D.C. Circuit Poised to Decide Constitutionality of CFPB Structure in PHH Case

The U.S. Court of Appeals for the D.C. Circuit (D.C. Circuit) held oral argument on May 24, 2017, in the PHH case, which we have blogged about extensively. The constitutionality of the Consumer Financial Protection Bureau’s (CFPB) structure was the central issue at the oral argument, occupying the vast majority of the time and the judges’ questions. It appears that the court intends to decide whether the CFPB’s single-director-removable-only-for-cause structure violates the Constitution’s separation of powers doctrine, even if the court rules in PHH’s favor on the RESPA issues.

The judges’ questioning signaled that, in their minds, the resolution turns on three questions: First, how does the CFPB structure diminish presidential power more than a multi-member commission structure, which the Supreme Court has approved? Second, doesn’t the CFPB’s structure make it more accountable and transparent than a multi-member commission? Third, what are the consequences of approving the CFPB structure? Judges that appeared not to be concerned with the CFPB’s structure generally focused on the first two questions. Judges that appeared to be concerned with the CFPB’s structure focused on the third question. Another key theme addressed at various points throughout the oral argument is whether the CFPB’s structure is sufficiently close to the structures validated in prior U.S. Supreme Court cases, such that the court must uphold the CFPB’s structure.

At the oral argument, PHH’s counsel urged the court to recognize the serious affront that the various features of the CFPB’s structure, taken together, present to presidential power, including:

  • the single director;
  • the for cause removal provision;
  • the funding outside the congressional appropriations process;
  • the director’s ability to appoint all inferior officers with no outside input;
  • the director’s five-year term;
  • the deferential standard of review given to the director’s decisions;
  • the director’s ability to promulgate regulations unilaterally; and
  • the director’s sole ability to interpret and enforce regulations.

Before PHH’s counsel could even fully articulate his argument, however, judges started questioning him on how these features diminished presidential power more than the multi-member commissions running other agencies, which the Supreme Court approved in Humphry’s Executor. The Department of Justice (DOJ), which was given time at the oral argument, forcefully responded to the judges’ questions. The “quintessential” character of the executive is the ability to act “with energy and dispatch,” counsel argued. Multi-member panels, as deliberative bodies, lack that quality and are thus more legislative and judicial than executive. Thus, they encroach on presidential power to a much lesser degree.

DOJ’s counsel also pointed out that the rationale justifying the for cause removal provision that that the Supreme Court approved in Humphry’s Executor was not present in agencies endowed with the CFPB’s structural features. The DOJ’s counsel pointed to language in Humphry’s Executor approving the for-cause removal provisions only as to “officers of the kind here under consideration,” namely Federal Trade Commission (FTC) commissioners. The Humphry’s Executor court extensively described the FTC and the officers “here under consideration” in a way that precluded any applicability of the case to the CFPB. In Humphry’s Executor, the FTC was described as a “non-partisan,” non-political body of experts that exercised quasi-judicial and quasi-legislative powers. The CFPB does not fit that mold, the DOJ's counsel argued.

Counsel for both PHH and the DOJ also stressed that the CFPB did not fit the mold of the inferior officer at issue in Morrison v Olson, in which the Supreme Court approved a for-cause removal provision applicable to a special prosecutor. A few judges asked counsel questions apparently aimed at establishing that the existence of special prosecutors was as great an affront to presidential power as is the CFPB’s structure.

During these lines of questioning, one judge suggested that the CFPB’s structure makes it more accountable to the President. She pointed out that, with a single director, there is one person to blame for problems and that, unlike multi-member commissions, the President has the power to appoint leadership with complete control over the agency. Counsel for PHH and the DOJ responded to this by reminding the court that the President can only appoint a director after the last director’s five-year term expires or the for-cause removal provision is triggered. Interestingly, no one raised the point that the for cause removal provision and five-year term also limit the ability of a President to remove a director that he or she appointed, even if the appointee did not act in a manner satisfactory to the President. Thus, the argument that the CFPB director is somehow more accountable than a multi-member commission does not hold water.

