According to a release by Americans for Financial Reform, Consumer Action and U.S. PIRG, CFPB Acting Director Mick Mulvaney has announced to employees that he is planning to transfer the bureau’s Office of Consumer Response into the Consumer Education and Engagement division. insideARM was not able to separately identify the source of the announcement.

The trio of consumer advocates posed this question:

While Mulvaney’s statement expressed his intention for efficiency we must ask:

• Consumer Response has essentially been an independent office housed in the Operations Division. As such, its research on consumer complaint trends has been equally available to all divisions and offices, including, for example, Supervision, Enforcement and Fair Lending; Research, Markets and Regulations; and Consumer Education and Engagement. Is this transfer designed to diminish the Consumer Response unit’s important role in helping all units of the agency collect and understand the ongoing complaints that consumers raise?
• What benefit does this transfer provide consumers and will this relocation affect the Complaint unit’s budget?

The Consumer Response (Complaints) unit of the CFPB is an integral part of the bureau. It empowers consumers and the consumer agency with firsthand information to help individuals make wise financial decisions, helps the Bureau prioritize its efforts to focus on patterns of harmful practices and helps to hold companies accountable. We plan to examine the effects of this change closely.

This activity coincides with a few other related initiatives:

One, Acting Director Mulvaney’s now famous January 23 ‘We are no longer going to push the envelope’ memo to staff referenced complaints, and the fact that he plans to use the CFPB’s complaint data to guide rulemaking priorities.

Two, ACA International released a whitepaper last week summarizing its analysis of 2017 debt collection complaints. You can download that full report here. The research concludes,

“Similar to ACA’s previous research, the findings suggest that while the overall raw number of complaint submissions appears high for the debt collection industry, once the data has been properly contextualized, the number of consumer complaints is remarkably low. This finding remains consistent despite the CFPB’s overly broad characterization of what constitutes a complaint.”

Significant among the findings are these two points:

• The total number of debt collection complaints received by the CFPB represents an incredibly small number of consumers (0.005%) who had contact with the debt collection industry during 2017 and are remarkably consistent with other financial services industries. Further, the complaints account for only .06% of all Americans estimated to have a debt in collection.
   
• Response options that measure the most negative stereotypes about the debt collection industry, such as harassment or illegal practices, were the categories consumers selected the least and represent an exceptionally small number of responses. Additionally, these categories saw declines from 2016 to 2017. These data suggest that consumers are not complaining about harassing or harsh debt collection practices and that the majority of debt collectors are adhering to legal requirements and ethical guidelines. 

insideARM Perspective

The second point noted above regarding debt collection complaints is important to note, and the detail behind this data should be an important guide in any related rulemaking. 

There continue to be complaints of illegal collection tactics such as threats, profane language, or calling outside the hours allowed by the FDCPA. All legitimate firms would agree these practices should not be allowed. But the relatively small number of complaints about these tactics suggest that more rules are not needed in that area. 

By far the most common complaint category is “attempts to collect debt not owed.” The most common sub-categories within this area are “debt was paid,” “debt is not yours,” and “didn’t receive enough information to verify debt.” These are all symptoms of a need to close the communication gap between third party collection agencies and their creditor clients. As noted in the ACA report, “These types of complaints underscore the need for accurate data, clarity of communication with lenders, and continually updated and maintained records and record keeping processes.”

Demanding that one party single-handedly fix a system that requires two parties — especially when you are demanding the fix from the one with the least leverage in the relationship — is unlikely to be successful. Improving the consumer experience in debt collection must involve all stakeholders.

As for the matter of where Consumer Response sits within the CFPB, it does seem to me that it’s an operations function. The skills required to manage a large scale call center and data processing organization are vastly different than those required to produce educational content. Of course, the connection with consumers ought to guide the content development. I can’t comment on whether the move would diminish the importance of the group, as charged by the consumer advocates. I can, however, say that I’d love to see a much bigger allocation of resources to financial education, and to helping consumers to avoid debt collection in the first place.

Educating all Americans is a monumental task. It requires more than pamphlets, targeted workshops, and FAQs on a website (although there’s nothing wrong with these). I’d love to see the CFPB partner with the Department of Education to bring true required financial literacy education to students beginning in elementary schools — and every year thereafter at an age appropriate level.

This article was co-authored by Joann Needleman, Jane C. Luxton, Thomas A. Brooks, partners at Clark Hill.

The D.C. Circuit Court of Appeals issued its long awaited decision in Consumer Financial Protection Bureau v. PHH, holding by a 7-3 decision that the Consumer Financial Protection Bureau’s (CFPB or Bureau) single-Director structure, which provides that its Director can be removed only “for cause,” is constitutional.  What has received scant recognition, however, is the court’s confirmation that the Bureau was wrong on several grounds in its imposition of a $109 million penalty against PHH. With this second holding, the ruling is far from a sweeping win for the CFPB, and its implications are profound for curtailing widely criticized Bureau practices of regulating by enforcement and retroactive imposition of new interpretations of the law.   

