Taking Apart The CFPB, Bit by Bit

graphic by Matt Shirk

Mick Mulvaney’s Message in the CFPB’s latest Semi-Annual Report is crystal clear regarding his plans for the Bureau:

As has been evident since the enactment of the Dodd-Frank Act, the Bureau is far too powerful, and with precious little oversight of its activities. Per the statute, in the normal course the Bureau’s Director simultaneously serves in three roles: as a one-man legislature empowered to write rules to bind parties in new ways; as an executive officer subject to limited control by the President; and as an appellate judge presiding over the Bureau’s in-house court-like adjudications. In Federalist No. 47, James Madison famously wrote that “[t]he accumulation of all powers, legislative, executive, and judiciary, in the same hands … may justly be pronounced the very definition of tyranny.” Constitutional separation of powers and related checks and balances protect us from government overreach. And while Congress may not have transgressed any constraints established by the Supreme Court, the structure and powers of this agency are not something the Founders and Framers would recognize. By structuring the Bureau the way it has, Congress established an agency primed to ignore due process and abandon the rule of law in favor of bureaucratic fiat and administrative absolutism.

The best that any Bureau Director can do on his own is to fulfill his responsibilities with humility and prudence, and to temper his decisions with the knowledge that the power he wields could all too easily be used to harm consumers, destroy businesses, or arbitrarily remake American financial markets. But all human beings are imperfect, and history shows that the temptation of power is strong. Our laws should be written to restrain that human weakness, not empower it.

I have no doubt that many Members of Congress disagree with my actions as the Acting Director of the Bureau, just as many Members disagreed with the actions of my predecessor. Such continued frustration with the Bureau’s lack of accountability to any representative branch of government should be a warning sign that a lapse in democratic structure and republican principles has occurred. This cycle will repeat ad infinitum unless Congress acts to make it accountable to the American people.

Accordingly, I request that Congress make four changes to the law to establish meaningful accountability for the Bureau :

1. Fund the Bureau through Congressional appropriations;

2. Require legislative approval of major Bureau rules;

3. Ensure that the Director answers to the President in the exercise of executive authority; and

4. Create an independent Inspector General for the Bureau. (2-3)

Mulvaney gets points for speaking clearly, but a lot of what he says is wrong and at odds with how the federal government has operated for nearly one hundred years. He is wrong in stating that the CFPB Director acts without judicial oversight. The Director’s decisions are appealable and his predecessor’s have, in fact, been overturned. And his call to a return to the federal government of the type recognizable to the Framers has a hollow ring since at least 1935 when the Supreme Court decided Humphrey’s Executor v. United States.

I would think that it should go without saying that the federal government has grown exponentially since its founding in the 18th century. The Supreme Court has acknowledged as much in Humphrey’s Executor which held that Congress could create independent agencies.  Independent agencies are now fundamental to the operation of the federal government.

Mulvaney and others are seeking to chip away at the legitimacy of the modern administrative state. That is certainly their prerogative. But they should not ignore the history of the last hundred years and skip all the way back to 18th century if they want their arguments to sound like anything more than a bit of sophistry.

Trump Wins Another Round in CFPB Fight

OMB Director Mick Mulvaney

Judge Gardephe (SDNY) ruled against the Lower East Side People’s Federal Credit Union in their suit against President Trump and Mick Mulvaney over the control of the Consumer Financial Protection Bureau. (Case 1:17-cv-09536-PGG, filed February 1, 2018) Trump has sought to install Mulvaney, his OMB Director, as the Acting Director of the CFPB. I submitted an amicus brief on behalf of the Credit Union along with a number of other academics who write about the consumer financial services sector but the judge did not reach the merits of the case. Rather, the judge found that the Credit Union did not have standing to bring the lawsuit. Standing, for you non-lawyers out there, refers to a showing by the plaintiff that it has enough of a connection to, as well as harm from, an action that the plaintiff is challenging to be the basis for the lawsuit.