Some judges’ questions presented the issue that “if” the CFPB director is the same as a special prosecutor or FTC commissioner, then the D.C. Circuit is bound by Humphry’s Executor and Morrison v. Olson. Without missing a beat, however, the DOJ picked up on that “if” and argued the point that the CFPB director is nothing like either position. DOJ’s counsel asserted that the director is not an inferior officer, as was the special prosecutor in Morrison v. Olson, nor is the director part of a non-partisan body of experts, as was the FTC commissioner in Humphry’s Executor.

During the argument, Judge Brown and Judge Kavanaugh, who wrote the panel’s majority opinion, attempted to draw the rest of the court’s attention to the consequences of extending Humphry’s Executor to a single-director agency and Morrison v. Olson to principal, as opposed to inferior officers. Judge Brown suggested that, if the CFPB’s structure is constitutional, nothing would prevent Congress from slapping lengthy terms and for-cause removal restrictions on cabinet-level officials. That, she argued, would reduce the presidency to a “nominal” office with no real executive power. Judge Kavanaugh addressed the same issue making an apparent reference to the speculation that U.S. Sen. Elizabeth Warren may run for President after President Donald J. Trump leaves office. How would it be, he questioned, if she ran on a consumer protection platform, got elected, and was stuck with a Trump-appointed CFPB director, who would presumably take a much different position on issues central to her platform?

The CFPB’s counsel defended the Bureau’s structure at the hearing using the same technical arguments that the CFPB has been making all along. The CFPB’s counsel asserted that the CFPB’s structure was constitutional because each of the features taken individually has support in Supreme Court jurisprudence, principally Humphry’s Executor and Morrison v. Olson.

In discussing the CFPB’s problematic structural features, CFPB counsel argued that, because each feature is a “zero” in terms of a problematic congressional encroachment on presidential power, that adding them together resulted in zero constitutional problems. “Zero plus zero plus zero, is zero,” he said. In rebuttal, PHH’s counsel pointed out that, as catchy as the argument may be rhetorically, it completely ignores the fact that even Supreme Court jurisprudence supportive of the individual features recognizes them as departures from the norm, acceptable only under certain circumstances. PHH’s counsel observed that the features at issue are not “zeros.”

The Real Estate Settlement Procedures Act (RESPA) and statute of limitations issues did not occupy much time at the oral argument. Counsel for PHH urged the D.C. Circuit to reinstate the panel’s RESPA and statute of limitations rulings, all of which were in favor of PHH, and to rule on one issue not addressed by the panel.  While the panel decided, contrary to the CFPB’s views, that the CFPB is subject to statutes of limitations in administrative proceedings, the panel left for the CFPB on remand to decide if, as argued by the CFPB, each reinsurance premium payment triggered a new three-year statute of limitations, or whether, as argued by PHH, the three-year statute of limitations is measured from the time of loan closing.  The judges did not raise any questions in response to counsel’s arguments on the RESPA and statutes of limitation issues.

Even though Lucia v. SEC was argued that same day, no questions surfaced during the PHH oral argument about the impact that Lucia may have on the PHH case.

It is likely that the earliest the D.C. Circuit’s decision will be issued is toward year-end. We will continue to monitor developments in this case.

- Theodore R. Flo

Vermont Enacts Loan Solicitation License, Amends Other Financial Regulation Licensing Provisions

Entities engaged in the business of loan solicitation are now required to be licensed with the Vermont Department of Financial Regulation following the recent enactment of Act 22. Loan comparison websites, lead generators, and other entities should review the new law to determine whether they are covered by the new licensing requirement, which became effective on May 4, 2017. The Act also amends several laws implemented by the Department pertaining to consumer litigation funding companies, lenders, money transmitters, check cashers and currency exchangers, debt adjusters, mortgage loan originators, and mortgage loan servicers.

