CFPB News: Self-Inflicted Wounds on Constitutionality and Other Developments

Manatt, Phelps & Phillips, LLP

Is the CFPB putting its own prior conduct at risk? Over the last few weeks at the Consumer Financial Protection Bureau (CFPB or Bureau), Director Kathleen Kraninger herself declared the structure of the CFPB unconstitutional, placing the director in a position arguably adverse to her own staff’s regulatory, supervisory and enforcement efforts.

Elsewhere in CFPB developments, an Innovation Insight report exploring the relationship between financial well-being (FWB) and the contents of and engagement with credit reports was published, a new enforcement action was filed, and a request for comment on the use of Tech Sprints was issued.

What happened

In the latest twist in the battle over the constitutionality of the CFPB, Kraninger informed her staff, and sent letters to the leaders of the Senate and House of Representatives, asserting that the for-cause director removal provision of the Consumer Financial Protection Act (CFPA) is, in fact, unconstitutional. Likewise, the Bureau has taken that position in an action pending before the Supreme Court.

“My determination that the for-cause removal provision is unconstitutional does not affect my commitment to fulfilling the Bureau’s statutory responsibilities,” she wrote to Congress. “I will continue to carry out the Bureau’s duties under the CFPA and to defend the Bureau’s actions. Further, a Supreme Court decision holding that the for-cause removal provision is unconstitutional should not affect the Bureau’s ability to carry out its important mission.”

But does it? On the internal front, Kraninger teed up the issue by communicating with CFPB staff. Under the new position, the CFPB is asserting merely that the constitutional defect can be resolved by severing the for-cause termination provision from the CFPA. On this issue, Kraninger has likewise directed the Bureau’s attorneys to refrain from defending the for-cause removal provision in other cases.

That said, the CFPB has been substantially more active than in the prior Mulvaney era, issuing civil investigative demands (CIDs), albeit with required new disclosures that better explain the conduct and laws at issue, and bringing significantly more enforcement actions, two of which we discuss below.

The constitutional issues will be at the forefront in multiple suits. In those actions, the Department of Justice (DOJ) will argue the CFPB’s new position going forward, on the Bureau’s behalf, Kraninger told the lawmakers, and has already filed a motion reflecting this stance in response to a petition for certiorari filed in CFPB v. Seila Law, an appeal from the U.S. Court of Appeals, Ninth Circuit’s decision upholding the constitutionality of the CFPB’s structure.

Another case attacking CFPB constitutionality, All American Check Cashing v. CFPB, could also head directly to the Supreme Court, following the en banc ruling in Collins v. Mnuchin, which we discussed last month, and which relates to similar language in the Federal Housing Finance Agency for-cause removal provisions. Petitioners in All American are asking the Supreme Court to take their case notwithstanding the Fifth Circuit’s directive to submit supplemental briefing on the impact of Collins. “What’s the point?” they effectively write.

Innovation Insights. The “Credit Characteristics, Credit Engagement Tools and Financial Well-Being” report explored the relationship between subjective FWB and objective credit report characteristics and consumers’ engagement with financial information through educational tools. The joint research study (conducted with Credit Karma) is the first to examine the relationship, analyzing data from a voluntary 10-question survey conducted in the fall of 2017 that yielded close to 3,000 de-identified observations.

Main takeaways from the report include a very strong positive correlation between a consumer’s credit score and FWB score, as well as a positive correlation between age and FWB score (that essentially disappears after accounting for credit score).

In addition, the study identified seven credit report variables and three engagement variables with a strong correlation to a consumer’s FWB score. Credit card limits, holding a credit card and the number of accounts recently opened with a balance all had positive correlations with a consumer’s FWB score, while credit card utilization, the number of revolving accounts, the number of collections in the past two years and having a student loan all had negative correlations.

As for engagement variables, a consumer’s FWB score correlates positively with the number of times the credit simulator was used and the number of times credit factors were reviewed; a negative correlation was found with the number of emails from Credit Karma that were opened by the consumer in the past 60 days.

“The observed correlations might be causal, or they might be explained by reverse causality or omitted variables like the propensity to plan,” the Bureau concluded. “Either way, the results are intriguing and warrant further study of these relationships as the CFPB develops its strategy for improving financial capability using the concept of financial well-being.”

Enforcement action. Despite the constitutionality issues, the CFPB remained active on the enforcement front.

