Richard Horn
Legal PLLC

Update on the Battle over the Interim Leadership of the CFPB

Update on the Battle over the Interim Leadership of the CFPB – The Deputy Director’s New Argument, a New Lawsuit, and Some Thoughts on the Current Situation at the CFPB

December 9, 2017

I am writing this post to update you on the ongoing battle to lead the CFPB. Although the District Court for the District of Columbia denied Deputy Director English’s motion for a temporary restraining order, giving the Trump administration an initial win, the case continues and has to be decided on the merits. On December 6, 2017, Deputy Director English filed a motion for a preliminary injunction. The hearing on this motion is scheduled for December 22.

In this post, I discuss the current status of the lawsuit, briefly summarize some the main arguments made by Deputy Director English in her filing for a preliminary injunction, and highlight a new argument that her legal team made. This new argument is that the CFPB Director is exempt from the Federal Vacancies Reform Act (FVRA), because the FVRA expressly exempts members of boards of government corporations, and the Director is also a member of the Board of Directors of the Federal Deposit Insurance Corporation (FDIC). I actually suggested this as a possible argument on a Mortgage Bankers Association webinar that I presented on November 29 regarding the leadership situation at the CFPB. The webinar was a great discussion about the lawsuit and the potential effects on the CFPB. You can obtain a recording of the webinar by clicking here: https://store.mba.org/ProductDetail.aspx?product_code=DL2-011413-WC-W.

In addition, a new lawsuit was filed by the Lower East Side People’s Federal Credit Union on December 5, 2017 to fight the Trump administration’s designation of Director Mulvaney as Acting Director of the CFPB. I briefly summarize the main arguments in this new lawsuit, which also uses the new argument made by Deputy Director English in the motion for a preliminary injunction.

I also discuss the current situation at the CFPB and the steps that Acting Director Mulvaney has already taken at the bureau. It appears that Acting Director Mulvaney could have a substantial impact on the CFPB’s rules and enforcement actions during his interim leadership. This may be a good time for industry to consider submitting information to the CFPB regarding steps Acting Director Mulvaney can take to provide regulatory relief.

I.  Status of the Lawsuit by Deputy Director English

A.  Trump Administration Wins the First Round

As you already know, President Trump designated Mick Mulvaney (who is also the Director of the Office of Management and Budget) the Acting Director of the CFPB upon Richard Cordray’s resignation on November 24, 2017. However, on his last day at the CFPB, Richard Cordray had also named the CFPB’s Chief of Staff, Leandra English, the Deputy Director and, pursuant to the automatic succession provision under the Dodd-Frank Act, the Acting Director of the CFPB.

Deputy Director Leandra English filed a lawsuit on Sunday, November 26, 2017, in the U.S. District Court for the District of Columbia, to prevent from assuming the role of Acting Director. Deputy Director English asked the District Court for a temporary restraining order (TRO) to temporarily prevent Mulvaney from assuming the role, and asked for a declaratory judgment that she is the authorized Acting Director. The case was assigned to Judge Timothy J. Kelly, who coincidentally was appointed by President Trump and joined the court in September 2017.   At a hearing on Tuesday, November 28, Judge Kelly issued a judgment denying the motion for a TRO, effectively keeping Mulvaney in place as the purported Acting Director of the CFPB while the case continues, as described below.

 B.  Deputy Director English Files a Motion for a Preliminary Injunction with a New Argument

Although the Trump administration won the first round, Deputy Director English continues to pursue the case. On December 6, 2017, Deputy Director English filed a motion for a preliminary injunction in the case. Below I briefly summarize the main arguments made by Deputy Director English’s legal team:

