Consumer Law & Policy Blog

Today's Recess Appointment News

by Deepak Gupta

• The Arbitration Wars Meet the Recess Appointment Wars: Since its beginning, this blog has closely covered controversies over mandatory arbitration in consumer and employment contracts. More recently, we've been covering the constitutional controversy over the President's recess appointments to the CFPB and NLRB. On Tuesday, those two worlds officially collided when lawyers for the D.R. Horton company sent a letter to the Fifth Circuit invoking the D.C. Circuit's recent decision in Noel Canning. As observers of the arbitration wars know, D.R. Horton has been fighting the NLRB's year-old decision holding that federal labor law precludes employers from forcing their workers to waive collective-action rights through arbitration clauses. Now, D.R. Horton argues that the March 2010 recess appointment of NLRB member Craig Becker is invalid and therefore nullifies the board's decision. "Just like the situation in Noel Canning," the letter asserts, "the vacancy Mr. Becker filled did not arise during the Senate's recess, nor did the president appoint him during that recess. When the NLRB issued the D.R. Horton decision, it therefore had only two properly appointed members and no quorum to act."

• A New Court Challenge to the Cordray Appointment? Carter Dougherty of Bloomberg reports on the possibility that a CFPB enforcement action now pending before the U.S. District Court in Los Angeles could provide a new forum for a court challenge to Rich Cordray's status as the Bureau's director. The defendants in the action are a law firm and its principals that operated a network of mortgage loan modification businesses. On Tuesday, their lawyer sent the Bureau a letter "asking for a negotiated settlement of the six-month-old case in light of" the D.C. Circuit decision in Noel Canning. The lawyer appears to be trying to use the prospect of a recess appointment challenge to obtain leverage in settlement negotiations: “I want to give them an opportunity to resolve this without court intervention,” he says. (The case that's received the most attention -- C. Boyden Gray's Big Spring case filed in district court here in Washington -- is likely to be thrown out on standing grounds, so the big question is where and when a fresh court challenge will appear. My guess is that the Los Angeles case won't become the next vehicle.)

• Free Webinar on Monday: Our friends at Ballard Spahr, a law firm that represents banks in consumer finance matters, are convening a free webinar on Monday at noon entitled "The Impact of the D.C. Circuit Court NLRB Ruling on the CFPB." I won't be able to participate in Monday's webinar, but I recently co-hosted a webinar with Ballard Spahr and can attest to the quality of their programming. This is a good opportunity to hear some of the banking industry perspective on the recess appointment controversy. The banks -- despite what they may say -- are quite worried about the CFPB's fate. The webinar will discus the holding and reasoning of the court and the possibility of a further en banc review by the D.C. Circuit or review by the U.S. Supreme Court; the status of other cases dealing with the recess appointments; how the CFPB will react to the ruling; the impact on ongoing investigations and consent orders; the impact on supervision of non-banks; and the political impact of the ruling.

The CFPB and the Recess Appointment: De Facto Officer Doctrine to the Rescue?

by Deepak Gupta

There are some important counterpoints to the wild predictions I'm already hearing from industry lawyers about the effect of today's D.C. Circuit's decision invalidating the NLRB recess appointments.

First, because the decision openly creates a circuit split with an Eleventh Circuit decision upholding George W. Bush's recess appointment of Judge Pryor and because of its tremendous importance for the separation of powers, the Supreme Court is likely to review the decision if the Justice Department files a cert petition. The need for the Court to step in is heightened by the sweeping nature of the decision, which goes well beyond the controversy over "pro forma" sessions and invalidates nearly two centuries of settled practice. (Indeed, the decision's unnecessary reading of the word "happen" to preclude appointments for vacancies that pre-exist the recess conflicts with the Eleventh, as well as the Ninth and Second Circuits.) There's also the possibility that the Justice Department will first seek en banc review.

Second, because the banking industry -- despite what it says -- fears chaos and regulatory uncertainty more than anything else, there will be pressure on the Senate to reach a deal and confirm Rich Cordray. 

Third, even assuming the decision on the NLRB appointments is ultimately upheld and that Rich Cordray's CFPB recess appointment is likewise unconstitutional, that doesn't necessarily mean that everything the Bureau has done under Cordray would be wiped out. A longstanding legal doctrine known as the "de facto officer doctrine" is designed to avoid the sort of needless chaos that would otherwise result from a ruling like today's. The de facto officer doctrine confers validity upon acts performed by a person acting under the color of official title even though it is later discovered that the legality of that person’s appointment or election to office is deficient. Although its roots are old and somewhat murky, the Supreme Court recognized the doctrine as recently as 1995. See Ryder v. United States, 515 U.S. 177 (1995).