The dispute over the leadership of the CFPB is still ongoing as Leandra English, the Deputy Director appointed by former Director Cordray, is still pressing the suit that she filed in the District Court for the District of Columbia. In that suit, English claims that she is the rightful Acting Director of the CFPB. While she lost in the District Court, she has filed an appeal to the Court of Appeals for the District of Columbia. That case turns on the complex interaction between the Dodd-Frank Act and the Federal Vacancies Reform Act, so it is hard to predict what the Court of Appeals will end up doing in that case.

In the short term, it means that the CFPB is somewhat rudderless as two people claim to lead the agency. This condition will likely prevail until President Trump gets a permanent Director confirmed by the Senate.

Trump Wins Round Two At CFPB

image by Slr722x

Bloomberg Law quoted me in Court Says Mulvaney Can Lead CFPB, but Legal Fight Continues. It opens,

The court battle over the Consumer Financial Protection Bureau’s top leadership has shifted in the Trump administration’s favor, but continued litigation could test its ability to revamp the agency.

Judge Timothy J. Kelly yesterday denied deputy director Laura English’s bid for an order that would have barred Office of Management and Budget Director Mick Mulvaney from serving as acting CFPB director, setting up what many expect to be an appeal to the U.S. Court of Appeals for the District of Columbia Circuit.

Although plenty of questions lie ahead, perhaps the biggest is whether and to what extent ongoing uncertainty raised by the case impacts the administration’s effort to revamp consumer protection regulation at the CFPB.

“This is clearly a win for the administration, but there’s still so much uncertainty,” David Reiss, professor of law at Brooklyn Law School in Brooklyn, N.Y, told Bloomberg Law in a phone interview. “What we’ll see for the next few months is whether that uncertainty makes it harder for Mulvaney to turn the ship.”

Kelly’s 46-page decision, which several attorneys privately described as careful and thorough, is the second such setback for English, who previously lost a bid for a temporary restraining order. Even so, hazards lie ahead for the administration.

University of Michigan Law School Professor Nina Mendelson said an eventual ruling on the merits against Mulvaney could call into question any actions based on authority he now claims, such as final regulations, settlements, or other matters.

“A court could invalidate all of those actions,” Mendelson said on a call hosted by consumer advocates. Mendelson, an expert on administrative law, said she’s taken an independent stance on the case.

New York Challenge

Kelly’s Jan. 10 ruling isn’t the last word, according to Brianne Gorod, an attorney with the Constitutional Accountability Center who also joined the call. “The legal fight here is far from over,” she said.

The decision also may boost the stakes for a separate challenge to Mulvaney in federal court in New York. There, the Lower East Side People’s Federal Credit Union also seeks a court order declaring that English, not Mulvaney, is the CFPB’s rightful acting director. The credit union says the appointment of Mulvaney has thrown the credit union into “regulatory chaos,” because it can’t identify the lawful director of the CFPB.

BTW, I am a signatory on an amicus brief filed in the Lower East Side People’s Federal Credit Union case.

People’s Credit Union v. Trump

photo by Janine and Jim Eden

Twenty-one consumer finance regulation scholars (including yours truly) filed an amicus brief in Lower East Side People’s Federal Credit Union v. Trump, No. 1:17-cv-09536 (SDNY Dec. 14, 2017). The Summary of the Argument reads as follows:

The orderly succession of the leadership of regulatory agencies is a hallmark of American democracy. Regulated entities, such as Plaintiff Lower East Side People’s Federal Credit Union (LESPFCU) rely on there being absolute clarity regarding who is duly authorized to exercise regulatory authority over them. Without such clarity, regulated entities cannot be certain if agency actions, including the promulgation or repeal of rules and informal regulatory guidance, are actual agency policy or mere ultra vires actions.

This case involves a controversy over who lawfully serves as the Acting Director of the Consumer Financial Protection Bureau (CFPB or the Bureau) following the resignation of the Bureau’s first Senate-confirmed Director. The statute that created the CFPB, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), is clear: the Deputy Director of the CFPB “shall . . . serve as acting Director in the absence or unavailability of the Director.” 12 U.S.C. § 5491(b)(5)(B). Thus, upon the resignation of the Director, the CFPB’s Deputy Director, Leandra English, became Acting Director and may serve in that role until a new Director has either been confirmed by the Senate or been recess appointed.