First, in a complaint filed in Maryland federal court, the Bureau accused a debt collection company, related entities, and their chief executive officer and president of violations of the CFPA and Fair Credit Reporting Act.

The CFPB claims defendants failed to establish or implement reasonable written policies and procedures regarding the accuracy and integrity of the information furnished to consumer reporting agencies (CRAs), failed to conduct a reasonable investigation—or, in some instances, any investigation—into the handling of indirect disputes, and neglected to stop furnishing information that was alleged to have been the result of identity theft before it made any determination as to whether the information was accurate.

Currently furnishing information about approximately 500,000 accounts, the defendants receive and respond to about 10,000 indirect disputes each month. Four employees at a call center in the Philippines handled the indirect disputes (when consumers object to furnished information from a CRA), the CFPB claimed, which investigations were “perfunctory and inadequate,” particularly in relation “to the nature, size, complexity or scope of [the defendants’] furnishing activities.”

The employees received “limited to no” affirmative training about how to conduct investigations of the disputes, according to the complaint. Employees were provided with a manual that hadn’t been updated since 2010 that provided “limited” guidance for certain types of indirect disputes and no guidance for “many other types of disputes,” the CFPB alleged.

The Bureau’s complaint seeks an injunction as well as damages, redress, disgorgement and a civil money penalty.

Second, the CFPB joined with the South Carolina Department of Consumer Affairs to commence proceedings alleging two companies and their owners illegally brokered high-interest loans to veterans that they falsely marketed as future pension or disability payments. The suit likewise claims that defendants improperly assessed creditworthiness of their alleged victims before entering into the transactions and permitted repayment from sources other than the contracted-for income streams.

This is not the first time the CFPB has targeted these practices. As we previously reported, in January and August 2019, the Bureau announced settlements with companies engaged in the same or similar practices. (Yes, we see a trend here.)

Tech Sprints. The CFPB published a Federal Register notice requesting comment on the use of Tech Sprints as a model for collaborative innovation. Tech Sprints “gather regulators, technologists, financial institutions and subject matter experts from key stakeholders for several days to work together to develop innovative solutions to clearly-identified challenges,” the Bureau explained.

The innovation model is used by the United Kingdom’s financial regulator as well as the U.S. Census Bureau and the U.S. Department of Health and Human Services, and the CFPB hopes Tech Sprints can help advance regulatory innovation and compliance.

Specifically, the Bureau is interested in using the forums to leverage cloud solutions and machine automated compliance checks that allow for independent validation by regulators, in order to identify new technologies and approaches that can be used by the CFPB to provide more cost-effective oversight of supervised entities and to reduce unwarranted regulatory compliance burdens, among other ideas.

The Federal Register notice asks for input on what issues, problems, procedures or requirements could benefit from innovation through a Bureau Tech Sprint, as well as other suggestions with regard to Tech Sprints or concerns that might discourage participation. Comments will be accepted until November 8, 2019.

To read Kraninger’s letter, click here.

To read the Innovation Insights Report, click here.

To read the petition for writ of certiorari in All American Check Cashing v. CFPB, click here.

To read the CFPB’s Maryland complaint, click here.

To read the CFPB and South Carolina complaint, click here.

To read the Federal Register notice about Tech Sprints, click here.

To read the CFPB Summer 2019 Supervisory Highlights, click here.

Why it matters

Do Director Kraninger’s actions place the CFPB at risk? According to conventional wisdom, the Court need only strike the “for cause” provision to render the structure constitutional. But declaring one’s own agency unconstitutionally structured is surely a first, and it will be interesting to see how this position plays out, not only in the courtroom (where the issue is now virtually guaranteed to be heard by the Supreme Court) but in Bureau offices, as the CFPB files enforcement actions and defendants respond with the same claims of unconstitutionality. Given the uncertainty in how broadly courts might rule, the failure to defend such claims could lead to rulings that threaten past and current regulatory, supervisory and enforcement activity.

On the enforcement front, the latest action against companies that attempt to characterize high-interest loans as the purchase of future pension or disability payments makes clear that this is an area of continued scrutiny by the CFPB, especially where veterans are the alleged victims. The action against a debt collector demonstrates the CFPB is again targeting this segment in ways that were largely suspended during Mulvaney’s tenure at the Bureau.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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