The CFPB Going Forward – Cordray’s Resignation, the Federal Vacancies Reform Act, and More

Clients and Friends,

You’ve probably already seen in the news that Director Cordray of the CFPB announced on November 15 that he planned to resign by the end of the month, and he officially resigned on Friday, November 24. Soon after Cordray announced his planned resignation, it was reported by several news organizations that the Trump administration planned to appoint the current Director of the Office of Management and Budget (OMB), Mick Mulvaney, as the Acting Director of the CFPB under the Federal Vacancies Reform Act of 1998 (FVRA). However, before Cordray resigned, he named the CFPB’s Chief of Staff, Leandra English, as the Deputy Director, and is reported to have stated to staff that she will be the Acting Director of the CFPB pursuant to the Dodd-Frank Act. In what is a sign of a coming fight over the leadership of the CFPB, soon after Director Cordray’s resignation, the Trump administration announced its appointment of Director Mulvaney as the Acting Director of the CFPB. Here are the relevant CFPB and White House press releases:

As you might suspect, the CFPB cannot have two Acting Directors. This situation sets up a new and interesting legal question, and likely a court battle, regarding whether the Dodd-Frank Act’s succession provision or the FVRA applies to the CFPB’s Director position. As I was quoted as stating in a RESPA News November 20, 2017 article regarding the FVRA, “I don’t think it’s entirely certain that the Vacancies Act applies to the CFPB, because the Act exempts statutes that designate an employee to perform functions in an acting capacity, and the Dodd-Frank Act provides that the Deputy Director acts for the Director in an acting capacity in the Director’s absence. So, the Dodd-Frank Act might be exempt from the Vacancies Act.” You can find the full article here: The White House is reported to have consulted with the Department of Justice before appointing Director Mulvaney and a formal opinion is reportedly forthcoming. But given the strong interests of both sides on this issue and the likelihood of a lawsuit, I think this question will ultimately need to be resolved by the courts. It will be interesting to see what happens at the CFPB on Monday.

Before this question can be answered by the courts, it is uncertain how the CFPB will be able operate with two supposed Acting Directors. And even if one side relents, the questions surrounding the legal authority of the Acting Director may persist. Actions undertaken by an unauthorized Acting Director of the CFPB may be void, which will place a huge question mark on any CFPB actions during this time period, including regulatory and enforcement actions. I will discuss in more detail below the FVRA and the legal issues regarding whether the FVRA or the Dodd-Frank Act controls the succession at the CFPB.

In addition, if Director Mulvaney is ultimately determined to be the authorized Acting Director of the CFPB, this interim directorship could last a significant amount of time under the FVRA and it could have a significant impact on the CFPB. In this update, I will briefly provide some of my thoughts on what this means for the CFPB going forward.

Finally, in other news, a bi-partisan regulatory relief bill was recently introduced in the Senate on November 16, 2017. Senate Bill 2155, titled the “Economic Growth, Regulatory Relief, and Consumer Protection Act” would affect a number of the CFPB’s mortgage rules, including the Ability to Repay/Qualified Mortgage and TRID rules. I will briefly highlight some of the provisions for you below.

I.  The Federal Vacancies Reform Act and the CFPB

A.  The Dodd-Frank Act and the FVRA

The question of whether the Trump administration can appoint an Acting Director of the CFPB in the event of Director Cordray’s expected departure has been the subject of much discussion recently. There are two relevant statutes, which appear to conflict: (1) section 1011(b)(5) of the Dodd-Frank Act, which provides that the Deputy Director “shall” act as the Director in the event of the Director’s “absence or unavailability;” and (2) the FVRA, which provides that the “first assistant” fills the role in an acting capacity, but also provides the President the authority to instead appoint someone already confirmed by the Senate or a different senior officer or employee on an acting basis. The question of the day is whether the Dodd-Frank Act or the FVRA controls the succession of the CFPB’s Acting Director in the event of the Director’s resignation. This is an open question that will likely need to be answered by the courts.

Specifically, the Dodd-Frank Act provides that the Director position is appointed by the President and has to be confirmed by the Senate, but the Deputy Director position is not. Instead, the Director appoints the Deputy Director. Dodd-Frank Act section 1011(b)(5) provides that the Deputy Director “shall serve as acting Director in the absence or unavailability of the Director.” 12 U.S.C. § 5491(b)(5). This provision appears to apply in the event of the Director’s resignation, because the Director would arguably be absent or unavailable.

