The leadership of the Consumer Financial Protection Bureau has been in controversy since last Friday when outgoing Director, Richard Cordray, and President Trump designated dueling individuals to serve as acting Director of the Bureau following Cordray’s resignation. Given the uncertainty surrounding this development, and its implications for the mortgage industry, I want to address several key issues involving the CFPB’s new leadership and the risks and opportunities that lie ahead.
Competing Interpretations of the Federal Vacancies Reform Act
In announcing the timing of his planned resignation, Cordray promoted longtime CFPB employee, Leandra English, to the position of Deputy Director, and announced that English would serve as acting Director of the CFPB pending the appointment and confirmation of his official replacement. Under Title X of the 2010 Dodd-Frank Act, the Deputy Director is designated to serve as acting Director in the “absence or unavailability” of the Director, which arguably includes the voluntary resignation of a Director. 12 U.S.C. § 5491(b).
But within hours of Cordray’s resignation, President Trump named current Office of Management and Budget (OMB) Director, Mick Mulvaney, to serve as acting Director of the CFPB. In appointing Director Mulvaney, the President points to authority under the Federal Vacancies Reform Act of 1998 (the “Vacancies Act”), which Congress designated as the “exclusive means” for temporarily authorizing an acting official to fill certain Executive branch offices. 5 U.S.C. § 3347(a). Under the Vacancies Act, the President may appoint someone who has already been confirmed by the Senate to a separate role in an acting capacity. The Senate had previously confirmed Mulvaney in February 2017 as Director of OMB.
On Sunday, English filed suit against the President and Director Mulvaney, and she has since sought an order from the court to prevent the President from appointing an acting Director of the CFPB. The case was assigned to Judge Timothy Kelly, who was nominated to the federal bench by President Trump in June 2017 and confirmed by the Senate in September 2017.
There is disagreement over the President’s authority to designate an acting Director under the Vacancies Act in light of Dodd-Frank’s own succession provision, which English argues should control. It is debatable, however, whether the terms “absence” or “unavailability” in Dodd-Frank, each implying an intent to return, are broad enough to encompass permanent vacancies resulting from resignation. 12 U.S.C. § 5491(b).
Even assuming Congress intended Dodd-Frank to apply to such vacancies, the sparse legal authorities addressing this issue—including formal legal opinions of the Justice Department and the CFPB Office of General Counsel—conclude that the President nonetheless may rely on the Vacancies Act to designate Director Mulvaney. While reasonable arguments exist on either side, the weight of legal authority appears to favor the President and acting Director Mulvaney.
The End of an Era and What May Lie Ahead
Regardless of the outcome of this legal dispute, which will likely be overshadowed by President Trump’s eventual nomination of a permanent Director, Cordray’s resignation marks the end of an era. As many have experienced firsthand, Cordray’s legacy will be defined by the CFPB’s repeated failure to provide clear and consistent guidance to the industry, hampering economic growth and unfairly burdening companies, even those merely aiming to comply. The Cordray era will be defined by the CFPB’s deeply politicized leadership, which was marked by a litany of unprecedented rulemakings and enforcement actions—the latter of which often valued high dollar settlements and press coverage over tangible benefits to consumers. Unsurprisingly, Cordray is reported to have left his post at the CFPB to run for governor of Ohio. Such political motivations undoubtedly drove the current dispute over succession, and shaped the unbalanced playing field that exists today. All in all, despite the CFPB’s broad Congressional mandate, Cordray missed a once-in-a-generation opportunity to develop an impartial and effective regulatory agency from scratch.
Juxtapose the CFPB as we know it to an agency led by acting Director Mulvaney, who has repeatedly voiced contempt for the CFPB and, in 2015, co-sponsored a bill to eliminate the agency entirely. Assuming acting Director Mulvaney prevails in the current succession dispute, the temporary posting could last for many months and undoubtedly would impact the CFPB’s rulemaking and enforcement functions. Indeed, press reports indicate acting Director Mulvaney has already instituted a 30-day hiring and rule-making freeze, while he reviews all pending rules and guidance. He is also reported to have initiated a review of all planned enforcement actions. In this context, we can expect the CFPB to soon become a product of its own failings.