Buried in the 250-page opinion is a reinstatement of the previously vacated Court of Appeals panel ruling that the CFPB’s interpretation of the Real Estate Settlement Procedures Act (RESPA) and its application to mortgage lender PHH was invalid in two ways:  (1) the Bureau incorrectly interpreted Section 8 of RESPA and retroactively imposed its new interpretation on PHH, depriving the lender  of its constitutional due process rights and (2) the CFPB was bound by the three-year RESPA statute of limitations. While the Bureau may have won the right to live another day with its current structure, its ways of conducting business and discharging its duties have significantly changed going forward.  

The ultimate dispute in the case stems from the guidance issued by the Department of Housing and Urban Development (HUD) which clarified the applicability of Section 8 of RESPA to captive reinsurance programs. HUD’s guidance stated that, under Section 8(c)(2) of RESPA, various exemptions from the statute’s prohibitions against paying for referrals and splitting fees were available. One exemption included payments for reinsurance under captive reinsurance arrangements that are solely for “payment for goods or facilities actually furnished or for services actually performed.” In addition, the statute of limitations for RESPA claims is three years. Industry members, including PHH, relied on HUD’s guidance for decades.  

In January 2014, the CFPB brought a notice of charges against PHH and its affiliates alleging they took improper referral fees, in the form of reinsurance premiums from PHH’s captive mortgage insurer, in violation of RESPA. In an administrative proceeding later that year, an Administrative Law Judge (ALJ) found that PHH had violated Section 8(a) of RESPA and that the violations occurred each time a loan was closed. The ALJ ordered a disgorgement of $6.4 million. Both sides appealed and pursuant to Dodd-Frank the matter was returned to the CFPB for disposition. In that proceeding, Director Cordray affirmed PHH’s RESPA violation but found that the violation occurred with each PHH acceptance of a reinsurance payment from a mortgage insurer, an interpretation that was contrary to the HUD guidance. The Director also concluded that no statute of limitations applied to the proceeding and imposed penalties as far back as 2008, even if the loan closed prior to that date. Based on this new interpretation, PHH was ordered to disgorge $109 million dollars. 

The matter was appealed to a three-judge panel of the D.C. Circuit Court of Appeals which in October 2016 soundly rejected and even rebuked the CFPB’s interpretation of RESPA and the statute of limitations. The Court found that the CFPB violated “bedrock principles of due process,” as reported in a prior alert.  In the January 2018 opinion, the full Circuit agreed and affirmed that substantive ruling but with little to no fanfare. The Court’s decision on these issues has at least as much import as the voluminous parts of the opinions focusing on the constitutionality of the Bureau’s structure. Those who have long objected on due process grounds to the Bureau’s practices – and the vast sums the Bureau has collected – no doubt feel vindicated by the Court’s ruling. Enforcement actions in process that are based on these approaches are now under a cloud of suspicion.  

These practices and the antics that have followed the midnight resignation of Richard Cordray, also previously reported, further confirm that regardless of whether the Bureau structure is legally sound, its practices have been open to question and will be tested for consistency with the rule of law.

Last week the U.S. District Court for the Southern District of New York dismissed the case filed by the Lower East Side People’s Federal Credit Union (LESPFCU) against President Trump and Acting CFPB Director Mick Mulvaney for lack of standing.

You can read the full 20-page Order here.

The LESPFCU filed suit on December 5, 2017 in support of Leandra English as the “only person permitted under law to be the Acting Director [of the CFPB],” and on December 12 moved for a prelimninary injunction to bar Mulvaney from working in that capacity. Among the claims made by the credit union was a complaint that the CFPB announced on December 21 that it planned to engage in rulemaking concerning the Home Mortgage Disclosure Act (HMDA) and that,

[t]he Credit Union is unable to engage in long-range planning about what HMDA disclosures it will have to make. The Credit Union will have to invest further resources now to plan for its alternative disclosure obligations depending on Mr. Mulvaney’s various potential revisions to HMDA. For the Creidt Union, this is wasteful, time-consuming, and a direct result of the actions Mr. Mulvaney has taken since he seized power at the CFPB.

The defendants argued that simply being a regulated entity does not satisfy the requirements for Article III standing.

On February 1, 2018 the Court agreed with the defendants, saying that standing cannot be premised on post-complaint conduct, and that the alleged injury is too “hypothetical” to confer standing. Accordingly, the Court granted the motion to dismiss, and denied LESPFCU’s motion for a preliminary injunction as moot.