However, the FVRA, which was enacted in 1998, well before the Dodd-Frank Act, also appears to apply to this situation. Specifically, it applies in the event an officer of an “executive agency” who is appointed by the President and Senate-confirmed “dies, resigns, or is otherwise unable to perform the functions and duties of the office.” 5 U.S.C. § 3345(a). The FVRA provides that the “first assistant” to the office fills the role in an acting capacity, as a default. But the statute also authorizes the President to appoint someone who has already been confirmed by the Senate to assume the role, or a different senior employee (if they meet certain conditions), in an acting capacity. Id. Significantly, the statute also provides that its authority is the “exclusive means for temporarily authorizing an acting official to perform the functions and duties” of a Presidentially-appointed and Senate confirmed position in an executive agency. But the FVRA provides an exception to its exclusivity if another statute “expressly…designates an officer or employee to perform the functions and duties of a specified office temporarily in an acting capacity.” 5 U.S.C. § 3347(a)(1).

B.  Is the CFPB Exempt from the FVRA?

One of the arguments in support of the Dodd-Frank Act controlling the succession of the Acting Director (which supporters of the CFPB would favor) is that Dodd-Frank Act section 1011(b)(5) satisfies the exemption from the exclusivity of the FVRA. At first glance, it appears that the Dodd-Frank Act does satisfy the exemption, because it provides that the Deputy Director acts as the Director in the Director’s absence or unavailability. In fact, the Dodd-Frank Act mandates that the Deputy Director serve in an acting capacity in this event. It does not provide that the Deputy Director “may” serve, but that the Deputy “shall” serve as Acting Director. This would appear to be the type of provision described by the exemption in the FVRA, because it designates an acting official.

However, those favoring the Trump administration’s ability to appoint an Acting Director under the FVRA could argue that the Dodd-Frank Act provision does not contain certain language necessary to satisfy the exemption from the FVRA. One of the potential arguments is that the Dodd-Frank Act provision does not refer to a “vacancy,” as does other statutes that are understood to be exempt. The legislative history for the FVRA shows that the drafters intended for 40 statutes that existed at that time in 1998 to be exempt. See S. Rept. 105-250 (1998). Some of these statutes have very similar provisions as the Dodd-Frank Act, and designate an agency official to serve as an acting head of the agency in the event of the official’s absence or inability to serve. However, these statutes also expressly refer to a “vacancy” in the office, which terminology does not appear in the Dodd-Frank Act. For example, the legislative history identified 49 U.S.C. § 102(c)(2), which applies to the Department of Transportation and provides that the Deputy Secretary “acts for the Secretary when the Secretary is absent or unable to serve or when the office of Secretary is vacant.” A recent report from the Congressional Research Service also stated that this statutory provision might satisfy the exemption from the FVRA. And while the language for the exemption changed in the final version of the legislation, the intent of the drafters may still be instructive to a court.

Is this a fatal flaw that prevents section 1011(b)(5) of the Dodd-Frank Act from satisfying the exemption under the FVRA? The plain language of the exemption under the FVRA does not expressly require use of the word “vacant,” and supporters of the CFPB could argue that the absence and unavailability of the Director are synonymous with a vacancy. On the other hand, supporters of the Trump administration could argue that the choice of Congress to use only the words “absence” and “unavailability” in the Dodd-Frank Act, while these other statutes also refer to a vacancy, means that it does not apply to a vacancy. They could also argue that even if Dodd-Frank Act section 1011(b)(5) satisfies the exemption in the event of the absence or unavailability of the Director, the FVRA is still the exclusive authority when the position is vacant (such as a resignation or removal of the Director).

There are other possible arguments that have been raised, aside from the issue of the exemption. For example, supporters of the Trump administration could argue that the FVRA applies to the resignation of the CFPB’s Director, because it specifically refers to the resignation of an agency official, while the Dodd-Frank Act does not. Supporters of the CFPB could argue that based on the rules of statutory interpretation, the Dodd-Frank Act should apply because it was enacted after the FVRA and is more specific to the CFPB than the FVRA. All of these potential arguments show that this is a difficult legal question.

C.  Can the FVRA Apply to the CFPB Even if it is Exempt?

Another legal issue is whether the FVRA’s authority for the President to designate someone remains available even if the Dodd-Frank Act satisfies the exemption from exclusivity under the FVRA. The legislative history for the FVRA indicates that the intent of the drafters was that the FVRA would provide an “alternative procedure for temporarily occupying the office” when a statute is exempt. There have been interpretations of the FVRA that have determined the FVRA provides additional authority to the President, even if there is existing authority under an agency’s statute to appoint an official temporarily. Under this interpretation, the Dodd-Frank Act and the FVRA would not be mutually exclusive, and both would be available as options for the President.

