CFPB Faces Challenges in Courts, Congress in 2017

By Chris Bruce

The Consumer Financial Protection Bureau will spend much of 2017 defending its leadership and fighting rear-guard battles while still staying focused on consumer protection against threats to its autonomy.

That balancing act is nothing new for the CFPB, which has been at the center of controversy since its 2010 creation by the Dodd-Frank Act.

But 2017 adds a new level of intensity. The agency is reeling from an October federal appeals court ruling in favor of PHH Corp. that could expose CFPB Director Richard Cordray to swift dismissal once President-elect Donald Trump takes office ( PHH Corp. v. CFPB , D.C. Cir., No. 15-cv-01177, 10/11/16 ).

Meanwhile, a petition following a separate appeals court decision in April has been put before the U.S. Supreme Court. It challenges Cordray’s August 2013 ratification of his actions prior to his July 2013 confirmation by the Senate ( Gordon v. CFPB , U.S., No. 16-cv-00673, petition for certiorari 11/17/16 ).

That petition, if granted by the justices, could put a question mark on actions by Cordray between his January 2012 recess appointment by President Barack Obama and the Senate’s July 2013 confirmation.

And in any case, the agency faces formidable opposition from Republicans on Capitol Hill who want a different leadership model and an end to a Dodd-Frank funding arrangement designed to encourage independent action by the CFPB.

For example, it’s possible that the CFPB could prevail in the PHH case, but lawmakers might redouble efforts to remake the agency, said R. Colgate Selden, counsel in the Washington offices of Alston & Bird and a founding member of the Treasury Department implementation team that created the CFPB.

“Even if the CFPB gets a favorable result in court, it might not help,” Selden told Bloomberg BNA Dec. 5. “It might just boost arguments on Capitol Hill that the CFPB should be subject to congressional appropriations.”

The Trump-Pence transition team did not respond to a request for comment, nor did the CFPB.

Variables Abound

Questions about Cordray’s fate have been in play since October, when two judges on a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit struck down a Dodd-Frank provision that limits the president’s ability to remove the CFPB director.

Left undisturbed, the decision effectively converts the CFPB from the independent agency created by Dodd-Frank into just another executive branch agency, making Cordray removable by the president at any time without cause. President Obama is unlikely to do that, but President-elect Donald Trump might, and perhaps even on his first day in office.

Aditya Bamzai, associate professor of law at the University of Virginia School of Law in Charlottesville, Va., is the author of a much-discussed blog post on whether the new president, after taking office in January, could remove Cordray before the PHH litigation wraps up.

The answer is yes, Bamzai told Bloomberg BNA Dec. 7. “The question whether the president can act on his own understanding of the law, despite the pending PHH litigation, has a pretty clear answer under executive branch precedents: He can,” Bamzai said.

What-If Scenarios

Alan S. Kaplinsky, a partner in Philadelphia who leads the consumer financial services practice at Ballard Spahr, said Cordray could fight back but that any such effort might require a separate lawsuit. It might also not help Cordray’s reported plans to run for elected office in Ohio in 2018, according to Kaplinsky.

“There is some procedural difficulty associated with either move, and it could be too costly politically, but it remains a possibility,” he said.

Another option is for Cordray to stay on until his statutory end-of-term-date at the end of July 2018. At that point, Trump could fill the position with his own nominee, with only a simple majority in the Senate needed for confirmation.

Kaplinsky said that’s probably a remote scenario, because Trump and Republicans could, if they wanted, make life miserable for Cordray. Rules finalized within the relevant time frame—including those on arbitration, small–dollar lending, debt collection, and prepaid cards—are subject to being overridden under the Congressional Review Act. Or, he said, Congress might enact legislation to replace the governance of the CFPB with a five-member commission.

“Does Director Cordray want to fight the good fight until July 2018?” Kaplinsky asked.

Lucy Morris, the CFPB’s former deputy enforcement director for litigation, said the future is unclear but that the bureau will stick to its mission. “In the short term, I think the CFPB will continue to work hard to try to accomplish as much as they can accomplish before there’s a change in the culture,” said Morris, a partner with Hudson Cook in Washington.

Stay Tuned

For now, the effect of the October PHH ruling is stayed because the CFPB has asked the full D.C. Circuit to rehear it. The next big signal in the case probably will come by Dec. 22 at the latest. That’s when PHH and the U.S. Solicitor General must respond to the CFPB’s petition.

The S.G.’s response will get special scrutiny, because it’s not clear what the S.G. will say, according to a Dec. 5 memo on the case by Morrison & Foerster. Although the Justice Department typically defends the constitutionality of federal statutes, it’s also “particularly sensitive” in guarding the president’s executive authority.

“This case pits those two institutional imperatives against each other,” Morrison & Foerster lawyers Joseph R. Palmore, Donald C. Lampe, and Bryan J. Leitch said in the memo. “Accordingly, while DOJ will likely support the CFPB’s position on the constitutional question, that is not a foregone conclusion.”

That’s Not All

Another important deadline is ahead. It’s Jan. 23, 2017, when the S.G. must respond to a petition by attorney Chance Gordon, who Nov. 17 asked the U.S. Supreme Court to review an April ruling for the CFPB by a divided Ninth Circuit panel.

At issue in the Ninth Circuit was whether Cordray had legal power to act, and in what form, after his January 2012 recess appointment by President Barack Obama but before the Senate’s July 2013 confirmation of Cordray as CFPB director.

In April, two judges on the pane—Judges John B. Owens and William K. Sessions—upheld a CFPB enforcement ruling against Gordon, even though Cordray hadn’t yet been confirmed when the CFPB sued Gordon.