  1. The Dodd-Frank Act’s succession provision controls the Acting Director position of the CFPB, rather than the FVRA, because the two statutes conflict and the Dodd-Frank Act was enacted later and is more specific. They point to the Dodd-Frank Act’s mandate that the Deputy Director “shall” serve as the Acting Director of the CFPB, and argue the mandate is more specific with respect to the CFPB because the FVRA’s provision provides that the President “may” designate an acting official. They also argue that although the FVRA has been determined to continue to apply to other statutes with mandatory succession provisions, those other statutes are distinguished from the Dodd-Frank Act, because they were enacted before the FVRA. They also point to the legislative history of the Dodd-Frank Act, noting that Congress in the final legislation changed the succession provision from a previous version that expressly relied on the FVRA, arguing that this indicates a choice by Congress to override the FVRA.
  2. The President’s appointment violates the Constitution’s Appointments Clause, because there is no statute authorizing the President to designate an Acting Director of the CFPB (based on their arguments that the Dodd-Frank Act’s mandatory succession provision controls).
  3. Even if the FVRA did apply to the CFPB’s Acting Director position, it would violate the requirement under the Dodd-Frank Act that the CFPB be “independent” (noting that the CFPB’s Director position is removable only for cause and it is not funded through appropriations). They argue that the CFPB’s independence is violated by Mulvaney serving as Acting Director, because he will continue to be an at-will employee of the White House as Director of OMB. In addition, they argue that the CFPB and FDIC are expressly exempted from OMB oversight by statute, and thus, the designation of the OMB Director to lead the CFPB and also serve on the FDIC board violates that independence.

In addition to these arguments, as noted above, Deputy Director English’s legal team also made a new argument that was not included in the initial complaint or filing for the TRO. The new argument is that the CFPB Director position is exempt from the FVRA, because the CFPB Director is also a member of the FDIC’s Board of Directors and FDIC board members are exempt from the FVRA. Specifically, the FVRA exempts, “any member who is appointed by the President, by and with the advice and consent of the Senate to any board, commission, or similar entity that governs an independent establishment or Government corporation.” 5 U.S.C. § 3349c(1). The CFPB Director is by statute a member of the FDIC board, which member positions satisfy this exemption under the FVRA, because the FDIC board is a board of a government corporation. 12 U.S.C. § 1812(a)(1). To support this argument, they also note that the Acting Director of the CFPB automatically serves on the FDIC board in the event of the absence of the CFPB Director. 12 U.S.C. § 1812(d)(2).

Notably, Deputy Director English’s filing did not cite the CFPB Director’s membership on the Financial Stability Oversight Council (FSOC), which is also required by statute under the Dodd-Frank Act. This may be another fact that supports the CFPB Director being exempt from the FVRA under section 3349c(1), because the FSOC is similar to a board or commission, and arguably an independent establishment.

Deputy Director English’s legal team appears to have largely abandoned the argument that the Dodd-Frank Act is exempt from the FVRA pursuant to 5 U.S.C. § 3347 (which exemption I discuss in my previous Client Update), although there are still references to this exemption in their filing. As I noted in my previous Client Update, the plain language of this exemption states that it provides an exemption from the “exclusivity” of the FVRA, and for that reason, it has been interpreted that even if a statute satisfies this exemption, the FVRA would still remain available to the President. In fact, the DOJ made this argument in its memorandum in opposition to the TRO. For this reason, they may have decided to focus their efforts on the other arguments.

C.  Possible Counterarguments for the DOJ

Before we turn to the possible counterarguments to the new argument in Deputy Director English’s motion for a preliminary injunction, it is worth noting that her filing uses some of the same arguments that were in the previous motion for a TRO. For that reason, in its opposition to the preliminary injunction, DOJ may use some of the same counterarguments it used to oppose the TRO. I briefly review some of the DOJ’s counterarguments below:

  1. With respect to the argument that the Dodd-Frank Act overrides the FVRA because it was enacted later and is more specific, the DOJ argued that for the Dodd-Frank Act to implicitly repeal the FVRA, under prior precedent, there has to be a “clear and manifest” intent of Congress. The DOJ argued that this intent is not clear, noting that the Dodd-Frank Act explicitly provides that it does not override federal laws dealing with employees and officers, unless expressly provided. See 12 U.S.C. § 5491(a). The DOJ also argued that the legislative history does not indicate this intent, and that if Congress had intended to override the FVRA, they would have made it clearer in light of past interpretations of the FVRA.
  2. With respect to the argument regarding the independence of the CFPB, the DOJ argued that the FVRA can apply to independent agencies, as it has previously been determined to apply to independent agencies such as the NLRB, Export-Import Bank, and Social Security Administration. The DOJ also argued that the court does not have jurisdiction to grant an injunction against the President from exercising his official appointment power.