But supporters of the CFPB could argue that because the Dodd-Frank Act was enacted after the FVRA and provides the specific mandate as described above, the Dodd-Frank Act supersedes the authority of the FVRA. The legislative history of the FVRA shows that the drafters intended for the FVRA to be able to be superseded by future statutes, stating that if “a statutory provision expressly provides that it supersedes the Vacancies Reform Act, the other statute will govern.” The final legislation’s language does not contain a particular provision for statutes to supersede the FVRA. But the CFPB’s supporters could potentially argue that, in light of the intent of the drafters, the Dodd-Frank Act has the effect of superseding the FVRA by creating a mandate for the Deputy Director to act as Director.

D.  An Open Question

It is an open question whether the Trump administration has the authority under the FVRA to appoint an Acting Director to the CFPB upon Director Cordray’s resignation, or whether the Dodd-Frank Act exclusively controls. To my knowledge, the courts have not addressed this issue. And as I’ve hopefully illustrated above, there are some plausible arguments on both sides of this debate. Given the strong interests on both sides of this issue, we could be headed for a protracted legal battle for the interim leadership of the CFPB.

II.  What Does this Mean for the CFPB?

 A.  CFPB Actions Potentially Void if Unauthorized Acting Director

If there is any question of whether the Acting Director of the CFPB is legally authorized, it could have a significant effect on the CFPB’s operations. The FVRA provides that unless someone is acting in a Presidentially appointed and Senate-confirmed position as authorized by the FVRA, the office remains vacant, actions by that acting officer have no force or effect, and such actions cannot be ratified later. 5 U.S.C. § 3348(d). This means that, as long as this question remains unanswered, the actions of whoever purports to be the Acting Director of the CFPB could potentially be held void by a court. In addition, because the FVRA provides that a future duly appointed Director cannot simply ratify such actions, this raises significant questions about any CFPB actions during this period being adopted by the CFPB in the future.

This could have some serious consequences and poses some serious questions. For example, enforcement actions initiated the CFPB could potentially be void and unable to be ratified in the future. This means that the CFPB would likely need to refrain from initiating lawsuits or administrative enforcement actions during this time. And does this apply to other legal actions or court filings, such as Civil Investigative Demands, settlements, Consent Orders, or the filing of appeals? What about appeals of agency actions to the CFPB Director? Also, how does this apply to proposed rules, final rules, or adjustments of regulatory thresholds required by statute?

In addition, the lack of clarity regarding who is the authorized Acting Director of the CFPB could have consequences even if one side relents before the initiation of a lawsuit. The actions of the other Acting Director could be called into question in future lawsuits. For example, if the White House decides to relent and accept the current Deputy Director of the CFPB as Acting Director, interested parties could still attempt to defend against particular actions of the CFPB, such as Civil Investigative Demands, by arguing that they are void under the FVRA. In addition, if the CFPB’s Deputy Director decides to relent, the actions of Acting Director Mulvaney could also be called into question. For example, if the Acting Director attempted to withdraw or rescind a rule, the authority to do so could be raised in a lawsuit. These are serious consequences that the industry could face during this period.

B.  The CFPB under an Acting Director Mulvaney

Industry should also consider how the CFPB might change if Director Mulvaney is determined to be the authorized Acting Director and takes the helm. The CFPB would be headed by someone who has been critical of the agency’s very existence. Director Mulvaney has been clear about his disdain for the agency. He referred to the agency as a “a sad, sick joke,” and stated, “I don’t like the fact that CFPB exists, I will be perfectly honest with you.” He also co-sponsored a bill to eliminate the CFPB in 2015 (HR 3118), among other bills affecting the CFPB.

One of the major areas where the effect of this change could be significant is the CFPB’s rulemaking function. The CFPB’s regulatory agenda would likely be stalled. The agenda included many rulemakings that are also controversial, such as rules affecting third party and first party debt collection, an overhaul of the overdraft disclosures, and a rule allowing the agency to supervise installment lenders. It is likely that the work on these rulemakings would cease. In addition, the CFPB could engage in rulemakings to rescind or delay the effectiveness of its other recent controversial rules, such as its HMDA final rule. Further, remember that Mick Mulvaney is currently the Director of OMB (he is expected to retain his role at OMB) and is responsible for implementing the administration’s executive orders on regulatory reform, which I have written about in the past. Director Mulvaney could potentially subject the CFPB to some of these executive orders on a voluntary basis.