The new loan solicitation license, enacted via amendments to the Licensed Lender Law, applies to entities that, for compensation or gain or with the expectation of compensation or gain:

  • offer, solicit, broker, or arrange a loan for a prospective Vermont borrower;

  • assist a Vermont borrower in obtaining a loan;

  • arrange a loan through a third party, regardless of whether the loan is actually approved or accepted; or

  • advertise in Vermont about a loan or any of the previously described services.

These covered activities appear to pertain to both consumer and commercial loans, with certain exceptions. Additionally, the statute does not specify whether the "compensation or gain" must come directly from a borrower.

Loan solicitation also includes any "lead generation" activity, consisting of online marketing, direct response advertising, telemarketing, or similar consumer contact; selling information identifying a potential consumer of a loan; or referring Vermont borrowers to others for loans. 

Any person licensed as a lender, sales finance company, or mortgage broker is not required to obtain a separate loan solicitation license when "acting on the person's own behalf." Financial institutions are also exempt from the licensing requirement, as are broker-dealers, insurance producers, and sellers of goods or services if such persons are not compensated by the consumer for their services.

The law clarifies the Department's jurisdiction to license entities engaged in loan brokerage and solicitation. Previously, there was some ambiguity as to whether entities acting on behalf of third parties were required to obtain a lender license in order to engage in the business of soliciting or making loans by mail, telephone, or electronic means to Vermont residents.

We recommend companies doing business in Vermont, regardless of their physical location, move quickly to evaluate whether they are subject to the loan solicitation license and develop a compliance strategy. The new license requirement technically became effective upon the Act's enactment, although the Department added the loan solicitation license application to NMLS on May 22, 2017.

Loan solicitors, as well as mortgage brokers that engage solely in lead generation, are required to disclose in loan advertisements and solicitations that they are not the lender, that information received will be shared with third parties in connection with the consumer's loan inquiry, and that lenders may be subject to federal lending laws and not all Vermont lending laws. Loan solicitation licensees must retain a number of records for at least seven years, including copies of solicitation materials (business cards, telephone scripts, mailers, electronic mail, and radio, television, and internet advertisements), records of any contact or attempted contact with a consumer, and any fees or consideration charged to or received from any person who received, requested, or contracted for leads or referrals.

The amendments in Act 22 that affect other regulated entities include the following:

  • Adjusted registration requirements for consumer litigation funding companies. Registration now must be renewed annually rather than every three years. The registration fee was reduced from $600 to $200 to reflect this change.

  • New mortgage loan originator pre-licensing and re-licensing education requirements. Amendments to the education requirements require mortgage loan originators to repeat the 20 hours of pre-licensing education required by the SAFE Mortgage Licensing Act if they fail to become a state-licensed or federally registered mortgage loan originator within three years of completing the pre-licensing education, or if they do become state-licensed or federally registered within three years but fail to maintain their license or registration for three or more years. Similarly, a person who does not obtain a Vermont mortgage loan originator license or whose license lapses must repeat the two hours of pre-license education on Vermont law and regulations.

  • Ability to consider licensing applicant's personal financial condition. The Commissioner of Financial Regulation may now consider how an applicant manages his or its own financial condition when reviewing the license application. This determination of financial responsibility plays a role in evaluating money transmitter, check casher and currency exchanger, debt adjuster, and loan servicer license applications.

  • Additional guidelines on "virtual currency." Virtual currency was added as a permissible investment for money transmitter and check casher and currency exchanger licensees (to the extent of outstanding transmission obligations received by the licensee in identical denomination of virtual currency). Virtual currency is defined as stored value that: can be a medium of exchange, a unit of account, or a store of value; has an equivalent value in money or acts as a substitute for money; may be centralized or decentralized; and can be exchanged for money or other convertible virtual currency.