This suit was filed against the backdrop of the case filed by Leandra English against President Trump and Acting Director Mulvaney, also claiming that she was the rightful person to have assumed the temporary CFPB leadership job. On November 24, 2017 former CFPB Director Richard Cordray named English, his Chief of Staff, Deputy Director. It was his last day in office following a sudden – yet not unexpected – resignation. Cordray is now campaigning to be the Governor of Ohio.

Because of two conflicting laws governing how to fill the CFPB vacancy, many claimed it was unclear who was actually in charge. One camp argued Dodd-Frank dictates that the Deputy Director fills the role until the President can nominate a replacement, and that person is confirmed by Congress. The other camp argued that the Federal Vacancies Act prevails, which gives authority to the President to name a temporary Director until the new person is confirmed. President Trump named Mulvaney, his Budget Director, to fill the post.

English’s initial motion for a restraining order to bar Mulvaney from serving as Acting Director was denied on November 28, 2017. She then filed for a preliminary injunction, which was denied on January 10, 2018. On January 12 English filed an appeal with the U.S. District Court for the District of Columbia. She also requested that the decision be expedited, which has since been granted.

President Trump has yet to nominate a permanent successor to Richard Cordray. A number of names have been circulated, but it seems none have emerged yet as the obvious choice. Mulvaney is allowed to serve for up to 210 days, however that can be extended if there is a nominee who is going through the confirmation process.

The Department of Education (ED) announced yesterday that Kathleen Smith will serve as the deputy chief operating officer, responsible for managing the daily operations of Federal Student Aid (FSA) and its 1,300 employees and $1.4 trillion student loan portfolio.

Last week ED announced that A. Wayne Johnson — who was named Chief Operating Officer of the Office of Federal Student Aid (FSA) in June 2017 — will now lead a new unit called the Office of Strategy and Transformation, and that James Manning, Acting Under Secretary, has assumed the duties of Acting Chief Operating Officer of FSA.

From 2009 to 2014, Smith served as chief of staff at the U.S. Department of Education in the Office of Postsecondary Education. Prior to that, she served as an Education policy advisor on the Senate Committee on Health Education, Labor and Pensions. From 2013 to 2015 Ms. Smith was a Senior Vice President at AccessLex Institute, a nonprofit organization that works to improve access for minorities to a quality legal education. Prior to that, she served for more than four years as Chief of Staff in the Office of Postsecondary Education.

insideARM Perspective

These moves come as a new chapter begins for FSA. A long legal battle over the Unrestricted Private Collection Agency contract award has just concluded (though many expect a new round of litigation to begin).

Meanwhile, ED is trying to modernize the operation that manages the $1.4 trillion federal student loan portfolio. This is a challenge that has eluded former ED leaders; any organization with 1300 employees and legacy systems takes creativity and courage to turn around. Last fall Johnson announced his intention to introduce a Next Generation Processing and Servicing Environment to bring the customer servicing capabilities of FSA into the 21st century. In December Johnson issued a Request for Advanced Market Research Information regarding his envisioned system. 

In another move to reduce costs and modernize the system, yesterday The Hill reported that ED will be launching a pilot program to put financial aid funds that are in excess of tuition on debit cards. They say this will allow officials to track how federal aid is being spent. As reported by The Hill, the program draft reads, “Any ability to restrict purchases or merchant access using Federal financial aid funds must be aligned with government approved use of funds.” Students would also receive text messages about the long-term “ramification” of spending the funds.

Given the abundance of students with loan balances in excess of their ability to pay, this seems reasonable — both for taxpayers, and  to borrowers. On the other hand, consumer advocates say this gives ED unreasonable control over how the money is spent.  

WILMINGTON, Del. – College Ave Student Loans, a leading provider of private student loans, announced today two key appointments to its leadership team:  Lisa Strauch Eggers has joined the team as Chief Legal Officer, and Angela Colatriano has been named Chief Marketing Officer. 

“We are thrilled with these exceptional additions to the College Ave Student Loans leadership team,” said CEO and Co-Founder Joe DePaulo. “Lisa’s years as a General Counsel, plus her extensive experience as in-house counsel, will be invaluable as we look to grow and pursue new avenues in higher education financing. Angela is a key member of College Ave’s leadership, and much of our success is due to her expertise in defining College Ave’s brand, product set and customer experience.  In her new position as Chief Marketing Officer, she will bring her background and vision to our future initiatives.” 

Strauch Eggers most recently served in the Department of State as a Foreign Service Officer based in Paris. Prior to that, she was the Interim General Counsel and Chief Ethics Officer for Eddie Bauer, where she led their legal team in all domestic and international legal matters. She also served as the first-ever Chief Legal Officer and Corporate Secretary for Callison, a private equity-backed international professional services firm, where she was responsible for establishing the legal department and leading the company through its sale to a publicly-traded company. She was the first international lawyer for Starbucks. Strauch Eggers earned a Juris Doctor degree from Georgetown University Law Center, and a Bachelor of Arts degree from The Johns Hopkins University.  