Turning to the new argument, I believe that this is a potentially strong argument. As noted above, I actually raised this as a possible argument on a Mortgage Bankers Association webinar regarding the leadership situation at the CFPB on November 27. The legislative history for the exemption indicates that the drafters of the FVRA believed that this exemption “has always been the case with the respect to the Vacancies Act…” and wanted to preserve it in its legislation replacing the prior Vacancies Act. And there does not appear to be an issue with the FVRA remaining available to the President for a board member, as there is with the exemption from the “exclusivity” of the FVRA under 5 U.S.C. § 3347. In addition, this is the main argument that Lower East Side People’s Federal Credit Union used in its new lawsuit filed on December 5, 2017, which I briefly describe below.

A possible counterargument is that the exemption under section 3349c(1) of the FVRA only applies to members that were specifically appointed and confirmed to the board, and thus, it does not apply to the CFPB Director whose membership on the FDIC board is based on a statutory mandate. This argument is based on the plain language of the exemption, which expressly states that it applies to a board member “who is appointed by the President, by and with the advice and consent of the Senate to any board….” 5 U.S.C. § 3349c(1) (emphasis added). Arguably, the person appointed and confirmed to be the CFPB Director is not appointed and confirmed to the FDIC board. The CFPB Director only serves on the FDIC board pursuant to a statutory mandate under the Federal Deposit Insurance Act (FDI Act). 12 U.S.C. § 1812(a)(1)(B). This is different than the members who are expressly appointed and confirmed to the FDIC board, including the Chairperson, under the FDI Act. 12 U.S.C. § 1812(a)(1)(C). In contrast, the statutory mandate for the CFPB Director means that the CFPB Director is not appointed and confirmed to the FDIC board. Accordingly, the CFPB Director position is not “appointed…to any board” as required under the FVRA for the exemption to apply, and thus, is not subject to the exemption.

With respect to the vacancy provision under 12 U.S.C. § 1812(d) under which the Acting Director of the CFPB automatically serves as a member of the FDIC board in the event of a vacancy in the CFPB Director’s seat, this provision does not speak to whether or not the FVRA applies to the CFPB. In addition, this vacancy provision was in the FDI Act before the FVRA was enacted, when it applied to the Comptroller of the Currency and the Director of the Office of Thrift Supervision (OTS). Notably, it appears that case law has interpreted the previous version of the FVRA to apply to the OTS, which could indicate that an acting official designated under the FVRA can serve on the FDIC board under this succession provision.

I raise these only as possible counterarguments. There may be deficiencies to these arguments, or there may be other possible counterarguments and interesting threads that could be analyzed further. For example, there are cases under the prior version of the Vacancies Act involving the Acting Director position at the OTS, which also served on the FDIC board under a statutory mandate, in which the issue of an exemption for FDIC board members does not appear to have been raised. This is in spite of the legislative history of the FVRA noting that this exemption for board members had “always been the case.” It will be interesting to see the upcoming briefs and hearing on this issue.

D.  The Case Going Forward

Although the Trump administration won the first round, the judge ordered the parties to meet and confer and submit a proposed schedule by December 1. They filed separate schedules on December 1 and indicated that Deputy Director English planned to file a motion for a preliminary injunction. Notably, the two proposed schedules differed substantially, with the DOJ’s schedule continuing through February 2018 and Deputy Director English’s schedule completing briefings by December 15. Because the parties submitted separate schedules, Judge Kelly ordered a scheduling conference on December 5 and then ordered the following schedule for the motion for a preliminary injunction:

  • Deputy Director English’s motion for a preliminary injunction due by December 6
  • DOJ’s opposing brief is due by December 18 at 1:00 p.m.
  • Deputy Director English’s reply brief is due by December 20 at 1:00 p.m.
  • The hearing on the motion for a preliminary injunction is set for December 22 at 10:00 a.m.

I want to reiterate that it is not certain who will ultimately prevail in this case. It is an open question whether the Dodd-Frank Act or the FVRA controls the succession of the Acting Director of the CFPB.   There are many arguments and counterarguments on both sides, including a new argument by Deputy Director in her most recent motion, as described above. And there could be appeals by either party from the District Court’s decision, meaning that this leadership question could last some time. It is important to reiterate that, as I mentioned in my last Client Update, there will be a question mark hanging over any official actions of the CFPB while this issue is unresolved, because such actions could be void.