Owens and Sessions said questions about Cordray’s ability to execute the laws under Article II of the U.S. Constitution weren’t fatal to the CFPB’s case in the Article III court, holding the Executive Branch had “interest” and “power” to enforce federal law.

But Judge Sandra S. Ikuta dissented, saying “no one had the executive power necessary to prosecute this civil enforcement action in the district court.”

Ratification Challenge Pressed

Gordon is represented by attorneys Richard A. Samp, Cory L. Andrews, and Mark S. Chenoweth of the Washington Legal Foundation. Their Nov. 17 petition to the Supreme Court mainly focuses on whether Cordray’s August 2013 statement of ratification sufficiently resolved questions about his pre-confirmation actions, and whether the district court that heard the CFPB’s case against Gordon had jurisdiction to do so.

“Because neither Cordray nor anyone else associated with CFPB possessed legal capacity to authorize this enforcement proceeding when it was filed and litigated, Supreme Court precedent bars him from ratifying it later,” the petition said.

But the petition said the importance of the separation-of-powers issues raised in the Gordon case is highlighted by the PHH ruling. In PHH, the petition said, the D.C. Circuit panel “left unanswered a crucial question that is bound to arise in scores if not hundreds of cases: what impact will the PHH decision have on the validity of the innumerable CFPB actions undertaken in the years prior to the Bureau’s October 2016 restructuring?”

Although the PHH and Gordon cases both challenge Cordray’s actions, there are important differences. The Gordon case doesn’t address all CFPB actions prior to the PHH ruling because it’s focused on Cordray’s actions between January 2012 and July 2013.

In addition, the Gordon case arises in the context of a recess appointment, and doesn’t challenge the constitutionality of the CFPB’s leadership structure—the explicit focus of PHH’s case. And it involves a federal court proceeding in a way that PHH doesn’t.

Even so, Washington Legal Foundation attorney Cory L. Andrews said the petition sets up a straightforward legal question on Cordray’s actions in the relevant period, including the suit against Gordon.

“We think the petition is a clean vehicle because no one disputes that Corday was unlawfully appointed at the time this suit was filed,” Andrews told Bloomberg BNA. “It’s not just whether they can ratify past actions, but whether they can ratify an entire federal court proceeding.”

Outside the Courts

Elsewhere, the CFPB could confront efforts aimed at structural change, especially if Congress moves to convert the agency’s single-director leadership model to a five-member governing commission. Lawmakers also might put the CFPB’s funding within the congressional appropriations and oversight process. Both moves are part of the Financial Choice Act passed by the House Financial Services Committee in September, and could see action in 2017.

Joseph Lynyak III, a partner with Dorsey who practices in the firm’s Washington and Southern California offices, said the most important dynamic on the congressional side will be the relationship between Sen. Mike Crapo (R-Idaho), who is poised to chair the Senate Banking Committee in the next Congress, and Sen. Sherrod Brown (D-Ohio), the committee’s top Democrat.

Whatever happens depends largely on how well those two can work together, said Lynyak, because Senate Democrats can be an effective blocking force if they choose.

Lynyak said the best guess is a compromise. “The most likely deal is that the CFPB’s governance is converted to a commission structure, and the current funding arrangement is left in place,” he said.

What About Rules?

Hurdles for the CFPB also are ahead on the regulatory side, even apart from its regular workload. Thomas P. Vartanian, a partner in Washington with Dechert who represents financial institutions, said the CFPB will probably field new questions about regulatory costs and benefits.

“No one really knows what will happen, although I expect much more focus on the cost-benefit aspect of regulations,” Vartanian told Bloomberg BNA. “I think the CFPB’s rules will be part of that.”

Lynyak said trade associations may be more assertive in asking the CFPB to modify its proposals. Some may have to go back to the drawing board because they were proposed at a time when the CFPB’s leadership was unconstitutional under the PHH panel ruling.

Although final rules aren’t likely to be a major problem, proposed rules could be, he said.

“For the final rules, the CFPB can probably reaffirm what they’ve already done,” Lynyak said. “But for proposals that aren’t yet final, those may have to start over, because how do you propose something you don’t have authority to propose?”

Fair Lending Enforcement

There’s wide agreement that the CFPB will stay active on fair lending enforcement, though there’s also substantial agreement that the agency may be less aggressive in some cases. At the very least, the CFPB will remain a force in fair lending because the agency still has examination authority, according to Lynyak.

“They can bring a fair lending component to every exam they do,” he said.

And enforcement under the Equal Credit Opportunity Act could stay on course, according to Morris, because the agency has a free hand. “The CFPB has independent litigating authority with respect to ECOA so I would expect them to keep pushing as long as they can there,” she said.

Fair lending enforcement elsewhere could be in for changes, especially at the Justice Department and the Department of Housing and Urban Development. In November, Trump said he’ll nominate Sen. Jeff Sessions (R-Ala.) as Attorney General, and on Dec. 5 named D. Ben Carson, the former director of pediatric neurosurgery at Johns Hopkins, as his candidate to lead HUD.

That raises the potential for policy shifts on consumer protection and fair lending at the Department of Justice and the Department of Housing and Urban Development. But Morris said the CFPB could keep operating at a high tempo anyway.

“You could have several months go by where there is no change at the CFPB,” she said. “In theory, you could have a change in tone at the Department of Justice and an enforcement slowdown at HUD, but a continued fast pace at the CFPB.”

To contact the reporter on this story: Chris Bruce in Washington at

To contact the editor responsible for this story: Michael Ferullo at

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