“It’s an exciting time at College Ave Student Loans, and I am looking forward to helping them navigate the evolving fintech lending industry with my legal and corporate expertise,” said Strauch Eggers. 

As Chief Marketing Officer, Colatriano is responsible for driving College Ave’s product platform and strategies, acquisition investments, customer experience and brand. Before being named Chief Marketing Officer, Colatriano served as Director of Product & Brand Management for the company. She is a founding member of College Ave’s leadership team, having joined the company for its launch in 2014. Prior to joining College Ave, Colatriano was a Senior Director at Sallie Mae, as well as Upromise by Sallie Mae, where she was responsible for enrollment and member engagement through the Upromise Rewards platform. Colatriano graduated summa cum laude from Towson University in Maryland with a Bachelor of Science degree. 

“As Chief Marketing Officer, I look forward to applying my industry knowledge and strategic insights to help College Ave succeed in 2018 and beyond,” said Colatriano. “Both online lending and higher education are undergoing important changes, and I am excited to continue with College Ave in my new capacity as we navigate our next phase of growth.” 

About College Ave Student Loans

College Ave Student Loans is simplifying the student loan experience so students can get on with what matters most: preparing for a bright future. As a fintech lending company with a sole focus on private student loans, we’re using technology and our deep industry expertise to connect families who need to cover education costs with lenders who can provide that funding. By specializing in student loans, we are able to give our customers the attention they deserve and deliver loans that are simple, clear, and personalized for the individual: we help you find your perfect fit. We offer competitive rates, a wide range of repayment options, and a customer-friendly experience from application through repayment. Visit: www.collegeavestudentloans.com.

Addition shows Altus’ commitment to elevate women into leadership positions 

NEW ORLEANS, La. — Altus Global Trade Solutions, a technology enabled business process outsourcing (BPO) firm, today announced that it has hired Christina Reed as marketing director.  Reed will be responsible for supporting the growth of the firm and expanding market reach through technology driven strategies.

“Christina has an extensive background in enhancing client experiences and relationships. Altus is excited to integrate her expertise to assure the highest benchmark is set for our customer experience,” says Tom Brenan, IV, president Altus Global Trade Solutions. “As Altus continues to develop cutting-edge BPO solutions, Christina’s leadership and contributions show Altus’ commitment to bring the best solutions and experience possible. She is a great addition to our executive team.”

Reed has over 20 years of business-to-business marketing leadership, sales and operations experience at telecommunications firms CenturyLink, Qwest Communications, Intermedia and CapRock Communications.  She has developed joint marketing campaigns with globally recognized technology firms such as Nokia, HPE, Cisco and Juniper.  She holds a bachelor of science degree from the University of New Orleans and has served as a volunteer and board member for multiple organizations serving the community. 

“Altus is a market leading BPO firm with an innovative and empowering culture. We have many women at Altus in leadership roles and I’m proud to join them,” says Christina Reed, marketing director at Altus. “Additionally, I am thrilled to bring robust marketing strategies that ensure the market has access to our world-class BPO solutions delivered with an exceptional customer experience.”

About Altus Global Trade Solutions

Altus Global Trade Solutions is a technology enabled BPO firm helping leading companies gain new levels of confidence and control over their credit to cash cycle. We combine the most advanced technology with the largest international network of trained, certified professionals to streamline first and third-party asset recovery at the highest levels of security and compliance.   Backed by our world-class ARM Managed Services Team, we gather and analyze rich insights and best practices at every step to continuously improve and enhance your entire receivables management process in ways you can see, feel and measure. For more information, visit www.trustaltus.com or connect with us on LinkedIn.

This week a House subcommittee held a hearing to better understand the how to balance the proliferation of financial technology (“fintech”) with consumer protection. As with all of the conversations, conferences and symposia regarding financial innovation, the discussion was focused on credit. However 30% of the adult population of the United States has at least one past due account. Yet, there is no discussion of real innovation on that side of the equation.

Blaine Luetkemeyer (R-NO), who chairs the Subcommittee on Financial Institutions and Consumer Credit, set the context. He noted that the universe of technology is evolving on a nearly daily basis, and has revolutionized the way consumers make payments and interact with financial services companies. He said,

“From online lending and payment companies to blockchain and cryptocurrencies, advances in financial technology are changing the way financial markets work and how consumers access credit. With greater understanding of fintech’s capabilities, the Financial Services Committee and Congress can better create an environment that fosters certainty and responsible innovation while maintaining consumer protections.”