And as you may recall, the CFPB issued two controversial final rules this year, its arbitration rule that would have restricted certain mandatory arbitration clauses and its payday loan rule that will restrict certain practices for short-term loans. As you may recall, Congress rejected the arbitration rule under the Congressional Review Act this fall. The payday loan rule is equally controversial. Significantly, Director Mulvaney has made critical comments about the CFPB’s payday loan rulemaking in the past, and sponsored a bill that would have put a moratorium on CFPB issuing a payday loan rule and allowed states to obtain renewable five-year waivers from such a rule. This means that an Acting Director Mulvaney could engage in a rulemaking to rescind the CFPB’s payday loan rule or provide such waivers, which would not require any action by Congress under the Congressional Review Act.

Hopefully, with a new agency head that is more sympathetic to the industry’s concerns, the CFPB would work to enhance its guidance function. The agency could improve its “No Action Letter” policy, or work on amendments to its current rules to provide additional official guidance or regulatory relief to the industry.

In addition, the CFPB would likely continue working on its assessments of the effectiveness of its significant rules under section 1022(d) of the Dodd-Frank Act. The CFPB is required to publish the report for each assessment no later than five years after the effective date of the rule. You may recall that the CFPB solicited information from the public for its review of the Ability-to-Repay/Qualified Mortgage rule this summer. The CFPB will soon need to begin its assessments of its other significant rules, including the TRID rule, which could require significant work.

The CFPB’s enforcement activity would also likely slow under an Acting Director Mulvaney. I expect the agency would be far less likely to engage in new investigations or to initiate new enforcement actions. This is especially true for those actions based on new or novel interpretations of the existing law, as Director Cordray has done in the past. The industry has been very critical of Director Cordray’s use of “regulation by enforcement,” which I would expect to cease under an Acting Director Mulvaney. This change in leadership might also affect the outcome of currently pending enforcement actions or settlement negotiations, or the CFPB’s willingness to appeal unfavorable court decisions.

While this slowing of enforcement activity appears to be a good result for the industry, it may be a double-edged sword. If the CFPB ceases enforcing against truly bad actors, companies that take compliance seriously could be forced to compete on an uneven playing field. Without the deterrent of a strong CFPB enforcement function, other companies may be more inclined to operate using potentially unfair and illicit practices. While state regulatory agencies or attorneys general may increase their enforcement activity to pick up the slack, this could still be an issue for industry. Industry should consider these potential effects of new interim leadership at the CFPB.

III. The Senate Regulatory Relief Bill

Senator Crapo, Chairman of the Senate Banking Committee, introduced a bill on November 16, 2017 to amend some financial regulatory statutes to provide regulatory relief. Senate Bill 2155, titled the “Economic Growth, Regulatory Relief, and Consumer Protection Act,” is a bi-partisan bill with a number of Democratic co-sponsors. The legislation would affect several of the mortgage rules, including the Ability-to-Repay/Qualified Mortgage (ATR/QM) and TRID rules. Please find a link to the announcement of the bill here: I will briefly highlight a few of the provisions of the bill below.

The bill would amend the ATR/QM provisions of the Truth in Lending Act to add a safe harbor for mortgages originated and held in portfolio by depository institutions with less than $10 billion in total consolidated assets. The loans would still have to meet the existing ATR/QM 3% points and fees cap, documentation requirements, and prepayment penalty restrictions, and not contain negative amortization or interest-only features. The bill would also add an exemption from new data requirements the Dodd-Frank Act added to the Home Mortgage Disclosure Act for insured depository institutions that originated fewer than 500 closed-end or open-end mortgage loans in the preceding two calendar years, which were implemented in the CFPB’s HMDA final rule.

The bill would also provide transitional licensing under the SAFE Act for a 120-day period for federally registered loan originators that become employed by state-licensed lenders, or for state-licensed loan originators that transfer to a different state. The bill would also amend the timing requirement for the HOEPA disclosures to provide that if a creditor provides a second loan offer with a lower APR, the three-business day timing requirement for the HOEPA disclosures would not apply to that second offer.

Finally, with respect to the TRID rule, the bill would also express the “sense of Congress” that the CFPB “should endeavor to provide clearer, authoritative guidance on” the applicability of the TRID rule to assumptions, construction-to-permanent loans, and the ability to rely on model forms published by the CFPB that do not reflect recent amendments to the rules.

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Please let me know if you have any questions or if you’d like to discuss.