Despite the Dodd-Frank Act’s clear statutory directive, Defendant Donald J. Trump declined to follow either of the routes constitutionally permitted to him for appointing a Director for the Bureau. Instead, Defendant Trump opted to illegally seize power at the CFPB by naming the current Director of Office of Management and Budget (OMB), Defendant John Michael Mulvaney, as Acting CFPB Director. Defendants claim this appointment is authorized by the Federal Vacancies Reform Act of 1998 (FVRA), 5 U.S.C. § 3345(a).

As scholars of financial regulation, we believe that Deputy Director English’s is the rightful Acting Director of the CPFB for a simple reason: the only applicable statute to the succession question is the Dodd-Frank Act. In the Dodd-Frank Act, Congress expressly provided for a mandatory line of succession for the position of CFPB Director, stating that the Deputy Director “shall” serve as the Acting Director in the event of a vacancy. Congress selected this provision after considering and rejecting the FVRA during the drafting of the Dodd-Frank Act, and Congress’s selection of this succession provision is an integral part of its design of the CFPB as an agency with unique independence and protection from policy control by the White House. The appointment of any White House official, but especially of the OMB Director as Acting CFPB Director is repugnant to the statutory design of the CFPB as an independent agency.

The FVRA has no application to the position of CFPB Director. By its own terms, the FVRA is inapplicable as it yields to subsequently enacted statutes with express mandatory provisions for filling vacancies at federal agencies. This is apparent from the text of the FVRA, from the FVRA’s legislative history, and from the need to comport with the basic constitutional principle that a law passed by an earlier Congress cannot bind a subsequent Congress. Moreover, the FVRA does not apply to “any member who is appointed by the President, by and with the advice and consent of the Senate to any” independent agencies with a multi-member board. 5 U.S.C. § 3349c(1). The CFPB Director is such a “member,” because the CFPB Director also serves as a member of a separate multi-member independent agency: the Board of Directors of the Federal Deposit Insurance Corporation (FDIC).

Plaintiff LESPFCU is seeking a preliminary injunction against acts by Defendants Mulvaney and Trump to illegally seize control of the CFPB, and it should be granted. As will be shown, LESPFCU has a high likelihood of success on the merits given the strength of its statutory arguments that the Dodd-Frank Act controls the CFPB Directorship succession. Unless the Court grants LESPFCU’s request for a preliminary injunction, LESPFCU will suffer irreparable harm because it will be subjected to regulation by a CFPB that would be under the direct political control by the White House that Congress took pains to forbid. Moreover, without a preliminary injunction, Defendant Mulvaney will continue to take actions that may place LESPFCU at a competitive disadvantage by creating an uneven regulatory playing field that favors certain types of institutions. See, e.g., Jessica Silver-Greenberg & Stacy Cowley, Consumer Bureau’s New Leader Steers a Sudden Reversal, N.Y.TIMES, Dec. 5, 2017. Nor will the President’s rights be in any way limited by such a preliminary injunction: the President remains able to seek Senate confirmation of a nominee for CFPB Director. All the President is being asked to do is fish or cut bait and proceed through normal constitutional order. The granting of a preliminary injunction is also very much in the public interest as it enables the controversy over the rightful claim to the CFPB Directorship to be resolved through an impartial court and not through a naked grab of power by the President.

Mooting The CFPB Constitutional Challenge

Law360 quoted me in DC Circ. May Skip CFPB Fight After Cordray’s Exit. It opens,

The legal battle over who will temporarily lead the Consumer Financial Protection Bureau comes as the D.C. Circuit is considering whether the bureau’s structure is constitutional, and experts say the fight over its leadership could lead the appeals court to punt on the constitutional question.

The full D.C. Circuit has been considering an appeal filed by mortgage servicer PHH Corp. to overturn a $109 million judgment entered by former CFPB Director Richard Cordray over alleged violations of anti-kickback provisions of the Real Estate Settlement Procedures Act. PHH’s argument is that the agency’s structure, which includes a single director rather than a commission along with independent funding not appropriated by Congress, is unconstitutional.

