On its fifth anniversary, CFPB is as controversial as ever

“This part of Robert the Bruce's body was cut out and taken on The Crusades.”

Back in 1987, a young man from Ohio, Richard Cordray, helped secure his reign as five-time “Jeopardy” champion by knowing the correct response: his heart. There was, perhaps, a degree of foreshadowing at work. Fast forward to 2016 and Cordray, now head of the Consumer Financial Protection Bureau, fends off crusaders of a different sort who want to eviscerate his agency.

The GOP platform, ratified by Republicans at their recent convention in Cleveland, further unsheathed their knives. “The worst of the Dodd-Frank Act is the CFPB, deliberately designed to be a rogue agency,” it says. “It answers to neither Congress nor the executive, has its own guaranteed funding outside the appropriations process, and uses its slush fund to steer settlements to politically favored groups.”

The CFPB, architected by Sen. Elizabeth Warren (D-Mass.), a professor at Harvard Law School at the time, was designed to be a government agency that advocates for consumers without interference from either Wall Street or Washington politics. Its creation was added to the 2010 Dodd-Frank Act, and it went to work five years ago on July 21, 2011. Since that time, it has provided $11.7 billion in relief for more than 27 million consumers across the country.

The intentional effort to insulate the agency from political pressures fuels the fire of many critics.

“Its director has dictatorial powers unique in the American Republic,” the GOP platform laments. “Its regulatory harassment of local and regional banks, the source of most home mortgages and small business loans, advantages big banks and makes it harder for Americans to buy a home. Its one-size-fits-all approach to every issue threatens the diversity of the country’s financial system and would leave us with just a few enormous institutions, as in many European countries.”

If the Bureau is not abolished, it should be subjected to congressional appropriation, Republicans say. As has been attempted in the past, there is once again pending legislation to do so.

For its part, the CFPB is undeterred. Recent rules, both proposed and finalized, target debt collectors, payday loans, mandatory arbitration, overdraft fees, prepaid debit cards, and auto loan lenders. One recent, notable rule requires mortgage companies to calculate a borrower’s ability to repay. Its plate is as full as it ever was.

“The agency’s genetic makeup—embedded in its culture and internal structure—is set up to continue pursuit of aggressive consumer protection measures, regardless of external Capitol Hill pressure.”
Jennifer Lee, Partner, Dorsey & Whitney

“The agency's genetic makeup—embedded in its culture and internal structure—is set up to continue pursuit of aggressive consumer protection measures, regardless of external Capitol Hill pressure,” says Jennifer Lee, a partner with law firm Dorsey & Whitney and a former CFPB enforcement attorney.

“The reason the CFPB is one of the most powerful and aggressive agencies in the country is because of the broad grants of statutory authority in Dodd-Frank, plus the manner in which the Bureau has exercised them,” Lee adds. “It is a constant feedback loop—with each successive new development, the agency gets emboldened to do more. The current appetite for increased enforcement is not going to change, and the prolific agency will continue ramping up its litigation docket in the coming years, regardless of what happens in the elections this fall.”

Party politics may not seem to deter the CFPB, but the legal system could. Thus far, it has prevailed against its constitutional challenges, but that could change in the very near future.

“Rather than regulatory or legislative pushback, the industry will be well-served to closely watch what federal judges do to reign in the authority of the CFPB, which is also more frequently being challenged in litigation as a natural consequence of many factors, including non-public investigations ripening into public actions these last five years,” Lee says.

In 2012, the Competitive Enterprise Institute, a conservative think tank; the 60 Plus Association; and State National Bank of Big Spring, Texas, filed a lawsuit challenging the constitutionality of the agency and Cordray's recess appointment as director. They were later joined as plaintiffs by the Republican attorneys general of 11 states.

Key elements of the lawsuit include:

That the agency lacks effective checks and balances to assure the public of accountability.

Congress exercises no “power of the purse” over the CFPB, because the agency’s budget—administered essentially by one person—comes from the Federal Reserve.

The President cannot remove the CFPB director except under limited circumstances.

Judicial review of the CFPB’s actions is limited, because Dodd-Frank requires the courts to give extra deference to its legal interpretations.

In an August 2013 opinion, Judge Ellen Segal Huvelle of the U.S. District Court for the District of Columbia ruled that the plaintiffs had no standing on these and other claims. In July 2015, however, the U.S. Court of Appeals for the District of Columbia Circuit overruled her decision and allowed the lawsuit to proceed.