As the Court explained in Ryder, the doctrine “springs from the fear of the chaos that would result from multiple and repetitious suits challenging every action taken by every official whose claim to office could be open to question, and seeks to protect the public by insuring the orderly functioning of the government despite technical defects in title to office.” 

In my view, the de facto officer doctrine may be successfully invoked to protect many of the Bureau's actions, including regulatory and supervisory actions.  Notably, this doctrine was applied to protect from legal challenge actions taken by an improperly-appointed Director of the Office of Thrift Supervision. See, e.g., Office of Thrift Supervision v. Paul, 985 F. Supp. 1465, 1475 (S.D. Fla. 1997); Franklin v. Sav. Ass’n v. Director of Office of Thrift Supervision, 740 F. Supp. 1535, 1542, 1542 (D. Kan. 1990). Ryder, however, provides an exception to the doctrine when “one makes a timely challenge to the appointment of an officer who adjudicates his case.” 515 U.S. at 181. Thus, the de facto officer doctrine might not be available if objections to Bureau authority are raised in the course of a pending adjudication, but could operate to insulate a finalized rulemaking, for example. 

WaPo Reports Obama to Re-Nominate Cordray to Head CFPB

by Jeff Sovern

Here.  I have seen reports that Cordray might seek the Ohio governorship, even that he might leave the CFPB directorship before his recess appointment expires at the end of this year to that end, but perhaps this indicates that he will stay at the Bureau.  I wonder if this is a pro forma thing or whether it means that the president thinks something may have changed or will change in the Senate--perhaps a change in the fillibuster rules?--that will enable the Senate to vote on Cordray's confirmation.

Times: Banks Seek a Shield in Mortgage Rules

Here.  It's about the CFPB's forthcoming qualified mortgage rules. An excerpt:

The rules are meant to help bolster the housing market. By shielding banks from potential litigation, policy makers contend that the industry will have a powerful incentive to make higher quality home loans.

But some banking and housing specialists worry that borrowers are losing a critical safeguard. Industries rarely get broad protection from consumer lawsuits, and banks would seem unlikely candidates given the range of abuses revealed during the housing bust.

House GOP Committee Attacks CFPB Head Cordray for Attending State of the Union Address

by Jeff Sovern

I kid you not.

The House Committee on Oversight and Government Reform, chaired by Darrell Issa, and its Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs, chaired by longtime CFPB foe Patrick McHenry, has issued a report titled THE CONSUMER FINANCIAL PROTECTION BUREAU’S THREAT TO CREDIT ACCESS IN THE UNITED STATES.  Here are the relevant paragraphs (footnotes omitted): 

In addition to concerns over the Bureau’s powers and uncertainty about the validity of Mr. Cordray’s appointment, questions exist about the CFPB’s development as an independent regulatory agency. On January 6, 2012, two days after Mr. Cordray’s controversial "recess" appointment, President Obama visited the CFPB headquarters in what was described as a "victory lap" to celebrate the appointment. Later that month, Mr. Cordray attended the President’s State of the Union address as the guest of First Lady Michelle Obama. Since his appointment, Mr. Cordray has also met regularly with senior Administration officials, including White House Deputy Chief of Staff Nancy Ann DeParle, and he attended an event in April 2012 called the "White House Cabinet Affairs Chief of Staff Lunch."

Other CFPB employees have enjoyed similar access to White House officials. Meredith Fuchs, the then-CFPB Chief of Staff, and Lisa Konwinski, the CFPB’s Assistant Director of Legislative Affairs, met with Gene Sperling, the Director of the National Economic Council, in February 2012. Although these meetings are not inappropriate per se , the appearance of a close and coordinated relationship between CFPB officials and political elements of the executive branch undermines the Bureau’s authority as a neutral and independent regulator. The Committee is concerned that this appearance of impropriety could jeopardize the CFPB’s ability to act effectively and independently.

So apparently it is no longer proper for CFPB officials to have contact with the White House.  I can't help noting the absence of listed contacts with Republicans.  Is that because there weren't any (is this about jealousy?)?  If there were some, should we also be concerned about meetings with Republicans tainting the Bureau?

The Report also contains the usual GOP talking points, although with more stridency than we normally see: they fear "the CFPB will become a run-away regulator unlike any other in American history."  Sigh.  Here's the Executive Summary (footnotes omitted):

The Consumer Financial Protection Bureau exercises tremendous and unmatched authority over American financial products and services. Created by the Dodd-Frank Wall Street Reform and Consumer Protection Act and given virtually limitless power, the CFPB has the real potential to severely reduce credit access for American consumers. Its unique structure, vague mandate, and lack of accountability position the Bureau to be an aggressive and heavy-handed financial regulator. The controversial and legally questionable selection of its first director – former Ohio Attorney General Richard Cordray – adds unneeded uncertainty to financial markets. The CFPB’s apparently close relationship with the Obama Administration has allowed the White House to attempt to use the Bureau to further its partisan agenda. These circumstances, and the manner in which the Bureau has begun to exercise its authority, suggest that the CFPB will become a run-away regulator unlike any other in American history.