Considering the Administration’s policy to reduce federal regulations deemed excessive or burdensome, the CFPB’s regulatory agenda will likely be stalled. Acting Director Mulvaney could put a halt to ongoing rulemakings relating to debt collection, overdraft fees and disclosures, and installment lenders. It is also unclear whether HMDA regulations, as currently written, will go into effect on January 1, 2018, or will be delayed for reconsideration of the need for certain data points not mandated by Dodd-Frank. Acting Director Mulvaney could also engage in rulemaking to rescind controversial rules promulgated by the CFPB under Cordray, such as its payday loan rule. Many other rules promulgated by the CFPB that were mandated by acts of Congress would stay in place, absent legislative action.
To the mortgage industry’s relief, the CFPB’s supervisory and enforcement activities will likely slow—but not halt. With fewer examinations and investigations, the CFPB can be expected to initiate fewer enforcement actions. Cordray developed a reputation for bringing enforcement actions founded on new interpretations of law, some threadbare and others in direct contravention of agency guidance—clear violations of due process. The industry can look forward to a change in this “regulation by enforcement” model under an acting Director Mulvaney.
With marginal additional effort, a new agency head could succeed where Cordray failed. The CFPB could expand and improve upon its guidance function through more frequent and transparent communication with industry participants. This could include an increase in the bureau’s willingness to issue formal guidance and “No Action” letters to give companies the assurances they need to grow their businesses. This is, of course, premature, given Cordray’s recent departure.
Pressing Decisions and Opportunities Ahead
In light of this change to CFPB leadership, which may represent a significant change in course, I believe responsible companies must respond prudently to any newfound breathing room. In the event of an enforcement slowdown, the industry will face a difficult choice. Companies will feel market-driven pressure to relax regulatory controls put in place over the past six years; but I urge caution and prudence in the face of such pressure, to avoid having to re-learn the hard lessons of the last financial crisis.
While some will view an enforcement slowdown as beneficial for business, it may carry serious long-term repercussions across the mortgage industry. Initially, the risk of future enforcement actions—this year, or several years from now—remains unchanged. Absent an act of Congress, the Dodd-Frank Act and other consumer laws will remain effective, regardless of how leniently they are enforced by the CFPB under the current Administration. And, if we have learned anything over the course of the past year, political winds can change quickly. Down the road, companies that flouted compliance during this period of uncertainty can expect to face significant legal exposure.
But the risk of liability for compliance failures does not arise from the CFPB alone. Before the CFPB took on the enforcement of federal consumer financial laws, other federal and state regulators, state attorneys general, and the private class action bar aggressively enforced federal and state consumer protection laws. Before Dodd-Frank, I represented a client that had to defend 13 simultaneous class action lawsuits in one state alone. Indeed, some in the private class action bar complained that the Obama Administration’s enforcement was cutting into their business, and we can expect private litigation to increase as federal enforcement wanes.
Equally important is the fact that Dodd-Frank expressly authorizes state regulators and attorneys general to bring civil actions to enforce its provisions. These powerful tools will allow state actors to fill any void left by scaled-back CFPB enforcement. States controlled by politicians that disagree with the Administration’s approach may take a different tact from a supervisory and enforcement perspective. We have seen just such an uptick in actions brought by state regulators and attorneys general over the past year, including recent actions by New York Attorney General Eric Schneiderman.
We are a nation of laws, and the rule of law functions when the laws are enforced impartially. If the Administration ceases or greatly scales down its rulemaking and enforcement functions, companies will maintain long-term regulatory security by continuing to follow the laws and regulations in force. We should take steps to change the laws and regulations that are particularly burdensome or unfair, but failing to comply with those regulations—even during periods of lax enforcement—carries significant risk.
In these uncertain times, it is more important than ever to have access to trusted advice and counsel. Weiner Brodsky Kider has served the mortgage industry for three decades, offering guidance through turbulent times, all with the goal of helping our clients in this industry prosper. While the political winds may be fickle, we continue to be here for our clients. Please feel free to reach out to me or any of our professionals — we’re here for you.