But now that a political and legal fight has broken out over who should temporarily lead the CFPB since Cordray has left the bureau, the D.C. Circuit may be even more inclined to find a way to decide the underlying arguments about the CFPB’s enforcement of a decades-old mortgage law without touching the constitutional questions.

“If the D.C. Circuit wants to avoid this question, they certainly have plausible means to do it,” said Brian Knight, a senior research fellow at George Mason University’s Mercatus Center.

The battle over the CFPB’s constitutionality waged by PHH in some ways opened the door for the current conflict over who should serve as the bureau’s acting director.

PHH’s fight with the CFPB stems from Cordray’s decision to jack up a RESPA penalty against the New Jersey-based mortgage company in June 2015.

A CFPB administrative law judge had originally issued a $6.4 million judgement against PHH over alleged mortgage kickbacks, but on appeal Cordray slapped the company with a $109 million penalty.

PHH then took its case to the D.C. Circuit, arguing that the single-director structure at the CFPB, which allowed Cordray to unilaterally hike the penalty, was a violation of the Constitution’s separation of powers clause.

Ultimately, a three-judge panel led by U.S. Circuit Judge Brett Kavanaugh found that the CFPB’s structure was unconstitutional but declined to eliminate the bureau and invalidate its actions. Instead, the panel elected to eliminate a provision that only allowed the president to fire the CFPB director for cause, rather than allowing the director to be fired at will by the president.

The original, now vacated, D.C. Circuit decision also overturned the CFPB’s penalty against PHH. That portion of the decision was unanimous.

The CFPB then sought an en banc review of the decision, with oral arguments held in May. Since then, the CFPB and the industry have waited for a decision.

In fact, the wait for that decision may have allowed Cordray to hang on as long as he did at the CFPB. Trump was expected to fire Cordray soon after taking office, but that never happened, and instead Cordray waited until November to depart the bureau for what many believe will be a run for governor in his home state of Ohio.

Many predicted the D.C. Circuit would go the route of U.S. Circuit Judge Karen L. Henderson, a member of the original panel that ruled in the PHH litigation. Judge Henderson dissented on the constitutional question but supported the decision on RESPA enforcement.

“You arguably don’t have to reach the constitutional question,” said Christopher Walker, a professor at Ohio State University’s Moritz School of Law.

But the D.C. Circuit’s decision comes as two individuals argue over which one of them is the CFPB’s rightful acting director.

Cordray last Friday promoted his chief of staff, Leandra English, to be the CFPB’s deputy director just moments before he formally announced his departure. Cordray and English argue that the 2010 Dodd-Frank Act, which created the CFPB, made the deputy director the acting director in his absence.

Hours later, Trump appointed Office of Management and Budget Director Mick Mulvaney, a fierce CFPB opponent, to be the federal consumer finance watchdog’s acting director under a different federal law.

English sued to block Mulvaney’s appointment, and although the case will continue, a judge on Tuesday rejected her request for a temporary restraining order.

Against that backdrop, the D.C. Circuit may have more of an incentive to lie low on the constitutional questions, said Brooklyn Law School professor David Reiss.

“My reading would be that if they reversed the agency on the RESPA issues, then they may be able to moot the constitutional issues,” he said.

Does Housing Finance Reform Still Matter?

Ed DeMarco and Michael Bright

Ed DeMarco and Michael Bright

The Milken Institute’s Michael Bright and Ed DeMarco have posted a white paper, Why Housing Reform Still Matters. Bright was the principal author of the Corker-Warner Fannie/Freddie reform bill and DeMarco is the former Acting Director of the Federal Housing Finance Agency. In short, they know housing finance. They write,

The 2008 financial crisis left a lot of challenges in its wake. The events of that year led to years of stagnant growth, a painful process of global deleveraging, and the emergence of new banking regulatory regimes across the globe.

But at the epicenter of the crisis was the American housing market. And while America’s housing finance system was fundamental to the financial crisis and the Great Recession, reform efforts have not altered America’s mortgage market structure or housing access paradigms in a material way.