The following witnesses testified:

• Nathaniel Hoopes, Executive Director, Marketplace Lending Association – official testimony
• Brian Knight, Director, Program on Financial Regulation and Senior Research Fellow, Mercatus Center, George Mason University – official testimony
• Brian Peters, Executive Director, Financial Innovation Now – official testimony
• Andrew Smith, Partner, Covington and Burling, LLP – official testimony
• Adam Levitin, Professor of Law, Georgetown University Law Center – official testimony

Most of the opinions represented industry, and described challenges that existing regulations have posed to the advancement of innovation through partnership between technology companies and traditional financial institutions. Levitin’s was the sole voice that provided cautionary tales of new strategies – such as making lending decisions based on the use of nontraditional data or neural networks — leading to discriminatory practices, even if unintentional. He stressed it is important for regulations to assist in differentiating between the good guys and the bad guys. He offered these recommendations:

• Encourage a national money transmitter license
• Encourage greater consumer financial data portability
• Don’t encourage the predatory lending practices he alleged would be caused by bills currently under consideration; R. 3299 and H.R. 4439.

Lawmakers asked the panel for their suggestions in how to thread the needle in creating regulation that supports innovation but also provides proper consumer protection. Brian Knight summed it up this way:

• Keep the consumer in mind first – How is the customer best served?
• Regulate to the risk
• Create conditions that allow for a regulatory sandbox where companies can safely test new products at scale

When asked what the chief barrier has been to innovation, panel members described: 1) Technology and financial services are now fully integrated, however the regulations were written in the days of paper; and 2) State by state rules for money transmission and lending prevent startups without the resources of major established companies from being able to enter the market.

insideARM Perspective

This sounds familiar…

“Laws were written in the days of paper.”

“The current structure is needlessly fragmented and inconsistent among federal regulators, and varies widely across state jurisdictions.”

“Regulations should help distinguish the good guys from the bad guys.”

Those of us who have been advocating for the modernization of the Fair Debt Collection Practices Act have repeatedly made the same statements. As it relates to the discussion at yesterday’s hearing, I offer these thoughts:

Perfection is impossible

Brian Knight made an interesting comment: “New opportunities should not be measured against perfection, but against the status quo.” This is such a relevant statement in the context of debt collection rulemaking. Discussions of ever-more complex rules that require the most granular operational contortions seem to have perfection as their goal. Folks, perfection is virtually impossible. 77 million consumers have a debt in collections, across dozens of industries and thousands of creditors, with hundreds of thousands of human employees. The more complex the rules, the less likely companies are to be able to execute them. I would argue this leads to more harm. No, I’m not suggesting there should be no rules. I am suggesting a limited number of really clear ones.

One very large part of the financial services industry is being left in the last century

All of the conversations, conferences and symposia regarding financial innovation are focused on the credit side of the equation. But 77 million Americans have a connection to the other side – when, for whatever reason, the bills aren’t paid. Most attempts to bring innovation to this side of the equation, such as (gasp) sending information to consumers about a debt through email – are met with attorneys saying, “can’t do it; there is too much risk.” This is crazy.

Here is the situation:

• As the population ages, digital-only consumers will become the lions’ share of those in collections. This group doesn’t talk on the phone and doesn’t open postal mail (unless of course it’s a package).
• Regulators and media constantly tell the public not to talk to strangers on the phone (or, especially, not to give out any personal information – which is currently required by law in order for a collector to tell you what they are calling about, because they first have to confirm you are the right person).
• Robocall blocking and labeling technology is increasingly getting in the way of communicating with consumers. The fact is, if we could simply get rid of “Rachel from card services” and the other ½ dozen egregious scams, the legitimate (even if unwanted) callers would be a whole lot more manageable.
• When legitimate collectors can’t reach consumers, what often happens (at the choice of the creditor) is that credit scores are harmed and lawsuits are filed. The debt doesn’t simply go away. A conversation needs to happen.

Fintech innovation is desperately needed in the past-due world too. Consumers need to be able to authenticate their identity in new and less threatening ways, they need to be able to pay debts the way they would pay regular bills, and they need to be able to communicate with companies through a range of channels just the way they would have before their bill went past due. Let’s get this marketplace into the conversation, too.

Editor’s note: For more on consumer preferences related to payment and communication, read this other story about Millenials and medical bills.

The long-awaited decision has just come from the United States Court of Appeals for the District of Columbia Circuit in the case of PHH Corp. v. Consumer Financial Protection Bureau (CFPB).  The full court’s vote to overturn the 2016 three-judge decision preserves the structure of the CFPB as laid out in Dodd-Frank. 

The Court granted “en banc” (by the full court) review to re-consider whether the federal statute providing the Director of the CFPB with a five-year term in office, subject to removal by the President only for “inefficiency, neglect of duty, or malfeasance in office,” is consistent with Article II of the Constitution.

You can download the full 250-page decision here.

Background

PHH, a mortgage company in Mount Laurel, N.J., wanted the U.S. Court of Appeals for the District of Columbia Circuit to vacate a June 2015 enforcement ruling by the CFPB that said PHH violated anti-kickback provisions in Section 8(a) of the Real Estate Settlement Procedures Act (RESPA) and had to give up $109 million in what CFPB Director Cordray had said were ill-gotten mortgage reinsurance premiums. 