At a time of prolonged economic strain, American consumers can ill-afford such an unaccountable, unresponsive, and all-powerful financial regulator. The Federal Deposit Insurance Corporation estimates that almost 30 percent of all Americans do not have adequate access to traditional financial services. Another study finds that half of all Americans could not produce $2,000 within 30 days in response to a financial emergency. Under the regulatory burden of the Dodd-Frank Act, financial products and services are costing more and small community banks are closing up shop at a pace of hundreds per year. Credit access has shrunk as lenders have raised lending standards and stopped offering some products and services. These effects have been felt most keenly by those borrowers at the margins, creating an economic divide in the United States between those with access to credit and those without. By all indications, the CFPB shows no signs of letting up. If the Bureau is not careful to add clarity and much-needed certainty to the financial sector, the CFPB may continue to drastically affect credit access for millions of American families and small businesses.

 

Yet the CFPB’s unprecedented structure and vague mandate threatens to restrict credit access even further. The regulator has refused to add certainty to its nebulous and overly burdensome regulatory authority, causing banks and credit unions to restrict certain credit products and services for fear of litigation and enforcement actions. The heavy-handed regulations proposed by the CFPB have proven costly for financial institutions, making borrowing more expensive and credit less available. In exercising its vast regulatory powers, the Bureau has not implemented adequate measures to fully assess and address the impact of its actions on credit access.

Already, according to estimates, the CFPB has increased the cost of consumer credit by a total of $17 billion and depressed job creation by about 150,000 jobs. By all indications, the CFPB shows no signs of letting up. If the Bureau is not careful to add clarity and much-needed certainty to the financial sector, the CFPB may continue to drastically affect credit access for millions of American families and small businesses.

CFPB Announces Proposed Policy for Letting Companies Test Disclosure Programs

by Jeff Sovern

Here.  The idea is that a company can apply to the Bureau for permission to try different disclosures and the disclosures can then be evaluated, and perhaps adopted.  In its statement announcing the proposal, the Bureau says:

When deciding whether or not to grant a company a waiver from current disclosure requirements,
the Bureau proposed policy would evaluate a number of factors including:

 Consumer Understanding: The Bureau will assess how effectively and efficiently the proposed trial will test for potential improvements to consumer understanding about the costs, benefits, and risks of products and services.

 Cost Effectiveness: The Bureau will evaluate how the proposed trial will help develop more cost-effective disclosure rules or policies.

 Minimizing Consumer Risk: The Bureau will evaluate the extent to which the program is designed to mitigate any risk to consumers.

It sounds like a good idea. After all, the companies who deal with consumers directly may know things the Bureau doesn't about how and what to tell consumers.  But I wish that the Bureau included in its evaluation criteria that it will also assess whether consumers use the disclosures.  Disclosures that clearly convey information but are ignored do consumers little good, and we've had far too many of those (does anyone really know the differnce between a full warranty and a limited warranty under the federal Magnuson-Moss Warranty Act, for example?).  Maybe that's implicit in testing for consumer understanding, but I would rather see it made explicit. 

Major CFPB Report on Credit Reporting Agencies

by Jeff Sovern

Here.  Two points from the Executive Summary, though there's quite a bit more than this: 

The NCRAs have created an automated system for handling consumer disputes and forwarding them to data furnishers. Through this automated system – called e-OSCAR – the NCRAs provide furnishers with one or two numeric codes indicating the nature of the consumer’s dispute and in a minority of cases (26%), explanatory text. At present, the NCRAs generally do not forward documentation that consumers submit with mailed disputes or provide a mechanism for consumers to forward supporting documents when filing disputes online or via phone. The NCRAs resolve an average of 15% of trade line disputes internally (without furnisher involvement) and refer the remaining 85% of the disputes they receive from consumers concerning trade lines to data furnishers through e-OSCAR. The furnisher of the disputed data is then required by the FCRA to investigate the dispute and report back to the NCRA.

• The NCRAs’ reliance on furnisher responses as the principal means of resolving disputes is a source of controversy. The NCRAs report that in seeking to maximize accuracy and in resolving disputes, they rely on furnishers meeting their obligations under the FCRA to report information accurately and to respond to disputes appropriately. Consumer advocates have argued that the NCRAs have an obligation to monitor and manage furnisher practices as part of their broader obligation to achieve credit report accuracy.