  • New receipt and refund requirements for money transmitters. Money transmitter licensees are now required to issue receipts to consumers with the licensee's name, address, and phone number, the amount of money transmitted, total fees charged, and the exchange rate (if set at the time the money transmission is initiated). Licensees must also refund customers within 10 days of a refund request, with limited exceptions. As these receipt and refund requirements are not aligned with the Consumer Financial Protection Bureau's Remittance Transfer Rule, we recommend Vermont money transmitters ensure they are in compliance with the new state law requirements.

While most of Act 22 became effective on May 4, 2017, provisions relating to money transmitter receipts and refunds and disclosures by loan solicitors and lead generators take effect on July 1, 2017.

-Alan S. Kaplinsky, John L. Culhane, Jr., John D. Socknat, Wendy Angus-Anderson, Heather S. Klein, and Scott M. Peason

ABA Critical of HMDA Rule in Comments to Treasury Secretary

Based on President Donald Trump’s Executive Order 13772 on The Core Principles for Regulating the United States Financial System, the American Bankers Association (ABA) submitted a white paper to Treasury Secretary Steven Mnuchin that criticizes the revised Home Mortgage Disclosure Act (HMDA) rule adopted by the Consumer Financial Protection Bureau (CFPB).

The executive order requires the Treasury Secretary, based on the core principles laid out in the executive order, to identify the federal laws that promote and inhibit the regulation of the U.S. financial system. In the white paper, the ABA “offers these views” to the Treasury Secretary in relation to the executive order’s directive:

  • Expanded data collection adds nothing but volumes of irrelevant data, distracting from achievement of HMDA’s purposes.

  • Regulators have failed to protect expanded HMDA data from breaches of security and privacy.

  • Expanded data collection will feed banker regulatory worries about meeting customer needs outside of the norm.

  • Data expansion should be suspended until security and privacy concerns are fully addressed.

  • Bureau regulatory expansion of data beyond the statute should be rescinded.

  • Dodd-Frank expansion of HMDA data fields should be repealed.

The comment regarding security and privacy addresses industry concerns that the greatly expanded nonpublic personal information on consumers presents data security risks and the public release of various new HMDA data elements will result in nonpublic personal information on consumers becoming readily available to the public. As we have reported previously, the CFPB has provided little insight into its decision making on what data will be released, and does not appear to be too concerned with data security or privacy issues. The ABA notes that it is “concerned that the Bureau has not initiated a public rulemaking to address the significant consumer privacy dangers and data protection threats that the expanded HMDA data collection poses.” The ABA concerns are based on the “probability that manipulation of the expanded data points will make it easier for unfriendly parties to unmask identities of borrowers and their personal financial profiles, and the wholesale risks common to an age where harmful data breaches of government-held information are real, frequent, and therefore must be anticipated.”

We share the ABA’s concerns that the expanded HMDA data categories presents, both with regard to the risk of unauthorized access to the data, and the public release of various data elements by the CFPB.

- Richard J. Andreano, Jr.

Dish Network Liable for $61 Million in Treble Damages for Service Provider's TCPA Violations

A recent federal court ruling provides a potent reminder that companies can be held liable for consumer protection law violations committed by third-party vendors—and underscores the importance of maintaining strong vendor oversight.

Earlier this year, a jury found Dish Network liable for violations of the Telephone Consumer Protection Act (TCPA) because its vendor initiated more than 50,000 calls to about 18,000 consumers whose telephone numbers appeared on the National Do-Not-Call Registry. The jury awarded damages of $400 per call, totaling nearly $20.5 million. Last week, the North Carolina federal judge presiding over the case found Dish vicariously liable for its vendor's willful and knowing violations and trebled the damages to $1,200 per call—more than $61 million in total. 

The court found that Dish had a common practice of engaging vendors to initiate calls to consumers on Dish's behalf. The calls at issue were placed by one of Dish's smaller service providers, Satellite Systems Network (SSN), which accounted for less than 0.1 percent of Dish's budget for new customers. The court found that SSN knowingly and willfully violated the TCPA when it made calls to numbers on the National Do-Not-Call Registry without checking the registry and conducting account scrubs to determine whether the calls were permissible.  