The last official activity in this case was in May 2017, when the court heard oral arguments. Since that time, lawmakers, regulators, industry and consumer advocates have awaited this decision.

Much has changed in the period since the original CFPB enforcement ruling: Richard Cordray is no longer in charge; Republicans control both houses of Congress and the White House; President Trump is in a position to name a replacement to lead the Bureau; under the Obama administration the Department of Justice (DOJ) supported the CFPB — under Trump, the DOJ has sided with PHH.  

The Decision

Judge Cornelia Pillard, representing the majority, wrote:  

Today, we hold that federal law providing the Director of the CFPB with a five-year term in office, subject to removal by the President only for “inefficiency, neglect of duty, or malfeasance in office,” is consistent with the President’s constitutional authority.

Congress validly decided that the CFPB needed a measure of independence and chose a constitutionally acceptable means to protect it. First, the removal restriction here is wholly ordinary—the verbatim protection approved by the Supreme Court back in 1935 in Humphrey’s Executor and reaffirmed ever since. The provision here neither adds layers of protection nor arrogates to Congress any role in removing an errant official. Second, the CFPB Director’s autonomy is consistent with a longstanding tradition of independence for financial regulators, and squarely supported by established precedent.

The CFPB’s budgetary independence, too, is traditional among financial regulators, including in combination with typical removal constraints. PHH’s constitutional challenge flies in the face of the Supreme Court’s removal-power cases, and calls into question the structure of a host of independent agencies that make up the fabric of the administrative state.

We are nevertheless urged that the constitutionality of for cause removal turns on a single feature of the agency’s design: whether it is led by an individual or a group. But this line of attack finds no home in constitutional law.

As a practical matter, considering the impact on presidential power, the line of accountability at the CFPB is at least as clear to the observing public as at multi-headed independent agencies, and the President’s control over the CFPB Director is at least as direct. PHH has not identified any reason to think that a single-director independent agency is any less responsive than one led by multiple commissioners or board members. If anything, the President’s for-cause removal prerogative may allow more efficient control over a solo head than a multi-member directorate. Consider the case of Humphrey’s Executor. There, President Roosevelt attempted to remove an FTC Commissioner based on policy disagreements. Of course, the Supreme Court put a stop to the President’s effort to sway the agency, upholding the Commissioner’s removal protection. But had the Court not so held, perhaps that would not have been the last of the personnel changes at the FTC. Removal of just one Commissioner by the President might not have had any substantial effect on the multi-member body’s direction, which he so strongly disfavored. The President might have had to remove multiple Commissioners in order to change the agency’s course.

Concluding finally,

Applying binding Supreme Court precedent, we see no constitutional defect in the statute preventing the President from firing the CFPB Director without cause. We thus uphold Congress’s choice.

The Supreme Court’s removal-power decisions have, for more than eighty years, upheld ordinary for-cause protections of the heads of independent agencies, including financial regulators. That precedent leaves to the legislative process, not the courts, the choice whether to subject the Bureau’s leadership to at-will presidential removal. Congress’s decision to provide the CFPB Director a degree of insulation reflects its permissible judgment that civil regulation of consumer financial protection should be kept one step removed from political winds and presidential will. We have no warrant here to invalidate such a time-tested course. No relevant consideration gives us reason to doubt the constitutionality of the independent CFPB’s single-member structure. Congress made constitutionally permissible institutional design choices for the CFPB with which courts should hesitate to interfere.

Not everyone agreed

Three judges on the panel dissented. In her opinion, Circuit Judge Karen LeCraft Henderson addressed the fundamental issue in the case:

“How does a single-Director independent agency fare worse than multi-member independent agencies in protecting individual liberty? A single-Director independent agency concentrates enforcement, rulemaking, and adjudicative power in one individual. By contrast, multi-member independent agencies do not concentrate all of that power in one individual. The multi-member structure thereby helps to prevent arbitrary decisionmaking and abuse of power, and to protect individual liberty.

The point is simple but profound. In a multi-member independent agency, no single commissioner or board member can affirmatively do much of anything. Before the agency can infringe your liberty in some way – for example, by enforcing a law against you or by issuing a rule that affects your liberty or property – a majority of commissioners must agree. As a former Chair of the Federal Trade Commission has explained, it takes ‘a consensus decision of at least a majority of commissioners to authorize, or forbear from, action.’ That in turn makes it harder for the agency to infringe your liberty.”

She also addresses the matter of independence, 

Moreover, even assuming that ongoing influence of independent agencies can occur in indirect ways, it is not plausible to say that a President could have more indirect ongoing influence over (i) a single Director who has policy views contrary to the President’s than the President has over (ii) a multi-member independent agency headed by a chair who is appointed by the President and shares the same policy views as the President.

