Implications of SCOTUS Collins decision for CFPB generates controversy

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Following the U.S. Supreme Court’s decision last month in Collins v. Yellin (previously captioned Collins v. Mnuchin), controversy quickly erupted over the decision’s implications for the CFPB in three pending cases: All American Check Cashing and the two cases involving the CFPB’s 2017 final payday/auto title/high-rate installment loan rule (2017 Rule).

In Collins, relying on its decision in Seila Law, the Supreme Court held that the Federal Housing Finance Agency’s structure is unconstitutional because the Housing and Economic Recovery Act of 2008 only allows the President to remove the FHFA’s Director “for cause.”  Despite ruling that the FHFA’s structure was unconstitutional, the Supreme Court also held that the proper remedy for the constitutional violation was not to invalidate the FHFA actions challenged by the plaintiffs.

All American Check Cashing.  The underlying case is an enforcement action filed by the CFPB against All American in 2016 in a Mississippi federal district court for alleged violations of the CFPA’s UDAAP prohibition.  In March 2018, the district court rejected All American’s constitutional challenge and denied its motion for judgment on the pleadings.  All American then sought an interlocutory appeal which the CFPB opposed, arguing that a notice of ratification of the lawsuit by former Acting Director Mulvaney cured any constitutional defect and mooted the constitutional issue.  The district court did not rule on the CFPB’s ratification argument and in March 2018 granted All American’s motion for interlocutory appeal which the Fifth Circuit agreed to hear.

After a Fifth Circuit panel ruled that the CFPB’s structure was constitutional, the Fifth Circuit, on its own motion (at a time when Seila Law was still awaiting decision by the Supreme Court), entered an order vacating the panel’s ruling and granting rehearing en banc.  In July 2020, following the Supreme Court’s Seila Law decision, the CFPB filed a declaration with the Fifth Circuit in which Director Kraninger stated that she had ratified the Bureau’s enforcement action against All American.  After calendaring the case for en banc oral argument in September 2020 and ordering the parties to file supplemental briefs, the Fifth Circuit issued a directive putting the case on hold until the Supreme Court issued its decision in Collins.  After Collins was decided, the Fifth Circuit issued an order directing the parties to submit letter briefs addressing how the case should proceed in light of Collins.

In its letter brief, All American argues that dismissal of the CFPB enforcement action is consistent with Collins.  Although it held in Collins that the proper remedy for the constitutional violation was not to invalidate the FHFA actions challenged by the plaintiffs, the Supreme Court stated that the plaintiffs might nevertheless be entitled to retrospective relief if they could show that the unconstitutional removal provision caused them harm and remanded the case to the lower courts to resolve in the first instance whether the provision caused harm.  One example the court gave of when an unconstitutional provision could inflict compensable harm was when “the President had made a public statement expressing displeasure with actions taken by a Director and had asserted that he would remove the Director if the statute did not stand in the way.”

According to All American, “the public record shows that for a substantial period of time in which this enforcement action was pending in the district court, President Trump’s desire and inclination was to replace Cordray—the CFPB’s Director at the time this case was filed…but was restricted by the removal provision.  All American also argues that in any event, Collins did not limit remedies for defendants in CFPB enforcement actions.  According to All American, “[c]ompensable harm has no relevance here because, unlike plaintiff shareholders [in Collins seeking to recover millions of dollars from the Treasury Department], All American is a defendant seeking to dismiss an enforcement action.” (emphasis included).  Accordingly, All American urges the Fifth Circuit to declare the CFPB unconstitutionally structured and grant All American judgment on the pleadings.

The CFPB argues in its letter brief that Collins squarely rejects All American’s argument that dismissal is appropriate.  According to the CFPB, the Supreme Court found no reason to regard actions taken by a properly appointed official as void merely because the agency’s enabling statute contained an invalid for-cause removal provision and the CFPB was headed by a properly appointed Director when it filed the enforcement action against All American.  In addition, the CFPB argues that All American cannot show that the invalid removal provision affected the decision to file the action because the action was ratified by directors not subject to the removal restriction.  The CFPB argues further that Collins undercuts All American’s argument that neither former Acting Director Mulvaney nor former Director Kraninger validly ratified the action because the Bureau lacked authority to file the complaint in the first instance.  According to the CFPB, the complaint was valid when filed because the Bureau’s Director at the time had been properly appointed and confirmed.  Accordingly, the CFPB urges the Fifth Circuit to deny All American’s motion for judgment on the pleadings and allow the case to go forward.

2017 Rule Cases.   Two cases are currently pending.  One is the Texas lawsuit filed by the Consumer Financial Services Association (CFSA) and another industry trade group seeking to invalidate the 2017 Rule’s payments provisions.  Briefing on the parties’ cross-motions for summary judgment closed in December 2020 and no date has been set for oral argument on the motions

Following Collins, the CFPB filed a Notice of Supplemental Authority in which it argues that Collins supports rejection of the trade groups’ argument that the payments provisions were void ab initio and therefore incapable of ratification.  The CFPB also argues the trade groups cannot show that the unconstitutional removal restriction caused them compensable harm that would entitle them to invalidation of the payments provisions.  Because a Director appointed by and removable at will by the President ratified the payments provisions, the restriction made no difference for the trade groups or for their members’ future obligation to comply with the payments provisions when they become effective.

In their response, the trade groups argue that Collins did not address whether a rule promulgated by an unaccountable agency head is void ab initio because Collins involved a contractual agreement entered into by an Acting FHFA Director who was removable at will.  According to the trade groups, the only remedies question in Collins was whether to undo the implementation of the agreement by FHFA Directors who were insulated from removal.  They argue that Collins only limited retrospective remedies and not the prospective relief against future regulatory enforcement they seek.  Finally, the trade groups argue they are entitled to relief even if Collins requires them to show that the removal restriction made a concrete difference because “the public record is full of evidence that President Trump wanted to fire Cordray, but was deterred from doing so by the statutory removal restriction.” (emphasis included).  (In its reply, the CFPB asserts that “[r]egardless of whether President Trump would have fired Director Cordray, President Trump’s own appointee expressly ratified [the payments provisions] after the removal provision was held invalid.” (emphasis included).)

The other pending case involving the 2017 Rule was filed in D.C. federal district court by the National Association for Latino Community Asset Builders (NALCAB) challenging the CFPB’s rescission of the “ability-to-repay” (ATR) or “mandatory underwriting provisions” in the rule.  The lawsuit seeks to overturn the CFPB’s July 2020 final rule that eliminated the ATR provisions but left in place the 2017 Rule’s payments provisions.  The CFSA intervened in the lawsuit.  Motions to dismiss filed by the CFPB and the CFSA are pending.

Following Collins, the NALCAB filed a Notice of Supplemental Authority in which it argues that Collins rejects the CFSA’s premise that actions taken by officials subject to an unconstitutional removal provision are void ab initio.  According to the NALCAB, Collins therefore supports its position that the ATR provisions were not void ab initio and, if the 2020 final rule repealing the ATR provisions is set aside, the ATR provisions would be reinstated.

CFSA’s response repeats the arguments made in its response to the CFPB’s Notice of Supplemental Authority in the Texas case.

The U.S. Supreme Court could soon have an opportunity to decide for itself what the implications of Collins are for the CFPB.  RD Legal Funding has filed a petition for a writ of certiorari that asks the Supreme Court to decide whether the CFPB can ratify actions taken when it was unconstitutionally structured and Seila Law is expected to file a cert petition also asking the Supreme Court to decide this question.

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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