting in compliance with existing guidance is very much an open question.

Should PHH choose to ask the Supreme Court to review the decision, an additional complication arises. Under the Dodd-Frank Act, the CFPB can represent itself in the Supreme Court only if the Justice Department agrees. Given that the Justice Department has taken the position that the panel decision was correct and the CFPB should be treated as an executive agency, would a Trump administration Justice Department consent to allowing the CFPB to argue a contrary position?

And, of course, having won a substantial victory on the RESPA enforcement issues that included the lifting of a $109 million payment liability, will PHH want to ask for a Supreme Court appeal rather than pursuing a likely dismissal at the administrative adjudication level?

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