In short, given the President’s inability to designate a new CFPB Director at the beginning of the Presidency – in contrast to the President’s ability to appoint chairs of the FTC, FCC, SEC, and NLRB, for example – the single-Director CFPB structure diminishes the President’s power more than the traditional multi-member independent agency does.

Finally, Judge Hendersen argued that the Court should have withheld any order in this case until the Supreme Court decides Lucia v. Securities and Exchange Commission, which many believe could have implications for the CFPB.

As the Court held in Freytag, Appointments Clause violations go “to the validity” of the underlying proceedings. Suppose the Supreme Court agrees with the Solicitor General in Lucia, which seems entirely probable. Then not only the CFPB Director’s order, but also all proceedings before the ALJ, including the ALJ’s Recommended Decision, would be invalid. Nevertheless, the majority – relying on the order granting en banc in PHH – remands the case to the CFPB without waiting for the Supreme Court to decide Lucia. (references omitted)

Two points about the order are worth noting. The first is that the order limited neither the issues to be argued nor the issues to be decided. The second is that the order embodied the en banc court’s judgment that the proper disposition of this case required consideration of the outcome in Lucia. Of course, the posture has changed. At the time of the en banc order, Lucia was pending in this court; now Lucia is pending in the Supreme Court. That difference makes it all the more important that we wait for the Supreme Court’s decision.

insideARM Perspective

The list of ironies of the changing positions and motivations related to this case is long.

When this case began in 2015, Democrats supported the single director fireable only for cause structure, saying it removed politics from the direction of the CFPB. But that was when Cordray still had several years left in his term, and many expected a Democrat to succeed Obama in the White House.

Conservatives in 2015 said the only appropriate structure for accountability must be a bi-partisan commission. But that was also when Cordray still had several years left in his term, and many expected a Democrat to succeed Obama in the White House.

Today’s decision leaves the power to re-shape the goals and actions of the CFPB in the hands of those who wanted to see the single-director structure deemed unconstitutional. 

Meanwhile, House Financial Services Committee Chairman Jeb Hensarling (R-TX) – a long time critic of the CFPB, and also a rumored potential Cordray replacement – released this statement:

“I am deeply disappointed with the court’s decision and hope the Supreme Court will review the ruling in short order. In the meantime, I take great solace in the fact that Mick Mulvaney can use his unchecked, unilateral powers to continue the agency’s transformation into one that will, as he said, “exercise [its] statutory authority to enforce the laws of this nation….execute the statutory mandate of the bureau to protect consumers’ and go no further.

Even though I have total confidence in Acting Director Mulvaney’s vision, the fact remains that no one person in America – especially someone who is unelected – should have the authority to unilaterally control whether working Americans can get a mortgage or a checking account. The Bureau’s consumer protection mission is important, but no government agency – no matter how well-intentioned – should be able to evade common sense checks and balances that are necessary for accountability.

Republicans stand ready to work with Democrats to reform the CFPB into a law enforcement agency that truly protects consumers and is accountable to the people’s elected representatives.”

On January 22, 2018, the U.S. Supreme Court issued an opinion where it resolved a jurisdictional split regarding the impact of 28 U.S.C. §1367(d)’s limitations period tolling on state law claims that are pending in federal court. 

A court can only hear a claim over which it has subject-matter jurisdiction. Federal courts generally do not have subject-matter jurisdiction over state law claims. However, a federal court may exercise what is called “supplemental jurisdiction” over state law claims that arise from the same case or controversy as a federal claim before the court.  E.g., allegations that one collection letter violates both the FDCPA and a state-equivalent law.

Section 1367(d) provides that if a federal court exercises supplemental jurisdiction over a state law claim, the limitations period for the state claim “shall be tolled while the claim is pending [in federal court] and for a period of 30 days after it is dismissed unless state law provides for a longer tolling period.”

There is a jurisdictional split regarding whether §1367(d) pauses the limitations clock on the state claim while it is pending in federal court or whether the clock continues to run but the plaintiff is afforded a 30 day grace period to file the claim in state court after the federal court dismissal. Of note, this is only applies to dismissals due to lack of supplemental jurisdiction over the claim. It does not apply to a dismissal on the merits, which would not trigger §1367(d). 

In Artis v. District of Columbia, 583 U.S. ____ (2018), an opinion written by Justice Ginsburg, the U.S. Supreme Court ruled that the former definition applies. 

Read the decision here. 

Facts of the Underlying Case 

Petitioner Stephanie Artis filed a lawsuit against the District of Columbia on a federal employment discrimination claim as well as several related state law claims, including a violation of the District of Columbia Whistleblower Act and other wrongful termination claims. This suit, which included both federal and state claims, was filed in federal court within the statute of limitations for all claims. The statute of limitations for the state law claims expired two years after Petitioner filed the federal court case.