Dish was found to be vicariously liable for its vendor's violations. The court found that "Dish knew or should have known that its agent, SSN, was violating the TCPA, and Dish's conduct thus willfully and knowingly violated the TCPA." The court supported this conclusion by finding that Dish ignored warning signs and "repeatedly looked the other way when SSN violated the telemarketing laws and when SSN disregarded contractual duties related to compliance. Stating that Dish’s compliance department was "a compliance department in name only," the court criticized Dish for not effectively overseeing its vendors. In determining that Dish was willful, the court noted a number of other factual findings:

  • Dish had previously entered into an "Assurance of Voluntary Compliance" (AVC) with 46 state attorneys general whereby the company "agreed to supervise its marketers, determine if they were complying with federal do-not-call laws, and discipline or terminate them if they failed to take steps to prevent violations of the law." However, the court indicated that Dish failed to take the actions set forth in the AVC.

  • Despite a contract granting Dish "virtually unlimited rights to monitor and control SSN's telemarketing," Dish failed to take action when SSN disregarded contractual duties related to compliance. The court noted that Dish was aware of consumer complaints about SSN's calls and of enforcement actions and class actions against SSN, but did not take any action or investigate the compliance issues.

  • The court noted that Dish wrongfully informed the named plaintiff that it was not responsible for the calls made by its service providers.

  • The court noted that Dish's compliance department maintained a derisive attitude toward individuals who filed TCPA lawsuits, referring to them as "harvesters," "frequent flyers," or people who "tended to make a living placing TCPA complaints."

The case is somewhat unusual in that it relates to telemarketing calls to numbers on the National Do-Not-Call Registry rather than consent requirements applicable to certain autodialed calls. But it serves as an important reminder that robust and active vendor oversight and compliance are keys to minimizing exposure under the TCPA and other consumer protection statutes.

- Alan S. Kaplinsky and Daniel JT McKenna

Did You Know?

NMLS Release 2017.2

NMLS Release 2017.2 will include the following updates, including, but not limited to, the following:

  • Addition of the “Returned to Surety by Regulator” functionality

  • Updates to the MSB Call Report

  • Updates to the Electronic Surety Bonds (ESB)

  • System Maintenance Updates

More information can be found here.

The release date is scheduled for June 19, 2017. 

Iowa Adopts Licensing Provisions Regarding MLOs

The Iowa Department of Commerce, Division of Banking, has adopted licensing provisions for mortgage loan originators, including, but not limited to, the following:

  • The term “nationwide multistate licensing system” or “NMLS” will be used in place of “nationwide mortgage licensing system and registry” or “NMLS&R.”

  • An applicant for MLO licensing must now provide fingerprints through NMLS.

  • An individual who has completed 20 hours of prelicensure education pursuant to 12 U.S.C. 5104(c) must retake 20 hours of prelicensure education in order to be eligible for mortgage loan originator licensure if the individual fails to acquire a valid state license or federal registration as a mortgage loan originator within three years from the date of federal compliance with 12 U.S.C. 5104(c); or fails to acquire a valid state license or federal registration as a mortgage loan originator within three years from the last date of licensure or registration as a mortgage loan originator.

These provisions are effective on July 1, 2017.

Minnesota Adds Motor Vehicle Sales Finance & Insurance Premium Finance License to NMLS

Effective June 1, 2017, the Minnesota Department of Commerce Motor Vehicle Sales Finance License and Insurance Premium Finance License can be filed on NMLS. The state licensing requirements can be found here.

South Carolina Will Adopt SAFE MLO Test

The South Carolina Department of Consumer Affairs and the Board of Financial Institutions will adopt the National State MLO Test Component with Uniform State Content on September 16, 2017, becoming the 55th and 56th agencies to adopt the Uniform State Test (UST).  Thus, these agencies will no longer require MLOs seeking licensure to take a second state-specific test component.

More information about the UST can be found here.

 - Wendy T. Novotne

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