E.  Lower East Side People’s Federal Credit Union Lawsuit

On December 5, 2017, another lawsuit was filed against the Trump administration’s designation of Director Mulvaney as Acting Director of the CFPB. The Lower East Side People’s Federal Credit Union filed a lawsuit in the District Court for the Southern District of New York against the Trump administration and Mulvaney. The credit union asked the court for an injunction against Mulvaney serving as Acting Director of the CFPB, and a declaratory judgment that Deputy Director English is the Acting Director of the CFPB.

The credit union made similar arguments to those by Deputy Director English, including the new argument based on the CFPB Director also serving on the FDIC board. These arguments are that the Dodd-Frank Act controls succession at the CFPB, because it is more specific and was enacted later; the CFPB Director position is exempt from the FVRA under 5 U.S.C. § 3349c, because the CFPB Director is a member of the FDIC board; and the appointment of an at-will White House employee violates the independence of the CFPB that is required under the Dodd-Frank Act. It will be interesting to see how this separate case is handled by the court and the DOJ.

II.  Current Situation at the CFPB

Director Mulvaney has been serving as Acting Director of the CFPB since the day after his appointment on November 27. His ability to serve as Acting Director is due to the District Court’s denial of Deputy Director English’s motion for a TRO. In addition, the CFPB staff’s treatment of Director Mulvaney as Acting Director appears due to an internal November 25 memorandum by the CFPB’s General Counsel, Mary McLeod, which opined that President Trump has the authority to designate Mulvaney as Acting Director CFPB. Specifically, the General Counsel advised the CFPB’s senior staff to “act consistently with the understanding that Director Mulvaney is the Acting Director of the CFPB.” Therefore, it appears that Director Mulvaney will be performing the functions of the Director of the CFPB, including directing CFPB staff, for the time being.

It appears that the CFPB will be frozen for some time under Acting Director Mulvaney. On his first day, November 27, he announced that he is imposing a “freeze” on hiring, new regulations, and payments from the CFPB civil penalty fund. In addition, it was reported that Acting Director Mulvaney instituted a moratorium on CFPB’s collection of consumer data citing cyber security risks.

With respect to the CFPB’s enforcement activities, it was also reported that Acting Director Mulvaney is reviewing the CFPB’s pending investigations and enforcement actions. Notably, the outcome of one of Mulvaney’s reviews of a pending investigation involving a large bank may be affected by a December 8 tweet by the President that signaled the President’s desire for a certain outcome. This could potentially serve as evidence of the claims in the two lawsuits that the CFPB’s independence under an at-will White House employee is violated. In addition, this also highlights the policy concerns of many regarding the ability of any administration to directly influence consumer financial regulation and enforcement, and may serve to increase support from both sides of the aisle for a change to the CFPB’s leadership structure to a board or commission.

With respect to the CFPB’s regulatory activities, it appears that Acting Director Mulvaney will be open to regulatory reform. He reportedly inquired about revising the CFPB’s payday loan final rule, which the CFPB issued this fall, but instead announced his support for the disapproval of the rule under the Congressional Review Act, for which a resolution was introduced in the House on December 1, 2017. It is still possible Acting Director Mulvaney could take action to curtail the rule if the disapproval resolution does not pass Congress. He also reportedly plans to bring on politically appointed staff to move the CFPB’s priorities closer to those of the Trump administration. This signals what is likely to be an increased focus at the CFPB on regulatory relief and reform during this time. There have already been some notable requests to Acting Director Mulvaney for regulatory relief. For example, an industry trade association and House Republicans have already asked Acting Director Mulvaney to delay the effective date of the HMDA rule. In addition, letters submitted to the CFPB have raised concerns with the CFPB’s plans for the public disclosure of the expanded HMDA data.

It is also interesting that many of these actions by Acting Director Mulvaney come to us through the news media. While this may not be surprising in light of the recent change and the public interest in the leadership situation at the CFPB, it is hopeful that as time goes on, information about the CFPB’s activities under its interim and future permanent leadership will come through official CFPB statements and announcements that are also published on its website and/or in the Federal Register.

In spite of the questions surrounding this interim leadership situation, as I noted above, this may be a good opportunity for the industry to inform the CFPB about opportunities for regulatory relief and reform. Please let me know if you’d like me to assist you in submitting information to the CFPB.

*          *          *          *          *

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

Leave a Reply