On June 27, 2014, two and a half years after the federal court case was filed, the court dismissed Petitioner’s only federal claim. Since the sole federal claim in the suit was dismissed, the court declined to exercise supplemental jurisdiction over the state law claims and dismissed them as well.

Petitioner filed her state law claims in state court fifty-nine days after the federal court dismissal. The state trial court granted Respondent’s motion to dismiss the claim due to it being time barred.  The trial court reasoned that the statute of limitations expired during the pendency of the federal court case so Petitioner only had a thirty day grace period to file her claims in state court per §1367(d).  The D.C. Court of Appeals affirmed this decision.  The case was ultimately reviewed and reversed by the U.S. Supreme Court.

Majority Opinion

In its decision, the Court reversed the D.C. Court of Appeals decision and decided that §1367(d) effectively stops the clock on the limitations period for a state claim while it is pending in federal court. 

The Court reviewed the evidence provided of other court interpretations and statutory use of each reading of the statute. In this review, the Court found that the grace period interpretation is “a feather on the scale against the weight of decisions in which ‘tolling’ a statute of limitations signals stopping the clock.”

Petitioner argued that if the stop-the-clock interpretation were Congress’ intent, then there would be no need for the 30 day grace period portion of the statute. This argument did not persuade the Court, which found that this 30 day grace period is intended as “breathing room” for a plaintiff that files her claim in federal court very close to the expiration of the statute of limitations. The Court dismissed the argument that a plaintiff can solve for this by pursuing the claim in state court while the federal case is pending, stating that this is inefficient and wastes already strained judicial resources. 

The majority opinion also addressed the constitutional issue of whether this interpretation of §1367(d) exceeds Congress’ enumerated powers and encroaches on state sovereignty. The majority opinion rejected both of these arguments.

Justice Gorsuch crafted the dissenting opinion, in which he was joined by Justice Kennedy, Justice Thomas, and Justice Alito.  

Industry Perspective

Many states have their own equivalent of the FDCPA. Since such state claims are usually filed in federal court along with federal FDCPA claims, firms and agencies in the debt collection industry should take note of this decision. U.S. Supreme Court decisions are binding on all courts and jurisdictions in the United States, both state and federal. 

The opinion may seem negative at first blush, but its impact to the industry will not be as widespread. Since §1367(d) only applies to claims that are dismissed due to the court declining to exercise supplemental jurisdiction, it will have no impact on state claims that a federal court decides on the merits. Once a claim is decided on the merits, res judicata principles prevent the plaintiff from re-litigating the claim against the same defendant in another court. The only recourse at that point is an appeal.

A situation that might trigger §1367(d) is where a case is filed in federal court alleging both an FDCPA and a state claim and the court dismisses an FDCPA claim for lack of standing per Spokeo. Since the only federal claim was dismissed, there is no similar case or controversy for the court to attach the state law claim to, thus prohibiting it from exercising supplemental jurisdiction. In this situation, the limitations period for the state law claim will have tolled – or paused – while the claim was pending in federal court. 

Conclusion 

In sum, a federal court exercising supplemental jurisdiction over a state law claim stops the clock on the limitations period for that claim.  Agencies and firms that are regularly sued on both federal and state claims in federal court – or that remove such claims to federal court – should keep this opinion in mind.

SARASOTA, Fla. – TEC Services Group, Inc. is pleased to announce their annual Scholarship Program, now in its third year. The program is open to individuals employed in the Accounts Receivables Management (ARM) industry and their dependent children. Selected participants will be awarded up to $1000 in scholarship funds. Applicants are eligible to receive an award up to four times during the term of their undergraduate program.

TEC began the program in 2016 as another way to give back to the community and show continued support to the ARM industry. Last year, TEC awarded four scholarships and expects even greater participation this year. To be eligible to participate, applicants must be a United States citizen and will be required to participate in an essay, provide academic achievements and community involvement.  

“Each year, TEC supports educational development through our annual World Vision donations and Scholarship Program; we believe education is the foundation for greater opportunities and are happy to sponsor programs that provide those opportunities for success.” Says Tom Sweat, President of TEC Services Group.

For more information about the program or to request an application, please contact TEC directly at (941) 375-0300 or Scholarship@TECsg.com. All applications and supporting materials must be received on or before May 31, 2018.  Scholarship recipients will be announced in August 2018.

About TEC Services Group
TEC Services Group, Inc. is a premier consulting firm serving as a trusted advisor and strategic partner to the Credit and Collections industry. Since 1998, TEC has provided professional, advisory and analytical consulting services using highly specialized subject matter experts. Our team members average 20 years of experience in Credit & Collections and we apply that expertise to every project we touch. At TEC, we commit ourselves to helping our clients achieve higher levels of IT and Operational excellence. TEC is your long-term partner invested in your success.  More at www.TECsg.com.