The CFPB’s birthday list

Observing its fifth anniversary, the Consumer Financial Protection Bureau released a list of five ways it “has made consumers count.” A selection appears below:
Actions have resulted in $11.7 billion in relief for more than 27 million harmed consumers
Over the past five years, our actions have resulted in billions in relief for millions of consumers harmed by financial companies and individuals that broke the law. We’ve taken legal action against:
Credit card companies for engaging in unfair, deceptive, and abusive practices related to marketing, billing, and enrollment for credit add-on products and services
Banks for charging overdraft fees to consumers who had not agreed to overdraft services
Payday lenders for pressuring borrowers into debt traps
For-profit colleges for exploiting students and pushing them into unaffordable loans
Debt collectors for using illegal tactics to intimidate consumers into paying debts they may not owe
Mortgage companies for wrongly foreclosing on consumers’ homes
We’ve handled nearly one million consumer complaints.
So far, we’ve handled nearly one million complaints from consumers around the country about problems with their credit cards, bank accounts, credit reports, mortgages, prepaid cards, and more.  We also publish complaints to amplify consumers’ voices and improve the consumer financial marketplace.
We’ve empowered millions of consumers to “Know Before You Owe”
Our “Know Before You Owe” initiative is making information about mortgages, student loans, auto loans, and other financial products and services more understandable to you. Consumers closed on 1.9 million mortgages during the first three months of this year and received our new Loan Estimate and Closing Disclosure forms to help them understand the true cost of borrowing. The financial aid shopping sheet we developed with the Department of Education has been voluntarily adopted by more than 3,400 colleges to help students better understand the type and amount of grants and loans they qualify for.
We’ve put in place new rules to make the mortgage market safer
We created new “back-to-basics” mortgage rules to address the risky lending and shoddy mortgage servicing that helped cause the financial crisis. Our new rules protect you at every stage of the process—from shopping for a loan, to closing on a mortgage, to paying it back.
Our “Know Before You Owe” mortgage disclosure rule gives you clear, easy-to-understand information so you can understand the terms of the deal and comparison shop. Our Ability-to-Repay rule protects you from dangerous lending practices by requiring lenders to verify that you can actually afford to pay back the mortgage they offered you. Our mortgage servicing rules protect you from surprises and runarounds while you are paying back your mortgage, and provide additional protections to help you if you fall behind on your mortgage payment. More than 49 million households have benefited from our mortgage servicing protections.
We’re curbing potentially harmful financial practices with new consumer protections
We’re working to put in place new consumer protections in several markets, some of them previously unregulated at the federal level. For payday lending, we are seeking comment on a proposed new rule to put an end to payday debt traps that plague a large percentage of the 12 million consumers who take out payday loans each year. This rule would require lenders to assess your ability to repay your debt before they offer you a loan.
Source: CFPB

Last month, the case was partially resolved. Huvelle ruled that concerns with Cordray’s 2012 recess appointment by President Obama were moot, because his subsequent reappointment and confirmation in 2013 enables him to validate all previous, legally questionable actions.

That opinion, as expected, infuriates agency critics. “Allowing Cordray to legitimize all of his previous decisions in one fell swoop, despite his being previously illegally appointed, is contrary to D.C. Circuit precedent and we plan to appeal this ruling. We continue to await a ruling on the more important fundamental issue in this lawsuit—whether the CFPB’s rogue-agency structure is constitutional,” says Sam Kazman, CEI’s general counsel.

As for the bigger question of whether the CFPB violates the Constitution’s separation of powers requirement, Huvelle created a cliffhanger, leaving the issue unresolved until a similar case, brought by New Jersey mortgage services company PHH Corp., is resolved.

PHH is challenging a $109 million enforcement action brought against it by the CFPB for alleged violations of the Real Estate Settlement Procedures Act, arguing that the agency had neither the regulatory jurisdiction nor constitutional authority to do so. A three-judge appellate panel of the U.S. Court of Appeals for the District of Columbia heard arguments in April and a decision is expected any day now.

Not surprisingly, the three plaintiffs in the other lingering constitutional challenge filed an amicus brief in the case. “The CFPB was designed to be—and operates as—a government unto itself,” it says. “It is vested with sweeping executive authority to make and enforce rules that affect virtually every sector of the U.S. economy…The Constitution does not permit the amalgamation of such sweeping and unchecked authority in a single executive entity. Certain features of the CFPB viewed in isolation may or may not be constitutionally permissible, but the combination is not. Fidelity to the Constitution requires that the CFPB be invalidated.”

While awaiting the resolution of those pending cases, the CFPB marches forward with its ambitious agenda. “The agency has looked at those challenges and made its own determination that they don’t have merit, that it is constitutional, and that it is going to keep doing what it is doing,” says Bob Jaworski, a member of Reed Smith’s financial services regulatory group.

That full-steam-ahead approach to regulation and enforcement has defined the CFPB since its inception. “They had to come out of the box very quickly because of all of the regulatory requirements that were imposed by the Dodd-Frank Act,” Jaworski says. “They had a ton of work on their plate and time limits in which to do it.” In the enforcement arena, staking a claim as a new sheriff in town also encouraged an aggressive approach. “They really wanted to make a mark quick and they did” he says. “They got those big dollars in the door.”

As for the current legal challenges, the CFPB may have a tougher battle. Jaworski notes that oral arguments in the PHH case suggested, in the view of two participating judges, that the argument for unconstitutionality may have legs. “In the PHH case one can certainly argue that the agency overreached. It’s a good factual setting in which the constitutional argument can be addressed,” he says.

It is notable that, despite the furor and political vendettas, not many other legal challenges have been filed against the agency. The likely reason illustrates what may be one of the most powerful weapons in the CFPB’s arsenal: public relations. What company wants to be a household name for its battle against a consumer watchdog?

“That also explains why there have been so few challenges to CFPB enforcement actions,” Jaworski says. “Virtually all of them have been settled. It is because the institutions don’t want their names out there as against the CFPB, a consumer agency, because then they will be seen as against consumers.”