The first point quoted above from the CFPB Report seems to confirm statements that appear in the National Consumer Law Center's report, Chi Chi Wu, Automated Injustice: How a Mechanized Dispute System Frustrates Consumers Seeking to Fix Errors in Their Credit Reports (2009).  Here is a striking excerpt from the Wu Report, at pp. 18-19, quoting from a 2007 deposition of Equifax’s Vice President of Global Consumer Services:

 Q: What knowledge do you have as to the mechanics of how a DDC Filipino employee would process an Equifax dispute?

[. ..]

A: The electronic image would be displayed on their screen. They would have an ACIS [Automated consumer Interview System] screen that they would use. They would then look at the electronic image. They would read off the identifying information, enter [. . .] that ID information into the system, access that credit report. At that point, they'd be able to determine if they were looking at the correct file. If they were, they'd go further. They'd read the letter, they gain an understanding of the issues at hand, and they'd look at the credit report to see if the credit report at that time reflects that. If it does, they would send those particular items to the data furnisher or furnishers. They would request that an investigation be started.

[. . . .]

Q: Right. But they're not -- they're not going to handle whatever response the creditor may provide?

A: That's correct.

Q: Do DDC employees have telephones on their desk?

A: I do not believe so.

Q: As part of their compliance with Equifax's procedures, do DDC's employees telephone consumers as part of conducting a reinvestigation?

A: They do not.

Q: Do they telephone creditors, the furnishers, as part of conducting a reinvestigation?

A: They do not.

Q: Do they telephone anybody from outside DDC or Equifax as part of conducting a reinvestigation of a consumer dispute?

A: They do not.

Q: What about e-mailing any of those non-Equifax, non-DDC people, creditor, consumer, or third party?

A: They should not be -- they do not e-mail them.

Q: And what about fax machines?

A: [. . .] They do not have fax machines either.

Q: Under what circumstances will a DDC employee forward the consumer's actual dispute letter or documents the consumer provided to the furnisher, the creditor, as part of a reinvestigation?

A: A mechanism does not exist to forward the actual documents.

The Wu Report states that the automated forms also include a place where a clerk can type a line of text and reportedly about 30% of the time the clerk writes something in that line.  Under the Fair Credit Reporting Act, 15 U.S.C. 1681i(a)(1)(A), credit bureaus must conduct a "reasonable reinvestigation" upon receiving notice of a consumer dispute. I sure would not want to defend the reasonableness of the process described above. 

Senate Passes CFPB Amendments

The Senate unanimously passed bills, previously passed by the House, pertaining to the confidentiality of information banks provide to the Consumer Financial Protection Bureau and the stickers on ATM terminals about fees.  Bloomberg has the story here.  The president is expected to sign the bills.

American Banker: Lobbying CFPB on Arbitration Intensifies

Here (login required).  An excerpt:

Likewise, there was initially deep skepticism inside the banking industry about the CFPB's arbitration study, and there is still a belief among industry insiders that the agency's research is likely to lead to new regulations. * * *

But over the last few months, industry observers have been relatively pleased
with they have seen from the consumer bureau.

Overseeing the arbitration study for the CFPB is Will Wade-Gery, a former
Morrison Foerster lawyer who used to represent financial institutions. * * *

Ballard Spahr's [Alan] Kaplinsky said: "I must say that before having had some discussions
with people at the CFPB about the project, I was probably very skeptical about
whether this would really be a fair study that they would conduct, whether it
would be based on political data, or whether it would be based more on
political leaning. And so far I've been impressed."

Dee Pridgen Paper on the CFPB and Recent Consumer Protection Statutes

Dee Pridgen of Wyoming has written Sea Changes in Consumer Financial Protection: Stronger Agency and Stronger Laws.  I read this one before it was posted and found it particularly useful in pulling together some recent themes in consumer law and explaining how the Dodd-Frank Act's anti-predatory lending rules are based on behavioral economics, as opposed to earlier statutes which partake more of traditional rational-person economics. Here is the abstract:

After the financial crisis of 2008, Congress responded by enacting new laws that changed the direction and theoretical underpinning of consumer protection in the financial sector. The Consumer Financial Protection Agency, formed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, is a new and stronger agency for consumers. Two pieces of legislation, the Mortgage Reform and Anti-Predatory Lending Act (Title XIV of Dodd-Frank), and the Credit Card Accountability, Responsibility and Disclosure Act (Credit CARD Act) of 2009, are stronger laws ensuring the safety of consumer financial products. These new legislative and regulatory developments mark a shift from the rational consumer theory that underlay the great disclosure statutes of the late 1960’s and early 1970’s, such as the Truth in Lending Act, and toward the rising influence of behavioral economics as a guiding force in consumer protection. This article examines the new agency and the new laws, explains how they differ from the prior governmental structure and precepts, compares and contrasts rational consumer theory and behavioral economics theory, demonstrates how the new developments are a reflection of the modern theory, and then analyzes the advantages and disadvantages of this new approach.