This work must get done. Eventually, legislators will have to resolve their differences to chart a modernized course for housing in our country. Reflecting upon the progress made and the failures endured in this effort since 2008, we have set ourselves to the task of outlining a framework meant to advance the public debate and help lawmakers create an achievable plan. Through a series of upcoming papers, our goal will be to not just foster debate but to push that debate toward resolution.

Before setting forth solutions, however, it is important to frame the issues and state why we should do this in the first place. In light of the growing chorus urging surrender and going back to the failed model of the past, our objective in this paper is to remind policymakers why housing finance reform is needed and help distinguish aspects of the current system that are worth preserving from those that should be scrapped. (1)

I agree with a lot of what they have to say.  First, we should not go back to “the failed model of the past,” and it amazes me that that idea has any traction at all. I guess political memories are as short as people say they are.

Second, “until Congress acts, the FHFA is stuck in its role of regulator and conservator.” (3) They argue that it is wrong to allow one individual, the FHFA Director, to dramatically reform the housing finance system on his own. This is true, even if he is doing a pretty good job, as current Director Watt is.

Third, I agree that any reform plan must ensure that the mortgage-backed securities market remain liquid; credit remains available in all submarkets markets; competition is beneficial in the secondary mortgage market.

Finally, I agree with many of the goals of their reform agenda: reducing the likelihood of taxpayer bailouts of private actors; finding a consensus on access to credit; increasing the role of private capital in the mortgage market; increasing transparency in order to decrease rent-seeking behavior by market actors; and aligning incentives throughout the mortgage markets.

So where is my criticism? I think it is just that the paper is at such a high level of generality that it is hard to find much to disagree about.  Who wouldn’t want a consensus on housing affordability and access to credit? But isn’t it more likely that Democrats and Republicans will be very far apart on this issue no matter how long they discuss it?

The authors promise that a detailed proposal is forthcoming, so my criticism may soon be moot. But I fear that Congress is no closer to finding common ground on housing finance reform than they have been for the better part of the last decade. The authors’ optimism that consensus can be reached is not yet warranted, I think. Housing reform may not matter because the FHFA may just implement a new regime before Congress gets it act together.

Reiss on Housing Finance Reform

Inside MBS and ABS, the trade journal, quoted me in DeMarco Cites ‘Structural Improvements’ in Housing Six Years After GSE Conservatorship, More Needed (behind a paywall). It reads,

Six years after the government takeover of Fannie Mae and Freddie Mac, the former regulator of the government-sponsored enterprises noted that the housing finance system has made “significant progress.” But even as critical structural changes are underway, comprehensive improvement is still several years out.

In a policy paper issued last week, Edward DeMarco–new senior fellow-in-residence for the Milken Institute’s Center for Financial Markets–said that house prices, as measured by the Federal Housing Finance Agency, have recovered more than 50 percent since their decline in 2007.

“While the damage from the housing crisis has been substantial, we are finally seeing a sustained market recovery,” said the former FHFA chief. “The crisis showed that numerous structural improvements were needed in housing–and such improvements have been underway for several years.”

Poor data, misuse of specialty mortgage products, lagging technologies, weak servicing standards and an inadequate securitization infrastructure became evident during the crisis.

“New data standards have emerged…with more on the way,” wrote DeMarco. “These standards should improve risk management while lowering origination costs and barriers to entry.” Development of the new securitization structure, begun more than two years ago, “should be a cornerstone for the future secondary mortgage market,” he added.

DeMarco said the major housing finance reform bills in the House and Senate share key similarities: “winding down Fannie Mae and Freddie Mac, building a common securitization infrastructure and drawing private capital back into the marketplace while reducing taxpayer involvement.”

DeMarco added, “We should build on these similarities, making them the cornerstone features of final legislation.” Prolonging the GSEs’ conservatorship, he warned, “will continue to distort the market and place taxpayers at risk.”

David Reiss, research director of the Center for Urban Business Entrepreneurship at the Brooklyn Law School, lauded the common securitization project. But Reiss worried the former FHFA head is too optimistic about the state of Fannie and Freddie.

“The GSEs have been in a state of limbo for far too long,” said Reiss. “All sorts of operational risks may be cropping up in the entities as employees sit around or walk out the door waiting for Congress to act.”